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As filed with the Securities and Exchange Commission on February 1, 2002

Registration No. 333-75830

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

PETCO Animal Supplies, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 5999
(Primary Standard Industrial
Classification Code Number) 33-0479906
(I.R.S. Employer
Identification Number)

9125 Rehco Road
San Diego, CA 92121
(858) 453-7845
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

Brian K. Devine
Chief Executive Officer and President
PETCO Animal Supplies, Inc.
9125 Rehco Road
San Diego, CA 92121
(858) 453-7845
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Thomas A. Edwards, Esq.
Andrew S. Greenhalgh, Esq.
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, CA 92101
(619) 236-1234 Nick P. Saggese, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071
(213) 687-5000

        Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / /

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / /

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /

        If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / /

CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered	Amount to be registered(1)	Proposed maximum offering price per share(2)	Proposed maximum aggregate offering price	Amount of registration fee
Common stock, $0.001 par value	16,675,000	$20.00	$333,500,000	$30,682(3)

(1)

Includes shares that the underwriters will have the right to purchase to cover over-allotments, if any.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as amended.

(3)

A fee of $68,713 was paid on December 21, 2001 based on the then existing fee rate.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

SUBJECT TO COMPLETION, DATED February 1, 2002

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS

14,500,000 Shares

PETCO Animal Supplies, Inc.

Common Stock

        PETCO Animal Supplies, Inc. is offering 14,500,000 shares of its common stock. This is our initial public offering, and no public market currently exists for our shares.

        We have applied to have the common stock approved for quotation on the Nasdaq National Market under the symbol "PETC." We currently estimate that the initial public offering price will be between $18.00 and $20.00 per share.

        Investing in our common stock involves risks that are described in the "Risk Factors" section of this prospectus beginning on page 8.

	Per Share	Total
Public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to PETCO	$	$

        PETCO and the selling stockholders have granted the underwriters the right to purchase up to an additional 2,175,000 shares of common stock to cover over-allotments. PETCO will not receive any of the proceeds from the sale of the 1,175,000 shares by the selling stockholders.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the shares to purchasers on or about                      , 2002.

Joint Book-Running Managers

Merrill Lynch & Co. Morgan Stanley

Deutsche Banc Alex. Brown
	Goldman, Sachs & Co.
		Lehman Brothers
			Salomon Smith Barney

The date of this prospectus is                        , 2002.

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

TABLE OF CONTENTS

	Page
Prospectus Summary	1
Risk Factors	8
Cautionary Note Regarding Forward-Looking Statements	15
About this Prospectus	16
Use of Proceeds	17
Dividend Policy	17
Dilution	18
Capitalization	19
Selected Historical Consolidated Financial and Other Data	20
Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Business	33
Management	41
Principal and Selling Stockholders	50
The Recapitalization Transaction	53
Certain Relationships and Related Transactions	55
Description of Capital Stock	57
Description of Certain Indebtedness	60
United States Federal Income Tax Consequences to Non-U.S. Holders	65
Shares Eligible for Future Sale	67
Underwriting	69
Legal Matters	72
Experts	72
Where You Can Find More Information	73
Index to Consolidated Financial Statements	F-1

        Until                                , 2002 (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. We urge you to read this entire prospectus carefully, including the "risk factors" section. In this prospectus, "PETCO Animal Supplies," "PETCO," "we," "our" and "us" refer to PETCO Animal Supplies, Inc. and its subsidiaries, unless the context requires otherwise. Our fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. For example, fiscal 2000 consisted of 53 weeks ending on February 3, 2001. All store counts are as of January 25, 2002. Adjusted EBITDA is as defined in "Summary Consolidated Financial and Other Data."

PETCO

        We are the nation's leading pet food and supplies specialty retailer with 561 stores in 41 states and the District of Columbia. Our products include pet food, supplies, grooming products, toys, novelty items and vitamins, small pets such as fish, birds and other small animals (excluding cats and dogs), and veterinary supplies. Our strategy is to offer our customers a complete assortment of pet-related products at competitive prices, with superior levels of customer service at convenient locations. As a result of our strong brand name and the successful implementation of our operating strategy, we have achieved substantial growth over the last five years. We have posted 36 consecutive fiscal quarters of positive comparable store net sales growth of 5% or more. For the fiscal year ended February 3, 2001, we generated net sales of $1.15 billion and Adjusted EBITDA of $117.2 million, representing a compounded annual growth rate, or CAGR, of 21.0% and 43.3%, respectively, over the last five fiscal years. For the 39-week period ended November 3, 2001, we generated net sales of $937.2 million and Adjusted EBITDA of $91.5 million, representing an increase of 15.7% and 28.1%, respectively, over the prior year period.

        Our stores combine the broad merchandise selection and everyday low prices of a pet supply warehouse store with the convenient location and knowledgeable customer service of a neighborhood pet supply store. We believe that this combination differentiates our stores and provides us with a competitive advantage. Our principal format is a 15,000 square foot superstore, conveniently located near local neighborhood shopping destinations, including supermarkets, bookstores, coffee shops, dry cleaners and video stores, where our target "pet parent" customer makes regular weekly shopping trips. We believe that our stores are well positioned, both in terms of product offerings and location, to benefit from favorable long-term demographic trends, a growing pet population and an increasing willingness of pet owners to spend on their pets.

Industry Overview

        We believe the pet food and supplies industry is benefiting from a number of favorable demographic trends that are continuing to support a steadily growing pet population. The U.S. pet population has now reached 353 million companion animals, including 141 million cats and dogs, with an estimated 62% of all U.S. households owning at least one pet, and three quarters of those households owning two or more pets. We believe the trend to more pets and more pet-owning households will continue, driven by an increasing number of children under 18 and a growing number of empty nesters whose pets have become their new "children." We estimate that U.S. retail sales of pet food, supplies, small animals (excluding cats and dogs) and services has increased to approximately $23 billion in 2001. We believe we are well positioned to benefit from several key growth trends within the industry:

•

Growth in Premium Cat and Dog Food as a Percentage of the $11 Billion Pet Food Market. Packaged Facts, an independent provider of market research reports, estimates sales of premium pet foods, which currently represents 30% of the total cat and dog food market, will grow at a CAGR of 9.0% from 2000 to 2005, driven by the marketing of premium brands by vendors and a heightened

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nutritional awareness among pet owners. Sales of premium dog and cat food accounted for $359 million, or 31%, of our fiscal 2000 net sales.

•

Growing Sales of Pet Supplies and Services. Packaged Facts projects that sales of pet supplies will account for approximately $6 billion in sales for 2001 and will grow at a CAGR of 7.2% through 2004. Pet supplies and small animals (excluding cats and dogs) accounted for $724 million, or 63%, of our fiscal 2000 net sales. Certain routine pet services are estimated to account for the remaining $6 billion of the overall $23 billion market, and although services do not represent a significant portion of our net sales, we believe that offering selected pet services better serves our best customers and increases traffic flow in our stores.



•

Continued Growth of Market Share in Highly Fragmented Industry. An estimated 9,000 independent pet supply stores operate in the United States, and PETCO is one of only two national specialty retailers of pet food and supplies. Between 1991 and 1999 specialty pet store chains such as PETCO experienced significant market share gains, largely at the expense of supermarkets. We believe that this shift primarily results from (1) the enhanced merchandising effort and product and services mix offered by specialty pet store chains and (2) the growing demand for premium pet food. The following chart illustrates this shift in distribution channels.

Our Strategy and Competitive Advantages

        Our strategy is to strengthen our position as the leading pet food and supplies specialty retailer by offering our customers a complete assortment of pet-related products at competitive prices with superior levels of customer service at convenient locations. We intend to continue to pursue the following elements of our strategy:

•

Continue to Increase Sales and Profitability. We will strive to increase our sales and earnings, by

•    generating continuous comparable store net sales growth,

•    expanding strategically in existing and new markets using our superstore format,

•    targeting sales of higher margin supplies and services, which have grown to 66.1% of net sales in fiscal 2000 up from 59.2% of net sales in fiscal 1996,

•    delivering economies of scale and purchasing efficiencies from our expanding store base and

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•    continuing to offer over 10,000 high quality products not typically found in supermarkets or mass merchants.

•

Capitalize Upon our Maturing Store Base to Increase Net Sales and EBITDA. Since approximately half of our stores are less than five years old, we expect to continue to leverage our maturing store base, which has historically improved average store level EBITDA margins from an estimated 6% in a store's first year to over 15% by year five.



•

Expand Using our Proven New Store Model. We plan to increase our net store count by 35 to 45 stores per year using our new store model, which generally results in stores achieving profitability by the end of their first year of operation, and we target for each store a five-year return on investment of more than 20%.



•

Leverage our Industry Leading Information Systems and Logistics Expertise. We plan to continue to leverage our investment in our information systems infrastructure and integrated distribution network to increase sales, enhance customer service and improve inventory turns, which have increased from 5.0x for fiscal 1995 to 6.7x for fiscal 2000.



•

Capitalize Upon our Brand Awareness and Highly Successful P.A.L.S. Customer Loyalty Program. Over 70% of our net sales come from our P.A.L.S. (PETCO Animal Lovers Save) members, who spend on average almost 50% more per transaction than do our non-P.A.L.S. customers. Recently we have been issuing nearly one million new P.A.L.S. cards per quarter.



•

Continue to Provide Superior, Knowledge-Based Customer Service. We will continue to seek to increase sales, attract new customers and build customer loyalty by enhancing our customers' shopping experience with store managers and sales associates who are pet owners and enthusiasts, which allows them to provide knowledgeable and friendly customer service and create a fun and exciting shopping environment.

        Despite the competitive advantages described above, our business is subject to a number of risks. If we fail to profitably open new stores and maintain the profitability of existing stores our results of operations would suffer. We have a substantial amount of indebtedness, which limits the cash flow we have available for our operations and may restrict our ability to exploit business opportunities. For a discussion of these and other risks please see "Risk Factors" beginning on page 8.

        Our corporate headquarters are located at PETCO Animal Supplies, Inc., 9125 Rehco Road, San Diego, CA 92121, and our telephone number is (858) 453-7845. Our website address is www.petco.com. The information contained or incorporated in our website is not a part of this prospectus.

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The Offering

Common stock offered by us		14,500,000 shares
Common stock to be outstanding immediately after this offering		55,750,320 shares
Over-allotment option:
	Offered by us	1,000,000 shares
	Offered by the selling stockholders	1,175,000 shares
Use of proceeds		We intend to use the net proceeds from this offering to redeem our outstanding shares of preferred stock, most of which are owned by BD Recapitalization Holdings LLC, an entity controlled by affiliates of Leonard Green & Partners, L.P. and affiliates of TPG Partners III, L.P., and by affiliates of Trust Company of the West. See "Certain Relationships and Related Transactions—Receipt of Proceeds from this Offering."
Proposed Nasdaq National Market symbol		"PETC"

        Unless otherwise indicated, all share information in this prospectus is based on the number of shares outstanding as of January 25, 2002 and:

•

includes the exercise of warrants to purchase an aggregate of 2,131,800 shares of common stock, at a weighted average exercise price of $0.001 per share;



•

excludes 1,413,884 shares of common stock reserved for issuance under our 1994 stock option plan, of which 1,353,048 shares were subject to outstanding options at a weighted average exercise price of $1.52 per share, and 60,836 shares were available for future grants;



•

excludes 1,170,756 shares of common stock that will be reserved for issuance under our 2002 incentive award plan, which we intend to adopt prior to the completion of the offering, of which options to purchase approximately 550,000 shares exercisable at the offering price will be issued concurrently with the closing of the offering; and



•

includes no exercise of the underwriters' over-allotment option.

        Unless stated otherwise, all information in this prospectus reflects a 22-for-1 stock split we effected on October 20, 2000 and a 2-for-1 stock split which we will effect prior to the offering.

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Summary Consolidated Financial and Other Data

        The following summary consolidated financial data as of, and for the fiscal years ended, January 30, 1999, January 29, 2000 and February 3, 2001, presented below under the caption "Statement of Operations Data," have been derived from our audited consolidated financial statements as of those dates and for those periods. The following summary consolidated financial data as of, and for the thirty-nine weeks ended, October 28, 2000 and November 3, 2001, presented below under the captions "Statement of Operations Data" and "Balance Sheet Data," have been derived from our unaudited consolidated financial statements as of those dates and for those periods. Results for the thirty-nine weeks ended October 28, 2000 and November 3, 2001 are not necessarily indicative of results for the full year. You should read the information set forth below in conjunction with other sections of this prospectus, including "Selected Historical Consolidated Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and related notes.

	Fiscal Year Ended									39 Weeks Ended
	Jan. 30, 1999			Jan. 29, 2000			Feb. 3, 2001(1)			October 28, 2000			November 3, 2001
										(unaudited)
	(amounts in millions, except per share amounts and net sales per square foot)
Statement of Operations Data:
Net sales	$	839.6		$	990.3		$	1,151.2		$	810.4		$	937.2
Gross profit		214.8			269.6			334.1			227.4			274.6
Operating income (loss)		3.9			48.8			13.4			(19.6	)		37.0
Interest expense, net		6.7			8.9			23.0			10.0			31.5
Net earnings (loss) available to common stockholders		(2.4	)		21.8			(28.8	)		(37.3	)		(32.4	)
Other Financial Data:
Gross profit margin		25.6	%		27.2	%		29.0	%		28.1	%		29.3	%
Adjusted EBITDA(2)	$	63.2		$	88.1		$	117.2		$	71.4		$	91.5
Adjusted EBITDA margin(3)		7.5	%		8.9	%		10.2	%		8.8	%		9.8	%
Depreciation and amortization	$	30.4		$	39.3		$	48.1		$	35.2		$	38.8
Inventory turns(4)		6.0	x		6.2	x		6.7	x		5.8	x		6.6	x
Store Data:
Percentage increase in comparable store net sales		6.4	%		11.1	%		6.4	%		6.5	%		8.4	%
Net sales per square foot(5)	$	157		$	168		$	177	(6)	$	127		$	131
Number of stores at period end		476			490			528			526			560

	As of November 3, 2001
	Actual		As Adjusted(7)
	(unaudited)
Balance Sheet Data:
Cash and cash equivalents	$	3.1	$	19.9
Working capital(8)		47.0		34.5
Total assets		483.1		499.9
Total debt, including current maturities(9)		402.5		402.5
Preferred stock		212.0		—
Stockholders' deficit		287.7		51.7

(1)

The fiscal year ended February 3, 2001 consisted of 53 weeks, as compared to 52 weeks for each of the fiscal years ended January 30, 1999 and January 29, 2000.

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(2)

Net earnings (loss) before interest (net), taxes, depreciation and amortization, Internet operations prior to consolidation in fiscal 2001, equity in loss of unconsolidated affiliates, extraordinary item and management fees, adjusted to exclude the effects of the following expenses for the periods referenced: (A) merger and non-recurring costs of $23.0 million and $55.9 million for the fiscal years ended January 30, 1999 and February 3, 2001, respectively, (B) general and administrative costs of $5.9 million in the fiscal year ended January 30, 1999 associated with a management realignment, an asset write-off related to the relocation of our main distribution center and the replacement of the point-of-sale equipment in all stores, (C) management fees of $1.0 million, $0.3 million and $2.3 million for the fiscal year ended February 3, 2001, the 39 weeks ended October 28, 2000 and the 39 weeks ended November 3, 2001, respectively, paid pursuant to our management services agreement, and (D) non-cash stock-based compensation of $14.8 million for the 39 weeks ended November 3, 2001, related to the deemed increase in fair value for accounting purposes resulting from this offering.

Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles, or GAAP, but is used by some investors to determine a company's ability to service or incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all companies and accordingly is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as an indicator of a company's operating performance or liquidity, and should not be considered in isolation from or as a substitute for net income (loss), cash flows from operations or cash flow data prepared in accordance with GAAP. We have presented Adjusted EBITDA in this prospectus solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. Adjusted EBITDA is not intended to represent and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP.

The calculation of Adjusted EBITDA is shown below:

	Fiscal Year Ended								39 Weeks Ended
	Jan. 30, 1999			Jan. 29, 2000		Feb. 3, 2001			October 28, 2000			November 3, 2001
	(in thousands)
									(unaudited)
Operating income (loss)	$	3,903		$	48,778	$	13,413		$	(19,619	)	$	36,997
Merger and non-recurring costs		22,963			—		55,928			56,154			445
Depreciation and amortization		30,382			39,280		48,100			35,182			38,830
Interest included in amortization above		—			—		(1,302	)		(579	)		(1,923	)
Special G&A costs		5,902	(a)		—		—			—			—
Management fees (b)		—			—		1,040			260			2,340
Stock-based compensation (c)		—			—		—			—			14,842
Adjusted EBITDA	$	63,150		$	88,058	$	117,179		$	71,398		$	91,531

(a)

General and administrative costs of $5.9 million in the fiscal year ended January 30, 1999, consists of $1.4 million incurred in connection with a management realignment and $4.5 million in connection with the relocation of our main distribution center and the replacement of our point-of-sale equipment in all stores.




(b)

Management fees are paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations. Upon the closing of this offering, the parties have agreed to terminate the management services agreement.




(c)

In connection with the deemed increase in fair value related to outstanding stock options for accounting purposes as a result of this offering, we recorded non-cash stock-based compensation totaling $14.8 million, of which $12.3 million and $2.5 million are recorded in selling, general and administrative expense and cost of sales and occupancy costs, respectively. We anticipate recording an aggregate of approximately $11.0 million of additional non-recurring non-cash stock-based compensation expense in the fourth quarter of fiscal 2001 and the first quarter of fiscal 2002 related to options outstanding prior to the offering. We do not currently anticipate recording any additional stock-based compensation expense related to options outstanding upon the closing of the offering.

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(3)

Calculated by dividing Adjusted EBITDA by net sales.

(4)

Calculated by dividing cost of sales by end of period inventory. For the 39 weeks ended October 28, 2000 and November 3, 2001, cost of sales has been annualized based on a 52-week year.

(5)

Calculated by dividing net sales by gross square footage of stores open, weighted by the number of months stores are open during the period.

(6)

As adjusted to a 52-week period, net sales per square foot would have been $173 for the fiscal year ended February 3, 2001.

(7)

As adjusted basis reflects the receipt by us of the net proceeds from the sale of 14,500,000 shares at an assumed offering price of $19.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us, and the application of the net proceeds of the offering.

(8)

Calculated by subtracting current liabilities from current assets (other than cash and cash equivalents).

(9)

Includes capital leases and other obligations.

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RISK FACTORS

The value of an investment in PETCO will be subject to significant risks inherent in our business. You should carefully consider the risks and uncertainties described below and other information included in this prospectus before purchasing our common stock. If any of the events described below occur, our business and financial results could be adversely affected in a material way. This could cause the trading price of our common stock to decline, perhaps significantly.

Risks Related to Our Business

If we are unable to profitably open and operate new stores and maintain the profitability of our existing stores, our business, financial condition and results of operations may be harmed.

        One of our strategies is to open new stores by focusing on both existing markets and by targeting new geographic markets. We have opened approximately 40 to 60 stores per year (offset by closings and relocations of existing stores) between fiscal 1998 and fiscal 2000. We plan to increase our net store count by 35 to 45 stores per year and plan to target one or two new geographic markets per year.

        There can be no assurance that we will be able to open stores at this rate. The rate of our expansion will depend on several factors, including general economic and business conditions affecting consumer confidence and spending, the availability of desirable locations, the negotiation of acceptable lease terms, the availability of qualified personnel and our ability to manage the operational aspects of our growth. The rate of our expansion will also depend on the availability of adequate capital, which in turn will depend in large part on cash flow generated by our business and the availability of equity and debt capital. There can be no assurance that we will be able to obtain equity or debt capital on acceptable terms or at all. Moreover, our senior credit facility and the indenture governing our senior subordinated notes contain provisions that restrict the amount of debt we may incur in the future. If we are not successful in obtaining sufficient capital, we may be unable to open additional stores as planned, which may adversely affect our results of operations.

        Our continued growth also depends, to a significant degree, on our ability to increase sales in our new and existing stores. Our comparable store net sales increased by 6.4%, 11.1% and 6.4% for fiscal 1998, 1999 and 2000, respectively, and 8.4% for the first thirty-nine weeks of fiscal 2001. As a result of new store openings in existing markets and because mature stores will represent an increasing proportion of our store base over time, our comparable store net sales increases in future periods may be lower than historical levels.

        There also can be no assurance that our existing stores will maintain their current levels of sales and profitability or that new stores will generate sales levels necessary to achieve store-level profitability, much less profitability comparable to that of existing stores. New stores that we open in our existing markets may draw customers from our existing stores and may have lower sales growth relative to stores opened in new markets. New stores also may face greater competition and have lower anticipated sales volumes relative to previously opened stores during their comparable years of operations. These factors, together with increased pre-opening expenses at our new stores, may reduce our average store contribution and operating margins. If we are unable to profitably open and operate new stores and maintain the profitability of our existing stores, our business, financial condition and results of operations may be harmed.

We may be unable to successfully execute our expansion strategy or manage and sustain our growth and, as a result, our business may be harmed.

        Our ability to open new stores depends on a number of factors, including:

•

adequate capital resources for leasehold improvements, fixtures and inventory and pre-opening expenses;

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•

our ability to locate and obtain favorable store sites and negotiate acceptable lease terms;

•

our ability to obtain and distribute adequate product supplies to our stores, including by expanding our distribution facilities;

•

our ability to hire, train and retain skilled managers and personnel; and

•

our ability to continue to upgrade our information and other operating systems to control the anticipated growth and expanded operations.

        Our senior credit facility and indenture also contain covenants which may restrict or impair our growth plans. We currently expect to finance our store expansion plans from cash flow from operations, lease financing and capacity under our senior credit facility. To the extent that we are unable to obtain adequate financing for new store growth on acceptable terms, our ability to open new stores will be negatively impacted. As a result, there can be no assurances that we will be able to achieve our current plans for the opening of new stores. In addition, our failure to expand our distribution facilities or other internal systems or procedures in accordance with our growth plans, or difficulties we may incur in operating our distribution facilities, could adversely affect our ability to deliver merchandise to our stores in a timely fashion. As a result, our ability to support our planned new store growth may be harmed.

        In addition, we routinely evaluate our strategic alternatives with respect to each of our stores and our other operating assets and investments. In connection with this evaluation, we may elect to close stores or to sell or otherwise dispose of selected assets or investments. Excluding store relocations, we closed 18 stores in fiscal 1999, ten stores in fiscal 2000 and four stores in the first thirty-nine weeks of fiscal 2001. There can be no assurance that any future sale or disposition would be achieved on terms favorable to us because we incur closing costs or may lose sales to our competitors as a result.

Our substantial amount of debt may limit the cash flow available for our operations and place us at a competitive disadvantage.

        We have, and will continue to have, a substantial amount of debt. As of November 3, 2001, this debt consisted primarily of (1) $200.0 million in principal amount of our senior subordinated notes and (2) $195.0 million of borrowings under our senior credit facility (with $69.3 million of additional available credit, subject to certain conditions). Our level of indebtedness has important consequences to you and your investment in our common stock. For example, our level of indebtedness may:

•

require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to use for working capital, capital expenditures and other general corporate purposes;

•

limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other investments, which may limit our ability to carry out our business strategy;

•

result in higher interest expense if interest rates increase on our floating rate borrowings; or

•

heighten our vulnerability to downturns in our business or in the general economy and restrict us from exploiting business opportunities or making acquisitions.

The agreements governing our debt impose restrictions on our business.

        The agreements governing our senior credit facility and the indenture governing our senior subordinated notes contain a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take

9

advantage of potential business opportunities as they arise. These covenants place restrictions on our ability to, among other things:

•

incur more debt;

•

pay dividends, redeem or repurchase our stock or make other distributions;

•

make acquisitions or investments;

•

enter into transactions with affiliates;

•

merge or consolidate with others;

•

dispose of assets or use asset sale proceeds;

•

create liens on our assets; and

•

extend credit.

        If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenue may decline and our operating results may suffer.

Our failure to satisfy covenants in our debt instruments will cause a default under those instruments.

        In addition to imposing restrictions on our business and operations, our debt instruments include a number of covenants relating to financial ratios and tests. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these covenants would result in a default under these instruments. An event of default would permit our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. Moreover, the lenders under our senior credit facility would have the option to terminate any obligation to make further extensions of credit under our senior credit facility. If we are unable to repay debt to our senior lenders, these lenders could proceed directly against our assets.

The loss of any of our three key vendors, or of our exclusive distribution arrangements with our vendors, would negatively impact our business.

        We purchase significant amounts of products from three key vendors: The Iams Company, Hill's Pet Products, Inc. (which produces Science Diet) and Nutro, Inc. Supplies of products from these vendors accounted for approximately 10%, 10% and 8%, respectively, of our net sales in fiscal 2000 and 9%, 10% and 8%, respectively, in the first thirty-nine weeks of fiscal 2001. We do not maintain long-term supply contracts with any of our vendors. While we believe that our vendor relationships are satisfactory, any vendor could discontinue selling to us at any time. The loss of any of our three key vendors or any other significant vendors of premium pet food or pet supplies offered by us would have a negative impact on our business, financial condition and results of operations.

        In addition, a change in how our key products are distributed could have a material adverse effect on our business. It could materially adversely affect our business if any premium pet food manufacturers were to make premium pet food products widely available in supermarkets or through mass merchants, or if the premium brands currently available to supermarkets and mass merchants were to increase their market share at the expense of the premium brands sold only through specialty pet food and supplies retailers.

        One of our primary premium pet food vendors, The Iams Company, was purchased by Procter & Gamble in fiscal 1999. Through the end of fiscal 1999, the premium pet food brands that we purchased from The Iams Company, Hill's Pet Products, Inc. and Nutro, Inc. were not widely available in supermarkets or mass merchants. In March 2000, Procter & Gamble broadened the distribution of the Iams brand to supermarkets, warehouse clubs and mass merchants across the country. The Eukanuba

10

brand of pet food, which is also manufactured by The Iams Company, continues to be sold exclusively through specialty channels such as PETCO. Iams brand pet food sales represented approximately 9% of our net sales in fiscal 1999, approximately 6% of our net sales in fiscal 2000 and has stabilized at approximately 5% of our net sales in the first thirty-nine weeks of fiscal 2001. The broadening of the distribution of Iams brand pet food negatively impacted our comparable store net sales during fiscal 2000, resulting in lower increases in comparable store net sales through the first quarter of 2001.

        Our principal vendors also currently provide us with certain incentives such as volume purchasing, trade discounts, cooperative advertising and market development funds. A reduction or discontinuance of these incentives would increase our costs and could reduce our profitability.

        We also purchase significant amounts of pet supplies from a number of vendors with limited supply capabilities. There can be no assurance that our current pet supply vendors will be able to accommodate our anticipated growth and expansion of our stores. We continually seek to expand our base of pet supply vendors and to identify new pet-related products. An inability of our existing vendors to provide products in a timely or cost-effective manner could impair our business, financial condition and results of operations.

Competition in the markets in which we operate is strong and if we are unable to compete effectively, our ability to generate sales may suffer and our operating income and net earnings would decline.

        The pet food and supplies retailing industry is highly competitive. We compete with a number of specialty pet store chains and traditional pet stores. We also compete with supermarkets, warehouse clubs and mass merchants. Many of these competitors are larger and have access to greater capital and management resources than we do.

        There can be no assurance that in the future we will not face greater competition from national, regional and local retailers. In particular, if any of our major competitors seeks to gain or retain market share by reducing prices or by introducing additional products, we may be required to reduce prices on our key products in order to remain competitive, which may negatively impact our profitability.

A prolonged economic downturn could result in reduced sales and lower revenues and profitability.

        Purchases of pet-related supplies may be affected by prolonged, negative trends in the general economy that adversely affect consumer spending. Any reduction in consumer confidence or disposable income in general may affect companies in pet-related industries more significantly than companies in industries that rely less on discretionary consumer spending. In addition, due to our substantial amount of debt and relatively limited amount of cash and cash equivalents, we are more susceptible to some of these adverse economic effects than are some of our competitors which have greater financial and other resources than we do.

Our operating results could be harmed if we are unable to integrate acquired companies into our operations.

        The pet food and supplies retailing industry is highly fragmented and has been characterized in recent years by consolidation. We may pursue expansion and acquisition opportunities in the future, and we must efficiently integrate and combine operations of acquired companies to realize the anticipated benefits of acquisitions. To be successful, the integration process requires us to achieve the benefits of combining the companies, including generating operating efficiencies and synergies and eliminating or reducing redundant costs. Since we often have limited prior knowledge of acquired companies, there can be no assurance that the anticipated benefits of these acquisitions will be fully realized without incurring unanticipated costs or diverting management's attention from our core operations. Our operating results could be harmed if we are unable to efficiently integrate newly acquired companies into our operations. Any future acquisitions also could result in potentially dilutive

11

issuances of equity securities, or the incurrence of additional debt or the assumption of contingent liabilities.

We have made investments in the past and may make investments in the future without being able to achieve an adequate return, if any, on our investment.

        In the past we have made, and in the future we may make, investments in strategic ventures or other complementary businesses in an effort to expand internationally or to otherwise grow our business. These investments typically involve many of the same risks posed by acquisitions, particularly those risks associated with the diversion of our resources, the inability of the new venture to generate sufficient revenues, the management of relationships with third parties and potential expenses. Strategic ventures have the added risk that the other strategic venture partners may have economic, business or legal interests or objectives that are inconsistent with our interests and objectives. Although we have no present plans to make any such investment, there can be no assurances that any investment we make in the future would achieve an adequate return, if any, on our investment.

        In the past we have terminated, and in the future we may terminate, our relationship in a strategic venture after we have made substantial investments in that strategic venture. For example, our investment in Petopia.com, an e-commerce destination for the sale of pet food and supplies, failed to achieve the desired results, and in fiscal 2000 we took a charge of approximately $10.2 million due to Petopia.com's pending liquidation and wrote off $1.3 million in receivables due from Petopia.com. In addition, on January 28, 2002 we terminated our relationship with Canadian Petcetera Limited Partnership, which operates 32 Petcetera retail pet food and supplies stores in Canada, because the stores operated by the Canadian partnership were not producing the results we had anticipated. At the time of the termination of our relationship, we also entered into a settlement agreement with the other partners of the partnership to resolve allegations made by the other partners that we had reneged on an alleged agreement to buy out their interests in the Canadian partnership. See "Business—Legal Proceedings." We will record a write-off of approximately $26.1 million in the fourth quarter of 2001 representing the carrying value of our Canadian investment and settlement expenses of approximately $10.3 million related to the settlement of the related dispute.

If we are required to restructure our operations to comply with regulations governing our business, it could have a material effect on our business and operations.

        The transportation and sale of small animals is governed by various state and local regulations. These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. While we seek to structure our operations to comply with the laws and regulations of each state in which we operate, there can be no assurance that, given varying and uncertain interpretations of these laws, we would be found to be in compliance in all states. A determination that we are in violation of applicable laws in any state in which we operate could require us to restructure our operations to comply with the requirements of that state, which could have a material adverse effect on our business and operations.

Some of our compensation practices have been challenged in a complaint that, if successful, could harm our financial condition and results of operations.

        In July 2001, we received a copy of a complaint filed in the Superior Court of California for the County of Los Angeles alleging violations of the California Labor Code and the Business and Professions Code. The purported class of plaintiffs allege that we improperly classified our salaried store managers and assistant store managers as exempt employees not entitled to overtime pay for work in excess of 40 hours per week. The relief sought includes compensatory damages, penalties, preliminary and permanent injunctions requiring us to pay overtime compensation under California law, prejudgment interest, costs and attorneys' fees and such other relief as the court deems proper. The complaint has only recently been filed. We have not yet answered the complaint but we have demurred

12

to the complaint and discovery has commenced. In November 2001, the case was transferred to the Superior Court of California for the County of San Diego. If successful, this litigation could harm our financial condition, and any required change in our labor practices could have a negative impact on our results of operations. See "Business—Legal Proceedings."

We depend on key personnel, and if we lose the services of any of our principal executive officers, including Mr. Devine, our Chairman, President and Chief Executive Officer, we may not be able to run our business effectively.

        We are dependent upon the efforts of our principal executive officers. In particular, we are dependent upon the management and leadership of Brian K. Devine, our Chairman, President and Chief Executive Officer. The loss of Mr. Devine or certain of our other principal executive officers could affect our ability to run our business effectively.

        Our success will depend on our ability to retain our current management and to attract and retain qualified personnel in the future. Competition for senior management personnel is intense and there can be no assurances that we can retain our personnel. The loss of a member of senior management requires the remaining executive officers to divert immediate and substantial attention to seeking a replacement. The inability to fill vacancies in our senior executive positions on a timely basis could adversely affect our ability to implement our business strategy, which would negatively impact our results of operations.

Risks Associated with this Offering

Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

        Upon completion of this offering, our executive officers, directors and principal stockholders will own, in the aggregate, approximately 70.5% of our outstanding common stock. As a result, these stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions and will have significant control over our management and policies. The directors elected by these stockholders will be able to make decisions affecting our capital structure, including decisions to issue additional capital stock, implement stock repurchase programs and incur indebtedness. This control may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interests.

Future sales of shares of our common stock in the public market may depress our stock price and make it difficult for you to recover the full value of your investment in our shares.

        If our existing stockholders sell substantial amounts of our common stock in the public market following this offering or if there is a perception that these sales may occur, the market price of our common stock could decline. Based on shares outstanding as of January 25, 2002, and assuming the exercise of warrants to purchase an aggregate of 2,131,800 shares of common stock, upon completion of this offering we will have outstanding approximately 55,750,320 shares of common stock. Of these shares, only the shares of common stock sold in this offering will be freely tradable, without restriction, in the public market. After the lockup agreements pertaining to this offering expire 180 days from the date of this prospectus, unless waived, an additional 41,250,320 shares will be eligible for sale in the public market at various times, subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended. See "Shares Eligible for Future Sale" for more information regarding shares of our common stock that may be sold by existing stockholders after the closing of this offering.

13

Because our common stock is not currently traded on a public market, the initial public offering price may not be indicative of the market price of our common stock after this offering. You may be unable to resell your shares at or above the initial public offering price.

        Prior to our October 2000 recapitalization, our common stock was listed on The Nasdaq Stock Market's National Market. In connection with our recapitalization, we terminated our listing, and there is currently no public market for our common stock. We cannot assure you that an active public market will develop for our common stock following this offering or that, if a market does develop, the market price of our common stock will equal or exceed the public offering price. The public offering price will be determined by negotiations between us and the representatives of the underwriters and will not necessarily be indicative of the market price of the common stock after the offering. The prices at which the common stock will trade after the offering will be determined by the marketplace and may be influenced by many factors, including:

•

the valuation multiples of publicly traded companies that are engaged in initiatives similar to ours;

•

our financial information;

•

the history of, and the prospects for, our company and the industry in which we compete;

•

an assessment of our management, our past and present operations, and the prospects for, and timing of, our future revenues;

•

the present state of our development; and

•

the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

The price of our common stock may be volatile.

        Following this offering, the price at which our common stock will trade may be volatile. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities. These fluctuations often have been unrelated or disproportionate to the operating performance of publicly traded companies. In the past, following periods of volatility in the market price of a particular company's securities, securities class-action litigation has often been brought against that company. If similar litigation were instituted against us, it could result in substantial costs and divert management's attention and resources from our core business.

Terrorism and the uncertainty of war may have a material adverse effect on our operating results.

        Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001 and other acts of violence or war may affect the market on which our common stock will trade, the markets in which we operate, our operations and profitability and your investment. Further terrorist attacks against the United States or U.S. businesses may occur. The potential near-term and long-term effect these attacks may have for our customers, the market for our common stock, the markets for our services and the U.S. economy are uncertain. The consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment.

Our stock price may be adversely affected because our results of operations may fluctuate from quarter to quarter.

        The timing of new store openings, related pre-opening expenses and the amount of revenue contributed by new and existing stores may cause our quarterly results of operations to fluctuate. Our business is also subject to seasonal fluctuation. If our quarterly revenue and operating results fall below the expectations of securities analysts and investors, the market price of our common stock could fall

14

substantially. Historically, we have realized a higher portion of our net sales during the month of December than during the other months of the year.

        Operating results also may vary depending on a number of factors, many of which are outside our control, including:

•

changes in our pricing policies or those of our competitors;

•

the hiring and retention of key personnel;

•

wage and cost pressures;

•

changes in fuel prices or electrical rates;

•

costs related to acquisitions of businesses; and

•

seasonal and general economic factors.

You will incur immediate and substantial dilution as a result of this offering.

        The initial public offering price is substantially higher than the book value per share of the common stock. As a result, purchasers in this offering will experience immediate and substantial dilution of $21.21 per share in the tangible book value of the common stock from the initial public offering price.

Takeover defense provisions may adversely affect the market price of our common stock.

        Various provisions of the Delaware general corporation law, or the DGCL, and of our corporate governance documents may inhibit changes in control not approved by our board of directors and may have the effect of depriving you of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile takeover. In addition, the existence of these provisions may adversely affect the market price of our common stock. These provisions include:

•

a classified board of directors;

•

a prohibition on stockholder action through written consents;

•

a requirement that special meetings of stockholders be called only by our board of directors, our chairman or our president;

•

advance notice requirements for stockholder proposals and nominations; and

•

availability of "blank check" preferred stock.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus are forward-looking statements. We generally identify forward-looking statements in this prospectus using words like "believe," "intend," "target," "expect," "estimate," "may," "should," "plan," "project," "contemplate," "anticipate," "predict" or similar expressions. These statements involve known and unknown risks, uncertainties and other factors, including those described in this "Risk Factors" section, that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the Securities and Exchange Commission, we do not plan to publicly update or revise any forward-looking statements after we distribute this prospectus, whether as a result of any new information, future events or otherwise.

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ABOUT THIS PROSPECTUS

        Market data used throughout this prospectus, including information relating to our relative position in the pet food and supplies retailing industry, is based on the good faith estimates of management, which estimates are based upon their review of internal surveys, independent industry publications and other publicly available information, including Packaged Facts reports and information prepared by the American Pet Products Manufacturers Association, or APPMA, the American Veterinary Medical Association, or AVMA, and the Business Communications Company, Inc., or BCC. Although we believe that these sources are reliable, we do not guarantee the accuracy or completeness of this information, and we have not independently verified this information.

        We own or have rights to trademarks or trade names that we use in conjunction with the operation of our business. In addition, our name, logo and website name and address are our service marks or trademarks. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. For example, Iams® and Eukanuba® are trademarks of The Iams Company, Science Diet® is a trademark of Hill's Pet Nutrition Inc., Nutro® is a trademark of Nutro Products, Inc., Purina® is a trademark of Ralston Purina Corp., Alpo® is a trademark of Friskies PetCare Company, Inc. and Kal Kan® is a trademark of Mars, Incorporated and its affiliates.

16

USE OF PROCEEDS

        We estimate that our net proceeds from the sale of the 14,500,000 shares of common stock offered by us will be approximately $255.1 million, or approximately $272.9 million if the underwriters exercise their over-allotment option in full, at an assumed initial public offering price of $19.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us of approximately $2.5 million. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

        We intend to use the net proceeds from this offering to:

•

redeem in full all outstanding shares of our 14% series A senior redeemable preferred stock; and

•

redeem in full all outstanding shares of our 12% series B junior redeemable preferred stock.

        Assuming this offering occurred on February 2, 2002, the last day of our 2001 fiscal year, the aggregate redemption price of our 14% series A preferred stock and 12% series B preferred stock would be approximately $140.9 million and $96.7 million, respectively, which in each case includes a redemption premium and accrued and unpaid dividends through February 2, 2002. The actual amount we will pay to redeem these shares will also include accrued and unpaid dividends from February 3, 2002 to the date the offering is completed. See "Description of Capital Stock—Preferred Stock" and "Certain Relationships and Related Transactions—Receipt of Proceeds from this Offering."

        Any remaining net proceeds, including proceeds to be received by us if the underwriters exercise their over-allotment option, will be used for general corporate purposes.

        Pending application of the net proceeds as described above, we intend to invest the net proceeds in short-term investment grade securities.

DIVIDEND POLICY

        We have not paid cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in the operation of our business and we do not anticipate paying cash dividends in the foreseeable future. In addition, our senior credit facility and the indenture governing our senior subordinated notes place limitations on our ability to pay dividends or make other distributions in respect of our common stock. Any future determination as to the payment of dividends on our common stock will be restricted by these limitations, will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant by the board of directors, including the DGCL, which provides that dividends are only payable out of surplus or current net profits.

        The terms of our series A and series B redeemable preferred stock require us to pay dividends whether or not declared by our board of directors, out of funds legally available. Dividends on the series A and series B redeemable preferred stock accrue at the rates of 14% and 12% of the liquidation preference per annum, respectively. Dividends are payable in cash on a quarterly basis. If dividends are not paid when due, the amount payable is added to the liquidation preference. As of February 2, 2002, dividends earned but not paid on the series A and series B redeemable preferred stock would be approximately $22.4 million and $13.4 million, respectively.

17

DILUTION

        If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. We calculate net tangible book value per share by dividing the net tangible book value (total assets less intangible assets and total liabilities, including preferred stock) by the number of outstanding shares of common stock.

        Based on shares outstanding as of November 3, 2001, our net tangible book value at November 3, 2001 was $(337.8) million or $(8.79) per share.

        After giving effect to the sale of the 14,500,000 shares of common stock by us at an assumed initial public offering price of $19.00 per share, and after deducting the underwriting discount and estimated offering expenses payable by us and the application of the net proceeds therefrom, and assuming the exercise of warrants to purchase an aggregate of 2,131,800 shares of common stock at a weighted average exercise price of $0.001 per share, our pro forma net tangible book value at November 3, 2001 would be $(121.5) million, or $(2.21) per share. This represents an immediate increase in the pro forma net tangible book value of $6.58 per share to existing stockholders and an immediate dilution of $21.21 per share to new investors.

        The following table illustrates this per share dilution:

Assumed initial public offering price per common share					$	19.00
	Net tangible book value per common share at November 3, 2001	$	(8.79	)
	Increase per share attributable to new investors		6.58
Pro forma net tangible book value per common share after the offering						(2.21	)
Dilution per common share to new investors					$	21.21

        The following table shows on a pro forma basis at November 3, 2001 the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering:

		Shares Purchased			Total Consideration
									Average Price Per Share
		Number	Percent		Amount		Percent
Existing stockholders		40,556,900	73.66	%	$	19,852,326	6.72	%	$	0.49
New investors		14,500,000	26.34	%	$	275,500,000	93.28	%	$	19.00
	Total	55,056,900	100.00	%	$	295,352,326	100.00	%

        The above information excludes (1) 1,872,468 shares of common stock reserved for issuance upon exercise of outstanding options at November 3, 2001, with a weighted average exercise price of $0.2275 per share, (2) options to purchase an aggregate of approximately 550,000 shares of common stock which will be issued concurrently with the closing of the offering and (3) 234,836 shares available for issuance under our 1994 stock option plan. It also excludes shares of common stock that the underwriters have the option to purchase from us solely to cover over-allotments. Assuming the exercise of all options outstanding at November 3, 2001, our pro forma net tangible book value at November 3, 2001 would be $(121.1) million, or $(2.13) per share, which would represent an immediate increase in the pro forma net tangible book value of $6.66 per share to existing stockholders and an immediate dilution of $21.13 per share to new investors.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and our capitalization as of November 3, 2001. Our capitalization is presented (1) on an actual basis and (2) as adjusted to give effect to the sale of 14,500,000 shares of our common stock at an assumed initial public offering price of $19.00 per share and the intended application of the net proceeds as if the offering had occurred on February 2, 2002, and the exercise of warrants to purchase an aggregate of 2,131,800 shares of our common stock, which we expect to be exercised concurrently with the offering. This presentation should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus.

			As of November 3, 2001
			Actual			As Adjusted
			(in thousands)
Cash and cash equivalents			$	3,064		$	19,861
Long-term debt, including current portion:
	Senior credit facility:
		Revolving credit facility(1)	$	—		$	—
		Term loan B facility		195,000			195,000
	10.75% senior subordinated notes due 2011			200,000			200,000
	Other debt(2)			7,472			7,472
		Total long-term debt, including current portion		402,472			402,472
Preferred stock:(3)
	$.01 par value, 500 shares authorized, 111 and 78 shares issued and outstanding
	14% series A senior redeemable exchangeable cumulative preferred stock			125,488			—
	12% series B junior redeemable cumulative preferred stock			86,542			—
Common stock				38			55
Additional paid-in capital				(181,607	)		68,459
Deferred compensation				(6,807	)		(6,807	)
Accumulated other comprehensive loss				(1,746	)		(1,746	)
Accumulated deficit				(97,549	)		(111,673	)
Total stockholders' deficit				(287,671	)		(51,712	)
Total capitalization			$	326,831		$	350,760

(1)

As of November 3, 2001, we also had outstanding letters of credit under our revolving credit facility of approximately $5.7 million, which reduce the amount we may borrow under our revolving credit facility. See "Description of Certain Indebtedness—Senior Credit Facility."

(2)

Consists of capital leases of $5.2 million and other obligations of $2.3 million.

(3)

Amounts equal liquidation preference, plus accrued and unpaid dividends, less unamortized issuance costs.

19

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

        The following selected historical consolidated financial data as of, and for the fiscal years ended, February 1, 1997, January 31, 1998, January 30, 1999, January 29, 2000 and February 3, 2001, presented below under the captions "Statement of Operations Data" and "Balance Sheet Data," have been derived from our audited consolidated financial statements as of those dates and for those periods. The following selected historical consolidated financial data as of, and for the thirty-nine weeks ended, October 28, 2000 and November 3, 2001, presented below under the captions "Statement of Operations Data" and "Balance Sheet Data," have been derived from our unaudited consolidated financial statements as of those dates and for those periods. Results for the thirty-nine weeks ended October 28, 2000 and November 3, 2001 are not necessarily indicative of results for the full year. The selected historical consolidated financial data and notes should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements.

		(amounts in thousands, except per share amounts, net sales per square foot and number of stores at period end)
		Fiscal Year Ended															39 Weeks Ended
		Feb. 1, 1997			Jan. 31, 1998			Jan. 30, 1999			Jan. 29, 2000			Feb. 3, 2001(1)			October 28, 2000			November 3, 2001
																	(unaudited)
Statement of Operations Data:
Net sales		$	600,637		$	749,789		$	839,622		$	990,289		$	1,151,178		$	810,350		$	937,249
Cost of sales and occupancy costs			446,315			553,566			624,818			720,711			817,084			582,977			662,614
Gross profit			154,322			196,223			214,804			269,578			334,094			227,373			274,635
Selling, general and administrative expenses			132,745			173,667			187,938			220,800			264,753			190,838			237,193
Merger and non-recurring costs			37,208			38,693			22,963			—			55,928			56,154			445
	Operating income (loss)		(15,631	)		(16,137	)		3,903			48,778			13,413			(19,619	)		36,997
Interest expense, net			600			2,530			6,718			8,936			22,971			9,937			31,545
Earnings (loss) before Internet operations and equity in loss of unconsolidated affiliates, income taxes and extraordinary item			(16,231	)		(18,667	)		(2,815	)		39,842			(9,558	)		(29,556	)		5,452
Internet operations and equity in loss of unconsolidated affiliates			—			—			—			(1,254	)		(4,543	)		(2,611	)		(2,505	)
Earnings (loss) before income taxes and extraordinary item			(16,231	)		(18,667	)		(2,815	)		38,588			(14,101	)		(32,167	)		2,947
Income taxes (benefit)			(4,075	)		(5,486	)		(438	)		16,831			4,974			2,016			1,895
Earnings (loss) before extraordinary item			(12,156	)		(13,181	)		(2,377	)		21,757			(19,075	)		(34,183	)		1,052
Extraordinary item—loss on extinguishment of debt (net of income tax benefit)			—			—			—			—			(1,264	)		(1,264	)		(12,942	)
Net earnings (loss)			(12,156	)		(13,181	)		(2,377	)		21,757			(20,339	)		(35,447	)		(11,890	)
Increase in carrying amount of redeemable preferred stock			—			—			—			—			(8,486	)		(1,862	)		(20,493	)
Net earnings (loss) available to common stockholders		$	(12,156	)	$	(13,181	)	$	(2,377	)	$	21,757		$	(28,825	)	$	(37,309	)	$	(32,383	)
Basic earnings (loss) per share		$	(0.01	)	$	(0.01	)	$	(0.00	)	$	0.02		$	(0.05	)	$	(0.04	)	$	(0.84	)
Diluted earnings (loss) per share		$	(0.01	)	$	(0.01	)	$	(0.00	)	$	0.02		$	(0.05	)	$	(0.04	)	$	(0.84	)
Shares used for computing basic earnings (loss) per share			854,744			908,424			927,212			928,136			632,162			830,152			38,336
Shares used for computing diluted earnings (loss) per share			854,744			908,424			927,212			938,872			632,162			830,152			38,336

20

Other Financial Data:
Gross profit margin		25.7	%		26.2	%		25.6	%		27.2	%		29.0	%		28.1	%		29.3	%
Adjusted EBITDA(2)	$	39,666		$	57,845		$	63,150		$	88,058		$	117,179		$	71,398		$	91,531
Adjusted EBITDA margin(3)		6.6	%		7.7	%		7.5	%		8.9	%		10.2	%		8.8	%		9.8	%
Depreciation and amortization	$	18,089		$	24,289		$	30,382		$	39,280		$	48,100		$	35,182		$	38,830
Inventory turns(4)		5.4	x		5.7	x		6.0	x		6.2	x		6.7	x		5.8	x		6.6	x
Store Data:
Percentage increase in comparable store net sales		16.1	%		11.5	%		6.4	%		11.1	%		6.4	%		6.5	%		8.4	%
Net sales per square foot(5)	$	162		$	158		$	157		$	168		$	177	(6)	$	127		$	131
Number of stores at period end		413			457			476			490			528			526			560

	As of											As of
	Feb. 1, 1997		Jan. 31, 1998		Jan. 30, 1999		Jan. 29, 2000		Feb. 3, 2001(1)			October 28, 2000			November 3, 2001
												(unaudited)
	(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	44,338	$	3,354	$	2,324	$	36,059	$	18,044		$	11,469		$	3,064
Working capital(7)		14,772		30,006		36,992		32,824		21,479			34,113			46,998
Total assets		312,617		335,195		387,135		453,894		454,319			461,179			483,089
Total debt, including current maturities(8)		29,106		46,442		99,880		118,465		391,191			403,119			402,472
Redeemable preferred stock		—		—		—		—		191,537			184,913			212,030
Common stockholders' equity (deficit)		196,499		186,057		183,841		205,890		(268,407	)		(277,397	)		(287,671	)

(1)

The fiscal year ended February 3, 2001 consisted of 53 weeks, as compared to 52 weeks for each of the fiscal years ended February 1, 1997, January 31, 1998, January 30, 1999 and January 29, 2000.

(2)

Net earnings (loss) before interest (net), taxes, depreciation and amortization, Internet operations prior to consolidation in fiscal 2001, equity in loss of unconsolidated affiliates, extraordinary item and management fees, adjusted to exclude the effects of the following expenses for the periods referenced: (A) merger and non-recurring costs of $37.2 million, $38.7 million, $23.0 million and $55.9 million for the fiscal years ended February 1, 1997, January 31, 1998, January 30, 1999 and February 3, 2001, respectively, (B) general and administrative costs of $11.0 million in the fiscal year ended January 31, 1998 associated with the acquisition of PetCare Plus, Inc., (C) general and administrative costs of $5.9 million in the fiscal year ended January 30, 1999 associated with a management realignment, an asset write-off related to the relocation of our main distribution center and the replacement of the point-of-sale equipment in all stores, (D) management fees of $1.0 million, $0.3 million and $2.3 million for the fiscal year ended February 3, 2001, the 39 weeks ended October 28, 2000 and the 39 weeks ended November 3, 2001, respectively, paid pursuant to our management services agreement, and (E) non-cash stock-based compensation of $14.8 million for the 39 weeks ended November 3, 2001, related to the deemed increase in fair value for accounting purposes resulting from this offering.

Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles, or GAAP, but is used by some investors to determine a company's ability to service or incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all companies and accordingly is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as an indicator of a company's operating performance or liquidity, and should not be considered in isolation from or as a substitute for net income (loss), cash flows from operations or cash flow data prepared in accordance with GAAP. We have presented Adjusted EBITDA in this prospectus solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. Adjusted EBITDA is not intended to represent and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP.

21

The calculation of Adjusted EBITDA is shown below:

	Fiscal Year Ended														39 Weeks Ended
	Feb. 1, 1997			Jan. 31, 1998			Jan. 30, 1999			Jan. 29, 2000		Feb. 3, 2001			October 28, 2000			November 3, 2001
	(in thousands)
															(unaudited)
Operating income	$	(15,631	)	$	(16,137	)	$	3,903		$	48,778	$	13,413		$	(19,619	)	$	36,997
Merger and non-recurring costs		37,208			38,693			22,963			—		55,928			56,154			445
Depreciation and amortization		18,089			24,289			30,382			39,280		48,100			35,182			38,830
Interest included in amortization above		—			—			—			—		(1,302	)		(579	)		(1,923	)
Special G&A costs		—			11,000	(a)		5,902	(b)		—		—			—			—
Management fees (c)		—			—			—			—		1,040			260			2,340
Stock-based compensation (d)		—			—			—			—		—			—			14,842
Adjusted EBITDA	$	39,666		$	57,845		$	63,150		$	88,058	$	117,179		$	71,398		$	91,531

(a)

General and administrative costs of $11.0 million for the fiscal year ended January 31, 1998 were incurred in connection with the acquisition of PetCare Plus, Inc.



(b)

General and administrative costs of $5.9 million for the fiscal year ended January 30, 1999, consists of $1.4 million incurred in connection with a management realignment, and $4.5 million in connection with the relocation of our main distribution center and the replacement of our point-of-sale equipment in all stores.



(c)

Management fees are paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations. Upon the closing of this offering, the parties have agreed to terminate the management services agreement.



(d)

In connection with the deemed increase in fair value related to outstanding stock options for accounting purposes as a result of this offering, we recorded non-cash stock-based compensation totaling $14.8 million, of which $12.3 million and $2.5 million are recorded in selling, general and administrative expense and cost of sales and occupancy costs, respectively. We anticipate recording an aggregate of approximately $11.0 million of additional non-recurring non-cash stock-based compensation expense in the fourth quarter of fiscal 2001 and the first quarter of fiscal 2002 related to options outstanding prior to the offering. We do not currently anticipate recording any additional stock-based compensation expense related to options outstanding upon the closing of the offering.

(3)

Calculated by dividing Adjusted EBITDA by net sales.

(4)

Calculated by dividing cost of sales by end of period inventory. For the thirty-nine weeks ended October 28, 2000 and November 3, 2001, cost of sales has been annualized based on a 52-week year.

(5)

Calculated by dividing net sales by gross square footage of stores open, weighted by the number of months stores are open during the period.

(6)

As adjusted to a 52-week period, net sales per square foot would have been $173 for the fiscal year ended February 3, 2001.

(7)

Calculated by subtracting current liabilities from current assets (other than cash and cash equivalents).

(8)

Includes capital leases and other obligations.

22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this prospectus. Our actual results may differ materially from those contained in any forward-looking statements.

General

        PETCO is a leading specialty retailer of premium pet food and supplies. At January 25, 2002, we operated 561 stores in 41 states and the District of Columbia. We plan to open superstores in the future and follow a strategy of converting and expanding our remaining smaller format stores to the superstore format. As a result of this strategy, we have opened and acquired superstores, have expanded and relocated smaller format stores into superstores and have closed underperforming stores. As a result of our store expansion strategy, operating results may reflect lower average store contribution and operating margins due to increased store pre-opening expenses and lower anticipated sales volumes of newer stores.

        On October 2, 2000, we completed a leveraged recapitalization with an entity controlled by affiliates of Leonard Green & Partners, L.P. and Texas Pacific Group, the sponsors of the transaction. The transaction was financed by a combination of equity, senior subordinated debt and a senior credit facility. A group of equity investors led by the sponsors contributed a total of approximately $200 million of equity to PETCO in the transaction. The transaction was accounted for as a recapitalization and as such, a step-up of assets to fair market value was not required.

Results of Operations

        The following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated. As a result of operational and strategic changes, period-to-period comparisons of financial results may not be meaningful and the results of our operations for historical periods may not be indicative of our future results.

	Fiscal Year Ended						39 Weeks Ended
	Jan. 30, 1999		Jan. 29, 2000		Feb. 3, 2001		October 28, 2000		November 3, 2001
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and occupancy costs	74.4		72.8		71.0		71.9		70.7
Gross profit	25.6		27.2		29.0		28.1		29.3
Selling, general and administrative expenses	22.4		22.3		23.0		23.6		25.4
Merger and non-recurring costs	2.7		—		4.8		6.9		—
Operating income (loss)	0.5		4.9		1.2		(2.4	)	3.9
Interest expense, net	0.8		0.9		2.0		1.2		3.4
Earnings (loss) before Internet operations and equity in loss of unconsolidated affiliates, income taxes and extraordinary item	(0.3	)	4.0		(0.8	)	(3.6	)	0.5
Internet operations and equity in loss of unconsolidated affiliates	—		(0.1	)	(0.4	)	(0.4	)	(0.3	)
Earnings (loss) before income taxes and extraordinary item	(0.3	)	3.9		(1.2	)	(4.0	)	0.2
Income taxes (benefit)	(0.0	)	1.7		0.4		0.2		0.1
Earnings (loss) before extraordinary item	(0.3	)	2.2		(1.6	)	(4.2	)	0.1
Extraordinary item—loss on extinguishment of debt (net of income tax benefit)	—		—		(0.1	)	(0.2	)	(1.4	)
Net earnings (loss)	(0.3	)	2.2		(1.7	)	(4.4	)	(1.3	)

23

Thirty-nine Weeks Ended November 3, 2001 Compared with Thirty-nine Weeks Ended October 28, 2000

        Net sales increased 15.7% to $937.2 million for the thirty-nine weeks ended November 3, 2001 from $810.4 million for the thirty-nine weeks ended October 28, 2000. The increase in net sales for the thirty-nine weeks ended November 3, 2001 resulted primarily from the addition of 53 superstores, partially offset by the closure of 19 stores, of which 12 were relocated, and a comparable store net sales increase of 8.4%. The comparable store net sales increase was attributable to maturing superstores, increased marketing and merchandising efforts and increased customer traffic. The increase in comparable store net sales accounted for approximately $67.2 million, or 53.0%, of the net sales increase, and $59.6 million, or 47.0%, was attributable primarily to the net increase in our store base. During the first quarter of fiscal 2000, the distribution of Iams brand pet food was broadened beyond specialty stores into supermarkets, warehouse clubs and mass merchants. Iams brand pet food represented approximately 9% of our net sales in fiscal 1999. The broadening of distribution of Iams brand pet food negatively impacted comparable store net sales by approximately 3% during both fiscal 2000 and in first quarter 2001. For the second and third quarter 2001, following the anniversary of the broadening of distribution of Iams brand pet food, the increases in comparable store net sales were 10.1% and 7.5%, respectively. Third quarter 2001 comparable store net sales were modestly impacted by the September 11^th terrorist attacks and, to a lesser extent, by weakening economic conditions.

        Gross profit, defined as net sales less the cost of sales including store occupancy costs, increased $47.3 million, or 20.8%, to $274.6 million for the thirty-nine weeks ended November 3, 2001 from $227.4 million for the thirty-nine weeks ended October 28, 2000. Gross profit as a percentage of net sales increased to 29.3% for the thirty-nine weeks ended November 3, 2001, from 28.1% in the prior year period. The majority of this increase in gross margin is due to the shift in the sales mix from lower-margin pet food sales to higher-margin categories, such as companion animals, toys and supplies, greater purchasing leverage and increased leverage of occupancy costs, partially offset by increases in accruals for merchandise shrink. Our reduced sales of Iams brand pet food due to its broader availability accelerated the shift in sales mix contributing to the gross margin increase. The increase in gross margin was offset by $2.5 million of non-cash stock-based compensation based on the deemed fair value of our common stock as a result of the offering.

        Selling, general and administrative expenses increased $46.4 million, or 24.3%, to $237.2 million for the thirty-nine weeks ended November 3, 2001 from $190.8 million for the thirty-nine weeks ended October 28, 2000. The increase was due primarily to non-cash stock-based compensation expense of $12.3 million based on the deemed fair value of our common stock as a result of the offering, and increased personnel and related costs associated with supporting increased sales and new store openings. As a percentage of net sales, these expenses increased to 25.4% for the thirty-nine weeks ended November 3, 2001 from 23.6% in the prior year period. The increase for the thirty-nine weeks ended November 3, 2001 was primarily due to costs related in increased support functions and transition costs for the post-acquisition integration of Internet operations, management fees under our management services agreement entered into in connection with our leveraged recapitalization and increased insurance costs.

        Merger and non-recurring costs of $0.4 million were recorded in the thirty-nine weeks ended November 3, 2001. These costs consisted of an additional loss of $0.3 million to sub-lease an acquired facility that was previously closed and additional legal costs of $0.1 million related to our leveraged recapitalization.

        Merger and non-recurring costs of $56.2 million were recorded in the thirty-nine weeks ended October 28, 2000. These costs consisted of $19.6 million of leveraged recapitalization transaction costs, compensation expense of $22.3 million related to the repurchase of outstanding options for common stock in our leveraged recapitalization, the write-off of $10.2 million with respect to our investment in Petopia.com and $4.1 million in expenses related to the settlement of existing shareholder lawsuits and shareholder lawsuits related to our leveraged recapitalization.

24

        Operating income was $37.0 million in the thirty-nine weeks ended November 3, 2001, or 3.9% of net sales, compared with operating losses of ($19.6) million for the thirty-nine week period ended October 28, 2000, or (2.4%) of net sales. Excluding merger and non-recurring costs and the $14.8 million non-cash stock-based compensation charge, on a comparable basis, we would have reported operating income of $52.3 million, or 5.6% of net sales, in the thirty-nine week period ended November 3, 2001, compared with operating income of $36.5 million, or 4.5% of net sales, in the prior year period. We anticipate recording an aggregate of approximately $11.0 million of additional non-recurring non-cash stock-based compensation expense in the fourth quarter of fiscal 2001 and the first quarter of fiscal 2002 related to options outstanding prior to the offering. We do not currently anticipate recording any additional stock-based compensation expense related to options outstanding upon the closing of the offering. Included in operating income for the thirty-nine week period ended November 3, 2001 is an operating loss of $1.6 million for Internet operations and transition costs related to Internet operations of $0.5 million.

        Net interest expense was $31.5 million for the thirty-nine week period ended November 3, 2001 compared with net interest expense of $9.9 million in the prior year period. Increased borrowings related to our leveraged recapitalization led to the increase in interest expense.

        We recognized $2.5 million in equity in loss of unconsolidated affiliates for the thirty-nine weeks ended November 3, 2001 from our former limited partner interest in a limited partnership which operates retail pet food and supplies stores in Canada. We accounted for our investment in the limited partnership using the equity method as we did not exercise control over the limited partnership, and we recorded our proportionate share of earnings or loss according to the partnership agreement. For a further discussion of our Canadian investment, see "—Canadian Partnership."

        We recorded a loss of $2.6 million for Internet operations and equity in loss of unconsolidated affiliates for the thirty-nine weeks ended October 28, 2000. This primarily non-cash loss consists of $11.5 million of equity in the losses of Petopia.com, partially offset by $8.9 million we earned for our support of Petopia.com principally under the terms of our strategic alliance agreement, net of related expenses. We acquired certain operating assets of Petopia.com in the fourth quarter of fiscal 2000 and the results or our Internet operations are included in our consolidated results for the thirty-nine weeks ended November 3, 2001.

        Income taxes were $1.9 million for the thirty-nine weeks ended November 3, 2001 compared with $2.0 million for the thirty-nine weeks ended October 28, 2000. We did not recognize any tax benefits from our equity in loss of unconsolidated affiliates, resulting in effective tax rates before extraordinary item of 64.3% and (6.3%), respectively, in the thirty-nine weeks ended November 3, 2001 and the prior year period.

        We redeemed our 13% senior subordinated notes due 2010 in the thirty-nine weeks ended November 3, 2001, resulting in an extraordinary loss upon early redemption of $12.9 million (net of income tax benefit of $7.9 million).

        We retired a credit facility in the thirty-nine weeks ended October 28, 2000 in connection with our leveraged recapitalization and related unamortized debt issuance costs were written off, resulting in an extraordinary loss of $1.3 million (net of income tax benefit of $0.8 million).

        The holders of our series A preferred stock and our series B preferred stock are entitled to receive dividends at a rate of 14% and 12%, respectively. We are not required to pay these dividends in cash. The dividends that are not paid in cash compound quarterly. The dividends earned in the thirty-nine weeks ended November 3, 2001 have been added to the principal balance of the preferred stock, with a corresponding deduction in net income available to common stockholders.

25

Fiscal Year Ended February 3, 2001 Compared with Fiscal Year Ended January 29, 2000

        Net sales increased 16.2% to $1,151.2 million in fiscal 2000 from $990.3 million in fiscal 1999. The increase in net sales in fiscal 2000 resulted primarily from the addition of 58 superstores, including the acquisition of six superstores, partially offset by the closure of 20 stores, of which ten were relocated, and a comparable store net sales increase of 6.4%. The comparable store net sales increase was attributable to maturing superstores, increased marketing and merchandising efforts and increased customer traffic. The increase in comparable store net sales accounted for approximately $64.0 million, or 39.8%, of the net sales increase, and $96.9 million, or 60.2% of the net sales increase, was attributable primarily to the net increase in our store base and the fact that fiscal 2000 contained 53 weeks, compared to 52 weeks in fiscal 1999. During the first quarter of fiscal 2000, the distribution of Iams brand pet food was broadened beyond specialty stores into supermarkets, warehouse clubs and mass merchants. Iams brand pet food sales represented approximately 9% of our net sales in fiscal 1999. The broadening of distribution of Iams brand pet food negatively impacted comparable store net sales by approximately 3% during fiscal 2000, a trend that continued through the first quarter of fiscal 2001.

        Gross profit increased $64.5 million, or 23.9%, to $334.1 million in fiscal 2000 from $269.6 million in fiscal 1999. Gross profit as a percentage of net sales increased to 29.0% in fiscal 2000 from 27.2% in fiscal 1999. The majority of this increase in gross margin is due to the continuing shift in the sales mix from lower-margin pet food sales to higher-margin categories such as companion animals, toys and supplies; greater purchasing leverage; and increased leverage of occupancy costs. Our reduced sales of Iams brand pet food due to its broader availability accelerated the shift in sales mix in fiscal 2000, contributing to the gross margin rate increase.

        Selling, general and administrative expenses increased $44.0 million, or 19.9%, to $264.8 million in fiscal 2000 from $220.8 million in fiscal 1999. The increase was due primarily to increased personnel and related costs associated with supporting increased sales and new store openings. As a percentage of net sales, these expenses increased to 23.0% in fiscal 2000 from 22.3% in fiscal 1999. The increase in 2000 was primarily due to increased personnel and related costs associated with our training and customer satisfaction initiatives, depreciation and maintenance of our investments in infrastructure in the prior year, and the accrual for management bonuses based on improved financial performance.

        Merger and non-recurring costs of $55.9 million were recorded in fiscal 2000. These costs consisted of $19.8 million of leveraged recapitalization transaction costs, compensation expense of $22.3 million related to the repurchase of outstanding options for common stock in our leveraged recapitalization, the write-off of $10.2 million with respect to our investment in Petopia.com and $3.7 million in expenses related to the settlement of existing shareholder lawsuits and shareholder lawsuits related to our leveraged recapitalization.

        Operating income was $13.4 million in fiscal 2000 compared with operating income of $48.8 million in fiscal 1999. Excluding merger and non-recurring costs, on a comparable basis, we would have reported operating income of $69.3 million, or 6.0% of net sales, in fiscal 2000, compared with operating income of $48.8 million, or 4.9% of net sales, in fiscal 1999.

        During fiscal 1999, we acquired an equity interest in Petopia.com, an e-commerce destination for the sale of pet food and supplies. Prior to our acquisition of certain assets of Petopia.com in the fourth quarter of fiscal 2000, we accounted for our investment in Petopia.com using the equity method and recorded our proportionate share of earnings or loss. We also had a limited partner interest in a limited partnership which operates retail pet food and supplies stores in Canada. We accounted for our investment in the limited partnership using the equity method as we did not exercise control over the limited partnership, and we recorded our proportionate share of earnings or loss according to the partnership agreement.

26

        We recognized losses of $1.3 million and $4.5 million for Internet operations and equity in loss of unconsolidated affiliates in fiscal 1999 and fiscal 2000, respectively. These amounts include the following:

•

Equity in losses for Petopia.com of $4.0 million and $11.5 million for fiscal 1999 and 2000, respectively;

•

Revenue and additional equity earned and expenses incurred in the amounts of $2.8 million and $10.3 million of net revenues in fiscal years 1999 and 2000, respectively, in providing certain marketing and fulfillment services to Petopia.com according to the terms of our strategic alliance agreement;

•

The write-off of $1.3 million in receivables due from Petopia.com in fiscal 2000 due to Petopia.com's pending liquidation;

•

Transition costs of $1.5 million incurred in fiscal 2000 in relocating Petopia.com's operating assets to our national support center following our acquisition of certain operating assets of Petopia.com; and

•

Equity in loss of $0.5 million in fiscal 2000 related to our former investment in a Canadian limited partnership.

        Net interest expense was $23.0 million in fiscal 2000 compared with net interest expense of $8.9 million in fiscal 1999. Increased borrowings in fiscal 2000, related to our leveraged recapitalization, led to the increase in interest expense.

        Income taxes were $5.0 million in fiscal 2000 compared with $16.8 million in fiscal 1999. Our effective tax rate before equity in loss of unconsolidated affiliates and non-deductible merger and non-recurring costs was 39.5% in fiscal 2000. Our effective tax rate before equity in loss of unconsolidated affiliates was 39.5% in fiscal 1999. We did not recognize any tax benefits from our equity in loss of unconsolidated affiliates, resulting in effective tax rates before extraordinary item of (35.3%) and 43.6%, respectively, in fiscal 2000 and fiscal 1999.

        We retired a credit facility during fiscal 2000 in connection with our leveraged recapitalization and related unamortized debt issuance costs were written off, resulting in an extraordinary expense of $1.3 million (net of income tax benefit of $0.8 million).

        Net loss was $20.3 million in fiscal 2000, compared with net earnings of $21.8 million in fiscal 1999. Net earnings, excluding Internet operations and equity in loss of unconsolidated affiliates and related tax effects, merger and non-recurring costs and related charges and related tax benefits and extraordinary item net of tax benefit, increased to $28.1 million, compared with net earnings in the prior year, excluding Internet operations and equity in loss of unconsolidated affiliates and related tax effects, of $24.1 million.

Fiscal Year Ended January 29, 2000 Compared with Fiscal Year Ended January 30, 1999

        Net sales increased 17.9% to $990.3 million in fiscal 1999 from $839.6 million in fiscal 1998. The increase in net sales in fiscal 1999 resulted primarily from the addition of 42 stores, partially offset by the closing of 18 stores, of which ten were relocations, and a comparable store net sales increase of 11.1%. The comparable store net sales increase was attributable to maturing superstores, increased marketing and merchandising efforts and increased customer traffic. The increase in comparable store net sales accounted for approximately $91.2 million, or 60.5%, of the net sales increase, and $59.5 million, or 39.5% of the net sales increase, was attributable to the net increase in our store base.

        Gross profit increased $54.8 million, or 25.5%, to $269.6 million in fiscal 1999 from $214.8 million in fiscal 1998. Gross profit as a percentage of net sales increased to 27.2% in fiscal 1999 from 25.6% in fiscal 1998. The majority of this increase in gross margin was due to the continuing shift in the sales

27

mix from lower-margin pet food sales to higher-margin categories such as companion animals, toys and supplies. Also, the fiscal 1998 gross margin was adversely affected by increased distribution costs resulting from our investment in two new central distribution centers and lower leverage of store occupancy costs in the acquired stores during the conversion process.

        Selling, general and administrative expenses increased $32.9 million, or 17.5%, to $220.8 million in fiscal 1999 from $187.9 million in fiscal 1998. The increase was due primarily to increased personnel and related costs associated with supporting increased sales and new store openings. As a percentage of net sales, these expenses decreased to 22.3% in fiscal 1999 from 22.4% in fiscal 1998. Included in selling, general and administrative expenses in fiscal 1998 are a $1.4 million charge for severance and legal costs related to our management realignment and a $4.5 million charge related to the write-off of assets in connection with the relocation of our main distribution center and the replacement of point-of-sale equipment in a chain-wide conversion of this equipment and other assets. Excluding these charges, selling, general and administrative expenses were 21.7% of net sales in fiscal 1998, compared with 22.3% of net sales in 1999. The increase in 1999 was primarily due to increased personnel and related costs associated with decentralization of field staff, depreciation and maintenance of our investments in infrastructure in the prior year, and the accrual for management bonuses based on improved financial performance.

        Merger and non-recurring costs of $23.0 million were recorded in fiscal 1998 in connection with the conversion activities of the stores acquired in the last half of fiscal 1997. These costs consisted of $0.5 million of transaction costs, $2.0 million of costs attributable to lease cancellations and closure of duplicate or inadequate facilities and activities, $19.1 million of reformatting, facility conversion and other integration costs and $1.4 million of severance and other costs.

        Operating income was $48.8 million in fiscal 1999 compared with operating income of $3.9 million in fiscal 1998. Excluding merger and non-recurring costs and other charges, on a comparable basis, we would have reported operating income of $48.8 million, or 4.9% of net sales, in fiscal 1999, compared with operating income of $32.8 million, or 3.9% of net sales, in fiscal 1998.

        Internet operations and equity in loss of unconsolidated affiliates resulted in a loss of $1.3 million in fiscal 1999. This consisted of $4.0 million of equity in the losses of Petopia.com, partially offset by $2.7 million we earned for our support of Petopia.com under the terms of our alliance agreement.

        Net interest expense was $8.9 million in fiscal 1999 compared with net interest expense of $6.7 million in fiscal 1998. Increased borrowings in fiscal 1999 led to the increase in interest expense.

        Income taxes were $16.8 million in fiscal 1999 compared with an income tax benefit of $0.4 million in fiscal 1998. Our effective tax rate before equity in loss of unconsolidated affiliates was 39.5% in fiscal 1999. Our effective tax rate before equity in loss of unconsolidated affiliates and non-deductible merger and non-recurring costs was 39.5% in fiscal 1998. We did not recognize any tax benefits from our equity in loss of unconsolidated affiliates, resulting in effective tax rates of 43.6% and 15.6%, respectively, in fiscal 1999 and fiscal 1998.

        Net earnings were $21.8 million in fiscal 1999, compared with net loss of $2.4 million in fiscal 1998. Net earnings in fiscal 1999, excluding Internet operations and equity in loss of unconsolidated affiliates and related tax effects, increased to $24.1 million, compared with net earnings in fiscal 1998, excluding merger and non-recurring costs and related charges and tax benefits, of $15.6 million.

Quarterly Data

        The following tables set forth the unaudited quarterly results of operations for fiscal 1999, fiscal 2000 and the first three quarters of 2001. This information includes all adjustments management considers necessary for fair presentation of such data. The results of operations for historical periods

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are not necessarily indicative of results for any future period. We expect quarterly results of operations to fluctuate depending on the timing and amount of net sales contributed by new stores.

        We believe that our business is moderately seasonal, with net sales and earnings generally higher in the fourth fiscal quarter due to year-end holiday purchases.

	Fiscal Quarter Ended
Fiscal 1999	May 1, 1999			Jul. 31, 1999			Oct. 30, 1999			Jan. 29, 2000
	(dollars in thousands)
Net sales	$	229,657		$	236,184		$	249,007		$	275,441
Gross profit		59,122			61,880			67,638			80,938
Operating income		7,812			8,889			11,387			20,690
Net earnings		3,562			4,121			4,889			9,185
Operating earnings(1)		3,562			4,121			5,349			11,072
Adjusted EBITDA(2)		16,856			19,204			21,302			30,696
Stores open at end of period		482			485			494			490
Aggregate gross square footage		5,773,881			5,889,004			6,068,222			6,075,030
Percentage increase in comparable store net sales		10.9	%		12.1	%		13.2	%		8.5	%

	Fiscal Quarter Ended
Fiscal 2000	Apr. 29, 2000			Jul. 29, 2000			Oct. 28, 2000			Feb. 3, 2001
	(dollars in thousands)
Net sales	$	265,166		$	262,719		$	282,465		$	340,828
Gross profit		73,266			73,371			80,736			106,721
Operating income (loss)		11,547			12,091			(43,256	)		33,031
Net earnings (loss)		6,381			2,694			(44,521	)		15,107
Operating earnings(1)		5,546			5,886			4,660			11,962
Adjusted EBITDA(2)		21,732			22,704			26,962			45,781
Stores open at end of period		503			509			526			528
Aggregate gross square footage		6,380,209			6,501,775			6,806,603			6,856,732
Percentage increase in comparable store net sales		8.5	%		5.0	%		6.3	%		6.1	%

	Fiscal Quarter Ended
Fiscal 2001	May 5, 2001			August 4, 2001			November 3, 2001
	(dollars in thousands)
Net sales	$	304,494		$	309,902		$	322,853
Gross profit		87,887			90,072			96,676
Operating income		11,783			10,766			14,448
Net earnings (loss)		(436	)		(694	)		(10,760	)
Operating earnings(1)		365			414			2,788
Adjusted EBITDA(2)		27,834			30,305			33,392
Stores open at end of period		538			548			560
Aggregate gross square footage		7,031,948			7,215,744			7,384,106
Percentage increase in comparable store net sales		7.7	%		10.1	%		7.5	%

(1)

Operating earnings exclude Internet operations and equity in loss of unconsolidated affiliates, net of tax effects, and merger and non-recurring costs, net of tax benefits.

(2)

Net earnings (loss) before interest (net), taxes, depreciation and amortization, Internet operations prior to consolidation in fiscal 2001, equity in loss of unconsolidated affiliates, extraordinary item and management fees, adjusted to exclude the effects of merger and non-recurring costs of $56.1 million, $(0.2) million and $0.4 million for the fiscal quarters ended October 28, 2000, February 3, 2001 and August 4, 2001, respectively, and non-cash stock-based compensation of $3,362, $5,809 and $5,671 for the fiscal quarters ended May 5, 2001, August 4, 2001 and November 3, 2001, respectively.

Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles, or GAAP, but is used by some investors to determine a company's ability to service or incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all companies and accordingly is not necessarily

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comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as an indicator of a company's operating performance or liquidity, and should not be considered in isolation from or as a substitute for net income (loss), cash flows from operations or cash flow data prepared in accordance with GAAP. We have presented Adjusted EBITDA in this prospectus solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. Adjusted EBITDA is not intended to represent and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP.

Liquidity and Capital Resources

        We have financed our operations and expansion program through internal cash flow, external borrowings and the sale of equity securities. At November 3, 2001, total assets were $477.6 million, $185.7 million of which were current assets. Net cash provided by operating activities was $27.9 million, $78.8 million, $55.9 million and $41.4 million for fiscal 1998, 1999, 2000 and the first thirty-nine weeks of fiscal 2001, respectively. Our sales are substantially on a cash basis. Therefore, cash flow generated from operating stores provides a significant source of liquidity. We use operating cash principally to make interest payments on our debt and to purchase inventory. A portion of our inventory purchases is financed through vendor credit terms. We are highly leveraged following our leveraged recapitalization in October 2000, and we use cash generated from operating activities to service the increased debt levels.

        We use cash in investing activities to purchase fixed assets for new stores, to acquire stores and, to a lesser extent, to purchase warehouse and office fixtures, equipment and computer hardware and software in support of our distribution and administrative functions. We invested $9.1 million in affiliates in the first thirty-nine weeks of fiscal 2001, $9.5 million in affiliates in fiscal 2000 and $18.5 million in affiliates in fiscal 1999. The affiliates include Petopia.com, an e-commerce destination for the sales of pet food and supplies, and a limited partnership that operates retail pet food and supplies stores in Canada. During fiscal 1998, we invested $4.9 million in the limited partnership and made loans of $6.5 million to a limited partner in the limited partnership. Cash used in investing activities was $62.3 million, $62.3 million, $72.6 million and $48.3 million for fiscal 1998, 1999, 2000 and the first thirty-nine weeks of fiscal 2001, respectively.

        We also finance some of our purchases of equipment and fixtures through capital lease and other obligations. No purchases of fixed assets were financed in this manner during fiscal 1999 or 2000. Purchases of $20.3 million of fixed assets were financed in this manner during fiscal 1998.

        During fiscal 1998, we completed two acquisitions of retailers of pet food and supplies in transactions accounted for as purchases. The aggregate fair value of assets acquired and the net cash invested in these businesses was $2.1 million, of which $0.3 million was expended in fiscal 1999. The excess of the aggregate cost over the fair value of net assets acquired was $1.8 million, which was recorded as goodwill and is being amortized over 15 years.

        During fiscal 1999, we completed one acquisition of a retailer of pet food and supplies in a transaction accounted for as a purchase. The aggregate fair value of assets acquired and the net cash invested in this business was $2.6 million. The excess of the aggregate cost over the fair value of net assets acquired was $1.5 million, which was recorded as goodwill and is being amortized over 15 years.

        During fiscal 2000, we completed one acquisition of a retailer of pet food and supplies in a transaction accounted for as a purchase. The aggregate fair value of assets acquired and the net cash invested in the business was $12.6 million. The excess of the aggregate cost over the fair value of net assets acquired was $10.9 million which was recorded as goodwill and is being amortized over 15 years.

        During fiscal 2000, we completed the acquisition of certain operating assets of Petopia.com in a transaction accounted for as a purchase. The aggregate fair value of assets acquired was $3.8 million.

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The excess of the aggregate cost over the fair value of net assets acquired was $3.1 million, which was recorded as goodwill and is being amortized over three years.

        On October 2, 2000, we completed the leveraged recapitalization. In the transaction, each issued and outstanding share of our common stock was cancelled and converted automatically into the right to receive $22.00 in cash, with the exception of 134,351 shares retained by members of our management. As a result of subsequent stock splits, these 134,351 shares now represent 5,911,444 shares of common stock. In the leveraged recapitalization, we issued an aggregate of $195.0 million in common stock and preferred stock and $120.0 million of senior subordinated debt, entered into a $350.0 million senior credit facility, retired debt under the then existing credit facility and repurchased substantially all of our outstanding common stock for an aggregate of $463.4 million. Net proceeds from the issuance of new shares of common stock in the leveraged recapitalization was $15.9 million. Following the leveraged recapitalization, we effected a 22-for-1 split of our common stock. This transaction was accounted for as a recapitalization and as such, a step-up of assets to fair market value was not required.

        Our primary long-term capital requirement is funding for the opening or acquisition of stores. Cash flows provided by (used in) financing activities were $33.3 million, $17.2 million and ($1.3) million in fiscal 1998, 1999 and 2000, respectively. In fiscal 1998, 1999, and 2000, net proceeds of $0.1 million, $0.3 million and $16.9 million, respectively, were generated from sales of common stock. In fiscal 2000, net proceeds of $107.4 million, $75.7 million and $1.1 million, respectively, were generated by the issuance of our series A senior redeemable exchangeable cumulative preferred stock, our series B junior redeemable cumulative preferred stock and common stock warrants. Remaining cash flows provided by financing activities were borrowings under long-term debt agreements, net of repayment of long-term debt agreements and other obligations. Cash flows from financing activities were used to fund our expansion program, investment in affiliates, leveraged recapitalization and working capital requirements.

        We have a senior credit facility with a syndicate of banks which had a commitment of up to $350.0 million that expired between October 2, 2006 and October 2, 2008. The senior credit facility consisted of an $80.0 million revolving credit facility, a $70.0 million term loan A facility and a $200.0 million term loan B facility. Following amendments of our senior credit facility in connection with an offering in October 2001 of 10.75% senior subordinated notes due 2011, the amount we are permitted to borrow under the revolving credit facility was reduced to $75.0 million, and our term loan facilities were restructured into a single $195.0 million term loan B facility. Borrowings under the senior credit facility are secured by substantially all of our assets and currently bear interest, at our option, at the agent bank's base rate plus a margin of up to 2.25%, or LIBOR plus a margin of up to 3.25%, based on our leverage ratio at the time in the case of the revolving credit facility and a fixed margin in the case of the term loan B facility. The credit agreement contains certain affirmative and negative covenants related to indebtedness, interest and fixed charges coverage and consolidated net worth. We were in full compliance with all these covenants at November 3, 2001. The proceeds of the offering of 10.75% senior subordinated notes due 2011, completed in October 2001, were used to redeem $120.0 million of 13% senior subordinated notes and to reduce indebtedness under the senior credit facility.

        As of February 3, 2001, we had available net operating loss carryforwards of $36.5 million for federal income tax purposes, which begin expiring in 2012, and $21.6 million for state income tax purposes, which begin expiring in 2005.

        We anticipate that funds generated by operations and funds available under the credit facility will be sufficient to finance our continued operations and planned store openings at least through fiscal 2002.

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Canadian Partnership

        We previously owned a non-controlling limited partnership interest in Canadian Petcetera Limited Partnership, which operates 32 Petcetera retail pet food and supplies stores in Canada. On January 28, 2002, we terminated our relationship with the partnership. Accordingly, we will record a write-off of approximately $26.1 million in the fourth quarter of 2001, which amount represents the carrying value of our investment as of the termination date. We will also record approximately $10.3 million of settlement expense in the fourth quarter of 2001 as a result of the settlement of a dispute between us and the other partners of the partnership. See "Business—Legal Proceedings."

Inflation

        Although we cannot accurately anticipate the effect of inflation on our operations, we do not believe that inflation has had, or is likely in the foreseeable future to have, a material impact on our net sales or results of operations.

Quantitative and Qualitative Disclosures About Market Risk

        Market risks relating to our operations result primarily from changes in short-term London Interbank Offered Rates, or LIBOR, as our senior credit facility utilizes a portfolio of short-term LIBOR contracts. LIBOR contracts are fixed rate instruments for a period of between one and six months, at our discretion. Our portfolio of LIBOR contracts vary in length and interest rate, such that adverse changes in short-term interest rates could affect our overall borrowing rate when contracts are renewed. We have entered into a $75.0 million interest rate collar agreement, or hedge, to limit our exposure to the interest rate risk associated with our variable rate debt. Changes in the intrinsic value of the hedge are recorded as accumulated other comprehensive income (loss). Amounts received or paid under the hedge are recorded as reductions of or additions to interest expense. We had a cumulative deferred loss on our hedge of $1.7 million, net of deferred tax benefit of $1.1 million, at November 3, 2001.

        Of the total $195.0 million in debt under our senior credit facility as of November 3, 2001, after giving effect to the hedge, $120.0 million was subject to variable interest rate fluctuations. Based on this debt level, and taking into account the hedge, a hypothetical 10% increase in LIBOR from the applicable rate at November 3, 2001 would increase net interest expense by approximately $0.4 million on an annual basis, and likewise would decrease both earnings and cash flows for that annual period by a corresponding amount. We cannot predict market fluctuations in interest rates and their impact on debt, nor can there be any assurance that long-term fixed-rate debt will be available at favorable rates, if at all. Consequently, future results may differ materially from estimated results due to adverse changes in interest rates or debt availability.

        We did not have any material foreign exchange or other significant market risk at November 3, 2001.

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BUSINESS

Company Overview

        We are the nation's leading pet food and supplies specialty retailer with 561 stores in 41 states and the District of Columbia. Our products include pet food, supplies, grooming products, toys, novelty items and vitamins, small pets such as fish, birds and other small animals (excluding cats and dogs), and veterinary supplies. Our strategy is to offer our customers a complete assortment of pet-related products at competitive prices, with superior levels of customer service at convenient locations.

        Our stores combine the broad merchandise selection and everyday low prices of a pet supply warehouse store with the convenient location and knowledgeable customer service of a neighborhood pet supply store. We believe that this combination differentiates our stores and provides us with a competitive advantage. Our principal format is a 15,000 square foot superstore, conveniently located near local neighborhood shopping destinations, including supermarkets, bookstores, coffee shops, dry cleaners and video stores, where our target "pet parent" customer makes regular weekly shopping trips. We believe that our stores are well positioned, both in terms of product offerings and location, to benefit from favorable long-term demographic trends, a growing pet population and an increasing willingness of pet owners to spend on their pets.

Store Locations

        We design our stores to offer a fun, vibrant and enjoyable shopping experience for our customers and their pets. A typical PETCO store is moderately sized at 12,000 to 15,000 square feet, with low ceilings, attractive signage and bright lighting, resulting in a distinctive retail setting. Below is a table which lists the number of our stores:

Number of PETCO Stores
as of January 25, 2002

State	Number of Stores	State	Number of Stores
Alabama	2	Mississippi	1
Arizona	15	Missouri	13
Arkansas	3	Montana	1
California	135	Nebraska	6
Colorado	12	Nevada	8
Connecticut	15	New Hampshire	6
Delaware	1	New Jersey	15
District of Columbia	1	New Mexico	3
Georgia	8	New York	33
Idaho	2	North Dakota	2
Illinois	38	Ohio	3
Indiana	6	Oregon	14
Iowa	6	Pennsylvania	23
Kansas	8	Rhode Island	1
Kentucky	1	South Dakota	1
Louisiana	2	Tennessee	7
Maine	1	Texas	49
Maryland	11	Utah	5
Massachusetts	24	Virginia	11
Michigan	14	Washington	26
Minnesota	18	Wisconsin	10

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Industry Overview

        General.    We believe the pet food and supplies industry is benefiting from a number of favorable demographic trends that are continuing to support a steadily growing pet population. The U.S. pet population has now reached 353 million companion animals, including 141 million cats and dogs, with an estimated 62% of all U.S. households owning at least one pet, and three quarters of those households owning two or more pets. We believe the trend to more pets and more pet-owning households will continue, driven by an increasing number of children under 18 and a growing number of empty nesters whose pets have become their new "children." Based on U.S. Census Bureau data, the number of children under 18 will continue to grow over the next five years. We believe that this trend will continue to support the growing U.S. pet population, as households with these demographics are more likely to own pets. We estimate that U.S. retail sales of pet food, supplies, small animals (excluding cats and dogs) and services has increased to approximately $23 billion in 2001.

        Pet Food.    Packaged Facts projects that dog and cat food sales, which represent the vast majority of all pet food sales, will account for approximately $11 billion in sales for 2001. In 2000, premium dog and cat food represented approximately 30% of the total dog and cat food market and is expected to increase to approximately 40% of the total dog and cat food market by 2005, representing a CAGR of 9.0%. Sales of dog and cat food accounted for $390 million or 34% of our fiscal 2000 net sales, of which $359 million, or 92%, was generated from premium dog and cat food sales.

        Historically, the pet food industry has been dominated by national supermarket brands such as Alpo, Kal Kan and Purina, which are primarily sold through grocery stores, supermarkets, convenience stores and mass merchants. In recent years, supermarkets' share of total pet food sales has steadily decreased as a result of competition from warehouse clubs, mass merchants and specialty pet store chains as well as the growing proportion of premium pet food sales. Premium pet foods, such as Science Diet, Nutro and Eukanuba, currently are not sold through supermarkets, warehouse clubs or mass merchants due to manufacturers' restrictions but are sold primarily through specialty retailers like PETCO, veterinarians and farm and feed stores.

        The growth of the premium pet food market is attributable to both the marketing of premium brands by vendors and a heightened nutritional awareness among pet owners. For example, during 1998, premium pet food manufacturers launched approximately 250 new specialty food products, such as all-natural products and products for pets with sensitive skin and stomachs. Management expects expanded product offerings by premium pet food manufacturers to continue, and that distribution of these products primarily through specialty retailers will continue to draw customers away from supermarkets and mass merchants.

        Pet Supplies and Small Animals.    Packaged Facts projects that sales of pet supplies will account for approximately $6 billion in sales for 2001 and will grow at a CAGR of 7.2% over the next few years. Pet supplies and small animals (excluding cats and dogs) accounted for $724 million or 63% of our fiscal 2000 net sales.

        The market for pet supplies consists of items such as collars and leashes, cages and habitats, toys, treats, aquatic supplies, pet carriers, vitamins and supplements and grooming and veterinary products. The channels of distribution for pet supplies are highly fragmented with products sold by many types of retailers, including supermarkets, warehouse clubs and other discounters, mass merchants, specialty pet store chains, direct mail and veterinarians. Specialty retailers such as PETCO, with wide assortments of pet supplies and higher levels of customer service, represent a growing channel for sales of pet supplies.

        The market for small animals (other than cats and dogs) includes sales of fish, birds, reptiles, rabbits, hamsters, mice and other small pets. Because of the overpopulation of cats and dogs and the controversial practices of some breeders, we have elected to limit our selection of animals to birds, fish, reptiles and other small animals. We do, however, participate in pet adoption programs for cats and dogs, which are administered through local animal welfare programs.

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        Pet Services.    Certain routine pet services are estimated to account for the remaining $6 billion of the overall $23 billion market projected by management, but represented less than 3% of our fiscal 2000 net sales. The market for pet services includes obedience training, grooming and other services. We offer obedience training in most of our stores, grooming in many of our stores and limited veterinary services, such as routine vaccinations, at a number of stores. Although services do not represent a significant portion of our net sales, we believe that offering selected pet services better serves our best customers and increases traffic flow in our stores.

        Distribution Channels.    The pet food and supplies industry is highly fragmented, with an estimated 9,000 independent pet supply stores operating in the United States. PETCO is one of only two national specialty retailers of pet food and supplies. Between 1991 and 1999, the last year for which data is available, specialty pet store chains such as PETCO experienced significant market share gains, largely at the expense of supermarkets. We believe that this shift primarily results from (1) the enhanced merchandising effort and product and services mix offered by specialty pet store chains and (2) the growing demand for premium pet food as nutritional awareness among the general population extends to pet owners and their pets. The following chart illustrates this shift in distribution channels.

Our Strategy and Competitive Advantages

        Our strategy is to strengthen our position as the leading pet food and supplies specialty retailer by offering our customers a complete assortment of pet-related products at competitive prices with superior levels of customer service at convenient locations. We intend to continue to pursue the following elements of our strategy:

•

Continue To Increase Sales and Profitability. We have increased our net sales from $443.6 million in fiscal 1995 to $1.15 billion in fiscal 2000, for a CAGR of 21.0%, while increasing our Adjusted EBITDA from $19.4 million to $117.2 million, for a CAGR of 43.3%. Our Adjusted EBITDA margins over this same period have more than doubled from 4.4% in fiscal 1995 to 10.2% in fiscal 2000. The principal contributors to these improvements in our financial performance include: (1) our ability to generate continuous comparable store net sales growth; (2) strategic expansion in both existing and new markets using our superstore format; (3) targeted merchandising efforts to drive greater sales of higher margin supplies and services, which have grown to 66.1% of net sales in fiscal 2000, up from 59.2% of net sales in fiscal 1996; (4) our expanding store base that offers economies of scale and purchasing efficiencies; and (5) a broad product offering of over 10,000 high quality pet-related products, most of which are not found in typical supermarkets or mass merchants.

•

Capitalize Upon Our Maturing Store Base. We have historically found that the most dramatic growth in a store's net sales and EBITDA occurs in the first five years following a store's opening. During this store maturation phase, we have historically experienced store level EBITDA margin improvements from an estimated 6% average EBITDA margin in the store's first year to over a 15%

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average EBITDA margin by year five. Approximately half of our stores were opened in the past five years and to date our newly opened stores have been maturing in accordance with historical rates. We believe that our maturing store base provides us with an opportunity to significantly increase our net sales and EBITDA with only modest incremental capital expenditures for these stores.

•

Expand Using Our Proven New Store Model. We believe that the highly fragmented pet food and supplies market offers compelling opportunities for us to increase our presence and gain market share. To capitalize on these opportunities and consistent with our existing strategy, we plan to increase our net store count by 35 to 45 stores per year over the next five years both by focusing on existing markets and by targeting one or two new geographic markets per year. We carefully measure each proposed store opening against demographic, economic and competitive factors. We have established an operating model that we believe enables us to quickly and profitably execute our expansion strategy after we have analyzed a market's potential. Our new stores generally have become profitable by the end of their first year of operation, and we target for each store a five-year return on investment of more than 20%.

•

Leverage Our Industry-Leading Integrated Information Systems. We have invested an aggregate of approximately $50 million over the last three fiscal years to replace and upgrade our POS and information system infrastructure. Our highly integrated POS system in each of our stores provides our management team with timely and valuable information on store and regional level sales and merchandising trends, inventory tracking and operational data. By integrating all of our key functional areas, our systems empower regional, district and store managers to increase sales, to improve operational efficiency, to control inventory, to monitor critical performance indicators and to enhance customer service and satisfaction.

•

Utilize Our Logistics Expertise. Our distribution system has over one million square feet of distribution capacity, including an integrated network of three national and five regional distribution centers. This network enables us to reduce our costs by reducing the delivered cost of merchandise and limiting the need to carry excess inventory. Our inventory control systems provide for effective replenishment of inventory and allow us to achieve optimal in-stock levels at our stores. Our logistics expertise has enabled us to dramatically increase inventory turns from 5.0x for fiscal 1995 to 6.7x for fiscal 2000.

•

Capitalize Upon Our Brand Awareness and Highly Successful Customer Loyalty Program. The "PETCO" brand name and our slogan "Petco, where the pets go" are well known by pet owners. We believe that this awareness reinforces the fun and enjoyable shopping experience that we seek to create for our customers and their pets. P.A.L.S., our highly successful customer loyalty program, further enhances and reinforces the loyalty, brand awareness and satisfaction of our customers. To date, we have issued approximately 13 million P.A.L.S. cards and recently have been issuing nearly one million cards per quarter. Our P.A.L.S. members account for over 70% of our net sales and spend an average of almost 50% more per transaction than do our non-P.A.L.S. customers. Our exclusive program fosters a long-term, one-on-one relationship with the customer and builds brand loyalty and customer retention. Our program also provides us with one of the largest databases of information in the industry. Information on our customers' buying preferences allows us to more precisely deliver targeted marketing efforts and assists us in more effectively catering to our customers' needs.

•

Continue to Provide Superior, Knowledge-Based Customer Service. We seek to enhance our customers' shopping experience by providing knowledgeable and friendly customer service and creating a fun and exciting shopping environment. We seek to hire store managers and sales associates who themselves are pet owners and enthusiasts and therefore are more eager and better able to assist customers with their needs. We believe it is better to hire animal lovers and train them in retail rather than hire experienced retailers and hope they like animals. We believe that our

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customer service differentiates us from our competitors, leading to increased sales, attracting new customers and building customer loyalty.

Purchasing and Distribution

        Our centralized purchasing and distribution system minimizes the delivered cost of merchandise and maximizes the in-stock position of our stores. We currently operate three central and five regional distribution centers. The central distribution centers are located in Mira Loma, California; Dayton, New Jersey; and Joliet, Illinois. Bulk items for all stores are either shipped to regional distribution centers for redistribution or are sent directly to store locations. Manufacturers ship non-bulk supplies to the central distribution facilities which we then distribute either to regional centers or directly to store locations. We believe that our centralized distribution system enables our stores to maximize selling space by reducing necessary levels of safety stock carried in each store. We also provide order fulfillment services for our Internet customers through our three central distribution centers.

Marketing and Advertising

        Our marketing department creates and implements a wide variety of nationwide, regional and local advertising, direct marketing and sales promotion programs. These television, radio, circular and direct mail programs are designed to increase sales and consumer awareness of the PETCO brand name.

        In late 1997 we launched our P.A.L.S. customer loyalty program, which provides us with one of the largest databases of customer information in the industry with approximately 13 million P.A.L.S. cards issued to date. Our P.A.L.S. database is integrated with our POS system, allowing us to track purchasing activity and shopping habits of our P.A.L.S. cardholders. This allows us to effectively target customers with personalized direct mail or e-mail messages, to provide promotional offers directly related to past purchases and to adjust our products and services mix to more effectively cater to our customers' needs.

        Local store marketing activities are conducted on a regular basis in most stores. These marketing activities include store opening events, in-store pet adoptions, informational seminars, school field trips, pet photos, products demonstrations, pet fairs and a variety of other local contests or cross-promotion events.

Competition

        The pet food and supplies business is highly competitive. This competition can be categorized into three different segments: (1) supermarkets, warehouse clubs and mass merchants; (2) specialty pet store chains; and (3) traditional pet stores. Many of the premium pet food brands we offer, such as Nutro, Science Diet and Eukanuba, are not presently available to supermarkets, warehouse clubs or mass merchants due to manufacturers' restrictions. We believe that the principal competitive factors influencing our business are product selection and quality, convenient store locations, customer service and price. We believe that we compete effectively within our various geographic areas; however, some of our competitors are much larger in terms of sales volume and have access to greater capital and management resources than we do.

        One of our premium pet food vendors, The Iams Company, was purchased by Procter & Gamble in fiscal 1999. Through the end of fiscal 1999, Iams brand pet food was not widely available in supermarkets or mass merchants. In fiscal 2000, Procter & Gamble broadened the distribution of Iams to supermarkets and mass merchants across the country. The Eukanuba brand of pet food, which is also manufactured by The Iams Company, continues to be sold exclusively by specialty channels such as PETCO.

        The pet food and supplies industry has been characterized in recent years by the consolidation of a number of pet supply chains. This consolidation has been accomplished through the acquisition of independent pet stores by larger specialty pet supply chains and the acquisition of these larger chains

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by similar competitors. We believe this consolidation trend may have a positive impact on industry conditions as store capacity may be rationalized, both in existing and in new units.

Suppliers and Vendors

        We purchase most of our merchandise directly from specialty suppliers and manufacturers of national brands. We purchase the majority of our pet food products from three vendors: The Iams Company, Hill's Pet Products, Inc. (which produces Science Diet), and Nutro, Inc. Supplies of products from these vendors accounted for approximately 10%, 10% and 8%, respectively, of our net sales in fiscal 2000 and 9%, 10% and 8%, respectively, in the first thirty-nine weeks of fiscal 2001. While we do not maintain long-term supply contracts with any of our vendors, we believe that we enjoy a favorable and stable relationship with each of these vendors.

Information Systems

        We have invested significant resources in establishing a comprehensive integrated information system infrastructure, including approximately $50 million over the last three fiscal years to replace and upgrade our information systems. We have integrated all key functional areas that provide our management team with timely information on sales trends, inventory tracking and operational data at the individual store level. The system empowers regional, district and store managers to increase sales, to control inventory and to enhance customer satisfaction.

        Our in-store point-of-sale system tracks all sales by stockkeeping unit (SKU) using bar codes and allows management to compare the current performance against historical performance and current year's budget on a daily basis. The information gathered by this system supports automatic replenishment of in-store inventory from our regional and central distribution centers and is integrated into product buying decisions. Store labor planning and visual presentation levels are supported by sales management information systems. We use Electronic Data Interchange (EDI) with selected suppliers for efficient transmittal of purchase orders, shipping notices and invoices. Management believes that the systems we have developed provide the ability to continue to improve customer service, operational efficiency and management's ability to monitor critical performance indicators. We continue to invest in supply chain technologies, human resources management, financial planning tools and continued improvement to the point-of-sale systems located in all stores.

Internet Initiatives

        We believe the Internet offers opportunities to complement our "brick-and-mortar" stores and to increase our retail commerce and consumer brand awareness of our products. We operate the popular e-commerce site www.petco.com, which provides our customers with pet-related content, commerce and community via the Internet. The information contained or incorporated in our website is not a part of this prospectus.

        On December 4, 2000, we acquired the Petopia.com website, including software and hardware required to operate the website, for an aggregate purchase price of approximately $3.8 million. Formerly, we had a strategic alliance with, and owned an equity interest of approximately 17.4% in, Petopia.com, a comprehensive pet commerce Internet destination that launched in the summer of 1999. The operations of Petopia.com have been rationalized and fully integrated with our Internet operations.

Trademarks and Licenses

        We have registered numerous service marks and trademarks with the United States Patent and Trademark Office. We believe the PETCO trademark has become an important component in our merchandising and marketing strategy. We believe we have all licenses necessary to conduct our business.

Employees

        As of November 3, 2001, we employed approximately 13,000 associates, of whom approximately 6,100 were employed full-time. Approximately 92% of our employees were employed in stores or in

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direct field supervision, approximately 4% in distribution centers and approximately 4% in our corporate headquarters in San Diego. We are not party to any collective bargaining arrangements, and we believe our labor relations are generally good.

Regulation

        The transportation and sale of small animals is governed by various state and local regulations. To date, these regulations have not had a material effect on our business or operations. Our aquatics and small animal buyers and real estate department are responsible for compliance with these regulations. Prior to the opening of each store, our aquatics and small animal buyers and real estate department review the regulations of the relevant state and local governments. Our real estate department then ensures ongoing compliance by keeping abreast of industry publications and maintaining contacts with our aquatics and small animal suppliers and the appropriate regulatory agency within each relevant state and local government.

Properties

        We lease substantially all of our store and warehouse locations. The original lease terms for our stores generally range from five to 20 years, with many of these leases containing renewal options. Leases on 145 stores expire within the next three years. Of these leases, 109 contain renewal options.

        Our headquarters, located in San Diego, California, consists of two facilities. We own an approximately 70,000 square foot facility and we lease an approximately 43,000 square foot facility. The owned San Diego facility is financed under an obligation which expires in February 2006. We also lease three central and five regional distribution centers. See "—Purchasing and Distribution." Our three central distribution centers collectively occupy approximately 800,000 square feet of space in Dayton, New Jersey; Joliet, Illinois; and Mira Loma, California under leases which expire in June 2002, April 2005 and September 2005, respectively. Our five regional distribution centers collectively occupy over 200,000 square feet of space in Stockton, California; Portland, Oregon; New Hope, Minnesota; Mansfield, Massachusetts; and Garland, Texas under leases which expire in April 2004, February 2002, September 2002, December 2003 and August 2004, respectively. Each of the distribution center leases contains a renewal option.

Legal Proceedings

        In July 2001, two former employees instituted an action against us in the Superior Court of California for the County of Los Angeles. The complaint in the action was filed, individually and on behalf of a purported class consisting of all current and former employees who worked as salaried managers or assistant managers in our stores in the state of California at any time between July 30, 1997, and the present. The complaint alleges that the individual plaintiffs and the purported class members worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law, and that they were classified as "exempt" store management employees but were forced to work more than 50% of their time in non-exempt tasks. The complaint alleges violations of the California Labor Code and the California Business and Professions Code. The relief sought includes compensatory damages, penalties, preliminary and permanent injunctions requiring us to pay overtime compensation under California law, prejudgment interest, costs and attorneys' fees and such other relief as the court deems proper. We have not answered the complaint but we have demurred to the complaint and discovery has commenced. In November 2001, the case was transferred to the Superior Court of California for the County of San Diego. We intend to vigorously defend the action, including contesting the certification of the action as a class action. If successful, this litigation could have a material adverse effect on our financial condition, and any required change in our labor practices, could have a negative impact on our results of operations.

        On January 28, 2002, we settled a dispute regarding our investment in Canadian Petcetera Limited Partnership, which operates 32 Petcetera retail pet food and supplies stores in Canada, and terminated our relationship with the partnership. Under the terms of the settlement agreement (1) we transferred all of our interests in the Canadian partnership to an affiliate of Canadian Petcetera

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Warehouse Inc., the general partner of the partnership, (2) we paid the partnership $15.9 million in Canadian dollars, or approximately $10.3 million in U.S. dollars, (3) we agreed not to enter the Canadian marketplace for a two-year period and (4) we and the other partners released each other from any and all liability in connection with the operation of the Canadian partnership. In addition, the settlement provides that we have a right to the proceeds of any sale of the Canadian partnership or its assets within the next two years, subject to a maximum amount of $20.0 million in Canadian dollars, or approximately $12.4 million in U.S. dollars.

        From time to time we are involved in routine litigation and proceedings in the ordinary course of our business. We are not currently involved in any other pending litigation matters that we believe would have a material adverse effect on us.

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MANAGEMENT

Directors and Executive Officers

        Our directors and executive officers and their respective ages as of January 25, 2002, are as follows:

Name	Age	Present Position
Brian K. Devine	59	Chairman, President and Chief Executive Officer
James M. Myers	44	Executive Vice President, Chief Financial Officer and Director
Bruce C. Hall	57	Executive Vice President and Chief Operating Officer
Robert E. Brann	50	Senior Vice President, Merchandising
Keith G. Martin	49	Senior Vice President, Operations
Janet D. Mitchell	46	Senior Vice President, Human Resources and Administration
William M. Woodard	53	Senior Vice President, Business Development
John M. Baumer	34	Director
Jonathan Coslet	37	Director
John G. Danhakl	45	Director
Julian C. Day	49	Director
William S. Price III	45	Director

Brian K. Devine, Chairman, President and Chief Executive Officer, joined PETCO in August 1990 and has served as Chairman since January 1994. Before joining PETCO, Mr. Devine was President of Krause's Sofa Factory, a furniture retailer and manufacturer, from 1988 to 1989. From 1970 until 1988, Mr. Devine held various positions with Toys "R" Us, a retailer of children's toys, including Senior Vice President, Director of Stores and Senior Vice President, Growth, Development and Operations. Mr. Devine currently serves on the Boards of Directors of Wild Oats Markets, Inc., a publicly held retailer and distributor of natural foods, the National Retail Federation, the International Mass Retail Association, Students in Free Enterprise and the Georgetown University College Board of Advisors. Mr. Devine graduated from Georgetown University with a degree in economics.

James M. Myers, Executive Vice President, Chief Financial Officer and a director, joined PETCO in May 1990. Mr. Myers became Executive Vice President in March 2001 and has been Chief Financial Officer since 1998. From 1996 to 1998, Mr. Myers served as Senior Vice President, Finance and before that as Vice President, Finance and as Vice President and Controller of PETCO. From 1980 to 1990, Mr. Myers held various positions at the accounting firm of KPMG LLP, including Senior Audit Manager. Mr. Myers has served as a director since October 2000, the date we completed our recapitalization. Mr. Myers is a CPA and received an accounting degree from John Carroll University.

Bruce C. Hall, Executive Vice President and Chief Operating Officer, joined PETCO in April 1997 and became Chief Operating Officer in March 2001. Mr. Hall spent 34 years from 1963 to 1997 with Toys "R" Us, a retailer of children's toys, where he progressively advanced from field operations through a number of positions, including Senior Vice President of Operations.

Robert E. Brann, Senior Vice President, Merchandising, joined PETCO in September 2000. From 1998 to 2000, Mr. Brann was with The Pep Boys, most recently as Senior Vice President Merchandising. From 1989 to 1998, Mr. Brann was with Trak Auto, where he became Executive Vice President Merchandising. From 1971 to 1989, Mr. Brann held various management positions in merchandising and operations with a number of retailers. Mr. Brann has over 30 years of retail experience.

Keith G. Martin, Senior Vice President, Operations, joined PETCO in July 2001. From 1999 to 2001, Mr. Martin was President of Country Stores for Gateway, Inc. From 1994 to 1999, Mr. Martin was with Office Depot, Inc., where he held various management positions and was ultimately named Senior Vice President, Stores. From 1974 to 1994, Mr. Martin held various management positions with

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a number of retailers. Mr. Martin has over 25 years of retail experience. Mr. Martin received a bachelor's degree from State University of New York.

Janet D. Mitchell, Senior Vice President, Human Resources and Administration, joined PETCO in February 1989. From 1989 to 1998, Ms. Mitchell served as Vice President, Human Resources. From 1981 to 1989, Ms. Mitchell held various management positions in human resources with the Southland Corporation's 7-Eleven stores. From 1978 to 1981, Ms. Mitchell held various positions with the El Torito Restaurant chain. Ms. Mitchell received a bachelor's degree from San Diego State University.

William M. Woodard, Senior Vice President, Business Development, joined PETCO in January 1991. From 1991 to 1999, Mr. Woodard served as Senior Vice President, Store Operations. From 1987 to 1990, Mr. Woodard was Vice President, Director of Marketing at J. M. Jones, Inc., a wholesale division of SuperValu Stores, Inc. From 1970 to 1987, Mr. Woodard was employed by Safeway Stores, Inc., a grocery retailer, in a number of positions including Retail Operations Manager and Marketing Operations Manager. Mr. Woodard holds an administrative management degree from North Texas State University and an M.B.A. in marketing from the University of Southern California.

        John M. Baumer has served as a director since October 2000, the date we completed our recapitalization. Mr. Baumer became a partner of Leonard Green & Partners, L.P. in January 2001. Mr. Baumer had previously been a Vice President at Leonard Green & Partners since May 1999. Prior to joining Leonard Green & Partners, he had been a Vice President in the Corporate Finance Division of Donaldson, Lufkin & Jenrette Securities Corporation (DLJ) in Los Angeles. Prior to joining DLJ in 1995, Mr. Baumer worked at Fidelity Investments and Arthur Andersen. Mr. Baumer currently serves on the Boards of Directors of Intercontinental Art, Inc., VCA Antech, Inc., Communications & Power Industries, Inc. and Leslie's Poolmart, Inc. Mr. Baumer is a 1990 graduate of the University of Notre Dame. He also received his M.B.A. in 1995 from the Wharton School at the University of Pennsylvania.

Jonathan Coslet has served as a director since October 2000, the date we completed our recapitalization. Mr. Coslet has been an executive of Texas Pacific Group since 1993. Prior to joining Texas Pacific Group, Mr. Coslet was in the Investment Banking Department of DLJ, specializing in leveraged acquisitions and high-yield finance from September 1991 to February 1993. Mr. Coslet serves on the Boards of Directors of Magellan Health Services, Inc. and Oxford Health Plans, Inc.

        John G. Danhakl has served as a director since October 2000, the date we completed our recapitalization. Mr. Danhakl has served as a partner at Leonard Green & Partners since 1995. Prior to becoming a partner at Leonard Green & Partners, Mr. Danhakl was a Managing Director at DLJ and had been with DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert from 1985 to 1990. Mr. Danhakl presently serves on the Boards of Directors of The Arden Group, Inc., Big 5 Sporting Goods, Inc., Communications & Power Industries, Inc., Twin Laboratories, Inc., Diamond Auto Glass Works, Liberty Group Publishing, Leslie's Poolmart, Inc., VCA Antech, Inc. and MEMC Electronic Materials, Inc., and on the Board of Managers of AsianMedia Group LLC. Mr. Danhakl is a 1980 graduate of the University of California at Berkeley. He received his M.B.A. in 1985 from the Harvard Business School.

        Julian C. Day has served as a director since November 2000. From 1999 to 2000, Mr. Day was with Sears Roebuck, most recently as Executive Vice President and Chief Operating Officer. From 1992 to 1998, Mr. Day was with Safeway, Inc., where he became Executive Vice President and Chief Financial Officer. Mr. Day is a 1974 graduate of Oxford University. He received his M.B.A. in 1979 from the London Business School.

William S. Price III has served as a director since November 2000. Mr. Price was a founding partner of Texas Pacific Group in 1992. Prior to forming Texas Pacific Group, Mr. Price was Vice President of Strategic Planning and Business Development for G.E. Capital, reporting to the Chairman. In this capacity, Mr. Price was responsible for acquiring new business units and determining the

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business and acquisition strategies for existing businesses. From 1985 to 1991, Mr. Price was employed by the management consulting firm of Bain & Company, attaining officer status and acting as co-head of the Financial Services Practice. Prior to 1985, Mr. Price was employed as an associate specializing in corporate securities transactions with the legal firm of Gibson, Dunn & Crutcher. Mr. Price is a member of the California Bar and graduated with honors in 1981 from the Boalt Hall School of Law at the University of California, Berkeley. He is a 1978 Phi Beta Kappa graduate of Stanford University. Mr. Price serves on the Boards of Directors of Continental Airlines, Inc., Del Monte Foods Company, Denbury Resources, Inc., Gemplus International, S.A., Verado Holdings, Inc. and several private companies.

        All of the directors were initially nominated pursuant to the terms of a stockholders agreement. These nomination rights will expire upon the closing of the offering. See "Certain Relationships and Related Transactions—Stockholders Agreement."

Board of Directors and Committees

        Upon the closing of this offering, we will have authorized nine directors. In accordance with the terms of our certificate of incorporation, the terms of office of our board of directors will be divided into three classes. As a result, a portion of our board of directors will be elected each year. The division of the three classes and their respective election dates are as follows:

•

the class I directors' term will expire at the annual meeting of stockholders to be held in 2003;

•

the class II directors' term will expire at the annual meeting of stockholders to be held in 2004; and

•

the class III directors' term will expire at the annual meeting of stockholders to be held in 2005.

        At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. In addition, our bylaws provide that the authorized number of directors may be changed by an amendment to the bylaws duly adopted by the board of directors or by the stockholders, or by a duly adopted amendment to our certificate of incorporation. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.

        Our board of directors intends to create an audit committee and a compensation committee. We expect that our audit committee will be comprised of three independent directors whom it will appoint and will be charged with the following responsibilities:

•

recommending the engagement of our independent public accountants;

•

reviewing the scope of the audit to be conducted by the independent public accountants;

•

meeting periodically with the independent public accountants and our Chief Financial Officer to review matters relating to our financial statements, our accounting principles and our system of internal accounting controls; and

•

reporting its recommendations as to the approval of our financial statements to the board of directors.

        We anticipate that the compensation committee will be composed of at least two independent directors. The compensation committee will be responsible for considering and making recommendations to the board of directors regarding executive compensation and will be responsible for administering our stock option and executive incentive compensation plans.

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Director Compensation

        Our directors are not entitled to any compensation for serving as a director. Directors may be reimbursed for the actual reasonable costs incurred in connection with attendance at board meetings.

Compensation Committee Interlocks and Insider Participation

        None of our executive officers or directors presently serves, or in the past has served, on the compensation committee of any other company with which we conduct business, nor do we expect any member of our compensation committee to serve, or in the past to have served, on the compensation committee of a company with which we conduct business.

Executive Compensation

        The following table sets forth information with respect to compensation awarded to, earned by or paid to each person who served as our Chief Executive Officer or was one of our four other most highly compensated executive officers during the fiscal year ended February 3, 2001. We refer to these officers as our named executive officers.

Summary Compensation Table

						Long-term Compensation Awards
		Fiscal Year Compensation
						Number of Securities Underlying Options(1)
Name and Principal Position(s)	Fiscal Year						All Other Compensation
		Salary		Bonus
Brian K. Devine Chairman, President and Chief Executive Officer	2000 1999 1998	$	550,000 485,000 450,000	$	1,143,529 1,125,200 112,500	100,000 100,000 100,000	$	4,855,947 11,627 16,451	(2)
Bruce C. Hall Executive Vice President and Chief Operating Officer	2000 1999 1998		300,000 275,000 253,450		498,994 510,400 203,200	50,000 50,000 50,000		1,568,950 10,276 9,961	(3)
James M. Myers Executive Vice President and Chief Financial Officer	2000 1999 1998		250,000 213,000 184,900		309,893 247,080 25,400	25,000 25,000 25,000		730,053 5,905 5,712	(4)
Janet D. Mitchell Senior Vice President, Human Resources and Administration	2000 1999 1998		175,000 150,000 134,400		181,925 174,000 16,900	25,000 25,000 25,000		792,803 4,819 3,470	(5)
William M. Woodard Senior Vice President, Business Development	2000 1999 1998		235,000 220,000 203,000		244,299 255,200 25,400	25,000 25,000 25,000		1,419,439 7,094 9,344	(6)

(1)

The number of securities underlying options have not been adjusted to reflect a 22-for-1 common stock split we effected on October 20, 2000 or the 2-for-1 common stock split we will effect prior to the completion of the offering. Other than options to purchase 6,411 shares held by Mr. Myers, these options were exercised and repurchased by us at a price of $22.00 per share on October 2, 2000 in connection with our leveraged recapitalization transaction. The options to purchase 6,411 shares (without adjustment for stock splits) were not repurchased and were outstanding as of February 3, 2001.

(2)

Includes (A) $47,162, representing our allocation to defined contribution plans, (B) $5,160, representing our payment of premiums on term life insurance and (C) $4,803,624, consisting of amounts paid in connection with our leveraged recapitalization, including amounts paid for the repurchase of stock options.

(3)

Includes (A) $24,203, representing our allocation to defined contribution plans, (B) $5,160, representing our payment of premiums on term life insurance and (C) $1,539,586, consisting of amounts paid in connection with our leveraged recapitalization, including amounts paid for the repurchase of stock options.

(4)

Includes (A) $14,752, representing our allocation to defined contribution plans, (B) $1,143, representing our payment of premiums on term life insurance and (C) $714,157, consisting of amounts paid in connection with our leveraged recapitalization, including amounts paid for the repurchase of stock options.

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(5)

Includes (A) $10,362, representing our allocation to defined contribution plans, (B) $1,650, representing our payment of premiums on term life insurance and (C) $780,791, consisting of amounts paid in connection with our leveraged recapitalization, including amounts paid for the repurchase of stock options.

(6)

Includes (A) $14,370, representing our allocation to defined contribution plans, (B) $2,639, representing our payment of premiums on term life insurance and (C) $1,402,430, consisting of amounts paid in connection with our leveraged recapitalization, including amounts paid for the repurchase of stock options.

        The following table sets forth information regarding the grant of stock options to purchase shares of our common stock made during the fiscal year ended February 3, 2001 to our named executive officers.

Option Grants in Last Fiscal Year

	Individual Grants						Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2)(3)
	Number of Securities Underlying Options Granted(1)	% of Total Options Granted to Employees in Fiscal 2000
Name				Exercise or Base Price Per Share(1)		Expiration Date
							5%		10%
Brian K. Devine	100,000	9.5	%	$	12.44	3/7/2010	$	155,133	$	235,795
Bruce C. Hall	50,000	4.8	%	$	12.44	3/7/2010	$	77,566	$	117,897
James M. Myers	25,000	2.4	%	$	12.44	3/7/2010	$	38,783	$	58,949
Janet D. Mitchell	25,000	2.4	%	$	12.44	3/7/2010	$	38,783	$	58,949
William M. Woodard	25,000	2.4	%	$	12.44	3/7/2010	$	38,783	$	58,949

(1)

The number of securities underlying options granted and the exercise price per share have not been adjusted to reflect a 22-for-1 common stock split we effected on October 20, 2000 or the 2-for-1 common stock split we will effect prior to the completion of the offering.

(2)

These amounts represent assumed rates of appreciation in the price of our common stock during the terms of the options in accordance with rates specified in applicable federal securities regulations. Actual gains, if any, on stock option exercises will depend on the future price of our common stock and overall stock market conditions. There is no representation that the rates of appreciation reflected in this table will be achieved.

(3)

These options were exercised and repurchased by us at a price of $22.00 per share on October 2, 2000 in connection with our leveraged recapitalization transaction.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

        The following table sets forth, for each of our named executive officers, information regarding the exercise of stock options to purchase shares of our common stock during the fiscal year ended February 3, 2001, the number of shares of common stock underlying stock options held at fiscal year end and the value of options held at fiscal year end.

				Number of Securities Underlying Unexercised Options at Year-End		Value of Unexercised In-the-Money Options at Year-End
Name	Shares Acquired on Exercise	Value Realized(2)
				Exercisable	Unexercisable	Exercisable	Unexercisable
Brian K. Devine	460,226	$	4,341,012	—	—	—	—
Bruce C. Hall	150,000	$	1,440,625	—	—	—	—
James M. Myers	89,366	$	780,791	—	—	—	—
Janet D. Mitchell	69,568	$	581,316	—	—	—	—
William M. Woodard	137,952	$	1,382,310	—	—	—	—

(1)

The number of shares acquired on exercise have not been adjusted to reflect a 22-for-1 common stock split we effected on October 20, 2000 or the 2-for-1 common stock split we will effect prior to the completion of the offering.

(2)

Represents cash payments in exchange for cancellation of options.

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Compensation Plans

        1994 Stock Option Plan.    On January 11, 1994, we adopted, and on February 24, 1994, our stockholders approved, the 1994 Stock Option and Restricted Stock Plan for Executive and Key Employees of PETCO Animal Supplies, Inc. The 1994 plan provides for the granting of stock options, stock appreciation rights or restricted stock with respect to shares of common stock to executives and other key employees. Stock options may be granted in the form of incentive stock options or non-statutory stock options and are exercisable for up to ten years following the date of grant. Stock option exercise prices must be equal to or greater than the fair market value of the common stock on the grant date.

        In June 1996, our stockholders approved an amendment to the 1994 plan to increase the number of shares available for issuance under the plan for each of the next five fiscal years by 3.0% of the number of shares of common stock issued and outstanding as of the end of the immediately preceding fiscal year. During fiscal 2000, as part of the merger and recapitalization transaction, with the exception of options to purchase 39,000 shares of common stock (before adjustment for our 22-for-1 common stock split), all options previously issued under the 1994 plan were cancelled and options with exercise prices of less than $22.00 were repurchased from their holders. Under the terms of the recapitalization, the options to purchase approximately 39,000 shares of common stock not repurchased were converted into options to purchase approximately 28,000 shares of common stock, and the exercise prices were adjusted, to preserve the economic value of the options for the holders. As a result of subsequent stock splits, these options now represent the right to purchase approximately 1,232,000 shares of common stock. In connection with the merger and recapitalization transaction, we adopted and our stockholders approved an amendment and restatement of the 1994 plan. Pursuant to this amendment and restatement, the total number of shares available for issuance under the plan was reset at 59,568 shares. As a result of subsequent stock splits, there are now 2,620,992 shares available for issuance under the plan. As of November 3, 2001, options to purchase 1,872,468 shares of common stock were outstanding at a weighted average exercise price of $0.2275.

        The 1994 plan also provides for the issuance of stock appreciation rights which will generally entitle a holder to receive cash or stock, as determined by the compensation committee, at the time of exercise equal to the difference between the exercise price and the fair market value of our common stock. In addition, the 1994 plan permits us to issue shares of restricted stock to executive or other key employees upon terms and conditions determined by the compensation committee.

        Adoption of 2002 Incentive Award Plan.    Prior to the offering, our board of directors intends to adopt the 2002 Incentive Award Plan of PETCO Animal Supplies, Inc., which we refer to as the Incentive Plan. Although the Incentive Plan has not been formally adopted by our board of directors, we expect the terms of the plan will be substantially as follows. The principal purpose of the Incentive Plan is to attract, retain and motivate selected officers, employees, consultants and directors through the granting of stock-based compensation awards. The Incentive Plan provides for a variety of awards, including non-qualified stock options, incentive stock options (within the meaning of Section 422 of the Internal Revenue Code), stock appreciation rights, restricted stock, deferred stock, dividend equivalents, performance awards, stock payments, and other stock-related benefits. Generally, the aggregate share limit under the Incentive Plan is equal to the sum of (1) 1,115,006 shares of common stock, plus (2) for each fiscal year during the term of the Incentive Plan commencing with the fiscal year ending January 31, 2004, a number of shares of common stock equal to 2.0% of the total number of issued and outstanding shares of common stock outstanding as of the last day of the immediately preceding fiscal year. With respect to grants under the Incentive Plan to our independent directors, the aggregate share limit under the Incentive Plan is equal to the sum of (1) 55,750 shares of common stock, plus (2) for each fiscal year during the term of the Incentive Plan commencing with the fiscal year ending January 31, 2004, a number of shares of common stock equal to 0.1% of the total number of issued and outstanding shares of common stock as of the last day of the immediately preceding fiscal

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year. The maximum number of shares of common stock that may be issued as incentive stock options under the Incentive Plan will not exceed 5,000,000 shares. The maximum number of shares which may be subject to awards granted under the Incentive Plan to any individual in any calendar year cannot exceed 500,000.

        A committee of independent directors (each of whom is a "non-employee director" for purposes of Rule 16b-3 under the Exchange Act and an "outside director" under Section 162(m) of the Internal Revenue Code) will administer grants to employees and consultants. The full board will administer the Incentive Plan with respect to options granted to independent directors.

        The Incentive Plan provides that the committee has the authority to (1) select the employees and consultants to whom awards are to be made, (2) determine the number of shares to be issued to recipients of awards and the terms and conditions of the awards, and (3) make all other determinations and to take all other actions necessary or advisable for the administration of the Incentive Plan with respect to employees or consultants.

        The Incentive Plan also provides that at certain times our independent directors will automatically be granted options to purchase shares of our common stock. All options granted to our independent directors will have an exercise price per share equal to the fair market value of a share of our common stock as of the date of grant.

        The committee or, in the case of options issued to independent directors, the entire board, is authorized to adopt, amend and rescind rules relating to the administration of the Incentive Plan, and to amend, suspend and terminate the Incentive Plan. We have attempted to structure the Incentive Plan in a manner such that remuneration attributable to stock options and other awards will not be subject to the deduction limitation contained in Section 162(m) of the Internal Revenue Code.

        401(k) plan.    We have a tax-qualified employee savings and retirement plan, or 401(k) plan, covering all of our eligible full-time employees. We adopted the 401(k) plan effective January 1992. Pursuant to the 401(k) plan, participants may elect to contribute, through salary reductions, up to 15% of their annual compensation. Effective April 1, 1998, we adopted a matching provision for 50% of the first 6% of compensation that is contributed by each participating employee. The 401(k) plan is designed to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions by employees or by us to the 401(k) plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) plan, and so that contributions by us, if any, will be deductible by us when made. The trustee under the 401(k) plan, at the direction of each participant, invests the assets of the 401(k) plan in any of nine investment options.

        Deferred Compensation Plan.    We have established a non-qualified deferred compensation plan for senior executives. The deferred compensation plan, which was adopted in January 1995, allows employees to defer compensation up to certain specified levels. Effective January 1, 2000, we adopted a matching provision for 50% of the first 6% of compensation that is contributed by each participating employee.

        Group Benefit Plan.    In July 1991, we established the Group Benefit Plan of PETCO Animal Supplies, Inc. which provides certain medical and vacation benefits for our employees. Pursuant to the terms of the group benefit plan, we contribute funds to a trust fund administered by the trustee under the group benefit plan.

Employment Agreements

        We have employment agreements with Messrs. Devine, Myers and Hall.

        Brian K. Devine.    Mr. Devine's employment agreement provides for Mr. Devine to serve as our Chairman of the Board of Directors, President and Chief Executive Officer for a term of three years. This term is continually extended until we give Mr. Devine notice that we no longer wish to extend the

47

term. The employment agreement also provides for Mr. Devine to receive an annual base salary of not less than $550,000, subject to annual increase, and to participate in a bonus plan.

        Mr. Devine's employment agreement provides for customary employment benefits, including, among others, group life, medical, disability and other benefits provided to our executives. In addition, Mr. Devine is entitled to various perquisites that will not exceed $100,000 per year. The employment agreement additionally entitles Mr. Devine to keep his office equipment and his company car for nominal consideration upon completion of his employment term.

        Mr. Devine's employment agreement may be terminated by him with or without good reason (as defined in the employment agreement), or by us with or without cause (as defined in the employment agreement), pursuant to customary termination provisions. Depending upon the circumstances of his termination, including termination following a change of control, Mr. Devine will be entitled to: (1) his base salary for a period of either 18 or 36 months; (2) an amount equal to either his highest bonus for a single fiscal year in the five fiscal years immediately preceding his termination or three times his average annual bonus for the three years immediately preceding his termination; (3) participate in our supplemental executive retirement program; (4) the immediate vesting of, or lapse of restrictions upon, all equity interests in PETCO held by Mr. Devine at the time of termination; (5) the immediate lapse of our call option granted under the terms of the stockholders agreement on all equity interests in PETCO held by Mr. Devine at the time of termination; and (6) additional tax gross-up payments in the amount of any excise tax imposed upon Mr. Devine in connection with the foregoing.

        Bruce C. Hall.    Mr. Hall's employment agreement with us provides for Mr. Hall to serve as our Executive Vice President and Chief Operating Officer for a term of three years. This term is continually extended until we give Mr. Hall notice that we no longer wish to extend the term. The provisions of Mr. Hall's employment agreement are substantially the same as those of Mr. Devine outlined above with the following exceptions: (1) Mr. Hall's annual base salary will be no less than $300,000, subject to annual increase; (2) Mr. Hall is entitled to various perquisites that will not exceed $25,000 per year; and (3) Mr. Hall will not be entitled to participate in our supplemental executive retirement program upon termination.

        Mr. Hall's employment agreement includes customary termination provisions which are substantially the same as those of Mr. Devine outlined above, with the following exceptions. Depending upon the circumstances of his termination, including termination following a change of control, Mr. Hall will be entitled to his base salary for a period of either nine or 18 months, and an amount equal to either his highest bonus for a single fiscal year in the five fiscal years immediately preceding his termination or one-and-a-half times his average annual bonus for the three years immediately preceding his termination.

        James M. Myers.    Mr. Myers' employment agreement with us provides for Mr. Myers to serve as our Executive Vice President and Chief Financial Officer for a term of three years. This term is continually extended until we give Mr. Myers notice that we no longer wish to extend the term. The provisions of Mr. Myers' employment agreement are substantially the same as those of Mr. Devine outlined above with the following exceptions: (1) Mr. Myers' annual base salary will be no less than $250,000, subject to annual increase; (2) Mr. Myers is entitled to various perquisites that will not exceed $25,000 per year; and (3) Mr. Myers will not be entitled to participate in our supplemental executive retirement program upon termination.

        Mr. Myers' employment agreement includes customary termination provisions which are substantially the same as those of Mr. Devine outlined above, with the following exceptions. Depending upon the circumstances of his termination, including termination following a change of control, Mr. Myers will be entitled to his base salary for a period of either nine or 18 months, and an amount equal to either his highest bonus for a single fiscal year in the five fiscal years immediately preceding

48

his termination or one-and-a-half times his average annual bonus for the three years immediately preceding his termination.

Retention Agreements

        We have retention agreements with each of our senior officers, other than Messrs. Devine, Myers and Hall which require us, among other things, to provide severance benefits to each officer upon termination of the officer's employment by us without cause or by the officer for good reason if the termination is in connection with, or within one year after, the occurrence of a change of control of PETCO. These benefits consist of (1) continuation of base salary and benefits for up to 12 months following termination of the officer, and (2) a lump-sum payment, payable upon termination, in an amount equal to the bonus that the officer would have received if the officer had been employed during the 12 months following termination. In addition, in the event of a change in control, all of the officers' rights to exercise options held by the officer at the time of the change in control will vest and become immediately exercisable.

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PRINCIPAL AND SELLING STOCKHOLDERS

        The following table sets forth information regarding beneficial ownership of the shares of our common stock as of January 25, 2002, by each of our executive officers and directors, our executive officers and directors as a group and all other stockholders known by us to beneficially own more than five percent of our outstanding common stock.

        Beneficial ownership of shares is determined under the rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. Except as indicated by footnote, and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all shares of common stock held by them. Shares of common stock subject to options currently exercisable or exercisable within 60 days of January 25, 2002 are deemed outstanding for calculating the percentage of outstanding shares of the person holding these options, but are not deemed outstanding for calculating the percentage of any other person. Unless otherwise indicated, the address for each of the stockholders listed below is c/o PETCO Animal Supplies, Inc., 9125 Rehco Road, San Diego, California 92121.

			Percent of Common Stock Outstanding
Name	Number of Shares(1)		Before Offering		After Offering
BD Recapitalization Holdings LLC(2)	31,135,142		79.6	%	55.8	%
Trust Company of the West(3)	2,070,684	(4)	5.1		3.7
Brian K. Devine	3,800,000	(5)	9.7		6.8
James M. Myers	800,000	(6)	2.0		1.4
Bruce C. Hall	800,000	(7)	2.0		1.4
Robert E. Brann	79,200	(8)	*		*
Keith G. Martin	—		*		*
Janet D. Mitchell	400,000	(9)	1.0		*
William M. Woodard	400,000	(10)	1.0		*
John M. Baumer	—	(11)	*		*
Jonathan Coslet	—	(12)	*		*
John G. Danhakl	—	(13)	*		*
Julian C. Day	16,412	(14)	*		*
William S. Price III	—	(15)	*		*
All directors and executive officers as a group (12 persons)	6,295,612	(16)	16.0		11.3

*

indicates less than one percent

(1)

All of our stockholders are parties to a stockholders agreement, which contains provisions restricting transfer of our capital stock. See "Certain Relationships and Related Transactions."

(2)

The address of BD Recapitalization Holdings LLC is 301 Commerce Street, Suite 3300, Fort Worth, Texas 76102. Each of Green Equity Investors III, L.P., an affiliate of Leonard Green & Partners, L.P., and TPG Partners III, L.P. and its affiliates beneficially own 50.0% of the interests in BD Recapitalization Holdings LLC. We have been informed that immediately prior to the completion of this offering, BD Recapitalization Holdings LLC will dissolve and its assets, including its shares of our common stock, will be distributed pro rata to its members. As a result of this transaction, after the offering, Green Equity Investors III, L.P. and TPG Partners III, L.P. and its affiliates will each beneficially own 15,567,571 shares of our common stock, representing 27.9% of our common stock.

(3)

The address of Trust Company of the West is 11100 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025.

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(4)

Includes (A) 929,368 shares of common stock underlying immediately exercisable warrants and 440,264 shares of common stock held by TCW/Crescent Mezzanine Partners II, L.P., (B) 225,280 shares of common stock underlying immediately exercisable warrants and 106,788 shares of common stock held by TCW/Crescent Mezzanine Trust II, (C) 88,836 shares of common stock underlying immediately exercisable warrants and 34,188 shares of common stock held by TCW Leveraged Income Trust, L.P., (D) 88,836 shares of common stock underlying immediately exercisable warrants and 34,144 shares of common stock held by TCW Leveraged Income Trust II, L.P., and (E) 88,836 shares of common stock underlying immediately exercisable warrants and 34,144 shares of common stock held by TCW Leveraged Income Trust IV, L.P.

(5)

Includes 40,000 shares held equally by Mr. Devine's children, Brooke K. Devine and Brian K. Devine, Jr., for which Mr. Devine disclaims beneficial ownership. Also includes 129,056 shares of common stock subject to options which are currently exercisable or exercisable within 60 days of January 25, 2002.

(6)

Includes 25,816 shares of common stock subject to options which are currently exercisable or exercisable within 60 days of January 25, 2002.

(7)

Includes 25,820 shares of common stock subject to options which are currently exercisable or exercisable within 60 days of January 25, 2002.

(8)

Includes 1,780 shares of common stock subject to options which are currently exercisable or exercisable within 60 days of January 25, 2002.

(9)

Shares are held by the Mitchell Family Trust UDT 11/9/00, for which Ms. Mitchell has sole voting and disposition authority. Also includes 12,888 shares of common stock subject to options which are currently exercisable or exercisable within 60 days of January 25, 2002.

(10)

Includes 80,440 shares held by the Woodard Family Trust UDT 1/15/96 and 306,672 shares held by Woodard Enterprises, LLC, for which Mr. Woodard has sole voting and disposition authority. Also includes 12,888 shares of common stock subject to options which are currently exercisable or exercisable within 60 days of January 25, 2002.

(11)

Mr. Baumer is a partner of Leonard Green & Partners, L.P., and therefore may be deemed to have beneficial ownership of the shares of common stock beneficially owned by BD Recapitalization Holdings LLC. Mr. Baumer disclaims beneficial ownership of such shares of common stock.

(12)

Mr. Coslet is an executive of Texas Pacific Group, and therefore may be deemed to have beneficial ownership of the shares of common stock beneficially owned by BD Recapitalization Holdings LLC. Mr. Coslet disclaims beneficial ownership of such shares of common stock.

(13)

Mr. Danhakl is a partner of Leonard Green & Partners, L.P., and therefore may be deemed to have beneficial ownership of the shares of common stock beneficially owned by BD Recapitalization Holdings LLC. Mr. Danhakl disclaims beneficial ownership of such shares of common stock.

(14)

Shares are held by the Day Annuity Trust, for which Mr. Day has sole voting and disposition authority. Mr. Day disclaims beneficial ownership of such shares of common stock.

(15)

Mr. Price is a founding partner of Texas Pacific Group, and therefore may be deemed to have beneficial ownership of the shares of common stock beneficially owned by BD Recapitalization Holdings LLC. Mr. Price disclaims beneficial ownership of such shares of common stock.

(16)

Includes 208,248 shares of common stock subject to options which are currently exercisable or exercisable within 60 days of January 25, 2002.

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        If the underwriters' over-allotment option is exercised in full, we will sell an additional 1,000,000 shares of common stock and the selling stockholders identified below will sell an aggregate of 1,175,000 shares of common stock. The following table presents information regarding the selling stockholders' beneficial ownership of our common stock as of the date of this prospectus as adjusted to reflect the sale of common stock by each selling stockholder assuming the underwriters exercise the over-allotment option in full:

	Shares of Common Stock Beneficially Owned Before the Offering				Shares of Common Stock To Be Sold In the Offering	Shares of Common Stock Beneficially Owned After the Offering
Name of Selling Stockholder
	Number		Percentage			Number	Percentage
Green Equity Investors III, L.P.(1)(2)	15,567,571		39.8	%	536,617	15,030,954	26.5	%
TPG Partners III, L.P.(1)(3)	11,774,688		30.1		405,875	11,368,813	20.0
TPG Parallel III, L.P.(1)(3)	2,263,992		5.8		78,040	2,185,952	3.9
TPG Dutch Parallel III, C.V.(1)(3)	749,143		1.9		25,823	723,320	1.3
TPG Investors III, L.P.(1)(3)	324,895		*		11,199	313,696	*
FOF Partners III, L.P.(1)(3)	19,584		*		675	18,909	*
FOF Partners III-B, L.P.(1)(3)	435,269		1.1		15,004	420,265	*
Canterbury Mezzanine Capital II, L.P.(4)	307,560	(5)	*		10,602	296,958	*
Transamerica Life Insurance Company(6)	307,560	(7)	*		10,602	296,958	*
J/Z CBO (Delaware), LLC(8)	177,672	(9)	*		6,124	171,548	*
IBJ Whitehall Bank & Trust Company(10)	88,836	(11)	*		3,062	85,774	*
TCW/Crescent Mezzanine Partners II, L.P.(12)	1,369,632	(13)	3.4		47,211	1,322,421	2.3
TCW/Crescent Mezzanine Trust II(12)	332,068	(14)	*		11,447	320,621	*
TCW Leveraged Income Trust, L.P.(12)	123,024	(15)	*		4,241	118,783	*
TCW Leveraged Income Trust II, L.P.(12)	122,980	(16)	*		4,239	118,741	*
TCW Leveraged Income Trust IV, L.P.(12)	122,980	(17)	*		4,239	118,741	*

*

indicates less than one percent

(1)

Immediately prior to the offering, BD Recapitalization Holdings LLC will dissolve and its assets will be distributed to its members. As a result of this dissolution, 15,567,571 shares of our common stock will be held by Green Equity Investors III, L.P., an affiliate of Leonard Green & Partners, L.P., and 15,567,571 shares of our common stock will be collectively held by TPG Partners III, L.P., TPG Parallel III, L.P., TPG Dutch Parallel III, C.V., TPG Investors III, L.P., FOF Partners III, L.P. and FOF Partners III-B, L.P.

(2)

The address of Green Equity Investors III, L.P. is 11111 Santa Monica Boulevard, Los Angeles, California 90025.

(3)

The address of TPG Partners III, L.P., TPG Parallel III, L.P., TPG Dutch Parallel III, C.V., TPG Investors III, L.P., FOF Partners III, L.P. and FOF Partners III-B, L.P. is 301 Main Street, Suite 3330, Fort Worth, Texas 76102.

(4)

The address of Canterbury Mezzanine Capital II, L.P. is 600 Fifth Avenue, 23rd Floor, New York, NY 10020.

(5)

Includes 222,068 shares of common stock underlying immediately exercisable warrants.

(6)

The address of Transamerica Life Insurance Company is 400 West Market Street, 10th Floor, Louisville, KY 40202.

(7)

Includes 222,068 shares of common stock underlying immediately exercisable warrants.

(8)

The address of J/Z CBO (Delaware), LLC is 767 Fifth Avenue, 48th Floor, New York, NY 10153.

(9)

Represents shares of common stock underlying immediately exercisable warrants.

(10)

The address of IBJ Whitehall Bank & Trust Company is One State Street, 9th Floor, New York, NY 10004.

(11)

Represents shares of common stock underlying immediately exercisable warrants.

(12)

The address of TCW/Crescent Mezzanine Partners II, L.P., TCW/Crescent Mezzanine Trust II, TCW Leveraged Income Trust, L.P., TCW Leveraged Income Trust II, L.P. and TCW Leveraged Income Trust IV, L.P. is 11100 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025.

(13)

Includes 929,368 shares of common stock underlying immediately exercisable warrants.

(14)

Includes 225,280 shares of common stock underlying immediately exercisable warrants.

(15)

Includes 88,836 shares of common stock underlying immediately exercisable warrants.

(16)

Includes 88,836 shares of common stock underlying immediately exercisable warrants.

(17)

Includes 88,836 shares of common stock underlying immediately exercisable warrants.

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THE RECAPITALIZATION TRANSACTION

        On October 2, 2000 we completed a recapitalization with BD Recapitalization Holdings LLC, an entity controlled by Leonard Green & Partners, L.P. and its affiliates, which we refer to collectively as Leonard Green, and TPG Partners III, L.P. and its affiliates, which we refer to collectively as Texas Pacific Group, the sponsors of the transaction. Richard J. Lynch, Jr., a member of our board of directors prior to the recapitalization, formerly had a business relationship with a company affiliated with Leonard Green. Mr. Lynch was not a member of the special committee that considered the recapitalization. We did not have any other relationship with either of the sponsors prior to the recapitalization transaction. Our common stock ceased to trade publicly following the recapitalization.

Reasons for the Recapitalization Transaction and this Offering

        In its evaluation of the recapitalization transaction and its determination that the transaction was in the best interests of PETCO and our stockholders, a special committee of our board of directors considered a number of factors. Among other things, the committee believed that the market price of our stock did not appropriately reflect PETCO's actual value. In particular, the committee believed that developments preceding the recapitalization, including perceived competitive threats posed by the anticipated mass rollout of Iams brand premium pet food following Proctor & Gamble's acquisition of The Iams Company and by many new Internet retailers focusing on pet food and supplies, had led to a relatively unfavorable valuation of our common stock in the stock market.

        Since becoming a private company, we have increased our net store count by 44 stores and have continued to improve operating results. In addition, the expansion of the distribution of Iams products to mass merchandisers and others outside of the specialty pet channel and the distribution of pet food and supplies over the Internet has not had a significant effect on our operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The recapitalization transaction and our current level of debt have not altered our capital expenditures, nor have they resulted in any other material adverse effect on our business. We believe the public offering of our common stock at this time will allow us to reduce our leverage and enhance our ability to operate and grow our business in the future. Specifically, this offering will allow us to eliminate the dividends accruing on our 14% series A senior redeemable preferred stock and our 12% series B junior redeemable preferred stock.

Costs and Benefits of the Recapitalization Transaction to Officers, Directors and Principal Stockholders

        In the recapitalization transaction, each issued and outstanding share of our common stock was cancelled and converted into the right to receive $22.00 per share in cash, with the exception of an aggregate of 134,351 shares retained by Brian K. Devine, Bruce C. Hall, James M. Myers, Janet D. Mitchell and William M. Woodard. As a result of subsequent stock splits, these 134,351 shares now represent 5,911,444 shares of common stock. In the transaction, we issued an aggregate of $195.0 million of our common stock and preferred stock and an aggregate of $120.0 million in senior subordinated debt and entered into a $350.0 million senior credit facility. Of the $195.0 million of equity, BD Recapitalization Holdings contributed $190.0 million and entities affiliated with Trust Company of the West contributed the remaining $5.0 million.

        We used a substantial portion of the net proceeds from our sale of equity and senior subordinated debt, together with borrowings of approximately $279.0 million under the senior credit facility, to:

•    repurchase each issued and outstanding share of our outstanding common stock, other than the retained shares described above, for an aggregate price of $463.4 million

•    retire approximately $92.7 million of existing debt; and

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•    pay approximately $19.8 million of transaction related expenses, including a one time $8.0 million structuring fee to Leonard Green and Texas Pacific Group under the management services agreement, and financing costs of approximately $11.3 million, which were deferred and are being amortized over the terms of the new debt facilities.

        BD Recapitalization Holdings currently holds 31,135,142 shares of our common stock. Based on an assumed offering price of $19.00 per share, these shares would be valued at $591.6 million upon completion of the offering. Entities affiliated with Trust Company of the West currently hold 649,528 shares of our common stock. Based on an assumed offering price of $19.00 per share, these shares would be valued at $12.3 million upon completion of the offering. In addition, entities affiliated with Trust Company of the West own warrants to purchase an aggregate of 1,421,156 shares of our common stock. See "Description of Capital Stock—Warrants." Based on an assumed initial offering price of $19.00 per share, these warrants have an aggregate unrealized value of $27.0 million. After the recapitalization, Julian Day, one of our directors, acquired 16,412 shares of common stock from BD Recapitalization Holdings. Based on an assumed offering price of $19.00 per share, these shares would be valued at $0.3 million upon completion of the offering. BD Recapitalization Holdings, entities affiliated with Trust Company of the West and Mr. Day will all also receive cash payments for the redemption of shares of preferred stock they own. See "Certain Relationships and Related Transactions—Receipt of Proceeds from this Offering."

        Mr. Devine, Mr. Hall, Mr. Myers, Ms. Mitchell and Mr. Woodard currently hold an aggregate of 5,993,532 shares of our common stock. Based on an assumed offering price of $19.00 per share, these shares would be valued at $113.9 million upon completion of the offering. See "Principal and Selling Stockholders." Mr. Devine, Mr. Hall, Mr. Myers, Ms. Mitchell and Mr. Woodard currently hold options to purchase an aggregate of 206,468 shares of common stock with a weighted average exercise price of $1.80 per share. Based on an assumed offering price of $19.00 per share, these options would have an aggregate unrealized value of approximately $3.6 million upon completion of the offering. Mr. Devine, Mr. Hall, Mr. Myers, Ms. Mitchell and Mr. Woodard also received payments of approximately $4.7 million, $1.8 million, $0.4 million, $0.7 million and $1.3 million, respectively, for shares and options which were repurchased in connection with the recapitalization transaction.

        The management services agreement we entered into with Leonard Green and Texas Pacific Group and the stockholders agreement we entered into in with our stockholders in connection with the recapitalization transaction are described elsewhere in the prospectus under the heading "Certain Relationships and Related Transactions." The employment agreements entered into with Messrs. Devine, Hall and Myers and the employee stock option plan we amended in connection with the recapitalization transaction are described elsewhere in this prospectus under the headings "Management—Employment Agreements" and "—Compensation Plans—1994 Stock Option Plan."

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Recapitalization Transaction

        On October 2, 2000, we completed a recapitalization with BD Recapitalization Holdings LLC, an entity controlled by Leonard Green and Texas Pacific Group, the sponsors of the transaction, in a transaction valued at approximately $600 million. See "The Recapitalization Transaction."

Stockholders Agreement

        On October 2, 2000, we entered into a stockholders agreement with each of our stockholders. The stockholders agreement provides for a number of rights which expire upon the closing of this offering, including director nomination rights, rights of first option and first offer, subscription rights and drag-along rights. The parties have agreed to amend the stockholders agreement in connection with the offering to provide that Leonard Green and affiliates of Texas Pacific Group, as well as PETCO, will have the right to purchase shares held by an employee who is a party to the stockholders agreement upon that employee voluntarily terminating employment with PETCO. The shares subject to this purchase right decrease ratably over two or three years, based on the employee's term of employment with PETCO. The amended stockholders agreement will also provide that entities controlled by Leonard Green and Texas Pacific Group will vote together to each maintain two directors on our board of directors, and also to grant each other tag-along rights on sales. In addition, the amended stockholders agreement will provide for registration rights. For a further discussion of these registration rights, see "Description of Capital Stock—Registration Rights."

Securityholders Agreement

        On October 2, 2000, we entered into a securityholders agreement with each of our securityholders. The securityholders agreement provides for a number of rights which expire upon the closing of this offering, including director nomination rights, rights of first option and first offer, subscription rights and drag-along rights. The parties have agreed to amend the securityholders agreement in connection with the offering to provide that Leonard Green and affiliates of Texas Pacific Group, as well as PETCO, will have the right to purchase shares held by an employee who is a party to the securityholders agreement upon that employee voluntarily terminating employment with PETCO. The shares subject to this purchase right decrease ratably over two or three years, based on the employee's term of employment with PETCO.

Management Services Agreement

        On October 2, 2000, we entered into a management services agreement with Leonard Green and Texas Pacific Group, who act as the managers under the agreement. The management services agreement provides that the managers will provide management, consulting and financial planning services and transaction-related financial advisory and investment banking services to us and our subsidiaries. We paid a one-time structuring fee of $8.0 million to the managers in October 2000 under the agreement. The managers receive an annual fee of approximately $3.1 million as compensation for the general services and normal and customary fees for transaction-related services, and are reimbursed for out-of-pocket expenses. If investors led by the managers invest any additional capital pursuant to the agreement, this annual fee will increase by 1.6% of the amount of the additional investment. The management services agreement terminates on October 2, 2010. In fiscal 2001, we have paid management fees in an aggregate amount of approximately $2.3 million to the managers for the period February 4, 2001 to November 3, 2001. Upon the closing of this offering, the parties have agreed to terminate the management services agreement. In connection with the termination, we will pay Leonard Green and Texas Pacific Group an aggregate amount of approximately $12.5 million.

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Indebtedness of Directors and Officers

        On October 25, 2000, we made a loan to James M. Myers, our Executive Vice President, Chief Financial Officer and a director, in the aggregate principal amount of $85,000. We made this loan to Mr. Myers to fund the exercise of his remaining stock options and to pay certain taxes in connection with the exercise of these options. This loan is evidenced by a secured promissory note which matures on October 25, 2005 and bears interest at the rate of 6.22%, compounded annually, and is payable at maturity. As of November 3, 2001, the outstanding balance of the loan was $90,441, inclusive of accrued interest.

Receipt of Proceeds from this Offering

        Upon completion of this offering, we intend to redeem all of the outstanding shares of preferred stock. See "Use of Proceeds." BD Recapitalization Holdings LLC, an entity controlled by Leonard Green and Texas Pacific Group, owns 102,217 shares of our series A preferred stock and 72,038 shares of our series B preferred stock. BD Recapitalization Holdings will be liquidated immediately prior to the completion of the offering and its assets will be distributed to its members. See "Principal and Selling Stockholders." Affiliates of Trust Company of the West own 5,815 shares of our series A preferred stock and 4,097 shares of our series B preferred stock. Julian Day, one of our directors, owns 54 shares of our series A preferred stock and 38 shares of our series B preferred stock. As a result of their ownership of preferred stock, and assuming this offering occurred on February 2, 2002, the last day of our 2001 fiscal year, Leonard Green and Texas Pacific Group would each receive approximately $109.8 million, affiliates of Trust Company of the West would receive an aggregate amount of approximately $12.5 million and Julian Day would receive approximately $0.1 million upon the redemption of the preferred stock. In addition, Leonard Green and Texas Pacific Group will receive a fee in connection with the termination of the management services agreement. See "—Management Services Agreement."

Redemption of 13% Senior Subordinated Notes due 2010

        In October 2001, we used a portion of the proceeds from the issuance of our 10.75% senior subordinated notes due 2011 to redeem all $120.0 million in aggregate principal amount of the 13% senior subordinated notes due 2010 we had issued in connection with the recapitalization transaction for an aggregate redemption price of $128.4 million, including an $8.4 million redemption premium. Entities affiliated with Trust Company of the West owned approximately $80.0 million in principal amount of the 13% senior subordinated notes on the redemption date and received an aggregate of approximately $85.6 million in connection with the redemption of such notes.

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DESCRIPTION OF CAPITAL STOCK

        This prospectus contains a summary of the material terms of our capital stock. The following description of our capital stock is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law.

        Upon completion of the offering, our authorized capital stock will consist of 250,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share.

Common Stock

        As of January 25, 2002, there were 39,118,520 shares of common stock outstanding, held of record by approximately 20 stockholders. Holders of shares of our common stock are entitled to one vote per share on matters to be voted upon by the stockholders and, subject to the prior rights of the holders of preferred stock, to receive dividends when and as declared by the board of directors with funds legally available therefor and to share ratably in our assets legally available for distribution to the stockholders in the event of liquidation or dissolution, after payment of all debts and other liabilities. For a description of our dividend policy, please refer to the information in this prospectus under the heading "Dividend Policy." Holders of our common stock are not entitled to preemptive rights and have no subscription, redemption or conversion privileges. Our common stock does not have cumulative voting rights, which means the holder or holders of more than one-half of the shares voting for the election of directors can elect all of the directors then being elected. All of the outstanding shares of our common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of our common stock are subject to the rights of the holders of shares of any series of preferred stock which we may issue in the future.

Preferred Stock

        As of November 3, 2001, we had outstanding the following shares of preferred stock:

•

110,526 shares of 14% series A senior redeemable exchangeable cumulative preferred stock, having an aggregate liquidation preference of $128.4 million, which amount includes an aggregate of approximately $17.9 million of accrued and unpaid dividends; and



•

77,895 shares of 12% series B junior redeemable cumulative preferred stock, having an aggregate liquidation preference of $88.6 million, which amount includes an aggregate of approximately $10.7 million of accrued and unpaid dividends.

        Upon completion of this offering, we intend to redeem all of our outstanding shares of series A preferred stock and series B preferred stock. Under our existing certificate of incorporation, to redeem all outstanding shares of preferred stock prior to October 2, 2002 we would be required to pay an amount equal to 110% of the liquidation preference per share, plus accrued and unpaid dividends. Using this formula and assuming this offering occurred on February 2, 2002, the redemption price would be approximately $246.5 million. However, we and the holders of the preferred stock have agreed to amend our certificate of incorporation to provide for a redemption price equal to 106% of the liquidation preference per share, plus accrued and unpaid dividends, if we redeem the preferred shares with the proceeds of this offering. Using this formula and assuming this offering occurred on February 2, 2002, the redemption price would be approximately $237.6 million.

        Following this offering, our certificate of incorporation will provide that our board of directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock, par value $0.01 per share, in one or more series and to fix the powers, preferences, privileges, rights and qualifications, limitations or restrictions thereof, including dividend rights,

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conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of the series, without any further vote or action by stockholders. We believe that the board of directors' authority to set the terms of, and our ability to issue, preferred stock will provide flexibility in connection with possible financing transactions in the future. The issuance of preferred stock, however, could adversely affect the voting power of holders of common stock, and the likelihood that the holders will receive dividend payments and payments upon liquidation could have the effect of delaying, deferring or preventing a change in control in us. We have no present plan to issue any shares of preferred stock.

Warrants

        As of November 3, 2001, warrants to purchase 2,131,800 shares of common stock were outstanding. The warrants are exercisable at any time prior to the closing of this offering with an exercise price of $0.001 per share. Warrants not exercised prior to the closing of this offering will expire immediately upon the closing of this offering.

Registration Rights

        Upon completion of this offering, under our stockholders agreement, the holders of 37,965,598 shares of common stock and warrants to purchase 2,131,800 shares of common stock, or their transferees, will be entitled to register these shares under the Securities Act.

        Under the stockholders agreement, holders may demand that we file a registration statement under the Securities Act covering some or all of the holder's registrable securities. The stockholders agreement limits the number of demand registrations that we are required to make on behalf of the holders. In an underwritten offering, the managing underwriter has the right, subject to specified conditions, to limit the number of registrable securities.

        In addition, holders have "piggyback" registration rights. If we propose to register any of our equity securities under the Securities Act other than pursuant to demand registration rights noted above or specified excluded registrations, holders may require us to include all or a portion of their registrable securities in the registration and in any related underwriting. In an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions, to limit the number of registrable securities.

        In general, we will bear all fees, costs and expenses of registrations, other than underwriting discounts and commissions.

Anti-takeover Provisions of our Charter, Bylaws and Delaware General Corporation Law

        Stockholder Action; Advance Notification of Stockholder Nominations and Proposals.    On the closing of this offering, our certificate of incorporation will require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by a consent in writing. Our certificate of incorporation will also require that special meetings of stockholders be called only by our board of directors, our chairman or our president. In addition, our bylaws will provide that candidates for director may be nominated and other business brought before an annual meeting only by the board of directors or by a stockholder who gives written notice to us no later than 90 days prior nor earlier than 120 days prior to the first anniversary of the last annual meeting of stockholders. These provisions may have the effect of deterring hostile takeovers or delaying changes in control of our management, which could depress the market price of our common stock.

        Number, Election and Removal of the Board of Directors.    On the closing of this offering, our certificate of incorporation will provide that the authorized number of directors will be as set forth in

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the bylaws and may be changed only by an amendment to the bylaws duly adopted by the board of directors or our stockholders. Our bylaws will provide that the board of directors may consist of between five and fifteen members to be determined from time to time by resolution of the board of directors. After the offering, the board of directors will consist of nine members divided into three different classes. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective terms. Between stockholder meetings, directors may be removed by our stockholders only for cause, and the board of directors may appoint new directors to fill vacancies or newly created directorships. These provisions may deter a stockholder from removing incumbent directors and from simultaneously gaining control of the board of directors by filling the vacancies created by removal with its own nominees.

        Delaware Anti-Takeover Law.    We are subject to Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

Indemnification of Directors and Officers and Limitation of Liability

        Our certificate of incorporation and bylaws allow us to eliminate the personal liability of our directors and to indemnify directors and officers to the fullest extent permitted by the DGCL.

        We also entered into indemnity agreements with each of our directors and officers, which provide for mandatory indemnity of an officer or director made party to a "proceeding" by reason of the fact that he or she is or was an officer or director of ours, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests. These agreements also obligate us to advance expenses to an indemnitee provided that he or she will repay advanced expenses in the event he or she is not entitled to indemnification. Indemnitees are also entitled to partial indemnification, and indemnification for expenses incurred as a result of acting at our request as a director, officer or agent of an employee benefit plan or other partnership, corporation, joint venture, trust or other enterprise owned or controlled by us.

        Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the above statutory provisions or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Transfer Agent and Registrar

        The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.

Listing

        We have applied to have our common stock approved for quotation on The Nasdaq Stock Market's National Market under the symbol "PETC."

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DESCRIPTION OF CERTAIN INDEBTEDNESS

This summary highlights the principal terms of the agreements and instruments governing our outstanding indebtedness.

Senior Credit Facility

        We amended and restated our senior credit facility as of October 26, 2001, with the lenders party thereto, Goldman Sachs Credit Partners L.P., as syndication agent, and Wells Fargo Bank, N.A., as administrative agent.

        Structure.    Our amended and restated senior credit facility consists of a $75.0 million revolving credit facility and a $195.0 million term loan B facility. Under the revolving credit facility, up to $25.0 million is available for use in connection with letters of credit, and up to $10.0 million in short-term funds is available for use under a "swing line" facility on same-day notice to the lenders.

        As of November 3, 2001, an aggregate of $195.0 million of borrowings was outstanding under our senior credit facility, consisting of no borrowings under the revolving credit facility and $195.0 million of borrowings under the term loan B facility. We used a portion of the net proceeds of the senior subordinated note offering to repay an aggregate of approximately $72.0 million of outstanding borrowings under the term loan A facility, which was repaid in full, and the term loan B facility. As of November 3, 2001, the weighted average interest rate on our senior credit facility was 7.2%, including costs under our hedge.

        Guarantees and Security.    Our obligations under our senior credit facility are guaranteed by each of our domestic subsidiaries. The borrowings under our senior credit facility and the subsidiary guarantees are secured by substantially all of our assets and the assets of the subsidiary guarantors. In addition, borrowings under our senior credit facility are secured by a pledge of substantially all of our capital stock and the capital stock, or similar equity interests, of the subsidiary guarantors. Our future domestic and foreign subsidiaries with assets or revenues in excess of $1.0 million will be required to enter into similar pledge agreements and guarantees, subject to limitations on the amount of stock of foreign subsidiaries required to be pledged.

        Interest Rate.    In general, borrowings under our senior credit facility bear interest based, at our option, on either the agent bank's base rate or LIBOR, in each case plus a margin. The applicable margin is based on our leverage ratio at the time in the case of the revolving credit facility and a fixed margin in the case of the term loan B facility.

        Maturity.    We are required to repay the amount borrowed under the term loan B facility in quarterly installments on December 31, March 31, June 30 and September 30 of each loan year. Quarterly payments equal approximately $0.5 million per quarter in years one through six of the loan and approximately $22.9 million per quarter in years seven and eight. The term loan B facility matures on October 2, 2008. The entire outstanding principal amount under the revolving credit facility is due on October 2, 2006. Mandatory prepayments under the term loan B facility are applied pro rata to each required quarterly payment, subject to a lender's ability to waive a term loan B facility payment and have it applied to the revolving credit facility. The term loan B facility and the revolving credit facility may be voluntarily prepaid in whole or in part without premium or penalty.

        Fees.    We are required to pay the lenders under our revolving credit facility a per annum commitment fee based on the daily average unused portion of the revolving credit facility (reduced by the amount of letters of credit issued and outstanding). We also are obligated to pay letter of credit fees based on the aggregate stated amount of outstanding letters of credit.

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        Covenants.    Our senior credit facility contains financial covenants that require us to satisfy, on a consolidated basis, specified quarterly financial tests, including:

•

a minimum consolidated interest expense coverage ratio;



•

a minimum fixed charge coverage ratio;



•

a maximum consolidated pro forma senior leverage ratio; and



•

a maximum consolidated pro forma total leverage ratio.

        Our senior credit facility also contains a number of other customary covenants that, among other things, restrict our ability and that of our subsidiaries to:

•

dispose of assets;



•

incur additional debt;



•

prepay other debt, subject to specified exceptions, or amend specified debt instruments;



•

pay dividends;



•

create liens on assets;



•

amend our certificate of incorporation or bylaws;



•

make investments, loans or advances;



•

make acquisitions;



•

engage in mergers or consolidations;



•

change the business conducted by us or our subsidiaries;



•

engage in sale and leaseback transactions;



•

sell accounts receivables;



•

purchase shares of our outstanding common stock;



•

make capital expenditures or engage in transactions with affiliates; and



•

otherwise undertake various corporate activities.

        Events of Default.    Our senior credit facility also contains customary events of default, including defaults based on:

•

nonpayment of principal, interest or fees when due, subject to specified grace periods;



•

cross-defaults to other debt;



•

breach of specified covenants;



•

material inaccuracy of representations and warranties;



•

certain other defaults under the credit documents;



•

events of bankruptcy and insolvency;



•

material judgments;



•

dissolution and liquidation;



•

failure to meet certain requirements imposed on pension plans by the Code and the Employee Retirement Income Security Act of 1974;

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•

events requiring the prepayment or acquisition of subordinated debt;



•

events constituting a change in control, including (1) prior to an initial public offering, Leonard Green and Texas Pacific Group or their respective affiliates failing to beneficially own and control at least 51% of our outstanding stock entitled to vote for the election of directors, (2) following an initial public offering (A) any person other than Leonard Green and Texas Pacific Group or their respective affiliates beneficially owning greater than 35% of our voting stock, (B) Leonard Green and Texas Pacific Group or their respective affiliates failing to beneficially own at least 35% of our voting stock or failing to beneficially own a greater percentage of our outstanding stock entitled to vote for the election of directors than the percentage of such stock beneficially owned by any other person or (C) Leonard Green and Texas Pacific Group or their respective affiliates failing to beneficially own and control a greater percentage of our voting stock than the percentage of such stock owned and controlled by any other person, or (3) a change in a majority of the members of our board of directors serving immediately following the recapitalization or directors elected to our board of directors with the approval of a majority of the directors serving immediately following the recapitalization; and



•

invalidity of any guaranty or security interest.

        Mandatory Prepayment Upon Certain Events.    Based upon formulas stated in each facility, all or a portion of the proceeds from asset sales, insurance/condemnation proceedings, equity offerings, including this offering, and debt issuances, as well as excess cash flow, must be used to pay down the outstanding balances under our senior credit facility. We expect the lenders under our senior credit facility will waive the requirement that we must use a portion of the proceeds of this offering to pay down outstanding balances under the senior credit facility.

10.75% Senior Subordinated Notes due 2011

        In October 2001, we sold $200.0 million aggregate principal amount of our 10.75% senior subordinated notes due 2011 in an offering that was not registered under the Securities Act.

        The senior subordinated notes:

•

are subject to the provisions of an indenture;



•

are senior subordinated obligations of ours;



•

will mature on November 1, 2011; and



•

bear interest at the rate of 10.75% per annum, which interest is to be paid semi-annually on May 1 and November 1 of each year, commencing May 1, 2002.

        Redemption.    We may redeem the notes, in whole or in part, at our option at any time on or after November 1, 2006. If we choose this optional redemption, we are required to redeem the senior subordinated notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on November 1 of the years indicated below:

Year	Percentage
2006	105.375	%
2007	103.583	%
2008	101.792	%
2009 and thereafter	100.000	%

        In addition, at any time on or prior to November 1, 2004, we may redeem up to 35% of the original aggregate principal amount of the senior subordinated notes with the net proceeds of one or

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more equity offerings, at a redemption price equal to 110.75% of the aggregate principal amount to be redeemed, together with accrued and unpaid interest, if any to the date of redemption; provided that at least 65% of the original aggregate principal amount of the senior subordinated notes remains outstanding after each redemption.

        Subordination and Guarantees.    The notes (1) are junior to all of our existing senior indebtedness and will be junior to all future senior indebtedness, (2) will be pari passu with all of our future senior subordinated indebtedness and (3) will be senior to all of our future indebtedness that is expressly subordinated to the notes.

        All of our existing domestic restricted subsidiaries have guaranteed, and all of our future domestic restricted subsidiaries will guarantee, our obligation to pay principal, premium, if any, and interest on the notes. The guarantees (1) are junior to all existing senior indebtedness of these subsidiaries and will be junior to all future senior indebtedness of these subsidiaries, (2) will rank pari passu with all future senior subordinated indebtedness of these subsidiaries and (3) will rank senior to all future indebtedness of these subsidiaries that is expressly subordinated to the guarantees.

        Covenants.    In the indenture relating to the senior subordinated notes, we agreed to some restrictions that limit, among other things, our and some of our subsidiaries' ability to:

•

incur more debt;



•

pay dividends, redeem stock or make other distributions;



•

make investments;



•

create liens;



•

enter into transactions with affiliates;



•

merge or consolidate; and



•

transfer or sell assets.

        Notwithstanding the foregoing restrictions, we are permitted by the terms of the indenture to use a portion of the proceeds of this offering to redeem the series A and series B preferred stock.

        In addition, in the event of a change of control, as defined in the indenture relating to the senior subordinated notes, each holder of senior subordinated notes will have the right to require us to repurchase all or part of the holder's senior subordinated notes at a price equal to 101% of the principal amount of the senior subordinated notes, plus accrued and unpaid interest.

        Events of Default.    Events of default under the indenture relating to the senior subordinated notes include but are not limited to:

•

the failure to pay any interest on any senior subordinated note when due, which failure continues for 30 days;



•

the failure to pay principal of or premium, if any, on any senior subordinated note when due;



•

the failure to comply with any of our other agreements in the indenture or the notes;



•

some defaults under the terms of our other indebtedness, whether the indebtedness existed before the issuance of the notes or is created after;



•

the failure by us or some of our subsidiaries to pay final judgments aggregating at any one time in excess of $17.0 million, which judgments are not paid, discharged or stayed for a period of 60 days;

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•

the holding in any judicial proceeding that a note guarantee is unenforceable or invalid or that a note guarantee ceases for any reason to be in full force and effect, or any guarantor denies or disaffirms its obligations under its note guarantee; and



•

certain events of bankruptcy or insolvency.

        If an event of default, other than events of bankruptcy or insolvency, occurs and is continuing, the maturity date of all of the senior subordinated notes may be accelerated. If a bankruptcy or insolvency occurs, the outstanding senior subordinated notes will automatically become immediately due and payable.

        Transfer Restrictions; Registration Covenant; Exchange Offer.    We have not registered the senior subordinated notes under the Securities Act. The senior subordinated notes are subject to transfer restrictions and may be offered or sold only pursuant to an exemption from the registration requirements of, or in transactions not covered by, the Securities Act. To give the holder the opportunity in the future to exchange the senior subordinated notes for notes with substantially identical terms, but that may be publicly traded (the exchange notes), we have agreed to:

•

file a registration statement for the exchange notes within 150 days after the issue date of the senior subordinated notes;



•

cause the registration statement to become effective within 240 days after the issue date of the senior subordinated notes; and



•

consummate the exchange offer within 270 days after the issue date of the senior subordinated notes.

        In addition, we have agreed, in some circumstances, to file a "shelf registration statement" that would allow some or all of the senior subordinated notes to be offered to the public. If we do not comply with the foregoing obligations under the exchange and registration rights agreement, we will be required to pay liquidated damages to holders of the senior subordinated notes. The amount of liquidated damages is calculated at a rate of 0.5% per annum on any principal amount of unregistered senior subordinated notes for the first 90 days of default, 1% per annum for the second 90 days of default, 1.5% per annum for the third 90 days of default and 2% per annum for any remaining period of default. For example, a 90-day default on $200 million in principal amount of senior subordinated notes would result in $250,000 in liquidated damages.

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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

        The following summary describes the material United States federal income and estate tax consequences of the ownership of common stock by a non-U.S. holder as of the date hereof. This discussion does not address all aspects of United States federal income and estate taxes that may be relevant to a non-U.S. holder of common stock. For example, in the case of a non-U.S. holder that is a partnership, the United States tax consequences of holding and disposing of our common stock may be affected by determinations made at the partner level. This discussion also does not address foreign, state and local tax consequences. Special rules may apply to certain non-U.S. holders, such as insurance companies, tax-exempt organizations, banks, financial institutions, dealers in securities, holders of securities held as part of a "straddle," "hedge" or "conversion transaction," "controlled foreign corporations," "passive foreign investment companies," "foreign personal holding companies" and corporations that accumulate earnings to avoid United States federal income tax, that are subject to special treatment under the Internal Revenue Code of 1986, as amended, or the Code. Such persons should consult their own tax advisors to determine the United States federal, state, local and other tax consequences that may be relevant to them. Furthermore, the discussion below is based upon the provisions of the Code, and regulations, rulings and judicial decisions thereunder as of the date hereof, and these authorities may be repealed, revoked or modified with retroactive effect so as to result in United States federal income tax consequences different from those discussed below.

        Persons considering the purchase, ownership or disposition of common stock should consult their own tax advisors concerning the United States federal income tax consequences in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction.

        As used in this section, a "U.S. holder" of common stock means a holder that is (1) a citizen or resident of the United States, (2) a corporation or partnership created or organized in or under the laws of the United States or of any state thereof or in the District of Columbia, unless in the case of a partnership, United States Treasury regulations provide otherwise, (3) an estate the income of which is subject to United States federal income taxation regardless of its source and (4) a trust (A) if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons has the authority to control all substantial decisions of the trust or (B) that has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. A "non-U.S. holder" is a holder that is not a U.S. holder.

Dividends

        Dividends paid to a non-U.S. holder of common stock generally will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States and, where a tax treaty applies, are attributable to a United States permanent establishment of the non-U.S. holder, are not subject to withholding tax, but instead are subject to United States federal income tax on a net income basis at applicable graduated individual or corporate rates. Certain certification and disclosure requirements must be complied with in order for effectively connected income to be exempt from withholding. Any such effectively connected dividends received by a foreign corporation may be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. A non-U.S. holder of common stock who wishes to claim the benefit of an applicable treaty rate (and avoid back-up withholding as discussed below) for dividends paid will be required to satisfy applicable certification and other requirements and may be required to obtain a United States taxpayer identification number.

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        A non-U.S. holder of common stock eligible for a reduced rate of United States withholding tax may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service, or the IRS.

Gain on Disposition of Common Stock

        A non-U.S. holder generally will not be subject to United States federal income tax with respect to gain recognized on a sale or other disposition of common stock unless (1) the gain is effectively connected with a trade or business of the non-U.S. holder in the United States, and, where a tax treaty applies, is attributable to a United States permanent establishment of the non-U.S. holder, (2) in the case of a non-U.S. holder who is an individual and holds the common stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met or (3) we are or have been a "U.S. real property holding corporation" for United States federal income tax purposes.

        A non-U.S. holder described in clause (1) above will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates and, if it is a corporation, may be subject to the branch profits tax at a rate equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty. An individual non-U.S. holder described in clause (2) above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States source capital losses (even though the individual is not considered a resident of the United States).

        We believe we are not and do not anticipate becoming a "U.S. real property holding corporation" for United States federal income tax purposes.

Federal Estate Tax

        Common stock held by an individual non-U.S. holder at the time of death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding

        We must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty.

        A non-U.S. holder may be subject to back-up withholding unless applicable certification requirements are met.

        Payment of the proceeds of a sale of common stock within the United States or conducted through certain United States related financial intermediaries is subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person) or the holder otherwise establishes an exemption.

        Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such holder's United States federal income tax liability provided the required information is furnished to the IRS.

66

SHARES ELIGIBLE FOR FUTURE SALE

        If our stockholders sell, or there is a perception they may sell, substantial amounts of our common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market following the offering, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

Sale of Restricted Shares and Lock-up Agreements

        Based on shares outstanding as of January 25, 2002, and assuming the exercise of warrants to purchase an aggregate of 2,131,800 shares of common stock, upon completion of this offering, we will have an aggregate of 55,750,320 shares of common stock outstanding, assuming no exercise of the 2,175,000 share underwriters' over-allotment option and no exercise of outstanding options to purchase common stock. If the underwriters' over-allotment option is exercised in full, we will have an aggregate of 56,750,320 shares of common stock outstanding. All of the 14,500,000 shares of common stock sold in this offering, plus any shares sold if the over-allotment option is exercised, will be freely tradable without restriction in the public market unless these shares are held by "affiliates," as that term is defined in Rule 144(a) under the Securities Act. For purposes of Rule 144, an "affiliate" of an issuer is a person that, directly or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, such issuer.

        The remaining 41,250,320 shares of common stock outstanding after the offering will be held by existing stockholders and are "restricted securities" under the Securities Act. Those shares may be sold in the public market only if registered under the Securities Act or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of the restricted securities in the public market, or the availability of such shares for sale, could adversely affect the market price of our common stock.

        We have agreed not to sell or otherwise dispose of any shares of our common stock for a period of 180 days after the date of this prospectus. In addition, our executive officers, employees and directors and substantially all of our other existing stockholders have also agreed not to sell or otherwise dispose of any shares of common stock for a period of 180 days after the date of this offering. Notwithstanding possible earlier eligibility for sale under the provisions of Rule 144, 144(k) or 701, shares subject to lock-up agreements will not be saleable until such agreements expire or are waived by Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated on behalf of the underwriters.

Rule 144

        In general, under Rule 144 as currently in effect, after the expiration of the lock-up agreements, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

•

one percent of the number of shares of common stock then outstanding; or



•

the average weekly trading volume of our common stock on The Nasdaq Stock Market's National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.

        Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice and the availability of current public information about us.

67

Rule 144(k)

        Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

Rule 701

        In general under Rule 701, any employee, director, officer, consultant or advisor who purchased his or her shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to rely on the resale provisions of Rule 701, which permits non-affiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the effective date of this offering.

Option Grants

        As of January 25, 2002, there were options issued and outstanding to purchase 1,353,048 shares of common stock. An additional 60,836 shares were reserved for issuance under our 1994 stock option plan. Under the terms of our Incentive Plan, which we intend to adopt prior to the offering, there will be an additional 1,170,756 shares reserved for issuance. See "Management—Compensation Plans—Adoption of 2002 Incentive Award Plan."

Registration Rights

        Some of our existing securityholders have rights under a stockholders agreement to cause us to register under the Securities Act all or part of their shares of our common stock. Registration of the sale of these shares of our common stock would permit their sale into the market immediately. If our existing stockholders sell a large number of shares, the market price of our common stock could decline. These holders of registration rights are subject to lock-up periods of 180 days following the date of this prospectus. Please refer to the information in the prospectus under the heading "Description of Capital Stock—Registration Rights" for a more detailed discussion of these registration rights.

S-8 Registration Statement

        We intend to file a registration statement under the Securities Act as promptly as possible after completion of this offering to register the shares of common stock reserved for issuance under our 1994 stock option plan and our Incentive Plan, including shares of common stock underlying outstanding options. We expect the registration statement to become effective immediately upon filing. Accordingly, shortly after completion of this offering, shares covered by the registration statement will become available for sale in the public market, subject to Rule 144 limitations applicable to affiliates, vesting restrictions and expiration of lock-up or market standoff agreements.

68

UNDERWRITING

        Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Deutsche Banc Alex. Brown Inc., Goldman, Sachs & Co., Lehman Brothers Inc. and Salomon Smith Barney Inc. are acting as representatives of the underwriters named below. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated are acting as Joint Book-Running Managers. Subject to the terms and conditions set forth in an underwriting agreement among us and the underwriters, we have agreed to sell to the underwriters, and the underwriters severally have agreed to purchase from us, the number of shares listed opposite their names below.

	Underwriter	Number of Shares
Merrill Lynch, Pierce, Fenner & Smith
Morgan Stanley & Co. Incorporated
Deutsche Banc Alex. Brown Inc.
Goldman, Sachs & Co.
Lehman Brothers Inc.
Salomon Smith Barney Inc.
	Total	14,500,000

        The underwriters have agreed to purchase all of the shares sold under the underwriting agreement if any of the shares are purchased. If an underwriter defaults, the underwriting agreement provides the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.

        We and the selling stockholders have agreed to indemnify the underwriters against liabilities specified in the underwriting agreement, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

        The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

        The Joint Book-Running Managers intend to allocate a number of shares to underwriters for sale to their online brokerage account holders and will make allocations to underwriters that may make Internet distributions on the same basis as they make other allocations. A prospectus in electronic format will be made available on web sites maintained by Merrill Lynch, Morgan Stanley & Co. Incorporated and Goldman Sachs & Co. or their respective affiliates. Other than the prospectus in electronic format, the information on any of these web sites and any other information contained on a web site maintained by an underwriter or a selling group member is not intended to be part of this prospectus.

        The representatives have advised us that the underwriters propose initially to offer the shares to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of $                  per share. The underwriters may allow, and the dealers may reallow, a discount not in excess of $                  per share to other dealers. After this offering, the public offering price, concession and discount may be changed.

69

        The following table shows the public offering price, underwriting discount and proceeds before expenses to us and other compensation. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.

	Per Share	Without Option	With Option
Public offering price	$	$	$
Underwriting discount	$	$	$
Proceeds, before expenses	$	$	$

        The underwriting discount is currently expected to be approximately             % of the public offering price. The expenses of the offering, not including the underwriting discount, are estimated at $2.5 million.

        PETCO and the selling stockholders have granted an option to the underwriters to purchase up to an aggregate of 2,175,000 additional shares at the public offering price less the underwriting discount. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any over-allotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares proportionate to that underwriter's initial amount reflected in the above table.

        At our request, Morgan Stanley & Co. Incorporated has reserved for sale, at the initial offering price, up to approximately 700,000 shares of common stock offered by this prospectus for officers, employees, business associates and other persons related to us or them. There can be no assurance that any of the reserved shares will be purchased. The number of shares of common stock available for sale to the general public will be reduced to the extent these parties purchase the reserved shares. Any reserved shares that are not so purchased will be offered to the general public on the same basis as the other shares offered by this prospectus.

        We and our executive officers, employees and directors and substantially all of our other existing stockholders have agreed, and any person who purchases reserved shares as described above will agree, subject to certain exceptions, that we and they will not, without first obtaining the written consent of Merrill Lynch and Morgan Stanley & Co. Incorporated, during the 180-day period after the date of this prospectus:

•

offer, pledge, sell or contract to sell any common stock,



•

sell any option or contract to purchase any common stock,



•

purchase any option or contract to sell any common stock,



•

grant any option, right or warrant for the sale of any common stock,



•

lend or otherwise dispose of or transfer any common stock,



•

request or demand that we file a registration statement related to the common stock, or



•

enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.

        This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.

        We have applied to have the common stock approved for quotation on the Nasdaq National Market under the symbol "PETC."

70

        Prior to this offering, there was no public market for our common stock.

        The initial public offering price will be determined through negotiations among us and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are:

•

the valuation multiples of publicly traded companies that are engaged in initiatives similar to ours,



•

our financial information,



•

the history of, and the prospects for, our company and the industry in which we compete,



•

an assessment of our management, our past and present operations, and the prospects for, and timing of, our future revenues,



•

the present state of our development, and



•

the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

        An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.

        The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.

        Until the distribution of the shares is completed, SEC rules may limit the underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.

        If the underwriters create a short position in the common stock in connection with the offering, i.e., if they sell more shares than are listed on the cover page of this prospectus, the representatives may reduce that short position by purchasing common stock in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of such purchases.

        The representatives may also impose a penalty bid on underwriters and selling group members. This means that if the representatives purchase shares in the open market to reduce the underwriters' short position or to stabilize the price of such shares, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. The imposition of a penalty bid may also affect the price of the shares in that it discourages resales of those shares.

        Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in such transactions or that these transactions, once commenced, will not be discontinued without notice.

        Some of the underwriters and their respective affiliates have provided and may in the future provide banking, advisory and other financial services to us and some of our affiliates in the ordinary course of the underwriters' businesses and may do so from time to time in the future. The underwriters have received customary compensation in connection with these transactions.

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LEGAL MATTERS

        The validity of the common stock offered hereby will be passed upon for us by Latham & Watkins, San Diego, California. Certain legal matters will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. Skadden, Arps represented Leonard Green & Partners and its affiliates, Texas Pacific Group and its affiliates, and BD Recapitalization Holdings LLC in connection with the recapitalization of PETCO and continues to represent them in connection with matters unrelated to the offering, including in connection with their investment in PETCO. Skadden, Arps has represented and continues to represent PETCO in connection with matters unrelated to the offering. In addition, Skadden, Arps represents Trust Company of the West in connection with matters unrelated to PETCO.

EXPERTS

        The consolidated balance sheets of PETCO Animal Supplies, Inc. as of January 29, 2000 and February 3, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended February 3, 2001, included in this prospectus and elsewhere in the registration statement, in reliance upon the report of KPMG LLP, independent accountants, appearing elsewhere herein and upon the authority of said firm as experts on accounting and auditing.

72

WHERE YOU CAN FIND MORE INFORMATION

        We filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act for the shares of common stock to be sold in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedules that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. Information on the operation of the public reference facilities may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov. You may also request copies of these filings, at no cost, by telephone at (858) 453-7845 or by mail to: PETCO Animal Supplies, Inc., 9125 Rehco Road, San Diego, California 92121, Attention: Chief Financial Officer.

        Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act, and, in accordance with such requirements, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. These periodic reports, proxy statements and other information will be available for inspection and copying at the regional offices, public reference facilities and web site of the Securities and Exchange Commission referred to above. We intend to furnish our stockholders with annual reports containing financial statements audited by our independent accountants.

73

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Balance Sheets as of February 3, 2001 and November 3, 2001 (Unaudited)	F-2
Consolidated Statements of Operations (Unaudited) for the Thirty-nine Weeks Ended October 28, 2000 and November 3, 2001	F-3
Consolidated Statement of Stockholders' Equity for the Thirty-nine Weeks Ended November 3, 2001 (Unaudited)	F-4
Consolidated Statements of Cash Flows (Unaudited) for the Thirty-nine Weeks Ended October 28, 2000 and November 3, 2001	F-5
Notes to Consolidated Financial Statements	F-6
Independent Auditors' Report	F-16
Consolidated Balance Sheets as of January 29, 2000 and February 3, 2001	F-17
Consolidated Statements of Operations for the Years Ended January 30, 1999, January 29, 2000 and February 3, 2001	F-18
Consolidated Statement of Stockholders' Equity for the Years Ended January 30, 1999, January 29, 2000 and February 3, 2001	F-19
Consolidated Statements of Cash Flows for the Years Ended January 30, 1999, January 29, 2000 and February 3, 2001	F-20
Notes to Consolidated Financial Statements	F-21

F-1

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

			February 3, 2001			November 3, 2001
						(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	18,044		$	3,064
	Receivables			8,311			11,569
	Inventories			122,246			133,511
	Deferred tax assets			14,127			19,550
	Other			7,760			23,524
		Total current assets		170,488			191,218
Fixed assets, net				199,068			205,295
Debt issuance costs				8,828			6,173
Goodwill				45,855			42,137
Investment in affiliates				19,447			26,035
Other assets				10,633			12,231
			$	454,319		$	483,089
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	45,511		$	48,025
	Accrued expenses			40,085			55,129
	Accrued interest			10,417			1,351
	Accrued salaries and employee benefits			23,513			28,940
	Current portion of long-term debt			5,250			2,000
	Current portion of capital lease and other obligations			6,189			5,711
		Total current liabilities		130,965			141,156
Long-term debt, excluding current portion				263,750			193,000
Senior subordinated notes payable				109,856			200,000
Capital lease and other obligations, excluding current portion				6,146			1,761
Accrued store closing costs				3,424			1,917
Deferred tax liability				3,182			3,183
Deferred rent and other liabilities				13,866			17,713
		Total liabilities		531,189			558,730
Preferred stock:
	$.01 par value, 500 shares authorized, 111 and 78 shares issued and outstanding
	14% Series A senior redeemable preferred stock			112,669			125,488
	12% Series B junior redeemable preferred stock			78,868			86,542
Stockholders' equity (deficit):
	Common stock, $.001 par value, 50,000 shares authorized, 38,194 and 38,425 shares issued and outstanding, respectively			38			38
	Additional paid-in capital			(182,786	)		(181,607	)
	Deferred compensation			—			(6,807	)
	Accumulated other comprehensive loss			—			(1,746	)
	Accumulated deficit			(85,659	)		(97,549	)
		Total stockholders' deficit		(268,407	)		(287,671	)
			$	454,319		$	483,089

See accompanying notes to consolidated financial statements.

F-2

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

			Thirty-nine Weeks Ended
			October 28, 2000			November 3, 2001
Net sales			$	810,350		$	937,249
Cost of sales and occupancy costs				582,977			662,614
	Gross profit			227,373			274,635
Selling, general and administrative expenses				190,838			237,193
Merger and non-recurring costs				56,154			445
	Operating income (loss)			(19,619	)		36,997
Interest expense, net				9,937			31,545
	Earnings (loss) before internet operations and equity in loss of unconsolidated affiliates and income taxes			(29,556	)		5,452
Internet operations and equity in loss of unconsolidated affiliates				(2,611	)		(2,505	)
	Earnings (loss) before income taxes and extraordinary item			(32,167	)		2,947
Income taxes				2,016			1,895
	Earnings (loss) before extraordinary item			(34,183	)		1,052
Extraordinary item—loss on early extinguishment of debt (net of income tax benefit of $825 and $7,888)				(1,264	)		(12,942	)
	Net loss			(35,447	)		(11,890	)
Increase in carrying amount of redeemable preferred stock				(1,862	)		(20,493	)
	Net loss available to common stockholders		$	(37,309	)	$	(32,383	)
Basic and diluted loss per common share:
	Loss before extraordinary item		$	(0.04	)	$	(0.50	)
	Extraordinary loss on early extinguishment of debt			—			(0.34	)
		Net loss per common share	$	(0.04	)	$	(0.84	)
Shares used for computing basic and diluted loss per share				830,152			38,336

See accompanying notes to consolidated financial statements.

F-3

PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)

	Common Stock			Additional Paid in Capital			Deferred Compensation		Accumulated Deficit			Other Comprehensive Loss			Total Stockholders Equity/(Deficit)
	Shares	Amount
Balance at Febuary 3, 2001	38,194	$	38	$	(182,786	)	—		$	(85,659	)	$	—		$	(268,407	)
Exercise of options (unaudited)	231		—		23		—			—			—			23
Accretion of redeemable preferred stock (unaudited)	—		—		(20,493	)	—			—			—			(20,493	)
Stock-based compensation (unaudited)	—		—		21,649		(7,191	)		—			—			14,458
Amortization of deferred compensation (unaudited)	—		—		—		384			—			—			384
Unrealized loss on hedge (unaudited)	—		—		—		—			—			(1,746	)		(1,746	)
Net loss (unaudited)	—		—		—		—			(11,890	)		—			(11,890	)
Balance at November 3, 2001 (unaudited)	38,425	$	38	$	(181,607	)	(6,807	)	$	(97,549	)	$	(1,746	)	$	(287,671	)

See accompanying notes to consolidated financial statements.

F-4

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

				Thirty-nine Weeks Ended
				October 28, 2000			November 3, 2001
Cash flows from operating activities:
	Net earnings			$	(35,447	)	$	(11,890	)
	Depreciation and amortization				34,603			36,907
	Amortization of debt discounts and issuance costs				579			1,923
	Deferred tax assets				1,993			(5,423	)
	Internet operations and equity in loss of unconsolidated affiliates				4,942			2,505
	Stock-based compensation				—			14,842
	Non-cash write-off of investment in affiliate				10,204			—
	Non-cash write-off of debt issuance costs				2,089			12,430
	Deferred revenue recognized				(876	)		—
	Changes in assets and liabilities, net of effects of purchase acquisitions:
		Receivables			(1,525	)		(3,258	)
		Inventories			(13,807	)		(11,307	)
		Other assets			(5,793	)		(16,217	)
		Accounts payable			3,339			2,514
		Accrued expenses			15,873			15,171
		Accrued interest			2,488			(9,065	)
		Accrued salaries and employee benefits			2,335			5,427
		Accrued store closing costs			(1,355	)		(1,903	)
		Deferred rent and other liabilities			397			440
			Net cash provided by operating activities		20,039			33,096
Cash flows from investing activities:
	Additions to fixed assets				(33,437	)		(39,209	)
	Investment in affiliates				(8,855	)		(9,093	)
	Net cash invested in acquisitions of businesses				(12,582	)		—
	Change in other assets				(147	)		—
			Net cash used in investing activities		(55,021	)		(48,302	)
Cash flows from financing activities:
	Borrowings under long-term debt agreements				397,513			215,650
	Repayment of long-term debt agreements				(107,175	)		(209,650	)
	Debt issuance costs				(11,254	)		(934	)
	Repayment of capital lease and other obligations				(5,764	)		(4,863	)
	Repurchase of common stock				(463,427	)		—
	Net proceeds from issuance of common stock				16,382			23
	Net proceeds from the issuance of Series A redeemable preferred stock				107,376			—
	Net proceeds from the issuance of Series B redeemable preferred stock				75,675			—
	Proceeds from the issuance of common stock warrants				1,066			—
			Net cash provided by financing activities		10,392			226
Net decrease in cash and cash equivalents					(24,590	)		(14,980	)
Cash and cash equivalents at beginning of year					36,059			18,044
Cash and cash equivalents at end of period				$	11,469		$	3,064
Supplemental cash flow disclosures:
	Interest paid on debt			$	8,330		$	41,102
	Income taxes paid			$	6,029		$	2,632

See accompanying notes to consolidated financial statements.

F-5

PETCO ANIMAL SUPPLIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)

Note 1—General

        In the opinion of management of Petco Animal Supplies, Inc. (the "Company" or "PETCO"), the unaudited consolidated financial statements presented herein contain all adjustments, consisting of normal recurring adjustments, necessary to present the financial position, results of operations and cash flows as of November 3, 2001, and for the periods ended October 28, 2000 and November 3, 2001. Because of the seasonal nature of the Company's business, the results of operations for the thirty-nine weeks ended October 28, 2000 and November 3, 2001 are not necessarily indicative of the results to be expected for the full year. The Company's fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year. For example, references to fiscal 2000 refer to the 53 week fiscal year beginning on January 30, 2000, and ending on February 3, 2001. Certain previously reported amounts have been reclassified to conform with the current period presentation.

Note 2—Investment in Affiliates

        The Company recorded income of $4,895 for Internet operations and equity in loss of unconsolidated affiliates in first quarter 2000. This consists primarily of non-cash income of $10,317 earned for support of Petopia.com principally under the terms of an alliance agreement, partially offset by $5,383 of equity in the losses of Petopia.com. PETCO acquired certain operating assets of Petopia.com in the fourth quarter of fiscal 2000 and the results of Internet operations are included in the consolidated results for the first thirty-nine weeks of 2001.

        The Company has a 79% limited partner interest in a limited partnership (the "LP") which operates retail pet food and supply stores in Canada. Pursuant to the terms of an option agreement, PETCO may increase its interest in the LP. PETCO accounts for its investment in the LP using the equity method as it does not exercise control over the LP and records its proportionate share of earnings or loss according to the partnership agreement. PETCO recorded equity in the loss of the LP of $2,505 for the first thirty-nine weeks of fiscal 2001. (Note 9)

Note 3—Extraordinary Item

        In October 2001, the Company retired debt in the amount of $182,380 and recorded an extraordinary loss on early extinguishment of debt totaling $12,942, consisting of a $8,400 prepayment penalty, the write-off of $9,459 in unamortized debt discount, and the write-off of $2,971 in unamortized debt issuance costs, net of a tax benefit of $7,888.

        During the thirty-nine weeks ended October 28, 2000, the Company retired its credit facility in connection with the recapitalization and recorded an extraordinary loss on early extinguishment of debt equal to the write-off of unamortized debt issue costs in the amount of $1,264, net of a tax benefit of $825.

Note 4—Stock-Based Compensation

        In connection with fixed plan stock option awards granted to employees for the thirty-nine weeks ended November 3, 2001, the Company recorded deferred compensation of $7,191 equal to the aggregate differences between the exercise prices of the options granted and the deemed fair value for accounting purposes. Deferred compensation is amortized over the vesting periods of the options,

F-6

generally five years. For variable plan awards, the Company recorded stock-based compensation of $14,458 based on the changes in the deemed fair value of the common stock.

        Total stock-based compensation for the thirty-nine weeks ended November 3, 2001 was $14,842 and is recorded as cost of sales and occupancy costs and selling, general and administrative costs in the amount of $2,555 and $12,287, respectively, in the accompanying statement of operations.

Note 5—Common Stock Split

        Prior to the completion of its planned public offering, the Company expects to effect a 2-for-1 stock split of its common stock in conjunction with its initial public offering. All references in the consolidated financial statements to number of shares outstanding, price per share and per share amounts have been retroactively restated to reflect the stock split for all periods presented.

Note 6—Accounting for Derivative Instruments and Hedging Activities

        Effective February 4, 2001, PETCO adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and 138, which establishes accounting and reporting standards for derivative instruments and hedging activities. As amended, SFAS No. 133 requires that the Company recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. PETCO has entered into a $75,000 interest rate collar agreement (hedge) to limit its exposure to the interest rate risk associated with its variable rate debt. Changes in the intrinsic value of the hedge are recorded as accumulated other comprehensive income (loss). Amounts received or paid under the hedge are recorded as reductions or additions to interest expense. The Company had a cumulative deferred loss on its hedge of $1,746, net of deferred tax benefit of $1,140, at November 3, 2001.

Note 7—New Accounting Standards

        In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations, and 142, Goodwill and Other Intangible Assets, which supersede Accounting Principles Board Opinion 17, Intangible Assets. SFAS 141 requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets that meet one of the two criteria, as defined in the statement. This statement applies to all business combinations initiated after June 30, 2001. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested at least annually for impairment. Separable intangible assets with defined lives will continue to be amortized over their useful lives. The provisions of SFAS 142 will apply to goodwill and intangible assets acquired before and after the statement's effective date. As permitted by SFAS, the Company plans to adopt the new standard in the first quarter of fiscal year 2002. PETCO is currently evaluating the effect that adoption of the provisions of SFAS 142 will have on its results of operations and financial position.

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset

F-7

retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. The Company has not yet determined the impact, if any, of adoption of SFAS No. 143.

        In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This new standard supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary objectives of this statement were to develop one accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale and to address significant implementation issues related to SFAS 121. Statement 144 requires that all long-lived assets, including discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001. We have not yet determined the impact, if any, of adoption of SFAS 144.

Note 8—Contingencies

        In July 2001, two former employees instituted an action against us in the Superior Court of California for the County of Los Angeles. The complaint in the action was filed, individually and on behalf of a purported class consisting of all current and former employees who worked as salaried managers or assistant managers in our stores in the state of California at any time between July 30, 1997, and the present. The complaint alleges that the individual plaintiffs and the purported class members worked hours for which they were entitled to receive, but did not receive, overtime compensation under California law, and that they were classified as "exempt" store management employees but were forced to work more than 50% of their time in non-exempt tasks. The complaint alleges violations of the California Labor Code and the California Business and Professions Code. The relief sought includes compensatory damages, penalties, preliminary and permanent injunctions requiring us to pay overtime compensation under California law, prejudgment interest, costs and attorneys' fees and such other relief as the court deems proper. We have not answered the complaint but we have demurred to the complaint and discovery has commenced. In November 2001, the case was transferred to the Superior Court of California for the County of San Diego. The Company intends to vigorously defend the action, including contesting the certification of the action as a class action. If successful, this litigation could have a material adverse effect on our financial condition, and any required change in our labor practices could have a negative impact on our results of operations.

        From time to time the Company is involved in routine litigation and proceedings in the ordinary course of its business. The Company is not currently involved in any other pending litigation matters that the Company believes would have a material adverse effect on the Company.

Note 9—Subsequent Event

        On January 28, 2002, the Company terminated its relationship with Canadian Petcetera Limited Partnership (the Partnership) and entered into a settlement agreement in connection with the resolution of a dispute with the other partners in the Partnership. In connection with the settlement

F-8

agreement, the Company transferred all of its limited partnership interest in the Partnership to an affiliate of the general partner and paid a settlement fee of $10.3 million. In conjunction with the termination of its relationship with the Partnership, the Company will record a write-off of its investment in the Partnership of $26.1 million and record settlement expense of approximately $10.3 million in the fourth quarter of fiscal year 2001.

Note 10—Supplemental Guarantor Condensed Consolidating Financial Statements

        In September 2001, the Company issued $200 million in principal amount of 10.75% Senior Subordinated Notes due 2011 in which certain of its wholly-owned subsidiaries (the guarantor subsidiaries) serve as guarantors on a full and unconditional basis. Certain other subsidiaries (the nonguarantor subsidiaries) do not guarantee such debt.

        The following tables present the unaudited condensed consolidating balance sheets of PETCO Animal Supplies, Inc. as a parent company, its guarantor subsidiaries and its nonguarantor subsidiaries as of February 3, 2001 and November 3, 2001 and the related unaudited condensed consolidating statements of operations and cash flows for the thirty-nine weeks ended October 28, 2000 and November 3, 2001.

F-9

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
February 3, 2001
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
ASSETS
Current assets:
	Cash and cash equivalents		$	17,104		$	940		$	—	$	—		$	18,044
	Receivables			1,749			6,562			—		—			8,311
	Inventories			112,418			9,828			—		—			122,246
	Deferred tax assets			14,127			—			—		—			14,127
	Other			7,446			314			—		—			7,760
		Total current assets		152,844			17,644			—		—			170,488
Fixed assets, net				177,134			21,934			—		—			199,068
Debt issuance costs				8,828			—			—		—			8,828
Goodwill				—			45,855			—		—			45,855
Investment in affiliates				—			—			19,447		—			19,447
Intercompany investments and advances				153,358			41,072			—		(194,430	)		—
Other assets				10,633			—			—		—			10,633
			$	502,797		$	126,505		$	19,447	$	(194,430	)	$	454,319
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	(119	)	$	45,630		$	—	$	—		$	45,511
	Intercompany payables			98,613			(98,613	)		—		—			—
	Accrued expenses			32,522			7,563			—		—			40,085
	Accrued interest			10,417			—			—		—			10,417
	Accrued salaries and employee benefits			22,968			545			—		—			23,513
	Current portion of long-term debt			5,250			—			—		—			5,250
	Current portion of capital lease and other obligations			6,189			—			—		—			6,189
		Total current liabilities		175,840			(44,875	)		—		—			130,965
Long-term debt, excluding current portion				263,750			—			—		—			263,750
Senior subordinated notes payable				109,856			—			—		—			109,856
Capital lease and other obligations, excluding current portion				6,146			—			—		—			6,146
Accrued store closing costs				3,424			—			—		—			3,424
Deferred tax liability				3,182			—			—		—			3,182
Deferred rent and other liabilities				13,419			447			—		—			13,866
		Total liabilities		575,617			(44,428	)		—		—			531,189
Preferred stock:
	14% Series A senior redeemable preferred stock			112,669			—			—		—			112,669
	12% Series B junior redeemable preferred stock			78,868			—			—		—			78,868
Stockholders' equity (deficit)				(264,357	)		170,933			19,447		(194,430	)		(268,407	)
			$	502,797		$	126,505		$	19,447	$	(194,430	)	$	454,319

F-10

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
November 3, 2001
(unaudited)
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
ASSETS
Current assets:
	Cash and cash equivalents		$	2,650		$	414		$	—	$	—		$	3,064
	Receivables			503			11,066			—		—			11,569
	Inventories			128,239			5,272			—		—			133,511
	Deferred tax assets			19,550			—			—		—			19,550
	Other			23,524			—			—		—			23,524
		Total current assets		174,466			16,752			—		—			191,218
Fixed assets, net				184,160			21,135			—		—			205,295
Debt issuance costs				6,173			—			—		—			6,173
Goodwill				—			42,137			—		—			42,137
Investment in affiliates				—			—			26,035		—			26,035
Intercompany investments and advances				165,678			45,695			—		(211,373	)		—
Other assets				12,231			—			—		—			12,231
			$	542,708		$	125,719		$	26,035	$	(211,373	)	$	483,089
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	4,223		$	43,802		$	—	$	—		$	48,025
	Intercompany payables			123,359			(132,623	)		5,550		3,714			—
	Accrued expenses			50,616			4,513			—		—			55,129
	Accrued interest			1,351			—			—		—			1,351
	Accrued salaries and employee benefits			28,052			888			—		—			28,940
	Current portion of long-term debt			2,000			—			—		—			2,000
	Current portion of capital lease and other obligations			5,711			—			—		—			5,711
		Total current liabilities		215,312			(83,420	)		5,550		3,714			141,156
Long-term debt, excluding current portion				193,000			—			—		—			193,000
Senior subordinated notes payable				200,000			—			—		—			200,000
Capital lease and other obligations, excluding current portion				1,761			—			—		—			1,761
Accrued store closing costs				1,920			(3	)		—		—			1,917
Deferred tax liability				3,183			—			—		—			3,183
Deferred rent and other liabilities				17,213			500			—		—			17,713
		Total liabilities		632,389			(82,923	)		5,550		3,714			558,730
Preferred stock:
	14% Series A senior redeemable preferred stock			125,488			—			—		—			125,488
	12% Series B junior redeemable preferred stock			86,542			—			—		—			86,542
Stockholders' equity (deficit)				(301,711	)		208,642			20,485		(215,087	)		(287,671	)
			$	542,708		$	125,719		$	26,035	$	(211,373	)	$	483,089

F-11

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the thirty-nine weeks ended October 28, 2000
(unaudited)
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Net sales			$	740,816		$	572,462		$	—	$	(502,928	)	$	810,350
Cost of sales and occupancy costs				543,336			488,827			—		(449,186	)		582,977
		Gross profit		197,480			83,635			—		(53,742	)		227,373
Selling, general and administrative expenses				182,578			62,002			—		(53,742	)		190,838
Merger and non-recurring costs				56,154			—			—		—			56,154
		Operating income (loss)		(41,252	)		21,633			—		—			(19,619	)
Interest income				(1,274	)		(2	)		—		—			(1,276	)
Interest expense				11,213			—			—		—			11,213
	Earnings (loss) before internet operations and equity in loss of unconsolidated affiliates, income taxes and extraordinary item			(51,191	)		21,635			—		—			(29,556	)
Internet operations and equity in loss of unconsolidated affiliates				(2,611	)		—			—		—			(2,611	)
	Earnings (loss) before income taxes and extraordinary item			(53,802	)		21,635			—		—			(32,167	)
Income taxes				2,016			—			—		—			2,016
	Earnings (loss) before extraordinary item			(55,818	)		21,635			—		—			(34,183	)
Extraordinary item—loss on early extinguishment of debt				(1,264	)		—			—		—			(1,264	)
Earnings (loss) before equity in earnings of subsidiaries				(57,082	)		21,635			—		—			(35,447	)
Equity in earnings of subsidiaries				21,635			—			—		(21,635	)		—
	Net earnings (loss)		$	(35,447	)	$	21,635		$	—	$	(21,635	)	$	(35,447	)

F-12

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the thirty-nine weeks ended November 3, 2001
(unaudited)
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Net sales			$	859,449		$	636,595	$	—		$	(558,795	)	$	937,249
Cost of sales and occupancy costs				616,430			544,647		—			(498,463	)		662,614
		Gross profit		243,019			91,948		—			(60,332	)		274,635
Selling, general and administrative expenses				232,844			64,587		94			(60,332	)		237,193
Merger and non-recurring costs				445			—		—			—			445
		Operating income (loss)		9,730			27,361		(94	)		—			36,997
Interest income				(492	)		—		—			—			(492	)
Interest expense				32,035			—		2			—			32,037
	Earnings (loss) before internet operations and equity in loss of unconsolidated affiliates, income taxes and extraordinary item			(21,813	)		27,361		(96	)		—			5,452
Internet operations and equity in loss of unconsolidated affiliates				—			—		(2,505	)		—			(2,505	)
	Earnings (loss) before income taxes and extraordinary item			(21,813	)		27,361		(2,601	)		—			2,947
Income taxes				1,895			—		—			—			1,895
	Earnings (loss) before extraordinary item			(23,708	)		27,361		(2,601	)		—			1,052
Extraordinary item—loss on early extinguishment of debt				(12,942	)		—		—			—			(12,942	)
Earnings (loss) before equity in earnings of subsidiaries				(36,650	)		27,361		(2,601	)		—			(11,890	)
Equity in earnings of subsidiaries				24,760			—		—			(24,760	)		—
	Net earnings (loss)		$	(11,890	)	$	27,361	$	(2,601	)	$	(24,760	)	$	(11,890	)

F-13

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
For the thirty-nine weeks ended October 28, 2000
(unaudited)
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Cash flows provided by (used in) operating activities:
	Net earnings (loss)		$	(35,447	)	$	21,635		$	—		$	(21,635	)	$	(35,447	)
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities				47,295			(22,299	)		8,855			21,635			55,486
		Net cash provided by (used in) operating activities		11,848			(664	)		8,855			—			20,039
Cash flows used in investing activities:
	Additions to fixed assets			(30,216	)		(3,221	)		—			—			(33,437	)
	Investment in affiliates			—			—			(8,855	)		—			(8,855	)
	Net cash invested in acquisitions of businesses			(12,582	)		—			—			—			(12,582	)
	Change in other assets			(147	)		—			—			—			(147	)
		Net cash used in investing activities		(42,945	)		(3,221	)		(8,855	)		—			(55,021	)
Cash flows provided by financing activities:
	Borrowings under long-term debt agreements			397,513			—			—			—			397,513
	Debt issuance costs			(11,254	)		—			—			—			(11,254	)
	Repayment of long term debt agreements			(107,175	)		—			—			—			(107,175	)
	Repayments of capital lease and other obligations			(5,764	)		—			—			—			(5,764	)
	Purchase of common stock			(463,427	)		—			—			—			(463,427	)
	Net proceeds from the issuance of common stock			16,382			—			—			—			16,382
	Net proceeds from the issuance of Series A redeemable preferred stock			107,376			—			—			—			107,376
	Net proceeds from the issuance of Series B redeemable preferred stock			75,675			—			—			—			75,675
	Proceeds from the issuance of warrants			1,066			—			—			—			1,066
		Net cash provided by financing activities		10,392			—			—			—			10,392
Net decrease in cash and cash equivalents				(20,705	)		(3,885	)		—			—			(24,590	)
Cash and cash equivalents at the beginning of the period				33,864			2,195			—			—			36,059
Cash and cash equivalents at the end of the period			$	13,159		$	(1,690	)	$	—		$	—		$	11,469

F-14

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
For the thirty-nine weeks ended November 3, 2001
(unaudited)
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Cash flows provided by (used in) operating activities:
	Net earnings (loss)		$	(11,890	)	$	27,361		$	(2,601	)	$	(24,760	)	$	(11,890	)
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities				33,817			(25,289	)		11,694			24,760			44,982
		Net cash provided by operating activities		21,927			2,072			9,093			—			33,092
Cash flows used in investing activities:
	Additions to fixed assets			(36,611	)		(2,598	)		—			—			(39,209	)
	Investment in affiliates			—			—			(9,093	)		—			(9,093	)
		Net cash used in investing activities		(36,611	)		(2,598	)		(9,093	)		—			(48,302	)
Cash flows provided by (used in) financing activities:
	Borrowings under long-term debt agreements			215,650			—			—			—			215,650
	Debt issuance costs			(934	)		—			—			—			(934	)
	Repayment of long term debt agreements			(209,650	)		—			—			—			(209,650	)
	Repayments of capital lease and other obligations			(4,863	)		—			—			—			(4,863	)
	Net proceeds from the issuance of common stock			27			—			—			—			27
		Net cash used in financing activities		230			—			—			—			230
Net decrease in cash and cash equivalents				(14,454	)		(526	)		—			—			(14,980	)
Cash and cash equivalents at the beginning of the period				17,104			940			—			—			18,044
Cash and cash equivalents at the end of the period			$	2,650		$	414		$	—		$	—		$	3,064

F-15

When the transaction referred to in the second paragraph of Note 1(c) of the Notes to the Consolidated Financial Statements has been consummated, we will be in a position to render the following report.

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Petco Animal Supplies, Inc.:

        We have audited the accompanying consolidated balance sheets of Petco Animal Supplies, Inc. and subsidiaries as of January 29, 2000 and February 3, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended February 3, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Petco Animal Supplies, Inc. and subsidiaries as of January 29, 2000 and February 3, 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended February 3, 2001, in conformity with accounting principles generally accepted in the United States of America.

San Diego, California
March 12, 2001, except for the second paragraph of Note 1(c)
    which is as of January 30, 2002

F-16

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

			January 29, 2000			February 3, 2001
ASSETS (note 5)
Current assets:
	Cash and cash equivalents		$	36,059		$	18,044
	Receivables			8,721			8,311
	Inventories			116,913			122,246
	Deferred tax assets (note 10)			18,686			14,127
	Other			4,844			7,760
		Total current assets		185,223			170,488
Fixed assets (note 7):
	Equipment			96,324			121,944
	Furniture and fixtures			62,901			71,133
	Leasehold improvements			134,429			144,848
				293,654			337,925
	Less accumulated depreciation and amortization			(101,251	)		(138,857	)
				192,403			199,068
Debt issuance costs				1,900			8,828
Goodwill				36,362			45,855
Investment in affiliates (note 4)				26,360			19,447
Other assets				11,646			10,633
			$	453,894		$	454,319
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	49,133		$	45,511
	Accrued expenses			30,975			40,085
	Accrued interest			954			10,417
	Accrued salaries and employee benefits			18,299			23,513
	Current portion of long-term debt (note 5)			9,125			5,250
	Current portion of capital lease and other obligations (note 7)			7,854			6,189
		Total current liabilities		116,340			130,965
Long-term debt, excluding current portion (note 5)				89,050			263,750
Senior subordinated notes payable (note 6)				—			109,856
Capital lease and other obligations, excluding current portion (note 7)				12,436			6,146
Accrued store closing costs				5,378			3,424
Deferred tax liability (note 10)				7,083			3,182
Deferred rent and other liabilities				17,717			13,866
		Total liabilities		248,004			531,189
Preferred stock:
	$.01 par value, 500 shares authorized, 111 and 78 shares issued and outstanding at February 3, 2001 (note 8)
	14% Series A senior redeemable preferred stock			—			112,669
	12% Series B junior redeemable preferred stock			—			78,868
Stockholders' equity (deficit) (note 9):
	Common stock, $.001 par value, 50,000 shares authorized at February 3, 2001 and 928,708 and 38,194 shares issued and outstanding at January 29, 2000 and February 3, 2001, respectively			928			38
	Additional paid-in capital			270,282			(182,786	)
	Accumulated deficit			(65,320	)		(85,659	)
		Total stockholders' equity (deficit)		205,890			(268,407	)
Commitments and contingencies (notes 5, 6, 7 and 13)
			$	453,894		$	454,319

See accompanying notes to consolidated financial statements.

F-17

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

			Years Ended
			January 30, 1999			January 29, 2000			February 3, 2001
Net sales			$	839,622		$	990,289		$	1,151,178
Cost of sales and occupancy costs				624,818			720,711			817,084
	Gross profit			214,804			269,578			334,094
Selling, general and administrative expenses				187,938			220,800			264,753
Merger and non-recurring costs (note 3)				22,963			—			55,928
	Operating income			3,903			48,778			13,413
Interest income				(176	)		(863	)		(1,551	)
Interest expense				6,894			9,799			24,522
	Earnings (loss) before Internet operations and equity in loss of unconsolidated affiliates, income taxes and extraordinary item			(2,815	)		39,842			(9,558	)
Internet operations and equity in loss of unconsolidated affiliates (note 4)				—			(1,254	)		(4,543	)
	Earnings (loss) before income taxes and extraordinary item			(2,815	)		38,588			(14,101	)
Income taxes (benefit) (note 10)				(438	)		16,831			4,974
	Earnings (loss) before extraordinary item			(2,377	)		21,757			(19,075	)
Extraordinary item—loss on extinguishment of debt (net of income tax benefit of $825) (note 5)				—			—			(1,264	)
	Net earnings (loss)			(2,377	)		21,757			(20,339	)
Increase in carrying amount of redeemable preferred stock				—			—			(8,486	)
	Net earnings (loss) available to common stockholders		$	(2,377	)	$	21,757		$	(28,825	)
Basic and diluted earnings (loss) per common share:
	Earnings (loss) before extraordinary item		$	(0.00	)	$	0.02		$	(0.05	)
	Extraordinary loss on early extinguishment of debt			—			—			—
		Earnings (loss) per common share	$	(0.00	)	$	0.02		$	(0.05	)
Shares used for computing basic earnings (loss) per share				927,212			928,136			632,162
Shares used for computing diluted earnings (loss) per share				927,212			938,872			632,162

See accompanying notes to consolidated financial statements.

F-18

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands)

	Common Stock											Total Stockholders' Equity/ (Deficit)
						Additional Paid-in Capital			Accumulated Deficit
	Shares		Amount
Balances at January 31, 1998	926,640		$	927		$	269,830		$	(84,700	)	$	186,057
Exercise of options	572			—			143			—			143
Issuance of stock for services	44			—			18			—			18
Net loss	—			—			—			(2,377	)		(2,377	)
Balances at January 30, 1999	927,256		$	927		$	269,991		$	(87,077	)	$	183,841
Exercise of options	1,452			1			291			—			292
Net earnings	—			—			—			21,757			21,757
Balances at January 29, 2000	928,708		$	928		$	270,282		$	(65,320	)	$	205,890
Exercise of options	4,690			5			1,096			—			1,101
Issuance of common stock	31,988			32			15,841			—			15,873
Repurchase and retirement of common stock	(927,192	)		(927	)		(462,500	)		—			(463,427	)
Note receivable from officer for exercise of options	—			—			(85	)		—			(85	)
Issuance of common stock warrants	—			—			1,066			—			1,066
Accretion of redeemable preferred stock	—			—			(8,486	)		—			(8,486	)
Net loss	—			—			—			(20,339	)		(20,339	)
Balances at February 3, 2001	38,194		$	38		$	(182,786	)	$	(85,659	)	$	(268,407	)

See accompanying notes to consolidated financial statements.

F-19

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

				Years Ended
				January 30, 1999			January 29, 2000			February 3, 2001
Cash flows from operating activities:
	Net earnings (loss)			$	(2,377	)	$	21,757		$	(20,339	)
	Depreciation and amortization				30,382			39,280			48,100
	Deferred taxes				(211	)		14,847			658
	Internet operations and equity in loss of unconsolidated affiliates				—			1,254			4,543
	Non-cash write-off of investment in affiliate				—			—			10,206
	Loss on retirement of fixed assets				1,743			30			—
	Issuance of stock for services				18			—			—
	Non-cash write-off of debt issuance costs				—			—			2,089
	Changes in assets and liabilities, net of effects of purchase acquisitions:
		Receivables			3,241			(1,083	)		(1,391	)
		Inventories			(7,916	)		(11,975	)		(2,813	)
		Other assets			(767	)		872			(1,229	)
		Accounts payable			(695	)		718			(3,622	)
		Accrued expenses			1,297			7,037			6,621
		Accrued interest			928			(100	)		9,463
		Accrued salary and employee benefits			550			5,823			5,214
		Accrued store closing costs			(1,069	)		(1,544	)		(1,869	)
		Deferred rent and other liabilities			2,822			1,856			273
			Net cash provided by operating activities		27,946			78,772			55,904
Cash flows from investing activities:
	Additions to fixed assets				(51,689	)		(40,050	)		(46,521	)
	Investment in affiliates				(4,879	)		(18,459	)		(9,510	)
	Net cash invested in acquisitions of businesses				(1,813	)		(2,927	)		(16,407	)
	Loan to affiliate				(6,545	)		—			—
	Change in other assets				2,622			(822	)		(197	)
		Net cash used in investing activities			(62,304	)		(62,258	)		(72,635	)
Cash flows from financing activities:
	Borrowings under long-term debt agreements				43,250			32,375			397,521
	Repayment of long-term debt agreements				(3,375	)		(4,075	)		(117,175	)
	Debt issuance costs				—			(1,656	)		(11,254	)
	Repayment of capital lease and other obligations				(6,690	)		(9,715	)		(7,955	)
	Repurchase of common stock				—			—			(463,427	)
	Net proceeds from the issuance of common stock				143			292			16,889
	Net proceeds from the issuance of Series A redeemable preferred stock				—			—			107,376
	Net proceeds from the issuance of Series B redeemable preferred stock				—			—			75,675
	Proceeds from the issuance of common stock warrants				—			—			1,066
		Net cash provided by (used in) financing activities			33,328			17,221			(1,284	)
Net increase/(decrease) in cash and cash equivalents					(1,030	)		33,735			(18,015	)
Cash and cash equivalents at beginning of year					3,354			2,324			36,059
Cash and cash equivalents at end of year				$	2,324		$	36,059		$	18,044
Supplemental cash flow disclosures:
	Interest paid on debt			$	5,684		$	9,481		$	13,734
	Income taxes paid			$	141		$	1,101		$	6,052
Supplemental disclosure of non-cash financing activities:
	Additions to capital leases			$	20,253		$	—		$	—

See accompanying notes to consolidated financial statements.

F-20

PETCO ANIMAL SUPPLIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

1.    Summary of Significant Accounting Policies

(a)  Description of Business:

        PETCO Animal Supplies, Inc., (the Company or PETCO) a Delaware corporation, is a national specialty retailer of premium pet food and supplies with stores in 41 states and the District of Columbia.

(b)  Basis of Presentation:

        The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in affiliates are accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated.

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(c)  Common Stock Split

        Following the recapitalization transaction described in Note 2, the Company effected a 22-for-1 split of its common stock. Historical share information prior to the recapitalization transaction has been retroactively restated to reflect the stock split for all periods presented.

        Additionally, prior to the completion of the Company's planned public offering, the Company intends to effect a 2-for-1 stock split of its common stock. All share information in the consolidated financial statements has been retroactively restated to reflect the stock split for all periods presented.

(d)  Fiscal Year:

        The Company's fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. The fiscal year ended February 3, 2001 consisted of 53 weeks. All other fiscal years presented herein consisted of 52 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year.

(e)  Cash Equivalents:

        The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.

(f)    Inventories:

        Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market.

(g)  Pre-opening Costs:

        Costs incurred in connection with opening new stores are expensed as incurred.

F-21

(h)  Fixed Assets:

        Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally five to ten years. Equipment under capital leases is stated at the present value of minimum lease payments at the inception of the lease. Amortization is computed using the straight-line method over the lesser of the lease term or the estimated useful lives of the assets, generally five to fifteen years.

(i)    Goodwill and Long-Lived Assets:

        Costs in excess of net assets of acquired businesses is amortized on the straight-line method over three to fifteen years. The carrying value of goodwill is reviewed on a periodic basis for recoverability based on expectations for future undiscounted cash flows from the related operations. Should the review indicate that goodwill is not recoverable, the Company adjusts the goodwill to the extent carrying value exceeds the fair value of the goodwill. Reviews of carrying values of goodwill resulted in write-downs of $14 and $501 during fiscal 1999 and 2000, respectively, related to planned store closures. Accumulated amortization at January 29, 2000 and February 3, 2001 was $12,790 and $17,362, respectively.

        In addition, the Company periodically assesses long-lived assets for impairment under Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," based on expectations of future undiscounted cash flows from the related operations, and when circumstances dictate, adjusts the asset to the extent carrying value exceeds the fair value of the asset. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of goodwill, other purchased intangibles and property and equipment. Assessments of long-lived assets resulted in write-downs of fixed assets of $396 and $2,457 during fiscal 1999 and 2000, respectively. These write-downs relate to store furnishings, equipment and leasehold improvements for planned store closures and are recorded as selling, general, and administrative expenses in the accompanying statement of operations.

(j)    Other Assets:

        The Company has a secured loan to another limited partner in a limited partnership which operates retail pet food and supply stores in Canada. The loan bears interest at 7.5% and matures on October 1, 2003. The loan balance at January 29, 2000 and February 3, 2001 was $6,545, and is included in other assets on the accompanying consolidated balance sheet.

        The remainder of other assets consists primarily of lease deposits, non-compete agreements and prepaid expenses. Non-compete agreements are amortized using the straight-line method over the periods of the agreements, generally five to seven years. Accumulated amortization for intangible other assets at January 29, 2000 and February 3, 2001 was $806 and $1,203, respectively.

(k)  Debt Issuance Costs:

        Debt issuance costs are amortized to interest expense using the effective interest method over the life of the related debt. Accumulated amortization for debt issuance costs at January 29, 2000 and February 3, 2001 was $774 and $614, respectively.

F-22

(l)    Store Closing Costs:

        Management continually reviews the ability of stores to provide positive contributions to the Company's results. The Company charges costs associated with store closures to operations upon commitment to close a store within the next 12 months. Store closing costs consist of future lease obligations, property taxes and common area maintenance costs, net against contractual sub-lease income and are recorded as selling, general, and administrative expenses in the accompanying statement of operations. For the fiscal years 1998, 1999, and 2000 store closing costs charged to operations were $2,745, $110, and $90, respectively.

(m)  Income Taxes:

        Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

        Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

(n)  Fair Value of Financial Instruments:

        Because of their short maturities, the carrying amounts for cash and cash equivalents, receivables, accounts payable, accrued expenses, accrued interest and accrued salaries and employee benefits approximate fair value. The carrying amounts for long-term debt, other obligations and loan to affiliate approximate fair value as the interest rates and terms are substantially similar to those that could be obtained currently for similar instruments.

        The Company uses an interest rate collar agreement to manage interest rate exposure. At February 3, 2001, the Company had a $75,000 notional amount interest rate collar using a floating index of one-month LIBOR contracts at an interest rate cap of 7.00% and an interest rate floor of 5.43%, expiring in December 2002. The interest rate differential to be paid, if interest rates are less than the interest rate floor, or received, if interest rates rise above the interest rate cap, is recognized quarterly as a component of interest expense or interest income over the life of the agreement.

(o)  Stock Options:

        The Company accounts for stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations which recognizes compensation expense on the grant date if the current market price of the stock exceeds the exercise price. The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."

F-23

(p)  Comprehensive Income:

        SFAS No. 130, "Reporting Comprehensive Income" requires that certain items of comprehensive income other than net earnings or loss be reported in the financial statements. For the three years ended February 3, 2001, the Company's comprehensive income (loss) equaled net earnings (loss).

(q)  Revenue Recognition:

        Revenue from sales of the Company's products is recognized at the point of sale for retail stores and at the time of shipment for e-commerce sales.

(r)  Segment Reporting:

        SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires annual and interim reporting for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources. All of the Company's stores are aggregated into one reportable segment given the similarities of economic characteristics between the operations represented by the stores and the common nature of the products, customers and methods of distribution.

(s)  Reclassifications:

        Certain previously reported amounts have been reclassified to conform with the current period presentation.

(t)    Effect of Accounting Changes:

        In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Accounting for changes in the fair value of a derivative depends on the intended use and resulting designation of the derivative. For derivatives designated as hedges, changes in the fair value are either offset against the change in fair value of the assets or liabilities through earnings or recognized in other comprehensive income in the balance sheet. This Statement was amended by SFAS No. 137 which defers the effective date to all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for the Company's first quarter in the fiscal year ending February 2, 2002 ("Fiscal 2001"). The Company expects to record a transition adjustment of approximately $650 to other comprehensive income in the balance sheet, during the first quarter of Fiscal 2001.

F-24

(u)  Earnings (Loss) per Share

        Basic net earnings (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net earnings (loss) per common share incorporates the incremental shares issuable upon the assumed exercise of potentially issuable common stock.

        Net earnings (loss) and weighted average common shares used to compute net earnings (loss) per common share, basic and diluted, are presented below:

	Years Ended
	January 30, 1999			January 29, 2000		February 3, 2001
Net earnings (loss) available to common stockholders	$	(2,377	)	$	21,757	$	(28,825	)
Common shares, basic		927,212			928,136		632,162
Dilutive effect of stock options		—			10,736		—
Common shares, diluted		927,212			938,872		632,162

        Warrants to purchase 2,132 shares of common stock were outstanding at February 3, 2001, but were not included in the computation of diluted earnings (loss) per common share because the conversion would have an antidilutive effect on diluted earnings (loss) per common share. Options to purchase common shares that were outstanding but not included in the computation of diluted earnings (loss) per common share because the conversion would have an antidilutive effect were 91,476, 111,320 and 1,452 for the fiscal years ended 1998, 1999 and 2000, respectively.

2.    Recapitalization

        During fiscal 2000, the Company entered into a merger and recapitalization agreement with BD Recapitalization Corp. ("BD"), an entity formed for that purpose by the sponsors of the merger and recapitalization transaction, Leonard Green & Partners, L.P. and Texas Pacific Group. In the merger, each issued and outstanding share of the Company's common stock was cancelled and converted automatically into the right to receive $0.50 per share in cash, with the exception of 5,911 shares retained by members of the Company's management. In October 2000, following approval of the transaction by the stockholders of the Company, BD completed the merger and recapitalization of the Company by investing $190.0 million in common and preferred stock, arranging financing in the form of a new credit facility and senior subordinated notes, retiring debt under the existing credit facility and repurchasing each share of outstanding common stock, other than the 5,911 shares held by management, for an aggregate of $463,427. Net proceeds from the issuance of new shares of common stock in the merger and recapitalization was $15,873. Following the merger and recapitalization the Company effected a 22-for-1 split of its common stock. This merger was accounted for as a recapitalization and as such, a step-up of assets to fair market value was not required.

        During fiscal 2000, transaction costs of $19,771 were incurred and expensed related to the recapitalization. Additionally, financing costs of $11,254 have been deferred and are being amortized over the lives of the new debt facilities.

F-25

3.    Business Combinations

        During fiscal 1998, the Company completed two acquisitions of retailers of pet food and supplies in transactions accounted for as purchases. The aggregate fair value of assets acquired and the net cash invested in these businesses was $2,088, of which $275 was expended in fiscal 1999. The excess of the aggregate cost over the fair value of net assets acquired was $1,814, which was recorded as goodwill and is being amortized over fifteen years.

        During fiscal 1999, the Company completed one acquisition of a retailer of pet food and supplies in a transaction accounted for as a purchase. The aggregate fair value of assets acquired and the net cash invested in this business was $2,623, of which $7 was expended in fiscal 2000. The excess of the aggregate cost over the fair value of net assets acquired was $1,468, which was recorded as goodwill and is being amortized over fifteen years. A summary of the assets acquired and liabilities assumed in the acquisition follows:

	Fair Value (in thousands)
Inventory	150
Intangible assets	600
Fixed assets	640
Goodwill	1,468
Other liabilities	(235	)
Purchase Price	2,623

        During fiscal 2000, the Company completed one acquisition of a retailer of pet food and supplies in a transaction accounted for as a purchase. The aggregate fair value of assets acquired and the net cash invested in the business was $12,575. The excess of the aggregate cost over the fair value of net assets acquired was $10,926, which was recorded as goodwill and is being amortized over fifteen years. A summary of the assets acquired and liabilities assumed in the acquisition follows:

	Fair Value (in thousands)
Inventory	1,925
Fixed assets	775
Goodwill	10,926
Other liabilities	(1,051	)
Purchase price	12,575

        Additionally, during fiscal 2000, the Company completed the acquisition of certain operating assets of Petopia.com, an e-commerce destination for pet food and supplies in a transaction accounted for as a purchase. The aggregate fair value of assets acquired was $3,825. The excess of the aggregate cost over the fair value of net assets acquired was $3,126, which was recorded as goodwill and is being

F-26

amortized over three years. A summary of the assets acquired and liabilities assumed in the acquisition follows:

	Fair Value (in thousands)
Inventory	120
Fixed assets	1,199
Other assets	210
Goodwill	3,126
Other liabilities	(830	)
Purchase price	3,825

        The consolidated financial statements include the operating results from the closing date for each respective purchase acquisition. The purchase acquisitions during fiscal years 1999 and 2000 did not materially affect results of operations and accordingly, pro-forma results are not presented.

        In fiscal 1998, merger and non-recurring costs of $22,963 were recorded related to fiscal 1997 acquisition and business integration activity. These costs consisted of $522 of transaction costs, $1,995 of costs attributable to lease cancellations and closure of duplicate or inadequate facilities and activities, $19,088 of reformatting, facility conversion and other integration costs and $1,358 of severance and other costs.

        In fiscal 2000, merger and non-recurring costs of $55,928 were recorded. These costs consisted of $19,771 of transaction costs related to the recapitalization, compensation expense of $22,254 related to the repurchase of outstanding options for common stock in the recapitalization of the Company, the write-off of $10,206 with respect to an investment in an affiliate and $3,697 in expenses related to the settlement of existing shareholder lawsuits and shareholder lawsuits related to the recapitalization of the Company.

4.    Investment in Affiliates

        During fiscal 1999, the Company acquired an equity interest in Petopia.com, an e-commerce destination for the sale of pet food and supplies. The Company accounted for its investment in Petopia.com using the equity method and recorded its proportionate share of earnings or loss. The Company recognized $4,021 and $11,498 in equity in losses for fiscal 1999 and 2000, respectively. The Company also provided certain marketing and fulfillment services to Petopia.com according to the terms of a strategic alliance agreement, under which the Company earned revenue and additional equity and incurred expenses. The net revenue from these activities are included in Internet operations and equity in loss of unconsolidated affiliates in fiscal years 1999 and 2000 in the amounts of $2,767 and $10,208, respectively. The Company wrote off its investment in Petopia.com of $10,206 in fiscal 2000, reflected in merger and non-recurring costs, due to Petopia.com's pending liquidation and wrote off $1,321 in receivables due from Petopia.com, reflected in Internet operations and equity in loss of unconsolidated affiliates. Subsequently, the Company acquired certain operating assets of that entity and recorded $1,455 in transition costs in Internet operations and equity in loss of unconsolidated

F-27

affiliates, in relocating Petopia.com's operating assets to the Company's national support center (see Note 3).

        The Company has a 72% limited partner interest in a limited partnership (the "LP") which operates retail pet food and supply stores in Canada. Pursuant to the terms of an option agreement, the Company may increase its interest in the LP. The Company accounts for its investment in the LP using the equity method as it does not exercise control over the LP and records its proportionate share of earnings or loss according to the partnership agreement. The Company did not record any earnings or loss for the year ended January 29, 2000 and recorded a loss of $477 for the year ended February 3, 2001, which is included in Internet operations and equity in loss of unconsolidated affiliates in the accompanying consolidated statements of operations. The Company's investment in the LP at January 29, 2000 and February 3, 2001 was $10,414 and $19,447, respectively.

5.    Long-Term Debt

        At January 29, 2000, the Company had a credit facility with a syndicate of banks with a commitment of up to $150.0 million consisting of $100.0 million in term loans and $50.0 million in revolving loans. This credit facility was retired during fiscal 2000 in connection with the merger and recapitalization and related unamortized debt issuance costs were written off resulting in an extraordinary expense of $1,264 (net of income tax benefit of $825).

        In connection with the merger and recapitalization of the Company during fiscal 2000, the Company obtained credit facilities consisting of $270 million in term loans and an $80 million revolving credit facility which expire between October 2, 2006 and October 2, 2008. Borrowings under the credit facilities are secured by substantially all of the assets of the Company and bear interest, at the Company's option, at either a base rate plus 2.25% to 3.00% per annum, or at a reserve adjusted Eurodollar rate plus 3.25% to 4.00% per annum. The effective interest rate of these borrowings at February 3, 2001 was 10.00% to 10.75%. The Company had available $80 million under the credit facilities at February 3, 2001. The credit agreement contains certain affirmative and negative covenants related to indebtedness, interest and fixed charges coverage and other usual and customary conditions. The Company was in compliance with all relevant covenants at February 3, 2001.

Long-term debt consists of:

	January 29, 2000		February 3, 2001
Revolving loans	$	—	$	—
Term loans		98,175		269,000
		98,175		269,000
Less current portion		9,125		5,250
	$	89,050	$	263,750

        Annual maturities of long-term debt for the next five fiscal years are as follows: $5,250, $10,000, $13,250, $14,750 and $19,000.

F-28

6.    Senior Subordinated Notes

        In connection with the recapitalization, the Company issued $120.0 million of the Company's Senior Subordinated Notes maturing on October 1, 2010. Interest on the Senior Subordinated Notes accrues at a rate of 13% per annum and is payable semi-annually. The Company may redeem the Senior Subordinated Notes at its option at any time after October 1, 2005, in whole or in part, based upon an agreed upon schedule of redemption prices. At any time before October 2, 2003, up to 35% of the aggregate principal amount of the Senior Subordinated Notes may be prepaid from the proceeds of a qualifying initial public offering of common stock of the Company at a redemption price of 113% of the principal amount of the Senior Subordinated Notes repaid, plus accrued interest. In connection with the issuance of the Senior Subordinated Notes, the purchaser received Series A and Series B redeemable preferred stock, with a fair value of $9,421 and warrants for the purchase of 2,132 shares of common stock of the Company, at an exercise price of $0.001 per share, with a fair value of $1,066. The fair value of the preferred stock and warrants was reflected as a discount to the Senior Subordinated Notes and is being amortized to interest expense over ten years. Accumulated amortization at February 3, 2001 is $343. The warrants are exercisable at any time.

7.    Lease Commitments and Other Obligations

        The Company finances certain fixed assets under capital leases. There are approximately $37,272 and $24,237 in fixed assets financed through capital leases at January 29, 2000 and February 3, 2001, respectively. Accumulated amortization related to these financed assets was approximately $16,690 and $11,808 at January 29, 2000 and February 3, 2001, respectively.

        The Company leases warehouse and store facilities and equipment under operating leases. These operating leases generally have terms from three to ten years. Certain store leases include additional contingent rental payments ranging from 2% to 6% of store revenues above defined levels. Contingent rentals during fiscal years 1998, 1999, and 2000 were $44, $68 and $77, respectively.

        At February 3, 2001, the present value of future minimum payments for capital lease and other obligations, and minimum lease payments under noncancelable operating leases were as follows:

Years	Capital Leases and Other Obligations		Operating Leases
2001	$	6,993	$	110,387
2002		4,366		107,905
2003		271		102,159
2004		262		90,855
2005		253		78,927
Thereafter		1,767		354,011
Total minimum payments		13,912	$	844,244
Less amount representing interest		1,577
Present value of net minimum capital lease and other obligation payments		12,335
Less current portion of capital lease and other obligations		6,189
Capital lease and other obligations	$	6,146

F-29

        Rent expense under operating leases for fiscal years 1998, 1999, and 2000 was approximately $79,672, $89,352 and $103,637, respectively.

8.    Preferred Stock

        The authorized number of shares of preferred stock at February 3, 2001 was 500 with a par value of $.01 per share. During fiscal 2000, the Board of Directors authorized the issuance of two series of redeemable preferred stock.

        Series A senior redeemable exchangeable cumulative preferred stock ("Series A Preferred") has 111 shares authorized and issued at February 3, 2001 and liquidation preference of $1,000 per share plus accrued and unpaid dividends. Dividends are 14% per year, payable quarterly whether or not declared by the Company's Board of Directors, and if not paid in cash, will accumulate as additional liquidation preference. Dividends will accrue on such additional liquidation preference. The Series A Preferred ranks senior to all other classes of the Company's capital stock. The Company is required to redeem the shares of Series A Preferred in whole after 12 years at the liquidation preference, together with accumulated but unpaid dividends. The terms of the Series A Preferred allow the Company to redeem shares of Series A Preferred before the mandatory redemption date at specified redemption prices and also allow the Company to exchange shares of the Series A Preferred for debt securities under some circumstances. The holders of the Series A Preferred generally have no voting rights, except in limited circumstances.

        Series B junior redeemable cumulative preferred stock ("Series B Preferred") has 78 shares authorized and issued at February 3, 2001 and liquidation preference of $1,000 per share plus accrued and unpaid dividends. Dividends are 12% per year, payable quarterly whether or not declared by the Company's Board of Directors, and if not paid in cash, will accumulate as additional liquidation preference. Dividends will accrue on such additional liquidation preference. The Series B Preferred ranks senior to all classes of the Company's common stock and ranks junior to the Series A Preferred. The Company is required to redeem the shares of Series B Preferred in whole after 12 years at the liquidation preference, together with accumulated but unpaid dividends. The terms of the Series B Preferred allow the Company to redeem shares of the Series B Preferred before the mandatory redemption date at specified redemption prices. The holders of the Series B Preferred generally have no voting rights, except in limited circumstances.

        The Board of Directors has not declared any dividend with respect to either series of preferred stock. Accumulated undeclared dividends as of February 3, 2001 were $5,293 and $3,193 for the Series A Preferred and Series B Preferred, respectively. The accretion of these dividends is reflected in the accompanying consolidated statement of stockholders' equity and is included in the carrying values of the preferred stock in the accompanying consolidated balance sheet.

9.    Equity

(a)  Common Stock:

        The authorized number of shares at January 29, 2000 was 100,000 with a par value of $0.0001. During fiscal 2000, a merger and recapitalization of the Company was completed, in which the authorized number of shares was established as 50,000 with a par value of $0.001 (Note 2).

F-30

(b)  Stock Options:

        In February 1994, the Company's stockholders approved the 1994 Stock Option Plan ("1994 Company Plan") which provides for the granting of stock options, stock appreciation rights or restricted stock with respect to shares of common stock to executives and other key employees. Stock options may be granted in the form of incentive stock options or non-statutory stock options and are exercisable for up to ten years following the date of grant. Stock option exercise prices must be equal to or greater than the fair market value of the common stock on the grant date. In June 1996, the Company's stockholders approved an amendment to the 1994 Company Plan to increase the number of shares available for issuance under the plan for each of the next five fiscal years by 3.0% of the number of shares of common stock issued and outstanding as of the end of the immediately preceding fiscal year. During fiscal 2000, as part of the merger and recapitalization transaction, with the exception of 1,727 options, all options previously issued under the plan were cancelled and options with exercise prices of less than $0.50 were repurchased from their holders.

        In February 1994, the Company's stockholders approved the Directors 1994 Stock Option Plan ("Directors Plan") which provides for the granting of common stock options to directors. Stock option exercise prices must be equal to the fair market value of the common stock on the grant date. In June 1995, the Company's stockholders approved an amendment to the Directors Plan to increase the number of shares available for issuance under the plan for each of the next five fiscal years by 0.1% of the number of shares of common stock issued and outstanding as of the end of the immediately preceding fiscal year. During fiscal 2000, as part of the merger and recapitalization transaction, all options previously issued under the plan were cancelled and options with exercise prices of less than $0.50 were repurchased from their holders. At February 3, 2001 there were no options outstanding under the plan and no further grants will be made.

        In 1996, the Company assumed an employee stock option plan ("1993 Company Plan") from Pet Food Warehouse which provided for the granting of incentive and nonqualified stock options with exercise prices equal to their fair market values on their grant dates that become exercisable over various periods and expire five or six years after the date of grant. The common shares and exercise prices under this plan were adjusted based on the common share conversion rate per the merger agreement with Pet Food Warehouse. During fiscal 2000, as part of the merger and recapitalization transaction, all options previously issued under the plan were cancelled and options with exercise prices of less than $0.50 were repurchased from their holders. At February 3, 2001 there were no options outstanding under the plan and no further grants will be made.

        In 1997, the Company assumed an employee stock option plan ("1989 Company Plan") from PetCare which provided for the granting of incentive and non-qualified stock options with exercise prices equal to their fair market values on their grant dates that became exercisable over various periods and expire up to ten years after the date of grant. The common shares and exercise prices under this plan were adjusted in accordance with the terms of the merger agreement with PetCare. During fiscal 2000, as part of the merger and recapitalization transaction, all options previously issued under the plan were cancelled and options with exercise prices of less than $0.50 were repurchased from their holders. At February 3, 2001 there were no options outstanding under the plan and no further grants will be made.

F-31

        Compensation expense of $22,254 related to the repurchase of outstanding options for common stock in the recapitalization is reflected in merger and non-recurring costs in fiscal 2000. Information regarding the stock option plans follows:

		All Company Plans
		Shares		Option Price Per Share					Weighted Avg. Exercise Price
Outstanding at January 31, 1998		66,997		$	0.18	-	$	0.72	$	0.42
	Granted	32,993		$	0.11	-	$	0.42	$	0.39
	Exercised	(792	)	$	0.23	-	$	0.47	$	0.28
	Cancelled	(7,742	)	$	0.23	-	$	0.56	$	0.45
Outstanding at January 30, 1999		91,456		$	0.11	-	$	0.72	$	0.41
	Granted	30,749		$	0.14	-	$	0.35	$	0.17
	Exercised	(1,452	)	$	0.18	-	$	0.28	$	0.20
	Cancelled	(9,458	)	$	0.17	-	$	0.63	$	0.32
Outstanding at January 29, 2000		111,295		$	0.11	-	$	0.72	$	0.36
Fiscal 2000 activity prior to merger and recapitalization:
	Granted	34,671		$	0.22	-	$	0.28	$	0.28
	Exercised	(4,384	)	$	0.17	-	$	0.42	$	0.25
	Cancelled	(139,855	)	$	0.11	-	$	0.72	$	0.29
Outstanding prior to merger and recapitalization		1,727		$	0.17	-	$	0.28	$	0.22

        In fiscal 2000, in connection with the merger and recapitalization of the company, the 1994 Company Plan was amended and restated to modify the total number of shares available for issuance under the plan to 2,339. Under the terms of the recapitalization, the 1,727 options not repurchased were converted into 1,215 options, and the exercise prices were adjusted, to preserve the economic value of the options for the holders.

        Information regarding the 1994 Company Plan, as amended, subsequent to the merger and recapitalization follows:

		Shares		Option Price Per Share	Weighted Average Exercise Price
Outstanding subsequent to merger and recapitalization		1,215		$0.10	$	0.10
Fiscal 2000 activity subsequent to merger and recapitalization:
	Granted	525		$0.50	$	0.50
	Exercised	(289	)	$0.10	$	0.10
Outstanding at February 3, 2001		1,451		$0.10 - $0.50	$	0.25

F-32

9.    Equity (Continued)

(c)  Accounting for Stock Options:

        The Company accounts for stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, under which no compensation expense was recognized. Had compensation costs for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss would have been increased by $3,749 during 1998, and the Company's net earnings would have been decreased by $3,521 during 1999 and the Company's net loss would have increased by $2,815 during 2000. The weighted average fair value of the options granted during 1998, 1999 and 2000 were estimated as $0.22, $0.10 and $0.13 on the date of grant using the Black-Scholes option pricing model with the following assumptions: no dividend yield, volatility of 59.0%, 62.1% and 49.5%, risk-free interest rate of 5.0%, 6.0% and 5.8% for 1998, 1999 and 2000, respectively, and an expected life of five years for all grants.

        The following table summarizes information about the options outstanding under the stock option plan at February 3, 2001:

		Options Outstanding				Options Exercisable
Range of Exercise Prices		Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$	0.10 - $0.50	1,451	7.25	$	0.25	926	$	0.10

10.    Income Taxes

        Income taxes (benefit) consists of the following:

		Years Ended
		January 30, 1999			January 29, 2000		February 3, 2001
Current:
	Federal	$	64		$	991	$	3,017
	State		(423	)		993		474
	Foreign		132			—		—
			(227	)		1,984		3,491
Deferred:
	Federal		(876	)		12,945		953
	State		665			1,902		(295	)
			(211	)		14,847		658
Income taxes (benefit)		$	(438	)	$	16,831	$	4,149

F-33

10.    Income Taxes (Continued)

        A reconciliation of income taxes at the federal statutory rate of 34% for the fiscal year ended January 30, 1999 and 35% for the fiscal years ended January 29, 2000 and February 3, 2001 with the provision for income taxes (benefit) follows:

	Years Ended
	January 30, 1999			January 29, 2000			February 3, 2001
Income taxes at federal statutory rate	$	(957	)	$	13,506		$	(5,666	)
Non-deductible expenses		286			463			2,276
State taxes, net of federal tax benefit		160			1,882			116
Foreign taxes, net of federal tax benefit		87			—			—
Change in valuation allowance		—			1,600			7,745
Other		(14	)		(620	)		(322	)
	$	(438	)	$	16,831		$	4,149

The sources of significant temporary differences which gave rise to the deferred tax provision and their effects follow:

	Years Ended
	January 30, 1999			January 29, 2000			February 3, 2001
Inventory	$	2,693		$	26		$	(42	)
Deferred rent		(779	)		(779	)		(160	)
Depreciation		4,220			7,808			1,179
Accrued fringes		204			(680	)		(777	)
Intangibles		686			(221	)		(411	)
Store closing costs		1,840			974			819
Fixed assets		1,571			24			5
Other assets		1,450			(970	)		(7,167	)
Benefit of net operating loss carryforwards		(12,482	)		9,093			4,110
Debt issuance costs		—			—			(2,164	)
Alternative minimum tax credit		—			(861	)		(1,996	)
Change in valuation allowance		—			1,600			7,745
Other		386			(1,167	)		(483	)
	$	(211	)	$	14,847		$	658

F-34

        Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets follow:

		January 29, 2000			February 3, 2001
Deferred tax assets:
	Inventory	$	3,530		$	3,572
	Deferred rent		4,970			5,130
	Accrued fringes		2,581			3,358
	Store closing costs		2,682			1,863
	Other assets		1,878			9,045
	Net operating loss carryforwards		18,011			13,901
	Debt issuance costs		—			2,164
	Alternative minimum tax credit		1,274			3,270
	Other		54			532
	Total deferred tax assets		34,980			42,835
	Valuation allowance		(6,500	)		(14,245	)
	Net deferred tax assets		28,480			28,590
Deferred tax liabilities:
	Depreciation		(15,194	)		(16,373	)
	Intangibles		(1,683	)		(1,272	)
	Total deferred tax liabilities		(16,877	)		(17,645	)
Net deferred tax assets		$	11,603		$	10,945

        The valuation allowance of $6,500 at January 29, 2000 and $14,245 at February 3, 2001 relates primarily to net operating loss carryforwards of PetCare and the Company's equity share of the losses of Petopia.com, with the increase in the valuation allowance at February 3, 2001 relating primarily to the Company's equity share of the additional losses of Petopia.com and the writeoff of the Company's investment in Petopia.com. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance.

        At February 3, 2001, the Company has available net loss carryforwards of $36,476 for federal income tax purposes, which begin expiring in 2012, and $21,585 for state income tax purposes, which begin expiring in 2005.

11.    Employee Savings Plans

        The Company has employee savings plans which permit eligible participants to make contributions by salary reduction pursuant to either section 401(k) of the Internal Revenue Code or under the

F-35

Company's non-qualified deferred compensation plan. The Company matches 50% of the first 6% of compensation that is contributed by each participating employee to the plans. In connection with the required match, the Company's contributions to the plans were $532 in 1998, $873 in 1999 and $1,052 in 2000.

12.    Related Party Transactions

        The Company entered into a management agreement with two entities who were sponsors of the merger and recapitalization transaction. Under the terms of this agreement, the Company paid management fees in an aggregate amount of $1,040 in fiscal 2000 to these two related parties.

        The Company issued Senior Subordinated Notes to related parties in fiscal 2000 (See note 6). The related parties have syndicated a portion of these Senior Subordinated Notes. Interest expense incurred on the Senior Subordinated Notes, primarily with related parties, including amortization of the discount, was $5,716 in fiscal 2000.

13.    Commitments and Contingencies

        The Company is involved in routine litigation arising in the ordinary course of its business. While the results of such litigation cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.

        During fiscal 2000, the Company entered into settlements with respect to an existing shareholder lawsuit and a shareholder lawsuit related to the recapitalization. The Company has recognized $3,697 in merger and non-recurring costs, which it believes is a reasonable estimate of the probable ultimate cost of these settlements and related legal expenses.

14.    Supplemental Guarantor Condensed Consolidating Financial Statements

        The Company issued $200 million in principal amount of 10.75% Senior Subordinated Notes Payable in which certain of its subsidiaries (the guarantor subsidiaries) will serve as guarantors on a full and unconditional basis. Certain other subsidiaries (the nonguarantor subsidiaries) will not guarantee such debt.

        The following tables present the unaudited condensed consolidating balance sheets of PETCO Animal Supplies, Inc. as a parent company, its guarantor subsidiaries and its nonguarantor subsidiaries as of January 29, 2000 and February 3, 2001 and the related unaudited condensed consolidating statements of operations and cash flows for each year in the three-year period ended February 3, 2001.

F-36

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
January 29, 2000
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
ASSETS
Current assets:
	Cash and cash equivalents		$	33,864	$	2,195		$	—	$	—		$	36,059
	Receivables			2,141		6,580			—		—			8,721
	Inventories			109,273		7,640			—		—			116,913
	Deferred tax assets			18,686		—			—		—			18,686
	Other			4,844		—			—		—			4,844
		Total current assets		168,808		16,415			—		—			185,223
Fixed assets, net				173,089		19,314			—		—			192,403
Debt issuance costs				1,900		—			—		—			1,900
Goodwill				—		36,362			—		—			36,362
Investment in affiliates				15,945		—			10,415		—			26,360
Intercompany investments and advances				111,475		33,081			—		(144,556	)		—
Other assets				11,646		—			—		—			11,646
			$	482,863	$	105,172		$	10,415	$	(144,556	)	$	453,894
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	5,375	$	43,758		$	—	$	—		$	49,133
	Intercompany payables			83,637		(83,637	)		—		—			—
	Accrued expenses			19,225		11,750			—		—			30,975
	Accrued interest			954		—			—		—			954
	Accrued salaries and employee benefits			17,435		864			—		—			18,299
	Current portion of long-term debt			9,125		—			—		—			9,125
	Current portion of capital lease and other obligations			7,854		—			—		—			7,854
		Total current liabilities		143,605		(27,265	)		—		—			116,340
Long-term debt, excluding current portion				89,050		—			—		—			89,050
Capital lease and other obligations, excluding current portion				12,436		—			—		—			12,436
Accrued store closing costs				5,378		—			—		—			5,378
Deferred tax liability				7,083		—			—		—			7,083
Deferred rent and other liabilities				17,421		296			—		—			17,717
		Total liabilities		274,973		(26,969	)		—		—			248,004
Stockholders' equity				207,890		132,141			10,415		(144,556	)		205,890
			$	482,863	$	105,172		$	10,415	$	(144,556	)	$	453,894

F-37

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY BALANCE SHEET
February 3, 2001
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
ASSETS
Current assets:
	Cash and cash equivalents		$	17,104		$	940		$	—	$	—		$	18,044
	Receivables			1,749			6,562			—		—			8,311
	Inventories			112,418			9,828			—		—			122,246
	Deferred tax assets			14,127			—			—		—			14,127
	Other			7,446			314			—		—			7,760
		Total current assets		152,844			17,644			—		—			170,488
Fixed assets, net				177,134			21,934			—		—			199,068
Debt issuance costs				8,828			—			—		—			8,828
Goodwill				—			45,855			—		—			45,855
Investment in affiliates				—			—			19,447		—			19,447
Intercompany investments and advances				153,358			41,072			—		(194,430	)		—
Other assets				10,633			—			—		—			10,633
			$	502,797		$	126,505		$	19,447	$	(194,430	)	$	454,319
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	(119	)	$	45,630		$	—	$	—		$	45,511
	Intercompany payables			98,613			(98,613	)		—		—			—
	Accrued expenses			32,522			7,563			—		—			40,085
	Accrued interest			10,417			—			—		—			10,417
	Accrued salaries and employee benefits			22,968			545			—		—			23,513
	Current portion of long-term debt			5,250			—			—		—			5,250
	Current portion of capital lease and other obligations			6,189			—			—		—			6,189
		Total current liabilities		175,840			(44,875	)		—		—			130,965
Long-term debt, excluding current portion				263,750			—			—		—			263,750
Senior subordinated notes payable				109,856			—			—		—			109,856
Capital lease and other obligations, excluding current portion				6,146			—			—		—			6,146
Accrued store closing costs				3,424			—			—		—			3,424
Deferred tax liability				3,182			—			—		—			3,182
Deferred rent and other liabilities				13,419			447			—		—			13,866
		Total liabilities		575,617			(44,428	)		—		—			531,189
Preferred stock:
	14% Series A senior redeemable preferred stock			112,669			—			—		—			112,669
	12% Series B junior redeemable preferred stock			78,868			—			—		—			78,868
Stockholders' equity (deficit)				(264,357	)		170,933			19,447		(194,430	)		(268,407	)
			$	502,797		$	126,505		$	19,447	$	(194,430	)	$	454,319

F-38

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the year ended January 30, 1999
(in thousands)

		Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Net sales		$	823,604		$	108,426	$	—	$	(92,408	)	$	839,622
Cost of sales and occupancy costs			615,057			94,645		—		(84,884	)		624,818
	Gross profit		208,547			13,781		—		(7,524	)		214,804
Selling, general and administrative expenses			187,056			8,406		—		(7,524	)		187,938
Merger and non-recurring costs			22,963			—		—		—			22,963
	Operating income (loss)		(1,472	)		5,375		—		—			3,903
Interest income			(176	)		—		—		—			(176	)
Interest expense			6,894			—		—		—			6,894
	Earnings (loss) before income taxes		(8,190	)		5,375		—		—			(2,815	)
Income taxes			(438	)		—		—		—			(438	)
	Earnings (loss) before equity in earnings of subsidiaries		(7,752	)		5,375		—		—			(2,377	)
	Equity in earnings of subsidiaries		5,375			—		—		(5,375	)		—
	Net earnings (loss)	$	(2,377	)	$	5,375	$	—	$	(5,375	)	$	(2,377	)

F-39

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the year ended January 29, 2000
(in thousands)

		Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Net sales		$	901,308		$	724,616		$	—	$	(635,635	)	$	990,289
Cost of sales and occupancy costs			671,451			620,263			—		(571,003	)		720,711
	Gross profit		229,857			104,353			—		(64,632	)		269,578
Selling, general and administrative expenses			212,451			72,981			—		(64,632	)		220,800
	Operating income		17,406			31,372			—		—			48,778
Interest income			(862	)		(1	)		—		—			(863	)
Interest expense			9,799			—			—		—			9,799
	Earnings before internet operations and equity in loss of unconsolidated affiliates and income taxes		8,469			31,373			—		—			39,842
Internet operations and equity in loss of unconsolidated affiliates			(1,254	)		—			—		—			(1,254	)
	Earnings (loss) before income taxes		7,215			31,373			—		—			38,588
Income taxes			16,831			—			—		—			16,831
	Earnings (loss) before equity in earnings of subsidiaries	$	(9,616	)		31,373			—		—			21,757
	Equity in earnings of subsidiaries		31,373			—			—		(31,373	)		—
	Net earnings	$	21,757		$	31,373		$	—	$	(31,373	)	$	21,757

F-40

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF OPERATIONS
For the year ended February 3, 2001
(in thousands)

		Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Net sales		$	1,050,340		$	799,214		$	—		$	(698,376	)	$	1,151,178
Cost of sales and occupancy costs			759,935			680,028			—			(622,879	)		817,084
	Gross profit		290,405			119,186			—			(75,497	)		334,094
Selling, general and administrative expenses			254,628			85,622			—			(75,497	)		264,753
Merger and non-recurring costs			54,618			1,310			—			—			55,928
	Operating income (loss)		(18,841	)		32,254			—			—			13,413
Interest income			(1,549	)		(2	)		—			—			(1,551	)
Interest expense			24,522			—			—			—			24,522
	Earnings (loss) before internet operations and equity in loss of unconsolidated affiliates, income taxes and extraordinary item		(41,814	)		32,256			—			—			(9,558	)
Internet operations and equity in loss of unconsolidated affiliates			(2,611	)		(1,455	)		(477	)		—			(4,543	)
	Earnings (loss) before income taxes and extraordinary item		(44,425	)		30,801			(477	)		—			(14,101	)
Income taxes			4,974			—			—			—			4,974
	Earnings (loss) before extraordinary item		(49,399	)		30,801			(477	)		—			(19,075	)
Extraordinary item—loss on early extinguishment of debt			(1,264	)		—			—			—			(1,264	)
	Earnings (loss) before equity in earnings of subsidiaries		(50,663	)		30,801			(477	)		—			(20,339	)
	Equity in earnings of subsidiaries		30,324			—			—			(30,324	)		—
	Net earnings (loss)	$	(20,339	)	$	30,801		$	(477	)	$	(30,324	)	$	(20,339	)

F-41

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
For the year ended January 30, 1999
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Cash flows provided by (used in) operating activities:
	Net earnings (loss)		$	(2,377	)	$	5,375		$	—		$	(5,375	)	$	(2,377	)
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities				22,697			(2,628	)		4,879			5,375			30,323
		Net cash provided by (used in) operating activities		20,320			2,747			4,879			—			27,946
Cash flows used in investing activities:
	Additions to fixed assets			(50,268	)		(1,421	)		—			—			(51,689	)
	Investment in affiliates			—			—			(4,879	)		—			(4,879	)
	Net cash invested in acquisitions of businesses			(1,813	)		—			—			—			(1,813	)
	Loan to affiliate			(6,545	)		—			—			—			(6,545	)
	Change in other assets			2,622			—			—			—			2,622
		Net cash used in investing activities		(56,004	)		(1,421	)		(4,879	)		—			(62,304	)
Cash flows provided by financing activities:
	Borrowings under long-term debt agreements			43,250			—			—			—			43,250
	Repayment of long term agreements			(3,375	)		—			—			—			(3,375	)
	Repayments of capital lease and other obligations			(6,690	)		—			—			—			(6,690	)
	Net proceeds from the issuance of common stock			143			—			—			—			143
		Net cash provided by financing activities		33,328			—			—			—			33,328
Net increase (decrease) in cash and cash equivalents				(2,356	)		1,326			—			—			(1,030	)
Cash and cash equivalents at the beginning of the period				3,354			—			—			—			3,354
Cash and cash equivalents at the end of the period			$	998		$	1,326		$	—		$	—		$	2,324

F-42

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
For the year ended January 29, 2000
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Cash flows provided by (used in) operating activities:
	Net earnings (loss)		$	21,757		$	31,373		$	—		$	(31,373	)	$	21,757
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities				44,183			(25,094	)		6,553			31,373			57,015
		Net cash provided by operating activities		65,940			6,279			6,553			—			78,772
Cash flows used in investing activities:
	Additions to fixed assets			(34,641	)		(5,409	)		—			—			(40,050	)
	Investment in affiliates			(11,906	)		—			(6,553	)		—			(18,459	)
	Net cash invested in acquisitions of businesses			(2,927	)		—			—			—			(2,927	)
	Change in other assets			(822	)		—			—			—			(822	)
		Net cash used in investing activities		(50,296	)		(5,409	)		(6,553	)		—			(62,258	)
Cash flows provided by financing activities:
	Borrowings under long-term debt agreements			32,375			—			—			—			32,375
	Debt issuance costs			(1,656	)		—			—			—			(1,656	)
	Repayment of long term debt agreements			(4,075	)		—			—			—			(4,075	)
	Repayments of capital lease and other obligations			(9,715	)		—			—			—			(9,715	)
	Net proceeds from the issuance of common stock			292			—			—			—			292
		Net cash provided by financing activities		17,221			—			—			—			17,221
Net increase in cash and cash equivalents				32,865			870			—			—			33,735
Cash and cash equivalents at the beginning of the period				999			1,325			—			—			2,324
Cash and cash equivalents at the end of the period			$	33,864		$	2,195		$	—		$	—		$	36,059

F-43

PETCO ANIMAL SUPPLIES, INC.
CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND
PARENT COMPANY STATEMENT OF CASH FLOWS
For the year ended February 3, 2001
(unaudited)
(in thousands)

			Petco Animal Supplies, Inc. Parent Company Guarantor			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Reclassifications and Eliminations			Petco Animal Supplies, Inc. and Subsidiaries
Cash flows provided by (used in) operating activities:
	Net earnings (loss)		$	(20,339	)	$	30,801		$	(477	)	$	(30,324	)	$	(20,339	)
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities				63,003			(27,071	)		9,987			30,324			76,243
		Net cash provided by (used in) operating activities		42,664			3,730			9,510			—			55,904
Cash flows used in investing activities:
	Additions to fixed assets			(41,536	)		(4,985	)		—			—			(46,521	)
	Investment in affiliates			—			—			(9,510	)		—			(9,510	)
	Net cash invested in acquisitions of businesses			(16,407	)		—			—			—			(16,407	)
	Change in other assets			(197	)		—			—			—			(197	)
		Net cash used in investing activities		(58,140	)		(4,985	)		(9,510	)		—			(72,635	)
Cash flows provided by (used in) financing activities:
	Borrowings under long-term debt agreements			397,521			—			—			—			397,521
	Debt issuance costs			(11,254	)		—			—			—			(11,254	)
	Repayment of long term debt agreements			(117,175	)		—			—			—			(117,175	)
	Repayments of capital lease and other obligations			(7,955	)		—			—			—			(7,955	)
	Purchase of common stock			(463,427	)		—			—			—			(463,427	)
	Net proceeds from the issuance of common stock			16,889			—			—			—			16,889
	Net proceeds from the issuance of Series A redeemable preferred stock			107,376			—			—			—			107,376
	Net proceeds from the issuance of Series B redeemable preferred stock			75,675			—			—			—			75,675
	Proceeds from the issuance of warrants			1,066			—			—			—			1,066
		Net cash provided by (used in) financing activities		(1,284	)		—			—			—			(1,284	)
Net increase (decrease) in cash and cash equivalents				(16,760	)		(1,255	)		—			—			(18,015	)
Cash and cash equivalents at the beginning of the period				33,864			2,195			—			—			36,059
Cash and cash equivalents at the end of the period			$	17,104		$	940		$	—		$	—		$	18,044

F-44

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

        The following table sets forth an estimate of expenses to be incurred by us in connection with the issuance and distribution of the securities offered hereby.

Securities and Exchange Commission registration fee		$	30,682
Blue Sky fees and expenses			*
Legal fees and disbursements			*
Printing and engraving expenses			*
Listing fees			95,000
NASD fees			30,500
Accounting fees and expenses			*
Transfer Agent and Registrar Fees			*
Miscellaneous			*
	TOTAL

*

To be supplied by amendment.

Item 14. Indemnification of Directors and Officers.

        Our company is incorporated under the laws of the State of Delaware. Reference is made to Section 102(b)(7) of the Delaware General Corporation Law, or DGCL, which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director for violations of the director's fiduciary duty, except (1) for any breach of the director's duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) pursuant to Section 174 of the DGCL, which provides for liability of directors for unlawful payments of dividends of unlawful stock purchase or redemptions or (4) for any transaction from which a director derived an improper personal benefit.

        Reference is also made to Section 145 of the DGCL, which provides that a corporation may indemnify any person, including an officer or director, who is, or is threatened to be made, party to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of such corporation, by reason of the fact that such person was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the corporation's best interest and, for criminal proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify any officer or director in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses that such officer or director actually and reasonably incurred.

II-1

        Our bylaws currently provide, and the amended and restated by-laws we intend to adopt prior to the completion of the offering will provide, for indemnification of the officers and directors to the full extent permitted by applicable law.

Item 15. Recent Sales of Unregistered Securities

        As part of our recapitalization, on October 2, 2000, we made the following sales of unregistered securities:

•

Issued and sold 31,999,968 shares of common stock 31,179,456 for an aggregate purchase price of $16.0 million to the following: 31,179,456 shares to BD Recapitalization Holdings LLC; 398,992 shares to TCW/Crescent Mezzanine Partners II, L.P.; 96,800 shares to TCW/Crescent Mezzanine Trust II; 108,240 shares to TCW Leveraged Income Trust, L.P.; 108,240 shares to TCW Leveraged Income Trust II, L.P.; and 108,240 shares to TCW Leveraged Income Trust IV, L.P. These securities were issued in reliance on the exemption from registration provided by Section 4(2) and Regulation D, Rule 506, under the Securities Act.

•

Issued and sold 105,000 shares of 14% series A senior redeemable exchangeable cumulative preferred stock at a per share price of $1,000 for an aggregate purchase price of $105.0 million to the following: 102,308 shares to BD Recapitalization Holdings LLC; 1,309 shares to TCW/Crescent Mezzanine Partners II, L.P.; 318 shares to TCW/Crescent Mezzanine Trust II; 355 shares to TCW Leveraged Income Trust, L.P.; 355 shares to TCW Leveraged Income Trust II, L.P.; and 355 shares to TCW Leveraged Income Trust IV, L.P. These securities were issued in reliance on the exemption from registration provided by Section 4(2) and Regulation D, Rule 506, under the Securities Act.

•

Issued and sold 74,000 shares of 12% series B junior redeemable cumulative preferred stock at a per share price of $1,000 for an aggregate purchase price of $74.0 million to the following: 72,103 shares to BD Recapitalization Holdings LLC; 922 shares to TCW/Crescent Mezzanine Partners II, L.P.; 225 shares to TCW/Crescent Mezzanine Trust II; 250 shares to TCW Leveraged Income Trust, L.P.; 250 shares to TCW Leveraged Income Trust II, L.P.; and 250 shares to TCW Leveraged Income Trust IV, L.P. These securities were issued in reliance on the exemption from registration provided by Section 4(2) and Regulation D, Rule 506, under the Securities Act.

•

Sold $120.0 million in senior subordinated notes due 2010 pursuant to an indenture of the same date with Firstar Bank, N.A., as trustee, to the following: $58.4 million to TCW/Crescent Mezzanine Partners II, L.P.; $14.1 million to TCW/Crescent Mezzanine Trust II; $15.8 million to TCW Leveraged Income Trust, L.P.; $15.8 million to TCW Leveraged Income Trust II, L.P.; and $15.8 million to TCW Leveraged Income Trust IV, L.P. In connection with the sale of the senior subordinated notes, we issued 5,526 shares of series A preferred stock, 3,895 shares of series B preferred stock and warrants to purchase up to 2,131,800 shares of common stock to the following entities and in the following amounts: 2,687 shares of series A preferred stock, 1,894 shares of series B preferred stock and warrants to purchase 1,036,640 shares of common stock to TCW/Crescent Mezzanine Partners II, L.P.; 652 shares of

series A preferred stock, 459 shares of series B preferred stock and warrants to purchase 251,284 shares of common stock to TCW/Crescent Mezzanine Trust II; 729 shares of series A preferred stock, 514 shares of series B preferred stock and warrants to purchase 281,292 shares of common stock to TCW Leveraged Income Trust, L.P.; 729 shares of series A preferred stock, 514 shares of series B preferred stock and warrants to purchase 281,292 shares of common stock to TCW Leveraged Income Trust II, L.P.; and 729 shares of series A preferred stock, 514 shares of series B preferred stock and warrants to purchase 281,292 shares of common stock to TCW Leveraged Income Trust IV, L.P. The warrants allow the holders to purchase shares of common stock at a price of $0.001 on or before the closing of an initial public offering of our common stock.

II-2

These securities were issued in reliance on the exemption from registration provided by Section 4(2) and Regulation D, Rule 506, of the Securities Act.

All of the financial information and share data described above gives effect to our 22-for-1 common stock split effected in October 2000 and a 2-for-1 stock split we will effect prior to the completion of the offering.

        On October 26, 2001, we sold $200 million aggregate principal amount of our 10.75% senior subordinated notes due 2011 in an offering exempt from the registration provisions of the Securities Act pursuant to Section 4(2), Rule 144A and Regulation S thereunder. Goldman, Sachs & Co. was the initial purchaser of the notes. The net proceeds of the offering were used to redeem all of our senior subordinated notes due 2010 and to repay an aggregate of approximately $72.0 million in outstanding borrowings under our senior credit facility.

        From October 2, 2000 to January 25, 2002, we issued an aggregate of 1,207,108 shares of common stock through the exercise of options. As of January 25, 2002, we had outstanding stock options to employees, officers, directors and consultants to purchase an aggregate of 1,353,048 shares of common stock at a weighted average exercise price of $1.52. The issuance of the options described above was exempt from registration under Rule 701 of the Securities Act.

Item 16. Exhibits And Financial Statement Schedules.

(a)

Exhibits

Exhibit Number	Description
1.1*	Form of Underwriting Agreement.
3.1*	Form of Amended and Restated Certificate of Incorporation.
3.2*	Form of Amended and Restated By-Laws.
4.1*	Form of Specimen Common Stock Certificate.
4.2**	Stockholders Agreement, dated as of October 2, 2000, by and among the Registrant, BD Recapitalization Holdings LLC and certain stockholders of the Registrant.
4.3**	Amendment No. 1 to Stockholders Agreement, dated as of January 22, 2001, by and among the Registrant, BD Recapitalization Holdings LLC, as representative on behalf of the purchaser parties, Brian K. Devine, as representative on behalf of the management parties, and Jean-Marc Chapus, as representative on behalf of the financing parties.
4.4**	Securityholders Agreement, dated as of October 2, 2000, by and among the Registrant, BD Recapitalization Holdings LLC and certain securityholders of the Registrant.
4.5**	Indenture, dated as of October 26, 2001, by and among the Registrant, certain subsidiaries of the Registrant and U.S. Bank N.A., as trustee.
4.6**	Exchange and Registration Rights Agreement, dated as of October 26, 2001, by and between the Registrant, certain subsidiaries of the Registrant and Goldman Sachs & Co., as initial purchaser.
5.1**	Form of Opinion of Latham & Watkins.
10.1**	Amended and Restated Credit Agreement, dated as of October 26, 2001, by and among the Registrant, Goldman Sachs Credit Partners L.P., as joint lead arranger, joint book-runner and sole syndication agent, Wells Fargo Bank National Association, as joint lead arranger, joint book-runner and sole administrative agent, and the lenders party thereto.
10.2**	Distribution Center Lease, dated as of June 23, 1997, by and between the Registrant and Knickerbocker Industrial Properties East LP, as amended, for 152 Dayton Jamesburg Road, South Brunswick, New Jersey.

II-3

10.3**	Distribution Center Lease, dated as of February 20, 1998, by and between the Registrant and Industrial Developments International, Inc. for 3801 Rock Creek Boulevard, Joliet, Illinois.
10.4**	Distribution Center Lease, dated as of November 24, 1997, by and between the Registrant and Opus West Corporation for 4345 Parkhurst Street, Mira Loma, California.
10.5**	Master Equipment Lease Agreement, dated as of September 15, 1998, by and between the Registrant and IBM Leasing.
10.6**	Management Services Agreement, dated as of October, 2, 2000, by and among the Registrant, Leonard Green & Partners, L.P. and TPG GenPar III, L.P.
10.7**	Amended and Restated Employment Agreement, dated as of October 2, 2000, by and between the Registrant and Brian K. Devine.
10.8**	Employment Agreement, dated as of October 2, 2000, by and between the Registrant and Bruce C. Hall.
10.9**	Employment Agreement, dated as of October 2, 2000, by and between the Registrant and James M. Myers.
10.10*	Form of Indemnification Agreement between the Registrant and certain officers and directors.
10.11**	Form of Retention Agreement for executive officers.
10.12**	Form of Retention Agreement for non-executive officers.
10.13**	PETCO Animal Supplies 401(k) plan.
10.14*	PETCO Animal Supplies, Inc. Group Benefit Plan, dated July 29, 1991, as amended.
10.15**	The 1994 Stock Option and Restricted Stock Plan for Executive and Key Employees of PETCO Animal Supplies, Inc., as amended and restated as of October 2, 2000.
10.16*	Form of PETCO Animal Supplies, Inc. Nonstatutory Stock Option Agreement.
10.17*	Form of PETCO Animal Supplies, Inc. Incentive Stock Option Agreement.
10.18*	Form of PETCO Animal Supplies, Inc. Restricted Stock Agreement.
10.19**	Agreement and Plan of Merger, dated as of May 17, 2000, by and between the Registrant and BD Recapitalization Corp.
10.20**	First Amendment to Agreement and Plan of Merger, dated as of September 14, 2000, by and between the Registrant and BD Recapitalization Corp.
10.21**	Standard Industrial/Commercial Lease, dated as of February 28, 2001, by and between the Registrant and Carol Canyon Properties, LLC for 8945 Rehco Road, San Diego, California.
10.22**	PETCO Animal Supplies Deferred Compensation Plan.
10.23*	2002 Incentive Award Plan of PETCO Animal Supplies, Inc.
21.1***	Subsidiaries of the Registrant.
23.1**	Consent of Latham & Watkins (included in Exhibit 5.1).
23.2**	Consent of KPMG LLP, Independent Auditors.
24.1***	Power of Attorney (included in the signature page of this Registration Statement).

*

To be supplied by amendment.

**

Filed herewith.

***

Previously filed.

(b)

Financial Statement Schedules

None

II-4

Item 17. Undertakings.

        The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

        Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

        The undersigned Registrant hereby undertakes that:

        (1)  For the purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective.

        (2)  For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-5

SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1, and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of San Diego, State of California, on the 1^st day of February, 2002.

PETCO ANIMAL SUPPLIES, INC.
By:	/s/  BRIAN K. DEVINE Brian K. Devine President and Chief Executive Officer

        Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/  BRIAN K. DEVINE Brian K. Devine	Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)	February 1, 2002
/s/  JAMES M. MYERS* James M. Myers	Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer)	February 1, 2002
/s/  JOHN M. BAUMER* John M. Baumer	Director	February 1, 2002
/s/  JONATHAN COSLET* Jonathan Coslet	Director	February 1, 2002
/s/  JOHN G. DANHAKL* John G. Danhakl	Director	February 1, 2002
/s/  JULIAN C. DAY* Julian C. Day	Director	February 1, 2002
/s/  WILLIAM S. PRICE III* William S. Price III	Director	February 1, 2002

*By: /s/  BRIAN K. DEVINE Brian K. Devine
Attorney-in-fact

II-6

QuickLinks

TABLE OF CONTENTS
PROSPECTUS SUMMARY
RISK FACTORS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ABOUT THIS PROSPECTUS
USE OF PROCEEDS
DIVIDEND POLICY
DILUTION
CAPITALIZATION
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
PRINCIPAL AND SELLING STOCKHOLDERS
THE RECAPITALIZATION TRANSACTION
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF CERTAIN INDEBTEDNESS
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
SHARES ELIGIBLE FOR FUTURE SALE
UNDERWRITING
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
SIGNATURES

EX-4.2

                             STOCKHOLDERS AGREEMENT




                           DATED AS OF OCTOBER 2, 2000


                                      among



                               BD RECAPITALIZATION
                                  HOLDINGS LLC,



                           PETCO ANIMAL SUPPLIES, INC.



                                       and



                              CERTAIN STOCKHOLDERS
                         OF PETCO ANIMAL SUPPLIES, INC.



                                                  TABLE OF CONTENTS





                                                                                                               Page
                                                                                                            
ARTICLE I.  BOARD OF DIRECTORS....................................................................................2
                   1.1     Board Composition......................................................................2
                   1.2     Nomination Rights......................................................................2
                   1.3     Election of Nominees...................................................................2
                   1.4     Vacancies..............................................................................3
                   1.5     Removal of Nominees....................................................................3
                   1.6     Committees.............................................................................4
                   1.7     Special Consent........................................................................4
                   1.8     Actions by the Stockholders............................................................6
                   1.9     Compensation...........................................................................7
                   1.10    Executive Employment Agreements........................................................7
                   1.11    Incentive Plans........................................................................7
                   1.12    Actions by Management Stockholders.....................................................8

ARTICLE II.  RESTRICTIONS ON TRANSFER.............................................................................8
                   2.1     General Restrictions on Transfer.......................................................8
                   2.2     Compliance with Securities Laws........................................................9
                   2.3     Agreement to Be Bound..................................................................9
                   2.4     Tag-along for the Management Parties and the Financing Parties.........................9
                           2.4.1    Right to Participate in Sale..................................................9
                           2.4.2    Sale Notice..................................................................11
                           2.4.3    Tag-Along Notice.............................................................11
                           2.4.4    Delivery of Certificates.....................................................12
                           2.4.5    Exempt Transfers.............................................................12
                   2.5     Cooperation...........................................................................13
                   2.6     Improper Transfer.....................................................................13
                   2.7     Involuntary Transfer..................................................................14
                   2.8     First Option/First Offer..............................................................14
                           2.8.1    First Option.................................................................14
                           2.8.2    First Offer..................................................................15
                           2.8.3    No Waiver....................................................................16
                           2.8.4    Exempt Transfers.............................................................16
                   2.9     Call Option...........................................................................17
                   2.10    Stock Subscription Rights.............................................................20
                           2.10.1   Right To Purchase New Securities.............................................20
                           2.10.2   New Securities...............................................................20
                           2.10.3   Required Notices.............................................................21
                           2.10.4   Company's Right To Sell......................................................21


                                                      i



                           2.10.5   Purchaser's Acquisition of Additional Shares.................................21
                           2.10.6   Assignment...................................................................22
                   2.11    Tax Treatment.........................................................................22

ARTICLE III.  DRAG-ALONG SALES...................................................................................22
                   3.1     Right of Purchaser Parties to Require Sale............................................22
                   3.2     Drag-Along Notice.....................................................................23
                   3.3     Delivery of Certificates..............................................................23
                   3.4     Consideration.........................................................................23
                   3.5     Cooperation...........................................................................23

ARTICLE IV.  REGISTRATION RIGHTS.................................................................................24
                   4.1     Definitions...........................................................................24
                   4.2     Demand Registrations..................................................................26
                           4.2.1    Number of Demand Registrations...............................................26
                           4.2.2    Registration.................................................................28
                           4.2.3    Inclusion of Registrable Shares..............................................29
                           4.2.4    Priority on Demand Registrations.............................................30
                           4.2.5    Compliance...................................................................30
                   4.3     Piggyback Registration................................................................31
                           4.3.1    Right to Include Registrable Shares..........................................31
                           4.3.2    Priority on Piggyback Registrations..........................................31
                   4.5     Registration Statement................................................................35
                   4.6     Registration Procedures...............................................................35
                   4.7     Holdback Agreements...................................................................41
                   4.8     Registration Expenses.................................................................42
                   4.9     Conditions to Holder's Rights.........................................................42
                           4.9.1    Cooperation..................................................................42
                           4.9.2    Undertakings.................................................................43
                           4.9.3    Indemnification..............................................................43
                   4.10    Indemnification.......................................................................43
                           4.10.1   Indemnification by the Company...............................................43
                           4.10.2   Indemnification by Holders of Registrable Shares.............................44
                           4.10.3   Conduct of Indemnification Proceedings.......................................45
                           4.10.4   Contribution.................................................................46
                           4.10.5   Underwriting Agreement to Govern.............................................46
                   4.11    Rule 144..............................................................................47

ARTICLE V.  REPRESENTATIONS AND WARRANTIES.......................................................................47
                   5.1     Representations and Warranties of the Company.........................................47
                           5.1.1    Organization.................................................................47
                           5.1.2    Authority....................................................................47
                           5.1.3    Binding Obligation...........................................................47


                                                     ii



                           5.1.4    No Conflict..................................................................47
                   5.2     Representations and Warranties of the Stockholders....................................48
                           5.2.1    Organization.................................................................48
                           5.2.2    Authority....................................................................48
                           5.2.3    Binding Obligation...........................................................48
                           5.2.4    No Conflict..................................................................48

ARTICLE VI.  TERMINATION OF AGREEMENT............................................................................48
                   6.1     Termination...........................................................................48

ARTICLE VII.  GENERAL............................................................................................48
                   7.1     Financial Reports and Information.....................................................48
                   7.2     Recapitalization, Exchanges, Etc., Affecting the Shares...............................49
                   7.3     Injunctive Relief.....................................................................49
                   7.4     Notices...............................................................................49
                   7.5     Legend................................................................................50
                   7.6     Transferees Bound.....................................................................51
                   7.7     Amendment; Waiver; Representatives....................................................51
                   7.8     Additional Documents; Further Changes.................................................52
                   7.9     No Third-Party Benefits...............................................................52
                   7.10    Successors And Assigns................................................................52
                   7.11    Severability..........................................................................52
                   7.12    Integration...........................................................................52
                   7.13    Governing Law.........................................................................53
                   7.14    Attorneys' Fees.......................................................................53
                   7.15    Headings..............................................................................53
                   7.16    Information For Notices...............................................................53
                   7.17    Counterparts..........................................................................53
                   7.18    Consent to Jurisdiction...............................................................53
                   7.19    No Inconsistent Agreements............................................................54
                   7.20    Approval of Management Services Agreement by Stockholders.............................54
                   7.21    Certain Limitations...................................................................54
                   7.22    Information Regarding Beneficial Ownership............................................54
                   7.23    No Tax Advice.........................................................................54
                   7.24    After Acquired Shares.................................................................55
                   7.25    Notices...............................................................................55



SCHEDULES AND EXHIBITS

                                                    iii




                             STOCKHOLDERS AGREEMENT

      THIS STOCKHOLDERS AGREEMENT (the "AGREEMENT") is entered into as of
October 2, 2000, by and among PETCO Animal Supplies, Inc., a Delaware
corporation (the "COMPANY"), BD Recapitalization Holdings LLC, a Delaware
limited liability company (the "PURCHASER"), the individuals named in Schedule I
hereto (the "INITIAL MANAGEMENT STOCKHOLDERS") and shall be binding upon and
inure to the benefit of any individual or Person (as defined in Section 2.1)
owning Shares (as defined herein) which were received in connection with the
exercise of any option granted under a compensatory benefit plan (collectively
the "EMPLOYEE STOCKHOLDERS") of the Company's, its parents, its subsidiaries or
majority-owned subsidiaries of the Company's parents (the Initial Management
Stockholders and the Employee Stockholders, collectively, the "MANAGEMENT
STOCKHOLDERS" and each individually, a "MANAGEMENT STOCKHOLDER"), and the
persons named in Schedule II hereto (collectively the "FINANCING STOCKHOLDERS"
and each individually a "FINANCING STOCKHOLDER"). Each of the parties to this
Agreement (other than the Company) and any other Person (as defined in Section
2.1) who shall become a party to or agree to be bound by the terms of this
Agreement after the date hereof is sometimes hereinafter referred to as a
"STOCKHOLDER".

                                    RECITALS

      Prior to the execution of this Agreement, the Company and BD
Recapitalization Corp., a subsidiary of the Purchaser ("MERGERSUB"), entered
into an Agreement and Plan of Merger, dated as of May 17, 2000, as amended (the
"MERGER AGREEMENT"), providing for the merger (the "Merger") of MergerSub with
and into the Company, with the Company as the surviving corporation.

      Following the consummation of the transactions contemplated by the Merger
Agreement, the Purchaser, the Management Stockholders, and the Financing
Stockholders will own, in the aggregate, that number of shares of Common Stock,
par value $0.001 per share, of the Company (the "COMMON STOCK") set forth
opposite their names on Schedule III, the Financing Stockholders will own, in
the aggregate, that number of warrants (the "WARRANTS") to purchase that number
of shares of Common Stock set forth opposite their names on Schedule III,
Purchaser and the Financing Stockholders will own that number of shares of
Series A 14% Senior Redeemable Exchangeable Cumulative Preferred Stock of the
Company (the "SERIES A PREFERRED STOCK") set forth opposite their names in
Schedule III and that number of shares of Series B 12% Junior Redeemable
Cumulative Preferred Stock of the Company (the "SERIES B PREFERRED STOCK" and,
together with the Series A Preferred Stock, the "PREFERRED STOCK"). Shares of
Common Stock, are collectively referred to as the "COMMON SHARES," shares of
Series A Preferred Stock are collectively referred to as the "SERIES A PREFERRED
SHARES," shares of Series B Preferred Stock are collectively referred to as the
"SERIES B PREFERRED SHARES," Series A Preferred Shares and Series B Preferred
Shares are collectively referred to as the "PREFERRED SHARES" and the Common
Shares, and the Preferred Shares are collectively (whether issued or acquired
hereafter, including all shares of capital stock of the Company issuable upon
the


                                       1



exercise of warrants, options or other rights to acquire shares of capital
stock of the Company, or upon the conversion or exchange of any security)
referred to as the "SHARES".

      The Company and each of the Stockholders desire, for their mutual benefit
and protection, to enter into this Agreement to set forth their respective
rights and obligations with respect to their Shares (whether issued or acquired
hereafter, including all shares of Common Stock issuable upon the exercise of
warrants, options or other rights to acquire shares of Common Stock or Preferred
Stock, or upon the conversion or exchange of any security).

      NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

                          ARTICLE I. BOARD OF DIRECTORS

      1.1   BOARD COMPOSITION. Commencing as of the effective time of the
Merger, and continuing throughout the term of this Agreement, (a) the Board of
Directors (the "BOARD") of the Company shall, subject to the second sentence
hereof, consist of at least 7 persons and no more than 10 persons; and (b),
except as otherwise provided herein, all actions to be taken by the Board will
require the affirmative vote of a majority of the members of the Board. The
exact number of members of the Board shall be determined by the Board in
accordance with the Company's By-Laws, provided that the number shall not be
less than 7 nor more than 10 without the affirmative vote of at least one of
the Management Stockholder Nominees (as defined below).

      1.2   NOMINATION RIGHTS. Management Stockholders holding a majority of
the voting power of all Shares held by the Management Stockholders (the
"MAJORITY MANAGEMENT STOCKHOLDERS") will be entitled to nominate 2 persons to
serve as directors of the Company (the "MANAGEMENT STOCKHOLDER NOMINEES").
Financing Stockholders holding a majority of the voting power of all Shares
held by the Financing Stockholders (the "MAJORITY FINANCING STOCKHOLDERS")
will be entitled to nominate one person to serve as a director of the Company
(the "FINANCING STOCKHOLDER NOMINEE"). Purchaser will be entitled to nominate
at least 4 and no more than 7 persons to serve as directors of the Company
(the "PURCHASER NOMINEES" and, together with the Management Stockholder
Nominees and the Financing Stockholder Nominees, the "NOMINEES"). The initial
Purchaser Nominees are: John Danhakl, John Baumer, Jonathan Coslet, and
Richard Boyce. The initial Management Stockholder Nominees are Brian K. Devine
and James M. Myers. The initial Financing Stockholder Nominee is Jean-Marc
Chapus.

      1.3   ELECTION OF NOMINEES. Each party hereto will use its respective
best efforts to cause the Nominees to be elected in any and all elections of
directors of the Company held during the term of this Agreement. Without
limiting the generality of the foregoing, each Stockholder will vote, consent
or cause to be voted for the election of the Nominees, in all elections of

                                       2



directors of the Company or written consents in lieu thereof held during the
term of this Agreement, all securities entitled to vote or consent in such
election that such Person has the power to vote or consent (or in respect of
which such Person has the power to direct the vote or consent).

      1.4   VACANCIES. (a) Each Nominee will hold his or her office as a
director of the Company for such term as is provided in the Company's
organizational documents and applicable law or until his or her death,
resignation, incapacity or removal from the Board or until his or her
successor has been duly elected and qualified in accordance with the
provisions of this Agreement. If any Nominee ceases to serve as a director of
the Company for any reason during his or her term (a "TERMINATING NOMINEE"), a
nominee for the vacancy resulting therefrom will be designated by Purchaser,
the Majority Management Stockholders or the Majority Financing Stockholders,
whichever nominated the Terminating Nominee.

      (b) If any of Purchaser, the Majority Management Stockholders or the
Majority Financing Stockholders (each, a "Failing Stockholder") fail at any time
to nominate the maximum number of persons for election to the Board that the
Purchaser, the Majority Management Stockholders or the Majority Financing
Stockholders, as the case may be, is or are entitled to nominate pursuant to
this Agreement, then each directorship in respect of which Purchaser, the
Majority Management Stockholders or the Majority Financing Stockholders so
failed to make a nomination will remain vacant unless such vacancy results in
there being fewer than the minimum number of directors required by the Company's
certificate of incorporation or bylaws or Delaware law, in which case the
nominee to fill such vacancy or vacancies will be nominated by Purchaser (in the
case of a failure by the Majority Management Stockholders or a failure by the
Majority Financing Stockholders) or the Majority Management Stockholders (in the
case of a failure by the Purchaser), in each such case only unless and until the
applicable Failing Stockholder shall exercise its rights pursuant to (i) Section
1.5 to remove such director, and (ii) this Section 1.4 to fill such vacancy.

      1.5   REMOVAL OF NOMINEES. If at any time Purchaser or the Majority
Management Stockholders or the Majority Financing Stockholders shall notify
the Company in writing of its or their desire to have removed from the Board,
with or without cause, any Nominee made by such party, each party hereto shall
use its best efforts to take or cause to be taken all such action as may be
required to remove such Nominee from the Board. Notwithstanding this Section
1.5, if a Board vacancy is filled pursuant to Section 1.4(b) due to the
failure of a Failing Stockholder to nominate the maximum number of persons for
election to the Board, such Failing Stockholder shall have the right to
request the removal such Board member and, in the event of such request, each
party hereto shall use its bests efforts to take or cause to be taken all such
action as may be required to remove such person from the Board.

                                       3



      1.6   COMMITTEES. The Board may designate one or more committees in
accordance with the bylaws of the Company; PROVIDED THAT the Stockholders
shall cause a majority of the members of any such committee to be Purchaser
Nominees and at least one member of any such committee to be a Management
Stockholder Nominee and at least one member of any such committee to be a
Financing Stockholder Nominee.

      1.7   SPECIAL CONSENT. Prior to the occurrence of the later of (i) a
Public Offering Event (as defined below) and (ii) a 50% Sale (as defined
below), the Company or each of the Company's subsidiaries shall not, and the
Stockholders shall cause the Company and each of the Company's subsidiaries
not to, take (or agree to take) any action regarding the following matters
without the affirmative vote of a majority of the Purchaser Nominees:

               (a)   any merger or consolidation of the Company or its
      successors or any subsidiary of the Company or its successors;

               (b)   any transfer of all or substantially all of the
      assets of the Company and its subsidiaries, taken as a whole;

               (c) any entry into a line of business other than the business
      of selling, retailing, producing, distributing, or marketing pet food, pet
      supplies or other pet-related products or services (whether by merger,
      stock or asset purchase or otherwise) by the Company or a subsidiary of
      the Company;

               (d) any acquisition or disposition of assets other than in the
      ordinary course of business (including the acquisition of any pet supply
      retailer or all or substantially all of its assets), pursuant to a single
      transaction or series of related transactions, if the purchase price
      therefor (including any debt assumed in connection therewith) or fair
      market value thereof exceeds $5 million;

               (e) any adoption or amendment of an employee, director or
      similar plan under which capital stock, or rights, options or warrants to
      acquire capital stock, of the Company or a subsidiary may be issued;

               (f) hire or terminate or make any change to the compensation
      of any senior management officer (including without limitation the
      Chairman of the Board, the President, the Chief Executive Officer, any
      Executive Vice President and any Senior Vice President) or director of the
      Company or any of its subsidiaries, any adoption of or amendment to any
      bonus, profit sharing or other employee benefit plan, or enter into or
      amend any employment agreement, severance agreement or similar agreement
      or plan;

               (g) any issuance or sale of (x) capital stock of the Company
      or any of its subsidiaries, (y) rights, options or warrants to acquire
      capital stock of the Company or any of its subsidiaries, or (z) any
      securities convertible or exchangeable into capital stock


                                       4



      of the Company or any of its subsidiaries, (other than (a) the issuance
      of capital stock of the Company, (b) rights, options or warrants to
      acquire capital stock of the Company, under employee stock option or
      stock purchase plans approved in accordance with the terms of this
      Agreement, (c) the grant of equity interests to the Company's
      management in the form of options or rights to purchase stock in an
      aggregate amount not to exceed 3% of the equity capitalization (on a
      fully diluted basis) of the Company, (d) any issuance or sale by a
      subsidiary to the Company or a wholly owned subsidiary of the Company,
      and (e) the issuance of any shares of Common Stock upon the exercise or
      conversion of any option, warrant or other convertible security
      outstanding on the date hereof or issued hereafter in accordance with
      the terms of this Agreement);

               (h) (i) any incurrence or assumption of indebtedness (except
      (a) for the Financing (as defined in the Merger Agreement), including the
      initial drawdown of up to $20,000,000 of the Revolving Loans (as defined
      in the Credit Agreement, dated October 2, 2000, among the Company, the
      lenders listed on the signature pages thereto, Goldman Sachs Credit
      Partners, L.P., and Wells Fargo Bank, N.A.), or (b) in the ordinary course
      of business, consistent with past practices and in any case which would
      not in the aggregate increase the amount of debt of the Company and its
      subsidiaries by $1,000,000) or (ii) any assumption, guarantee, endorsement
      or other action by which the Company or any of its subsidiaries would
      become liable or responsible (whether directly, contingently or otherwise)
      for any indebtedness of any other person, except in the ordinary course of
      business consistent with past practices and which, in the aggregate
      (including amounts incurred in (h)(i) above, without duplication), do not
      exceed $1,000,000;

               (i) any declaration or payment of any dividend on,
      distributions with respect to, or repurchase or redemption of (x)
      capital stock of the Company or any of its subsidiaries, (y) rights,
      options or warrants to acquire capital stock of the Company or any of
      its subsidiaries, or (z) any securities convertible or exchangeable
      into capital stock of the Company or any of its subsidiaries;

               (j) any amendment of the certificate of incorporation or
      bylaws or other organizational documents of the Company or any of its
      subsidiaries, other than the restated certificate of incorporation filed
      on the date hereof;

               (k) any dissolution of, liquidation of or bankruptcy filing
      by the Company or any subsidiary;

               (l) any replacement of independent accountants;

               (m) any transaction with any Stockholder, any person,
      controlling, controlled by, or under common control with any of the
      Stockholders or the Company (other than the transactions contemplated by
      the Merger Agreement, including the Financing, as defined therein, and the
      transactions contemplated by this Agreement); or


                                       5



               (n) any increase or reduction in the number of authorized
      members of the Board or any committee of the Board or the creation of or
      appointment of members to a committee of the Board, or any direct or
      indirect payment to, or on behalf of, any member of such Board, as
      compensation for serving thereon or as a member of any committee thereof
      (other than reimbursement of expenses in accordance with Section 1.9
      hereof).

      1.8   ACTIONS BY THE STOCKHOLDERS. Prior to the occurrence of a Public
Offering Event (as defined below), the Company shall not, and the Company
shall cause each of the Company's subsidiaries not to, take (or agree to take)
any action regarding the following matters without the affirmative vote of
holders of a majority of the outstanding shares of Common Stock:

               (a) any merger or consolidation of the Company or its
      successors or any subsidiary of the Company or its successors, other than
      any merger between the Company and any direct or indirect wholly owned
      subsidiary, or between direct or indirect wholly owned subsidiaries;

               (b) any transfer of all or substantially all of the assets of
      the Company and its subsidiaries, taken as a whole (but excluding any
      pledge, hypothecation or encumbrance of such assets to provide security
      for any BONA FIDE debt approved in accordance with the terms of this
      Agreement);

               (c) any entry into a line of business other than the business
      of selling, retailing, producing, distributing, or marketing pet food, pet
      supplies or other pet-related products or services (whether by merger,
      stock or asset purchase or otherwise) by the Company or a subsidiary of
      the Company;

               (d) any acquisition or disposition of assets other than in the
      ordinary course of business (including the acquisition of any pet supply
      retailer or all or substantially all of its assets), pursuant to a single
      transaction or series of related transactions, if the purchase price
      therefor (including any debt assumed in connection therewith) exceeds $5
      million;

               (e) any issuance or sale of capital stock or rights, options
      or warrants to acquire capital stock of the Company or any subsidiary of
      the Company (other than the issuance of capital stock of the Company or
      rights, options or warrants to acquire capital stock of the Company under
      employee stock option or stock purchase plans approved in accordance with
      the terms of this Agreement, any issuance or sale by a subsidiary to the
      Company or a wholly owned subsidiary of the Company, and the issuance of
      any shares of Common Stock upon the exercise or conversion of any option,
      warrant or other convertible security outstanding on the date hereof or
      issued hereafter in accordance with the terms of this Agreement);


                                       6




               (f) any declaration or payment of any dividend on,
      distributions with respect to, or repurchase or redemption of capital
      stock of the Company other than (1) PRO RATA dividends on the Common Stock
      paid from current earnings, (2) dividends on the Preferred Stock, (3)
      payments of dividends on or repurchases of shares of wholly owned
      subsidiaries' capital stock or (4) repurchases of Common Stock held by
      BONA FIDE, full-time employees of the Company or its subsidiaries in
      connection with the death, disability or termination of such employees in
      accordance with the terms of this Agreement or of any employment
      agreement, employee stock option or stock purchase plan approved in
      accordance with the term of this Agreement;

               (g) any amendment of the certificate of incorporation or
      bylaws or other organizational documents of the Company or any
      subsidiary;

               (h) any dissolution of, liquidation of or bankruptcy filing by
      the Company or any subsidiary;

               (i) any replacement of independent accountants; or

               (j) any increase or reduction in the number of authorized
      members of the Board.

      1.9   COMPENSATION. The directors shall not receive any compensation for
their services, but shall be entitled to be reimbursed for reasonable
out-of-pocket expenses incurred in connection therewith.

      1.10  EXECUTIVE EMPLOYMENT AGREEMENTS. On or promptly after the date
hereof, the Company will enter into employment agreements (the "Employment
Agreements") substantially similar to the form of agreement contained in EXHIBIT
A hereto with those individuals and with those changes identified in SCHEDULE
1.10. Promptly following the consummation of the Merger, the Company shall hold
a special meeting of stockholders to vote on, or seek approval by written
consent of, a proposal (the "Benefits Proposal") to approve the Employment
Agreements and the benefits payable thereunder, as contemplated by Section 5(l)
of the form of employment agreement attached hereto as EXHIBIT A. The Purchaser
and the Financing Stockholders hereby agree, with respect to all Common Shares
held by the Purchaser or the Financing Stockholders, as applicable, to vote for
the Benefits Proposal at such stockholders meeting or any adjournment thereof
or, if applicable, to consent to the Benefits Proposal by executing a written
consent thereto.

      1.11  INCENTIVE PLANS. On or promptly after the date hereof, the Company
will adopt bonus plans and stock option plans, the awards grants, terms and
other conditions of which shall be designed to produce bonuses at least as
favorable to the participants as the bonus plans and stock option plans of the
Company in effect on the date hereof.


                                       7



      1.12  ACTIONS BY MANAGEMENT STOCKHOLDERS. Any action to be taken by the
Management Stockholders pursuant to this Article I (other than actions taken by
the Management Stockholders at an annual or special meeting of holders of Common
Stock) shall be deemed to have been taken by the Management Stockholders at such
time as a written notice, signed by the Majority Management Stockholders shall
have been delivered in accordance with the notice procedures hereof.

      1.13  ACTIONS BY FINANCING STOCKHOLDERS. Any action to be taken by the
Financing Stockholders pursuant to this Article I (other than actions taken by
the Financing Stockholders at an annual or special meeting of holders of Common
Stock) shall be deemed to have been taken by the Financing Stockholders at such
time as a written notice, signed by the Majority Financing Stockholders shall
have been delivered in accordance with the notice procedures hereof.

                      ARTICLE II. RESTRICTIONS ON TRANSFER

      2.1   GENERAL RESTRICTIONS ON TRANSFER. Each Stockholder agrees that,
except as required in connection with obtaining the Financing (as defined in the
Merger Agreement), or any replacement thereof, and excluding any Transfer (as
defined below) by any Purchaser Party (as defined below) to any other Purchaser
Party or to its equity participants, such Stockholder will not, directly or
indirectly, sell, hypothecate, give, bequeath, transfer, assign, pledge or in
any other way whatsoever encumber or dispose of (whether for or without
consideration, whether voluntarily or involuntarily or by operation of law) (any
such event, a "TRANSFER") any Shares now or hereafter at any time owned by such
Stockholder (or any interest therein) to another individual, corporation,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, other entity or government or other agency or
political subdivision thereof (a "Person") ("TRANSFEREE"), other than in
accordance with all applicable provisions of this Agreement. The Company shall
not transfer upon its books any Shares to any Person to the extent prohibited by
this Agreement and any purported transfer in violation hereof shall be null and
void ab initio and of no effect. Each Management Stockholder represents and
warrants to the Purchaser, the Financing Stockholders, and the Company that the
Shares owned by such Management Stockholder were acquired by such Management
Stockholder for investment only and not with a view to any public distribution
thereof, and there is not any current plan or intention on the part of such
Management Stockholder to offer to sell, exchange or otherwise dispose of the
Shares owned by such Management Stockholder in violation of any of the
requirements of the Securities Act of 1933, as amended, or any similar federal
statute, and the rules and regulations of the Commission (as defined in Section
4.1) thereunder, all as the same shall be in effect from time to time (the
"SECURITIES ACT"), or any comparable state or foreign securities laws.


                                       8



      2.2   COMPLIANCE WITH SECURITIES LAWS. No Stockholder or holder of
Warrants shall Transfer any Shares or Warrants, and the Company shall not
transfer on its books any Shares, unless (a) the Transfer is pursuant to an
effective registration statement under the Securities Act and is in compliance
with any applicable state securities or Blue Sky laws or (b) such Stockholder
or holder of Warrants shall have furnished the Company with an opinion of
counsel, to the extent reasonably required by the Company, which opinion and
counsel shall be reasonably satisfactory to the Company, to the effect that no
such registration is required because of the availability of an exemption from
registration under the Securities Act; PROVIDED, HOWEVER, that any Transfer by
a Stockholder or a holder of Warrants which is a state-sponsored employee
benefit plan to a successor trust or fiduciary or pursuant to a statutory
reconstitution or which is permitted hereunder pursuant to the provisions of
Section 2.8.4(a) shall be expressly permitted and no opinions of counsel shall
be required in connection therewith and PROVIDED, FURTHER, that any Transfer
by any Purchaser Party to any other Purchaser Party or to its equity
participants shall be expressly permitted and no opinions of counsel shall be
required in connection therewith. As used in this Agreement, the term
"AFFILIATE" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such
Person. For purposes of this Agreement, the term "CONTROL," (including, with
correlative meanings, the terms "CONTROLLING," "CONTROLLED BY," and "UNDER
COMMON CONTROL WITH"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.

      2.3   AGREEMENT TO BE BOUND. No Transfer, including, without limitation,
by means of an Involuntary Transfer, of Shares by a Stockholder or of Warrants
by a Financing Stockholder shall be effective (and the Company shall not
transfer on its books any Shares) unless (i) the certificates representing
such Shares or Warrants, as the case may be, issued to the Transferee shall
bear the legend provided in Section 7.5, if required by such Section 7.5, and
(ii) the Transferee shall have executed and delivered to the Company, as a
condition precedent to such Transfer, an instrument or instruments in form and
substance satisfactory to the Company confirming that the Transferee agrees to
be bound by the terms of this Agreement and accepts the rights and obligations
set forth hereunder as if it were the transferor of the relevant Shares or
Warrants.

      2.4   TAG-ALONG FOR THE MANAGEMENT PARTIES AND THE FINANCING PARTIES

            2.4.1  RIGHT TO PARTICIPATE IN SALE.

                   (a) Purchaser and its members and affiliates and their
      limited partners, general partners, principals, stockholders and
      affiliates, and any of their Transferees, are sometimes referred to in
      this Agreement, collectively, as the "PURCHASER PARTIES" and,
      individually, as a "PURCHASER PARTY." The Management Stockholders and
      their respective spouses, any direct or adopted lineal descendants and
      ancestors and any trusts solely for the benefit of any or all of the
      foregoing, and any of their Transferees, are sometimes


                                       9



      referred to in this Agreement, collectively, as the "MANAGEMENT
      PARTIES" and, individually, as a "MANAGEMENT PARTY." The Financing
      Stockholders, and any accounts managed by Trust Company of the West
      ("TCW"), and any of their Transferees, are sometimes referred to in
      this Agreement, collectively, as the "FINANCING PARTIES" and,
      individually, as a "FINANCING PARTY." If all previous transfers for
      value of Common Shares made by any Purchaser Party participating in a
      transfer, together with any transfers for value of Common Shares
      proposed to be made by any Purchaser Party participating in a transfer,
      in each case other than the exempt transfers described in Section 2.4
      would result in the transfer, in the aggregate for all such
      transactions by such Purchaser Parties since the last Tag-Along Sale
      (as hereinafter defined), if any, of at least five percent (5%) of the
      outstanding Common Shares, (such sale or other disposition for value
      being referred to as a "TAG-ALONG SALE"), then such Purchaser Parties
      shall afford the Management Parties and the Financing Parties (each,
      individually, a "TAG-ALONG STOCKHOLDER" and, collectively, the
      "TAG-ALONG STOCKHOLDERS") the opportunity to participate proportionately
      in such Tag-Along Sale in accordance with this Section 2.4. The number
      of Common Shares that each Tag-Along Stockholder will be entitled to
      include in such Tag-Along Sale (the "TAG-ALONG ALLOTMENT") shall be
      determined by multiplying (i) the number of Common Shares held by such
      Tag-Along Stockholder as of the close of business on the day
      immediately prior to the Tag-Along Notice Date (as hereinafter defined)
      by (ii) a fraction, the numerator of which shall equal the number of
      Common Shares proposed by the Purchaser Parties to be sold or otherwise
      disposed of pursuant to the Tag-Along Sale and the denominator of which
      shall equal the total number of Common Shares that are beneficially
      owned by the Purchaser Parties as of the close of business on the day
      immediately prior to the Tag-Along Notice Date (the "COMMON SHARES
      PURCHASER FRACTION").

                   (b) Notwithstanding any other provision hereof, if any of the
      Management Parties or the Financing Parties fails to elect to participate
      in a Tag-Along Sale within five (5) days of written notification of such
      Tag-Along Sale, Purchaser shall give notice of such failure to the other
      Tag-Along Stockholders. Such notice shall be made by telephone and
      confirmed in writing within two (2) days. The other Tag-Along Stockholders
      shall have three (3) days from the date such written notice was given to
      agree to sell their pro rata share of any unsold portion. For purposes of
      this Section 2.4.1, a participating Tag-Along Stockholder's pro rata share
      of any unsold portion of Common Shares shall be equal to the number of
      shares obtained by MULTIPLYING (A) the Common Shares Purchaser Fraction
      TIMES the total number of Common Shares that are held by the Management
      Parties and the Financing Parties that are not participating in the
      Tag-Along Sale, if any, BY (B) the number of Common Shares held by such
      participating Tag-Along Stockholder DIVIDED by the total number of Common
      Shares held by all Tag-Along Stockholders that are participating in the
      Tag-Along Sale with respect to Common Shares.


                                      10



            2.4.2  SALE NOTICE. The relevant Purchaser Parties shall provide
each Tag-Along Stockholder and the Company with written notice (the "TAG-ALONG
SALE NOTICE") not more than sixty (60) days nor less than fifteen (15) days
prior to the proposed date of the Tag-Along Sale (the "TAG-ALONG SALE DATE").
Each Tag-Along Sale Notice shall be accompanied by a copy of any written
agreement relating to the Tag-Along Sale and shall set forth: (i) the name and
address of each proposed Transferee of Shares in the Tag-Along Sale; (ii) the
number of Common Shares proposed to be Transferred by such Purchaser Parties;
(iii) the proposed amount and form of consideration (including any potential
adjustments to the consideration paid for such Shares contained in the written
agreement relating to the Tag-Along Sale) to be paid for such Shares and the
terms and conditions of payment offered by each proposed Transferee; (iv) the
aggregate number of Common Shares held of record by the Purchaser Parties
proposing to participate in a Tag-Along Sale as of the close of business on the
day immediately prior to the date of the Tag-Along Notice (the "TAG-ALONG NOTICE
DATE"); (v) the Tag-Along Stockholder's Tag-Along Allotment assuming the
Tag-Along Stockholder elected to sell the maximum number of Common Shares; (vi)
confirmation that the proposed Transferee has been informed of the "Tag-Along
Rights" provided for herein and has agreed to purchase Shares from any Tag-Along
Stockholder in accordance with the terms hereof; and (vii) the Tag-Along Sale
Date.

            2.4.3  TAG-ALONG NOTICE. Any Tag-Along Stockholder wishing to
participate in the Tag-Along Sale shall provide written notice (the "TAG-ALONG
NOTICE") to the relevant Purchaser Parties no more than ten (10) days after
receipt of the Tag-Along Sale Notice. The Tag-Along Notice shall set forth the
number of Shares that such Tag-Along Stockholder elects to include in the
Tag-Along Sale, which shall not exceed such Tag-Along Stockholder's applicable
Tag-Along Allotment. The Tag-Along Notice given by any Tag-Along Stockholder
shall constitute such Tag-Along Stockholder's binding agreement to sell the
Shares specified in the Tag-Along Notice on the terms and conditions applicable
to the Tag-Along Sale; PROVIDED, HOWEVER, that in the event that there is any
material change in the terms and conditions of such Tag-Along Sale applicable to
the Tag-Along Stockholder (including, but not limited to, any decrease in the
purchase price that occurs other than pursuant to an adjustment mechanism set
forth in the agreement relating to the Tag-Along Sale) after such Tag-Along
Stockholder gives its Tag-Along Notice, then, notwithstanding anything herein to
the contrary, the Tag-Along Stockholder shall have the right to withdraw from
participation in the Tag-Along Sale with respect to all of its Shares affected
thereby. If the proposed Transferee does not consummate the purchase of all of
the Shares requested to be included in the Tag-Along Sale by any Tag-Along
Stockholder on the same terms and conditions applicable to the Purchaser
Parties, then such Purchaser Parties shall not consummate the Tag-Along Sale of
any of its Shares to such Transferee, unless the Shares of such Purchaser
Parties and the Tag-Along Stockholders to be sold are reduced or limited PRO
RATA in proportion to the respective number of Shares actually sold in any such
Tag-Along Sale and all other terms and conditions of the Tag-Along Sale are the
same for such Purchaser Parties and the Tag-Along Stockholders. Notwithstanding
the foregoing, if the number of Shares proposed to be sold in any proposed
Tag-Along Sale are reduced or limited such that the proposed sale is no longer a
Tag-Along Sale in accordance with the terms of this Agreement, then the terms of
this Agreement shall be inapplicable to such


                                      11



proposed sale and no Management Party or other Stockholder shall have the
right hereunder to participate in such proposed transaction as a Tag-Along
Stockholder.

            If a Tag-Along Notice from any Tag-Along Stockholder is not received
by such Purchaser Parties within the ten (10) day period specified above, such
Purchaser Parties shall have the right to consummate the Tag-Along Sale without
the participation of such Tag-Along Stockholder, but only on terms and
conditions which are no more favorable in any material respect to such Purchaser
Parties (and, in any event, at no greater a purchase price) than as stated in
the Tag-Along Sale Notice and only if such Tag-Along Sale occurs on a date
within ninety (90) days of the Tag-Along Sale Date. If such Tag-Along Sale does
not occur within such ninety (90) day period, the Shares that were to be subject
to such Tag-Along Sale thereafter shall continue to be subject to all of the
restrictions contained in this Section 2.4.

            2.4.4  DELIVERY OF CERTIFICATES. On the Tag-Along Sale Date, each
Tag-Along Stockholder shall deliver a certificate or certificates for the Shares
to be sold by such Tag-Along Stockholder in connection with the Tag-Along Sale,
duly endorsed for transfer with signatures guaranteed, to the Transferee in the
manner and at the address indicated in the Tag-Along Notice against delivery of
the purchase price for such Shares.

            2.4.5  EXEMPT TRANSFERS. The provisions of this Section 2.4 shall
not apply:

                   (a) to any sale or other disposition of Shares by and
      exclusively among Purchaser Parties;

                   (b) to any sale of Shares to the public pursuant to an
      effective registration statement under the Securities Act or pursuant to
      Rule 144 under the Securities Act, as such rule may be amended from time
      to time, or any other similar regulation hereinafter adopted by the
      Commission ("RULE 144");

                   (c) to, or from and after, a Public Offering Event (as
      defined below);

                   (d) to any Transfer occurring by reason of the death of
      any Stockholder; or

                   (e) to any Involuntary Transfer.

For the purposes of this Agreement, a "PUBLIC OFFERING EVENT" shall mean a firm
commitment underwritten public offering of shares of Common Stock of the Company
pursuant to a registration statement or registration statements under the
Securities Act with aggregate gross proceeds to the Company of at least seventy
five million dollars ($75,000,000), and in connection with such offering such
Common Stock is listed or admitted to trading on a national securities exchange
or on the Nasdaq Stock Market.


                                      12



      2.5   COOPERATION. (a) The Company will provide reasonable assistance to
any Management Party or any Purchaser Party or any Financing Party seeking to
sell its Shares in accordance with the terms of the Agreement, PROVIDED,
HOWEVER, that the Company shall not be required to provide any confidential
information to any prospective purchaser who has not executed a
confidentiality agreement in a form reasonably satisfactory to the Company.
Except as otherwise provided herein, any reasonable out-of-pocket costs to the
Company of providing such assistance shall be paid pro rata by each
Stockholder seeking to sell its Shares. The Company will also cooperate with
any Management Party or any Purchaser Party or any Financing Party in having
all stop transfer instructions or notations and restrictive legends lifted in
connection with the sale (other than to an affiliate of the Company) of Shares
pursuant to Rule 144; PROVIDED, HOWEVER, that in such a case the selling
Stockholder shall be required to provide the Company with the opinion provided
for in Section 2.2(b) hereof.

                  (b) Any Management Party seeking to sell its Shares shall
      enter into an agreement (the "Tag Along Sale Agreement") in connection
      with a Tag-Along Sale containing substantially similar representations,
      warranties, indemnities and agreements as made by the Purchaser Party in
      connection with such Tag-Along Sale, but in no case shall such
      representations, warranties, indemnities and agreements made by the
      Management Party or the Financing Party be more restrictive than those
      made by the Purchaser Party in connection with such Tag-Along Sale.

                  (c) Any Financing Party seeking to sell its Shares in
      connection with a Tag-Along Sale shall be required to make in the
      Tag-Along Sale Agreement only a representation and warranty with respect
      to its own ownership of the Shares to be sold by it and its ability to
      convey title thereto free and clear of liens, encumbrances or adverse
      claims; the liability of each Financing Party with respect to any
      representation and warranty made in connection with a sale of Shares
      pursuant to this Section 2.5 shall be several and not joint with any other
      person; such liability shall be limited to the amount of consideration
      actually received by each such Financing Party in the sale of Shares
      pursuant to Section 2.4, and no Financing Party shall be required to
      provide any indemnification or escrow (other than a pro rata share of any
      escrow provided by all Stockholders and an indemnity limited to such pro
      rata share) to anyone in connection with the sale of Shares pursuant to
      Section 2.4, other than with respect to the representations and warranties
      made by such Financing Party in connection with the sale of Stock pursuant
      to Section 2.4.

      2.6   IMPROPER TRANSFER. Any attempt to Transfer or otherwise encumber
any Shares in violation of this Agreement shall be null and void and neither
the Company nor any transfer agent of such Shares shall give any effect to
such attempted Transfer or encumbrance in its stock records.

                                      13



      2.7   INVOLUNTARY TRANSFER. In the case of any Transfer of title or
beneficial ownership of Shares upon default, foreclosure, forfeit, court
order, or otherwise than by a voluntary decision on the part of a Stockholder
(an "INVOLUNTARY TRANSFER"), such Stockholder (or his legal representatives)
shall promptly (but in no event later than two (2) Business Days (as defined
in the Merger Agreement) after such Involuntary Transfer) furnish written
notice to the Company indicating that the Involuntary Transfer has occurred,
specifying the name of the Person to whom such Shares have been transferred,
giving a detailed description of the circumstances giving rise to, and stating
the legal basis for, the Involuntary Transfer.

      2.8   FIRST OPTION/FIRST OFFER.

            2.8.1  FIRST OPTION. Except for (i) Tag-Along Sales made in
accordance with Section 2.4 or (ii) Drag-Along 100% Sales or Drag-Along 50%
Sales made in accordance with Article III or (iii) sales upon exercise of a
Call Option pursuant to Section 2.9, no Management Party shall Transfer any
Shares except as specifically permitted by this Section 2.8. If at any time
any Management Party desires to Transfer all or any part of the Shares held by
such Person (a "MANAGEMENT SELLING PARTY") (other than in accordance with
Section 2.8.4) such Management Selling Party shall obtain an irrevocable and
unconditional bona fide arm's length written offer (the "BONA FIDE OFFER") for
the purchase of such Shares for cash, cash equivalents, or a debt instrument
with commercially reasonable terms from a third party unaffiliated with such
Management Selling Party (an "OUTSIDE PARTY"), following which the Management
Selling Party shall provide written notice (the "SALE NOTICE") to each of (i)
Purchaser (together with its assigns, the "PURCHASER BUYER") and (ii) the
Company (each of Purchaser Buyer and the Company a "POTENTIAL BUYER") setting
forth such desire to Transfer such Shares, which Sale Notice shall be
accompanied by a photocopy or other facsimile of the Bona Fide Offer and shall
set forth the name and address of the Outside Party and the price and terms of
such Bona Fide Offer. Upon the giving of such Sale Notice, each Potential
Buyer shall, subject to the priorities set forth below, have the option (which
option (the "PURCHASE OPTION"), in the case of Purchaser only, shall be freely
assignable at Purchaser's sole discretion) to purchase all or any portion of
such Shares specified in the Sale Notice, on the same terms and conditions,
including but not limited to the offer price for the Shares as set forth in
the Bona Fide Offer. Each Potential Buyer shall have thirty (30) days from
receipt of the Sale Notice to provide written notice (the "ACCEPTANCE NOTICE")
to such Management Selling Party of its desire to exercise such Purchase
Option. If more than one Potential Buyer shall deliver an Acceptance Notice
within such thirty (30) day period, the priority as among the Potential Buyers
to match the Bona Fide Offer and purchase such Shares shall be, to the extent
such Potential Buyers have delivered Acceptance Notices, FIRST, the Purchaser
Buyer and, SECOND, the Company.

            If a Potential Buyer or Potential Buyers, as applicable, elects to
purchase, all or any portion of the Shares covered by the Bona Fide Offer on the
terms and conditions set forth in the Sale Notice, the Potential Buyer(s)
entitled to purchase such Shares (the "CHOSEN BUYER(S)") shall be determined in
accordance with the priorities set forth, if applicable, above and such Chosen
Buyer(s) shall be obligated to purchase, and such Management Selling Party shall
be

                                      14



obligated to sell, such Shares at the price and terms specified in the Sale
Notice. The closing of the purchase by the Chosen Buyer(s) shall be held on a
Business Day within ninety days (90) days after the giving of the relevant
Acceptance Notice, at the principal offices of the Chosen Buyer(s), or at such
other time and place as may be mutually agreed to by the Chosen Buyer(s) and
the Management Selling Party. "Business Day" shall mean any day that is not a
Saturday, Sunday or legal holiday in the State of New York.

            If Acceptance Notice(s) are not delivered within the periods
specified above by one or more Potential Buyer(s), as applicable, with respect
to all of the Shares included in the Sale Notice, the Selling Party shall, upon
compliance with the provisions of Section 2.3, have the right to consummate the
sale of all (but not less than all) of the Shares covered by the Sale Notice and
not included in an Acceptance Notice to the Outside Party but only at the price
and upon terms and conditions no less favorable to the Selling Party than those
contained in the Sale Notice (PROVIDED that the purchase price must be payable
solely in cash, cash equivalents or, to the extent and in accordance with the
terms set forth in the Sale Notice, a debt instrument with commercially
reasonable terms) and only if such sale occurs on a date within ninety (90) days
of the date of the Sale Notice; PROVIDED, HOWEVER, that in the event the Selling
Party has not so Transferred all such Shares to the Outside Party within such
ninety-day period, then such Shares thereafter shall continue to be subject to
all of the restrictions contained in this Agreement.

            2.8.2 FIRST OFFER. Except for (i) Tag-Along Sales made in
accordance with Section 2.4, (ii) Drag-Along 100% Sales made in accordance
with Article III, or (iii) the ninety (90) day period immediately following
the Effective Time (as defined in the Merger Agreement), no Financing Party
shall Transfer any Shares except as specifically permitted by this Section
2.8. If at any time any Financing Party desires to Transfer all or any part of
the Shares held by such Person (other than in accordance with Section 2.8.4)
(a "FINANCING SELLING PARTY"), then such Financing Selling Party shall deliver
written notice of its desire to sell such Shares (a "NOTICE OF INTENTION"),
accompanied by a copy of a proposal relating to such sale (the "SALE
PROPOSAL"), to each of the Purchaser and the Company, setting forth such
Financing Selling Party's desire to make such sale, the number and class of
Shares proposed to be transferred (the "OFFERED SECURITIES"), the cash price
at which such Financing Selling Party proposes to sell the Offered Securities
(the "FIRST OFFER PRICE") and other terms applicable thereto.

      Upon receipt of the Notice of Intention, the Purchaser and the Company
shall then have the right to purchase at the First Offer Price and on the other
terms specified in the Sale Proposal, all, but not less than all (unless the
Financing Selling Party shall have consented to the purchase of less than all of
such Offered Securities). The rights of the Purchaser and the Company pursuant
to this Section 2.8.2 shall be exercisable by the delivery of notice to the
Financing Selling Party (the "NOTICE OF EXERCISE"), within thirty (30) calendar
days from the date of delivery of the Notice of Intention. If the Financing
Selling Party receives more than one Notice of Exercise within such thirty (30)
day period, the priority as among the Purchaser and the Company to match the
First Offer Price and purchase such Shares shall be, FIRST, the Purchaser and,
SECOND, the Company. The Notice of Exercise shall state that the Purchaser or
the

                                      15



Company, as the case may be, is willing to purchase the Offered Securities on
the terms specified in the Sale Proposal. A copy of such Notice of Exercise
shall also be delivered by the Purchaser or the Company, as the case may be,
to each of the Purchaser or the Company, as the case may be. The rights of the
Purchaser and the Company pursuant to this Section 2.8.2 shall terminate if
unexercised thirty (30) calendar days after the date of delivery of the Notice
of Intention.

      In the event that the Purchaser or the Company exercise their rights to
purchase all (unless the Financing Selling Party shall have consented to the
purchase of less than all) of the Offered Securities in accordance with this
Section 2.8.2, then the Selling Financing Party must sell the Offered Securities
to the Purchaser and/or the Company, as the case may be, within thirty (30)
calendar days from the date of delivery of the Notice of Exercise received by
the Selling Financing Party, on such date as shall be determined by the
Financing Selling Party by written notice thereof.

      If all notices required pursuant to this Section 2.8.2 have been duly
given and the Purchaser and the Company do not exercise their respective options
to purchase the Offered Securities at the First Offer Price, then the Financing
Selling Party shall have the right, subject to compliance by the Financing
Selling Party with the provisions of Section 2.3 hereof, for a period of ninety
(90) calendar days from the earlier of (i) the expiration of the option period
pursuant to this Section 2.8.2 with respect to such Sale Proposal or (ii) the
date on which such Financing Selling Party receives notice from the Purchaser or
the Company that they will not exercise all of the option granted pursuant to
this Section 2.8.2, to sell to any third party all, but not less than all, of
the Offered Securities remaining unsold at a price of not less than the First
Offer Price and on terms not less favorable to the Financing Selling Party than,
the other terms specified in the Sale Proposal.

      Notwithstanding the foregoing, in the event that the Financing Selling
Party desires to Transfer Senior Subordinated Notes of the Company due 2010
("Notes") or Warrants together with the Offered Securities, such Notes and/or
Warrants shall constitute "Offered Securities" for purposes of this Section
2.8.2. In such event, neither the Purchaser nor the Company may exercise their
respective option to purchase any of the Shares or Warrants constituting Offered
Securities unless all of the Notes and Warrants included in the Offered
Securities are purchased as well.

            2.8.3 NO WAIVER. Any election in any instance by any Potential
Buyer not to exercise its option rights under this Section 2.8 shall not
constitute a waiver of such rights with respect to any other proposed Transfer
of Shares.

            2.8.4 EXEMPT TRANSFERS. The provisions of this Section 2.8 shall
not apply and the Transfer shall be permitted:

                  (a) to any Transfer of Shares by any of the persons listed on
      SCHEDULE I hereto (each, a "MANAGEMENT PERSON") to the spouse of any of
      them, any direct or

                                      16



      adopted lineal descendant or ancestor of either of them or any trust
      solely for the benefit of any or all of the foregoing, PROVIDED that each
      of the following conditions shall be satisfied:

                        (i) after giving effect to such Transfer, sole voting
                        power with respect to such Transferred Shares shall be
                        held by the transferor Management Person (unless such
                        Transfer occurs by reason of the death of such
                        Management Person); and

                        (ii) the Transferee of such Transferred Shares shall
                        have executed and delivered to the Company, as a
                        condition precedent to such Transfer, an instrument or
                        instruments in form and substance satisfactory to the
                        Company confirming that the Transferee agrees to be
                        bound by the terms of this Agreement and accepts the
                        rights and obligations set forth in this Agreement as if
                        it were the transferor Management Person;

                  (b) to any distribution of Shares by (i) the Purchaser or any
      other Purchaser Party or (ii) a Financing Party to its respective equity
      participants in accordance with the terms of any applicable limited
      partnership agreement, operating agreement or other governing agreement or
      instrument;

                  (c) to any Transfer of Shares by any Financing Party to any
      other Financing Party, any Person who controls, is controlled by or is
      under common control with TCW; provided, that for the purposes of this
      Section 2.8.4 "control" means the beneficial ownership of more than 50% of
      the total voting power of a Person normally entitled to vote in the
      election of directors, managers or trustees, as applicable of a Person,
      PROVIDED that if the Transferee of such Transferred Shares is not already
      a party to this Agreement, it shall have executed and delivered to the
      Company, as a condition precedent to such Transfer, an instrument or
      instruments in form and substance satisfactory to the Company confirming
      that the Transferee agrees to be bound by the terms of this Agreement and
      accepts the rights and obligations set forth in this Agreement as if it
      were the transferor Financing Party; or

                  (d) to any sale of Shares by a Management Party or Financing
      Party to the public pursuant to an effective registration statement under
      the Securities Act.

      2.9   CALL OPTION. The Management Stockholders each agree for themselves
and all Management Parties who subsequently acquire or hold Shares that the
Company and the Purchaser Buyer will have a call option (the "CALL OPTION") on
all Shares held by any Management Stockholder or Management Party, including
all Shares issuable upon exercise of any options to acquire Shares from the
Company, (the "CALLABLE SECURITIES") upon the termination of such Management
Stockholder's employment with the Company for any reason

                                      17



(each, a "CALL EVENT"); provided, that the Company may provide that the
Company and the Purchaser Buyer may exercise the Call Option through the
purchase of the Management Stockholder's options to acquire Shares from the
Company and, if by the Purchaser Buyer, such option shall be exercisable by
the Purchaser Buyer in accordance with its terms for the exercise price
thereof. The Call Option will expire as to 20% of the Shares owned, or Shares
issuable upon exercise of any option to acquire Shares from the Company owned,
by each such Person upon each anniversary of the later of (a) the date hereof
or, (b) the date such Management Stockholder first acquires such Shares or was
granted such option (each, the "GRANT DATE"), and on each anniversary of such
Grant Date through the fifth anniversary of such Grant Date. Upon the
occurrence of a Call Event, the Company and the Purchaser Buyer may exercise
the Call Option by written notice (an "OPTION NOTICE") delivered to the
Management Stockholder (or, if different, the then current holder of the
Shares) within 90 days after such Call Event, of its election to purchase and,
upon the giving of such notice the Chosen Buyer will be obligated to purchase
and the Management Stockholder (or, if different, the then current holder of
the Shares) ("SELLER") will be obligated to sell all or any lesser portion
indicated in the Option Notice of the Callable Securities owned at the time of
the Call Event by the Seller. The consideration for the Callable Securities
referred to in the preceding sentence shall be the Management Stockholder's
Cost of such Callable Securities, plus 10 per cent for each full calendar year
from the applicable Grant Date, provided, however, that in respect of options
granted after the date hereof, if the Management Stockholder's cost is zero,
the consideration shall be an amount equal to ten (10) percent of the per
share exercise price of such option for each full calendar year from the
applicable Grant Date. For purposes of determining the Chosen Buyer (which
term shall have the same meaning as set forth in Section 2.8.1 in the context
of a Call Option), the priority as among the Company and the Purchaser Buyer
to purchase the Callable Securities shall be, FIRST, the Purchaser Buyer and,
SECOND, the Company.

      In the event the Company or any Purchaser Buyer elects not to participate
in the purchase of Callable Securities pursuant to the Call Option, the same
procedures as to allocation as are set forth in Section 2.8 in respect of the
First Option will govern. The closing for all purchases and sales of Callable
Securities pursuant to this Section 2.9 will be at the principal executive
offices of the Company on the 60th day after the giving of the Option Notice.
The applicable purchase price for the Callable Securities will be paid in cash
or by cashier's check. The Seller will cause the Callable Securities to be
delivered to the Chosen Buyer at the closing free and clear of all liens,
charges or encumbrances of any kind except those which shall continue to apply
to such Shares by the terms of this Agreement. Such Seller will take all such
actions as the Chosen Buyer reasonably requests to vest in the Chosen Buyer
title to the Callable Securities free of any lien, charge or encumbrance
incurred by or through the Seller.

      Notwithstanding any other section of this Agreement, in the event a
Management Stockholder's employment with the Company is terminated other than
through the Stockholder's Retirement from the Company, all of the Stockholder's
vested options to acquire Shares from the Company may be exercisable for three
months following such termination and the exercise price may be paid at the
Stockholder's election (i) by cash or cashiers check, or (ii) by surrender of

                                      18



Shares or options to acquire Shares from the Company ("NET ISSUANCE") as
determined below. If the Stockholder elects the Net Issuance method, the Company
will issue Shares in accordance with the following formula:

            X = Y(A-B)
                ------
                  A

Where:      X =   the number of Shares to be issued to the Stockholder

            Y =   the number of Shares requested to be exercised under this
                  Agreement

            A =   the Fair Market Value of one (1) Share

            B =   the Exercise Price

Notwithstanding, any other section of this Agreement, in the event a Management
Stockholder's employment with the Company is terminated through the
Stockholder's Retirement from the Company, all of the Stockholder's vested
options to acquire Shares from the Company may be exercised at any time and from
time to time until the expiration of such vested options to acquire Shares from
the Company.

      For purposes of this Section 2.9, the following terms have the following
meanings:

            "MANAGEMENT STOCKHOLDER'S COST" means (x) in respect of the Common
Shares, (1) $22, per share, with respect to Common Shares which are either (A)
retained by the holder thereof pursuant to Section 2.2(c) of the Merger
Agreement or (B) acquired pursuant to the exercise of Options (as defined in the
Merger Agreement) retained by the holder thereof pursuant to Section 2.6(c) of
the Merger Agreement, or (2) the consideration paid for such Common Shares, with
respect to Common Shares which are otherwise acquired, (y) in respect of options
to purchase Common Shares outstanding on the date hereof, the excess of $22.00
over the exercise price thereof, per share, and (z) in respect of options to
purchase Common Stock granted after the date hereof, the excess of the Fair
Market Value of the Shares subject to such option over the net of the exercise
price thereof.

            "FAIR MARKET VALUE" means, as of any date, the value of a share of
the Common Stock determined as follows: (i) if the Common Stock is then quoted
on the Nasdaq National Market, its last reported sale price on the Nasdaq
National Market or, if no such reported sale takes place on such date, the
average of the closing bid and asked prices; (ii) if the Common Stock is
publicly traded and is then listed on a national securities exchange but is not
quoted on the Nasdaq National Market, the last reported sale price or, if no
such reported sale takes place on such date, the average of the closing bid and
asked prices on the principal national securities exchange on which the Common
Stock is listed or admitted to trading; (iii) if such Common Stock is publicly
traded but is not quoted on the Nasdaq National Market nor listed or admitted

                                      19



to trading on a national securities exchange, the average of the closing bid
and asked prices on such date, as reported in the Western Edition of THE WALL
STREET JOURNAL, for the over-the-counter market; or (iv) if none of the
foregoing is applicable, by the Board in good faith.

            "RETIREMENT" means retirement pursuant to the Company's standard
retirement policy in effect from time to time but in no event prior to the age
of 65, unless otherwise agreed upon by the Stockholder and the Board.

      2.10  STOCK SUBSCRIPTION RIGHTS.

            2.10.1 RIGHT TO PURCHASE NEW SECURITIES. The Company hereby grants
to each Stockholder the right to purchase a pro rata portion of all New
Securities (as defined in Section 2.10.2) which the Company may, from time to
time, propose to sell and issue at the cash price and on the terms on which
the Company proposes to sell such New Securities. A Management Stockholder's
pro rata share, for purposes of this Section 2.10, shall be equal to a
fraction (A) the numerator of which is the number of Common Shares (on fully
diluted basis assuming the exercise of all warrants, options or other rights
to acquire Common Shares and all Common Shares issuable upon the conversion or
exchange of any security) held by such Management Stockholder on the date of
the Company's written notice pursuant to Section 2.10.3 below; and (B) the
denominator of which is the number of Common Shares outstanding (on fully
diluted basis assuming the exercise of all warrants, options or other rights
to acquire Common Shares and all Common Shares issuable upon the conversion or
exchange of any security) on such date. A Financing Stockholder's pro rata
share, for purposes of this Section 2.10, shall be equal to a fraction (A) the
numerator of which is the number of Common Shares (on a fully diluted basis
assuming the exercise of all warrants, options or other rights to acquire
Common Shares and all Common Shares issuable upon the conversion or exchange
of any security) held by such Financing Stockholder on the date of the
Company's written notice pursuant to Section 2.10.3 below; and (B) the
denominator of which is the number of Common Shares (on fully diluted basis
assuming the exercise of all warrants, options or other rights to acquire
Common Shares and all Common Shares issuable upon the conversion or exchange
of any security) outstanding. Purchaser's pro rata share, for purposes of this
Section 2.10, shall be equal to a fraction (A) the numerator of which is the
number of Common Shares (on fully diluted basis assuming the exercise of all
warrants, options or other rights to acquire Common Shares and all Common
Shares issuable upon the conversion or exchange of any security) held by such
Purchaser Stockholder on the date of the Company's written notice pursuant to
Section 2.10.3 below; and (B) the denominator of which is the number of Common
Shares outstanding (on a fully diluted basis assuming exercise of all
outstanding options and warrants to acquire Common Shares on such a date). The
right to purchase New Securities shall be subject to the following additional
provisions of this Section 2.10.

            2.10.2 NEW SECURITIES. "NEW SECURITIES" shall mean any Common
Stock of the Company whether now authorized or not, and rights, options or
warrants to purchase Common Stock, and securities of any type whatsoever that
are, or may by their terms become, convertible

                                      20



into or exchangeable for Common Stock which are sold by the Company for cash
or indebtedness; PROVIDED, HOWEVER, that the term New Securities shall not
include (i) securities issued in a Public Offering Event; (ii) Common Stock
(including options to purchase Common Stock), issued to employees, consultants
or directors of the Company pursuant to plans or agreements approved by the
Board or any committee thereof, (iii) securities issued pursuant to any stock
dividend, stock split, combination or other reclassification by the Company of
any of its capital stock; or (iv) securities issued pursuant to the exercise
of warrants, rights, options or other securities issued in connection with
financing transactions to which the Company and an unaffiliated third party
may be a party and which are approved by the Board and issuances of Common
Stock pursuant thereto, including, without limitation, Common Stock issuable
pursuant to the exercise of warrants, rights, options or other securities
issued in connection with obtaining the Financing (as defined in the Merger
Agreement).

            2.10.3 REQUIRED NOTICES. In the event the Company proposes to
undertake an issuance of New Securities it shall give each Stockholder written
notice, pursuant to the provisions of Section 7.4 hereof, of its intention,
describing the type of New Securities, the cash price, the number of shares
and the general terms upon which the Company proposes to issue the same. Each
Stockholder shall have 30 days from the date of receipt of any such notice to
agree to purchase any or all of such Stockholder's pro rata share of such New
Securities for the price and upon the general terms specified in the notice by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.

            2.10.4 COMPANY'S RIGHT TO SELL. In the event the existing
Stockholders fail to exercise the right of first refusal as to the New
Securities offered within said thirty (30) day period, the Company shall have
60 days thereafter to sell or enter into an agreement (pursuant to which the
sale of New Securities covered thereby shall be closed, if at all, within 120
days from the date of said agreement) to sell all such New Securities
respecting which the right to purchase provided in Section 2.10.1 was not
exercised, at a price and upon the general terms not more favorable in any
material respect to the purchasers thereof than specified in the Company's
notice. In the event the Company has not sold within said 60 day period or
entered into any agreement to sell all such New Securities within said 60 day
period (or sold and issued all such New Securities in accordance with the
foregoing within 120 days from the date of said agreement), the Company shall
not thereafter issue or sell any New Securities, without first offering such
securities to the Stockholders in the manner provided above.

            2.10.5 PURCHASER'S ACQUISITION OF ADDITIONAL SHARES. The Purchaser
agrees with the Management Stockholders that if the Purchaser or any of its
affiliates makes any future equity investments in the Company in connection
with any acquisition of another corporation or entity by the Company by merger
or otherwise (an "ACQUISITION INVESTMENT"), the Purchaser shall (i) with
respect to the first $50 million, in the aggregate, so invested acquire Common
Stock (which shares of Common Stock are New Securities as specified in Section
2.10.2 hereof, notwithstanding the proviso thereto) and preferred stock (with
terms substantially similar to the Preferred Stock purchased by the Purchaser
in connection with the Merger) in the same

                                      21



proportion as was acquired by the Purchaser in connection with the Merger, and
(ii) with respect to any Acquisition Investments made by the Purchaser in
excess of the first $50 million, in the aggregate, of Acquisition Investments,
the Purchaser shall use reasonable efforts to ensure that any such Acquisition
Investment is made in a manner that provides the Management Stockholders the
opportunity to maintain their relative Common Stock ownership on similar terms
(but in any event on terms less favorable to the Management Stockholders than
those set forth in clause (i) hereof). For illustrative purposes, an example
of the Purchaser's agreement in connection with Acquisition Investments is set
forth on EXHIBIT B attached hereto. The terms of this Section 2.10.5 shall be
for solely for the benefit, or enforceable by, the Management Stockholders.
The terms of this Section 2.10.5 may be waived by the Majority Management
Stockholders.

            2.10.6 ASSIGNMENT. The rights provided in this Section 2.10 are
not assignable, except that, notwithstanding any other provision of this
Agreement such rights are assignable by (x) a Management Stockholder to a
Management Party, (y) a Financing Stockholder to another Financing Party, or
(z) the Purchaser to a Purchaser Party, in accordance with the restrictions
contained in this Agreement.

      2.11  TAX TREATMENT. The attachment of restrictions to the Shares held
by the Management Stockholders and the subsequent lapse of those restrictions
(the "EXCHANGE RESTRICTIONS") is not intended to constitute a transfer of
property in connection with the performance of services by the Management
Stockholders within the meaning of section 83 of the Code. Accordingly, the
Company will not report compensation to the Management Stockholders at any
time with respect to the Exchange Restrictions unless required to by
applicable law.



                         ARTICLE III. DRAG-ALONG SALES.

      3.1   RIGHT OF PURCHASER PARTIES TO REQUIRE SALE. Notwithstanding any
other provision of this Agreement, if some or all Purchaser Parties (the
"DRAG-ALONG SELLERS") receive an offer in writing from a third Person or third
Persons who are not affiliates of any of the Drag-Along Sellers (a "THIRD
PARTY") (x) to purchase all or substantially all of the Shares then owned by
the Purchaser Parties (a "DRAG-ALONG 100% SALE"), or (y) to purchase 50% or
more in the aggregate of the outstanding Common Shares or Preferred Shares of
any class or series, in each case, in one or more related transactions (a
"DRAG-ALONG 50% SALE"), or (z) to effect a business combination of the Company
with such Third Party or the purchase or other acquisition of all or
substantially all of the assets of the Company by such Third Party (an
"ACQUISITION PROPOSAL"), and the Purchaser Parties desire to accept or cause
the Company to accept such Acquisition Proposal, then, in any such case, upon
the demand of a majority of the Drag-Along Sellers, each of the other
Stockholders (a "REQUIRED SELLER") shall be required to sell to such Third
Party the number of Shares specified in the applicable Drag-Along Notice (as
defined below), at the same price and on the same purchase terms and
conditions as the Drag-Along Sellers have agreed to with such

                                      22



Third Party, including, subject to Section 3.5, no greater indemnification
liability on a pro rata basis than the Drag-Along Sellers have agreed to with
such Third Party, or, as the case may be, vote all of the Common Shares
beneficially owned by such Stockholder in favor of such Acquisition Proposal
and take all other necessary or desirable actions within their control
(including, without limitation, by attending meetings in person or by proxy
for the purpose of obtaining a quorum and executing of written consents in
lieu of meetings), to cause the approval of such Acquisition Proposal
(provided, however, that in the case of a Drag-Along 50% Sale, Stockholder
shall not include a Financing Stockholder).

      3.2   DRAG-ALONG NOTICE. Prior to making any Drag-Along Sale, the
Drag-Along Sellers shall promptly provide each Required Seller with written
notice (the "DRAG-ALONG NOTICE") not more than thirty (30) or less than
fifteen (15) days prior to the proposed date of the Drag-Along Sale (the
"DRAG-ALONG SALE DATE"). The Drag-Along Notice shall set forth: (i) the name
and address of the Third Party; (ii) the name and address of each member of
the Drag-Along Sellers; (iii) the proposed amount and form of consideration to
be paid per Share and the terms and conditions of payment offered by the Third
Party; (iv) the number of Shares held of record as of the close of business on
the date of the Drag-Along Sale Notice (the "DRAG-ALONG NOTICE DATE") by the
Required Seller to whom the notice is sent (and in the case of a Drag-Along
100% Sale such total number of Shares held by the Required Seller shall be the
number of Shares required to be sold by such Required Seller); (v) the
aggregate number of Shares held of record as of the Drag-Along Notice Date by
the Drag-Along Sellers; (vi) in the case of a Drag-Along 50% Sale, the pro
rata number of Shares to be sold by such Required Seller, which shall be in
proportion to the portion of the relevant class or series of securities being
sold by the Drag-Along Sellers, (vii) the Drag-Along Sale Date; and (viii)
confirmation that the proposed Third Party has agreed to purchase the Required
Sellers' Shares in accordance with the terms hereof.

      3.3   DELIVERY OF CERTIFICATES. On the date that is at least one
Business Day (as defined in the Merger Agreement) before the Drag-Along Sale
Date, each Required Seller shall deliver a certificate or certificates for all
of its Shares duly endorsed for transfer with signatures guaranteed, free and
clear of any lien, claim, encumbrance, charge or security interest of any kind
to such Third Party in the manner and at the address indicated in the
Drag-Along Notice against delivery of the purchase price for such Required
Seller's Shares.

      3.4   CONSIDERATION.  The provisions of this Article 3 shall apply
regardless of the form of consideration received in the Drag-Along Sale.

      3.5   COOPERATION. The Required Sellers shall cooperate in good faith
with the Drag-Along Sellers in connection with the consummation of the
Drag-Along Sale, which cooperation shall include, without limitation, with
respect to all Required Sellers other than Required Sellers that are Financing
Parties, by executing a document containing substantially similar
representations, warranties, indemnities and agreements as requested by the
Drag-Along Sellers in connection with the Drag Along Sale, but in no case
shall such representations, warranties, indemnities and agreements made by the
Required Sellers be more restrictive than

                                      23



those made by the Drag-Along Sellers in connection with such Drag-Along Sale.
With respect to Required Sellers that are Financing Parties, such document
shall contain only a representation and warranty with respect to each such
Financing Party's own ownership of the Shares to be sold by it and its ability
to convey title thereto free and clear of liens, encumbrances or adverse
claims; the liability of each Financing Party with respect to any
representation and warranty made in connection with a sale of Shares pursuant
to this Article III shall be several and not joint with any other person; such
liability shall be limited to the amount of proceeds actually received by each
such Financing Party in the sale of Shares pursuant to Article III, and no
Financing Party shall be required to provide any indemnification or escrow
(other than a pro rata shares of any escrow provided by all Stockholders) to
anyone in connection with the sale of Shares pursuant to this Article III;
provided, however, that a Financing Party shall not be obligated to
participate in a sale of Shares pursuant to this Article III unless such
Financing Party would not by virtue of such participation be in violation of
the registration or qualification requirements of federal or applicable state
securities laws, or, if such Financing Party is not provided with an opinion
of counsel to the Company to such effect, the Company shall indemnify the
Financing Party for any violation.


                        ARTICLE IV. REGISTRATION RIGHTS.

      4.1   DEFINITIONS.

            "CLOSING" means the closing under the Merger Agreement.

            "COMMISSION" means the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.

            "DEMAND REGISTRATION" means the registration under the Securities
Act (including, but not limited to, a shelf registration under Rule 415
promulgated under the Securities Act) by the Company of all or part of the
Registrable Shares of the Management Holders, the Financing Holders or the
Purchaser Holders, as applicable, pursuant to a Demand received by the Company.

            "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder.

            "FINANCING HOLDER" means a Holder of Registrable Financing Shares,
including a Transferee of Registrable Financing Shares if (i) the Transfer to
such Transferee is not prohibited by this Agreement, and (ii) the Shares
Transferred to such transferee continue to be Registrable Shares.

            "HOLDER" means a Holder of Registrable Shares. A Person is deemed to
be a Holder of Registrable Shares whenever such Person owns Registrable Shares;
PROVIDED, HOWEVER, that unless the Company is otherwise notified by the Holder
of Registrable Shares, the

                                      24



Holder of Registrable Shares shall be deemed to be that Person set forth on
the books and records of the Company or the registrar for such Registrable
Shares.

            "MANAGEMENT HOLDER" means a Holder of Registrable Common Management
Shares, including a Transferee of Registrable Common Management Shares if (i)
the Transfer to such Transferee is not prohibited by this Agreement, and (ii)
the Shares Transferred to such Transferee continue to be Registrable Shares.

            "PURCHASER HOLDER" means a Holder of Registrable Purchaser Shares,
including a Transferee of Registrable Purchaser Shares if (i) the Transfer to
such Transferee is not prohibited by this Agreement, and (ii) the Shares
Transferred to such transferee continue to be Registrable Shares.

            "REGISTRABLE COMMON FINANCING SHARES" means the shares of Common
Stock owned by the Financing Parties immediately following the Closing or
subsequently acquired by any Financing Party (and any securities issued or
issuable with respect to such Common Stock by way of stock dividends or stock
splits or in connection with a combination of shares, recapitalization, merger,
consolidation, or other reorganization or otherwise);

            "REGISTRABLE COMMON MANAGEMENT SHARES" means the shares of Common
Stock owned by the Management Parties immediately following the Closing or
subsequently acquired by any Management Party (and any securities issued or
issuable with respect to such Common Stock by way of stock dividends or stock
splits or in connection with a combination of shares, recapitalization, merger,
consolidation, or other reorganization or otherwise).

            "REGISTRABLE COMMON PURCHASER SHARES" means the shares of Common
Stock or subsequently acquired by any Purchaser Party (and any securities issued
or issuable with respect to such Common Stock by way of stock dividends or stock
splits or in connection with a combination of shares, recapitalization, merger,
consolidation, or other reorganization or otherwise).

            "REGISTRABLE COMMON SHARES" means the Registrable Common Financing
Shares, the Registrable Common Management Shares, and the Registrable Common
Purchaser Shares.

            "REGISTRABLE FINANCING SHARES" means the Registrable Common
Financing Shares and the Registrable Preferred Financing Shares.

            "REGISTRABLE PREFERRED FINANCING SHARES" means the shares of Series
A Preferred Stock and/or Series B Preferred Stock owned by the Financing Parties
immediately following the Closing or subsequently acquired by any Financing
Party (and any securities issued or issuable with respect to such Series A
Preferred Stock and/or Series B Preferred Stock by way of stock dividends or
stock splits or in connection with a combination of shares, recapitalization,

                                      25



merger, consolidation, or other reorganization or otherwise; including but not
limited to any exchange debentures issued in exchange for shares of Series A
Preferred Stock).

            "REGISTRABLE PREFERRED PURCHASER SHARES" means the shares of Series
A Preferred Stock and/or Series B Preferred Stock owned by the Purchaser
immediately following the Closing to Purchaser or subsequently acquired by any
Purchaser Party (and any securities issued or with respect to such Series A
Preferred Stock and/or Series B Preferred Stock by way of stock dividends or
stock splits or in connection with a combination of shares, recapitalization,
merger, consolidation, or other reorganization or otherwise; including but not
limited to any exchange debentures issued in exchange for shares of Series A
Preferred Stock).

            "REGISTRABLE PREFERRED SHARES" means the Registrable Preferred
Financing Shares and the Registrable Preferred Purchaser Shares.

            "REGISTRABLE PURCHASER SHARES" means the Registrable Common
Purchaser Shares and the Registrable Purchaser Preferred Shares.

            "REGISTRABLE SHARES" means the Registrable Financing Shares, the
Registrable Common Management Shares and the Registrable Purchaser Shares;
PROVIDED, HOWEVER, that any such Shares will cease to be Registrable Shares, as
the case may be, when (i) a registration statement covering such Shares has been
declared effective and such Shares have been disposed of pursuant to such
effective registration statement, or (ii) such Shares are distributed to the
public pursuant to Rule 144.

            "SELLING HOLDER" means, with respect to any registration statement,
any Holder whose Registrable Shares are included therein.

      4.2   DEMAND REGISTRATIONS.

            4.2.1 NUMBER OF DEMAND REGISTRATIONS.

                  (a)   PURCHASER HOLDERS' DEMAND RIGHTS.

                        (i)   Purchaser Holders shall be entitled to make
written request (any such written request pursuant to this Section 4.2 by
Purchaser Holders, Management Holders or Financing Holders, a "DEMAND") of the
Company to register (any such Demand by Purchaser Holders, Management Holders or
Financing Holders to register Registrable Common Shares pursuant to this Section
4.2, a "COMMON DEMAND REGISTRATION") all or part of their Registrable Common
Purchaser Shares under the Securities Act (including, but not limited to, a
shelf registration under Rule 415 promulgated under the Securities Act);
PROVIDED, HOWEVER, that not more than an aggregate of four (4) Demand
Registrations with respect to the Registrable Common Purchaser Shares may be
made pursuant to the rights granted by this Section 4.2.1(a)(i).

                                      26



                        (ii)  Purchaser Holders shall be entitled to Demand
the Company to register (any such Demand by the Purchaser Holders to register
Registrable Preferred Shares pursuant to this Section 4.2, a "PREFERRED DEMAND
REGISTRATION") all or part of their Registrable Preferred Purchaser Shares under
the Securities Act (including, but not limited to, a shelf registration under
Rule 415 promulgated under the Securities Act); PROVIDED, HOWEVER, that not more
than an aggregate of four (4) Preferred Demand Registrations with respect to the
Registrable Preferred Purchaser Shares may be made pursuant to the rights
granted by this Section 4.2.1(a)(ii).

                  (b)   MANAGEMENT HOLDERS' DEMAND RIGHTS.

                  (i)   Commencing on the date that is six (6) months after
the later of (i) a Public Offering Event and (ii) the sale (a "25% SALE") by
Purchaser, any Purchaser Party and the equity participants of any Purchaser
Party, in the aggregate when combined with all such sales (excluding any
Transfer by any Purchaser Party to any other Purchaser Party or to its equity
participants) by all such parties, of Shares equal to twenty-five percent
(25%) or more of the Shares owned by Purchaser immediately following the
Effective Time (as defined in the Merger Agreement), the Majority Management
Stockholders on the date thereof shall be entitled to Demand of the Company
one Common Demand Registration.

                  (ii)  Commencing on the date that is six (6) months after
the later of (i) a Public Offering Event and (ii) the sale (a "50% SALE") by
Purchaser, any Purchaser Party and the equity participants of any Purchaser
Party, in the aggregate when combined with all such sales (excluding any
Transfer by any Purchaser Party to any other Purchaser Party or to its equity
participants) by all such parties, of Shares equal to fifty percent (50%) or
more of the Shares owned by Purchaser immediately following the Effective Time
(as defined in the Merger Agreement), the Majority Management Stockholders on
the date thereof shall be entitled to Demand of the Company (i) one Common
Demand Registration, or (ii) if the Majority Management Stockholders have not
made a Common Demand Registration pursuant to Section 4.2.1(b)(i), two Common
Demand Registrations.

                  (c)   FINANCING HOLDERS' DEMAND RIGHTS. Commencing on the
      earlier of (i) the date that is six (6) months after a Public Offering
      Event, and (ii) the fifth anniversary of the date of this Agreement,
      Financing Holders, acting collectively as a group, holding an aggregate
      number of Registrable Financing Shares at least equal to or greater than
      fifty percent (50%) of the number of Registrable Financing Shares
      outstanding on the date of their Demand shall be entitled to make a Demand
      of the Company to consummate a Demand Registration of all or part of the
      Registrable Financing Shares; PROVIDED, HOWEVER, that not more than one
      (1) Demand Registration with respect to the Registrable Financing Shares
      may be made pursuant to the rights granted by this Section 4.2.1(c).

                                      27




                  (d) SELECTION OF UNDERWRITER. Any Demand Registration
      hereunder shall be on any appropriate form under the Securities Act
      permitting registration of such Registrable Shares for resale by the
      Selling Holders in the manner or manners designated by them (including,
      without limitation, pursuant to one or more underwritten offerings). The
      determination of whether the offering will involve an underwritten
      offering, and the selection of investment bankers and managers, if any,
      and counsel, shall be made by Holders of a majority of the Registrable
      Shares demanded to be included in such registration, PROVIDED, HOWEVER,
      that the selection of investment bankers and managers, if any, and counsel
      so selected shall be reasonably satisfactory to the Company. If requested,
      the Company shall enter into an underwriting or purchase agreement with an
      investment banking firm in connection with a Demand Registration,
      containing representations, warranties, indemnities and agreements then
      customarily included in underwriting or purchase agreements by such
      underwriter with respect to secondary distributions of securities.

            4.2.2 REGISTRATION. The Company shall file a registration statement
with respect to each Demand Registration and use its best efforts to cause the
same to be declared effective as promptly as practicable following such Demand,
but not later than one hundred twenty (120) days thereafter. Unless all of the
Registrable Shares covered by the registration statement have earlier been sold
or withdrawn from sale, the Company shall keep any such Registration Statement
effective for a period of at least one hundred eighty (180) days after such
registration statement is first declared effective plus a period equal to (x)
any period during which the Selling Holders are prohibited from making sales
because of any stop order, injunction or other order or requirement of the
Commission or any other governmental agency or court plus (y) any Demand
Suspension Period (as defined below) plus (z) any holdback period pursuant to
Section 4.7 that occurs while the registration statement is effective (the
"DEMAND PERIOD") and a registration will not count as a Demand Registration
unless it is declared effective by the Commission and remains effective until
the earlier of such time as all of the Registrable Shares included in such
registration have been sold or disposed of or withdrawn from sale by the Selling
Holders or the expiration of the Demand Period or, if the registration remains
effective for a shorter period, the Selling Holders have sold at least eighty
percent (80%) of their Registrable Shares included in such Demand Registration.
In addition, a request for registration shall not be deemed to constitute a
Demand Registration if: (i) the conditions to closing specified in the purchase
agreement or underwriting agreement entered into in connection with such Demand
Registration are not satisfied other than by reason of some act or omission by
the Selling Holders; (ii) the Company voluntarily takes any action that would
result in the Selling Holders not being able to sell such Registrable Shares
covered thereby during the Demand Period; (iii) after it has become effective,
such Demand Registration becomes subject to any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court and
such order, injunction or requirement is not promptly withdrawn or lifted, and
such Demand Registration has not otherwise remained effective for the Demand
Period (including effective periods both before and after the order, injunction
or requirement is made or imposed); or (iv) such Demand Registration does not
involve an underwritten offering and the Selling Holders determine not to


                                      28



proceed following any delay imposed hereunder by the Company; PROVIDED, HOWEVER,
that prior to such a delay under this clause (iv), the Selling Holders have not
sold more than eighty percent (80%) of the Registrable Shares included in such
Demand Registration. Notwithstanding the foregoing, the Company may, at any
time, delay the filing or delay or suspend the effectiveness of the Demand
Registration or, without suspending such effectiveness, instruct the Selling
Holders not to sell any securities included in the Demand Registration, if the
Company shall have determined in good faith (as evidenced by a resolution of the
Board of Directors of the Company delivered to the Selling Holders) that
proceeding with the Demand Registration at such time may have a material adverse
effect on the Company or the Company shall have determined upon the advice of
counsel that as a result of complying with such Demand it would be required to
disclose any material actions proposed to be taken by the Company in good faith
and for valid business reasons, including without limitation, the acquisition or
divestiture of assets, which disclosure may have a material adverse effect on
the Company or on such actions (a "DEMAND SUSPENSION PERIOD"), by providing the
Selling Holders with written notice of such Demand Suspension Period and the
reasons therefor. The Company shall use its reasonable best efforts to provide
such notice at least ten (10) days prior to the commencement of such a Demand
Suspension Period; PROVIDED, HOWEVER, that in any event the Company shall
provide such notice no later than the commencement of such Demand Suspension
Period; and PROVIDED, FURTHER, that in no event shall the Demand Suspension
Periods exceed a total of sixty (60) days in any twelve (12) month period.

            The Company further agrees to supplement or amend such registration
statement with respect to such Demand Registration, as required by the
registration form utilized by the Company or by the instructions applicable to
such registration form or by the Securities Act for the registration of
securities or as reasonably requested (which request shall result in the filing
of a supplement or amendment subject to approval thereof by the Company, which
approval shall not be unreasonably withheld) by any Selling Holder or any
managing underwriter of Registrable Shares to which such Demand Registration
relates, and the Company agrees to furnish to the Selling Holders (and any
managing underwriter) copies, in substantially the form proposed to be used
and/or filed, of any such supplement or amendment prior to its being used and/or
filed with the Commission. The Company shall amend or supplement the
registration statement with respect to such Demand Registration no less
frequently than every forty five (45) days to update the list of Selling Holders
pursuant to written requests by such Holders.

            4.2.3 INCLUSION OF REGISTRABLE SHARES. Any written request for a
Demand shall specify the number of Registrable Common Shares or Registrable
Preferred Shares (specifying the number of Series A Preferred Shares and Series
B Preferred Shares included therein) to be registered and the intended methods
of disposition thereof. Within ten (10) days after receipt of such Demand, the
Company shall give written notice of such registration request to all Holders of
Registrable Common Shares or Registrable Preferred Shares, as applicable, which
have not made the Demand, and the Company shall include in such registration all
Registrable Common Shares or Registrable Preferred Shares, as applicable, with
respect to which the Company has received written requests for inclusion therein
within fifteen (15) days after the date on which


                                      29



such notice is given. Each such request shall also specify the aggregate
number of Registrable Common Shares or Registrable Preferred Shares
(specifying the number of Series A Preferred Shares and Series B Preferred
Shares included therein), as applicable, to be registered. The Company may
also include in such Demand Registration shares of Common Stock for the
account of the Company and any other Persons who hold shares of Common Stock.

            4.2.4 PRIORITY ON DEMAND REGISTRATIONS. If a Demand Registration
is an underwritten registration and the managing underwriters of such offering
determine that the aggregate number of (i) Registrable Shares of the Selling
Holders exercising their rights to participate in the Demand Registration on a
demand basis, pursuant to this Section 4.2; (ii) Shares of the Company; and
(iii) Shares of any other Persons entitled to participate in such Demand
Registration, in each case proposed to be included in such registration
statement, exceeds the maximum number of Shares that can reasonably be expected
to be sold within a price range acceptable to the Company and the Selling
Holders, then the number of shares to be offered for the account of the Company
and for the account of all such other Persons, other than holders of Registrable
Shares who initiated the demand, participating in such registration shall be
reduced or limited PRO RATA (and to zero, if necessary) in proportion to the
respective number of Shares requested to be registered to the extent necessary
to reduce the total number of Shares requested to be included in such
registration statement to the maximum number of Shares that can reasonably be
expected to be included therein and still satisfy such price requirement. If the
foregoing market "cutback" does not reduce the aggregate number of Shares
proposed to be included in the registration statement to the maximum number of
Shares that can reasonably be expected to be sold within the price range
acceptable to the Company and the Selling Holders, the Company shall further
reduce the number of Shares to be included in such registration PRO RATA among
all such remaining Selling Holders on the basis of the number of Registrable
Shares of the Company requested to be included by all such Selling Holders. Any
request for registration with respect to which such a market "cutback" with
respect to such Selling Holders occurs shall be deemed to constitute a Demand
Registration for all purposes of this Article 4; PROVIDED, HOWEVER, that if any
such market "cutback" occurs with respect to a Demand Registration and all
Selling Holders who initiated the Demand are not able to sell at least eighty
percent (80%) of the Registrable Shares which such Holders proposed to sell
pursuant to such Demand Registration, then, although such request for
registration will be effectuated, such request will not count against the number
of Demands to which the Purchaser Holders, the Management Holders and the
Financing Holders are entitled pursuant to Section 4.2 hereof.

            4.2.5 COMPLIANCE. Notwithstanding any other provisions hereof,
the Company shall use its reasonable best efforts to ensure that (i) any
registration statement filed in connection with a Demand Registration, and any
amendment thereto, and any prospectus forming a part thereof, and any supplement
thereto, complies in all material respects with the Securities Act and the rules
and regulations thereunder, (ii) any registration statement filed in connection
with a Demand Registration, and any amendment thereto, does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading and (iii) any prospectus forming part


                                      30



of any registration statement filed in connection with a Demand Registration,
and any supplement to such prospectus, does not include an untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements, in the light of the circumstances under which they are
made, not misleading.

      4.3   PIGGYBACK REGISTRATION.

            4.3.1 RIGHT TO INCLUDE REGISTRABLE SHARES. If the Company at any
time proposes to register any of its equity securities under the Securities
Act, whether or not for sale for its own account, on a form and in a manner
which would permit registration of Registrable Shares for a public offering
under the Act (other than on a registration statement (i) on Form S-4 or Form
S-8 or any successor form thereto or (ii) filed in connection with an
exchange offer), the Company shall give written notice of the proposed
registration to each Holder at least fifteen (15) days prior to the filing
thereof, and each Holder shall have the right to request that all or any part
of its Registrable Shares of the same class or series of the equity
securities proposed to be registered by the Company be included in such
registration by giving written notice to the Company within ten (10) days
after the giving of such notice by the Company. If the registration statement
is to cover an underwritten offering, such Registrable Shares shall be
included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters. Notwithstanding the
foregoing, a Holder may not request the registration of its Registrable
Shares if such Shares may, at the time (or within thirty days thereafter), be
distributed to the public pursuant to Rule 144, or any other similar
provision hereafter adopted by the Commission.

            4.3.2 PRIORITY ON PIGGYBACK REGISTRATIONS.

                  (b) COMPANY REGISTRATIONS. If the registration is an
underwritten primary registration on behalf of the Company and the managing
underwriter(s) of such offering determine in their good faith judgment that the
aggregate number of securities, including Registrable Shares, of the Company
which all Holders and all other security holders of the Company, pursuant to
contractual rights to participate in such registration (the "OTHER HOLDERS"),
propose to include in such registration statement exceeds the maximum number of
securities, including Registrable Shares, that can reasonably be expected to be
sold in such offering without materially and adversely affecting the
marketability of the offering or the selling price to be obtained, the Company
will include in such registration, first, the shares of Common Stock or other
securities which the Company proposes to sell and, second, the Registrable
Shares of such Selling Holders and other securities to be sold for the account
of Other Holders, PRO RATA among all such Selling Holders and Other Holders,
taken together, on the basis of the number of Registrable Shares or other
securities of the Company requested to be included by all Selling Holders and
Other Holders who have requested that securities owned by them be so included
(it being agreed and understood, however, that such managing underwriter(s)
shall have the right to eliminate entirely the participation in such
registration of all Selling Holders and Other Holders).


                                      31



                  (c)   SELLING HOLDERS' REGISTRATION. (i) If the registration
is being made pursuant to a Demand by Purchaser Holders pursuant to Section 4.2
hereof, and the managing underwriter(s) determine that the aggregate number of
securities which all Selling Holders, the Company and all Other Holders propose
to include in such registration exceeds the maximum number of securities that
can reasonably be expected to be sold within the price range acceptable to the
Company and the Selling Holders, the Company will include in such registration,
first, the Registrable Purchaser Shares of the Selling Holders participating in
such registration on a demand basis in accordance with Section 4.2.4 hereof,
and, second, any securities to be sold for the account of the Company,
securities to be sold for the account of the Selling Holders that are either
Purchaser Holders or Management Holders or Financing Holders and that are
participating in such offering on a piggyback basis and any securities to be
sold for the account of the Other Holders electing to include securities in such
registration, PRO RATA among the Company, all such Selling Holders and all such
Other Holders, taken together, on the basis of the number of Shares or other
securities to be sold by the Company in the absence of such PRO RATION, number
of Registrable Shares or other securities requested to be included by all such
Selling Holders and the number of Shares or other securities requested to be
included by all such Other Holders (it being agreed and understood, however,
that such managing underwriter(s) shall have the right to eliminate entirely the
participation therein of the Company and of all such Selling Holders and Other
Holders pursuant to the terms of this sentence).

                  (ii)  If the registration is being made pursuant to a Demand
by Management Holders pursuant to Section 4.2 hereof, and the managing
underwriter(s) determine that the aggregate number of securities which all
Selling Holders, the Company and all Other Holders propose to include in such
registration exceeds the maximum number of securities that can reasonably be
expected to be sold within the price range acceptable to the Company and the
Management Holders that are Selling Holders, the Company will include in such
registration, first, the Registrable Common Management Shares of the Selling
Holders participating in such registration on a demand basis in accordance with
Section 4.2.4 hereof, and, second, any securities to be sold for the account of
the Company, securities to be sold for the account of the Selling Holders that
are either Purchaser Holders or Management Holders or Financing Holders and that
are participating in such offering on a piggyback basis and any securities to be
sold for the account of the Other Holders electing to include securities in such
registration, PRO RATA among the Company, all such Selling Holders and all such
Other Holders, taken together, on the basis of the number of Shares or other
securities to be sold by the Company in the absence of such PRO RATION, number
of Registrable Shares or other securities requested to be included by all such
Selling Holders and the number of Shares or other securities requested to be
included by all such Other Holders (it being agreed and understood, however,
that such managing underwriter(s) shall have the right to eliminate entirely the
participation therein of the Company and of all such Selling Holders and Other
Holders pursuant to the terms of this sentence).

                  (iii) If the registration is being made pursuant to a Demand
by Financing Holders pursuant to Section 4.2 hereof, and the managing
underwriter(s) determine that the aggregate number of securities which all
Selling Holders, the Company and all Other


                                      32



Holders propose to include in such registration exceeds the maximum number of
securities that can reasonably be expected to be sold within the price range
acceptable to the Company and the Financing Holders that are Selling Holders,
the Company will include in such registration, first, the Registrable
Financing Shares of the Selling Holders participating in such registration on
a demand basis in accordance with Section 4.2.4 hereof, and, second, any
securities to be sold for the account of the Company, securities to be sold
for the account of the Selling Holders that are either Purchaser Holders or
Management Holders or Financing Holders and that are participating in such
offering on a piggyback basis and any securities to be sold for the account
of the Other Holders electing to include securities in such registration, PRO
RATA among the Company, all such Selling Holders and all such Other Holders,
taken together, on the basis of the number of Shares or other securities to
be sold by the Company in the absence of such PRO RATION, number of
Registrable Shares or other securities requested to be included by all such
Selling Holders and the number of Shares or other securities requested to be
included by all such Other Holders (it being agreed and understood, however,
that such managing underwriter(s) shall have the right to eliminate entirely
the participation therein of the Company and of all such Selling Holders and
Other Holders pursuant to the terms of this sentence).

                  (c)  OTHER HOLDERS' REGISTRATION. If the registration is an
underwritten secondary registration on behalf of any of the Other Holders
pursuant to demand registration rights and the managing underwriters determine
that the aggregate number of securities which all Selling Holders, the Company
and all Other Holders propose to include in such registration exceeds the
maximum number of securities that can reasonably be expected to be sold within
the price range acceptable to the Company and the Other Holders that are Selling
Holders, the Company will include in such registration, first, the securities to
be sold for the account of the Other Holders demanding registration (but only to
the extent such Other Holders are entitled to demand inclusion thereof pursuant
to demand registration rights), second, any securities to be sold for the
account of the Company, and, third, the Registrable Shares of such Selling
Holders and other securities to be sold for the account of the Other Holders
electing to include (but not being entitled pursuant to demand registration
rights to demand inclusion of) securities in such registration, PRO RATA among
all such Selling Holders and Other Holders, taken together, on the basis of the
number of Registrable Shares or other securities of the Company requested to be
included by all Selling Holders and such Other Holders who have requested that
securities owned by them be included (it being agreed and understood, however,
that such managing underwriter(s) shall have the right to eliminate entirely the
participation therein of all such Selling Holders and Other Holders with respect
to such securities since they are not entitled to demand inclusion of such
securities pursuant to demand registration rights).

                  (d)  UNDERWRITERS. Registrable Shares proposed to be
registered and sold for the account of any Selling Holder pursuant to a
piggyback registration shall be sold to prospective underwriters selected or
approved by the Company, and on the terms and subject to the conditions of
one or more underwriting agreements negotiated between the Company, the
Selling Holders, if any, and/or Other Holders demanding registration and such
prospective underwriters. The Selling Holders shall be permitted to withdraw
all or a part of the Registrable


                                      33



Shares held by such Selling Holders which were to be included in such
piggyback registration at any time prior to the effective date of such
registration. The Company may withdraw any registration statement for such
registration at any time before it becomes effective, or postpone the
offering of securities, without obligation or liability to any Selling Holder
participating on a piggyback basis (except pursuant to Section 4.8 hereof).

      4.4  REGISTRATIONS ON FORM S-3. At such time as the Company shall have
qualified for the use of Form S-3, or any similar form or forms promulgated by
the Commission, the Holders of Registrable Securities shall each have the right
to request an unlimited number of registrations of Form S-3. Any such request
shall be in writing, shall specify the Registrable Securities intended to be
sold or disposed of by the Holders thereof, shall state the intended method of
disposition of such Registrable Securities by the Holder(s) requesting such
registration and shall relate to Registrable Securities having proposed gross
cash offering proceeds (prior to deduction of underwriters commissions and
expenses, if any) of Two Million Dollars ($2,000,000) or more for all
Registrable Securities to be included, on the basis of a reasonable (in light of
the current market price) proposed per share offering price. The Company shall
be obligated to effect such registration or registrations on Form S-3 as soon as
practicable after receipt of such request; provided, however, that the Company
shall not be obligated to effect the filing of a registration pursuant to this
Section 4.4(i) during the period starting with the date ninety (90) days prior
to the Company's estimated date of filing of, and ending on a date one hundred
eighty (180) days following the effective date of, a registration statement
pertaining to a public offering of Common Stock for the account of the Company,
provided that the Company is actively employing in good faith all reasonable
efforts to cause such registration statement to become effective and that, in
the good faith judgement of the Company's underwriter for an underwritten
offering or of the Company's Board of Directors for any other offering, an
offering pursuant to such a registration statement would interfere in any
material respect with the successful marketing (including pricing) of the Common
Stock to be included in the Company's proposed registration statement, or (ii)
if the Company's Board of Directors shall determine in good faith that such
filing will interfere in any material respect with a pending or contemplated
financing, merger, sale of assets, recapitalization or other similar corporate
action of the Company. In the event the Company's obligations are abated
pursuant to the foregoing PROVISO, and if any of the Holders on whose behalf the
requested registration statement would be filed and who were unable to have all
of the Registrable Securities included in the Company's registration statement
pursuant to Section 4.2 hereof and then want such registration statement to be
filed, the Company shall file such registration statement as promptly as
practicable following (x) one hundred eighty (180) days after the effective date
of the registration statement with respect to the offering referred to in clause
(i) above, or (y) the date on which the transactions referred to in clause (ii)
above shall have been completed or abandoned (as the case may be), but not later
than one hundred twenty (120) days after the initial registration request notice
was given; PROVIDED FURTHER, HOWEVER, that the Company shall not be obligated to
file and cause to become effective (a) more than two (2) registrations on Form
S-3 in any one twelve (12) month period or (b) any registration on Form S-3
within six (6) months after the effective date of any previous registration
statement filed under Section 4.2 or Section 4.3, with respect to which all
Holders


                                      34



who had requested the inclusion of any such shares in a registration
statement were entitled to included in such registration statement all
Registrable Securities requested to be included therein. No registration
pursuant to this Section 4.4 shall count as a Demand Registration pursuant to
Section 4.2 hereof.

      4.5  REGISTRATION STATEMENT. In connection with any registration of
Registrable Shares under the Securities Act pursuant to this Agreement, the
Company will furnish each Selling Holder and each underwriter, if any, with a
copy of the registration statement and all amendments thereto and will supply
each such Selling Holder with copies of any prospectus included therein
(including a preliminary prospectus and all amendments and supplements thereto),
in each case including all exhibits, and such other documents as may be
reasonably requested, in such quantities as may be reasonably necessary for the
purposes of the proposed sale or distribution covered by such registration (the
Company hereby consenting to the use in accordance with all applicable law of
each such registration statement (or amendment or post-effective amendment
thereto) and each such prospectus (or preliminary prospectus or supplement
thereto) by each such Selling Holder and the underwriters, if any, in connection
with the offering and sale of the Registrable Shares covered by such
registration statement or prospectus). The Company shall not, however, be
required to maintain the registration statement relating to a Demand
Registration and to supply copies of a prospectus for a period beyond the Demand
Period, and, at the end of such period, the Company may register any Registrable
Shares covered by such registration statement and not then sold or distributed.
In connection with any such registration of Registrable Shares, the Company
will, at the request of the managing underwriter with respect thereto (or, if
not an underwritten offering, at the request of Selling Holders holding a
majority of the Registrable Shares to be included in the registration) use its
reasonable best efforts to register or qualify such Registrable Shares for sale
under the securities laws of such states as is reasonably requested to permit
the distribution of such Registrable Shares and to use its reasonable efforts to
keep each such registration or qualification effective during the period such
registration statement is required to be kept effective and to do such other
acts or things reasonably necessary to enable the disposition in such
jurisdictions of the securities covered by the applicable registration statement
in accordance with applicable Blue Sky securities laws of such jurisdictions;
PROVIDED, HOWEVER, that the Company shall not be required in connection
therewith or as a condition thereof to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction or become
subject to taxation in any jurisdiction. In connection with any offering of
Registrable Shares registered pursuant to this Agreement, the Company shall (i)
furnish each Selling Holder, at the Company's expense and at least three (3)
business days prior to the sale of any Registrable Shares to the underwriters,
with unlegended certificates in a form eligible for deposit with The Depository
Trust Company representing ownership of the Registrable Shares which are sold
pursuant to the registration statement, in such denominations and registered in
such names as the managing underwriter, if any, or such Selling Holder shall
reasonably request, and (ii) instruct the transfer agent and registrar of the
Common Stock to release any stop transfer orders with respect to the Registrable
Shares so sold.


                                      35



      4.6  REGISTRATION PROCEDURES. In connection with the Company's obligations
to effect a registration pursuant to Sections 4.2, 4.3 and 4.4 (but subject to
the last sentence of Section 4.3.2(d) and PROVIDED that any time periods set
forth in this Section 4.6 regarding effective periods and the like shall apply
only in the event of a Demand Registration), the Company will as expeditiously
as is reasonably practicable:

                  (a) prepare and file with the Commission as soon as
      practicable (in the case of a Demand Registration) a registration
      statement with respect to such Registrable Shares, on a form available for
      the sale of the Registrable Shares by the Holders thereof in accordance
      with the intended method or methods of distribution thereof and use its
      commercially reasonable efforts to cause each such registration statement
      to become and remain effective; PROVIDED, HOWEVER, that before filing a
      registration statement or prospectus or any amendments or supplements
      thereto (including documents that would be incorporated or deemed to be
      incorporated therein by reference) and, whether or not filed pursuant to
      Section 4.2, 4.3 or 4.4, the Company will furnish to the Holders of the
      Registrable Shares covered by such registration statement and the
      underwriters, if any, and any attorney, accountant or other agent retained
      by the Holders of Registrable Shares covered by such registration
      statement, copies of all such documents proposed to be filed, which
      documents will be subject to the review and comment of such Holders, such
      counsel and underwriters, if any. The Company will not file any
      registration statement or any amendment thereto or any prospectus or any
      supplement thereto in connection with a Demand Registration pursuant to
      Section 4.2 (including such documents incorporated by reference and
      proposed to be filed after the initial filing of the registration
      statement) to which the Holders of a majority of the Registrable Shares
      covered by such registration statement or the underwriters, if any, shall
      reasonably and timely object;

                  (b) prepare and file with the Commission such amendments and
      post-effective amendments to such registration statement and such
      supplements to the prospectus used in connection therewith as may be
      necessary to keep such registration statement effective (to the extent
      otherwise required by this Agreement) and to comply with the provisions of
      the Securities Act with respect to the disposition of all securities
      covered by such registration statement until such time as all of such
      securities have been disposed of in accordance with the intended methods
      of disposition by the seller or sellers thereof set forth in such
      registration statement or the expiration of the Demand Period (in the case
      of a Demand Registration), whichever occurs earlier; PROVIDED, HOWEVER,
      that the only remedy for any failure to keep the registration statement so
      effective shall be as set forth in Section 4.2.2 and PROVIDED, FURTHER,
      that the Company will have no obligation to a Selling Holder participating
      on a "piggyback" basis in a registration statement that has become
      effective to keep such registration statement effective for a period
      beyond 120 days from the effective date of such registration statement;

                  (c) cooperate and assist in any filings required to be
      made with the National Association of Securities Dealers, Inc. (the
      "NASD");


                                      36



                  (d) notify each Selling Holder and the managing underwriter,
      if any, promptly (and in any event within three (3) business days): (A)
      when the prospectus or any prospectus supplement or post-effective
      amendment has been filed, and with respect to the registration statement
      or any post-effective amendment, when the same has become effective; (B)
      of any request by the Commission or any other federal or state
      governmental authority for any amendments or supplements to the
      registration statement or the prospectus or for additional information;
      (C) of the issuance by the Commission of any stop order suspending the
      effectiveness of the registration statement or the initiation of any
      proceedings for that purpose; (D) if, at any time prior to the closing
      contemplated by an underwriting agreement entered into in connection with
      such registration statement, that the representations and warranties of
      the Company contained in such agreement cease to be true and correct; (E)
      of the receipt by the Company of any notification with respect to the
      suspension of the qualification of the Registrable Shares for sale in any
      jurisdiction or the initiation or threatening of any proceeding for such
      purpose; (F) of the happening of any event which makes any statement made
      in the registration statement, the prospectus or any document incorporated
      or deemed to be incorporated therein by reference untrue or which requires
      the making of any changes in the registration statement, the prospectus or
      any document incorporated therein by reference in order to make the
      statements therein not misleading; and (G) of the Company's reasonable
      determination that a post-effective amendment to a registration statement
      would be required;

                  (e) make commercially reasonable efforts to prevent the
      issuance of any order suspending the effectiveness of the registration
      statement or of any order preventing or suspending the use of a prospectus
      or suspending the qualification of any of the Registrable Shares included
      therein for sale in any jurisdiction (subject to the proviso at the end of
      the penultimate sentence of Section 4.5), and, in the event of the
      issuance of any stop order suspending the effectiveness of the
      registration statement, or of any order suspending or preventing the use
      of any related prospectus or suspending the qualification of any Common
      Shares included in such registration statement for sale in any
      jurisdiction (subject to the proviso at the end of the penultimate
      sentence of Section 4.5), the Company will use its reasonable best efforts
      to promptly obtain the withdrawal of any such order;

                  (f) furnish to each Selling Holder and the managing
      underwriters, if any, without any additional charge, one signed copy of
      the registration statement and any post-effective amendment thereto,
      including financial statements and schedules, all documents incorporated
      therein by reference and all exhibits (including those incorporated by
      reference);

                  (g) as promptly as reasonably practicable, if required, based
      on the advice of the Company's counsel, or upon the occurrence of any
      event contemplated by


                                      37



      Section 4.6(d) hereof, prepare and file a supplement or post-effective
      amendment to the registration statement, the related prospectus or any
      document incorporated therein by reference or file any other required
      document so that, as thereafter delivered to the purchasers of the
      Registrable Shares, the prospectus will not contain an untrue statement
      of a material fact or omit to state any material fact necessary to make
      the statements therein not misleading;

                  (h) cause all Registrable Shares covered by the registration
      statement to be listed on each securities exchange on which identical
      securities issued by the Company are then listed if requested by the
      Selling Holders holding a majority in number of the Registrable Shares
      covered by the Registration Statement or the managing underwriters, if
      any;

                  (i) provide and cause to be maintained a transfer agent and
      registrar for all Registrable Shares covered by such registration
      statement from and after a date not later than the effective date of such
      registration statement;

                  (j) use its reasonable best efforts to provide a CUSIP number
      for the Registrable Shares, not later than the effective date of the
      registration statement;

                  (k) use its reasonable best efforts to (A) obtain opinions of
      counsel to the Company (which counsel and opinions (in form, scope and
      substance) shall be reasonably satisfactory to the managing underwriters,
      if any, and not objected to by the Holders of a majority of the
      Registrable Shares being sold), and updates thereof addressed to the
      Selling Holders, covering the matters customarily covered in opinions
      requested in underwritten offerings and such other matters as may be
      reasonably requested by the underwriters, if any; and (B) obtain "cold
      comfort" letters and updates thereof (which letters and updates (in form,
      scope and substance) shall be reasonably satisfactory to the managing
      underwriters, if any, and counsel to the Holders of a majority of the
      Registrable Shares being sold) from the Company's independent certified
      public accountants addressed to such Selling Holders (and, if necessary,
      any other independent certified public accountants of any subsidiary of
      the Company or of any business acquired by the Company for which financial
      statements and financial data are, or are required to be, included in the
      registration statement), such letters to be in customary form and covering
      matters of the type customarily covered in "cold comfort" letters by
      accountants in connection with underwritten offerings and such other
      matters as the underwriters, if any, or the Holders of a majority of the
      Registrable Shares being sold, reasonably request. The above shall be done
      at each closing under such underwriting or similar agreement or as and to
      the extent required thereunder or, if not an underwritten offering, as
      otherwise reasonably requested by the Holders of a majority of the
      Registrable Shares being sold;

                  (l) make available for inspection by a representative of the
      Selling Holders and any attorneys or accountants retained by such Holders
      (and, to the extent


                                      38



      reasonably requested, furnish copies), in connection with the
      preparation of a registration statement pursuant to this Agreement, all
      financial and other records and pertinent corporate documents and
      properties of the Company, and cause the Company's officers, directors
      and employees to supply all information reasonably requested by any
      such representative(s), attorney(s) or accountant(s) in connection with
      such registration; PROVIDED, HOWEVER, that any records, information or
      documents that are designated by the Company in writing as confidential
      shall be kept confidential by such persons unless disclosure of such
      records, information or documents is required by court or administrative
      order or under applicable law; and PROVIDED, FURTHER, that appropriate
      arrangements are made, to the extent required by applicable antitrust
      law, to limit access to such information of the Company to
      representatives of the Holders who are not officers or employees of the
      Selling Holders; and PROVIDED, FURTHER, that, without limiting the
      foregoing, no such information shall be used by any such Person in
      connection with any market transactions in securities of the Company or
      its subsidiaries in violation of law;

                  (m) enter into such agreements reasonably requested
      (including, as applicable, an underwriting agreement in form, scope and
      substance as is customary in underwritten secondary offerings and is
      reasonably satisfactory to the Company) and take all such other customary
      and reasonable actions in connection therewith (including those requested
      by the managing underwriters) in order to expedite or facilitate the
      disposition of the Registrable Shares, and in such connection, whether or
      not an underwriting agreement is entered into and whether or not the
      registration is an underwritten registration:

                        (i) make such representations and warranties to the
                        Holders of such Registrable Shares included in the
                        registration statement and the underwriters, if any,
                        with respect to the business of the Company and the
                        registration statement, prospectus and documents, if
                        any, incorporated or deemed to be incorporated by
                        reference therein, in each case, in form, substance and
                        scope as are customarily made by issuers to underwriters
                        in underwritten offerings and confirm the same, if and
                        when reasonably requested; and

                        (ii) deliver such documents and certificates as may be
                        reasonably requested by the Holders of a majority of the
                        Registrable Shares being included in the registration
                        statement and managing underwriters, if any, to evidence
                        compliance with clause (a) above and with any provisions
                        contained in the underwriting agreement or other similar
                        agreement entered into by the Company;


                                      39



The above shall be done at each closing under such underwriting or similar
agreement or, if not an underwritten offering, to the extent otherwise
reasonably requested by the Holders of a majority of the Registrable Shares
being sold pursuant to the registration statement;

                  (n) (a) if so required by the managing underwriter in an
      underwritten offering of Registrable Shares covered by a registration
      statement filed pursuant to Section 4.2, 4.3 or 4.4 hereof, not publicly
      or privately sell, make any short sale of, loan, grant any option, effect
      any public sale or distribution of or otherwise dispose of its equity
      securities or securities convertible into or exchangeable or exercisable
      for any of such securities during the ten (10) days prior to and the
      ninety (90) days after any underwritten registration pursuant hereto has
      become effective, except as part of such underwritten registration and
      except pursuant to any exchange offer or registrations on Form S-4 or S-8
      or any successor or similar forms thereto, except that the Company may
      make grants of options under its stock option plans and may issue
      securities issuable upon the exercise or conversion of outstanding
      convertible securities, stock options and other options, warrants and
      rights of the Company and (b) if requested, use reasonable efforts to
      cause each holder of ten percent (10%) or more of the securities of the
      same class as the securities included in any underwritten registration
      pursuant to Section 4.2 hereof, or any securities convertible into or
      exchangeable or exercisable for such securities, in each case purchased
      from the Company at any time after the date of this Agreement (other than
      in a registered public offering) to agree not to effect any public or
      private sale or distribution or otherwise dispose (including sales
      pursuant to Rule 144 promulgated under the Act) of any such securities
      during the ten (10) days prior to and the ninety (90) days after any
      underwritten registration pursuant hereto has become effective (except as
      part of such underwritten registration, if otherwise permitted), unless
      the underwriters managing the registered public offering otherwise agree;

                  (o) if requested, furnish each Selling Holder with a copy (or
      a reasonable number of copies, as requested) of the registration statement
      (together with the Exhibits thereto) and each amendment thereto prior to
      the filing thereof with the Commission;

                  (p) if requested by the managing underwriters, if any, or a
      Holder of Registrable Shares being sold, promptly incorporate in a
      prospectus, supplement or post-effective amendment such information as the
      managing underwriters, if any, and the Holders of the Registrable Shares
      being sold reasonably request to be included therein relating to the sale
      of the Registrable Shares, including, without limitation, information with
      respect to the number of Registrable Shares being sold to underwriters,
      the purchase price being paid therefor by such underwriters and with
      respect to any other terms of the underwritten offering of the Registrable
      Shares to be sold in such offering; and make all required filings of such
      prospectus, supplement or post-effective amendment promptly following
      notification of the matters to be incorporated in such supplement or
      post-effective amendment;


                                      40



                  (q) upon the occurrence of any event that would cause a shelf
      registration statement (A) to contain a material misstatement or omission
      or (B) to be not effective and usable for resale of Registrable Shares
      during the Demand Period, the Company shall promptly file an amendment to
      such shelf registration statement, in the case of clause (A), correcting
      any such misstatement or omission and, in the case of either clause (A) or
      (B), use its commercially reasonable efforts to cause such amendment to be
      declared effective and such shelf registration statement to become usable
      as soon as reasonably practicable thereafter;

                  (r) otherwise use its reasonable best efforts to (x) comply
      with all applicable rules and regulations of the Commission and to take
      all other steps reasonably necessary to effect the registration of the
      Registrable Shares covered by the registration statement contemplated
      hereby, and (y) make available to its security holders an earnings
      statement which satisfies the provisions of Section 11(a) of the
      Securities Act and Rule 158 thereunder (or any similar rule promulgated
      under the Act) no later than forty-five (45) days after the end of any
      twelve-month (12) period (or ninety (90) days after the end of any
      twelve-month (12) period if such period is a fiscal year) (or in each case
      within such extended period of time as may be permitted by the Commission
      for filing the applicable report with the Commission) (i) commencing at
      the end of any fiscal quarter in which Registrable Shares are sold to
      underwriters in a firm commitment or best efforts underwritten offering
      and (ii) if not sold to underwriters in such an offering, commencing on
      the first day of the first fiscal quarter of the Company after the
      effective date of a Registration Statement, which statements shall cover
      said twelve-month (12) periods; and

                  (s) in connection with any underwritten offering, cooperate
      with all marketing efforts reasonably requested by the managing
      underwriter or managing underwriters in connection with the sale of the
      Registrable Shares, including, without limitation, participation in a
      reasonable number of road-show presentations and other marketing activity
      by Management Stockholders and other employees of the Company requested by
      such underwriter or underwriters PROVIDED, HOWEVER, that the scheduling of
      the road-show presentations shall be set in consultation with the Company
      and will not require the Company's involvement at any time or place to
      which the Company has a reasonable objection.

      4.7  HOLDBACK AGREEMENTS. Each of the Company and each Holder of
Registrable Shares (whether or not such Registrable Shares are covered by a
Registration Statement filed pursuant to Section 4.2 or 4.3 hereof) agrees,
if requested (pursuant to a timely written notice) by the managing
underwriter or underwriters in an underwritten offering, not to effect any
public sale or distribution of any of the Company's securities, including a
sale pursuant to Rule 144 (except as part of such underwritten offering),
during the period beginning ten (10) days prior to, and ending one hundred
and eighty (180) days after, the closing date of the underwritten offering
made pursuant to such Registration Statement. The foregoing provisions shall
not apply to the


                                      41



Company or any Holder of Registrable Shares if such Person is prevented by
applicable statute or regulation from entering into any such agreement;
PROVIDED, HOWEVER, that any such Person shall undertake not to effect any
public sale or distribution of the class of securities covered by such
Registration Statement (except as part of such underwritten offering) during
such period unless it has provided sixty (60) days' prior written notice of
such sale or distribution to the managing underwriter.

      4.8  REGISTRATION EXPENSES. Except as otherwise required by state
securities laws or the rules and regulations promulgated thereunder, all
expenses, disbursements and fees incurred by the Company and the Selling
Holders in connection with carrying out their obligations under this Article
4, including but not limited to, (i) the reasonable and documented fees and
expenses of one law firm (plus local counsel) for the Selling Holders (which
counsel shall be selected by Holders of a majority of the Registrable Shares
held by the Holders who initially requested the applicable registration),
(ii) all registration, filing fees and expenses (including fees with respect
to filings made with the NASD, including, if applicable, the fees and
expenses of any "qualified independent underwriter" and its counsel, as may
be required by the rules and regulations of the NASD), (iii) fees and
expenses of compliance with securities or Blue Sky laws (including fees and
disbursements of counsel for the underwriters or Selling Holders in
connection with Blue Sky qualifications of the Registrable Shares and
determinations of their eligibility for investment under the laws of such
jurisdiction as the managing underwriters or Holders of a majority of the
Registrable Shares being sold may designate, subject to the proviso to the
last sentence of the penultimate sentence of Section 4.5), (iv) printing
expenses (including printing certificates for the Registrable Shares to be
sold and the registration statements and prospectuses), messenger and
delivery expenses, duplication, word processing, and telephone expenses, (v)
fees and disbursements of counsel for the Company, and (vi) fees and
disbursements of all independent certified public accountants of the Company
incurred in connection with such registration (including the expenses of any
special audit and "cold comfort" letters incident to such registration) and
fees and disbursements of underwriters (excluding discounts, commissions or
fees of underwriters, selling brokers, dealer managers or similar securities
industry professionals relating to the distribution of the Registrable
Shares) and other Persons retained by the Company (all such expenses being
herein called "REGISTRATION EXPENSES"), will be borne by the Company
regardless of whether a registration statement becomes effective; PROVIDED,
HOWEVER, that the Company will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expenses of any annual
audit or quarterly review, the fees and expenses of any Person, including
special experts, retained by the Company, the expense of any liability
insurance and the expenses and fees for listing the securities to be
registered on each securities exchange on which similar securities issued by
the Company are then listed or on the Nasdaq Stock Market; and PROVIDED,
FURTHER, that each Selling Holder shall pay (x) all costs and expenses of
counsel (other than the counsel costs referred to in (i) above), accounting
or financing professionals retained by such Selling Holder, (y) all
underwriting discounts, commissions, fees and expenses and all transfer taxes
with respect to the Shares sold by such Selling Holder, and (z) all other
expenses incurred


                                      42



by such Selling Holder and incidental to the sale and delivery of the Shares
to be sold by such Holder.

      4.9   CONDITIONS TO HOLDER'S RIGHTS. It shall be a condition of each
Selling Holder's rights hereunder that:

            4.9.1 COOPERATION. Such Selling Holder shall cooperate with the
Company by supplying information and executing documents relating to such
Selling Holder or the securities of the Company owned by such Selling Holder
in connection with such registration which are customary for offerings of this
type (including agreeing to sell such Selling Holder's Registrable Shares on
the basis provided in any underwriting arrangements containing customary terms
reasonably satisfactory to such Selling Holder);

            4.9.2 UNDERTAKINGS. Such Selling Holder shall enter into any
undertakings and take such other action relating to the conduct of the proposed
offering which the Company or the underwriters may reasonably request as being
necessary to insure compliance with federal and state securities laws and the
rules or other requirements of the NASD or which the Company or the underwriters
may reasonably request to otherwise effectuate the offering; and

            4.9.3 INDEMNIFICATION. Such Selling Holder shall execute and deliver
an agreement to indemnify to the fullest extent permitted by law and hold
harmless the Company, each of its directors, each of its officers who has signed
the registration statement, any underwriter (as defined in the Securities Act),
and each person, if any, who controls the Company or such underwriter within the
meaning of the Securities Act, against such losses, claims, damages or
liabilities (including reimbursement for legal and other expenses) to which the
Company or any such director, officer, underwriter or controlling person may
become subject under the Securities Act or otherwise, in such manner as is
customary for registrations of the type then proposed, but only with respect to
written information about or pertaining to such Selling Holder furnished by such
Selling Holder for inclusion in the Registration Statement.

      4.10  INDEMNIFICATION.

            4.10.1 INDEMNIFICATION BY THE COMPANY. In the case of any offering
registered pursuant to this Agreement, the Company agrees to indemnify to the
fullest extent permitted by law and hold each Selling Holder, each affiliate of
such Selling Holder and each director, officer, agent, representative,
principal, partner and employee of such Selling Holder and its affiliates, each
Person who controls each Selling Holder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act and the directors, officers,
agents, principals, partners or employees of each such controlling person
harmless against any and all losses, claims, damages, liabilities, actions
(including reasonable and documented costs, including, without limitation, costs
of preparation and reasonable attorneys' fees and disbursements) and expenses,
including reasonable expenses of investigation (collectively "LOSSES") to which
they or any of them may become subject under the Securities Act or any other
statute or common law or otherwise, insofar

                                      43



as any such Losses shall arise out of, be caused by or shall be based upon (i)
any untrue statement or alleged untrue statement of a material fact contained
in the registration statement relating to the sale of the Registrable Shares
covered thereby, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus
(as amended or supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereof), if used prior to the
effective date of such registration statement, or contained in the prospectus
(as amended or supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereof, including the
information deemed part of such registration statement pursuant to Rule 430A
promulgated under the Securities Act), if used within the period during which
the Company shall be required to keep the registration statement to which such
prospectus relates current pursuant to the terms of this Agreement, or the
omission or alleged omission to state therein (if so used) a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that the indemnification agreement contained in this Section 4.10.1 shall not
apply to such Losses which shall arise from the sale of Registrable Shares to
any Person if such Losses shall arise out of, shall be caused by or shall be
based upon any such untrue statement or alleged untrue statement, or any such
omission or alleged omission, (i) if such statement or omission shall have
been made in reliance upon and in conformity with information furnished in
writing to the Company by and about such Selling Holder specifically for use
in connection with the preparation of the registration statement or any
preliminary prospectus or prospectus contained in the registration statement
or any such amendment thereof or supplement thereto; (ii) if such untrue
statement or omission was made in any preliminary prospectus to the extent
that (a) the prospectus corrected such untrue statement or such omission and
(b) the Selling Holder was legally required to and failed to send or deliver a
copy of the prospectus with or prior to the delivery of written confirmation
of the sale by such Selling Holder of Registrable Shares to the Person
asserting the claim from which such Losses arise and the Company made the
prospectus available to such Selling Holder in accordance with the terms of
the Agreement; or (iii) if any such Losses arise out of, are caused by or are
based upon an untrue statement or omission in the prospectus, to the extent
that (a) such untrue statement or omission is corrected in an amendment or
supplement to the prospectus and (b) having previously been furnished by or on
behalf of the Company with copies of the prospectus as so amended or
supplemented, such Selling Holder was legally required to and thereafter fails
to deliver such prospectus as so amended or supplemented, prior to or
concurrently with the sale of Registrable Shares to the Person asserting the
claim from which such Losses arise. This indemnity shall be in addition to any
other indemnification arrangements to which the Company may otherwise be a
party.

            1.10.2 INDEMNIFICATION BY HOLDERS OF REGISTRABLE SHARES. Each
Selling Holder agrees to indemnify to the fullest extent permitted by law and
hold the Company and each other Selling Holder, and their respective
affiliates, directors, officers, agents, members, principals, partners and
employees, each Person who controls the Company or such other Selling Holder
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act and the

                                      44



directors, officers, agents or employees of such controlling persons harmless
against any and all Losses arising out of, caused by or based upon any untrue
statement of a material fact contained in any registration statement,
prospectus or form of prospectus, or arising out of, caused by or based upon
any omission of a material fact required to be stated therein or necessary to
make the statements therein (in the case of the preliminary prospectus and the
prospectus, in each case including amendments or supplements), in the light of
the circumstances in which they were made not misleading, to the extent, but
only to the extent, that such untrue statement or omission was contained in
any information regarding such Selling Holder furnished in writing by such
Selling Holder to the Company, expressly for use in such registration
statement or prospectus; PROVIDED, HOWEVER, that the obligation to indemnify
will be several and not joint and in no event shall the liability of any
Selling Holder hereunder be greater in amount than the dollar amount of the
proceeds (net of the payment of underwriting discounts and commissions payable
by such Selling Holder) received by any such Selling Holder upon the sale of
the Registrable Shares giving rise to such indemnification obligation. The
Company and the Selling Holders shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution to the same extent as provided
above with respect to information so furnished in writing by such Persons and
regarding such Person expressly for use in any prospectus or registration
statement.

            4.10.3 CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled
to indemnity under this Agreement (an "INDEMNIFIED PARTY") shall give prompt
written notice to the party from which such indemnity is sought (the
"INDEMNIFYING PARTY") of any claim or of the commencement of any proceeding
with respect to which such Indemnified Party seeks indemnification or
contribution pursuant hereto; PROVIDED, HOWEVER, that the failure so to notify
the Indemnifying Party shall not relieve the indemnifying party from any
obligation or liability except to the extent that the Indemnifying Party has
been prejudiced materially by such failure. The Indemnifying Party shall have
the right exercisable by giving written notice to an Indemnified Party
promptly after the receipt of written notice from such Indemnified Party of
such claim or proceeding to assume, at the Indemnifying Party's expense, the
defense of any such claim or proceeding, with counsel reasonably satisfactory
to such Indemnified Party; PROVIDED, HOWEVER, that under such circumstances an
Indemnified Party shall have the right to employ separate counsel in any such
claim or proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
unless: (1) the Indemnifying Party agrees to pay such fees and expenses; or
(2) the Indemnifying Party fails promptly to assume the defense of such claim
or proceeding or fails to employ counsel reasonably satisfactory to such
Indemnified Party; or (3) the Indemnified Party shall have been advised by
counsel that (i) there may be one or more material defenses available to such
Indemnified Party that are different from or additional to those available to
the Indemnifying Party or its affiliates, or (ii) a conflict of interest
likely exists if such counsel represents such Indemnified Party and such
Indemnifying Party or its affiliate, in which case, if such Indemnified Party
notifies the Indemnifying Party in writing that it elects to employ separate
counsel at the expense of the Indemnifying Party, the Indemnifying Party shall
not have the right to assume the defense thereof, it being understood,
however, that the Indemnifying Party shall not, in

                                      45



connection with any one such claim or proceeding, or separate but
substantially similar or related claims or proceedings arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel which such counsel shall be designated by the Indemnified Party and be
reasonably acceptable to the Indemnifying Party) at any time for such
Indemnified Party, or for fees and expenses that are not reasonable. Whether
or not such defense is assumed by the Indemnifying Party, such Indemnifying
Party will not be subject to any liability for any settlement made without its
consent (which consent shall not be unreasonably withheld). The Indemnifying
Party shall not consent to entry of any judgment or settle or compromise any
pending or threatened claim, action or proceeding, unless it contains as an
unconditional term thereof the giving by the claimant or plaintiff to the
Indemnified Party of a release, in form and substance satisfactory to such
Indemnified Party, from all liability in respect of such claim or litigation
for which such Indemnified Party would be entitled to indemnification
hereunder.

            The Indemnifying Party's liability to any such Indemnified Party
hereunder shall not be extinguished solely because any other Indemnified Party
is not entitled to indemnity hereunder.

            4.10.4 CONTRIBUTION. If the indemnification provided for in this
Section 4.10 is unavailable to an Indemnified Party in respect of any Losses
or is insufficient to hold such Indemnified Party harmless, then, except to
the extent that contribution is not permitted under Section 11(f) of the
Securities Act, each applicable Indemnifying Party shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Losses,
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party, on the one hand, and such Indemnified Party, on the other
hand, in connection with the actions, statements or omissions that resulted in
such Losses as well as any other relevant equitable considerations appropriate
under the circumstances. The relative fault of such Indemnifying Party, on the
one hand, and such Indemnified Party, on the other hand, shall be determined
by reference to, among other things, whether any action in question, including
any untrue statement of a material fact or omission to state a material fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information concerning the matter with respect to which
the claim was asserted and opportunity to correct or prevent such action,
statement or omission. The amount paid or payable by a party as a result of
any Losses shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with any investigation or
proceeding.

            The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 4.10.4 were determined by PRO RATA
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 4.10.4, no Indemnifying Party
that is a Selling Holder shall be required to contribute any amount in excess of
the amount by which the net proceeds received by such Selling Holder from the
sale of Registrable Shares exceeds the amount of any damages that such Selling
Holder has otherwise

                                      46



been required to pay by reason of such untrue or alleged untrue statement or
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.

            4.10.5 UNDERWRITING AGREEMENT TO GOVERN. At such time as an
underwriting agreement with respect to a particular underwriting is entered
into, the terms of any such underwriting agreement shall govern with respect to
the matters set forth therein to the extent inconsistent with this Section 4.10;
PROVIDED, HOWEVER, however, that the indemnification provisions of such
underwriting agreement as they relate to Selling Holders are customary for
registrations of the type then proposed and provide for indemnification by such
Selling Holders only with respect to written information regarding such Selling
Holder furnished by such Selling Holders.

      4.11  RULE 144. Following a Public Offering Event, the Company shall
file the reports required be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the Commission
thereunder and will take such further action as any Holder of Registrable
Shares may reasonably request, all to the extent required from time to time to
enable such Holder to sell Registrable Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144.
Upon the request of any Holder of Registrable Shares, the Company will deliver
to such Holder a written statement as to whether it has complied with such
requirements.


                  ARTICLE V.  REPRESENTATIONS AND WARRANTIES

      5.1   REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      The Company represents and warrants to the Stockholders as follows:

            5.1.1 ORGANIZATION. It is a corporation duly organized and
validly listing under the laws of the State of Delaware;

            5.1.2 AUTHORITY. It has full corporate power and authority to
execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby;

            5.1.3 BINDING OBLIGATION. The execution, delivery and performance of
this Agreement by it and the consummation by it of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on its part, and, assuming the due execution by the Stockholder seeking
enforcement against the Company, this Agreement constitutes its binding
obligation, enforceable against it in accordance with its terms, except insofar
as enforceability may be limited by bankruptcy, insolvency, moratorium or other
laws which may affect creditors rights and remedies generally and by principles
of equity (regardless of whether enforceability is considered in a proceeding in
equity or at law); and

                                      47



            5.1.4 NO CONFLICT. The execution, delivery and performance of this
Agreement by it and the consummation by it of the transactions contemplated
hereby will not, with or without the giving of notice or the lapse of time, or
both, (i) violate any provision of law, statute, rule or regulation to which it
is subject, (ii) violate any order, judgment or decree applicable to it, or
(iii) conflict with, or result in a breach or default under, any term or
condition of its certificate or articles of incorporation or its bylaws or any
material agreement or other material instrument to which it is a party or by
which it or its property is bound.

      5.2   REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. Each of the
Stockholders represents and warrants to each other and to the Company as
follows:

            5.2.1 ORGANIZATION. If it is an entity, it is a corporation,
limited partnership or other entity duly organized and validly existing under
the laws of its respective state of organization;

            5.2.2 AUTHORITY. It has full power and authority to execute,
deliver and perform this Agreement and to consummate the transactions
contemplated hereby;

            5.2.3 BINDING OBLIGATION. The execution, delivery and performance of
this Agreement by it and the consummation by it of the transactions contemplated
hereby have been duly and validly authorized by all necessary action on its
part, and, assuming the due execution by the Company, this Agreement constitutes
its binding obligation, enforceable against it in accordance with its terms,
except insofar as enforceability may be limited by bankruptcy, insolvency,
moratorium or other laws which may affect creditors' rights and remedies
generally and by principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law); and

            5.2.4 NO CONFLICT. The execution, delivery and performance of this
Agreement by it and the consummation by it of the transactions contemplated
hereby will not, with or without the giving of notice or the lapse of time, or
both, (i) violate any provision of law, statute, rule or regulation to which it
is subject, (ii) violate any order, judgment or decree applicable to it, or
(iii) conflict with, or result in a breach or default under, any term or
condition of its certificate of incorporation, bylaws, trust or equivalent
governing document or any material agreement or other material instrument to
which it is a party or by which it or its property is bound.

                      ARTICLE VI. TERMINATION OF AGREEMENT

      6.1   TERMINATION. Subject to the next succeeding sentence, this
Agreement shall terminate ten (10) years from the date of this Agreement (the
"TERMINATION DATE"). If any rights and obligations provided in Article I,
Sections 2.3, 2.4, 2.5, 2.7, 2.8, 2.9 and Section 2.10, and Article III of
this Agreement have not terminated earlier in accordance with the preceding
sentence, such rights and obligations shall terminate on the date of a Public
Offering Event.

                                      48



                              ARTICLE VII. GENERAL

      7.1   FINANCIAL REPORTS AND INFORMATION.

                  (a) Within one hundred twenty (120) days after the end of each
      fiscal year of the Company, for so long as this Agreement shall be in
      effect, the Company agrees to furnish each of the Financing Stockholders
      with audited consolidated financial statements of the Company for such
      fiscal year (showing comparison to the prior fiscal year) which shall
      include a statement of income and retained earnings for each such fiscal
      year, a balance sheet as at the last day thereof, and a statement of cash
      flows prepared in accordance with generally accepted accounting principles
      consistently applied.

                  (b) If for any period any company shall have any subsidiary or
      subsidiaries whose accounts are consolidated with those of the Company,
      then in respect of such period the financial statements delivered pursuant
      to the foregoing Section 7.1(a) shall be the consolidated financial
      statements of the Company and all such consolidated subsidiaries.

                  (c) Promptly upon becoming available, the Financing
      Stockholders shall be given copies of all financial statements, reports,
      press releases, notices, proxy statements and other documents sent by the
      Company to its lenders (including, without limitation, the information to
      be provided pursuant to Section 6.1 of the Credit Agreement, dated October
      2, 2000, among the Company, the lenders listed on the signature pages
      thereto, Goldman Sachs Credit Partners, L.P., and Wells Fargo Bank, N.A.,
      as in effect on the date hereof) or released to the public and copies of
      all regular and periodic reports, if any, filed by the Company with the
      Commission or any securities exchange.

      7.2   RECAPITALIZATION, EXCHANGES, ETC., AFFECTING THE SHARES. The
provisions of this Agreement shall apply to the full extent set forth herein
with respect to (a) the Shares and any option, right or warrant to acquire
Shares, and (b) any and all shares of capital stock of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) which may be issued in respect of, in exchange for, or in
substitution for any Shares, by combination, recapitalization, reclassification,
merger, consolidation or otherwise. In the event of any change in the
capitalization of the Company, as a result of any stock split, stock dividend or
stock combination, the provisions of this Agreement shall be appropriately
adjusted.

      7.3   INJUNCTIVE RELIEF. It is hereby agreed and acknowledged that it will
be impossible to measure in money the damages that would be suffered if the
parties fail to comply with any of the obligations herein imposed on them and
that, in the event of any such failure, an aggrieved person will be irreparably
damaged and will not have an adequate remedy of law. Any such person shall,
therefore, be entitled to injunctive relief, including specific performance, to
enforce

                                      49



such obligations, without the posting of any bond and if any action should be
brought in equity to enforce any of the provisions of this Agreement, none of
the parties hereto shall raise the defense that there is an adequate remedy
at law.

      7.4   NOTICES. Except as otherwise expressly provided herein, any and all
notices, demands or other communications required or permitted hereunder shall
be in writing and shall be made by hand delivery (deemed given upon receipt), or
by certified mail return receipt requested (deemed given upon execution of such
return receipt), addressed to a Stockholder and the Company at the address set
forth below such person's or entity's signature. Any party may change its
address for notice by notice given to each Stockholder and the Company in
accordance with the foregoing. No objection may be made to the method of
delivery of any notice actually and timely received.

      7.5   LEGEND. In addition to any other legend which may be required by
applicable law, each share certificate representing Shares which are subject to
this Agreement shall have endorsed, to the extent appropriate, upon its face the
following words:

            THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
            REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
            OR THE SECURITIES LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT
            BE OFFERED, SOLD, TRANSFERRED, PLEDGED, ASSIGNED, ENCUMBERED,
            HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (I) A
            REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES THAT IS
            EFFECTIVE UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAW, OR (II)
            ANY EXEMPTION FROM REGISTRATION UNDER SUCH ACT, OR APPLICABLE STATE
            SECURITIES LAW, RELATING TO THE DISPOSITION OF SECURITIES, INCLUDING
            RULE 144, PROVIDED AN OPINION OF COUNSEL IS FURNISHED TO THE
            COMPANY, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE
            COMPANY, TO THE EFFECT THAT AN EXEMPTION FROM THE REGISTRATION
            REQUIREMENTS OF THE ACT AND/OR APPLICABLE STATE SECURITIES LAW IS
            AVAILABLE.

            IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT
            BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
            DISPOSED OF UNLESS SUCH TRANSFER COMPLIES WITH THE PROVISIONS OF A
            STOCKHOLDERS AGREEMENT DATED AS OF OCTOBER 2, 2000, AS SUCH MAY BE
            AMENDED FROM TIME TO TIME (THE "STOCKHOLDERS AGREEMENT"), A COPY OF
            WHICH IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF

                                      50



            THE COMPANY. NO TRANSFER OF THE SECURITIES WILL BE MADE ON THE BOOKS
            OF THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH THE
            TERMS OF SUCH STOCKHOLDERS AGREEMENT. THE SECURITIES REPRESENTED BY
            THIS CERTIFICATE ARE ALSO SUBJECT TO OTHER RIGHTS AND OBLIGATIONS AS
            SET FORTH IN THE STOCKHOLDERS AGREEMENT.

To the extent the circumstances or provisions requiring any of the above legends
have ceased to be effective, the Company will upon request reissue certificates
without the applicable legend or legends.

      7.6   TRANSFEREES BOUND. All Shares owned by a Transferee shall, subject
to the terms of Section 2.3 of this Agreement, for all purposes be subject to
the terms of this Agreement, whether or not such Transferee has executed a
consent to be bound by this Agreement. The foregoing shall not apply in the case
of any Shares acquired by a Transferee pursuant to a sale of Shares pursuant to
an effective registration statement under the Securities Act or, except for
sales to an affiliate of the Company or sales made prior to a Public Offering
Event, pursuant to Rule 144.

      7.7   AMENDMENT; WAIVER; REPRESENTATIVES. This Agreement may be amended,
modified, supplemented or terminated only by a written instrument signed by each
of (i) the Company, (ii) Stockholders holding a majority of the Registrable
Purchaser Shares, (iii) Management Stockholders holding a majority of the
Registrable Common Management Shares, and (iv) Financing Stockholders holding a
majority of the Registrable Financing Shares. No provision of this Agreement may
be waived orally, but only by a written instrument signed by the party against
whom enforcement of such waiver is sought. Stockholders shall be bound from and
after the date of the receipt of a written notice from the Company setting forth
such amendment or waiver by any consent authorized by this Section 7.7, whether
or not the Shares shall have been marked to indicate such consent; no
alteration, modification or impairment shall be implied by reason of any
previous waiver, extension of time, delay or omission in exercise, or other
indulgence. For purposes of this Agreement, the parties hereto shall designate
and appoint representatives (each, a "REPRESENTATIVE") as provided in this
Section 7.7. The Purchaser Parties hereby designate and appoint Purchaser (or
any successor designated in writing by the Purchaser Parties holding Shares that
constitute, on a fully-diluted basis, a majority in value of the Shares held by
all of the Purchaser Parties) as Representative on behalf of the Purchaser
Parties; the Management Parties hereby designate and appoint Brian K. Devine (or
any successor designated in writing by Management Parties holding Common Shares
that constitute, on a fully-diluted basis, a majority in value of the Common
Shares held by all of the Management Parties) as Representative on behalf of the
Management Parties; and the Financing Parties hereby designate and appoint
Jean-Marc Chapus (or any successor designated in writing by

                                      51



Financing Parties holding Shares that constitute, on a fully-diluted basis, a
majority in value of the Shares held by all of the Financing Parties) as
Representative on behalf of the Financing Parties. Each Representative shall
have the authority to receive any notices, settle any claims, agree to any
amendments, and grant any consents or waivers on behalf of the parties that
such Representative represents. The parties hereto shall be entitled to deal
exclusively with the respective Representatives with respect to matters
arising out of this Agreement, and the parties hereto shall be entitled to
deliver any notices to the respective Representatives and rely on any action
of the respective Representatives with respect to actions taken under this
Agreement on behalf of the parties hereto.

      7.8   ADDITIONAL DOCUMENTS; FURTHER CHANGES. Each party hereto agrees to
execute any and all further documents and writings within its powers and to
perform such other actions which may be or become necessary or expedient to
effectuate and carry out this Agreement. Each party hereto acknowledges and
agrees to negotiate in good faith to amend this Agreement to the extent
necessary to provide for customary and reasonable changes required by any
third-party co-investor or other person acquiring an equity interest in the
Company pursuant to the financing of the transactions contemplated by the Merger
Agreement.

      7.9   NO THIRD-PARTY BENEFITS. Other than Section 4.10 hereof, none of the
provisions of this Agreement shall be for the benefit of, or enforceable by, any
third-party beneficiary.

      7.10  SUCCESSORS AND ASSIGNS. Subject to the terms hereof, this Agreement
shall be binding upon and shall inure to the benefit of the Stockholders, and
their respective successors and permitted assigns; PROVIDED, HOWEVER, (i)
neither this Agreement nor any rights or obligations hereunder may be
transferred by the Company and (ii) no rights or obligations of any Stockholder
under this Agreement may be assigned except that (x) any Stockholder may
transfer its rights and obligations hereunder, in whole or in part in connection
with a Transfer of Shares made in compliance with all of the provisions of this
Agreement and (y) any Purchaser Party may transfer such Purchaser Party's rights
hereunder, including, without limitation, the right to nominate Purchaser
Nominees pursuant to Section 1.2, in whole or in part, to any affiliate in
connection with a Transfer of Shares made in compliance with all of the
provisions of this Agreement.

      7.11  SEVERABILITY. In case any one or more of the provisions contained
in this Agreement 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 provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein; PROVIDED, HOWEVER, that the parties hereto shall
use their reasonable best efforts to find and employ an

                                      52



alternative means to achieve the same or substantially the same result as that
contemplated by such invalid, illegal or unenforceable term, provision,
covenant or restriction.

      7.12  INTEGRATION. This Agreement contains the entire understanding of
the parties with respect to the subject matter hereof. There are no
restrictions, agreements, promises, representations, warranties, covenants or
undertakings with respect to the subject matter hereof other than those
expressly set forth or referred to herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to its subject
matter.

      7.13  GOVERNING LAW. THE RIGHTS AND LIABILITIES OF THE PARTIES SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF DELAWARE, REGARDLESS OF THE CHOICE
OF LAWS PROVISIONS OF SUCH STATE OR ANY OTHER JURISDICTION.

      7.14  ATTORNEYS' FEES. Should any litigation or arbitration be commenced
(including any proceedings in a bankruptcy court) between the parties hereto or
their representatives concerning any provision of this Agreement or the rights
and duties of any person or entity hereunder, the party or parties prevailing in
such proceeding shall be entitled, in addition to such other relief as may be
granted, to the reasonable attorneys' fees and court costs incurred by reason of
such litigation or arbitration.

      7.15  HEADINGS. The headings in this Agreement are inserted only as a
matter of convenience, and in no way define, limit, or extend or interpret the
scope of this Agreement or of any particular Section.

      7.16  INFORMATION FOR NOTICES. No Stockholder (other than a Stockholder
as of the date of this Agreement with respect to the Shares held as of such
date) shall hold any of its Shares in nominee name unless it otherwise provides
the Company and the other Stockholders with its name and address and other
information reasonably requested by the Company in order to establish such
Stockholder's particular status under this Agreement (e.g., Purchaser Holder,
Management Party, etc.).

      7.17  COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

      7.18  CONSENT TO JURISDICTION. Each Stockholder agrees that any
proceeding arising out of or relating to this Agreement or the breach or
threatened breach of this Agreement may be commenced and prosecuted in a court
in the State of Delaware. Each Stockholder hereby irrevocably and
unconditionally consents and submits to the non-exclusive personal
jurisdiction of any court in the State of Delaware in respect of

                                      53



any such proceeding. Each Stockholder consents to service of process upon it
with respect to any such proceeding by registered mail, return receipt
requested, and by any other means permitted by applicable laws and rules. Each
Stockholder waives any objection that it may now or hereafter have to the
laying of venue of any such proceeding in any court in the State of Delaware
and any claim that it may now or hereafter have that any such proceeding in
any court in the State of Delaware has been brought in an inconvenient forum.

      7.19  NO INCONSISTENT AGREEMENTS. The Company will not hereafter enter
into any agreements with respect to its securities which are inconsistent with
or violate in any material respects the rights granted to the Holders of
Registrable Shares in this Agreement.

      7.20  APPROVAL OF MANAGEMENT SERVICES AGREEMENT BY STOCKHOLDERS. Each of
the Stockholders, by such Stockholder's execution of this Agreement, hereby (i)
approves the payment by the Company to Leonard Green & Partners, L.P. ("LGP")
and TPG GenPar III, L.P. ("TPG") of certain fees in connection with the
consummation of the transactions contemplated by the Merger Agreement and
certain fees in connection with the provision of ongoing services to the
Company, and (ii) approves and adopts the Management Services Agreement to be
entered into between the Company and LGP and TPG, dated as of the date hereof
(the "MANAGEMENT SERVICES AGREEMENT"). The payment of any fees, expenses, or
other related items under this Section 7.20 or under the Management Services
Agreement shall be excluded from and shall not affect the determination or the
amount of any bonus payments made under any of the Company's bonus plans,
including those to be adopted pursuant to Section 1.11 hereof, all such
determinations and amounts of bonus payments shall be calculated and made as if
any such fees were neither paid nor payable by the Company.

      7.21  CERTAIN LIMITATIONS. Notwithstanding anything to the contrary
contained in this Agreement, prior to the issuance or sale of any shares of the
Company's capital stock pursuant to an effective registration statement under
the Securities Act, the Company shall not be required to register any transfer
of Shares on the Company's books if in the reasonable, good faith judgment of
the Company, registering such transfer would cause the Company to become subject
to registration pursuant to the Exchange Act.

      7.22  INFORMATION REGARDING BENEFICIAL OWNERSHIP. Each Stockholder agrees
to promptly provide to the Company any information or representations that the
Company may request regarding such holder's beneficial ownership of shares of
any class of the Company's capital stock.


                                      54



      7.23  NO TAX ADVICE. Each Management Stockholder acknowledges that the
United States federal, state, local, and other tax consequences to such
stockholder of acquiring, holding, and selling or otherwise disposing of its
Shares may be affected by an election by such stockholder under Section 83(b) of
the Internal Revenue Code of 1986, as amended (an "83(b) ELECTION") with regard
to such Shares. Each Management Stockholder understands and acknowledges that
(i) it has not relied on the Company or Purchaser (or any of their affiliates,
employees, agents or advisors) with regard to the desirability or manner of
making an 83(b) Election and (ii) the Company has urged such stockholder to
consult its tax advisor with regard to the desirability and manner of making an
83(b) Election. Each Management Stockholder shall promptly provide the Company
with a copy of any 83(b) Elections made by such stockholder with regard to its
Shares.

      7.24  AFTER ACQUIRED SHARES. The provisions of this Agreement shall apply
to any shares of capital stock of the Company acquired after the date hereof by
any party hereto or by any party that agrees to be bound by the terms thereof.

      7.25  NOTICES. Unless otherwise specified herein, all notices and other
communications hereunder shall be in writing and shall be deemed given upon
personal delivery, facsimile transmission (which is confirmed), telex or
delivery by an overnight express courier service (delivery, postage or freight
charges prepaid), or on the fourth day following deposit in the United States
mail (if sent by registered or certified mail, return receipt requested,
delivery, postage or freight charges prepaid, and otherwise to be sent by first
class mail), addressed to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):


                  if to the Company, to:

                  PETCO Animal Supplies, Inc.
                  9125 Rehco Road
                  San Diego, California 92121-2270
                  Attention: James M. Myers, Chief Financial Officer
                  Telephone: (858) 453-7845
                  Facsimile: (858) 657-2085



                  with a copy (which shall not constitute notice) to:

                  Latham & Watkins
                  701 B Street, Suite 2100
                  San Diego, California 92101


                                      55



                  Attention: Thomas Edwards, Esq.
                  Telephone: (619) 236-1234
                  Facsimile: (619) 696-7419

                  If to any of the Purchaser Parties, to:

                  BD Recapitalization Holdings LLC
                  201 Main Street, Suite 2420
                  Fort Worth, Texas 76102

                  with a copy (which shall not constitute notice) to:

                  Leonard Green & Partners, L.P.
                  11111 Santa Monica Blvd., Suite 2000
                  Los Angeles, California 90025
                  Attention: John G. Danhakl
                  Telephone: (310) 954-0444
                  Facsimile: (310) 954-0404

                  and

                  Skadden, Arps, Slate, Meagher & Flom LLP
                  300 South Grand Avenue, Suite 3400
                  Los Angeles, California 90071-3144
                  Attention: Nicholas P. Saggese, Esq.
                  Telephone: (213) 687-5000
                  Facsimile: (213) 687-5600

                  and

                  Cleary, Gottlieb, Steen & Hamilton
                  One Liberty Plaza
                  New York, New York 10006
                  Attention: David Leinwand, Esq.
                  Telephone: (212) 225-2000
                  Facsimile: (212) 225-3999




                                      56



                  if to any of the Management Parties, to the address and/or
                  telephone number set forth below such Stockholder's name on
                  the signature pages hereto

                  with a copy (which shall not constitute notice) to:

                  Munger Tolles & Olson LLP
                  355 South Grand Avenue, Suite 3500
                  Los Angeles, California 90071-1560
                  Attention: Simon M. Lorne, Esq.
                  Telephone: (213) 683-9139
                  Facsimile: (213) 683-5139


                  If to any of the Financing Parties, to:

                  TCW/Crescent Mezzanine LLC
                  200 Park Avenue, 22nd Floor
                  New York, NY 10166
                  Attention: Mark Gold
                             John Rocchio

                  with a copy (which shall not constitute notice) to:

                  Trust Company of the West
                  11100 Santa Monica Boulevard, Suite 2000
                  Los Angeles, California 90025
                  Telecopier no.: (310) 235-5967
                  Attention: Jean-Marc Chapus

                  with another copy to (which shall not constitute
                  notice):

                  Pepper Hamilton LLP
                  3000 Two Logan Square
                  18th And Arch Streets
                  Philadelphia, PA 19103-2799
                  Telecopier no.: (215) 981-4750
                  Attention: Cary S. Levinson, Esquire


      7.26  AMENDED OPTION AGREEMENT. Any Employee Stockholder that executes an
Amended Option Agreement substantially in the form included in Schedule 7.26
shall be a party to this Agreement and all options to purchase Shares and all
Shares issuable upon the exercise of such options shall be subject to the terms
of this Agreement.


                                      57



      IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first set forth above.


                              PETCO ANIMAL SUPPLIES, INC.

                              By:        /s/ JAMES M. MYERS
                                   -----------------------------------
                                   Name: James M. Myers
                                   Title: Senior Vice President and
                                          Chief Financial Officer



                              BD RECAPITALIZATION HOLDINGS LLC


                              GREEN EQUITY INVESTORS III, L.P.,
                              Managing Member

                              By:  GEI Capital III, LLC General Partner


                              By:   /s/ JOHN DANHAKL
                                   -----------------------------------
                                   Name:  John Danhakl
                                   Title: Manager



                              TPG PARTNERS III, L.P.

                              By:  TPG GenPar III, L.P. Its General Partner,
                                   Managing Member

                              By:  TPG Advisors III, Inc.
                                   its General Partner



                              By:   /s/   JAMES J. O'BRIEN
                                   -----------------------------------
                                   Name:  James J. O'Brien
                                   Title: Vice President



                              MANAGEMENT STOCKHOLDERS

                               /s/ BRIAN K. DEVINE
                              ----------------------------------------
                              Brian K. Devine


                               /s/ WILLIAM W. WOODARD
                              ----------------------------------------
                              William W. Woodard


                               /s/ BRUCE C. HALL
                              ----------------------------------------
                              Bruce C. Hall


                               /s/ JAMES M. MYERS
                              ----------------------------------------
                              James M. Myers


                               /s/ JANET D. MITCHELL
                              ----------------------------------------
                              Janet D. Mitchell



                              TCW LEVERAGED INCOME TRUST, L.P.

                              By: TCW Advisers (Bermuda), Ltd.
                              as its General Partner

                              By:  /s/ MARK L. ATTANASIO
                                   -----------------------------------
                              Name: Mark L. Attanasio
                              Title: Group Managing Director

                              By: TCW Investment Management Company
                              as Investment Advisor

                              By:  /s/ JEAN-MARC CHAPUS
                                   -----------------------------------
                              Name: Jean-Marc Chapus
                              Title: Managing Director

                              TCW LEVERAGED INCOME TRUST II, L.P.

                              By: TCW (LINC II), L.P.
                              as its General Partner

                              By: TCW Advisers (Bermuda), Ltd.
                              its General Partner

                              By:  /s/ MARK L. ATTANASIO
                                   -----------------------------------
                              Name: Mark L. Attanasio
                              Title: Group Managing Director

                              By: TCW Investment Management Company
                              as Investment Adviser

                              By:   /s/ JEAN-MARC CHAPUS
                                   -----------------------------------
                              Name: Jean-Marc Chapus
                              Title: Managing Director

                              TCW LEVERAGED INCOME TRUST IV, L.P.

                              By: TCW Asset Management Company
                              as its Investment Adviser

                              By:   /s/ JEAN-MARC CHAPUS
                                   -----------------------------------
                              Name: Jean-Marc Chapus
                              Title: Managing Director



                              By :  /s/ MARK L. ATTANASIO
                                   -----------------------------------
                              Name: Mark L. Attanasio
                              Title: Group Managing Director

                              By: TCW (LINC IV), L.L.C.
                              as General Partner

                              By: TCW Asset Management Company
                              as its Managing Member

                              By:   /s/ JEAN-MARC CHAPUS
                                   -----------------------------------
                              Name: Jean-Marc Chapus
                              Title: Managing Director

                              By:   /s/ MARK L. ATTANASIO
                                   -----------------------------------
                              Name: Mark L. Attanasio
                              Title: Group Managing Director

                              TCW/CRESCENT MEZZANINE PARTNERS II, L.P.

                              By: TCW/Crescent Mezzanine II, L.P.
                              its General Partner or Managing Member

                              By: TCW/Crescent Mezzanine, L.L.C.
                              its General Partner

                              By:  /s/ JEAN-MARC CHAPUS
                                   -----------------------------------
                              Name: Jean-Marc Chapus
                              Title: Managing Director


                              TCW/CRESCENT MEZZANINE TRUST II

                              By: TCW/Crescent Mezzanine II, L.P.
                              its General Partner or Managing Member

                              By: TCW/Crescent Mezzanine, L.L.C.
                              its General Partner

                              By:   /s/ JEAN-MARC CHAPUS
                                   -----------------------------------
                              Name: Jean-Marc Chapus
                              Title: Managing Director





                                   SCHEDULE I


INITIAL MANAGEMENT STOCKHOLDERS

Brian K. Devine
William W. Woodard
Bruce C. Hall
James M. Myers
Janet D. Mitchell





                                   SCHEDULE II


FINANCING STOCKHOLDERS

TCW Leveraged Income Trust, L.P.
TCW Leveraged Income Trust II, L.P.
TCW Leveraged Income Trust IV, L.P.
TCW/Crescent Mezzanine Partners II, L.P.
TCW/Crescent Mezzanine Trust II




SCHEDULE III




STOCKHOLDER                                  COMMON STOCK    SERIES A PREFERRED STOCK    SERIES B PREFERRED STOCK     WARRANTS
- -----------                                  ------------    ------------------------    ------------------------     --------
                                                                                                          
BD Recapitalization                             708,624              102,308                      72,103                    0
Holdings LLC

Brian K. Devine                                  87,976                    0                           0                    0

William W. Woodard                                8,798                    0                           0                    0

Bruce C. Hall                                    17,595                    0                           0                    0

James M. Myers                                   11,184                    0                           0                    0

Janet D. Mitchell                                 8,798                    0                           0                    0

TCW Leveraged Income Trust, L.P.                  2,460                1,084                         764                6,393

TCW Leveraged Income Trust II, L.P.               2,460                1,084                         764                6,393

TCW Leveraged Income Trust IV, L.P.               2,460                1,084                         764                6,393

TCW/Crescent Mezzanine Partners II, L.P.          9,068                3,996                       2,816               23,560

TCW/Crescent Mezzanine Trust II                   2,200                  970                         684                5,711

EX-4.3

                 AMENDMENT NO. 1 TO STOCKHOLDERS AGREEMENT

      This AMENDMENT NO. 1 (this "AMENDMENT") is entered into as of January 22,
2001 by and among PETCO Animal Supplies, Inc., a Delaware corporation (the
"COMPANY"), BD Recapitalization Holdings LLC, a Delaware limited liability
company (the "PURCHASER"), as Representative on behalf of the Purchaser Parties,
Brian K. Devine, as Representative on behalf of the Management Parties and
Jean-Marc Chapus, as Representative on behalf of the Financing Parties.

RECITALS

      WHEREAS, the Company, the Purchaser, the Management Stockholders and the
Financing Stockholders entered into the Stockholders Agreement, dated as of
October 2, 2000 (the "STOCKHOLDERS AGREEMENT"); and

      WHEREAS, the Company and the Stockholders desire to amend the Stockholders
Agreement upon the terms and conditions set forth herein to clarify the
definitions of "Registrable Common Purchaser Shares" and "Registrable Purchaser
Shares."

      NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

      A.    DEFINED TERMS.  Capitalized terms used herein but not
otherwise defined in this Amendment shall have the respective meanings
set forth in the Stockholders Agreement.

      B.    STOCKHOLDERS AGREEMENT.  Section 4.1 of the Stockholders
Agreement shall be amended as follows:

            (i)  The definition of "Registrable Common Purchaser Shares" shall
be deleted and replaced in its entirety with the following definition:

                 "REGISTRABLE COMMON PURCHASER SHARES" means the shares of
Common Stock owned by the Purchaser Parties immediately following the Closing or
subsequently acquired by any Purchaser Party (and any securities issued or
issuable with respect to such Common Stock by way of stock dividends or stock
splits or in connection with a combination of shares, recapitalization, merger,
consolidation, or other reorganization or otherwise).

            (ii) The definition of "Registrable Purchaser Shares" shall be
deleted and replaced in its entirety with the following definition:

                 "REGISTRABLE PURCHASER SHARES" means the Registrable Common
Purchaser Shares and the Registrable Preferred Purchaser Shares.

      C.    CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall
become effective when executed counterparts of this Amendment, duly executed by
each of (i) the




Company, (ii) the Purchaser, as Representative on behalf of the Purchaser
Parties, (iii) Brian K. Devine, as Represenative on behalf of the Management
Parties, and (iv) Jean-Marc Chapus, as Representative on behalf of the
Financing Parties, shall have been delivered to the Company.

      D.    COUNTERPARTS.  This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

      E.    EFFECT OF AMENDMENT. The parties hereto agree that, except as
amended hereby or hereafter, the Stockholders Agreement and any and all other
agreements, documents, certificates and other instruments executed in
connection therewith shall remain in full force and effect in accordance with
their terms. Any reference to the Stockholders Agreement shall be a reference
to the Stockholders Agreement as amended by this Amendment.

      F.    GOVERNING LAW.  This Amendment shall be governed by and construed
in accordance with the laws of the State of Delaware.


                                       2



      IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment
as of the day and year first set forth above.


                           PETCO ANIMAL SUPPLIES, INC.

                           By:        /s/ JAMES M. MYERS
                              --------------------------------------------
                                Name:   James M. Myers
                                Title:  Senior Vice President and
                                        Chief Financial Officer


                           BD RECAPITALIZATION HOLDINGS LLC,
                           as Representative on behalf of the Purchaser Parties

                           By:  GREEN EQUITY INVESTORS III, L.P.,
                                Managing Member

                                By:  GEI Capital III, LLC,
                                     General Partner

                                By:    /s/  JOHN DANHAKL
                                   ---------------------------------------
                                     Name:  John Danhakl
                                     Title: Manager


                           By:  TPG PARTNERS III, L.P.,
                                Managing Member

                                By:  TPG GenPar III, L.P.,
                                     Its General Partner

                                By:  TPG Advisors III, Inc.
                                     Its General Partner


                                By:   /s/  JAMES J. O'BRIEN
                                   ---------------------------------------
                                     Name:  James J. O'Brien
                                     Title: Vice President





                           BRIAN K. DEVINE,
                           as Representative on behalf of the Management Parties

                           By: /s/ BRIAN K. DEVINE
                              --------------------------------------------
                              Name:  Brian K. Devine



                           JEAN-MARC CHAPUS,
                           as Representative on behalf of the Financing Parties

                           By: /s/ JEAN-MARC CHAPUS
                              --------------------------------------------
                              Name:  Jean-Marc Chapus

EX-4.4

                            SECURITYHOLDERS AGREEMENT




                           DATED AS OF OCTOBER 2, 2000


                                      among



                               BD RECAPITALIZATION
                                  HOLDINGS LLC,



                          PETCO ANIMAL SUPPLIES, INC.



                                       and



                             CERTAIN SECURITYHOLDERS
                         OF PETCO ANIMAL SUPPLIES, INC.



                                                 TABLE OF CONTENTS





                                                                                                               Page
                                                                                                            
ARTICLE I.  ......................................................................................................2

RESTRICTIONS ON TRANSFER..........................................................................................2
                   1.1     GENERAL RESTRICTIONS ON TRANSFER.......................................................2
                   1.2     COMPLIANCE WITH SECURITIES LAWS........................................................2
                   1.3     AGREEMENT TO BE BOUND..................................................................3
                   1.4     COOPERATION............................................................................3
                   1.5     IMPROPER TRANSFER......................................................................3
                   1.6     INVOLUNTARY TRANSFER...................................................................4
                   1.7     FIRST OPTION...........................................................................4
                           1.7.1    NO WAIVER.....................................................................5
                           1.7.2    EXEMPT TRANSFERS..............................................................5
                   1.8     CALL OPTION............................................................................6
                   1.9     STOCK SUBSCRIPTION RIGHTS..............................................................8
                           1.9.1    RIGHT TO PURCHASE NEW SECURITIES..............................................8
                           1.9.2    NEW SECURITIES................................................................9
                           1.9.3    REQUIRED NOTICES..............................................................9
                           1.9.4    COMPANY'S RIGHT TO SELL.......................................................9
                           1.9.5    ASSIGNMENT...................................................................10
                   1.10    TAX TREATMENT.........................................................................10

ARTICLE II.  DRAG-ALONG SALES....................................................................................10
                   2.1     RIGHT OF PURCHASER PARTIES TO REQUIRE SALE............................................10
                   2.2     DRAG-ALONG NOTICE.....................................................................11
                   2.3     DELIVERY OF CERTIFICATES..............................................................11
                   2.4     CONSIDERATION.........................................................................11
                   2.5     COOPERATION...........................................................................11

ARTICLE III.  ...................................................................................................11
                   3.1     REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................11
                           3.1.1    ORGANIZATION.................................................................12
                           3.1.2    AUTHORITY....................................................................12
                           3.1.3    BINDING OBLIGATION...........................................................12
                           3.1.4    NO CONFLICT..................................................................12
                   3.2     REPRESENTATIONS AND WARRANTIES OF THE SECURITYHOLDERS.................................12
                           3.2.1    ORGANIZATION.................................................................12
                           3.2.2    AUTHORITY....................................................................12
                           3.2.3    BINDING OBLIGATION...........................................................12


                                                     i



                           3.2.4    NO CONFLICT..................................................................13

ARTICLE IV.  TERMINATION OF AGREEMENT............................................................................13
                   4.1     TERMINATION...........................................................................13

ARTICLE V.  GENERAL..............................................................................................13
                   5.1     RECAPITALIZATION, EXCHANGES, ETC., AFFECTING THE SHARES...............................13
                   5.2     INJUNCTIVE RELIEF.....................................................................13
                   5.3     NOTICES...............................................................................13
                   5.4     LEGEND................................................................................14
                   5.5     TRANSFEREES BOUND.....................................................................15
                   5.6     AMENDMENT; WAIVER; REPRESENTATIVES....................................................15
                   5.7     ADDITIONAL DOCUMENTS; FURTHER CHANGES.................................................16
                   5.8     NO THIRD-PARTY BENEFITS...............................................................16
                   5.9     SUCCESSORS AND ASSIGNS................................................................16
                   5.10    SEVERABILITY..........................................................................16
                   5.11    INTEGRATION...........................................................................16
                   5.12    GOVERNING LAW.........................................................................17
                   5.13    ATTORNEYS' FEES.......................................................................17
                   5.14    HEADINGS..............................................................................17
                   5.15    INFORMATION FOR NOTICES...............................................................17
                   5.16    COUNTERPARTS..........................................................................17
                   5.17    CONSENT TO JURISDICTION...............................................................17
                   5.18    NO INCONSISTENT AGREEMENTS............................................................18
                   5.19    CERTAIN LIMITATIONS...................................................................18
                   5.20    INFORMATION REGARDING BENEFICIAL OWNERSHIP............................................18
                   5.21    NO TAX ADVICE.........................................................................18
                   5.22    AFTER ACQUIRED SHARES.................................................................18
                   5.23    NOTICES...............................................................................18



SCHEDULES AND EXHIBITS


                                                     ii









                            SECURITYHOLDERS AGREEMENT

      THIS SECURITYHOLDERS AGREEMENT (the "AGREEMENT") is entered into as of
October 2, 2000, by and among PETCO Animal Supplies, Inc., a Delaware
corporation (the "COMPANY"), BD Recapitalization Holdings LLC, a Delaware
limited liability company (the "PURCHASER") and the individuals named in
Schedule I hereto (the "INITIAL EMPLOYEE SECURITYHOLDERS") and shall be binding
upon and inure to the benefit of any individual or Person (as defined in Section
1.1) owning Shares (as defined herein) which were received in connection with
the exercise of any option granted under a compensatory benefit plan of the
Company, its parents, its subsidiaries or majority-owned subsidiaries of the
Company's parents (such individuals, together with the Initial Employee
Securityholders, the "EMPLOYEE SECURITYHOLDERS" and each individually, an
"EMPLOYEE SECURITYHOLDER"). Each of the parties to this Agreement (other than
the Company) and any other Person (as defined in Section 1.1) who shall become a
party to or agree to be bound by the terms of this Agreement after the date
hereof is sometimes hereinafter referred to as a "SECURITYHOLDER".

                                    RECITALS

      Prior to the execution of this Agreement, the Company and BD
Recapitalization Corp., a subsidiary of the Purchaser ("MERGERSUB"), entered
into an Agreement and Plan of Merger, dated as of May 17, 2000, as amended (the
"MERGER AGREEMENT"), providing for the merger (the "Merger") of MergerSub with
and into the Company, with the Company as the surviving corporation.

      Following the consummation of the transactions contemplated by the Merger
Agreement, the Purchaser will own shares of Common Stock, par value $0.001 per
share, of the Company (the "COMMON STOCK") and the Initial Employee
Securityholders will own options ("EMPLOYEE OPTIONS") to purchase shares of
Common Stock. Shares of Common Stock (whether issued or acquired hereafter,
including all shares of capital stock of the Company issuable upon the exercise
of warrants, options or other rights to acquire shares of capital stock of the
Company, or upon the conversion or exchange of any security) and Employee
Options are collectively referred to as the "SHARES".

      The Company and each of the Securityholders desire, for their mutual
benefit and protection, to enter into this Agreement to set forth their
respective rights and obligations with respect to their Shares (whether issued
or acquired hereafter, including all shares of Common Stock issuable upon the
exercise of warrants, options or other rights to acquire shares of Common Stock,
or upon the conversion or exchange of any security).

      NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:


                                       1





                                   ARTICLE I.
                            RESTRICTIONS ON TRANSFER

      1.1    GENERAL RESTRICTIONS ON TRANSFER. Each Securityholder agrees that,
except as required in connection with obtaining the Financing (as defined in the
Merger Agreement), or any replacement thereof, and excluding any Transfer (as
defined below) by any Purchaser Party (as defined below) to any other Purchaser
Party or to its equity participants, such Securityholder will not, directly or
indirectly, sell, hypothecate, give, bequeath, transfer, assign, pledge or in
any other way whatsoever encumber or dispose of (whether for or without
consideration, whether voluntarily or involuntarily or by operation of law) (any
such event, a "TRANSFER") any Shares now or hereafter at any time owned by such
Securityholder (or any interest therein) to another individual, corporation,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, other entity or government or other agency or
political subdivision thereof (a "Person") ("TRANSFEREE"), other than in
accordance with all applicable provisions of this Agreement. The Company shall
not transfer upon its books any Shares to any Person to the extent prohibited by
this Agreement and any purported transfer in violation hereof shall be null and
void ab initio and of no effect. Each Employee Securityholder represents and
warrants to the Purchaser and the Company that the Shares owned by such Employee
Securityholder were acquired by such Employee Securityholder for investment only
and not with a view to any public distribution thereof, and there is not any
current plan or intention on the part of such Employee Securityholder to offer
to sell, exchange or otherwise dispose of the Shares owned by such Employee
Securityholder in violation of any of the requirements of the Securities Act of
1933, as amended, or any similar federal statute, and the rules and regulations
of the Securities and Exchange Commission or any other agency at the time
administering the Securities Act (as defined herein) thereunder, all as the same
shall be in effect from time to time (the "SECURITIES ACT"), or any comparable
state or foreign securities laws. Purchaser and its members and affiliates and
their limited partners, general partners, principals, stockholders and
affiliates, and any of their Transferees, are sometimes referred to in this
Agreement, collectively, as the "PURCHASER PARTIES" and, individually, as a
"PURCHASER PARTY." The Employee Securityholders and their respective spouses,
any direct or adopted lineal descendants and ancestors and any trusts solely for
the benefit of any or all of the foregoing, and any of their Transferees, are
sometimes referred to in this Agreement, collectively, as the "EMPLOYEE PARTIES"
and, individually, as an "EMPLOYEE PARTY."

      1.2    COMPLIANCE WITH SECURITIES LAWS. No Securityholder shall Transfer
any Shares, and the Company shall not transfer on its books any Shares, unless
(a) the Transfer is pursuant to an effective registration statement under the
Securities Act and is in compliance with any applicable state securities or
Blue Sky laws or (b) such Securityholder shall have furnished the Company with
an opinion of counsel, to the extent reasonably required by the Company, which
opinion and counsel shall be reasonably satisfactory to the Company, to the
effect that no such registration is required because of the availability of an
exemption from registration under the


                                       2



Securities Act; PROVIDED, HOWEVER, that any Transfer by a Securityholder which
is a state-sponsored employee benefit plan to a successor trust or fiduciary or
pursuant to a statutory reconstitution or which is permitted hereunder pursuant
to the provisions of Section 1.7.2(a) shall be expressly permitted and no
opinions of counsel shall be required in connection therewith and PROVIDED,
FURTHER, that any Transfer by any Purchaser Party to any other Purchaser Party
or to its equity participants shall be expressly permitted and no opinions of
counsel shall be required in connection therewith. As used in this Agreement,
the term "AFFILIATE" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such Person. For purposes of this Agreement, the term "CONTROL," (including,
with correlative meanings, the terms "CONTROLLING," "CONTROLLED BY," and "UNDER
COMMON CONTROL WITH"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.

      1.3    AGREEMENT TO BE BOUND. No Transfer, including, without limitation,
by means of an Involuntary Transfer, of Shares by a Securityholder shall be
effective (and the Company shall not transfer on its books any Shares) unless
(i) the certificates representing such Shares, as the case may be, issued to
the Transferee shall bear the legend provided in Section 5.4, if required by
such Section 5.4, and (ii) the Transferee shall have executed and delivered to
the Company, as a condition precedent to such Transfer, an instrument or
instruments in form and substance satisfactory to the Company confirming that
the Transferee agrees to be bound by the terms of this Agreement and accepts
the rights and obligations set forth hereunder as if it were the transferor of
the relevant Shares.

      1.4    COOPERATION. (a) The Company will provide reasonable assistance to
any Employee Party or any Purchaser Party seeking to sell its Shares in
accordance with the terms of the Agreement, PROVIDED, HOWEVER, that the Company
shall not be required to provide any confidential information to any
prospective purchaser who has not executed a confidentiality agreement in a
form reasonably satisfactory to the Company. Except as otherwise provided
herein, any reasonable out-of-pocket costs to the Company of providing such
assistance shall be paid pro rata by each Securityholder seeking to sell its
Shares. The Company will also cooperate with any Employee Party or any
Purchaser Party in having all stop transfer instructions or notations and
restrictive legends lifted in connection with the sale (other than to an
affiliate of the Company) of Shares pursuant to Rule 144 under the Securities
Act, as such rule may be amended from time to time, or any other similar
regulation hereinafter adopted by the Commission ("RULE 144"); PROVIDED,
HOWEVER, that in such a case the selling Securityholder shall be required to
provide the Company with the opinion provided for in Section 1.2(b) hereof.

      1.5    IMPROPER TRANSFER. Any attempt to Transfer or otherwise encumber
any Shares in violation of this Agreement shall be null and void and neither
the Company nor any transfer agent of such Shares shall give any effect to such
attempted Transfer or encumbrance in its stock records.


                                       3



      1.6    INVOLUNTARY TRANSFER. In the case of any Transfer of title or
beneficial ownership of Shares upon default, foreclosure, forfeit, court order,
or otherwise than by a voluntary decision on the part of a Securityholder (an
"INVOLUNTARY TRANSFER"), such Securityholder (or his legal representatives)
shall promptly (but in no event later than two (2) Business Days (as defined in
the Merger Agreement) after such Involuntary Transfer) furnish written notice to
the Company indicating that the Involuntary Transfer has occurred, specifying
the name of the Person to whom such Shares have been transferred, giving a
detailed description of the circumstances giving rise to, and stating the legal
basis for, the Involuntary Transfer.

      1.7    FIRST OPTION. Except for (i) Drag-Along 100% Sales or Drag-Along
50% Sales made in accordance with Article II or (ii) sales upon exercise of a
Call Option pursuant to Section 1.8, no Employee Party shall Transfer any
Shares except as specifically permitted by this Section 1.7. If at any time any
Employee Party desires to Transfer all or any part of the Shares held by such
Person (an "EMPLOYEE SELLING PARTY") (other than in accordance with Section
1.7.2) such Employee Selling Party shall obtain an irrevocable and
unconditional bona fide arm's length written offer (the "BONA FIDE OFFER") for
the purchase of such Shares for cash, cash equivalents, or a debt instrument
with commercially reasonable terms from a third party unaffiliated with such
Employee Selling Party (an "OUTSIDE PARTY"), following which the Employee
Selling Party shall provide written notice (the "SALE NOTICE") to each of (i)
Purchaser (together with its assigns, the "PURCHASER BUYER") and (ii) the
Company (each of Purchaser Buyer and the Company a "POTENTIAL BUYER") setting
forth such desire to Transfer such Shares, which Sale Notice shall be
accompanied by a photocopy or other facsimile of the Bona Fide Offer and shall
set forth the name and address of the Outside Party and the price and terms of
such Bona Fide Offer. Upon the giving of such Sale Notice, each Potential Buyer
shall, subject to the priorities set forth below, have the option (which option
(the "PURCHASE OPTION"), in the case of Purchaser only, shall be freely
assignable at Purchaser's sole discretion) to purchase all or any portion of
such Shares specified in the Sale Notice, on the same terms and conditions,
including but not limited to the offer price for the Shares as set forth in the
Bona Fide Offer. Each Potential Buyer shall have thirty (30) days from receipt
of the Sale Notice to provide written notice (the "ACCEPTANCE NOTICE") to such
Employee Selling Party of its desire to exercise such Purchase Option. If more
than one Potential Buyer shall deliver an Acceptance Notice within such thirty
(30) day period, the priority as among the Potential Buyers to match the Bona
Fide Offer and purchase such Shares shall be, to the extent such Potential
Buyers have delivered Acceptance Notices, FIRST, the Purchaser Buyer and,
SECOND, the Company.

             If a Potential Buyer or Potential Buyers, as applicable, elects to
purchase, all or any portion of the Shares covered by the Bona Fide Offer on the
terms and conditions set forth in the Sale Notice, the Potential Buyer(s)
entitled to purchase such Shares (the "CHOSEN BUYER(S)") shall be determined in
accordance with the priorities set forth, if applicable, above and such Chosen
Buyer(s) shall be obligated to purchase, and such Employee Selling Party shall
be obligated to sell, such Shares at the price and terms specified in the Sale
Notice. The closing of the purchase by the Chosen Buyer(s) shall be held on a
Business Day within ninety days (90) days after the giving of the relevant
Acceptance Notice, at the principal offices of the Chosen


                                       4



Buyer(s), or at such other time and place as may be mutually agreed to by the
Chosen Buyer(s) and the Employee Selling Party. "Business Day" shall mean any
day that is not a Saturday, Sunday or legal holiday in the State of New York.

             If Acceptance Notice(s) are not delivered within the periods
specified above by one or more Potential Buyer(s), as applicable, with respect
to all of the Shares included in the Sale Notice, the Selling Party shall, upon
compliance with the provisions of Section 1.3, have the right to consummate the
sale of all (but not less than all) of the Shares covered by the Sale Notice and
not included in an Acceptance Notice to the Outside Party but only at the price
and upon terms and conditions no less favorable to the Selling Party than those
contained in the Sale Notice (PROVIDED that the purchase price must be payable
solely in cash, cash equivalents or, to the extent and in accordance with the
terms set forth in the Sale Notice, a debt instrument with commercially
reasonable terms) and only if such sale occurs on a date within ninety (90) days
of the date of the Sale Notice; PROVIDED, HOWEVER, that in the event the Selling
Party has not so Transferred all such Shares to the Outside Party within such
ninety-day period, then such Shares thereafter shall continue to be subject to
all of the restrictions contained in this Agreement.

             1.7.1 NO WAIVER. Any election in any instance by any Potential
Buyer not to exercise its option rights under this Section 1.7 shall not
constitute a waiver of such rights with respect to any other proposed Transfer
of Shares.

             1.7.2 EXEMPT TRANSFERS.  The provisions of this Section 1.7 shall
not apply and the Transfer shall be permitted:

                   (a)  to any Transfer of Shares by any Employee Securityholder
      to the spouse of any of them, any direct or adopted lineal descendant or
      ancestor of either of them or any trust solely for the benefit of any or
      all of the foregoing, PROVIDED that each of the following conditions shall
      be satisfied:

                        (i)  after giving effect to such Transfer, sole voting
                        power with respect to such Transferred Shares shall be
                        held by the transferor Employee Securityholder (unless
                        such Transfer occurs by reason of the death of such
                        Employee Securityholder); and

                        (ii)  the Transferee of such Transferred Shares shall
                        have executed and delivered to the Company, as a
                        condition precedent to such Transfer, an instrument or
                        instruments in form and substance satisfactory to the
                        Company confirming that the Transferee agrees to be
                        bound by the terms of this Agreement and accepts the
                        rights and obligations set forth in this Agreement as if
                        it were the transferor Employee Securityholder;



                                       5



                  (b) to any distribution of Shares by the Purchaser or any
      other Purchaser Party to its respective equity participants in accordance
      with the terms of any applicable limited partnership agreement, operating
      agreement or other governing agreement or instrument;

                  (c) to any sale of Shares by an Employee Party (as defined
      below) to the public pursuant to an effective registration statement under
      the Securities Act.

      1.8    CALL OPTION. The Employee Securityholders each agree for
themselves and all Employee Parties who subsequently acquire or hold Shares
that the Company and the Purchaser Buyer will have a call option (the "CALL
OPTION") on all Shares held by any Employee Securityholder or Employee Party,
including all Shares issuable upon exercise of any options to acquire Shares
from the Company, (the "CALLABLE SECURITIES") upon the termination of such
Employee Securityholder's employment with the Company for any reason (each, a
"CALL EVENT"); provided, that the Company may provide that the Company and the
Purchaser Buyer may exercise the Call Option through the purchase of the
Employee Securityholder's options to acquire Shares from the Company and, if
by the Purchaser Buyer, such option shall be exercisable by the Purchaser
Buyer in accordance with its terms for the exercise price thereof. The Call
Option will expire as to 20% of the Shares owned, or Shares issuable upon
exercise of any option to acquire Shares from the Company owned, by each such
Person upon each anniversary of the later of (a) the date hereof or, (b) the
date such Employee Securityholder first acquires such Shares or was granted
such option (each, the "GRANT DATE"), and on each anniversary of such Grant
Date through the fifth anniversary of such Grant Date. Upon the occurrence of
a Call Event, the Company and the Purchaser Buyer may exercise the Call Option
by written notice (an "OPTION NOTICE") delivered to the Employee
Securityholder (or, if different, the then current holder of the Shares)
within 90 days after such Call Event, of its election to purchase and, upon
the giving of such notice the Chosen Buyer will be obligated to purchase and
the Employee Securityholder (or, if different, the then current holder of the
Shares) ("SELLER") will be obligated to sell all or any lesser portion
indicated in the Option Notice of the Callable Securities owned at the time of
the Call Event by the Seller. The consideration for the Callable Securities
referred to in the preceding sentence shall be the Employee Stockholder's Cost
of such Callable Securities, plus 10 per cent for each full calendar year from
the applicable Grant Date, provided, however, that in respect of options
granted after the date hereof, if the Employee Stockholder's cost is zero, the
consideration shall be an amount equal to ten (10) percent of the per share
exercise price of such option for each full calendar year from the applicable
Grant Date. For purposes of determining the Chosen Buyer (which term shall
have the same meaning as set forth in Section 1.7 in the context of a Call
Option), the priority as among the Company and the Purchaser Buyer to purchase
the Callable Securities shall be, FIRST, the Purchaser Buyer and, SECOND, the
Company.

      In the event the Company or any Purchaser Buyer elects not to participate
in the purchase of Callable Securities pursuant to the Call Option, the same
procedures as to allocation as are set forth in Section 1.7 in respect of the
First Option will govern. The closing for all purchases and

                                      6



sales of Callable Securities pursuant to this Section 1.8 will be at the
principal executive offices of the Company on the 60th day after the giving of
the Option Notice. The applicable purchase price for the Callable Securities
will be paid in cash or by cashier's check. The Seller will cause the Callable
Securities to be delivered to the Chosen Buyer at the closing free and clear
of all liens, charges or encumbrances of any kind except those which shall
continue to apply to such Shares by the terms of this Agreement. Such Seller
will take all such actions as the Chosen Buyer reasonably requests to vest in
the Chosen Buyer title to the Callable Securities free of any lien, charge or
encumbrance incurred by or through the Seller.

      Notwithstanding any other section of this Agreement, in the event a
Employee Securityholder's employment with the Company is terminated other than
through the Securityholder's Retirement from the Company, all of the
Securityholder's vested options to acquire Shares from the Company may be
exercisable for three months following such termination and the exercise price
may be paid at the Securityholder's election (i) by cash or cashiers check, or
(ii) by surrender of Shares or options to acquire Shares from the Company ("NET
ISSUANCE") as determined below. If the Securityholder elects the Net Issuance
method, the Company will issue Shares in accordance with the following formula:

             X = Y(A-B)
                 ------
                   A

Where:       X =  the number of Shares to be issued to the Securityholder

             Y =  the number of Shares requested to be exercised under this
                  Agreement

             A =  the Fair Market Value of one (1) Share

             B =  the Exercise Price

Notwithstanding, any other section of this Agreement, in the event a Employee
Securityholder's employment with the Company is terminated through the
Securityholder's Retirement from the Company, all of the Securityholder's vested
options to acquire Shares from the Company may be exercised at any time and from
time to time until the expiration of such vested options to acquire Shares from
the Company.

      For purposes of this Section 1.8, the following terms have the following
meanings:

             "EMPLOYEE STOCKHOLDER'S COST" means (x) in respect of the Common
Shares, (1) $22, per share, with respect to Common Shares which are either (A)
retained by the holder thereof pursuant to Section 2.2(c) of the Merger
Agreement or (B) acquired pursuant to the exercise of Options (as defined in the
Merger Agreement) retained by the holder thereof pursuant to Section 2.6(c) of
the Merger Agreement, or (2) the consideration paid for such Common Shares, with
respect to Common Shares which are otherwise acquired, (y) in respect of options
to

                                       7



purchase Common Shares outstanding on the date hereof, the excess of $22.00
over the exercise price thereof, per share, and (z) in respect of options to
purchase Common Stock granted after the date hereof, the excess of the Fair
Market Value of the Shares subject to such option over the net of the exercise
price thereof.

             "FAIR MARKET VALUE" means, as of any date, the value of a share of
the Common Stock determined as follows: (i) if the Common Stock is then quoted
on the Nasdaq National Market, its last reported sale price on the Nasdaq
National Market or, if no such reported sale takes place on such date, the
average of the closing bid and asked prices; (ii) if the Common Stock is
publicly traded and is then listed on a national securities exchange but is not
quoted on the Nasdaq National Market, the last reported sale price or, if no
such reported sale takes place on such date, the average of the closing bid and
asked prices on the principal national securities exchange on which the Common
Stock is listed or admitted to trading; (iii) if such Common Stock is publicly
traded but is not quoted on the Nasdaq National Market nor listed or admitted to
trading on a national securities exchange, the average of the closing bid and
asked prices on such date, as reported in the Western Edition of THE WALL STREET
JOURNAL, for the over-the-counter market; or (iv) if none of the foregoing is
applicable, by the Board in good faith.

             "RETIREMENT" means retirement pursuant to the Company's standard
retirement policy in effect from time to time but in no event prior to the age
of 65, unless otherwise agreed upon by the Securityholder and the Board.

      1.9    STOCK SUBSCRIPTION RIGHTS.

             1.9.1 RIGHT TO PURCHASE NEW SECURITIES. The Company hereby grants
to each Securityholder the right to purchase a pro rata portion of all New
Securities (as defined in Section 1.9.2) which the Company may, from time to
time, propose to sell and issue at the cash price and on the terms on which
the Company proposes to sell such New Securities. An Employee Securityholder's
pro rata share, for purposes of this Section 1.9, shall be equal to a fraction
(A) the numerator of which is the number of Common Shares (on fully diluted
basis assuming the exercise of all warrants, options or other rights to
acquire Common Shares and all Common Shares issuable upon the conversion or
exchange of any security) held by such Employee Securityholder on the date of
the Company's written notice pursuant to Section 1.9.3 below; and (B) the
denominator of which is the number of Common Shares outstanding (on fully
diluted basis assuming the exercise of all warrants, options or other rights
to acquire Common Shares and all Common Shares issuable upon the conversion or
exchange of any security) on such date. Purchaser's pro rata share, for
purposes of this Section 1.9, shall be equal to a fraction (A) the numerator
of which is the number of Common Shares (on fully diluted basis assuming the
exercise of all warrants, options or other rights to acquire Common Shares and
all Common Shares issuable upon the conversion or exchange of any security)
held by such Purchaser Securityholder on the date of the Company's written
notice pursuant to Section 1.9.3 below; and (B) the denominator of which is
the number of Common Shares outstanding (on a fully diluted basis assuming
exercise of all outstanding options and warrants to acquire Common Shares on

                                       8



such a date). The right to purchase New Securities shall be subject to the
following additional provisions of this Section 1.9.

             1.9.2 NEW SECURITIES. "NEW SECURITIES" shall mean any Common Stock
of the Company whether now authorized or not, and rights, options or warrants to
purchase Common Stock, and securities of any type whatsoever that are, or may by
their terms become, convertible into or exchangeable for Common Stock which are
sold by the Company for cash or indebtedness; PROVIDED, HOWEVER, that the term
New Securities shall not include (i) securities issued in a Public Offering
Event; (ii) Common Stock (including options to purchase Common Stock), issued to
employees, consultants or directors of the Company pursuant to plans or
agreements approved by the Board or any committee thereof, (iii) securities
issued pursuant to any stock dividend, stock split, combination or other
reclassification by the Company of any of its capital stock; or (iv) securities
issued pursuant to the exercise of warrants, rights, options or other securities
issued in connection with financing transactions to which the Company and an
unaffiliated third party may be a party and which are approved by the Board and
issuances of Common Stock pursuant thereto, including, without limitation,
Common Stock issuable pursuant to the exercise of warrants, rights, options or
other securities issued in connection with obtaining the Financing (as defined
in the Merger Agreement). For the purposes of this Agreement, a "PUBLIC OFFERING
EVENT" shall mean a firm commitment underwritten public offering of shares of
Common Stock of the Company pursuant to a registration statement or registration
statements under the Securities Act with aggregate gross proceeds to the Company
of at least seventy five million dollars ($75,000,000), and in connection with
such offering such Common Stock is listed or admitted to trading on a national
securities exchange or on the Nasdaq Stock Market.

             1.9.3 REQUIRED NOTICES. In the event the Company proposes to
undertake an issuance of New Securities it shall give each Securityholder
written notice, pursuant to the provisions of Section 5.23 hereof, of its
intention, describing the type of New Securities, the cash price, the number of
shares and the general terms upon which the Company proposes to issue the same.
Each Securityholder shall have 30 days from the date of receipt of any such
notice to agree to purchase any or all of such Securityholder's pro rata share
of such New Securities for the price and upon the general terms specified in the
notice by giving written notice to the Company and stating therein the quantity
of New Securities to be purchased.

             1.9.4 COMPANY'S RIGHT TO SELL. In the event the existing
Securityholders fail to exercise the right of first refusal as to the New
Securities offered within said thirty (30) day period, the Company shall have 60
days thereafter to sell or enter into an agreement (pursuant to which the sale
of New Securities covered thereby shall be closed, if at all, within 120 days
from the date of said agreement) to sell all such New Securities respecting
which the right to purchase provided in Section 1.9.1 was not exercised, at a
price and upon the general terms not more favorable in any material respect to
the purchasers thereof than specified in the Company's notice. In the event the
Company has not sold within said 60 day period or entered into any agreement to
sell all such New Securities within said 60 day period (or sold and issued all
such New Securities in accordance with the foregoing within 120 days from the
date of said

                                       9



agreement), the Company shall not thereafter issue or sell any New Securities,
without first offering such securities to the Securityholders in the manner
provided above.

             1.9.5 ASSIGNMENT. The rights provided in this Section 1.9 are not
assignable, except that, notwithstanding any other provision of this Agreement
such rights are assignable by (x) a Employee Securityholder to an Employee Party
or (y) the Purchaser to a Purchaser Party, in accordance with the restrictions
contained in this Agreement.

      1.10   TAX TREATMENT. The attachment of restrictions to the Shares held
by the Employee Securityholders and the subsequent lapse of those restrictions
(the "EXCHANGE RESTRICTIONS") is not intended to constitute a transfer of
property in connection with the performance of services by the Employee
Securityholders within the meaning of section 83 of the Code. Accordingly, the
Company will not report compensation to the Employee Securityholders at any
time with respect to the Exchange Restrictions unless required to by
applicable law.


                          ARTICLE II. DRAG-ALONG SALES.

      2.1    RIGHT OF PURCHASER PARTIES TO REQUIRE SALE. Notwithstanding any
other provision of this Agreement, if some or all Purchaser Parties (the
"DRAG-ALONG SELLERS") receive an offer in writing from a third Person or third
Persons who are not affiliates of any of the Drag-Along Sellers (a "THIRD
PARTY") (x) to purchase all or substantially all of the Shares then owned by
the Purchaser Parties (a "DRAG-ALONG 100% SALE"), or (y) to purchase 50% or
more in the aggregate of the outstanding Common Shares or Preferred Shares of
any class or series, in each case, in one or more related transactions (a
"DRAG-ALONG 50% SALE"), or (z) to effect a business combination of the Company
with such Third Party or the purchase or other acquisition of all or
substantially all of the assets of the Company by such Third Party (an
"ACQUISITION PROPOSAL"), and the Purchaser Parties desire to accept or cause
the Company to accept such Acquisition Proposal, then, in any such case, upon
the demand of a majority of the Drag-Along Sellers, each of the other
Securityholders (a "REQUIRED SELLER") shall be required to sell to such Third
Party the number of Shares specified in the applicable Drag-Along Notice (as
defined below), at the same price and on the same purchase terms and
conditions as the Drag-Along Sellers have agreed to with such Third Party,
including, subject to Section 1.4, no greater indemnification liability on a
pro rata basis than the Drag-Along Sellers have agreed to with such Third
Party, or, as the case may be, vote all of the Common Shares beneficially
owned by such Securityholder in favor of such Acquisition Proposal and take
all other necessary or desirable actions within their control (including,
without limitation, by attending meetings in person or by proxy for the
purpose of obtaining a quorum and executing of written consents in lieu of
meetings), to cause the approval of such Acquisition Proposal.

                                      10



      2.2    DRAG-ALONG NOTICE. Prior to making any Drag-Along Sale, the
Drag-Along Sellers shall promptly provide each Required Seller with written
notice (the "DRAG-ALONG NOTICE") not more than thirty (30) or less than fifteen
(15) days prior to the proposed date of the Drag-Along Sale (the "DRAG-ALONG
SALE DATE"). The Drag-Along Notice shall set forth: (i) the name and address of
the Third Party; (ii) the name and address of each member of the Drag-Along
Sellers; (iii) the proposed amount and form of consideration to be paid per
Share and the terms and conditions of payment offered by the Third Party; (iv)
the number of Shares held of record as of the close of business on the date of
the Drag-Along Sale Notice (the "DRAG-ALONG NOTICE DATE") by the Required Seller
to whom the notice is sent (and in the case of a Drag-Along 100% Sale such total
number of Shares held by the Required Seller shall be the number of Shares
required to be sold by such Required Seller); (v) the aggregate number of Shares
held of record as of the Drag-Along Notice Date by the Drag-Along Sellers; (vi)
in the case of a Drag-Along 50% Sale, the pro rata number of Shares to be sold
by such Required Seller, which shall be in proportion to the portion of the
relevant class or series of securities being sold by the Drag-Along Sellers,
(vii) the Drag-Along Sale Date; and (viii) confirmation that the proposed Third
Party has agreed to purchase the Required Sellers' Shares in accordance with the
terms hereof.

      2.3    DELIVERY OF CERTIFICATES. On the date that is at least one Business
Day (as defined in the Merger Agreement) before the Drag-Along Sale Date, each
Required Seller shall deliver a certificate or certificates for all of its
Shares duly endorsed for transfer with signatures guaranteed, free and clear of
any lien, claim, encumbrance, charge or security interest of any kind to such
Third Party in the manner and at the address indicated in the Drag-Along Notice
against delivery of the purchase price for such Required Seller's Shares.

      2.4    CONSIDERATION. The provisions of this Article 2 shall apply
regardless of the form of consideration received in the Drag-Along Sale.

      2.5    COOPERATION. The Required Sellers shall cooperate in good faith
with the Drag-Along Sellers in connection with the consummation of the
Drag-Along Sale, which cooperation shall include, without limitation, with
respect to all Required Sellers, by executing a document containing
substantially similar representations, warranties, indemnities and agreements
as requested by the Drag-Along Sellers in connection with the Drag Along Sale,
but in no case shall such representations, warranties, indemnities and
agreements made by the Required Sellers be more restrictive than those made by
the Drag-Along Sellers in connection with such Drag-Along Sale.


                 ARTICLE III. REPRESENTATIONS AND WARRANTIES

      3.1    REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      The Company represents and warrants to the Securityholders as follows:


                                      11



             3.1.1 ORGANIZATION. It is a corporation duly organized and
validly listing under the laws of the State of Delaware;

             3.1.2 AUTHORITY. It has full corporate power and authority to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby;

             3.1.3 BINDING OBLIGATION. The execution, delivery and performance
of this Agreement by it and the consummation by it of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on its part, and, assuming the due execution by the
Securityholder seeking enforcement against the Company, this Agreement
constitutes its binding obligation, enforceable against it in accordance with
its terms, except insofar as enforceability may be limited by bankruptcy,
insolvency, moratorium or other laws which may affect creditors rights and
remedies generally and by principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law); and

             3.1.4 NO CONFLICT. The execution, delivery and performance of
this Agreement by it and the consummation by it of the transactions
contemplated hereby will not, with or without the giving of notice or the
lapse of time, or both, (i) violate any provision of law, statute, rule or
regulation to which it is subject, (ii) violate any order, judgment or decree
applicable to it, or (iii) conflict with, or result in a breach or default
under, any term or condition of its certificate or articles of incorporation
or its bylaws or any material agreement or other material instrument to which
it is a party or by which it or its property is bound.

      3.2    REPRESENTATIONS AND WARRANTIES OF THE SECURITYHOLDERS. Each of the
Securityholders represents and warrants to each other and to the Company as
follows:

             3.2.1 ORGANIZATION. If it is an entity, it is a corporation,
limited partnership or other entity duly organized and validly existing under
the laws of its respective state of organization;

             3.2.2 AUTHORITY. It has full power and authority to execute,
deliver and perform this Agreement and to consummate the transactions
contemplated hereby;

             3.2.3 BINDING OBLIGATION. The execution, delivery and performance
of this Agreement by it and the consummation by it of the transactions
contemplated hereby have been duly and validly authorized by all necessary
action on its part, and, assuming the due execution by the Company, this
Agreement constitutes its binding obligation, enforceable against it in
accordance with its terms, except insofar as enforceability may be limited by
bankruptcy, insolvency, moratorium or other laws which may affect creditors'
rights and remedies generally and by principles of equity (regardless of
whether enforceability is considered in a proceeding in equity or at law); and


                                      12




           3.2.4  NO CONFLICT. The execution, delivery and performance of
this Agreement by it and the consummation by it of the transactions contemplated
hereby will not, with or without the giving of notice or the lapse of time, or
both, (i) violate any provision of law, statute, rule or regulation to which it
is subject, (ii) violate any order, judgment or decree applicable to it, or
(iii) conflict with, or result in a breach or default under, any term or
condition of its certificate of incorporation, bylaws, trust or equivalent
governing document or any material agreement or other material instrument to
which it is a party or by which it or its property is bound.

                      ARTICLE IV. TERMINATION OF AGREEMENT

      4.1  TERMINATION. Subject to the next succeeding sentence, this Agreement
shall terminate ten (10) years from the date of this Agreement (the "TERMINATION
DATE"). If any rights and obligations provided in Sections 1.3, 1.4, 1.6, 1.7,
1.8 and Section 1.9, and Article II of this Agreement have not terminated
earlier in accordance with the preceding sentence, such rights and obligations
shall terminate on the date of a Public Offering Event.

                               ARTICLE V. GENERAL

      5.1  RECAPITALIZATION, EXCHANGES, ETC., AFFECTING THE SHARES. The
provisions of this Agreement shall apply to the full extent set forth herein
with respect to (a) the Shares and any option, right or warrant to acquire
Shares, and (b) any and all shares of capital stock of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) which may be issued in respect of, in exchange for, or in
substitution for any Shares, by combination, recapitalization, reclassification,
merger, consolidation or otherwise. In the event of any change in the
capitalization of the Company, as a result of any stock split, stock dividend or
stock combination, the provisions of this Agreement shall be appropriately
adjusted.

      5.2  INJUNCTIVE RELIEF. It is hereby agreed and acknowledged that it will
be impossible to measure in money the damages that would be suffered if the
parties fail to comply with any of the obligations herein imposed on them and
that, in the event of any such failure, an aggrieved person will be irreparably
damaged and will not have an adequate remedy of law. Any such person shall,
therefore, be entitled to injunctive relief, including specific performance, to
enforce such obligations, without the posting of any bond and if any action
should be brought in equity to enforce any of the provisions of this Agreement,
none of the parties hereto shall raise the defense that there is an adequate
remedy at law.

      5.3  NOTICES. Except as otherwise expressly provided herein, any and all
notices, demands or other communications required or permitted hereunder shall
be in writing and shall be made by hand delivery (deemed given upon receipt), or
by certified mail return receipt requested (deemed given upon execution of such
return receipt), addressed to a Securityholder at the address set forth below
such Securityholder's signature on such Securityholder's Amended and Restated
Stock Option Agreement (as defined below). Any party may change its address for


                                      13



notice by notice given to each Securityholder and the Company in accordance with
the foregoing. No objection may be made to the method of delivery of any notice
actually and timely received.

      5.4  LEGEND. In addition to any other legend which may be required by
applicable law, each share certificate representing Shares which are subject to
this Agreement shall have endorsed, to the extent appropriate, upon its face the
following words:

           THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
           REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
           OR THE SECURITIES LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT
           BE OFFERED, SOLD, TRANSFERRED, PLEDGED, ASSIGNED, ENCUMBERED,
           HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (I) A
           REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES THAT IS
           EFFECTIVE UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAW, OR (II)
           ANY EXEMPTION FROM REGISTRATION UNDER SUCH ACT, OR APPLICABLE STATE
           SECURITIES LAW, RELATING TO THE DISPOSITION OF SECURITIES, INCLUDING
           RULE 144, PROVIDED AN OPINION OF COUNSEL IS FURNISHED TO THE
           COMPANY, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE
           COMPANY, TO THE EFFECT THAT AN EXEMPTION FROM THE REGISTRATION
           REQUIREMENTS OF THE ACT AND/OR APPLICABLE STATE SECURITIES LAW IS
           AVAILABLE.

           IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT
           BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
           DISPOSED OF UNLESS SUCH TRANSFER COMPLIES WITH THE PROVISIONS OF A
           SECURITYHOLDERS AGREEMENT DATED AS OF OCTOBER 2, 2000, AS SUCH MAY
           BE AMENDED FROM TIME TO TIME (THE "SECURITYHOLDERS AGREEMENT"), A
           COPY OF WHICH IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL
           OFFICE OF THE COMPANY. NO TRANSFER OF THE SECURITIES WILL BE MADE ON
           THE BOOKS OF THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF
           COMPLIANCE WITH THE TERMS OF SUCH SECURITYHOLDERS AGREEMENT. THE
           SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO OTHER
           RIGHTS AND OBLIGATIONS AS SET FORTH IN THE SECURITYHOLDERS AGREEMENT.


                                      14



To the extent the circumstances or provisions requiring any of the above legends
have ceased to be effective, the Company will upon request reissue certificates
without the applicable legend or legends.

      5.5  TRANSFEREES BOUND. All Shares owned by a Transferee shall, subject to
the terms of Section 1.3 of this Agreement, for all purposes be subject to the
terms of this Agreement, whether or not such Transferee has executed a consent
to be bound by this Agreement. The foregoing shall not apply in the case of any
Shares acquired by a Transferee pursuant to a sale of Shares pursuant to an
effective registration statement under the Securities Act or, except for sales
to an affiliate of the Company or sales made prior to a Public Offering Event,
pursuant to Rule 144.

      5.6  AMENDMENT; WAIVER; REPRESENTATIVES. This Agreement may be amended,
modified, supplemented or terminated only by a written instrument signed by each
of (i) the Company, (ii) Securityholders holding a majority of the Shares held
by the Purchaser Parties, and (iii) Employee Securityholders holding a majority
of the Shares held by the Employee Securityholders. No provision of this
Agreement may be waived orally, but only by a written instrument signed by the
party against whom enforcement of such waiver is sought. Securityholders shall
be bound from and after the date of the receipt of a written notice from the
Company setting forth such amendment or waiver by any consent authorized by this
Section 5.6, whether or not the Shares shall have been marked to indicate such
consent; no alteration, modification or impairment shall be implied by reason of
any previous waiver, extension of time, delay or omission in exercise, or other
indulgence. For purposes of this Agreement, the parties hereto shall designate
and appoint representatives (each, a "REPRESENTATIVE") as provided in this
Section 5.6. The Purchaser Parties hereby designate and appoint Purchaser (or
any successor designated in writing by the Purchaser Parties holding Shares that
constitute, on a fully-diluted basis, a majority in value of the Shares held by
all of the Purchaser Parties) as Representative on behalf of the Purchaser
Parties and the Employee Parties hereby designate and appoint Brian K. Devine
(or any successor designated in writing by the Employee Parties holding Common
Shares that constitute, on a fully-diluted basis, a majority in value of the
Common Shares held by all of the Employee Parties) as Representative on behalf
of the Employee Parties. Each Representative shall have the authority to receive
any notices, settle any claims, agree to any amendments, and grant any consents
or waivers on behalf of the parties that such Representative represents. The
parties hereto shall be entitled to deal exclusively with the respective
Representatives with respect to matters arising out of this Agreement, and the
parties hereto shall be entitled to deliver any notices to the respective
Representatives and rely on any action of the respective Representatives with
respect to actions taken under this Agreement on behalf of the parties hereto.


                                      15



      5.7  ADDITIONAL DOCUMENTS; FURTHER CHANGES. Each party hereto agrees to
execute any and all further documents and writings within its powers and to
perform such other actions which may be or become necessary or expedient to
effectuate and carry out this Agreement. Each party hereto acknowledges and
agrees to negotiate in good faith to amend this Agreement to the extent
necessary to provide for customary and reasonable changes required by any
third-party co-investor or other person acquiring an equity interest in the
Company pursuant to the financing of the transactions contemplated by the Merger
Agreement.

      5.8  NO THIRD-PARTY BENEFITS.  None of the provisions of this Agreement
shall be for the benefit of, or enforceable by, any third-party beneficiary.

      5.9  SUCCESSORS AND ASSIGNS. Subject to the terms hereof, this Agreement
shall be binding upon and shall inure to the benefit of the Securityholders, and
their respective successors and permitted assigns; PROVIDED, HOWEVER, (i)
neither this Agreement nor any rights or obligations hereunder may be
transferred by the Company and (ii) no rights or obligations of any
Securityholder under this Agreement may be assigned except that (x) any
Securityholder may transfer its rights and obligations hereunder, in whole or in
part in connection with a Transfer of Shares made in compliance with all of the
provisions of this Agreement and (y) any Purchaser Party may transfer such
Purchaser Party's rights hereunder, including, without limitation, the right to
nominate Purchaser Nominees pursuant to Section 1.2, in whole or in part, to any
affiliate in connection with a Transfer of Shares made in compliance with all of
the provisions of this Agreement.

      5.10 SEVERABILITY. In case any one or more of the provisions contained in
this Agreement 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 provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein; PROVIDED, HOWEVER, that the parties hereto shall
use their reasonable best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
invalid, illegal or unenforceable term, provision, covenant or restriction.

      5.11 INTEGRATION. This Agreement contains the entire understanding of the
parties with respect to the subject matter hereof. There are no restrictions,
agreements, promises, representations, warranties, covenants or undertakings
with respect to the subject matter hereof other than those expressly set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to its subject matter.


                                      16



      5.12 GOVERNING LAW. THE RIGHTS AND LIABILITIES OF THE PARTIES SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF DELAWARE, REGARDLESS OF THE CHOICE
OF LAWS PROVISIONS OF SUCH STATE OR ANY OTHER JURISDICTION.

      5.13 ATTORNEYS' FEES. Should any litigation or arbitration be commenced
(including any proceedings in a bankruptcy court) between the parties hereto or
their representatives concerning any provision of this Agreement or the rights
and duties of any person or entity hereunder, the party or parties prevailing in
such proceeding shall be entitled, in addition to such other relief as may be
granted, to the reasonable attorneys' fees and court costs incurred by reason of
such litigation or arbitration.

      5.14 HEADINGS. The headings in this Agreement are inserted only as a
matter of convenience, and in no way define, limit, or extend or interpret the
scope of this Agreement or of any particular Section.

      5.15 INFORMATION FOR NOTICES. No Securityholder (other than a
Securityholder as of the date of this Agreement with respect to the Shares held
as of such date) shall hold any of its Shares in nominee name unless it
otherwise provides the Company and the other Securityholders with its name and
address and other information reasonably requested by the Company in order to
establish such Securityholder's particular status under this Agreement (e.g.,
Purchaser Party, Employee Party, etc.).

      5.16 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

      5.17 CONSENT TO JURISDICTION. Each Securityholder agrees that any
proceeding arising out of or relating to this Agreement or the breach or
threatened breach of this Agreement may be commenced and prosecuted in a court
in the State of Delaware. Each Securityholder hereby irrevocably and
unconditionally consents and submits to the non-exclusive personal jurisdiction
of any court in the State of Delaware in respect of any such proceeding. Each
Securityholder consents to service of process upon it with respect to any such
proceeding by registered mail, return receipt requested, and by any other means
permitted by applicable laws and rules. Each Securityholder waives any objection
that it may now or hereafter have to the laying of venue of any such proceeding
in any court in the State of Delaware and any claim that it may now or hereafter
have that any such proceeding in any court in the State of Delaware has been
brought in an inconvenient forum.


                                      17



      5.18 NO INCONSISTENT AGREEMENTS. The Company will not hereafter enter into
any agreements with respect to its securities which are inconsistent with or
violate in any material respects the rights granted to the parties to this
Agreement.

      5.19 CERTAIN LIMITATIONS. Notwithstanding anything to the contrary
contained in this Agreement, prior to the issuance or sale of any shares of the
Company's capital stock pursuant to an effective registration statement under
the Securities Act, the Company shall not be required to register any transfer
of Shares on the Company's books if in the reasonable, good faith judgment of
the Company, registering such transfer would cause the Company to become subject
to registration pursuant to the Securities Exchange Act of 1934, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder.

      5.20 INFORMATION REGARDING BENEFICIAL OWNERSHIP. Each Securityholder
agrees to promptly provide to the Company any information or representations
that the Company may request regarding such holder's beneficial ownership of
shares of any class of the Company's capital stock.

      5.21 NO TAX ADVICE. Each Employee Securityholder acknowledges that the
United States federal, state, local, and other tax consequences to such
stockholder of acquiring, holding, and selling or otherwise disposing of its
Shares may be affected by an election by such stockholder under Section 83(b) of
the Internal Revenue Code of 1986, as amended (an "83(b) ELECTION") with regard
to such Shares. Each Employee Securityholder understands and acknowledges that
(i) it has not relied on the Company or Purchaser (or any of their affiliates,
employees, agents or advisors) with regard to the desirability or manner of
making an 83(b) Election and (ii) the Company has urged such stockholder to
consult its tax advisor with regard to the desirability and manner of making an
83(b) Election. Each Employee Securityholder shall promptly provide the Company
with a copy of any 83(b) Elections made by such stockholder with regard to its
Shares.

      5.22 AFTER ACQUIRED SHARES. The provisions of this Agreement shall apply
to any shares of capital stock of the Company acquired after the date hereof by
any party hereto or by any party that agrees to be bound by the terms thereof.

      5.23 NOTICES. Unless otherwise specified herein, all notices and other
communications hereunder shall be in writing and shall be deemed given upon
personal delivery, facsimile transmission (which is confirmed), telex or
delivery by an overnight express courier service (delivery, postage or freight
charges prepaid), or on the fourth day following deposit in the United States
mail (if sent by registered or certified mail, return receipt requested,
delivery, postage or freight charges prepaid, and otherwise to be sent by first
class mail), addressed to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):


                                      18



                  if to the Company, to:

                  PETCO Animal Supplies, Inc.
                  9125 Rehco Road
                  San Diego, California  92121-2270
                  Attention: James M. Myers, Chief Financial Officer
                  Telephone: (858) 453-7845
                  Facsimile: (858) 657-2085



                  with a copy (which shall not constitute notice) to:

                  Latham & Watkins
                  701 B Street, Suite 2100
                  San Diego, California  92101
                  Attention: Thomas Edwards, Esq.
                  Telephone: (619) 236-1234
                  Facsimile: (619) 696-7419

                  If to any of the Purchaser Parties, to:

                  BD Recapitalization Holdings LLC
                  201 Main Street, Suite 2420
                  Fort Worth, Texas 76102

                  with a copy (which shall not constitute notice) to:

                  Leonard Green & Partners, L.P.
                  11111 Santa Monica Blvd., Suite 2000
                  Los Angeles, California  90025
                  Attention: John G. Danhakl
                  Telephone: (310) 954-0444
                  Facsimile: (310) 954-0404

                  and

                  Skadden, Arps, Slate, Meagher & Flom LLP
                  300 South Grand Avenue, Suite 3400
                  Los Angeles, California  90071-3144
                  Attention:  Nicholas P. Saggese, Esq.



                                      19



                  Telephone: (213) 687-5000
                  Facsimile: (213) 687-5600

                  and

                  Cleary, Gottlieb, Steen & Hamilton
                  One Liberty Plaza
                  New York, New York  10006
                  Attention: David Leinwand, Esq.
                  Telephone: (212) 225-2000
                  Facsimile: (212) 225-3999

                  if to any of the Employee Parties, to the address and/or
                  telephone number set forth below such Securityholder's name on
                  the signature pages of such Securityholder's Amended and
                  Restated Stock Option Agreement.

      5.24 AMENDED AND RESTATED STOCK OPTION AGREEMENT. Any Employee
Securityholder that executes an Amended and Restated Stock Option Agreement,
which agreement incorporates the terms of this Agreement, substantially in the
form included in Schedule 5.24, shall be a party to this Agreement and all
options to purchase Shares and all Shares issuable upon the exercise of such
options shall be subject to the terms of this Agreement.




                                      20



      IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first set forth above.


                                   PETCO ANIMAL SUPPLIES, INC.

                                   By:  /s/ JAMES M. MYERS
                                       -----------------------------------
                                       Name:  James M. Myers
                                       Title: Senior Vice President and
                                              Chief Financial Officer






                                   BD RECAPITALIZATION HOLDINGS LLC


                                   GREEN EQUITY INVESTORS III, L.P.,
                                   Managing Member

                                   By:  GEI Capital III, LLC General Partner


                                   By:   /s/ JOHN DANHAKL
                                       -------------------------------
                                       Name:  John Danhakl
                                       Title:  Manager


                                   TPG PARTNERS III, L.P.

                                   By: TPG GenPar III, L.P. Its General Partner,
                                       Managing Member

                                   By: TPG Advisors III, Inc.
                                       its General Partner


                                   By:   /s/ JAMES J. O'BRIEN
                                       -------------------------------
                                       Name:  James J. O'Brien
                                       Title: Vice President





                                   SCHEDULE I
                        INITIAL EMPLOYEE SECURITYHOLDERS

EX-4.5

- --------------------------------------------------------------------------------



                           PETCO ANIMAL SUPPLIES, INC.


                    10.75% SENIOR SUBORDINATED NOTES DUE 2011





                                    INDENTURE






                          Dated as of October 26, 2001




                      ------------------------------------




                                 U.S. BANK N.A.
                                     Trustee



- --------------------------------------------------------------------------------







                             CROSS-REFERENCE TABLE*

                                                                       
TRUST INDENTURE ACT SECTION                                               INDENTURE SECTION
310   (a)(1)...................................................................    7.10
      (a)(2)...................................................................    7.10
      (a)(3)...................................................................    N.A.
      (a)(4)...................................................................    N.A.
      (a)(5)...................................................................    7.10
      (b)(i), (ii).............................................................    7.10
      (c)......................................................................    N.A.
311   (a)......................................................................    7.11
      (b)......................................................................    7.11
      (c)......................................................................    N.A.
312   (a)......................................................................    2.05
      (b)......................................................................    12.03
      (c)......................................................................    12.03
313   (a)......................................................................    7.06
      (b)(2)...................................................................    7.06; 7.07
      (c)......................................................................    7.06; 12.02
      (d)......................................................................    7.06
314   (a)......................................................................    4.03; 12.02
      (b)......................................................................    N.A.
      (c)(1)...................................................................    12.04
      (c)(2)...................................................................    12.04
      (c)(3)...................................................................    N.A.
      (d)......................................................................    N.A.
      (e)......................................................................    12.05
      (f)......................................................................    N.A.
315   (a)......................................................................    7.01
      (b)......................................................................    7.05; 12.02
      (c)......................................................................    7.01
      (d)......................................................................    7.01
      (e)......................................................................    6.11
316   (a)(last sentence).......................................................    2.09
      (a)(1)(A)................................................................    6.05
      (a)(1)(B)................................................................    6.04
      (a)(2)...................................................................    N.A.
      (b)......................................................................    6.07
      (c)......................................................................    2.12
317   (a)(1)...................................................................    6.08
      (a)(2)...................................................................    6.09
      (b)......................................................................    2.04
318   (a)......................................................................    12.01
      (b)......................................................................    N.A.
      (c)......................................................................    12.01



N.A.  means not applicable.
*This Cross-Reference Table is not part of the Indenture.







                                TABLE OF CONTENTS

                                                                                              PAGE
                                                                                              ----

                                   ARTICLE 1.
                   DEFINITIONS AND INCORPORATION BY REFERENCE

                                                                                           
Section 1.01.   Definitions.....................................................................1
Section 1.02.   Other Definitions..............................................................27
Section 1.03.   Terms of TIA...................................................................27
Section 1.04.   Rules of Construction..........................................................28

                                   ARTICLE 2.
                                   THE NOTES

Section 2.01.   Form and Dating................................................................28
Section 2.02.   Execution and Authentication...................................................30
Section 2.03.   Registrar and Paying Agent.....................................................30
Section 2.04.   Paying Agent to Hold Money in Trust............................................31
Section 2.05.   Holder Lists...................................................................31
Section 2.06.   Transfer and Exchange..........................................................31
Section 2.07.   Replacement Notes..............................................................42
Section 2.08.   Outstanding Notes..............................................................43
Section 2.09.   Treasury Notes.................................................................43
Section 2.10.   Temporary Notes................................................................43
Section 2.11.   Cancellation...................................................................44
Section 2.12.   Defaulted Interest.............................................................44
Section 2.13.   CUSIP Numbers..................................................................44

                                   ARTICLE 3.
                                   REDEMPTION

Section 3.01.   Notice of Redemption to Trustee................................................45
Section 3.02.   Selection of Notes to Be Redeemed..............................................45
Section 3.03.   Notice of Redemption to Holders................................................45
Section 3.04.   Effect of Notice of Redemption.................................................46
Section 3.05.   Deposit of Redemption Price....................................................46
Section 3.06.   Notes Redeemed in Part.........................................................47
Section 3.07.   Optional Redemption............................................................47
Section 3.08.   Mandatory Redemption...........................................................48

                                   ARTICLE 4.
                                   COVENANTS

Section 4.01.   Payment of Notes...............................................................48
Section 4.02.   Maintenance of Office or Agency................................................48


                                      -i-



                                                                                            
Section 4.03.   Compliance Certificate.........................................................49
Section 4.04.   Taxes..........................................................................49
Section 4.05.   Stay, Extension and Usury Laws.................................................49
Section 4.06.   Corporate Existence............................................................50
Section 4.07.   Offer to Repurchase upon Change of Control.....................................50
Section 4.08.   Asset Sales....................................................................52
Section 4.09.   [Intentionally Omitted]........................................................55
Section 4.10.   Restricted Payments............................................................55
Section 4.11.   Incurrence of Indebtedness and Issuance of Preferred Stock.....................59
Section 4.12.   No Senior Subordinated Debt....................................................62
Section 4.13.   Liens..........................................................................62
Section 4.14.   Dividend and Other Payment Restrictions Affecting
                   Restricted Subsidiaries.....................................................62
Section 4.15.   Transactions with Affiliates...................................................64
Section 4.16.   Additional Note Guarantees.....................................................66
Section 4.17.   Designation of Restricted and Unrestricted Subsidiaries........................66
Section 4.18.   Limitations on Issuances of Guarantees of Indebtedness.........................66
Section 4.19.   Business Activities............................................................67
Section 4.20.   Reports........................................................................67

                                   ARTICLE 5.
                                   SUCCESSORS

Section 5.01.   Merger, Consolidation or Sale of Assets........................................68
Section 5.02.   Successor Corporation Substituted..............................................69

                                   ARTICLE 6.
                              DEFAULTS AND REMEDIES

Section 6.01.   Events of Default..............................................................69
Section 6.02.   Acceleration...................................................................71
Section 6.03.   Other Remedies.................................................................72
Section 6.04.   Waiver of Past Defaults........................................................72
Section 6.05.   Control by Majority............................................................72
Section 6.06.   Limitation on Suits............................................................73
Section 6.07.   Rights of Holders of Notes to Receive Payment..................................73
Section 6.08.   Collection Suit by Trustee.....................................................73
Section 6.09.   Trustee May File Proofs of Claim...............................................73
Section 6.10.   Priorities.....................................................................74
Section 6.11.   Undertaking for Costs..........................................................74

                                   ARTICLE 7.
                                    TRUSTEE

Section 7.01.   Duties of Trustee..............................................................75
Section 7.02.   Rights of Trustee..............................................................76
Section 7.03.   Individual Rights of Trustee...................................................77
Section 7.04.   Trustee's Disclaimer...........................................................77
Section 7.05.   Notice of Defaults.............................................................78
Section 7.06.   Reports by Trustee to Holders of the Notes.....................................78
Section 7.07.   Compensation and Indemnity.....................................................78
Section 7.08.   Replacement of Trustee.........................................................79
Section 7.09.   Successor Trustee by Merger, etc...............................................80
Section 7.10.   Eligibility; Disqualification..................................................80
Section 7.11.   Preferential Collection of Claims Against Issuer...............................80

                                   ARTICLE 8.
               LEGAL DEFEASANCE AND COVENANT DEFEASANCE; DISCHARGE

Section 8.01.   Option to Effect Legal Defeasance or Covenant Defeasance.......................81
Section 8.02.   Legal Defeasance and Discharge.................................................81
Section 8.03.   Covenant Defeasance............................................................82
Section 8.04.   Conditions to Legal or Covenant Defeasance.....................................82
Section 8.05.   Deposited Money and Government Securities to Be Held in Trust; Other
                    Miscellaneous Provisions...................................................84
Section 8.06.   Repayment to Issuer............................................................84
Section 8.07.   Reinstatement..................................................................85
Section 8.08.   Discharge......................................................................85

                                   ARTICLE 9.
                        AMENDMENT, SUPPLEMENT AND WAIVER

Section 9.01.   Without Consent of Holders of Notes............................................86
Section 9.02.   With Consent of Holders of Notes...............................................87
Section 9.03.   Compliance with Trust Indenture Act............................................89
Section 9.04.   Revocation and Effect of Consents..............................................89
Section 9.05.   Notation on or Exchange of Notes...............................................89
Section 9.06.   Trustee to Sign Amendments, etc................................................89

                                   ARTICLE 10.
                                  SUBORDINATION

Section 10.01.  Agreement to Subordinate.......................................................90
Section 10.02.  Certain Definitions............................................................90
Section 10.03.  Liquidation; Dissolution; Bankruptcy...........................................91
Section 10.04.  Default on Designated Senior Debt..............................................91
Section 10.05.  Acceleration of Securities.....................................................92
Section 10.06.  When Distribution Must Be Paid Over............................................92
Section 10.07.  Notice by Issuer...............................................................93
Section 10.08.  Subrogation....................................................................93
Section 10.09.  Relative Rights................................................................93
Section 10.10.  Subordination May Not Be Impaired by Issuer....................................94
Section 10.11.  Distribution or Notice to Representative.......................................94
Section 10.12.  Rights of Trustee and Paying Agent.............................................95
Section 10.13.  Authorization to Effect Subordination..........................................95
Section 10.14.  Amendments.....................................................................95

                                   ARTICLE 11.
                              SUBSIDIARY GUARANTEES

Section 11.01.  Guarantee......................................................................96
Section 11.02.  Subordination of Note Guarantee................................................97
Section 11.03.  Limitation on Guarantor Liability..............................................97
Section 11.04.  Execution and Delivery of Note Guarantee.......................................97
Section 11.05.  Guarantors May Consolidate, etc., on Certain Terms.............................98
Section 11.06.  Releases of Subsidiary Guarantors..............................................98

                                   ARTICLE 12.
                                  MISCELLANEOUS

Section 12.01.  Trust Indenture Act Controls...................................................99
Section 12.02.  Notices........................................................................99
Section 12.03.  Communication by Holders of Notes with Other Holders of Notes.................101
Section 12.04.  Certificate and Opinion as to Conditions Precedent............................101
Section 12.05.  Statements Required in Certificate or Opinion.................................101
Section 12.06.  Rules by Trustee and Agents...................................................102
Section 12.07.  No Personal Liability of Directors, Officers, Employees and
                     Stockholders.............................................................102
Section 12.08.  Governing Law.................................................................102
Section 12.09.  No Adverse Interpretation of Other Agreements.................................102
Section 12.10.  Successors....................................................................102
Section 12.11.  Severability..................................................................102
Section 12.12.  Counterpart Originals; Acceptance by Trustee..................................103
Section 12.13.  Table of Contents, Headings, etc..............................................103



                                       -ii-



EXHIBITS

Exhibit A-1       Form of Note
Exhibit A-2       Form of Regulation S Temporary Global Note
Exhibit B         Form of Certificate of Transfer
Exhibit C         Form of Certificate of Exchange
Exhibit D         Form of Certificate from Acquiring Institutional
                    Accredited Investor
Exhibit E         Form of Senior Subordinated Note Guarantee
Exhibit F         Form of Supplemental Indenture

                                       -i-


INDENTURE dated as of October 26, 2001 by and among PETCO Animal Supplies, Inc.,
a Delaware corporation ("Issuer"), the Guarantors (as defined) and U.S. Bank
N.A., a national banking association organized and existing under the laws of
the United States, as Trustee.

                  Issuer and the Trustee agree as follows for the benefit of
each other and for the equal and ratable benefit of the Holders of the Notes:


                                   ARTICLE 1.
                   DEFINITIONS AND INCORPORATION BY REFERENCE


Section 1.01.       DEFINITIONS.

                  "144A GLOBAL NOTE" means a global note in the form of EXHIBIT
A-1 hereto bearing the Global Note Legend and the Private Placement Legend and
deposited with or on behalf of, and registered in the name of, the Depository or
its nominee that will be issued in a denomination equal to the outstanding
principal amount of the Notes sold in reliance on Rule 144A.

                  "ACQUIRED DEBT" means, with respect to any specified Person:

                  (1) Indebtedness of any other Person existing at the time such
         other Person is merged with or into or became a Restricted Subsidiary
         of such specified Person, whether or not such Indebtedness is incurred
         in connection with, or in contemplation of, such other Person merging
         with or into, or becoming a Restricted Subsidiary of, such specified
         Person; and

                  (2) Indebtedness secured by a Lien encumbering any asset
         acquired by such specified Person.

                  "AFFILIATE" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control," as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise. For purposes of this definition, the
terms "controlling," "controlled by" and "under direct or indirect common
control with" shall have correlative meanings.

                  "AGENT" means any Registrar, Paying Agent or co-registrar.

                  "AMEND" means to amend, supplement, restate, amend and restate
or otherwise modify; and "AMENDMENT" shall have a correlative meaning.



                                      -2-


                  "APPLICABLE FOREIGN INVESTMENT LIMIT" means $15.0 million
increased, on the first day of each fiscal year commencing with the fiscal year
beginning on February 3, 2002, by an additional $5.0 million.

                  "APPLICABLE PROCEDURES" means, with respect to any transfer or
exchange of or for beneficial interests in any Global Note, the rules and
procedures of the Depository, Euroclear and Clearstream that apply to such
transfer or exchange.

                  "ASSET" means any asset or property whether real or personal,
tangible or intangible.

                  "ASSET SALE" means:

                  (1)      the sale, lease (other than under operating leases),
         conveyance or other disposition of any assets or rights, other than
         sales of inventory in the ordinary course of business; PROVIDED that
         any transaction covered by Section 4.07 or 5.01 hereof shall be
         governed by those provisions as applicable and not by Section 4.08
         hereof; and

                  (2)      the issuance of Equity Interests by any of Issuer's
         Restricted Subsidiaries or the sale of Equity Interests in any of its
         Restricted Subsidiaries or the sale of Equity Interests held by Issuer
         or any of its Restricted Subsidiaries in any of its Unrestricted
         Subsidiaries.

Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:

                  (1)      any single transaction or series of related
         transactions that: (a) involves assets having a fair market value of
         less than $5.0 million, or (b) results in net proceeds to Issuer and
         its Restricted Subsidiaries of less than $5.0 million;

                  (2)      an issuance of Equity Interests by a Restricted
         Subsidiary to Issuer or to a Restricted Subsidiary;

                  (3)      a Restricted Payment or a Permitted Investment that
         is not prohibited by Section 4.10 hereof;

                  (4)      any transfer of assets by Issuer to any Restricted
         Subsidiary of Issuer that is a Guarantor, or by a Restricted Subsidiary
         of Issuer to Issuer or to another Restricted Subsidiary of Issuer;

                  (5)      any conversion of Cash Equivalents into cash or any
         other form of Cash Equivalents;

                  (6)      sales, transfers or other dispositions of past due
         accounts receivable in the ordinary course of business;



                                       -3-


                  (7)      grants of credits and allowances in the ordinary
         course of business;

                  (8)      the sublease of real or personal property on
         commercially reasonable terms;

                  (9)      trade-ins or exchanges of equipment or other fixed
         assets;

                  (10)     sales, transfers or other dispositions of damaged,
         worn-out or obsolete equipment or assets that, in Issuer's reasonable
         judgment, are no longer either used or useful in the business of Issuer
         or any of its Restricted Subsidiaries;

                  (11)     any termination or expiration of any lease of real
         property in accordance with its terms;

                  (12)     any surrender or waiver of contract rights or the
         settlement, release or surrender of contract, tort or other litigation
         claims in the ordinary course of business;

                  (13)     the granting of Liens (and foreclosure thereon) not
         prohibited by this Indenture; and

                  (14)     the closure and disposition of retail stores or
         distribution centers in the ordinary course of business.

                  "ATTRIBUTABLE DEBT" in respect of a sale and leaseback
transaction (other than in the ordinary course of business, not involving
capital leases, with respect to individual retail store locations) means, at the
time of determination, the present value of the obligation of the lessee for net
rental payments during the remaining term of the lease included in such sale and
leaseback transaction including any period for which such lease has been
extended or may, at the option of the lessor, be extended. Such present value
shall be calculated using a discount rate equal to the rate of interest implicit
in such transaction, determined in accordance with GAAP.

                  "BANKRUPTCY LAW" means Title 11, U.S. Code or any similar
federal or state law for the relief of debtors.

                  "BENEFICIAL OWNER" has the meaning assigned to such term in
Rule 13d-3 and Rule 13d-5 under the Exchange Act. For the purposes of this
definition, the term "Beneficially Own" shall have a correlative meaning.

                  "BOARD OF DIRECTORS" means (1) in the case of a corporation,
the board of directors and (2) in all other cases, a body performing
substantially similar functions as a board of directors.




                                       -4-


                  "BROKER-DEALER" means any broker or dealer registered with the
SEC under the Exchange Act.

                  "BUSINESS DAY" means any day other than a Legal Holiday.

                  "CANADIAN SUBSIDIARY" means any Foreign Subsidiary of Issuer
domiciled in Canada and conducting a substantial portion of its business in
Canada.

                  "CAPITAL LEASE OBLIGATION" means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease that would at that time be required to be capitalized on a balance
sheet in accordance with GAAP.

                  "CAPITAL STOCK" means:

                  (1)      in the case of a corporation, corporate stock;

                  (2)      in the case of an association or business entity, any
         and all shares, interests, participations, rights or other equivalents
         (however designated) of corporate stock;

                  (3)      in the case of a partnership or limited liability
         company, partnership or membership interests (whether general or
         limited); and

                  (4)      any other interest or participation (other than
         Indebtedness) that confers on a Person the right to receive a share of
         the profits and losses of, or distributions of assets of, the issuing
         Person.

                  "CASH EQUIVALENTS" means:

                  (1)      United States dollars;

                  (2)      securities issued or directly and fully guaranteed or
         insured by the United States government or any agency or
         instrumentality thereof (provided that the full faith and credit of the
         United States is pledged in support thereof) having maturities of not
         more than six months from the date of acquisition;

                  (3)      certificates of deposit and eurodollar time deposits
         with maturities of six months or less from the date of acquisition,
         bankers' acceptances with maturities not exceeding six months and
         overnight bank deposits, in each case, with any domestic commercial
         bank having capital and surplus in excess of $500 million and a Thomson
         BankWatch Rating of "B" or better;



                                       -5-


                  (4)      repurchase obligations with a term of not more than
         seven days for underlying securities of the types described in clauses
         (2) and (3) above entered into with any financial institution meeting
         the qualifications specified in clause (3) above;

                  (5)      commercial paper having the highest rating obtainable
         from Moody's Investors Service, Inc. or Standard & Poor's Rating Group
         and in each case maturing within six months after the date of
         acquisition; and

                  (6)      money market funds at least 95% of the assets of
         which constitute Cash Equivalents of the kinds described in clauses (1)
         through (5) of this definition.

                  "CHANGE  OF CONTROL" means the occurrence of any of the
following:

                  (1)      the sale, transfer, conveyance or other disposition
         (other than by way of merger or consolidation), in one or a series of
         related transactions, of all or substantially all of the assets of
         Issuer and its Restricted Subsidiaries taken as a whole to any "person"
         (as such term is used in Section 13(d)(3) of the Exchange Act) other
         than a Sponsor or a Related Party of a Sponsor;

                  (2)      the adoption of a plan relating to the liquidation or
         dissolution of Issuer;

                  (3)      prior to a Public Equity Offering, the Sponsors and
         their Related Parties, in the aggregate, do not Beneficially Own,
         directly or indirectly, Capital Stock of Issuer representing more than
         50% of all voting power of the Voting Stock of Issuer;

                  (4)      the consummation of any transaction (including,
         without limitation, any merger or consolidation) the result of which is
         that any "person" (as defined above), other than the Sponsors and their
         Related Parties, becomes the Beneficial Owner, directly or indirectly,
         of Capital Stock of Issuer representing more than 35% of all voting
         power of the Voting Stock of Issuer, and the Sponsors and their Related
         Parties, in the aggregate, Beneficially Own, directly or indirectly,
         Capital Stock of Issuer representing a lesser percentage of such voting
         power than the Capital Stock Beneficially Owned, directly or
         indirectly, by such "person";

                  (5)      the first day on which a majority of the members of
         the Board of Directors of Issuer are not Continuing Directors; or

                  (6)      Issuer consolidates with, or merges with or into, any
         Person, or any Person consolidates with, or merges with or into,
         Issuer, in any such event pursuant to a transaction in which any of the
         outstanding Voting Stock of Issuer is converted into or exchanged for
         cash, securities or other assets, other than any such transaction where
         the Voting Stock of Issuer outstanding immediately prior to such
         transaction is con-



                                       -6-


         verted into or exchanged for Voting Stock (other than Disqualified
         Stock) of the surviving or transferee Person constituting a majority of
         the outstanding shares of such Voting Stock of such surviving or
         transferee Person immediately after giving effect to such issuance.

                  "CLEARSTREAM" means Clearstream Banking Luxembourg.

                  "CONSOLIDATED CASH FLOW" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period PLUS (to
the extent such item was deducted in computing such Consolidated Net Income) (in
each case on a consolidated basis and determined in accordance with GAAP):

                  (1)      an amount equal to any extraordinary loss plus any
         net loss realized in connection with an Asset Sale; PLUS

                  (2)      provision for taxes based on income or profits of
         such Person and its Restricted Subsidiaries for such period; PLUS

                  (3)      consolidated interest expense of such Person and its
         Restricted Subsidiaries for such period, whether paid or accrued and
         whether or not capitalized (including, without limitation, amortization
         of debt issuance costs and original issue discount, non-cash interest
         payments, the interest component of any deferred payment obligations,
         the interest component of all payments associated with Capital Lease
         Obligations, imputed interest with respect to Attributable Debt,
         interest on guaranteed indebtedness, commissions, discounts and other
         fees and charges incurred in respect of letter of credit or bankers'
         acceptance financings, and net payments, if any, pursuant to Hedging
         Obligations); PLUS

                  (4)      depreciation, amortization (including amortization of
         goodwill and other intangibles but excluding amortization of prepaid
         cash expenses that were paid in a prior period) and other non-cash
         expenses or items (excluding any such non-cash expense or item to the
         extent that it represents an accrual of or reserve for cash expenses or
         items in any future period or amortization of a prepaid cash expense or
         item that was paid in a prior period) of such Person and its Restricted
         Subsidiaries for such period to the extent that such depreciation,
         amortization and other non-cash expenses or items were deducted in
         computing such Consolidated Net Income; PLUS

                  (5)      customary fees (excluding financing fees) and
         professional expenses incurred in connection with any consummation of
         any acquisition permitted by this Indenture; MINUS

                  (6)      other non-cash items increasing such Consolidated Net
         Income for such period, other than items that were accrued in the
         ordinary course of business;



                                      -7-


PROVIDED that the following shall be excluded:

                  (a)      any gain (or loss), together with any related
         provision for taxes on such gain (or loss), realized in connection
         with: (x) any asset sale (other than in the ordinary course of
         business); or (y) the disposition of any securities by such Person or
         any of its Restricted Subsidiaries or the extinguishment of any
         Indebtedness of such Person or any of its Restricted Subsidiaries; and

                  (b)      any extraordinary gain (or loss), together with any
         related provision for taxes on such extraordinary gain (or loss).

                  "CONSOLIDATED NET INCOME" means, with respect to any specified
Person for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; PROVIDED that:

                  (1)      the Net Income (but not loss) of any Person
         (including an Unrestricted Subsidiary) that is not a Restricted
         Subsidiary or that is accounted for by the equity method of accounting
         shall be included only to the extent of the amount of dividends or
         distributions paid in cash to the specified Person or (subject to
         clause (2) below) a Restricted Subsidiary thereof;

                  (2)      the Net Income of any Restricted Subsidiary shall be
         excluded to the extent that the declaration or payment of dividends or
         similar distributions by that Restricted Subsidiary of that Net Income
         is not at the date of determination permitted without any prior
         governmental approval (that has not been obtained) or by operation of
         the terms of its charter or any agreement, instrument, judgment,
         decree, order, statute, rule or governmental regulation applicable to
         that Restricted Subsidiary or its stockholders;

                  (3)      the Consolidated Net Income of any Person shall be
         increased by the amount, if any, of (a) non-cash charges relating to
         the exercise of options and (b) non-cash losses (or minus non-cash
         gains) from foreign currency translation, to the extent such items
         reduced the Net Income of Issuer or its Restricted Subsidiaries during
         any period;

                  (4)      the Net Income of any Person acquired in a pooling of
         interests transaction for any period prior to the date of such
         acquisition shall be excluded;

                  (5)      the cumulative effect of a change in accounting
         principles shall be excluded;

                  (6)      any restoration to income of any contingency reserve
         of an extraordinary, non-recurring or unusual nature shall be excluded,
         except to the extent that pro-




                                      -8-


         vision for such reserve was made out of Consolidated Net Income accrued
         in any period for which Consolidated Net Income is required to be
         calculated for purposes of this Indenture; and

                  (7)      for purposes of Section 4.10 hereof, in the case of a
         successor to the specified Person by consolidation or merger or as a
         transferee of the specified Person's assets, any earnings of the
         successor corporation prior to such consolidation, merger or transfer
         of assets shall be excluded.

                  "CONTINUING DIRECTORS" means, as of any date of determination,
any member of the Board of Directors of Issuer who:

                  (1)      was a member of such Board of Directors on the date
         of this Indenture; or

                  (2)      was nominated for election or elected to such Board
         of Directors with the approval of a majority of the Continuing
         Directors who were members of such Board at the time of such nomination
         or election including new directors designated in or provided for in an
         agreement regarding the merger, consolidation or sale, transfer or
         other conveyance of all or substantially all of the assets of Issuer,
         if such agreement was approved by a vote of such majority of directors.

                  "CORPORATE TRUST OFFICE" of the Trustee shall be at the
address of the Trustee specified in Section 12.02 hereof or such other address
as to which the Trustee may give notice to Issuer.

                  "CUSTODIAN" means the Trustee, as custodian with respect to
the Notes in global form, or any successor entity thereto.

                  "DEFAULT" means any event that is, or with the passage of time
or the giving of notice or both would be, an Event of Default.

                  "DEFINITIVE NOTE" means a certificated Note registered in the
name of the Holder thereof and issued in accordance with Section 2.06 hereof, in
the form of EXHIBIT A-1 hereto except that such Note shall not bear the Global
Note Legend and shall not have the "Schedule of Exchanges of Interests in the
Global Note" attached thereto.

                  "DEPOSITORY" means, with respect to the Notes issuable or
issued in whole or in part in global form, the Person specified in Section 2.03
hereof as the Depository with respect to the Notes, and any and all successors
thereto appointed as depository hereunder and having become such pursuant to the
applicable provision of this Indenture.




                                      -9-


                  "DISQUALIFIED STOCK" means any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible, or for
which it is exchangeable, in each case at the option of the holder thereof), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which the Notes mature. Notwithstanding the preceding
sentence, any Capital Stock that would constitute Disqualified Stock solely
because the holders thereof have the right to require Issuer to repurchase such
Capital Stock upon the occurrence of a change of control or an asset sale shall
not constitute Disqualified Stock if the terms of such Capital Stock provide
that Issuer may not repurchase or redeem any such Capital Stock pursuant to such
provisions prior to Issuer's purchase of such Notes as are required to be
purchased pursuant to Section 4.07 or 4.08 hereof, as applicable.

                  "EQUITY INTERESTS" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, Capital Stock).

                  "EUROCLEAR" means Euroclear Bank S.A./N.V., as operator of the
Euroclear system.

                  "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

                  "EXCHANGE DEBENTURES" means Issuer's 14% Subordinated Exchange
Debentures due 2012 issued in exchange for the Senior Preferred Stock under the
Exchange Debenture Indenture.

                  "EXCHANGE DEBENTURE INDENTURE" means the form of exchange
debenture indenture in existence on the Issue Date or as thereafter amended in
accordance with the provisions of Issuer's certificate of incorporation;
PROVIDED that (1) the covenants thereunder shall not be materially more
restrictive, taken as a whole, than those under this Indenture, taken as a
whole, (2) the subordination provisions thereunder shall not have been changed
to materially adversely affect the rights of any Holder unless the Holders
representing a majority of the aggregate principal amount of Notes outstanding
consent to such change and (3) the Stated Maturity of the principal amount of
the Exchange Debentures shall not be earlier than October 2, 2012.

                  "EXCHANGE NOTES" means the Notes issued in exchange for the
Initial Notes in the Exchange Offer pursuant to Section 2.06(f) hereof or, with
respect to Initial Notes issued under this Indenture subsequent to the date of
this Indenture pursuant to Section 2.02 hereof, the exchange offer contemplated
by the registration rights agreement relating thereto substantially identical to
the Registration Rights Agreement.




                                      -10-


                  "EXCHANGE OFFER" has the meaning set forth in the Registration
Rights Agreement.

                  "EXCHANGE OFFER REGISTRATION STATEMENT" has the meaning set
forth in the Registration Rights Agreement.

                  "EXISTING INDEBTEDNESS" means Indebtedness of Issuer and its
Restricted Subsidiaries in existence on the date of this Indenture, until such
amounts are repaid (unless replaced by Permitted Refinancing Indebtedness at the
time of repayment).

                  "EXISTING INVESTMENTS" means Investments outstanding on the
Issue Date.

                  "EXISTING PREFERRED STOCK" means Issuer's 14% Series A Senior
Redeemable Exchangeable Cumulative Preferred Stock and 12% Series B Junior
Redeemable Cumulative Preferred Stock.

                  "FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of:

                  (1)      the consolidated interest expense of such Person and
         its Restricted Subsidiaries for such period, whether paid or accrued,
         including, without limitation, amortization of debt issuance costs and
         original issue discount, non-cash interest payments, the interest
         component of any deferred payment obligations, the interest component
         of all payments associated with Capital Lease Obligations, imputed
         interest with respect to Attributable Debt, commissions, discounts and
         other fees and charges incurred in respect of letters of credit or
         bankers' acceptance financings, and net payments, if any, pursuant to
         Hedging Obligations; PLUS

                  (2)      the consolidated interest of such Person and its
         Restricted Subsidiaries that was capitalized during such period (other
         than Capital Lease Obligations); PLUS

                  (3)      any interest expense on Indebtedness of another
         Person that is Guaranteed by such Person or one of its Restricted
         Subsidiaries or secured by a Lien on assets of such Person or one of
         its Restricted Subsidiaries, whether or not such Guarantee or Lien is
         called upon; PLUS

                  (4)      the product of (a) all dividend payments, whether or
         not in cash, on any series of Disqualified Stock of such Person and on
         any series of preferred stock of such Person or any of its Restricted
         Subsidiaries, other than dividend payments on Equity Interests payable
         solely in Equity Interests of Issuer (other than Disqualified Stock) or
         payable to Issuer or a Restricted Subsidiary of Issuer, times (b) a
         fraction, the numerator of which is one and the denominator of which is
         one minus the then




                                      -11-


         current combined federal, state and local statutory tax rate of such
         Person, expressed as a decimal, in each case, on a consolidated basis
         and in accordance with GAAP.

                  "FIXED CHARGE COVERAGE RATIO" means with respect to any
specified Person for any period, the ratio of the Consolidated Cash Flow of such
Person and its Restricted Subsidiaries for such period to the Fixed Charges of
such Person for such period. In the event that the specified Person or any of
its Restricted Subsidiaries incurs, Guarantees, redeems, retires, defeases or
otherwise repays any Indebtedness (other than revolving credit borrowings) or
issues or redeems or repays preferred stock subsequent to the commencement of
the period for which the Fixed Charge Coverage Ratio is being calculated but on
or prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "CALCULATION DATE"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
Guarantee, redemption, retirement, defeasance or other repayment of
Indebtedness, or such issuance or redemption or repayment of preferred stock, as
if the same had occurred at the beginning of the applicable four-quarter
reference period.

                  In addition, for purposes of calculating the Fixed Charge
Coverage Ratio:

                  (1)      acquisitions that have been made by the specified
         Person or any of its Restricted Subsidiaries, including through mergers
         or consolidations and including any related financing transactions,
         during the four-quarter reference period or subsequent to such
         reference period and on or prior to the Calculation Date shall be
         deemed to have occurred on the first day of the four-quarter reference
         period and Consolidated Cash Flow for such reference period shall be
         calculated without giving effect to clause (4) of the proviso set forth
         in the definition of Consolidated Net Income;

                  (2)      the Consolidated Cash Flow attributable to
         discontinued operations, as determined in accordance with GAAP, and
         operations or businesses disposed of on or prior to the Calculation
         Date, shall be excluded; and

                  (3)      the Fixed Charges attributable to discontinued
         operations, as determined in accordance with GAAP, and operations or
         businesses disposed of on or prior to the Calculation Date, shall be
         excluded, but only to the extent that the obligations giving rise to
         such Fixed Charges will not be obligations of the specified Person or
         any of its Restricted Subsidiaries following the Calculation Date.

                  "FOREIGN SUBSIDIARY" means any Restricted Subsidiary of Issuer
organized under the laws of, and conducting a substantial portion of its
business in, any jurisdiction other than the United States of America or any
State thereof or the District of Columbia.

                  "GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting




                                      -12-


Standards Board or in such other statements by such other entities as have been
approved by a significant segment of the accounting profession, which are in
effect as of the date of determination.

                  "GLOBAL NOTE LEGEND" means the legend set forth in Section
2.06(g)(ii) which is required to be placed on all Global Notes issued under this
Indenture.

                  "GLOBAL NOTES" means, individually and collectively, each of
the Restricted Global Notes and the Unrestricted Global Notes, in the form of
EXHIBIT A hereto issued in accordance with Section 2.01, 2.06(b)(iv),
2.06(d)(ii) or 2.06(f) hereof.

                  "GOVERNMENT SECURITIES" means direct obligations of, or
obligations guaranteed by, the United States of America, and the payment for
which the United States pledges its full faith and credit.

                  "GUARANTEE" means a guarantee other than by endorsement of
negotiable instruments for collection in the ordinary course of business, direct
or indirect, in any manner, including, without limitation, through letters of
credit or reimbursement agreements in respect thereof, of all or any part of any
Indebtedness.

                  "GUARANTORS" means each of:

                  (1)      International Pet Supplies and Distribution, Inc.,
         PETCO Southwest, Inc., Pet Concepts International, PM Management
         Incorporated and PETCO Southwest, L.P., and

                  (2)      any other Subsidiary of Issuer that executes a Note
         Guarantee in accordance with the provisions of this Indenture,

in each case, until such Person is released from its Note Guarantee in
accordance with the provisions of this Indenture.

                  "HEDGING OBLIGATIONS" means, with respect to any Person, the
obligations of such Person under:

                  (1)      interest rate swap agreements, interest rate cap
         agreements and interest rate collar agreements; and

                  (2)      other agreements or arrangements designed to protect
         such Person against fluctuations in interest rates or foreign currency
         exchange rates.

                  "HOLDER" means a Person in whose name a Note is registered.



                                      -13-


                  "INCUR" means to directly or indirectly create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to any Indebtedness and "INCURRENCE"
shall have a correlative meaning. For the avoidance of doubt, the accrual of
interest or dividends and accretion or amortization of original issue discount
shall not be an incurrence; PROVIDED that in each such case, the amount thereof
is included in Fixed Charges of Issuer as accrued.

                  "INDEBTEDNESS" means, with respect to any specified Person,
any indebtedness of such Person, whether or not contingent:

                  (1)      in respect of borrowed money;

                  (2)      evidenced by bonds, notes, debentures or similar
         instruments or letters of credit (or reimbursement agreements in
         respect thereof);

                  (3)      in respect of banker's acceptances;

                  (4)      representing Capital Lease Obligations and all
         Attributable Debt in respect of sale and leaseback transactions (other
         than in the ordinary course of business, not involving capital leases,
         with respect to individual retail store locations);

                  (5)      representing the balance deferred and unpaid of the
         purchase price of any asset, except any such balance that constitutes
         an accrued expense or trade payable;

                  (6)      representing any Hedging Obligations; or

                  (7)      representing any Disqualified Stock of such Person
         and any preferred stock issued by a Restricted Subsidiary of such
         Person,

if and to the extent any of the preceding items (other than letters of credit,
Hedging Obligations, Disqualified Stock and preferred stock of a Restricted
Subsidiary) would appear as a liability upon a balance sheet of the specified
Person prepared in accordance with GAAP. In addition, the term "Indebtedness"
includes (a) all Indebtedness of others secured by a Lien on any asset of the
specified Person (whether or not such Indebtedness is assumed by the specified
Person), and (b) to the extent not otherwise included, the Guarantee by such
Person of any Indebtedness of any other Person.

                  The amount of any Indebtedness outstanding as of any date
shall be:

                  (1)      the accreted value thereof, in the case of any
         Indebtedness issued with original issue discount;





                                      -14-


                  (2)      the maximum fixed redemption or repurchase price, in
         the case of Disqualified Stock of such Person;

                  (3)      the maximum voluntary or involuntary liquidation
         preferences plus accrued and unpaid dividends, in the case of preferred
         stock of a Restricted Subsidiary of such Person; and

                  (4)      the principal amount thereof in the case of any other
          Indebtedness.

                  "INDENTURE" means this Indenture, as amended or supplemented
from time to time.

                  "INDIRECT PARTICIPANT" means a Person who holds a beneficial
interest in a Global Note through a Participant.

                  "INITIAL NOTES" means, collectively, (i) the 10.75% Senior
Subordinated Notes due 2011 of Issuer issued on the date of this Indenture and
(ii) one or more series of 10.75% Senior Subordinated Notes due 2011 that are
issued subsequent to the date of this Indenture pursuant to Section 2.02 hereof,
in each case for so long as such securities constitute "restricted securities"
as such term is defined in Rule 144(a)(3) under the Securities Act; PROVIDED
that the Trustee shall be entitled to request and conclusively rely on an
Opinion of Counsel, which may be from counsel to the Holder thereof, with
respect to whether any Note constitutes such a restricted security.

                  "INSTITUTIONAL ACCREDITED INVESTOR" means an institution that
is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under
the Securities Act.

                  "INTEREST" with respect to the Notes, means interest on the
Notes and, except for purposes of Article 9, any Liquidated Damages.

                  "INVESTMENTS" means, with respect to any Person, all
investments by such Person in other Persons in the forms of direct or indirect
loans (including Guarantees of Indebtedness or other obligations), advances or
capital contributions, purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. "Investment" excludes (1) extensions of trade credits and
allowances by Issuer and its Restricted Subsidiaries on commercially reasonable
terms in accordance with normal trade practices of Issuer or such Restricted
Subsidiary, as the case may be, (2) any Restricted Payment (other than with
respect to Equity Interests of a Restricted Subsidiary) described in clause (2)
of the definition thereof and (3) any purchase or acquisition of Indebtedness of
Issuer or any of its Restricted Subsidiaries (other than any Restricted Payment
described in clause (3) of the definition thereof). If Issuer or any Restricted
Subsidiary of Issuer sells or otherwise disposes of any Equity Interests of any
direct or indirect Restricted Subsidiary of




                                      -15-


Issuer such that, after giving effect to any such sale or disposition, such
Person is no longer a Restricted Subsidiary of Issuer, Issuer shall be deemed to
have made an Investment on the date of any such sale or disposition equal to the
fair market value of the Equity Interests of such Restricted Subsidiary not sold
or disposed of in an amount determined as provided in the final paragraph of
Section 4.10 hereof. The amount of any Investment shall be the original cost of
such Investment, without any adjustments for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment but less
all cash distributions constituting a return of capital.

                  "ISSUE DATE" means the date on which the Notes are first
issued.

                  "LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which
banking institutions in the City of New York are authorized by law, regulation
or executive order to remain closed. If a payment date is a Legal Holiday at a
place of payment, payment may be made at that place on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue on such payment for
the intervening period.

                  "LETTER OF TRANSMITTAL" means the letter of transmittal to be
prepared by Issuer and sent to all Holders of the Notes for use by such Holders
in connection with the Exchange Offer.

                  "LIEN" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law, including any conditional sale or other title retention agreement, any
lease in the nature thereof, and any filing of any financing statement under the
Uniform Commercial Code (or equivalent statutes) of any jurisdiction.

                  "LIQUIDATED DAMAGES" means all liquidated damages, if any,
then owing pursuant to Section 2(c) of the Registration Rights Agreement.

                  "MANAGEMENT SERVICES AGREEMENT" means the Management Services
Agreement dated as of October 2, 2000 by and among Issuer, Leonard Green &
Partners, L.P. and TPG GenPar III, L.P., as the same may be amended from time to
time.

                  "NET INCOME" means, with respect to any Person, the net income
(loss) of such Person and its Restricted Subsidiaries, determined in accordance
with GAAP and before any reduction in respect of preferred stock dividends.

                  "NET PROCEEDS" means the aggregate cash proceeds received by
Issuer or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale, including, without limitation,
legal, accounting and investment banking fees, and sales commissions, and any
relocation ex-




                                      -16-


penses incurred as a result thereof, taxes paid or payable as a result thereof,
in each case after taking into account any available tax credits or deductions,
and amounts required to be applied to the repayment of Indebtedness, other than
Senior Debt, secured by a Lien on the asset or assets that were the subject of
such Asset Sale.

                  "NON-U.S. PERSON" means a Person who is not a U.S. Person.

                  "NOTE GUARANTEE" means the subordinated Guarantee by each
Guarantor of Issuer's payment obligations under this Indenture and the Notes,
executed pursuant to the provisions of this Indenture.

                  "NOTES" means, collectively, the Initial Notes and the
Unrestricted Notes, treated as a single class of securities, as amended or
supplemented from time to time in accordance with the terms hereof, that are
issued pursuant to the terms of this Indenture

                  "OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.

                  "OFFICER" means, with respect to any Person, the Chairman of
the Board, the Chief Executive Officer, the President, any Executive or Senior
Vice President, the Chief Operating Officer, the Chief Financial Officer, the
Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice
President of such Person.

                  "OFFICERS' CERTIFICATE" means a certificate signed on behalf
of Issuer by any two of the following: the Chief Executive Officer, the
President, the Vice President-Finance, the Chief Financial Officer, the
Treasurer, the Controller or the Secretary of Issuer and delivered to the
Trustee.

                  "OPINION OF COUNSEL" means a written opinion from legal
counsel who is reasonably acceptable to the Trustee. The counsel may be an
employee of or counsel to Issuer, a Guarantor or the Trustee. The opinion may be
subject to reasonable assumptions and conditions.

                  "PARTICIPANT" means, with respect to the Depository, Euroclear
or Clearstream, a Person who has an account with the Depository, Euroclear or
Clearstream, respectively (and, with respect to The Depository Trust Company,
shall include Euroclear and Clearstream).

                  "PERMITTED BUSINESS" means the business of Issuer and its
Restricted Subsidiaries conducted on the Issue Date and businesses ancillary or
reasonably related thereto or any reasonable expansion of any of the foregoing.




                                      -17-


                  "PERMITTED INVESTMENTS" means:

                  (1)      any Investment in Cash Equivalents or the Notes;

                  (2)      any Investment in Issuer or any Guarantor;

                  (3)      any Investment by Issuer or any of its Restricted
         Subsidiaries in a Person, if as a result of such Investment:

                           (a)      such Person becomes a Guarantor; or

                           (b)      such Person is merged or consolidated with
                  or into, or transfers or conveys all or substantially all of
                  its assets to, or is liquidated into, Issuer or a Guarantor;

                  (4)      any Investment by any Restricted Subsidiary of Issuer
         that is not a Guarantor in:

                           (a)      any other Restricted Subsidiary of Issuer;
                  or

                           (b)      any Person, if as a result of such
                  Investment (x) such Person becomes a Restricted Subsidiary of
                  Issuer, or (y) such Person is merged or consolidated with or
                  into, or transfers or conveys all or substantially all of its
                  assets to, or is liquidated into, Issuer or any of its
                  Restricted Subsidiaries;

                  (5)      any Existing Investments;

                  (6)      Investments of a Person or any of its Subsidiaries
                           existing at the time such Person becomes a Restricted
         Subsidiary or at the time such Person merges or consolidates with
         Issuer or any of its Restricted Subsidiaries, in either case, in
         compliance with this Indenture; PROVIDED that such Investments were not
         made by such Person in connection with, or in anticipation or
         contemplation of, such Person becoming a Restricted Subsidiary or such
         merger or consolidation;

                  (7)      Investments in purchase price adjustments, contingent
         purchase price payments or other earn-out obligations received in
         connection with Investments otherwise permitted under this Indenture;

                  (8)      Hedging Obligations permitted by clause (6) of the
         second paragraph of Section 4.11 hereof;

                  (9)      any Investment made as a result of the receipt of
         non-cash consideration from an Asset Sale that was made pursuant to and
         in compliance with Section




                                      -18-


4.08 hereof or any transaction not constituting an Asset Sale by reason of the
$5.0 million threshold contained in the definition thereof;

                  (10)     any Investment acquired in exchange for the issuance
         of, or acquired with the net cash proceeds of any substantially
         concurrent issuance and sale of, Equity Interests (other than
         Disqualified Stock) of Issuer; PROVIDED that no such issuance or sale
         shall increase the Basket;

                  (11)     loans and advances to employees of Issuer for
         emergencies and for moving, entertainment, travel and other business
         expenses in the ordinary course of business;

                  (12)     loans and advances not to exceed (a) $2.0 million at
         any one time outstanding pursuant to this subclause (a) to employees of
         Issuer or its Subsidiaries for the purpose of funding the purchase of
         Capital Stock of Issuer by such employees and (b) $2.0 million at any
         time outstanding pursuant to this subclause (b) to employees of Issuer
         or any of its Subsidiaries which may be used for any other purpose;

                  (13)     Investments (without duplication) in Foreign
         Subsidiaries and Petcetera; PROVIDED that the aggregate amount of
         Investments made and outstanding pursuant to this clause (13) at any
         time shall not exceed the lesser of (x) $30.0 million and (y) the
         Applicable Foreign Investment Limit at such time, increased in each
         case by the amount (not to exceed $7.0 million) of Indebtedness owed to
         Issuer or any of its Restricted Subsidiaries on the date of this
         Indenture by any investor in Petcetera (other than Issuer and its
         Restricted Subsidiaries) that is repaid after the date of this
         Indenture;

                  (14)     Investments received in settlement of obligations or
         pursuant to any plan of reorganization or similar arrangement upon the
         bankruptcy, insolvency, reorganization, recapitalization or liquidation
         of any Person or the good faith settlement of debts of any Person;

                  (15)     other Investments in any Person having an aggregate
         fair market value (measured on the date each such Investment was made
         and without giving effect to subsequent changes in value), when taken
         together with all other Investments made pursuant to this clause (15),
         not to exceed $10.0 million at any one time outstanding;

                  (16)     any Guarantees of Indebtedness to the extent
         permitted by clause (7) of the second paragraph of Section 4.11 hereof;
         and

                  (17)     any Investments representing amounts held for
         employees of the Issuer and its Restricted Subsidiaries under the
         Issuer's deferred compensation plan, PROVIDED the amount of such
         Investments (excluding income earned thereon) shall not ex-



                                      -19-



         ceed the amount otherwise payable to such employees the payment of
         which was deferred under such plan and any amounts matched by the
         Issuer under such plan.

Permitted Investments shall not be deemed to be Restricted Payments.

                  "PERMITTED LIENS" means:

                  (1)      Liens securing Senior Debt or any Indebtedness of any
         Foreign Subsidiary;

                  (2)      Liens in favor of Issuer or any Restricted
         Subsidiary;

                  (3)      Liens on assets of a Person existing at the time such
         Person is acquired by or merged or consolidated with or into Issuer or
         any Restricted Subsidiary of Issuer; PROVIDED that such Liens were in
         existence prior to the contemplation of such acquisition, merger or
         consolidation and do not extend to any assets other than those of the
         Person acquired by or merged or consolidated with or into Issuer or its
         Restricted Subsidiary;

                  (4)      Liens on any assets of any Person existing at the
         time of acquisition of such assets by Issuer or any Restricted
         Subsidiary of Issuer, PROVIDED that such Liens were in existence prior
         to the contemplation of such acquisition and do not extend to any
         assets other than the assets so acquired;

                  (5)      Liens to secure the performance of statutory
         obligations, including Liens made in connection with workmen's
         compensation, unemployment insurance, old-age pensions, social security
         and public liability and similar legislation, surety or appeal bonds,
         performance bonds or other obligations of a like nature incurred in the
         ordinary course of business;

                  (6)      Liens to secure indebtedness the proceeds of which
         are used to acquire the assets subject to the Lien; PROVIDED, the Lien
         covers only the assets acquired with such Indebtedness;

                  (7)      Liens existing on the date of this Indenture;

                  (8)      Liens securing Permitted Refinancing Indebtedness
         which is incurred to refinance any Indebtedness which has been secured
         by a Lien permitted under this Indenture and which has been incurred in
         accordance with the provisions of this Indenture; PROVIDED that such
         Liens (A) are not materially less favorable to the Holders and are not
         materially more favorable to the lienholders with respect to such Liens
         than the Liens in respect of the Indebtedness being refinanced and (B)
         do not extend to




                                      -20-


         or cover any assets of Issuer or any of its Restricted Subsidiaries not
         securing the Indebtedness so refinanced;

                  (9)      Liens upon specific items of inventory or other goods
         and proceeds of any Person securing such Person's obligations in
         respect of bankers' acceptances issued or created for the account of
         such Person to facilitate the purchase, shipment or storage of such
         inventory or other goods;

                  (10)     Liens securing reimbursement obligations with respect
         to letters of credit which encumber documents and other assets relating
         to such letters of credit and products and proceeds thereof;

                  (11)     Liens securing the payment of taxes, assessments and
         governmental charges or levies, either (A) not delinquent or (B) being
         contested in good faith by appropriate proceedings;

                  (12)     carriers', warehousemen's, mechanics', landlords',
         materialmen's, repairmen's or other similar Liens that are not
         delinquent or that are being contested in good faith and by appropriate
         proceedings;

                  (13)     Liens securing (a) the non-delinquent performance of
         bids, trade contracts (other than for borrowed money), leases and
         statutory obligations and (b) other non-delinquent obligations of a
         like nature, incurred in the ordinary course of business;

                  (14)     Liens consisting of judgment or judicial attachment
         Liens and Liens securing contingent obligations on appeal bonds and
         other bonds posted in connection with court proceedings or judgments,
         only for so long as the existence of the related judgment does not
         otherwise give rise to an Event of Default;

                  (15)     interests of lessors or sublessors, easements,
         rights-of-way, zoning restrictions and other similar encumbrances or
         other title defects which, in the aggregate, do not materially detract
         from the value of the property subject thereto or interfere with the
         ordinary conduct of the business of Issuer and its Subsidiaries taken
         as a whole;

                  (16)     purchase money security interests on any assets
         acquired by Issuer or any of its Restricted Subsidiaries, securing
         Indebtedness incurred or assumed for the purpose of financing all or
         any part of the cost of acquiring, developing, constructing, installing
         or improving such assets, PROVIDED that (a) any such Lien attaches to
         such assets concurrently with or within 180 days after the acquisition,
         development, construction, installation or improvement thereof, (b)
         such Lien attaches solely to the assets so acquired, developed,
         constructed, installed or improved in such transaction, and




                                      -21-


         (c) the principal amount of the Indebtedness secured thereby does not
         exceed 100% of the cost of such assets;

                  (17)     Liens arising out of conditional sale, title
         retention, consignment or similar arrangements for sale of goods;

                  (18)     Liens securing Obligations in respect of Capital
         Lease Obligations on assets subject to such lease; PROVIDED that such
         Capital Lease Obligations are otherwise permitted hereunder;

                  (19)     Liens arising solely by virtue of any statutory or
         common law provision relating to banker's liens, rights of setoff or
         similar rights and remedies as to deposit accounts or other funds
         maintained with a creditor depository institution;

                  (20)     licenses of intellectual property granted in the
         ordinary course of business; and

                  (21)     Liens in favor of customs or revenue authorities in
         connection with customs duties.

                  "PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness or
Preferred Stock of Issuer or any of its Restricted Subsidiaries issued in
exchange for, or the net proceeds of which are used to refinance, other
Indebtedness or Preferred Stock of Issuer or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); PROVIDED that:

                  (1)      the principal amount (or accreted value, if
         applicable) or liquidation preference of such Permitted Refinancing
         Indebtedness does not exceed the principal amount of (or accreted
         value, if applicable), plus accrued interest and premium, if any, on
         the Indebtedness, or the liquidation preference, plus accrued dividends
         and premium, if any, on the Preferred Stock so refinanced (plus the
         amount of reasonable fees and expenses incurred in connection
         therewith);

                  (2)      such Permitted Refinancing Indebtedness has a final
         maturity date later than the final maturity date of, and has a Weighted
         Average Life to Maturity equal to or greater than the Weighted Average
         Life to Maturity of, the Indebtedness or Preferred Stock being
         refinanced;

                  (3)      if the Indebtedness being refinanced is contractually
         subordinated in right of payment to the Notes, such Permitted
         Refinancing Indebtedness is contractually subordinated in right of
         payment to the Notes on terms at least as favorable to the Holders of
         Notes as those contained in the documentation governing the
         Indebtedness being refinanced;




                                      -22-


                  (4)      Preferred Stock shall be refinanced only with
         Preferred Stock; and

                  (5)      such Indebtedness or Preferred Stock is incurred
         either by Issuer or by the Restricted Subsidiary that is the obligor on
         the Indebtedness, or the issuer of the Preferred Stock, as applicable,
         being refinanced.

                  "PERSON" means an individual, partnership, corporation,
limited liability company, unincorporated organization, trust or joint venture
or a governmental agency or political subdivision thereof.

                  "PETCETERA" means Canadian Petcetera Limited Partnership or
any successor business.

                  "PREFERRED STOCK" of any Person means any Capital Stock of
such Person that has preferential rights to any other Capital Stock of such
Person with respect to dividends or redemption or upon liquidation.

                  "PRIVATE PLACEMENT LEGEND" means the legend set forth in
Section 2.06(g)(i) to be placed on all Notes issued under this Indenture except
where otherwise permitted by the provisions of this Indenture.

                  "PUBLIC EQUITY OFFERING" means any underwritten public
offering of common stock of Issuer in which the gross proceeds to Issuer are at
least $50.0 million.

                  "QIB" means a "qualified institutional buyer" as defined in
Rule 144A.

                  "REDEEM" means to redeem, repurchase, purchase, defease,
retire, discharge or otherwise acquire or retire for value; and "REDEMPTION"
shall have a correlative meaning. For the avoidance of doubt, an offer to
purchase Notes as required by Sections 4.07 and 4.08 shall not constitute a
redemption of the Notes.

                  "REFINANCE" means to refinance, repay, prepay, replace, renew
or refund; and "REFINANCING" shall have a correlative meaning.

                  "REGISTRATION RIGHTS AGREEMENT" means the Exchange and
Registration Rights Agreement, dated as of the date of this Indenture, by and
among Issuer and the other parties named on the signature pages thereof, as such
agreement may be amended, modified or supplemented from time to time, and, with
respect to Initial Notes issued under this Indenture subsequent to the date of
this Indenture pursuant to Section 2.02 hereof, the registration rights
agreement relating thereto substantially identical to the Registration Rights
Agreement.

                  "REGULATION S" means Regulation S promulgated under the
Securities Act.




                                      -23-


                  "REGULATION S GLOBAL NOTE" means a Regulation S Temporary
Global Note or Regulation S Permanent Global Note, as appropriate.

                  "REGULATION S PERMANENT GLOBAL NOTE" means a permanent global
Note in the form of EXHIBIT A-1 hereto bearing the Global Note Legend and the
Private Placement Legend and deposited with or on behalf of and registered in
the name of the Depository or its nominee, issued in a denomination equal to the
outstanding principal amount of the Regulation S Temporary Global Note upon
expiration of the Restricted Period.

                  "REGULATION S TEMPORARY GLOBAL NOTE" means a temporary global
Note in the form of EXHIBIT A-2 hereto bearing the Global Note Legend and the
Private Placement Legend and deposited with or on behalf of and registered in
the name of the Depository or its nominee, issued in a denomination equal to the
outstanding principal amount of the Notes initially sold in reliance on Rule 903
of Regulation S.

                  "RELATED BUSINESS ASSETS" means assets used or useful in a
Permitted Business or securities of a Person principally engaged in a Permitted
Business who is a Restricted Subsidiary after the acquisition of such securities
by Issuer or any of its Restricted Subsidiaries.

                  "RELATED PARTY" with respect to any Sponsor means:

                  (1)      any Affiliate of such Sponsor (including, without
         limitation, any Subsidiary of such Sponsor);

                  (2)      any controlling stockholder of such Sponsor;

                  (3)      any general partner of such Sponsor; or

                  (4)      any investment fund or investment partnership,
         limited liability company or similar entity managed by such Sponsor or
         any Person referred to in clause (1), (2) or (3) above.

                  "RESPONSIBLE OFFICER," when used with respect to the Trustee,
means any officer within the corporate trust department of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.

                  "RESTRICTED DEFINITIVE NOTE" means a Definitive Note bearing
         the Private Placement Legend.



                                      -24-


                  "RESTRICTED GLOBAL NOTE" means a Global Note bearing the
         Private Placement Legend.

                  "RESTRICTED INVESTMENT" means an Investment other than a
         Permitted Investment.

                  "RESTRICTED PERIOD" means the 40-day restricted period as
         defined in Regulation S.

                  "RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of
         the referent Person that is not an Unrestricted Subsidiary.

                  "RULE 144" means Rule 144 promulgated under the Securities
         Act.

                  "RULE 144A" means Rule 144A promulgated under the
         Securities Act.

                  "RULE 903" means Rule 903 promulgated under the Securities
         Act.

                  "RULE 904" means Rule 904 promulgated the Securities Act.

                  "SEC" means the Securities and Exchange Commission.

                  "SECURITIES ACT" means the Securities Act of 1933, as amended.

                  "SENIOR CREDIT FACILITY" means the Credit Agreement, dated as
of October 2, 2000 among Issuer, as borrower, the lenders listed therein and
Wells Fargo Bank, N.A. and Goldman Sachs Credit Partners L.P., as agents,
including any notes, guarantees, collateral and security documents (including
mortgages, pledge agreements and other security arrangements), instruments and
agreements executed in connection therewith, and in each case as amended or
refinanced from time to time, including any agreement or agreements extending
the maturity of, refinancing or otherwise restructuring (including increasing
the amount of borrowings or other Indebtedness outstanding or available to be
borrowed thereunder) all or any portion of the Indebtedness under such
agreement, and any successor or replacement agreement or agreements with the
same or any other borrowers, agents, creditors, lenders or group of creditors or
lenders.

                  "SENIOR PREFERRED STOCK" means Issuer's 14% Series A Senior
Redeemable Exchangeable Cumulative Preferred Stock outstanding on the date of
this Indenture and any such Preferred Stock issued in payment of dividends
thereon.

                  "SHELF REGISTRATION STATEMENT" means the Shelf Registration
Statement as defined in the Registration Rights Agreement.



                                      -25-


                  "SIGNIFICANT SUBSIDIARY" means (1) any Restricted Subsidiary
that would be a "significant subsidiary" as defined in Regulation S-X
promulgated pursuant to the Securities Act as such Regulation is in effect on
the Issue Date and (2) any Restricted Subsidiary that, when aggregated with all
other Restricted Subsidiaries that are not otherwise Significant Subsidiaries
and as to which any event described in Section 6.01(f), 6.01(g) or 6.01(h) has
occurred and is continuing, would constitute a Significant Subsidiary under
clause (1) of this definition.

                  "SPONSOR" means Green Equity Investors III, L.P., a Delaware
limited partnership, and/or Affiliates of TPG Partners III, L.P., a Delaware
limited partnership.

                  "STATED  MATURITY" means, with respect to any installment of
interest or principal on any Indebtedness, the date on which such payment of
interest or principal is scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any interest or principal prior to the date
originally scheduled for the payment thereof.

                  "SUBSIDIARY" means, with respect to any Person:

                  (1)      any corporation, association or other business entity
         of which more than 50% of the total voting power of shares of Capital
         Stock entitled (without regard to the occurrence of any contingency) to
         vote in the election of directors, managers or trustees thereof is at
         the time owned or controlled, directly or indirectly, by such Person or
         one or more of the other Subsidiaries of that Person (or a combination
         thereof); and

                  (2)      any partnership (a) the sole general partner or the
         managing general partner of which is such Person or a Subsidiary of
         such Person or (b) the only general partners of which are such Person
         or one or more Subsidiaries of such Person (or any combination
         thereof).

                  "TIA"    means the Trust Indenture Act of 1939 (15 U.S.C.
         Sections 77aaa-77bbbb) as in effect on the date on which this Indenture
         is qualified under the TIA, except as provided in Section 9.03 hereof.

                  "TRUSTEE" means the party named as such above until a
         successor replaces it in accordance with the applicable provisions of
         this Indenture and thereafter means the successor serving hereunder.

                  "UNRESTRICTED DEFINITIVE NOTES" means one or more Definitive
Notes that do not bear and are not required to bear the Private Placement
Legend.



                                      -26-


                  "UNRESTRICTED GLOBAL NOTE" means a permanent global Note in
the form of EXHIBIT A-1 attached hereto that bears the Global Note Legend and
that has the "Schedule of Exchanges of Interests in the Global Note" attached
thereto, and that is deposited with or on behalf of and registered in the name
of the Depository, representing a series of Notes that do not and are not
required to bear the Private Placement Legend.

                  "UNRESTRICTED NOTES" means one or more Unrestricted Global
Notes and/or Unrestricted Definitive Notes, including, without limitation, the
Exchange Notes.

                  "UNRESTRICTED SUBSIDIARY" means any Subsidiary of Issuer that
is designated by the Board of Directors of Issuer as an Unrestricted Subsidiary
pursuant to a Board Resolution, but only to the extent that such Subsidiary, at
the time of such designation, is not party to any agreement, contract or
arrangement with Issuer or any Restricted Subsidiary of Issuer unless the terms
of any such agreement, contract or arrangement are no less favorable to Issuer
or such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of Issuer.

                  Any designation of a Subsidiary of Issuer as an Unrestricted
Subsidiary shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by Section 4.10 hereof.

                  "U.S. PERSON" means a U.S. person as defined in Rule 902(o)
under the Securities Act.

                  "VOTING STOCK" of any Person as of any date means the Capital
Stock of such Person that is entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees of such
Person.

                  "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness or Disqualified Stock at any date, the number of years obtained by
dividing:

                  (1)      the sum of the products obtained by multiplying (a)
         the amount of each then remaining installment, sinking fund, serial
         maturity or other required payment of principal or liquidation
         preference, including payment at final maturity, in respect thereof, by
         (b) the number of years (calculated to the nearest one-twelfth) that
         will elapse between each such date and the making of each such payment;
         by

                  (2)      the then outstanding principal amount or liquidation
         preference of such Indebtedness or Disqualified Stock.

                  "WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of



                                      -27-


which (other than directors' qualifying shares) shall at the time be owned by
such Person and/or by one or more Wholly Owned Restricted Subsidiaries of
such Person.

Section 1.02.       OTHER DEFINITIONS.



                                                                                             DEFINED
              TERM                                                                         IN SECTION
              ----                                                                         ----------
                                                                                        

              "AFFILIATE TRANSACTION"................................................        4.15
              "ALTERNATE OFFER"......................................................        4.07
              "ASSET SALE OFFER".....................................................        4.08
              "ASSET SALE OFFER AMOUNT"..............................................        4.08
              "ASSET SALE PAYMENT"...................................................        4.08
              "ASSET SALE PAYMENT DATE" .............................................        4.08
              "AUTHENTICATION ORDER".................................................        2.02
              "BASKET"...............................................................        4.10
              "CHANGE OF CONTROL OFFER"..............................................        4.07
              "CHANGE OF CONTROL PAYMENT"............................................        4.07
              "CHANGE OF CONTROL PAYMENT DATE" ......................................        4.07
              "COVENANT DEFEASANCE"..................................................        8.03
              "DESIGNATED SENIOR DEBT"...............................................        10.02
              "EVENT OF DEFAULT".....................................................        6.01
              "FIXED CHARGE COVERAGE RATIO EXCEPTION"................................        4.11
              "ISSUER"...............................................................        preamble
              "LEGAL DEFEASANCE" ....................................................        8.02
              "PAYING AGENT".........................................................        2.03
              "PAYMENT BLOCKAGE NOTICE"..............................................        10.04
              "PAYMENT DEFAULT"......................................................        6.01
              "PERMITTED DEBT".......................................................        4.11
              "PERMITTED JUNIOR SECURITIES"..........................................        10.02
              "REGISTRAR"............................................................        2.03
              "REPRESENTATIVE".......................................................        10.02
              "RESTRICTED PAYMENTS"..................................................        4.10
              "SENIOR DEBT"..........................................................        10.02
              "TRUSTEE"..............................................................        preamble


Section 1.03.       TERMS OF TIA.

                  Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.



                                     -28-


                  The following TIA terms used in this Indenture have the
following meanings:

                  "INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the
Trustee; and

                  "OBLIGOR" on the Notes and the Note Guarantees means Issuer
         and the Guarantors, respectively, and any successor obligor upon the
         Notes and the Note Guarantees, respectively.

                  All other terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule under
the TIA have the meanings so assigned to them.

Section 1.04.       RULES OF CONSTRUCTION.

                  Unless the context otherwise requires: (i) a term has the
meaning assigned to it; (ii) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP; (iii) "or" is not exclusive;
(iv) words in the singular include the plural, and in the plural include the
singular; (v) provisions apply to successive events and transactions; and (vi)
references to sections of or rules under the Securities Act or the Exchange Act
shall be deemed to include substitute, replacement or successor sections or
rules adopted by the SEC from time to time.


                                   ARTICLE 2.
                                    THE NOTES


Section 2.01.       FORM AND DATING.

                  (a)      GENERAL. The Notes and the Trustee's certificate of
authentication shall be substantially in the form of EXHIBIT A hereto. The Notes
may have notations, legends or endorsements required by law, stock exchange rule
or usage. Each Note shall be dated the date of its authentication. The Notes
shall be in denominations of $1,000 and integral multiples thereof.

                  The terms and provisions contained in the Notes shall
constitute, and are hereby expressly made, a part of this Indenture, and Issuer,
the Guarantors and the Trustee, by their execution and delivery of this
Indenture, expressly agree to such terms and provisions and to be bound thereby.
However, to the extent any provision of any Note conflicts with the express
provisions of this Indenture, the provisions of this Indenture shall govern and
be controlling.

                  (b)      GLOBAL NOTES. Notes issued in global form shall be
substantially in the form of EXHIBITS A-1 or A-2 attached hereto (including the
Global Note Legend thereon and



                                      -29-


the "Schedule of Exchanges of Interests in the Global Note" attached thereto).
Notes issued in definitive form shall be substantially in the form of EXHIBIT
A-1 attached hereto (but without the Global Note Legend thereon and without the
"Schedule of Exchanges of Interests in the Global Note" attached thereto). Each
Global Note shall represent such of the outstanding Notes as shall be specified
therein and each shall provide that it shall represent the aggregate principal
amount of outstanding Notes from time to time endorsed thereon and that the
aggregate principal amount of outstanding Notes represented thereby may from
time to time be reduced or increased, as appropriate, to reflect exchanges and
redemptions. Any endorsement of a Global Note to reflect the amount of any
increase or decrease in the aggregate principal amount of outstanding Notes
represented thereby shall be made by the Trustee or the Custodian, at the
direction of the Trustee, in accordance with instructions given by the Holder
thereof as required by Section 2.06 hereof.

                  (c)      TEMPORARY GLOBAL NOTES. Notes offered and sold in
reliance on Regulation S shall be issued initially in the form of the Regulation
S Temporary Global Note, which shall be deposited on behalf of the purchasers of
the Notes represented thereby with the Trustee, at its Corporate Trust Office,
as custodian for the Depository, and registered in the name of the Depository or
the nominee of the Depository for the accounts of designated agents holding on
behalf of Euroclear or Clearstream, duly executed by Issuer and authenticated by
the Trustee as hereinafter provided. The Restricted Period shall terminate upon
the receipt by the Trustee of (i) a written certificate from the Depository,
together with copies of certificates from Euroclear and Clearstream certifying
that they have received certification of non-United States beneficial ownership
of 100% of the aggregate principal amount of the Regulation S Temporary Global
Note (except to the extent of any beneficial owners thereof who acquired an
interest therein during the Restricted Period pursuant to another exemption from
registration under the Securities Act and who will take delivery of a beneficial
ownership interest in a 144A Global Note bearing a Private Placement Legend, all
as contemplated by Section 2.06(a)(ii) hereof), and (ii) an Officers'
Certificate from Issuer. Following the termination of the Restricted Period,
beneficial interests in the Regulation S Temporary Global Note shall be
exchanged for beneficial interests in Regulation S Permanent Global Notes
pursuant to the Applicable Procedures. Simultaneously with the authentication of
Regulation S Permanent Global Notes, the Trustee shall cancel the Regulation S
Temporary Global Note. The aggregate principal amount of the Regulation S
Temporary Global Note and the Regulation S Permanent Global Notes may from time
to time be increased or decreased by adjustments made on the records of the
Trustee and the Depository or its nominee, as the case may be, in connection
with transfers of interest as hereinafter provided.

                  (d)      EUROCLEAR AND CLEARSTREAM PROCEDURES APPLICABLE. The
operating procedures, terms and conditions of Euroclear and Clearstream shall be
applicable to transfers of beneficial interests in the Regulation S Temporary
Global Note and the Regulation S Permanent Global Notes that are held by
Participants through Euroclear or Clearstream.



                                      -30-


Section 2.02.       EXECUTION AND AUTHENTICATION.

                  An Officer shall sign the Notes for Issuer by manual or
facsimile signature. If an Officer whose signature is on a Note no longer holds
that office at the time a Note is authenticated, the Note shall nevertheless be
valid.

                  A Note shall not be valid until authenticated by the manual or
facsimile signature of the Trustee. The signature shall be conclusive evidence
that the Note has been authenticated under this Indenture.

                  The Trustee shall, upon a written order of Issuer signed by an
Officer (an "AUTHENTICATION ORDER"), authenticate (i) Initial Notes for original
issue in an unlimited principal amount and (ii) Unrestricted Notes from time to
time in exchange for a like principal amount of Initial Notes or for original
issue in an unlimited principal amount.

                  In the event that Issuer shall issue and the Trustee shall
authenticate any Notes issued under this Indenture subsequent to the date of
this Indenture, Issuer shall use its reasonable best efforts to obtain the same
"CUSIP" number for such Notes as is printed on the Notes outstanding at such
time; PROVIDED, HOWEVER, that if any series of Notes issued under this Indenture
subsequent to the date of this Indenture is determined, pursuant to an Opinion
of Counsel of Issuer in a form reasonably satisfactory to the Trustee, to be a
different class of security than the Notes outstanding at such time for federal
income tax purposes, the Issuer may obtain a "CUSIP" number for such Notes that
is different than the "CUSIP" number printed on the Notes then outstanding.
Notwithstanding the foregoing, all Notes issued and outstanding under this
Indenture shall vote and consent together on all matters as one class and no
series of Notes will have the right to vote or consent as a separate class on
any matter.

                  The Trustee may appoint an authenticating agent acceptable to
Issuer to authenticate Notes. An authenticating agent may authenticate Notes
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with Holders or an
Affiliate of Issuer.

Section 2.03.       REGISTRAR AND PAYING AGENT.

                  Issuer shall maintain an office or agency where Notes may be
presented for registration of transfer or for exchange ("REGISTRAR") and an
office or agency where Notes may be presented for payment ("PAYING AGENT"). The
Registrar shall keep a register of the Notes and of their transfer and exchange.
Issuer may appoint one or more co-registrars and one or more additional paying
agents. The term "Registrar" includes any co-registrar and the term "Paying
Agent" includes any additional paying agent. Issuer may change any Paying Agent
or Registrar without notice to any Holder. Issuer shall notify the Trustee in
writing of the name and address of any Agent not a party to this Indenture. If
Issuer fails to appoint or



                                      -31-


maintain another entity as Registrar or Paying Agent, the Trustee shall act as
such. Issuer or any of its Subsidiaries may act as Paying Agent or Registrar.

                  Issuer initially appoints The Depository Trust Company to act
as Depository with respect to the Global Notes.

                  Issuer initially appoints the Trustee to act as the Registrar
and Paying Agent and to act as Custodian with respect to the Global Notes.

                  Issuer shall, prior to each interest record date, notify the
Paying Agent of any wire transfer instructions for payments that it receives
from Holders.

Section 2.04.       PAYING AGENT TO HOLD MONEY IN TRUST.

                  Issuer shall require each Paying Agent other than the Trustee
to agree in writing that the Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of
principal or premium, if any, or interest on the Notes, and will notify the
Trustee of any default by Issuer in making any such payment. While any such
default continues, the Trustee may require a Paying Agent to pay all money held
by it to the Trustee. Issuer at any time may require a Paying Agent to pay all
money held by it to the Trustee. Upon payment over to the Trustee, the Paying
Agent (if other than Issuer or a Subsidiary) shall have no further liability for
the money. If Issuer or a Subsidiary acts as Paying Agent, it shall segregate
and hold in a separate trust fund for the benefit of the Holders all money held
by it as Paying Agent. Upon any bankruptcy or reorganization proceedings
relating to Issuer, the Trustee shall serve as Paying Agent for the Notes.

Section 2.05.       HOLDER LISTS.

                  The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of all Holders and shall otherwise comply with TIA Section 312(a).
If the Trustee is not the Registrar, Issuer shall furnish to the Trustee at
least seven Business Days before each interest payment date and at such other
times as the Trustee may request in writing, a list in such form and as of
such date as the Trustee may reasonably require of the names and addresses of
the Holders of Notes and Issuer shall otherwise comply with TIA Section
312(a).

Section 2.06.       TRANSFER AND EXCHANGE.

                  (a)      TRANSFER AND EXCHANGE OF GLOBAL NOTES. A Global Note
may not be transferred as a whole except by the Depository to a nominee of the
Depository, by a nominee of the Depository to the Depository or to another
nominee of the Depository, or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository. Global Notes
will not be exchanged by Issuer for Definitive Notes unless (i) Issuer




                                      -32-


delivers to the Trustee notice from the Depository that it is unwilling or
unable to continue to act as Depository or that it is no longer a clearing
agency registered under the Exchange Act and, in either case, a successor
Depository is not appointed by Issuer within 120 days after the date of such
notice from the Depository; (ii) Issuer in its sole discretion determines that
the Global Notes (in whole but not in part) should be exchanged for Definitive
Notes and delivers a written notice to such effect to the Trustee (provided that
in no event shall the Regulation S Temporary Global Note be exchanged by Issuer
for Definitive Notes prior to (x) the expiration of the Restricted Period and
(y) the receipt by the Registrar of any certificates required pursuant to Rule
903(c)(3)(ii)(B) under the Securities Act and provided further, there shall be
no continuing Default or Event of Default); or (iii) an Event of Default shall
have occurred and be continuing with respect to the Notes and the Trustee has
received a request from the Depository or any Holder to issue Definitive Notes.
Upon the occurrence of any of the preceding events in (i), (ii) or (iii) above,
Definitive Notes shall be issued in such names as the Depository shall instruct
the Trustee. Global Notes also may be exchanged or replaced, in whole or in
part, as provided in Sections 2.07 and 2.10 hereof. Every Note authenticated and
delivered in exchange for, or in lieu of, a Global Note or any portion thereof,
pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be
authenticated and delivered in the form of, and shall be, a Global Note. A
Global Note may not be exchanged for another Note other than as provided in this
Section 2.06(a), however, beneficial interests in a Global Note may be
transferred and exchanged as provided in Section 2.06(b) or (f) hereof.

                  (b)      TRANSFER AND EXCHANGE OF BENEFICIAL INTERESTS IN
GLOBAL NOTES. The transfer and exchange of beneficial interests in the Global
Notes shall be effected through the Depository, in accordance with the
provisions of this Indenture and the Applicable Procedures. Beneficial interests
in the Restricted Global Notes shall be subject to restrictions on transfer
comparable to those set forth herein to the extent required by the Securities
Act. Transfers of beneficial interests in the Global Notes also shall require
compliance with either subparagraph (i) or (ii) below, as applicable, as well as
one or more of the other following subparagraphs, as applicable:

                  (i) TRANSFER OF BENEFICIAL INTERESTS IN THE SAME GLOBAL NOTE.
         Beneficial interests in any Restricted Global Note may be transferred
         to Persons who take delivery thereof in the form of a beneficial
         interest in the same Restricted Global Note in accordance with the
         transfer restrictions set forth in the Private Placement Legend;
         provided, however, that prior to the expiration of the Restricted
         Period, transfers of beneficial interests in the Temporary Regulation S
         Global Note may not be made to a U.S. Person or for the account or
         benefit of a U.S. Person (other than an Initial Purchaser). Beneficial
         interests in any Unrestricted Global Note may be transferred to Persons
         who take delivery thereof in the form of a beneficial interest in an
         Unrestricted Global Note. No written orders or instructions shall be
         required to be delivered to the Registrar to effect the transfers
         described in this Section 2.06(b)(i).



                                      -33-


                 (ii) ALL OTHER TRANSFERS AND EXCHANGES OF BENEFICIAL INTERESTS
         IN GLOBAL NOTES. In connection with all transfers and exchanges of
         beneficial interests in any Global Note that is not subject to Section
         2.06(b)(i) above, the transferor of such beneficial interest must
         deliver to the Registrar (1) a written order from a Participant or an
         Indirect Participant given to the Depository in accordance with the
         Applicable Procedures directing the Depository to credit or cause to be
         credited a beneficial interest in another Global Note in an amount
         equal to the beneficial interest to be transferred or exchanged and (2)
         instructions given in accordance with the Applicable Procedures
         containing information regarding the Participant account to be credited
         with such increase. Upon consummation of the Exchange Offer by Issuer
         in accordance with Section 2.06(f) hereof, the requirements of this
         Section 2.06(b)(ii) shall be deemed to have been satisfied upon receipt
         by the Registrar of the instructions contained in the Letter of
         Transmittal delivered by the holder of such beneficial interests in the
         Restricted Global Notes. Upon satisfaction of all of the requirements
         for transfer or exchange of beneficial interests in Global Notes
         contained in this Indenture and the Notes or otherwise applicable under
         the Securities Act, the Trustee shall adjust the principal amount of
         the relevant Global Note(s) pursuant to Section 2.06(h) hereof.

                (iii) TRANSFER OF BENEFICIAL INTERESTS TO ANOTHER RESTRICTED
         GLOBAL NOTE. A beneficial interest in any Restricted Global Note may be
         transferred to a Person who takes delivery thereof in the form of a
         beneficial interest in another Restricted Global Note if the transfer
         complies with the requirements of Section 2.06(b)(ii) above and the
         Registrar receives the following:

                           (A) if the transferee will take delivery in the form
                  of a beneficial interest in a 144A Global Note, then the
                  transferor must deliver a certificate in the form of EXHIBIT B
                  hereto, including the certifications in item (1) thereof; and

                           (B) if the transferee will take delivery in the form
                  of a beneficial interest in a Regulation S Global Note, then
                  the transferor must deliver a certificate in the form of
                  EXHIBIT B hereto, including the certifications in item (2)
                  thereof;

                 (iv) TRANSFER AND EXCHANGE OF BENEFICIAL INTERESTS IN A
         RESTRICTED GLOBAL NOTE FOR BENEFICIAL INTERESTS IN AN UNRESTRICTED
         GLOBAL NOTE. A beneficial interest in any Restricted Global Note may be
         exchanged by any holder thereof for a beneficial interest in an
         Unrestricted Global Note or transferred to a Person who takes delivery
         thereof in the form of a beneficial interest in an Unrestricted Global
         Note if the exchange or transfer complies with the requirements of
         Section 2.06(b)(ii) above and:

                           (A) such exchange or transfer is effected pursuant to
                  the Exchange Offer in accordance with the Registration Rights
                  Agreement and the holder of





                                      -34-


                  the beneficial interest to be transferred, in the case of an
                  exchange, or the transferee, in the case of a transfer,
                  certifies in the applicable Letter of Transmittal that it is
                  not (1) a broker-dealer, (2) a Person participating in the
                  distribution of the Exchange Notes or (3) a Person who is an
                  affiliate (as defined in Rule 144) of Issuer;

                           (B) such transfer is effected pursuant to the
                  Shelf Registration Statement in accordance with the
                  Registration Rights Agreement;

                           (C) such transfer is effected by a Broker-Dealer
                  pursuant to the Shelf Registration Statement in accordance
                  with the Registration Rights Agreement; or

                           (D) the Registrar receives the following:

                                    (1) if the holder of such beneficial
                           interest in a Restricted Global Note proposes to
                           exchange such beneficial interest for a beneficial
                           interest in an Unrestricted Global Note, a
                           certificate from such holder in the form of EXHIBIT C
                           hereto, including the certifications in item (1)(a)
                           thereof; or

                                    (2) if the holder of such beneficial
                           interest in a Restricted Global Note proposes to
                           transfer such beneficial interest to a Person who
                           shall take delivery thereof in the form of a
                           beneficial interest in an Unrestricted Global Note, a
                           certificate from such holder in the form of EXHIBIT B
                           hereto, including the certifications in item (4)
                           thereof;

                  and, in each such case set forth in this subparagraph (D), if
                  the Registrar so requests or if the Applicable Procedures so
                  require, an Opinion of Counsel in form reasonably acceptable
                  to the Registrar to the effect that such exchange or transfer
                  is in compliance with the Securities Act and that the
                  restrictions on transfer contained herein and in the Private
                  Placement Legend are no longer required in order to maintain
                  compliance with the Securities Act.

                  If any such transfer is effected pursuant to subparagraph (B)
or (D) above at a time when an Unrestricted Global Note has not yet been issued,
Issuer shall issue and, upon receipt of an Authentication Order in accordance
with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
aggregate principal amount of beneficial interests transferred pursuant to
subparagraph (B) or (D) above.




                                      -35-


                  Beneficial interests in an Unrestricted Global Note cannot be
exchanged for, or transferred to Persons who take delivery thereof in the form
of, a beneficial interest in a Restricted Global Note.

                  (c)      TRANSFER AND EXCHANGE OF BENEFICIAL INTERESTS IN
GLOBAL NOTES FOR DEFINITIVE NOTES. A beneficial interest in a Global Note may
not be exchanged for a Definitive Note except under the circumstances described
in Section 2.06(a) hereof. A beneficial interest in a Global Note may not be
transferred to a Person who takes delivery thereof in the form of a Definitive
Note except under the circumstances described in Section 2.06(a) hereof.

                  (d)      TRANSFER AND EXCHANGE OF DEFINITIVE NOTES FOR
BENEFICIAL INTERESTS IN GLOBAL NOTES.

                  (i) RESTRICTED DEFINITIVE NOTES TO BENEFICIAL INTERESTS IN
RESTRICTED GLOBAL NOTES. If any Holder of a Restricted Definitive Note proposes
to exchange such Note for a beneficial interest in a Restricted Global Note or
to transfer such Restricted Definitive Notes to a Person who takes delivery
thereof in the form of a beneficial interest in a Restricted Global Note, then,
upon receipt by the Registrar of the following documentation:

                  (A) if the Holder of such Restricted Definitive Note proposes
         to exchange such Note for a beneficial interest in a Restricted Global
         Note, a certificate from such Holder in the form of EXHIBIT C hereto,
         including the certifications in item (2)(a) thereof;

                  (B) if such Restricted Definitive Note is being transferred to
         a QIB in accordance with Rule 144A under the Securities Act, a
         certificate to the effect set forth in EXHIBIT B hereto, including the
         certifications in item (1) thereof;

                  (C) if such Restricted Definitive Note is being transferred to
         a Non-U.S. Person in an offshore transaction in accordance with Rule
         903 or Rule 904 under the Securities Act, a certificate to the effect
         set forth in EXHIBIT B hereto, including the certifications in item (2)
         thereof;

                  (D) if such Restricted Definitive Note is being transferred
         pursuant to an exemption from the registration requirements of the
         Securities Act in accordance with Rule 144 under the Securities Act, a
         certificate to the effect set forth in EXHIBIT B hereto, including the
         certifications in item (3)(a) thereof;

                  (E) if such Restricted Definitive Note is being transferred to
         an Institutional Accredited Investor in reliance on an exemption from
         the registration requirements of the Securities Act other than those
         listed in subparagraphs (B) through (D) above, a certificate to the
         effect set forth in EXHIBIT B hereto, including the certifications,
         certificates and Opinion of Counsel required by item (3)(d) thereof, if
         applicable;




                                      -36-


                  (F) if such Restricted Definitive Note is being transferred to
         Issuer or any of its Subsidiaries, a certificate to the effect set
         forth in EXHIBIT B hereto, including the certifications in item (3)(b)
         thereof; or

                  (G) if such Restricted Definitive Note is being transferred
         pursuant to an effective registration statement under the Securities
         Act, a certificate to the effect set forth in Exhibit B hereto,
         including the certifications in item (3)(c) thereof,

the Trustee shall cancel the Restricted Definitive Note, and increase or cause
to be increased the aggregate principal amount of, in the case of clause (A)
above, the appropriate Restricted Global Note, in the case of clause (B) above,
the 144A Global Note, and in the case of clause (C) above, the Regulation S
Global Note.

                 (ii) RESTRICTED DEFINITIVE NOTES TO BENEFICIAL INTERESTS IN
UNRESTRICTED GLOBAL NOTES. A Holder of a Restricted Definitive Note may exchange
such Note for a beneficial interest in an Unrestricted Global Note or transfer
such Restricted Definitive Note to a Person who takes delivery thereof in the
form of a beneficial interest in an Unrestricted Global Note only if:

                  (A) such exchange or transfer is effected pursuant to the
         Exchange Offer in accordance with the Registration Rights Agreement and
         the Holder, in the case of an exchange, or the transferee, in the case
         of a transfer, certifies in the applicable Letter of Transmittal that
         it is not (1) a broker-dealer, (2) a Person participating in the
         distribution of the Exchange Notes or (3) a Person who is an affiliate
         (as defined in Rule 144) of Issuer;

                  (B) such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights Agreement;

                  (C) such transfer is effected by a Broker-Dealer pursuant to
         the Exchange Offer Registration Statement in accordance with the
         Registration Rights Agreement; or

                  (D) the Registrar receives the following:

                           (1) if the Holder of such Definitive Notes proposes
                  to exchange such Notes for a beneficial interest in the
                  Unrestricted Global Note, a certificate from such Holder in
                  the form of EXHIBIT C hereto, including the certifications in
                  item (1)(b) thereof; or

                           (2) if the Holder of such Definitive Notes proposes
                  to transfer such Notes to a Person who shall take delivery
                  thereof in the form of a beneficial in-



                                      -37-



                  terest in the Unrestricted Global Note, a certificate from
                  such Holder in the form of EXHIBIT B hereto, including the
                  certifications in item (4) thereof;

         and, in each such case set forth in this subparagraph (D), if the
         Registrar so requests or if the Applicable Procedures so require, an
         Opinion of Counsel in form reasonably acceptable to the Registrar to
         the effect that such exchange or transfer is in compliance with the
         Securities Act and that the restrictions on transfer contained herein
         and in the Private Placement Legend are no longer required in order to
         maintain compliance with the Securities Act.

Upon satisfaction of the conditions of any of the subparagraphs in this Section
2.06(d)(ii), the Trustee shall cancel the Definitive Notes and increase or cause
to be increased the aggregate principal amount of the Unrestricted Global Note.

                (iii) UNRESTRICTED DEFINITIVE NOTES TO BENEFICIAL INTERESTS IN
UNRESTRICTED GLOBAL NOTES. A Holder of an Unrestricted Definitive Note may
exchange such Note for a beneficial interest in an Unrestricted Global Note or
transfer such Definitive Notes to a Person who takes delivery thereof in the
form of a beneficial interest in an Unrestricted Global Note at any time. Upon
receipt of a request for such an exchange or transfer, the Trustee shall cancel
the applicable Unrestricted Definitive Note and increase or cause to be
increased the aggregate principal amount of one of the Unrestricted Global
Notes.

                  If any such exchange or transfer from a Definitive Note to a
beneficial interest is effected pursuant to subparagraph (ii)(B), (ii)(D) or
(iii) above at a time when an Unrestricted Global Note has not yet been issued,
Issuer shall issue and, upon receipt of an Authentication Order in accordance
with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
principal amount of Definitive Notes so transferred.

                  (e)      TRANSFER AND EXCHANGE OF DEFINITIVE NOTES FOR
DEFINITIVE NOTES. Upon request by a Holder of Definitive Notes and such Holder's
compliance with the provisions of this Section 2.06(e), the Registrar shall
register the transfer or exchange of Definitive Notes. Prior to such
registration of transfer or exchange, the requesting Holder shall present or
surrender to the Registrar the Definitive Notes duly endorsed or accompanied by
a written instruction of transfer in form satisfactory to the Registrar duly
executed by such Holder or by its attorney, duly authorized in writing. In
addition, the requesting Holder shall provide any additional certifications,
documents and information, as applicable, required pursuant to the following
provisions of this Section 2.06(e).

                  (i) RESTRICTED DEFINITIVE NOTES TO RESTRICTED DEFINITIVE
         NOTES. Any Restricted Definitive Note may be transferred to and
         registered in the name of Persons who take delivery thereof in the form
         of a Restricted Definitive Note if the Registrar receives the
         following:




                                      -38-


                           (A) if the transfer will be made pursuant to Rule
                  144A under the Securities Act, then the transferor must
                  deliver a certificate in the form of EXHIBIT B hereto,
                  including the certifications in item (1) thereof;

                           (B) if the transfer will be made pursuant to Rule 903
                  or Rule 904 under the Securities Act, then the transferor must
                  deliver a certificate in the form of EXHIBIT B hereto,
                  including the certifications in item (2) thereof; and

                           (C) if the transfer will be made pursuant to any
                  other exemption from the registration requirements of the
                  Securities Act, then the transferor must deliver a certificate
                  in the form of EXHIBIT B hereto, including the certifications,
                  certificates and Opinion of Counsel required by item (3)(d)
                  thereof, if applicable.

                 (ii) RESTRICTED DEFINITIVE NOTES TO UNRESTRICTED DEFINITIVE
         NOTES. Any Restricted Definitive Note may be exchanged by the Holder
         thereof for an Unrestricted Definitive Note or transferred to a Person
         or Persons who take delivery thereof in the form of an Unrestricted
         Definitive Note if:

                           (A) such exchange or transfer is effected pursuant to
                  the Exchange Offer in accordance with the Registration Rights
                  Agreement and the Holder, in the case of an exchange, or the
                  transferee, in the case of a transfer, certifies in the
                  applicable Letter of Transmittal that it is not (1) a
                  broker-dealer, (2) a Person participating in the distribution
                  of the Exchange Notes or (3) a Person who is an affiliate (as
                  defined in Rule 144) of Issuer;

                           (B) any such transfer is effected pursuant to
                  the Shelf Registration Statement in accordance with the
                  Registration Rights Agreement;

                           (C) any such transfer is effected by a Broker-Dealer
                  pursuant to the Exchange Offer Registration Statement in
                  accordance with the Registration Rights Agreement; or

                           (D) the Registrar receives the following:

                                    (1) if the Holder of such Restricted
                           Definitive Notes proposes to exchange such Notes for
                           an Unrestricted Definitive Note, a certificate from
                           such Holder in the form of EXHIBIT C hereto,
                           including the certifications in item (1)(c) thereof;
                           or

                                    (2) if the Holder of such Restricted
                           Definitive Notes proposes to transfer such Notes to a
                           Person who shall take delivery thereof in the form of
                           an Unrestricted Definitive Note, a certificate from
                           such




                                      -39-


                           Holder in the form of EXHIBIT B hereto, including the
                           certifications in item (4) thereof;

                  and, in each such case set forth in this subparagraph (D), if
                  the Registrar so requests, an Opinion of Counsel in form
                  reasonably acceptable to Issuer to the effect that such
                  exchange or transfer is in compliance with the Securities Act
                  and that the restrictions on transfer contained herein and in
                  the Private Placement Legend are no longer required in order
                  to maintain compliance with the Securities Act.

                (iii) UNRESTRICTED DEFINITIVE NOTES TO UNRESTRICTED DEFINITIVE
         NOTES. A Holder of Unrestricted Definitive Notes may transfer such
         Notes to a Person who takes delivery thereof in the form of an
         Unrestricted Definitive Note. Upon receipt of a request to register
         such a transfer, the Registrar shall register the Unrestricted
         Definitive Notes pursuant to the instructions from the Holder thereof.

                  (f)      EXCHANGE OFFER. Upon the occurrence of the Exchange
Offer in accordance with the Registration Rights Agreement, Issuer shall issue
and, upon receipt of an Authentication Order in accordance with Section 2.02,
the Trustee shall authenticate (i) one or more Unrestricted Global Notes in an
aggregate principal amount equal to the principal amount of the beneficial
interests in the Restricted Global Notes tendered for acceptance by Persons that
certify in the applicable Letters of Transmittal that (x) they are not
broker-dealers, (y) they are not participating in a distribution of the Exchange
Notes and (z) they are not affiliates (as defined in Rule 144) of Issuer, and
accepted for exchange in the Exchange Offer and (ii) Definitive Notes in an
aggregate principal amount equal to the principal amount of the Restricted
Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with
the issuance of such Notes, the Trustee shall cause the aggregate principal
amount of the applicable Restricted Global Notes to be reduced accordingly, and
Issuer shall execute and the Trustee shall authenticate and deliver to the
Persons designated by the Holders of Definitive Notes so accepted Definitive
Notes in the appropriate principal amount.

                  (g)      LEGENDS. The following legends shall appear on the
face of all Global Notes and Definitive Notes issued under this Indenture unless
specifically stated otherwise in the applicable provisions of this Indenture.

                  (i) PRIVATE PLACEMENT LEGEND.

                           (A) Except as permitted by subparagraph (B) below,
                  each Global Note and each Definitive Note (and all Notes
                  issued in exchange therefor or substitution thereof) shall
                  bear the legend in substantially the following form:

                                    "THE NOTES EVIDENCED HEREBY HAVE NOT BEEN
                           REGISTERED UNDER THE SECURITIES ACT OF 1933, AS





                                      -40-

                           AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE
                           OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
                           EXCEPT (A) (1) TO A PERSON WHOM THE SELLER REASONABLY
                           BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN
                           THE MEANING OF RULE 144A UNDER THE SECURITIES ACT
                           PURCHASING FOR ITS OWN ACCOUNT OR THE ACCOUNT OF A
                           QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION
                           MEETING THE REQUIREMENTS OF RULE 144A, (2) IN AN
                           OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE
                           903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES
                           ACT, (3) TO AN INSTITUTIONAL ACCREDITED INVESTOR AS
                           DEFINED IN RULE 501(a)(1), (2), (3) or (7) OF
                           REGULATION D IN A TRANSACTION EXEMPT FROM THE
                           REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, (4)
                           PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
                           SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
                           AVAILABLE), (5) PURSUANT TO ANOTHER EXEMPTION FROM
                           REGISTRATION AVAILABLE UNDER THE SECURITIES ACT OR
                           (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
                           UNDER THE SECURITIES ACT AND (B) IN ACCORDANCE WITH
                           ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE
                           UNITED STATES."

                           (B) Notwithstanding the foregoing, any Global Note or
                  Definitive Note issued pursuant to subparagraph (b)(iv),
                  (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) of this Section
                  2.06 (and all Notes issued in exchange therefor or
                  substitution thereof) shall not bear the Private Placement
                  Legend.

                  (ii) GLOBAL NOTE LEGEND. Each Global Note shall bear a
         legend in substantially the following form:

                           "THIS GLOBAL NOTE IS HELD BY THE DEPOSITORY (AS
                  DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE
                  IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF,
                  AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
                  EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS
                  MAY BE REQUIRED PURSUANT TO THE INDENTURE, (II) THIS GLOBAL
                  NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO
                  SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY
                  BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO
                  SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE
                  TRANS-




                                      -41-


                  FERRED TO A SUCCESSOR DEPOSITORY WITH THE PRIOR WRITTEN
                  CONSENT OF ITS ISSUER."

                  (iii) REGULATION S TEMPORARY GLOBAL NOTE LEGEND. The
         Regulation S Temporary Global Note shall bear a legend in substantially
         the following form:

                           "THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY
                  GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS
                  EXCHANGE FOR CERTIFICATED NOTES, ARE AS SPECIFIED IN THE
                  INDENTURE (AS DEFINED HEREIN)."

                  (h)      CANCELLATION AND/OR ADJUSTMENT OF GLOBAL NOTES. At
such time as all beneficial interests in a particular Global Note have been
exchanged for Definitive Notes or a particular Global Note has been redeemed,
repurchased or canceled in whole and not in part, each such Global Note shall be
returned to or retained and canceled by the Trustee in accordance with Section
2.11 hereof. At any time prior to such cancellation, if any beneficial interest
in a Global Note is exchanged for or transferred to a Person who will take
delivery thereof in the form of a beneficial interest in another Global Note or
for Definitive Notes, the principal amount of Notes represented by such Global
Note shall be reduced accordingly and an endorsement shall be made on such
Global Note by the Trustee or by the Depository at the direction of the Trustee
to reflect such reduction; and if the beneficial interest is being exchanged for
or transferred to a Person who will take delivery thereof in the form of a
beneficial interest in another Global Note, such other Global Note shall be
increased accordingly and an endorsement shall be made on such Global Note by
the Trustee or by the Depository at the direction of the Trustee to reflect such
increase.

                  (i)      GENERAL PROVISIONS RELATING TO TRANSFERS AND
EXCHANGES.

                  (i) To permit registrations of transfers and exchanges, Issuer
shall execute and the Trustee shall authenticate Global Notes and Definitive
Notes upon Issuer's order or at the Registrar's request.

                 (ii) No service charge shall be made to a holder of a
beneficial interest in a Global Note or to a Holder of a Definitive Note for any
registration of transfer or exchange, but Issuer may require payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable in
connection therewith (other than any such transfer taxes or similar governmental
charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 4.07,
4.08 and 9.05 hereof).

                (iii) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive Notes shall
be the valid obligations of Issuer, evidencing the same debt, and entitled to
the same benefits under this Indenture, as the Global Notes or Definitive Notes
surrendered upon such registration of transfer or exchange.





                                      -42-

                 (iv) The Registrar shall not be required (A) to issue, to
register the transfer of or to exchange any Notes during a period beginning at
the opening of business 15 days before the day of any selection of Notes for
redemption under Section 3.02 hereof and ending at the close of business on the
day of selection, (B) to register the transfer of or to exchange any Note so
selected for redemption in whole or in part, except the unredeemed portion of
any Note being redeemed in part or (C) to register the transfer of or to
exchange a Note between a record date and the next succeeding Interest Payment
Date.

                  (v) Prior to due presentment for the registration of a
transfer of any Note, the Trustee, any Agent and Issuer may deem and treat the
Person in whose name any Note is registered as the absolute owner of such Note
for the purpose of receiving payment of principal of and interest on such Notes
and for all other purposes, and none of the Trustee, any Agent or Issuer shall
be affected by notice to the contrary.

                 (vi) The Trustee shall authenticate Global Notes and Definitive
Notes in accordance with the provisions of Section 2.02 hereof.

                (vii) All certifications, certificates and Opinions of Counsel
required to be submitted to the Registrar pursuant to this Section 2.06 to
effect a registration of transfer or exchange may be submitted by facsimile.

               (viii) Each Holder of a Note agrees to indemnify Issuer and the
Trustee against any liability that may result from the transfer, exchange or
assignment of such Holder's Note in violation of any provision of this Indenture
and/or applicable United States federal or state securities law.

The Trustee shall have no obligation or duty to monitor, determine or inquire as
to compliance with any restrictions on transfer imposed under this Indenture or
under applicable law with respect to any transfer of any interest in any Note
(including any transfers between or among Depository Participants or beneficial
owners of interests in any Global Note) other than to require delivery of such
certificates and other documentation or evidence as are expressly required by,
and to do so if and when expressly required by the terms of, this Indenture, and
to examine the same to determine substantial compliance as to form with the
express requirements hereof.

Section 2.07.       REPLACEMENT NOTES

                  If any mutilated Note is surrendered to the Trustee or Issuer
and the Trustee receive evidence to its satisfaction of the destruction, loss or
theft of any Note, Issuer shall issue and the Trustee, upon receipt of an
Authentication Order, shall authenticate a replacement Note if the Trustee's
requirements are met. An indemnity bond must be supplied by the Holder that is
sufficient in the judgment of the Trustee and Issuer to protect Issuer, the
Trus-



                                      -43-


tee, any Agent and any authenticating agent from any loss that any of them
may suffer if a Note is replaced. Issuer may charge for its expenses in
replacing a Note.

                  Every replacement Note is an additional obligation of Issuer
and shall be entitled to all of the benefits of this Indenture equally and
proportionately with all other Notes duly issued hereunder.

Section 2.08.       OUTSTANDING NOTES.

                  The Notes outstanding at any time are all the Notes
authenticated by the Trustee except for those canceled by it, those delivered to
it for cancellation, those reductions in the interest in a Global Note effected
by the Trustee in accordance with the provisions hereof and those described in
this Section as not outstanding. Except as set forth in Section 2.09 hereof, a
Note does not cease to be outstanding because Issuer or an Affiliate of Issuer
holds the Note; however, Notes held by Issuer or a Subsidiary of Issuer shall
not be deemed to be outstanding for purposes of Section 3.07(b) hereof.

                  If a Note is replaced pursuant to Section 2.07 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Note is held by a bona fide purchaser.

                  If the principal amount of any Note is considered paid under
Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to
accrue.

                  If the Paying Agent (other than Issuer, a Subsidiary of Issuer
or an Affiliate of any thereof) holds, on a redemption date or maturity date,
money sufficient to pay Notes payable on that date, then on and after that date
such Notes shall be deemed to be no longer outstanding and shall cease to accrue
interest.

Section 2.09.       TREASURY NOTES.

                  In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, waiver or consent, Notes owned
by Issuer, or by any Person directly or indirectly controlling or controlled by
or under direct or indirect common control with Issuer, shall be considered as
though not outstanding, except that for the purposes of determining whether the
Trustee shall be protected in relying on any such direction, waiver or consent,
only Notes that a Responsible Officer of the Trustee knows are so owned shall be
so disregarded.

Section 2.10.       TEMPORARY NOTES.

                  Issuer may prepare and the Trustee, upon receipt of an
Authentication Order, shall authenticate temporary Notes. Temporary Notes shall
be substantially in the form of




                                      -44-



permanent Notes but may have variations that Issuer considers appropriate for
temporary Notes and as shall be reasonably acceptable to the Trustee. Issuer may
prepare and the Trustee, upon receipt of an Authentication Order, shall
authenticate permanent Notes in exchange for temporary Notes.

                  Holders of temporary Notes shall be entitled to all of the
benefits of this Indenture.

Section 2.11.       CANCELLATION.


                  Issuer at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation and shall dispose of
the Notes in accordance with its customary procedures (subject to the record
retention requirement of the Exchange Act). Issuer may not issue new Notes to
replace Notes that it has paid or that have been delivered to the Trustee for
cancellation.

Section 2.12.       DEFAULTED INTEREST.


                  If Issuer defaults in a payment of interest on the Notes, such
interest shall cease to be payable to the Holders on the relevant record date
and Issuer shall instead pay the defaulted interest in any lawful manner plus,
to the extent lawful, interest payable on the defaulted interest, to the Persons
who are Holders on a subsequent special record date, in each case at the rate
provided in the Notes and in Section 4.01 hereof. Issuer shall notify the
Trustee in writing of the amount of defaulted interest proposed to be paid on
each Note and the date of the proposed payment. Issuer shall fix or cause to be
fixed each such special record date and payment date, PROVIDED that no such
special record date shall be less than 10 days prior to the related payment date
for such defaulted interest. At least 15 days before the special record date,
Issuer (or, upon the written request of Issuer, the Trustee in the name and at
the expense of Issuer) shall mail or cause to be mailed to Holders a notice that
states the special record date, the related payment date and the amount of such
interest to be paid.

Section 2.13.       CUSIP NUMBERS.


                  Issuer, in issuing the Notes, may use "CUSIP" numbers (if then
generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; PROVIDED that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Notes or as contained in any notice of a redemption and
that reliance may be placed only on the other identification numbers printed on
the Notes, and any such redemption shall not be affected by any defect in or
omission of such numbers. Issuer will promptly notify the Trustee of any change
in the "CUSIP" numbers.




                                      -45-


                                   ARTICLE 3.
                                   REDEMPTION


Section 3.01.       NOTICE OF REDEMPTION TO TRUSTEE.


                  If Issuer elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee,
at least 30 days but not more than 90 days before the redemption date, an
Officers' Certificate setting forth (i) the clause of this Indenture pursuant to
which the redemption shall occur, (ii) the redemption date, (iii) the principal
amount of Notes to be redeemed and (iv) the redemption price.

Section 3.02.       SELECTION OF NOTES TO BE REDEEMED.


                  If less than all of the Notes are to be redeemed at any time
pursuant to Section 3.07 hereof, the Trustee shall select Notes for redemption
as follows:

         o        if the Notes are listed, in compliance with the requirements
                  of the principal national securities exchange on which the
                  Notes are listed; or

         o        if the Notes are not so listed, on a pro rata basis, by lot or
                  by such method as the Trustee shall deem fair and appropriate.

                  In the event of partial redemption by lot pursuant to Section
3.07 hereof, the particular Notes to be redeemed shall be selected, unless
otherwise provided herein, not less than 30 nor more than 60 days prior to the
redemption date by the Trustee from the outstanding Notes not previously called
for redemption.

                  The Trustee shall promptly notify Issuer in writing of the
Notes selected for redemption and, in the case of any Note selected for partial
redemption, the principal amount thereof to be redeemed. Notes and portions of
Notes selected shall be in amounts of $1,000 or whole multiples of $1,000;
except that if all of the Notes of a Holder are to be redeemed, the entire
outstanding amount of Notes held by such Holder, even if not a multiple of
$1,000, shall be redeemed. Except as provided in the preceding sentence,
provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption. No Notes of $1,000 or less
shall be redeemed in part.

Section 3.03.       NOTICE OF REDEMPTION TO HOLDERS.


                  If Issuer elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.07 hereof, at least 30 days but not more than
60 days before the redemption date, Issuer shall mail or cause to be mailed, by
first class mail, a notice of redemption to each Holder whose Notes are to be
redeemed at its registered address. Notices of redemption may




                                      -46-


not be conditional; PROVIDED that if the redemption is pursuant to Section
3.07(b) hereof and the proposed redemption date is not later than 30 days after
the date of closing of such Public Equity Offering, the redemption may be
subject to such closing. The notice shall identify the Notes to be redeemed
(including "CUSIP" number(s)) and shall state: (i) the redemption date; (ii) the
redemption price; (iii) if any Note is being redeemed in part, the portion of
the principal amount of such Note to be redeemed and that, after the redemption
date upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion shall be issued upon cancellation of the original
Note; (iv) the name and address of the Paying Agent; (v) that Notes called for
redemption must be surrendered to the Paying Agent to collect the redemption
price; (vi) that, unless Issuer defaults in making such redemption payment,
interest on Notes called for redemption ceases to accrue on and after the
redemption date; (vii) the paragraph of the Notes and/or Section of this
Indenture pursuant to which the Notes called for redemption are being redeemed;
(viii) if the second sentence of this paragraph is applicable, that the
redemption is subject to the closing of the Public Equity Offering; and (ix)
that no representation is made as to the correctness or accuracy of the "CUSIP"
number, if any, listed in such notice or printed on the Notes.

                  At Issuer's request, the Trustee shall give the notice of
redemption in Issuer's name and at its expense; PROVIDED, HOWEVER, that Issuer
shall have delivered to the Trustee, at least 60 days prior to the redemption
date, an Officers' Certificate requesting that the Trustee give such notice and
setting forth the information to be stated in such notice as provided in the
preceding paragraph.

Section 3.04.       EFFECT OF NOTICE OF REDEMPTION.


                  Once notice of redemption is mailed in accordance with Section
3.03 hereof, Notes called for redemption become irrevocably due and payable on
the redemption date at the redemption price unless the notice of redemption is
conditional in accordance with Section 3.03 hereof and the condition is not met.

Section 3.05.       DEPOSIT OF REDEMPTION PRICE.


                  One Business Day prior to the redemption date, Issuer shall
deposit with the Paying Agent money sufficient to pay the redemption price of
and accrued interest on all Notes to be redeemed on that date. The Paying Agent
shall promptly return to Issuer any money deposited with the Paying Agent by
Issuer in excess of the amounts necessary to pay the redemption price of, and
accrued interest on, all Notes to be redeemed.

                  If Issuer complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption. If a Note is redeemed
on or after an interest record date but on or prior to the related interest
payment date, then any accrued and unpaid interest shall be paid to the Person
in whose name such Note was registered at the close of business on such record
date. If any




                                      -47-


Note called for redemption shall not be so paid upon surrender for
redemption because of the failure of Issuer to comply with the preceding
paragraph, interest shall be paid on the unpaid principal, from the redemption
date until such principal is paid, and to the extent lawful on any interest not
paid on such unpaid principal, in each case at the rate provided in the Notes
and in Section 4.01 hereof.

Section 3.06.       NOTES REDEEMED IN PART.


                  Upon surrender of a Note that is redeemed in part, Issuer
shall issue and, upon Issuer's written request, the Trustee shall authenticate
for the Holder at the expense of Issuer a new Note equal in principal amount to
the unredeemed portion of the Note surrendered.

Section 3.07.       OPTIONAL REDEMPTION.


                  (a)      Except as set forth in clause (b) of this Section
3.07, Issuer shall not have the option to redeem the Notes pursuant to this
Section 3.07 prior to November 1, 2006. On or after November 1, 2006, the Notes
will be subject to redemption at any time at the option of Issuer, in whole or
in part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest thereon, if any, to the applicable redemption date,
if redeemed during the twelve-month period beginning on November 1 of the years
indicated below:




YEAR                                                PERCENTAGE
- ----                                                ----------
                                                 

2006..........................................             105.375%
2007..........................................             103.583%
2008..........................................             101.792%
2009 and thereafter...........................             100.000%

                  (b)      Notwithstanding the provisions of clause (a) of this
Section 3.07, at any time on or prior to November 1, 2004, Issuer may on any one
or more occasions redeem up to 35% of the aggregate principal amount of Notes at
a redemption price equal to 110.75% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the redemption date, with the
net cash proceeds of one or more Public Equity Offerings by Issuer; PROVIDED
that (i) at least 65% of the aggregate principal amount of Notes issued under
this Indenture remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by Issuer and its Subsidiaries) and (ii) such
redemption shall occur within 90 days of the date of the closing of such Public
Equity Offering.

                  (c)      Any redemption pursuant to this Section 3.07 shall be
made pursuant to the provisions of Sections 3.01 through 3.06 hereof.




                                      -48-


Section 3.08.       MANDATORY REDEMPTION.


                  Issuer shall not be required to make mandatory redemption
payments with respect to the Notes. For the avoidance of doubt, an offer to
purchase pursuant to Section 4.07 or 4.08 shall not be deemed a redemption.


                                   ARTICLE 4.
                                    COVENANTS


Section 4.01.       PAYMENT OF NOTES.


                  Issuer shall pay or cause to be paid the principal of,
premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes. Principal, premium, if any, and interest shall be
considered paid on the date due if the Paying Agent, if other than Issuer or a
Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due date money
deposited by Issuer in immediately available funds and designated for and
sufficient to pay all principal, premium, if any, and interest then due. Issuer
shall pay all Liquidated Damages, if any, in the same manner on the dates and in
the amounts set forth in the Registration Rights Agreement.

                  Issuer shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue principal at the rate equal
to the then applicable interest rate on the Notes to the extent lawful; it shall
pay interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue installments of interest (without regard to any
applicable grace period) at the same rate to the extent lawful.

Section 4.02.       MAINTENANCE OF OFFICE OR AGENCY.


                  Issuer shall maintain in the Borough of Manhattan, the City of
New York, an office or agency (which may be an office of the Trustee or an
affiliate of the Trustee, Registrar or co-registrar) where Notes may be
surrendered for registration of transfer or for exchange and where notices and
demands to or upon Issuer in respect of the Notes and this Indenture may be
served. Issuer shall give prompt written notice to the Trustee of the location,
and any change in the location, of such office or agency. If at any time Issuer
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee.

                  Issuer may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; PROVIDED,
HOWEVER, that no such designation or rescission shall in any manner relieve
Issuer of its obligation to maintain an office or agency




                                      -49-


in the Borough of Manhattan, the City of New York for such purposes. Issuer
shall give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or agency.

                  Issuer hereby designates the Corporate Trust Office of the
Trustee as one such office or agency of Issuer in accordance with Section 2.03.

Section 4.03.       COMPLIANCE CERTIFICATE.


                  (a)      Issuer and each Guarantor (to the extent that such
Guarantor is so required under the TIA) shall deliver to the Trustee, within 90
days after the end of each fiscal year, an Officers' Certificate stating that a
review of the activities of Issuer and its Subsidiaries during the preceding
fiscal year has been made under the supervision of the signing Officers with a
view to determining whether Issuer has kept, observed, performed and fulfilled
its obligations under this Indenture, and further stating, as to each such
Officer signing such certificate, that to the best of his or her knowledge
Issuer has kept, observed, performed and fulfilled each and every covenant
contained in this Indenture and is not in default in the performance or
observance of any of the terms, provisions and conditions of this Indenture (or,
if a Default shall have occurred and be continuing, describing all such Defaults
of which he or she may have knowledge and what action Issuer is taking or
proposes to take with respect thereto) and that to the best of his or her
knowledge no event has occurred and remains in existence by reason of which
payments on account of the principal of or interest, if any, on the Notes is
prohibited or if such event has occurred, a description of the event and what
action Issuer is taking or proposes to take with respect thereto.

                  (b)      Issuer shall, so long as any of the Notes are
outstanding, deliver to the Trustee as soon as possible and in any event within
five days, forthwith upon Issuer becoming aware of any Default that has occurred
and is continuing, an Officers' Certificate specifying such Default and what
action Issuer is taking or proposes to take with respect thereto.

Section 4.04.       TAXES.


                  Issuer shall pay, and shall cause each of its Subsidiaries to
pay, prior to delinquency, all material taxes, assessments, and governmental
levies except such as are contested in good faith and by appropriate proceedings
or where the failure to effect such payment is not adverse in any material
respect to the Holders of the Notes.

Section 4.05.       STAY, EXTENSION AND USURY LAWS.


                  Issuer and each of the Guarantors covenants (to the extent
that it may lawfully do so) that it shall not at any time insist upon, plead, or
in any manner whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law wherever enacted, now or at any time hereafter in force,
that may affect the covenants or the performance of this Inden-




                                      -50-


ture; and Issuer and each of the Guarantors (to the extent that it may lawfully
do so) hereby expressly waives all benefit or advantage of any such law, and
covenants that it shall not, by resort to any such law, hinder, delay or impede
the execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law has been enacted.

Section 4.06.       CORPORATE EXISTENCE.


                  Subject to Article 5 hereof, Issuer shall do or cause to be
done all things necessary to preserve and keep in full force and effect (i) its
corporate existence, and the corporate, partnership or other existence of each
of its Subsidiaries, in accordance with the respective organizational documents
(as the same may be amended from time to time) of Issuer or any such Subsidiary
and (ii) the rights (charter and statutory), licenses and franchises of Issuer
and its Subsidiaries; PROVIDED, HOWEVER, that Issuer shall not be required to
preserve any such right, license or franchise, or the corporate, partnership or
other existence of any of its Subsidiaries, if the Board of Directors shall
determine that the preservation thereof is no longer desirable in the conduct of
the business of Issuer and its Subsidiaries, taken as a whole.

Section 4.07.       OFFER TO REPURCHASE UPON CHANGE OF CONTROL.


                  If a Change of Control occurs, each Holder of Notes will have
the right to require Issuer to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "CHANGE OF CONTROL OFFER") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of purchase (the "CHANGE OF CONTROL
PAYMENT").

                  Within 30 days following any Change of Control, Issuer shall
send, by first class mail, a notice to the Trustee and to each Holder at its
registered address. The notice shall contain all instructions and materials
necessary to enable such Holder to tender Notes pursuant to the Change of
Control Offer. Any Change of Control Offer shall be made to all Holders. The
notice, which shall govern the terms of the Change of Control Offer, shall
state: (1) that the Change of Control Offer is being made pursuant to this
Section 4.07; (2) the Change of Control Payment and the date on which Notes
tendered and accepted for payment shall be purchased, which date shall be at
least 30 days and no later than 60 days from the date such notice is mailed (the
"CHANGE OF CONTROL PAYMENT DATE"); (3) that any Note not tendered or accepted
for payment shall continue to accrete or accrue interest; (4) that, unless
Issuer defaults in making such payment, any Note accepted for payment pursuant
to the Change of Control Offer shall cease to accrete or accrue interest after
the Change of Control Payment Date; (5) that Holders electing to have a Note
purchased pursuant to the Change of Control Offer may only elect to have all of
such Note purchased and may not elect to have only a portion of such Note
purchased; (6) that Holders electing to have a Note purchased pursuant to any
Change of Control Offer shall be required to surrender the Note, with the




                                      -51-


form entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, or transfer by book-entry transfer, to Issuer, a depository, if
appointed by Issuer, or the Paying Agent at the address specified in the notice
at least three days before the Change of Control Payment Date; (7) that Holders
shall be entitled to withdraw their election if Issuer, the depository or the
Paying Agent, as the case may be, receives, not later than the Change of Control
Payment Date, a notice setting forth the name of the Holder, the principal
amount of the Note the Holder delivered for purchase and a statement that such
Holder is withdrawing his election to have such Note purchased; (8) that Notes
and portions of Notes purchased shall be in amounts of $1,000 or whole multiples
of $1,000, except that if all of the Notes of a Holder are to be purchased, the
entire outstanding amount of Notes held by such Holder, even if not a multiple
of $1,000, shall be purchased; and (9) that Holders whose Notes were purchased
only in part shall be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered (or transferred by book-entry
transfer). Issuer shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control. To the extent any
such rules or regulations conflict with this Section 4.07, Issuer will not be
deemed to have breached its obligations under this Indenture by virtue of
complying with such rules or regulations.

                  On the Change of Control Payment Date, Issuer shall, to the
extent lawful: (1) accept for payment all Notes or portions thereof properly
tendered pursuant to the Change of Control Offer; (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all Notes
or portions thereof so tendered; and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being repurchased by
Issuer.

                  Prior to complying with any of the provisions of this Section
4.07, but in any event within 90 days following a Change of Control, Issuer will
either repay all outstanding Designated Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Designated Senior
Debt to permit the repurchase of Notes required by this Section 4.07. Issuer
will publicly announce the results of the Change of Control Offer as soon as
practicable after the Change of Control Payment Date.

                  The Paying Agent shall promptly mail to each Holder of Notes
so tendered the Change of Control Payment for such Notes, and the Trustee shall
promptly authenticate pursuant to an Authentication Order and mail (or cause to
be transferred by book entry) to each Holder a new Note equal in principal
amount to any unrepurchased portion of the Notes surrendered, if any; PROVIDED
that each such new Note shall be in a principal amount of $1,000 or an integral
multiple thereof. However, if the Change of Control Payment Date is on or after
an interest record date and on or before the related interest payment date, any
accrued and unpaid interest shall be paid to the Person in whose name a Note is
registered at the close of



                                      -52-



business on such record date, and no additional interest shall be payable to
Holders who tender Notes pursuant to the Change of Control Offer.

                  Subject to the second succeeding paragraph, the provisions
described above that require Issuer to make a Change of Control Offer following
a Change of Control will be applicable regardless of whether or not any other
provisions of the Indenture are applicable.

                  Notwithstanding anything to the contrary in this Section 4.07,
Issuer shall not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in this
Section 4.07 and purchases all Notes validly tendered and not withdrawn under
such Change of Control Offer.

                  Notwithstanding anything to the contrary in this Section 4.07,
Issuer shall not be required to make a Change of Control Offer, as provided
above, if, in connection with or in contemplation of any Change of Control, it
or a third party has made an offer to purchase (an "ALTERNATE OFFER") any and
all Notes validly tendered at a cash price equal to or higher than the Change of
Control Payment and has purchased all Notes properly tendered in accordance with
the terms of such Alternate Offer.

Section 4.08.       ASSET SALES.


                  Issuer will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:

         (1)      Issuer (or the Restricted Subsidiary, as the case may be)
                  receives consideration at the time of such Asset Sale at least
                  equal to the fair market value of the assets or Equity
                  Interests issued or sold or otherwise disposed of (except as a
                  result of any foreclosure or sale by any lenders);

         (2)      such fair market value is determined by Issuer's Board of
                  Directors and evidenced by a resolution of the Board of
                  Directors; and

         (3)      at least 75% of the consideration therefor received by Issuer
                  or such Restricted Subsidiary is in the form of cash or Cash
                  Equivalents or Related Business Assets. For purposes of this
                  provision, each of the following shall be deemed to be cash:

                           (a)   any Indebtedness of Issuer or any Restricted
                  Subsidiary (other than Indebtedness that is by its terms
                  subordinated to the Notes or any Note Guarantee) that are
                  assumed by the transferee of any such assets; PROVIDED that
                  Issuer or such Restricted Subsidiary is released from such
                  Indebtedness; and




                                      -53-


                           (b)   any notes, securities or other obligations
                  received by Issuer or any such Restricted Subsidiary from such
                  transferee that are converted by Issuer or such Restricted
                  Subsidiary into cash within 90 days after the date of the
                  Asset Sale (to the extent of the cash received in that
                  conversion).

                  Within 365 days after the receipt of any Net Proceeds from an
Asset Sale, Issuer may apply such Net Proceeds at its option:

         (1)      to repay Senior Debt; and/or

         (2)      to make an investment in or expenditures for assets that
                  replace the assets that were the subject of the Asset Sale or
                  in assets (other than securities) that will be used or useful
                  in a Permitted Business or to make a Permitted Investment
                  (other than an Investment in Cash Equivalents or the Notes).

Pending the final application of any such Net Proceeds, Issuer may temporarily
reduce revolving credit borrowings or otherwise invest such Net Proceeds in any
manner that is not prohibited by this Indenture.

                  Any Net Proceeds from Asset Sales that Issuer does not apply,
or decides not to apply, as provided in the preceding paragraph will constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0
million, Issuer will make an offer (an "ASSET SALE OFFER") to all Holders of
Notes and all holders of other Indebtedness that is PARI PASSU with the Notes
containing provisions similar to those set forth in this Indenture with respect
to offers to purchase or redeem such Indebtedness with the proceeds of sales of
assets to purchase the maximum principal amount of Notes and such other PARI
PASSU Indebtedness that may be purchased out of the Excess Proceeds (the "ASSET
SALE OFFER AMOUNT"). The offer price for Notes in any Asset Sale Offer will be
equal to 100% of the aggregate principal amount plus accrued and unpaid
interest, if any, to the date of purchase (the "ASSET SALE PAYMENT"), and will
be payable in cash. If any Excess Proceeds remain after consummation of an Asset
Sale Offer, Issuer may use such Excess Proceeds for any purpose not otherwise
prohibited by this Indenture and such Excess Proceeds will no longer be subject
to the provisions of this Section 4.08. If the aggregate principal amount of
Notes and such other PARI PASSU Indebtedness tendered into such Asset Sale Offer
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and
such other PARI PASSU Indebtedness to be purchased on a pro rata basis based
upon the principal amount or accreted value (as applicable) of the Notes and
such other Indebtedness. Upon completion of each Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero.

                  Issuer shall comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of an Asset Sale. To the extent the
provisions of any applicable securities laws or regulations conflict





                                      -54-


with the provisions of this Section 4.08, Issuer will not be deemed to have
breached its obligations under this Indenture by virtue of complying with such
laws or regulations.

                  Upon the commencement of an Asset Sale Offer, Issuer shall
send, by first class mail, a notice to the Trustee and to each Holder at its
registered address. The notice shall contain all instructions and materials
necessary to enable such Holder to tender Notes pursuant to the Asset Sale
Offer. Any Asset Sale Offer shall be made to all Holders. The notice, which
shall govern the terms of the Asset Sale Offer, shall state:

         (1)      that the Asset Sale Offer is being made pursuant to this
                  Section 4.08;

         (2)      the Asset Sale Offer Amount, the Asset Sale Payment and the
                  date on which Notes tendered and accepted for payment shall be
                  purchased, which date shall be at least 30 days and no later
                  than 60 days from the date such notice is mailed (the "ASSET
                  SALE PAYMENT DATE");

         (3)      that any Note not tendered or accepted for payment shall
                  continue to accrete or accrue interest;

         (4)      that, unless Issuer defaults in making such payment, any Note
                  accepted for payment pursuant to the Asset Sale Offer shall
                  cease to accrete or accrue interest after the Asset Sale
                  Payment Date;

         (5)      that Holders electing to have a Note purchased pursuant to the
                  Asset Sale Offer may only elect to have all of such Note
                  purchased and may not elect to have only a portion of such
                  Note purchased;

         (6)      that Holders electing to have a Note purchased pursuant to any
                  Asset Sale Offer shall be required to surrender the Note, with
                  the form entitled "Option of Holder to Elect Purchase" on the
                  reverse of the Note completed, or transfer by book-entry
                  transfer, to Issuer, a depository, if appointed by Issuer, or
                  the Paying Agent at the address specified in the notice at
                  least three days before the Asset Sale Payment Date;

         (7)      that Holders shall be entitled to withdraw their election if
                  Issuer, the Depository or the Paying Agent, as the case may
                  be, receives, not later than the Asset Sale Payment Date, a
                  notice setting forth the name of the Holder, the principal
                  amount of the Note the Holder delivered for purchase and a
                  statement that such Holder is withdrawing his election to have
                  such Note purchased;

         (8)      that, if the aggregate principal amount of Notes surrendered
                  by Holders exceeds the Asset Sale Offer Amount, Issuer shall
                  select the Notes to be purchased on a PRO RATA basis (with
                  such adjustments as may be deemed appropri-




                                      -55-


                  ate by Issuer so that only Notes in denominations of $1,000,
                  or integral multiples thereof, shall be purchased); and

         (9)      that Holders whose Notes were purchased only in part shall be
                  issued new Notes equal in principal amount to the unpurchased
                  portion of the Notes surrendered (or transferred by book-entry
                  transfer).

                  On the Asset Sale Payment Date, Issuer shall, to the extent
lawful: (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Asset Sale Offer; (2) deposit with the Paying Agent an amount
equal to the Asset Sale Payment in respect of all Notes or portions thereof so
tendered; and (3) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions thereof being repurchased by Issuer. Issuer shall
publicly announce the results of the Asset Sale Offer on the Asset Sale Payment
Date.

                  The Paying Agent shall promptly mail to each Holder of Notes
so tendered the Asset Sale Payment for such Notes, and the Trustee shall
promptly authenticate pursuant to an Authentication Order and mail (or cause to
be transferred by book entry) to each Holder a new Note equal in principal
amount to any unrepurchased portion of the Notes surrendered, if any; PROVIDED
that each such new Note shall be in a principal amount of $1,000 or an integral
multiple thereof. However, if the Asset Sale Payment Date is on or after an
interest record date and on or before the related interest payment date, any
accrued and unpaid interest shall be paid to the Person in whose name a Note is
registered at the close of business on such record date, and no additional
interest shall be payable to Holders who tender Notes pursuant to the Asset Sale
Offer.

Section 4.09.       [Intentionally Omitted].

Section 4.10.       RESTRICTED PAYMENTS.

                  Issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:

                  (1)      declare or pay any dividend or make any other payment
         or distribution on account of Issuer's or any of its Restricted
         Subsidiaries' Equity Interests or to holders of Issuer's or any of its
         Restricted Subsidiaries' Equity Interests in their capacity as such
         (other than dividends or other payments or distributions payable solely
         in Equity Interests (other than Disqualified Stock) of Issuer or
         dividends or other payments or distributions payable to Issuer or a
         Restricted Subsidiary of Issuer);

                  (2)      purchase, redeem or otherwise acquire or retire for
         value any Equity Interests of Issuer or any Restricted Subsidiary of
         Issuer (other than any such Equity Interests owned by Issuer or any
         Restricted Subsidiary of Issuer);



                                      -56-



                  (3)      purchase, redeem, defease, prepay or otherwise
         acquire or retire for value any Indebtedness of Issuer or any Guarantor
         that is subordinated to the Notes or the Note Guarantees, except (x)
         any payment of interest or principal at the Stated Maturity thereof,
         (y) any payment made with Equity Interests (other than Disqualified
         Stock) of Issuer and (z) any payment to Issuer or any of its Restricted
         Subsidiaries;

                  (4)      if the Senior Preferred Stock is exchanged into
         Exchange Debentures pursuant to clause (9) of the next paragraph, make
         any payment of cash interest on the Exchange Debentures; or

                  (5)      make any Restricted Investment

(all such payments and other actions set forth in clauses (1) through (5) above
being collectively referred to as "RESTRICTED PAYMENTS"), unless, at the time of
and after giving effect to such Restricted Payment:

                  (1)      no Default or Event of Default shall have occurred
         and be continuing or would occur as a consequence thereof; and

                  (2)      Issuer would, at the time of such Restricted Payment
         and after giving pro forma effect thereto as if such Restricted Payment
         had been made at the beginning of the applicable four-quarter period,
         have been permitted to incur at least $1.00 of additional Indebtedness
         pursuant to the Fixed Charge Coverage Ratio Exception; and

                  (3)      such Restricted Payment, together with the aggregate
         amount of all other Restricted Payments made by Issuer and its
         Restricted Subsidiaries after the date of this Indenture (excluding
         Restricted Payments permitted by clauses (2), (3), (4), (5), (6), (7),
         (8), (9) or (10) of the next succeeding paragraph), is less than the
         sum (the "BASKET"), without duplication, of

                           (a)      50% of the Consolidated Net Income of Issuer
                  for the period (taken as one accounting period) from the
                  beginning of the first fiscal quarter commencing after the
                  date of this Indenture to the end of Issuer's most recently
                  ended fiscal quarter for which internal financial statements
                  are available at the time of such Restricted Payment (or, if
                  such Consolidated Net Income for such period is a deficit,
                  less 100% of such deficit), plus

                           (b)      100% of the aggregate net cash proceeds
                  received by Issuer since the Issue Date as a contribution to
                  its common equity capital or from the issue or sale of Equity
                  Interests of Issuer (other than Disqualified Stock) or from
                  the issue or sale of convertible or exchangeable Disqualified
                  Stock or convertible or exchangeable debt securities or
                  Indebtedness of Issuer that have been converted into or
                  exchanged for such Equity Interests (other than Equity




                                      -57-


                  Interests, Disqualified Stock or debt securities or
                  Indebtedness sold to a Subsidiary of Issuer), plus

                           (c)      to the extent not otherwise included in the
                  calculation of Consolidated Net Income for purposes of clause
                  (a) above, 100% of (x) an amount equal to any dividends,
                  repayment of loans, or advances with respect to, and (y) the
                  aggregate net proceeds (including the fair market value of
                  assets other than cash) received by Issuer or any of its
                  Restricted Subsidiaries upon the sale or other disposition of,
                  any Investment made by Issuer and its Restricted Subsidiaries
                  since the Issue Date; PROVIDED that the foregoing sum shall
                  not exceed, in the case of any investee, the aggregate amount
                  of Investments previously made by Issuer or any of its
                  Restricted Subsidiaries in such investee subsequent to the
                  Issue Date; plus

                           (d)      to the extent not otherwise included in the
                  calculation of Consolidated Net Income for purposes of clause
                  (a) above, an amount equal to the sum of (x) the net reduction
                  in Investments in Unrestricted Subsidiaries of Issuer
                  resulting from dividends, repayments of loans or advances or
                  other transfers of assets, in each case to Issuer or any of
                  its Restricted Subsidiaries from Unrestricted Subsidiaries of
                  Issuer, and (y) the fair market value of the net assets of an
                  Unrestricted Subsidiary of Issuer at the time such
                  Unrestricted Subsidiary is redesignated as a Restricted
                  Subsidiary multiplied by Issuer's proportionate interest in
                  such Subsidiary; PROVIDED that the foregoing sum shall not
                  exceed, in the case of any Unrestricted Subsidiary, the
                  aggregate amount of Investments previously made by Issuer or
                  any of its Restricted Subsidiaries in such Unrestricted
                  Subsidiary subsequent to the Issue Date.

                  The preceding provisions will not prohibit:

                  (1)      the payment of any dividend within 60 days after the
         date of declaration thereof, if at said date of declaration such
         payment would have complied with the provisions of this Indenture;

                  (2)      the redemption, repurchase, retirement, defeasance,
         prepayment or other acquisition of any subordinated Indebtedness of
         Issuer or any Guarantor or of any Equity Interests of Issuer or any
         Restricted Subsidiary in exchange for, or out of the net cash proceeds
         of the substantially concurrent sale (other than to a Subsidiary of
         Issuer) of, Equity Interests of Issuer (other than Disqualified Stock);
         PROVIDED that the amount of any such net cash proceeds that are
         utilized for any such redemption, repurchase, retirement, defeasance,
         prepayment or other acquisition shall not increase the Basket;




                                      -58-


                  (3)      the defeasance, redemption, repurchase or other
         prepayment or acquisition of subordinated Indebtedness of Issuer or any
         Guarantor with the net cash proceeds from an incurrence of, or in
         exchange for, Permitted Refinancing Indebtedness; PROVIDED that the
         amount of any such net cash proceeds that are utilized for any such
         defeasance, redemption, repurchase or other prepayment or acquisition
         shall not increase the Basket;

                  (4)      the payment of any dividend by a Restricted
         Subsidiary of Issuer to the holders of all of its common Equity
         Interests on a pro rata basis;

                  (5)      the repurchase of Equity Interests deemed to occur
         upon the exercise of stock options if such Equity Interests represent a
         portion of the exercise price thereof;

                  (6)      the repurchase, redemption or other acquisition for
         value of any Equity Interests of Issuer held by any employee or
         director of Issuer or any of its Restricted Subsidiaries pursuant to
         any equity subscription agreement, stock option agreement or similar
         agreement in connection with the termination of employment, death or
         disability of any member of management in an aggregate amount not to
         exceed $10.0 million from and after the date of this Indenture;

                  (7)      the redemption or repurchase by Issuer or any of its
         Restricted Subsidiaries of Equity Interests, stock equivalents or stock
         options from an employee covered by Issuer or any of its Restricted
         Subsidiaries by an insurance policy using the proceeds from the
         insurance policy covering such employee;

                  (8)      for the avoidance of doubt only, payments pursuant to
         the Management Services Agreement;

                  (9)      following the third anniversary of the Issue Date,
         the exchange of all (and not less than all) of the Senior Preferred
         Stock into Exchange Debentures; and

                  (10)     other Restricted Payments pursuant to this clause
         (10) not to exceed $10.0 million in the aggregate from and after the
         Issue Date.

                  The amount of all Restricted Payments (other than cash) shall
be the fair market value on the date of the Restricted Payment of the asset(s)
or securities proposed to be transferred or issued by Issuer or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
Section 4.10 shall be determined by Issuer, which determination must be based
upon an opinion or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if the fair market value exceeds $5 million.
Not later than the date of making any Restricted Payment in excess of $5
million, Issuer shall deliver to the Trustee an Officers' Certificate stating
that such Restricted Payment is permitted and setting forth the




                                      -59-


basis upon which the calculations required by this Section 4.10 were computed,
together with a copy of any fairness opinion or appraisal required by this
Indenture.

Section  4.11. Incurrence of Indebtedness and Issuance of Preferred Stock.

                  Issuer will not, and will not permit any of its Restricted
Subsidiaries to, incur any Indebtedness (including Acquired Debt), and Issuer
will not issue any Disqualified Stock and will not permit any of its Restricted
Subsidiaries to issue any Preferred Stock; PROVIDED that Issuer, any Guarantor
or any Canadian Subsidiary may incur Indebtedness (including Acquired Debt), and
Issuer may issue Disqualified Stock, if the Fixed Charge Coverage Ratio for
Issuer's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been at least 2.0 to 1.0, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period (this proviso, the
"FIXED CHARGE COVERAGE RATIO EXCEPTION").

                  The preceding paragraph will not prohibit the incurrence of
any of the following (collectively, "PERMITTED DEBT"):

                  (1)      Indebtedness under the Senior Credit Facility (with
         letters of credit being deemed to have a principal amount equal to the
         maximum potential liability of Issuer and its Restricted Subsidiaries
         thereunder) in an aggregate principal amount outstanding pursuant to
         this clause (1) (including amounts outstanding on the date of this
         Indenture) not to exceed the greater of (x) $310.0 million LESS the
         aggregate amount of all Net Proceeds of Asset Sales applied by Issuer
         or any of its Subsidiaries since the date of this Indenture to repay
         Indebtedness under the Senior Credit Facility pursuant to Section 4.08
         hereof and (y) the sum of 85% of the book value of accounts receivable
         and 65% of the book value of inventory of Issuer and its Restricted
         Subsidiaries determined on a consolidated basis in accordance with
         GAAP; PROVIDED that the maximum amount permitted to be outstanding
         pursuant to this clause (1) shall not be deemed to limit additional
         Indebtedness under the Senior Credit Facility that is permitted to be
         incurred pursuant to any of the other provisions of this covenant;

                  (2)      the Notes issued on the Issue Date, Existing
         Indebtedness (other than Indebtedness under the Senior Credit
         Facility), the Exchange Notes and the Note Guarantees thereof and, for
         the avoidance of doubt only, the Existing Preferred Stock (including
         any subsequent increase in the liquidation preference from amounts
         payable as dividends thereon that are not paid in cash on the scheduled
         payment dates);




                                      -60-


                  (3)      Capital Lease Obligations, mortgage financings or
         purchase money obligations, in each case, incurred for the purpose of
         financing all or any part of the purchase price or cost of development,
         construction, installation or improvement of property, plant or
         equipment used in the business of Issuer or such Restricted Subsidiary,
         and refinancings thereof, in an aggregate principal amount not to
         exceed $15.0 million at any time outstanding pursuant to this clause
         (3);

                  (4)      Permitted Refinancing Indebtedness in respect of
         Indebtedness that was permitted by this Indenture to be incurred under
         the Fixed Charge Coverage Ratio Exception or clause (2) or (10) of this
         paragraph or this clause (4);

                  (5)      Indebtedness owed by Issuer or any of its Restricted
         Subsidiaries to Issuer or any of its Restricted Subsidiaries; PROVIDED
         that

                           (a)      any such Indebtedness owed by Issuer shall
                  be expressly subordinated to the prior payment in full in cash
                  of all Obligations with respect to the Notes, and any such
                  Indebtedness owed by any Guarantor shall be expressly
                  subordinated to the prior payment in full in cash of all
                  Obligations with respect to the Note Guarantee of such
                  Guarantor; and

                           (b)      if such Indebtedness is held by a Person
                  other than Issuer or any of its Restricted Subsidiaries,
                  Issuer or such Restricted Subsidiary shall be deemed to have
                  incurred Indebtedness not permitted by this clause (5);

                  (6)      Hedging Obligations that are incurred for the purpose
         of fixing or hedging (x) interest rate risk with respect to any
         floating rate Indebtedness that is permitted by the terms of this
         Indenture to be outstanding or (y) foreign currency exchange rate risk;

                  (7)      (x) the Guarantee by Issuer or any Guarantor of
         Indebtedness of Issuer or a Guarantor, (y) the Guarantee by any
         Canadian Subsidiary of Indebtedness of any other Canadian Subsidiary
         and (z) the Guarantee by any Restricted Subsidiary that is not a
         Guarantor or a Canadian Subsidiary of Indebtedness of any other
         Restricted Subsidiary that is not a Guarantor; PROVIDED that, in each
         case, the Indebtedness being Guaranteed is permitted to be incurred by
         another provision of this Section 4.11;

                  (8)      Indebtedness incurred in respect of workers'
         compensation claims, self-insurance obligations, bankers' acceptances,
         letters of credit (not supporting Indebtedness for borrowed money),
         performance, surety and similar bonds and completion guarantees or
         similar obligations provided by Issuer or a Guarantor in the ordinary
         course of business;




                                      -61-


                  (9)      the agreements of Issuer or a Restricted Subsidiary
         providing for indemnification, adjustment of purchase price or similar
         obligations, in each case, incurred or assumed in connection with the
         disposition of any business or assets of Issuer or any Restricted
         Subsidiary or Capital Stock of a Restricted Subsidiary; PROVIDED that
         the maximum aggregate liability in respect of all such obligations
         outstanding under this clause (9) shall at no time exceed the gross
         proceeds actually received by Issuer and its Restricted Subsidiaries in
         connection with such dispositions;

                  (10)     Acquired Debt; PROVIDED that, with respect to any
         Acquired Debt incurred and outstanding pursuant to this clause (10),
         (x) it shall have been incurred prior to the time that the debtor
         thereunder was acquired by or merged into Issuer or any of its
         Subsidiaries, or prior to the time that the related asset was acquired
         by Issuer or any of its Subsidiaries, and was not incurred in
         connection with, or in contemplation of, such acquisition or merger,
         and (y) either (1) the aggregate principal amount of such Acquired Debt
         shall not exceed $5.0 million outstanding at any time or (2)
         immediately after giving effect to such transaction, Issuer shall be
         able to incur an additional $1.00 of Indebtedness under the Fixed
         Charge Coverage Ratio Exception;

                  (11)     Indebtedness secured by a mortgage or deed of trust
         on real property acquired by Issuer or any of its Restricted
         Subsidiaries for use as a new corporate headquarters, and refinancings
         thereof, in an aggregate amount not to exceed $15.0 million at any time
         outstanding pursuant to this clause (11);

                  (12)     Indebtedness arising from the honoring by a bank or
         other financial institution of a check, draft or similar instrument
         inadvertently (except in the case of daylight overdrafts) drawn against
         insufficient funds;

                  (13)     Indebtedness incurred by Foreign Subsidiaries in an
         aggregate principal amount at any time outstanding not to exceed $5.0
         million pursuant to this clause (13); and

                  (14)     additional Indebtedness in an aggregate principal
         amount not to exceed $15.0 million at any time outstanding pursuant to
         this clause (14); PROVIDED that, to avoid any doubt, all or a portion
         of the Indebtedness permitted to be incurred under this clause (14)
         may, at the option of Issuer, be incurred under the Senior Credit
         Facility.

                  For purposes of determining compliance with this Section 4.11,
in the event that an item of Indebtedness meets the criteria of more than one of
the categories of Permitted Debt described in clauses (1) through (14) above, or
is entitled to be incurred pursuant to the Fixed Charge Coverage Ratio
Exception, Issuer shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this Section 4.11 (PROVIDED that
all Indebtedness under the Senior Credit Facility outstanding on the date of
this Indenture shall be




                                      -62-


deemed to have been incurred pursuant to clause (1) hereof) and may later
reclassify such Indebtedness into any one or more of the categories of Permitted
Debt described in clauses (1) and (3) through (14) above (PROVIDED that at the
time of reclassification it meets the criteria in such category or categories).

Section 4.12.       NO SENIOR SUBORDINATED DEBT.

                  Issuer will not incur any Indebtedness that is, or purports to
be, contractually subordinated or junior in right of payment to any Senior Debt
of Issuer and senior in any respect in right of payment to the Notes. No
Guarantor will incur any Indebtedness that is, or purports to be, contractually
subordinated or junior in right of payment to any Senior Debt of such Guarantor
and senior in any respect in right of payment to such Guarantor's Note
Guarantee.

Section 4.13.       LIENS.

                  Issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien of any kind securing Indebtedness, Attributable Debt or trade
payables on any asset now owned or hereafter acquired, except Permitted Liens,
unless all payments due under this Indenture and the Notes are secured on an
equal and ratable basis with the obligation so secured until such time as such
obligation is no longer secured by a Lien; PROVIDED that if such obligation is
by its terms expressly subordinated to the Notes or any Note Guarantee, the Lien
securing such obligation shall be contractually subordinate and junior to the
Lien securing the Notes and the Note Guarantees with the same relative priority
as such subordinate or junior obligation shall have with respect to the Notes
and the Note Guarantees.

Section 4.14.       DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
                    RESTRICTED SUBSIDIARIES.

                  Issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:

                  (1)      pay dividends or make any other distributions on its
         Capital Stock or with respect to any other interest or participation
         in, or measured by, its profits, to Issuer or any Guarantor, or pay any
         indebtedness owed to Issuer or any Guarantor;

                  (2)      make loans or advances to Issuer or any Guarantor; or

                  (3)      transfer any of its assets to Issuer or any
         Guarantor.




                                      -63-


                  However, the preceding restrictions will not apply to
encumbrances or restrictions existing under or by reason of:

                  (1)      any Senior Debt or Existing Indebtedness, and any
         amendments or refinancings thereof; PROVIDED that such Senior Debt, and
         any amendments or refinancings of Senior Debt or Existing Indebtedness,
         are no more restrictive, taken as a whole, with respect to such
         dividend and other restrictions than those contained in the Senior
         Credit Facility or such Existing Indebtedness, as in effect on the date
         of this Indenture;

                  (2)      this Indenture and the Notes and any Indebtedness
         that is PARI PASSU to the Notes, and any amendments or refinancings
         thereof; PROVIDED that such amendments or refinancings are not
         materially more restrictive taken as a whole with respect to such
         provisions than those contained in this Indenture and the Notes on the
         date hereof;

                  (3)      the Senior Preferred Stock and the Exchange
         Debentures issuable in exchange for the Senior Preferred Stock, in each
         case, as in effect on the date of this Indenture, and any amendments or
         refinancings thereof; PROVIDED that such amendments or refinancings are
         not materially more restrictive taken as a whole with respect to such
         provisions than those contained in this Indenture and the Notes on the
         date hereof;

                  (4)      statutory or contractual provisions requiring PRO
         RATA treatment of holders of Capital Stock of Restricted Subsidiaries
         held, in whole or in part, by Persons other than Issuer or any
         Restricted Subsidiary;

                  (5)      applicable law;

                  (6)      any instrument governing Indebtedness or Capital
         Stock of a Person acquired by Issuer or any of its Restricted
         Subsidiaries as in effect at the time of such acquisition (except to
         the extent such Indebtedness was incurred in connection with or in
         contemplation of such acquisition), which encumbrance or restriction is
         not applicable to any Person, or the assets of any Person, other than
         the Person, or the assets of the Person, so acquired; PROVIDED that, in
         the case of Indebtedness, such Indebtedness was permitted by the terms
         of this Indenture to be incurred;

                  (7)      customary non-assignment provisions in leases entered
         into in the ordinary course of business and consistent with past
         practices;

                  (8)      capital leases or purchase money obligations for
         assets acquired or leased in the ordinary course of business that
         impose restrictions on the assets so acquired of the nature described
         in clause (3) of the preceding paragraph;





                                      -64-


                  (9)      any agreement for the sale or other disposition of
         any assets, including Capital Stock of a Restricted Subsidiary, that
         restricts the transfer of such assets, or in the case of the sale of
         Capital Stock of such Restricted Subsidiary, distributions by such
         Restricted Subsidiary, pending its sale or other disposition;

                  (10)     Permitted Refinancing Indebtedness; PROVIDED that
         such dividend and other restrictions contained in the agreements
         governing such Permitted Refinancing Indebtedness are no more
         restrictive, taken as a whole, than those contained in the agreements
         governing the Indebtedness being refinanced;

                  (11)     Liens securing Indebtedness otherwise permitted to be
         incurred pursuant to Section 4.13 hereof that limit the right of Issuer
         or any of its Restricted Subsidiaries to dispose of the assets subject
         to such Lien;

                  (12)     provisions with respect to the disposition or
          distribution of assets in joint venture agreements and other similar
         agreements entered into in the ordinary course of business;

                  (13)     restrictions on cash or other deposits or net worth
         imposed by customers under contracts entered into in the ordinary
         course of business;

                  (14)     any agreement relating to a sale and leaseback
         transaction or Capital Lease Obligation, in each case, otherwise
         permitted by this Indenture, but only on the assets subject to such
         transaction or lease and only to the extent that such restrictions or
         encumbrances are customary with respect to a sale and leaseback
         transaction or capital lease; and

                  (15)     customary provisions in intellectual property
         agreements, licenses and leases and other similar agreements entered
         into in the ordinary course of business.

Section 4.15.       TRANSACTIONS WITH AFFILIATES.


                  Issuer will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its assets to, or purchase any assets from, or enter into or
make or amend any transaction, contract, agreement, understanding, loan, advance
or guarantee with, or for the benefit of, any Affiliate (each, an "AFFILIATE
TRANSACTION"), unless:

                  (1)      such Affiliate Transaction is on terms that are no
         less favorable to Issuer or the relevant Restricted Subsidiary than
         those that would have been obtained in a comparable transaction by
         Issuer or such Restricted Subsidiary with an unrelated Person; and




                                      -65-


                  (2)      Issuer delivers to the Trustee:

                           (a)   with respect to any Affiliate Transaction or
                  series of related Affiliate Transactions involving aggregate
                  consideration in excess of $1.0 million, a resolution of the
                  Board of Directors set forth in an Officers' Certificate
                  certifying that such Affiliate Transaction complies with this
                  Section 4.15 and that such Affiliate Transaction has been
                  approved by a majority of the disinterested members of the
                  Board of Directors, if there are any such disinterested
                  members; and

                           (b)   with respect to any Affiliate Transaction or
                  series of related Affiliate Transactions involving aggregate
                  consideration in excess of $10.0 million, or in excess of $1.0
                  million and not approved by a majority of the disinterested
                  members of the Board of Directors of Issuer, an opinion as to
                  the fairness to Issuer of such Affiliate Transaction from a
                  financial point of view issued by an accounting, appraisal or
                  investment banking firm of national standing.

                  The following items shall not be deemed to be Affiliate
Transactions and, therefore, will not be subject to the provisions of the prior
paragraph:

                  (1)      transactions between or among Issuer and/or one or
         more of its Restricted Subsidiaries;

                  (2)      Restricted Payments and Permitted Investments that
         are not prohibited by Section 4.10 hereof;

                  (3)      payment of compensation, bonuses, severance awards,
         advances, grants, reimbursement of expenses and indemnity to officers,
         directors and employees consistent with market practices for services
         actually rendered to Issuer and its Restricted Subsidiaries; and

                  (4)      (x) so long as no Default has occurred and is
         continuing, (i) payment of annual management fees to the Sponsors or
         any of their Affiliates in an aggregate amount not to exceed, during
         any consecutive 12-month period, $3.12 million plus 1.6% of their
         cumulative cash equity investment in Issuer made after the date of this
         Indenture at the time of such payment (provided that unpaid amounts may
         be paid in any subsequent period so long as no Default has occurred and
         is continuing) and (ii) payment of fees to the Sponsors or any of their
         Affiliates for financial advisory and investment banking services
         rendered to Issuer and its Restricted Subsidiaries in connection with
         acquisitions, securities offerings and other financings and similar
         significant corporate transactions in customary and reasonable amounts
         for such transactions; and (y) reimbursement of reasonable
         out-of-pocket expenses incurred by the




                                      -66-


         Sponsors or any of their Affiliates in connection with such services;
         PROVIDED that the foregoing payments and reimbursements are
         subordinated to the Notes to the same extent as the Notes are
         subordinated to Designated Senior Debt; PROVIDED, FURTHER, that if any
         such Default prevents the payment of any such fees, Issuer may pay such
         deferred fees at the time such Default is cured or waived.

Section 4.16.       ADDITIONAL NOTE GUARANTEES.


                  If Issuer or any of its Restricted Subsidiaries transfers,
acquires or creates another Restricted Subsidiary (other than any Foreign
Subsidiary) after the date of this Indenture, then that newly acquired or
created Restricted Subsidiary must become a Guarantor and shall, within ten
business days of the date on which it was acquired or created, execute and
deliver to the Trustee a supplemental indenture in form reasonably satisfactory
to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of Issuer's obligations under the Notes and this
Indenture on the terms set forth in this Indenture until released in accordance
with the terms of this Indenture. Thereafter, such Restricted Subsidiary shall
be a Guarantor for all purposes of this Indenture.

                  Notwithstanding the preceding paragraph, any Note Guarantee
will provide by its terms that it will be automatically and unconditionally
released and discharged under the circumstances described under Section 11.06
hereof. The form of the Note Guarantee is attached hereto as EXHIBIT E.

Section 4.17.       DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES.


                  The Board of Directors may designate any Restricted Subsidiary
to be an Unrestricted Subsidiary if that designation would not cause a Default.
If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by Issuer and its Restricted Subsidiaries in the
Subsidiary so designated will be deemed to be an Investment made as of the time
of such designation and will reduce the amount available for Restricted Payments
under the first paragraph of Section 4.10 hereof or for Permitted Investments,
as applicable. All such outstanding Investments will be valued at their fair
market value at the time of such designation. The designation will be permitted
only if such Investment would not be prohibited at that time under Section 4.10
hereof and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. The Board of Directors may redesignate any Unrestricted
Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a
Default.

Section 4.18.       LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS.


                  Issuer will not permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee any other Indebtedness of Issuer unless
such Restricted Subsidiary simultaneously executes and delivers a Note Guarantee
in the manner set forth in Section 4.16 hereof,




                                      -67-


which Note Guarantee shall be senior to or PARI PASSU with such Restricted
Subsidiary's Guarantee of such other Indebtedness, unless such other
Indebtedness is Senior Debt, in which case such Note Guarantee may be
subordinated to the Guarantee of such Senior Debt to the same extent as the
Notes are subordinated to such Senior Debt.

Section 4.19.       BUSINESS ACTIVITIES.


                  Issuer will not, and will not permit any Restricted Subsidiary
to, engage in any business other than Permitted Businesses, except to the extent
that any such business would not be material to Issuer and its Restricted
Subsidiaries, taken as a whole.

Section 4.20.       REPORTS.


                  (a)      Whether or not required by the rules and regulations
of the SEC, so long as any Notes are outstanding, Issuer shall furnish to the
Holders of Notes and make available to beneficial owners of Notes, within the
time periods specified in the SEC's rules and regulations: (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the SEC on Forms 10-Q and 10-K if Issuer were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report on the annual financial statements by Issuer's certified independent
accounts; and (ii) all current reports that would be required to be filed with
the SEC on Form 8-K if Issuer were required to file such reports. In addition,
whether or not required by the SEC, Issuer shall, following the consummation of
the Exchange Offer pursuant to the Registration Rights Agreement, file a copy of
all of the information and reports referred to in clauses (i) and (ii) above
with the SEC for public availability within the time periods specified in the
SEC's rules and regulations (unless the SEC will not accept such a filing) and
make such information available to securities analysts and prospective investors
upon request.

                  (b)      In addition, for so long as any Restricted Global
Notes or Restricted Definitive Notes remain outstanding, Issuer and the
Guarantors shall furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act. Any materials
required to be furnished to Holders of Notes by this Section 4.20 shall discuss,
in reasonable detail, either on the face of the financial statements included
therein or in the footnotes thereto and in any "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the financial
condition and results of operations of Issuer and its Restricted Subsidiaries
separate from the financial condition and results of operations of the
Unrestricted Subsidiaries of Issuer.

                  (c)      Delivery of such reports, information and documents
to the Trustee is for informational purposes only and the Trustee's receipt of
such shall not constitute constructive notice of any information contained
therein or determinable from information contained




                                      -68-


therein, including Issuer's compliance with any of its covenants hereunder (as
to which the Trustee is entitled to rely exclusively on Officers' Certificates).


                                   ARTICLE 5.
                                   SUCCESSORS


Section 5.01.       MERGER, CONSOLIDATION OR SALE OF ASSETS.


                  Issuer may not, directly or indirectly: (i) consolidate or
merge with or into another Person (whether or not Issuer is the surviving
corporation); or (ii) sell, assign, lease, transfer, convey or otherwise dispose
of all or substantially all of Issuer's assets (determined on a consolidated
basis for Issuer and its Restricted Subsidiaries), in one or more related
transactions, to another Person, unless:

         (1)      either: (a) Issuer is the surviving corporation; or (b) the
                  Person formed by or surviving any such consolidation or merger
                  (if other than Issuer) or to which such sale, assignment,
                  transfer, conveyance or other disposition shall have been made
                  is a corporation or limited liability company organized or
                  existing under the laws of the United States, any State
                  thereof or the District of Columbia;

         (2)      the Person formed by or surviving any such consolidation or
                  merger (if other than Issuer) or the Person to which such
                  sale, assignment, transfer, conveyance or other disposition
                  shall have been made assumes all the obligations of Issuer
                  under the Notes, this Indenture and the Registration Rights
                  Agreement pursuant to agreements reasonably satisfactory to
                  the Trustee;

         (3)      immediately after such transaction no Default exists
                  (including, without limitation, after giving effect to any
                  Indebtedness or Liens incurred, assumed or granted in
                  connection with or in respect of such transaction); and

         (4)      Issuer or the Person formed by or surviving any such
                  consolidation or merger (if other than Issuer) will, on the
                  date of such transaction after giving pro forma effect thereto
                  and any related financing transactions as if the same had
                  occurred at the beginning of the applicable four-quarter
                  period, be permitted to incur at least $1.00 of additional
                  Indebtedness pursuant to the Fixed Charge Coverage Ratio
                  Exception.

                  Upon any sale, assignment, transfer, conveyance or other
disposition of all or substantially all of Issuer's assets, in one or more
related transactions, in compliance with the provisions of this Section 5.01,
Issuer will be released from its obligations under the Notes



                                      -69-



and this Indenture, except with respect to any obligations that arise from, or
are related to, such transaction.

                  This Section 5.01 will not apply to a sale, assignment,
transfer, conveyance or other disposition of assets between or among Issuer and
any of its Wholly Owned Restricted Subsidiaries or any Guarantor.

Section 5.02.       SUCCESSOR CORPORATION SUBSTITUTED.


                  Upon any consolidation or merger, or any sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the assets of Issuer in accordance with Section 5.01 hereof, the successor
corporation formed by such consolidation or into or with which Issuer is merged
or to which such sale, assignment, transfer, lease, conveyance or other
disposition is made shall succeed to, and be substituted for (so that from and
after the date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Issuer" shall
refer instead to the successor corporation and not to Issuer), and may exercise
every right and power of Issuer under this Indenture with the same effect as if
such successor Person had been named as Issuer herein.


                                   ARTICLE 6.
                              DEFAULTS AND REMEDIES


Section 6.01.       EVENTS OF DEFAULT.


                  Each of the following is an "EVENT OF DEFAULT":

                  (a)      default for a continued period of 30 days in the
         payment when due of interest on the Notes, whether or not prohibited by
         the subordination provisions of this Indenture;

                  (b)      default in payment when due of the principal of or
         premium, if any, on the Notes, whether or not prohibited by the
         subordination provisions of this Indenture;

                  (c)      Issuer fails to observe or perform any other covenant
         or other agreement in this Indenture or the Notes and such failure
         continues for a period of thirty (30) days in the case of a default
         with respect to Section 4.07, 4.08, 4.10, 4.11, 4.13, 4.15 or 5.01 or
         sixty (60) days in the case of a default with respect to any other
         covenant or agreement;

                  (d) default under any mortgage, indenture or instrument under
         which there may be issued or by which there may be secured or evidenced
         any Indebtedness for money borrowed by Issuer or any of its Restricted
         Subsidiaries (or the payment of




                                      -70-


         which is Guaranteed by Issuer or any of its Restricted Subsidiaries)
         whether such Indebtedness or Guarantee now exists, or is created after
         the date of this Indenture, if that default

                               (i)   is caused by a failure to pay principal of
                             or premium, if any, or interest on such
                             Indebtedness at final Stated Maturity prior to the
                             expiration of the grace period provided in such
                             Indebtedness on the date of such default (a
                             "PAYMENT DEFAULT"); or

                              (ii)    results in the acceleration of such
                             Indebtedness prior to its express maturity;

         and, in each case, the principal amount of such Indebtedness, together
         with the principal amount of any other such Indebtedness under which
         there has been a Payment Default or the maturity of which has been so
         accelerated, aggregates $17.0 million or more;

                           (e)      failure by Issuer or any of its Restricted
         Subsidiaries to pay final judgments aggregating at any one time in
         excess of $17.0 million, which judgments are not paid, discharged or
         stayed for a period of 60 days;

                           (f)      except as permitted by this Indenture, any
         Note Guarantee of any Guarantor that is a Significant Subsidiary shall
         be held in any judicial proceeding to be unenforceable or invalid or
         shall cease for any reason to be in full force and effect, or any
         Guarantor, or any Person acting on behalf of any Guarantor, shall deny
         or disaffirm its obligations under its Note Guarantee;

                           (g)      Issuer or any of its Significant
         Subsidiaries pursuant to or within the meaning of Bankruptcy Law:

                                    (i)      commences a voluntary case,

                                    (ii)     consents to the entry of an order
                                for relief against it in an involuntary case,

                                    (iii)    consents to the appointment of a
                                custodian of it or for all or substantially all
                                of its property,

                                    (iv)     makes a general assignment for the
                                benefit of its creditors, or

                                    (v)      generally is not paying its debts
                                as they become due; or

                           (h)      a court of competent jurisdiction enters an
              order or decree under any Bankruptcy Law that:




                                      -71-


                           (i)      is for relief against Issuer or any of its
              Significant Subsidiaries;

                           (ii)     appoints a custodian of Issuer or any of its
              Significant Subsidiaries or for all or substantially all of the
              property of Issuer or any of its Significant Subsidiaries; or

                           (iii)    orders the liquidation of Issuer or any of
         its Significant Subsidiaries;

      and the order or decree remains unstayed and in effect for 60 consecutive
days.

Section 6.02.       ACCELERATION.


                  In the case of an Event of Default arising from either Section
6.01(g) or 6.01(h) hereof, all outstanding Notes will become due and payable
immediately without further action or notice. If any other Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
aggregate principal amount of the then outstanding Notes may declare all the
Notes to be due and payable immediately; PROVIDED that if there are any amounts
outstanding under the Senior Credit Facility, such amounts shall become
immediately due and payable upon the first to occur of (x) an acceleration under
the Senior Credit Facility and (y) five (5) business days after receipt by
Issuer and the representative under the Senior Credit Facility of such
acceleration notice but only if such Event of Default is then continuing.

                  At any time after a declaration of acceleration has been made
and before a judgment or decree for payment of the money due has been obtained
by the Trustee, the Holders of a majority in aggregate principal amount of the
Notes outstanding, by written notice to Issuer and the Trustee, may rescind and
annul such declaration and its consequences, on behalf of all Holders of Notes,
if:

                  (a)      Issuer has paid or deposited with the Trustee a sum
              sufficient to pay

                           (i)      all sums paid or advanced by the Trustee
                  under Section 7.07 and the reasonable compensation, expenses,
                  disbursements and advances of the Trustee, its agents and
                  counsel, and

                          (ii) to the extent that payment of such interest is
                  lawful, interest upon overdue interest and overdue principal,
                  which has become due otherwise than by such declaration of
                  acceleration at the rate borne by the Notes;

                  (b) all Events of Default, other than the non-payment of
         principal of or interest on Notes which have become due solely by such
         declaration of acceleration, have been cured or waived as provided in
         Section 6.04;




                                      -72-


                  (c) the rescission would not conflict with any judgment or
         decree; and

                  (d) in the event of the cure or waiver of an Event of Default
         described in Section 6.01(g) or 6.01(h), the Trustee has received an
         Officers' Certificate that such Event of Default has been cured or
         waived.

         No such rescission shall affect any subsequent Default or impair any
right consequent thereto.

Section 6.03.       OTHER REMEDIES.


                  If an Event of Default occurs and is continuing, the Trustee
may, subject to Article 10, pursue any available remedy to collect the payment
of principal, premium, if any, and interest on the Notes or to enforce the
performance of any provision of the Notes or this Indenture.

                  The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Holder of a Note in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.

Section 6.04.       WAIVER OF PAST DEFAULTS.


                  Holders of a majority in aggregate principal amount of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Notes waive any past or existing Default or Event of Default and its
consequences hereunder, except a continuing Default or Event of Default in the
payment of the principal of, premium, if any, or interest on the Notes. Upon
such waiver, such Default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been cured for every purpose of this
Indenture; but no such waiver shall extend to any subsequent or other Default or
impair any right consequent thereon.

Section 6.05.       CONTROL BY MAJORITY.


                  Holders of a majority in principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. Holders may not enforce this Indenture or the
Notes, however, except as provided in this Indenture. In addition, the Trustee
may refuse to follow any direction that conflicts with law or this Indenture or
that the Trustee determines may be unduly prejudicial to the rights of other
Holders of Notes or that may involve the Trustee in personal liability.




                                      -73-


Section 6.06.       LIMITATION ON SUITS.


                  A Holder of a Note may pursue a remedy with respect to this
Indenture or the Notes only if: (a) the Holder of a Note gives to the Trustee
written notice of a continuing Event of Default; (b) the Holders of at least 25%
in principal amount of the then outstanding Notes make a written request to the
Trustee to pursue the remedy; (c) such Holder of a Note or Holders of Notes
offer and, if requested, provide to the Trustee indemnity satisfactory to the
Trustee against any loss, liability or expense; (d) the Trustee does not comply
with the request within 60 days after receipt of the request and the offer and,
if requested, the provision of indemnity; and (e) during such 60-day period the
Holders of a majority in principal amount of the then outstanding Notes do not
give the Trustee a direction inconsistent with the request.

                  A Holder of a Note may not use this Indenture to prejudice the
rights of another Holder of a Note or to obtain a preference or priority over
another Holder of a Note.

Section 6.07.       RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.


                  Notwithstanding any other provision of this Indenture and
subject to Article 10 and Section 11.02, the right of any Holder of a Note to
receive payment of principal, premium, if any, and interest on the Note, on or
after the respective due dates expressed in the Note, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.

Section 6.08.       COLLECTION SUIT BY TRUSTEE.


                  If an Event of Default specified in Section 6.01(a) or (b)
occurs and is continuing, the Trustee is authorized to recover judgment in its
own name and as trustee of an express trust against Issuer for the whole amount
of principal of, premium, if any, and interest remaining unpaid on the Notes and
interest on overdue principal and, to the extent lawful, interest and such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.

Section 6.09.       TRUSTEE MAY FILE PROOFS OF CLAIM.


                  The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel) and
the Holders of the Notes allowed in any judicial proceedings relative to Issuer
(or any other obligor upon the Notes), its creditors or its property and shall
be entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments to
the Trustee, and in





                                      -74-


the event that the Trustee shall consent to the making of such payments directly
to the Holders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To
the extent that the payment of any such compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, and any other amounts due
the Trustee under Section 7.07 hereof out of the estate in any such proceeding,
shall be denied for any reason, payment of the same shall be secured by a Lien
on, and shall be paid out of, any and all distributions, dividends, money,
securities and other properties that the Holders may be entitled to receive in
such proceeding whether in liquidation or under any plan of reorganization or
arrangement or otherwise. Nothing herein contained shall be deemed to authorize
the Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder, or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.

Section 6.10.       PRIORITIES.


                  If the Trustee collects any money pursuant to this Article, it
shall, subject to Article 10, pay out the money in the following order:

                  FIRST: to the Trustee, its agents and attorneys for amounts
         due under Section 7.07 hereof, including payment of all compensation,
         expense and liabilities incurred, and all advances made, by the Trustee
         and the costs and expenses of collection;

                  SECOND: to Holders of Notes for amounts due and unpaid on the
         Notes for principal, premium, if any, and interest, ratably, without
         preference or priority of any kind, according to the amounts due and
         payable on the Notes for principal, premium, if any and interest,
         respectively; and

                  THIRD:   to Issuer or to such party as a court of competent
         jurisdiction shall direct.

                  The Trustee may fix a record date and payment date for any
payment to Holders of Notes pursuant to this Section 6.10.

Section 6.11.       UNDERTAKING FOR COSTS.


                  In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees and expenses, against any party litigant in the suit,
having due regard to the merits and good faith of the claims or defenses made by
the party litigant. This Section




                                      -75-


does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant
to Section 6.07 hereof, or a suit by Holders of more than 10% in principal
amount of the then outstanding Notes.


                                   ARTICLE 7.
                                     TRUSTEE


Section 7.01.       DUTIES OF TRUSTEE.


                  (a)      If an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by this Indenture, and use the same degree of care and skill in its exercise,
as a prudent person would exercise or use under the circumstances in the conduct
of such person's own affairs.

                  (b)      Except during the continuance of an Event of Default:

                  (i) the duties of the Trustee shall be determined solely by
         the express provisions of this Indenture and the Trustee need perform
         only those duties that are specifically set forth in this Indenture and
         no others, and no implied covenants or obligations shall be read into
         this Indenture against the Trustee; and

                 (ii) in the absence of bad faith on its part, the Trustee may
         conclusively rely, as to the truth of the statements and the
         correctness of the opinions expressed therein, upon certificates or
         opinions furnished to the Trustee and conforming to the requirements of
         this Indenture. However, in the case of any such certificates or
         opinions which by any provision hereof are specifically required to be
         furnished to the Trustee, the Trustee shall examine the certificates
         and opinions to determine whether or not they conform to the
         requirements of this Indenture.

                  (c)      The Trustee may not be relieved from liabilities for
its own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:

                  (i) this paragraph does not limit the effect of paragraph
         (b) of this Section;

                 (ii) the Trustee shall not be liable for any error of judgment
         made in good faith by a Responsible Officer, unless it is proved that
         the Trustee was negligent in ascertaining the pertinent facts; and

                (iii) the Trustee shall not be liable with respect to any action
         it takes or omits to take in good faith in accordance with a direction
         received by it pursuant to Section 6.05 hereof.



                                      -76-



                  (d)      Whether or not therein expressly so provided, every
provision of this Indenture that in any way relates to the Trustee is subject to
the paragraphs of this Section 7.01.

                  (e)      The Trustee shall not be liable for interest on any
money received by it except as the Trustee may agree in writing with Issuer.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.

Section 7.02.       RIGHTS OF TRUSTEE.


                  (a)      The Trustee may conclusively rely upon any document
believed by it to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in the
document.

                  (b)      Before the Trustee acts or refrains from acting, it
may require an Officers' Certificate or an Opinion of Counsel or both. The
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on such Officers' Certificate or Opinion of Counsel. The
Trustee may consult with counsel of its selection and the advice of such counsel
or any Opinion of Counsel shall be full and complete authorization and
protection from liability in respect of any action taken, suffered or omitted by
it hereunder in good faith and in reliance thereon.

                  (c)      The Trustee may act through its attorneys and agents
and shall not be responsible for the misconduct or negligence of any agent
appointed with due care.

                  (d)      The Trustee shall not be liable for any action it
takes or omits to take in good faith that it believes to be authorized or within
the rights or powers conferred upon it by this Indenture.

                  (e)      Unless otherwise specifically provided in this
Indenture, any demand, request, direction or notice from Issuer shall be
sufficient if signed by an Officer of Issuer.

                  (f)      No provision of this Indenture shall require the
Trustee to expend or risk its own funds or incur any liability. The Trustee
shall be under no obligation to exercise any of its rights or powers under this
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee security or indemnity satisfactory to the
Trustee against any loss, liability or expense that might be incurred by it in
compliance with such request or direction.

                  (g)      The Trustee shall not be bound to make any
investigation into the facts or matters stated in any document, but the Trustee,
in its discretion, may make such further inquiry or investigation into such
facts or matters as it may see fit and, if the Trustee shall determine to make
such further inquiry or investigation, it shall be entitled to examine the




                                      -77-


books, records and Issuer's premises, personally or by agent or attorney at the
sole cost of Issuer, and shall incur no liability or additional liability of any
kind by reason of such inquiry or investigation.

                  (h)      The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by it
hereunder.

                  (i)      The Trustee shall not be deemed to have notice of any
Default or Event of Default unless a Responsible Officer of the Trustee has
actual knowledge thereof or unless written notice of any event which is in fact
such a default is received by the Trustee at the Corporate Trust Office of the
Trustee, and such notice references the Securities and this Indenture.

                  (j)      The rights, privileges, protections, immunities and
benefits given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and to each agent, custodian and other Person
employed to act hereunder.

Section 7.03.       INDIVIDUAL RIGHTS OF TRUSTEE.


                  The Trustee in its individual or any other capacity may become
the owner or pledgee of Notes and may otherwise deal with Issuer or any
Affiliate of Issuer with the same rights it would have if it were not Trustee.
However, in the event that the Trustee acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the SEC for permission to
continue as trustee or resign. Any Agent may do the same with like rights and
duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof.

Section 7.04.       TRUSTEE'S DISCLAIMER.


                  The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture or the Notes, it
shall not be accountable for Issuer's use of the proceeds from the Notes or any
money paid to Issuer or upon Issuer's direction under any provision of this
Indenture, it shall not be responsible for the use or application of any money
received by any Paying Agent other than the Trustee, and it shall not be
responsible for any statement or recital herein or any statement in the Notes or
any other document in connection with the sale of the Notes or pursuant to this
Indenture other than its certificate of authentication.




                                      -78-


Section 7.05.       NOTICE OF DEFAULTS.


                  If a Default or Event of Default occurs and is continuing and
if it is actually known to a Responsible Officer of the Trustee, the Trustee
shall mail to Holders of Notes at their respective addresses as they appear on
the register maintained by the Registrar a notice of the Default or Event of
Default within 90 days after it occurs. Except in the case of a Default or Event
of Default relating to the payment of principal or interest on any Note, the
Trustee may withhold the notice if it determines, in good faith, that
withholding the notice is in the interests of the Holders of the Notes.

Section 7.06.       REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.


                  Within 60 days after each January 15 beginning with the
January 15 following the date of this Indenture, and for so long as Notes
remain outstanding, the Trustee shall mail to the Holders of the Notes a
brief report dated as of such reporting date that complies with TIA Section
313(a) (but if no event described in TIA Section 313(a) has occurred within
the twelve months preceding the reporting date, no report need be
transmitted). The Trustee also shall comply with TIA Section 313(b)(2). The
Trustee shall also transmit by mail all reports as required by TIA Section
313(c).

                  A copy of each report at the time of its mailing to the
Holders of Notes shall be mailed to Issuer and filed with the SEC and each
stock exchange on which the Notes are listed in accordance with TIA Section
313(d). Issuer shall promptly notify the Trustee when the Notes are listed on
any stock exchange and of any delisting thereof.

Section 7.07.       COMPENSATION AND INDEMNITY.


                  Issuer shall pay to the Trustee from time to time compensation
for its acceptance of this Indenture and services as Issuer and the Trustee
shall from time to time agree in writing. The Trustee's compensation shall not
be limited by any law on compensation of a trustee of an express trust. Issuer
shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the compensation,
disbursements and expenses of the Trustee's agents and counsel.

                  Issuer shall indemnify the Trustee or any predecessor Trustee
against any and all losses, damages, claims, liabilities or expenses incurred by
it including taxes (other than taxes based upon, measured by or determined by
the income of the Trustee) arising out of or in connection with the acceptance
or administration of its duties under this Indenture, including the costs and
expenses of enforcing this Indenture against Issuer (including this Section
7.07) and defending itself against any claim (whether asserted by Issuer or any
Holder or any other person) or liability in connection with the acceptance,
exercise or performance of any of its powers or duties hereunder, except to the
extent any such loss, damage, claim, liability or




                                      -79-


expense may be attributable to its negligence or bad faith. The Trustee shall
notify Issuer promptly of any claim for which it may seek indemnity. Failure by
the Trustee to so notify Issuer shall not relieve Issuer of its obligations
hereunder, except to the extent that Issuer is actually prejudiced thereby.
Issuer shall defend the claim and the Trustee shall cooperate in the defense.
The Trustee may have separate counsel and Issuer shall pay the reasonable fees
and expenses of such counsel. Issuer need not pay for any settlement made
without its consent, which consent shall not be unreasonably withheld.

                  The obligations of Issuer under this Section 7.07 shall
survive the satisfaction and discharge of this Indenture.

                  To secure Issuer's payment obligations in this Section, the
Trustee shall have a Lien prior to the Notes on all money or property held or
collected by the Trustee, except that held in trust to pay principal and
interest on particular Notes. Such Lien shall survive the satisfaction and
discharge of this Indenture.

                  When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.01(g) or (h) hereof occurs, the expenses
and the compensation for the services (including the fees and expenses of its
agents and counsel) are intended to constitute expenses of administration under
any Bankruptcy Law.

                  The Trustee shall comply with the provisions of TIA Section
313(b)(2) to the extent applicable.

Section 7.08.       REPLACEMENT OF TRUSTEE.


                  A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section 7.08.

                  The Trustee may resign in writing at any time and be
discharged from the trust hereby created by so notifying Issuer. The Holders of
Notes of a majority in principal amount of the then outstanding Notes may remove
the Trustee by so notifying the Trustee and Issuer in writing. Issuer may remove
the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b)
the Trustee is adjudged a bankrupt or an insolvent or an order for relief is
entered with respect to the Trustee under any Bankruptcy Law; (c) a custodian or
public officer takes charge of the Trustee or its property; or (d) the Trustee
becomes incapable of acting.

                  If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, Issuer shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by Issuer.




                                      -80-


                  If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, Issuer,
or the Holders of Notes of at least 10% in principal amount of the then
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee, at the expense of Issuer.

                  If the Trustee, after written request by any Holder of a Note
who has been a Holder of a Note for at least six months, fails to comply with
Section 7.10, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.

                  A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to Issuer. Thereupon, the resignation or
removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The successor Trustee shall mail a notice of its succession to
Holders of the Notes. The retiring Trustee shall promptly transfer all property
held by it as Trustee to the successor Trustee, PROVIDED all sums owing to the
Trustee hereunder have been paid and subject to the Lien provided for in Section
7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section
7.08, Issuer's obligations under Section 7.07 hereof shall continue for the
benefit of the retiring Trustee.

Section 7.09.       SUCCESSOR TRUSTEE BY MERGER, ETC.


                  If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.

Section 7.10.       ELIGIBILITY; DISQUALIFICATION.


                  There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has a combined capital and surplus of at
least $50 million as set forth in its most recent published annual report of
condition.

                  This Indenture shall always have a Trustee who satisfies
the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is
subject to TIA Section 310(b).

Section 7.11.       PREFERENTIAL COLLECTION OF CLAIMS AGAINST ISSUER.


                  The Trustee is subject to TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has
resigned or been removed shall be subject to TIA Section 311(a) to the extent
indicated therein.



                                      -81-



                                   ARTICLE 8.
               LEGAL DEFEASANCE AND COVENANT DEFEASANCE; DISCHARGE


Section 8.01.       OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT
                    DEFEASANCE.



                  Issuer may, at the option of its Board of Directors evidenced
by a resolution set forth in an Officers' Certificate, at any time, elect to
have either Section 8.02 or 8.03 hereof be applied to all outstanding Notes and
Note Guarantees upon compliance with the conditions set forth below in this
Article 8.

Section 8.02.       LEGAL DEFEASANCE AND DISCHARGE.


                  Upon Issuer's exercise under Section 8.01 hereof of the option
applicable to this Section 8.02, Issuer and the Guarantors, respectively shall,
subject to the satisfaction of the conditions set forth in Section 8.04 hereof,
be deemed to have been discharged from its obligations with respect to all
outstanding Notes and all obligations of the Guarantors be deemed to have been
discharged with respect to their Note Guarantees on the date the conditions set
forth below are satisfied (hereinafter, "LEGAL DEFEASANCE"). For this purpose,
Legal Defeasance means that Issuer shall be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Notes, which shall
thereafter be deemed to be "outstanding" only for the purposes of Section 8.05
hereof and the other Sections of this Indenture referred to in (a) and (b)
below, and to have satisfied all its other obligations under such Notes and this
Indenture and the Guarantors shall be deemed to have satisfied all of their
obligations under the Note Guarantees and this Indenture (and the Trustee, on
demand of and at the expense of Issuer, shall execute proper instruments
acknowledging the same), except for the following provisions which shall survive
until otherwise terminated or discharged hereunder:

                  (a) the rights of Holders of outstanding Notes to receive,
         solely from the trust fund described in Section 8.04 hereof, and as
         more fully set forth in such Section 8.04, payments in respect of the
         principal of, premium, if any, and interest on such Notes when such
         payments are due;

                  (b) Issuer's obligations with respect to such Notes under
         Article 2 and Section 4.02 hereof;

                  (c) the rights, powers, trusts, duties and immunities of
         the Trustee hereunder and Issuer's obligations in connection therewith;
         and

                  (d) this Article 8.




                                      -82-


                  Subject to compliance with this Article Eight, Issuer may
exercise its option under this Section 8.02 notwithstanding the prior exercise
of its option under Section 8.03 hereof.

Section 8.03.       COVENANT DEFEASANCE.


                  Upon Issuer's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03, Issuer and the Guarantors shall, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, be released
from their respective obligations under the covenants contained in Sections
4.03, 4.04, 4.07, 4.08, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18,
4.19, 4.20 and clauses (3) and (4) of Section 5.01 hereof with respect to the
outstanding Notes on and after the date the conditions set forth in Section 8.04
are satisfied (hereinafter, "COVENANT DEFEASANCE"), and the Notes shall
thereafter be deemed not "outstanding" for the purposes of any direction,
waiver, consent or declaration or act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"outstanding" for all other purposes hereunder (it being understood that such
Notes shall not be deemed outstanding for accounting purposes). For this
purpose, Covenant Defeasance means that, with respect to the outstanding Notes,
Issuer and the Guarantors may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere herein to
any such covenant or by reason of any reference in any such covenant to any
other provision herein or in any other document and such omission to comply
shall not constitute a Default or an Event of Default under Section 6.01 hereof,
but, except as specified above, the remainder of this Indenture and such Notes
shall be unaffected thereby. In addition, upon Issuer's exercise under Section
8.01 hereof of the option applicable to this Section 8.03, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, Sections
6.01(c) through 6.01(e) hereof shall not constitute Events of Default.

Section 8.04.       CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.


                  The following shall be the conditions to the application of
either Section 8.02 or 8.03 hereof to the outstanding Notes:

                  In order to exercise either Legal Defeasance or Covenant
Defeasance:

                  (a) Issuer must irrevocably deposit with the Trustee, in
         trust, for the benefit of the Holders of the Notes, cash in United
         States dollars, non-callable Government Securities, or a combination
         thereof, in such amounts as will be sufficient, in the opinion of a
         nationally recognized firm of independent public accountants, to pay
         the principal of, premium, if any, and interest on the outstanding
         Notes on the Stated Maturity or on the applicable redemption date, as
         the case may be, and Issuer must specify whether the Notes are being
         defeased to maturity or to a particular redemption date;



                                      -83-



                  (b) in the case of an election under Section 8.02 hereof,
         Issuer shall have delivered to the Trustee an Opinion of Counsel in the
         United States reasonably acceptable to the Trustee opining that (i)
         Issuer has received from, or there has been published by, the Internal
         Revenue Service a ruling or (ii) since the date of this Indenture,
         there has been a change in the applicable federal income tax law, in
         either case to the effect that, and based thereon such Opinion of
         Counsel shall opine that, the Holders of the outstanding Notes will not
         recognize income, gain or loss for federal income tax purposes as a
         result of such Legal Defeasance and will be subject to federal income
         tax on the same amounts, in the same manner and at the same times as
         would have been the case if such Legal Defeasance had not occurred;

                  (c) in the case of an election under Section 8.03 hereof,
         Issuer shall have delivered to the Trustee an Opinion of Counsel in the
         United States reasonably acceptable to the Trustee opining that the
         Holders of the outstanding Notes will not recognize income, gain or
         loss for federal income tax purposes as a result of such Covenant
         Defeasance and will be subject to federal income tax on the same
         amounts, in the same manner and at the same times as would have been
         the case if such Covenant Defeasance had not occurred;

                  (d) no Default shall have occurred and be continuing either:
         (a) on the date of such deposit (other than a Default resulting from
         the borrowing of funds to be applied to such deposit); or (b) in the
         case of Legal Defeasance, insofar as Events of Default from bankruptcy
         or insolvency events are concerned, at any time in the period ending on
         the 91st day after the date of deposit;

                  (e) Issuer must have delivered to the Trustee an Opinion of
         Counsel to the effect that such Legal Defeasance or Covenant Defeasance
         shall not result in a breach or violation of, or constitute a default
         under, any material agreement or instrument (other than this Indenture)
         to which Issuer or any of its Restricted Subsidiaries is a party or by
         which Issuer or any of its Restricted Subsidiaries is bound;

                  (f) Issuer must have delivered to the Trustee an Opinion of
         Counsel to the effect that, assuming that no Holder is an "insider," as
         that term is defined in the Bankruptcy Code, after the 91st day
         following the deposit, the trust funds will not be subject to avoidance
         as a preference under Section 547 of the Bankruptcy Code;

                  (g) Issuer shall have delivered to the Trustee an Officers'
         Certificate stating that the deposit was not made by Issuer with the
         intent of defeating, hindering, delaying or defrauding creditors of
         Issuer or others; and

                  (h) Issuer must have delivered to the Trustee an Officers'
         Certificate stating that all conditions precedent relating to the Legal
         Defeasance or the Covenant Defeasance contained in (b), (c), (d), (e)
         and (f) have been complied with.





                                      -84-


Section 8.05.    DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD
                 IN TRUST; OTHER MISCELLANEOUS PROVISIONS.


                  Subject to Section 8.06 hereof, all money and non-callable
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the
outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the payment,
either directly or through any Paying Agent (including Issuer acting as Paying
Agent) as the Trustee may determine, to the Holders of such Notes of all sums
due and to become due thereon in respect of principal, premium, if any, and
interest, but such money need not be segregated from other funds except to the
extent required by law.

                  Issuer shall pay and indemnify the Trustee against any tax,
fee or other charge imposed on or assessed against the cash or non-callable
Government Securities deposited pursuant to Section 8.04 hereof or the principal
and interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.

                  Anything in this Article 8 to the contrary notwithstanding,
the Trustee shall deliver or pay to Issuer from time to time upon the request of
Issuer any money or non-callable Government Securities held by it as provided in
Section 8.04 hereof which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
8.04(b) hereof), are in excess of the amount thereof that would then be required
to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance.

Section 8.06.       REPAYMENT TO ISSUER.


                  Any money deposited with the Trustee or any Paying Agent, or
then held by Issuer, in trust for the payment of the principal of, premium, if
any, or interest on any Note and remaining unclaimed for two years after such
principal, and premium, if any, or interest has become due and payable shall be
paid to Issuer on its request or (if then held by Issuer) shall be discharged
from such trust; and the Holder of such Note shall thereafter, as a secured
creditor, look only to Issuer for payment thereof, and all liability of the
Trustee or such Paying Agent with respect to such trust money, and all liability
of Issuer as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the
Trustee or such Paying Agent, before being required to make any such repayment,
may at the expense of Issuer cause to be published once, in THE NEW YORK TIMES
and THE WALL STREET JOURNAL (national edition), notice that such money remains
unclaimed and that, after a date specified therein, which shall not be less than
30 days from the date of such notification or publication, any unclaimed balance
of such money then remaining will be repaid to Issuer.




                                      -85-


Section 8.07.       REINSTATEMENT.


                  If the Trustee or Paying Agent is unable to apply any United
States dollars or non-callable Government Securities in accordance with Section
8.02 or 8.03 hereof, as the case may be, by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, then Issuer's obligations under this Indenture and
the Notes shall be revived and reinstated as though no deposit had occurred
pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying
Agent is permitted to apply all such money in accordance with Section 8.02 or
8.03 hereof, as the case may be; PROVIDED, HOWEVER, that, if Issuer makes any
payment of principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, Issuer shall be subrogated to the rights of
the Holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.

Section 8.08.       DISCHARGE.


                  This Indenture will be discharged and will cease to be of
further effect (except as to surviving rights of registration of transfer or
exchange of the Notes, as expressly provided for in this Indenture) as to all
outstanding Notes when (a) either (i) all Notes theretofore authenticated and
delivered (except lost, stolen or destroyed Notes which have been replaced or
paid and Notes for whose payment money has theretofore been deposited in trust
or segregated and held in trust by Issuer and thereafter repaid to Issuer or
discharged from such trust) have been delivered to the Trustee for cancellation
or (ii) all Notes not theretofore delivered to the Trustee for cancellation have
become due and payable and Issuer has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire Indebtedness on the Notes not theretofore delivered to the Trustee
for cancellation, for principal of, premium, if any, and interest on the Notes
to the date of deposit together with irrevocable instructions from Issuer
directing the Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be; (b) Issuer has paid all other sums payable under
this Indenture by Issuer; and (c) Issuer has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel stating that all conditions
precedent under this Indenture relating to the satisfaction and discharge of
this Indenture have been complied with; PROVIDED, HOWEVER, that such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of
Issuer.



                                   -86-




                                   ARTICLE 9.
                        AMENDMENT, SUPPLEMENT AND WAIVER


Section 9.01.       WITHOUT CONSENT OF HOLDERS OF NOTES.


                  Notwithstanding Section 9.02 hereof, Issuer and the Trustee
may (subject to Section 10.14 hereof) amend or supplement this Indenture or the
Notes without notice to or the consent of any Holder of a Note:

                  (a) to cure any ambiguity, defect or inconsistency;

                  (b) to provide for uncertificated Notes in addition to or
         in place of certificated Notes;

                  (c) to provide for the assumption of the obligations of Issuer
         or any Guarantor to Holders of Notes in the case of a merger or
         consolidation or sale of all or substantially all assets in accordance
         with Article 5 or Section 11.05;

                  (d) to make any change that would provide any additional
         rights or benefits to the Holders of Notes or that does not adversely
         affect the legal rights hereunder of any Holder;

                  (e) to comply with requirements of the SEC in order to
         effect or maintain the qualification of this Indenture under the TIA;

                  (f) to make any change in Article 10 hereof that would limit
         or terminate the benefits available to any holder of Senior Debt (or
         any Representative) under this Indenture;

                  (g) to add additional Note Guarantees;

                  (h) to secure the Notes;

                  (i) to add to the covenants of Issuer for the benefit of the
         Holders or to surrender any right or power herein conferred upon
         Issuer;

                  (j) to comply with the procedures of the Trustee, The
         Depository Trust Company or other applicable entity with respect to the
         provisions of this Indenture and the Notes relating to transfers of the
         Notes or to provide for the issuance of the Exchange Notes, which shall
         have terms substantially identical in all material respects to the
         Notes (except that the transfer restrictions contained in the Notes
         shall be modified or eliminated, as appropriate), and which shall be
         treated, together with any outstanding Notes, as a single issue of
         securities; or





                                      -87-

                  (k) to change the name or title of the Notes and make any
         non-substantive conforming changes related thereto.

                  Upon the request of Issuer accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon receipt by the Trustee of any of the documents requested by
it pursuant to Section 7.02(b) hereof, the Trustee shall join with Issuer and
the Guarantors in the execution of such amended or supplemental Indenture and to
make any further appropriate agreements and stipulations that may be therein
contained, unless such amended or supplemental Indenture directly affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise, in
which case the Trustee may in its discretion, but shall not be obligated to,
enter into such amended or supplemental Indenture.

Section 9.02.       WITH CONSENT OF HOLDERS OF NOTES.


                  Except as provided below in this Section 9.02 and in Section
10.14, Issuer and the Trustee may amend or supplement this Indenture or the
Notes and/or any Note Guarantees may be amended or supplemented with the consent
of the Holders of at least a majority in principal amount of the Notes then
outstanding voting as a single class (including, without limitation, consents
obtained in connection with a purchase of, tender offer or exchange offer for,
Notes), and, subject to Sections 6.04 and 6.07 hereof, any existing Default or
Event of Default (other than a Default in the payment of the principal of,
premium, if any, or interest on the Notes, except a payment default resulting
from an acceleration that has been rescinded) or compliance with any provision
of this Indenture, the Notes or the Note Guarantees may be waived with the
consent of the Holders of a majority in principal amount of the then outstanding
Notes (including consents obtained in connection with a purchase of, tender
offer or exchange offer for, Notes). Section 2.08 hereof shall determine which
Notes are considered to be "outstanding" for purposes of this Section 9.02.

                  Upon the request of Issuer accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by
the Trustee of any document requested by it pursuant to Section 7.02(b) hereof,
the Trustee shall join with Issuer and the Guarantors in the execution of such
amended or supplemental Indenture and to make any further appropriate agreements
and stipulations that may be therein contained, unless such amended or
supplemental Indenture directly affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise, in which case the Trustee may in
its discretion, but shall not be obligated to, enter into such amended or
supplemental Indenture.

                  It shall not be necessary for the consent of the Holders of
Notes under this Section 9.02 to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.




                                      -88-


                  After an amendment or waiver under this Section 9.02 becomes
effective, Issuer shall mail to the Holders of Notes affected thereby a notice
briefly describing the amendment or waiver. Any failure of Issuer to mail such
notice, or any defect therein, shall not, however, in any way impair or affect
the validity of any such amended or supplemental Indenture or waiver. Subject to
Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal
amount of the Notes then outstanding voting as a single class may waive
compliance by Issuer and/or the Guarantors with any provision of this Indenture,
the Notes or the Note Guarantees. However, without the consent of each Holder
affected, an amendment or waiver under this Section 9.02 may not (with respect
to any Notes held by a non-consenting Holder):

                  (a) reduce the principal amount of Notes whose Holders
         must consent to an amendment or waiver;

                  (b) reduce the principal of or change or have the effect
         of changing the fixed maturity of any Note;

                  (c) reduce the redemption price of Notes or alter the
         provisions with respect to the redemption of the Notes in a manner
         adverse to the Holders (other than, for the avoidance of doubt,
         Sections 4.07 and 4.08 hereof);

                  (d) reduce the rate of or change the time for payment of
         scheduled interest on any Note;

                  (e) waive a Default in the payment of scheduled principal of
         or premium, if any, or interest on the Notes (except a rescission of
         acceleration of the Notes by the Holders of a majority in aggregate
         principal amount of the Notes and a waiver of the payment default that
         resulted from such acceleration);

                  (f) make any Note payable in money other than that stated
         in the Notes;

                  (g) make any change in the provisions of this Indenture
         relating to waivers of past Defaults or the rights of Holders of Notes
         to receive scheduled payments of principal of or premium, if any, or
         interest on the Notes;

                  (h) waive a redemption payment with respect to any Note
         (other than, for the avoidance of doubt, a payment required by Sections
         4.07 and 4.08 hereof);

                  (i) release any Guarantor from any of its obligations
         under its Note Guarantee or this Indenture otherwise than in accordance
         with the terms of this Indenture;

                  (j) make any change in Section 6.04, 6.07 or 9.01 hereof or in
         this Section 9.02; or




                                      -89-


                  (k) make any change in Article 10 (including the related
         definitions) that materially adversely affects the rights of the
         Holders of the Notes, taken as a whole.

Section 9.03.       COMPLIANCE WITH TRUST INDENTURE ACT.


                  Every amendment or supplement to this Indenture or the Notes
shall be set forth in a amended or supplemental Indenture that complies with the
TIA as then in effect.

Section 9.04.       REVOCATION AND EFFECT OF CONSENTS.


                  Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder of a
Note and every subsequent Holder of a Note or portion of a Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
is not made on any Note. However, any such Holder of a Note or subsequent Holder
of a Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder.

Section 9.05.       NOTATION ON OR EXCHANGE OF NOTES.


                  The Trustee may place an appropriate notation about an
amendment, supplement or waiver on any Note thereafter authenticated. Issuer in
exchange for all Notes may issue and the Trustee shall, upon receipt of an
Authentication Order, authenticate new Notes that reflect the amendment,
supplement or waiver.

                  Failure to make the appropriate notation or issue a new Note
shall not affect the validity and effect of such amendment, supplement or
waiver.

Section 9.06.       TRUSTEE TO SIGN AMENDMENTS, ETC.


                  The Trustee shall sign any amended or supplemental Indenture
authorized pursuant to this Article 9 if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
Issuer may not sign an amendment or supplemental Indenture until the Board of
Directors approves it. In executing any amended or supplemental indenture, the
Trustee shall be entitled to receive and (subject to Section 7.01 hereof) shall
be fully protected in relying upon, in addition to the documents required by
Section 12.04 hereof, an Officers' Certificate and an Opinion of Counsel stating
that the execution of such amended or supplemental indenture is authorized or
permitted by this Indenture.




                                      -90-


                                   ARTICLE 10.
                                  SUBORDINATION


Section 10.01.      AGREEMENT TO SUBORDINATE.


                  Issuer agrees, and each Holder by accepting a Note agrees,
that the Indebtedness, interest and other Obligations of any kind evidenced by
the Notes and this Indenture is subordinated in right of payment, to the extent
and in the manner provided in this Article 10, to the prior payment in full in
cash or Cash Equivalents of all Senior Debt of Issuer (whether outstanding on
the date hereof or hereafter created, incurred, assumed or guaranteed), and that
the subordination is for the benefit of the holders of Senior Debt.

Section 10.02.      CERTAIN DEFINITIONS.


                  "DESIGNATED SENIOR DEBT" means (i) the Obligations of Issuer
under the Senior Credit Facility or a guarantee thereof and (ii) any other
Senior Debt permitted under this Indenture (a) the principal amount of which is
$25.0 million or more and (b) that has been designated by Issuer or a Guarantor
as "Designated Senior Debt."

                  "PERMITTED JUNIOR SECURITIES" means: (1) Equity Interests in
Issuer (other than any Equity Interests that are subject to redemption or
purchase obligations or put rights effective prior to six months following the
final maturity of Senior Debt and any debt securities issued in exchange for
Senior Debt); or (2) unsecured debt securities of Issuer or any Guarantor that
are subordinated to all Senior Debt and any debt securities issued in exchange
for Senior Debt to substantially the same extent as, or to a greater extent
than, the Notes and the Note Guarantees are subordinated to Senior Debt pursuant
to the terms of this Indenture and which have no required payments of principal
prior to six months following the final maturity of Senior Debt and any debt
securities issued in exchange for Senior Debt.

                  "REPRESENTATIVE" means the indenture trustee or other trustee,
agent or representative for any Senior Debt.

                  "SENIOR DEBT" means: (i) all Indebtedness outstanding under
the Senior Credit Facility, and all Hedging Obligations with respect thereto;
(ii) any other Indebtedness permitted to be incurred by Issuer or a Guarantor
under the terms of this Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with the
Notes or subordinated in right of payment to the Notes or any other Indebtedness
of Issuer; and (iii) all Obligations with respect to the items listed in the
preceding clauses (i) and (ii). Notwithstanding anything to the contrary in the
preceding, Senior Debt will not include: (i) any liability for federal, state,
local or other taxes owed or owing by Issuer; (ii) any Indebtedness of Issuer to
any of its Subsidiaries or other Affiliates; (iii) any obligation of Issuer
aris-




                                      -91-


ing from Disqualified Stock of Issuer; (iv) any trade payables; or (v) any
Indebtedness that is incurred in violation of this Indenture.

Section 10.03.      LIQUIDATION; DISSOLUTION; BANKRUPTCY.


                  Upon any distribution to creditors of Issuer or any Guarantor
whether in cash, properties, securities or otherwise, (i) in a liquidation or
dissolution of Issuer or any Guarantor, (ii) in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to Issuer or its assets,
(iii) in an assignment for the benefit of creditors or (iv) in any marshaling of
Issuer's assets and liabilities, the holders of Senior Debt shall be entitled to
receive payment in full in cash or Cash Equivalents of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt whether or
not such interest is an allowable claim) before the Holders of Notes will be
entitled to receive any payment with respect to the Notes or under the Note
Guarantees, and until all Obligations with respect to Senior Debt are paid in
full in cash, any distribution to which the Holders of Notes would be entitled
shall be made to the holders of Senior Debt (except that Holders of Notes may
receive and retain Permitted Junior Securities and payments made from the trust
created pursuant to Article 8 hereof).

                  To the extent any payment of Senior Debt (whether by or on
behalf of Issuer or any Subsidiary, as proceeds of security or enforcement of
any right of setoff or otherwise) is declared to be fraudulent or preferential,
set aside or required to be paid to any receiver, trustee in bankruptcy,
liquidating trustee, agent or other similar Person under any bankruptcy,
insolvency, receivership, fraudulent conveyance or similar law, then if such
payment is recovered by, or paid over to, such receiver, trustee in bankruptcy,
liquidating trustee, agent or other similar Person, the Senior Debt or part
thereof originally intended to be satisfied shall be deemed to be reinstated and
outstanding as if such payment had not occurred. To the extent the obligation to
repay any Senior Debt is declared to be fraudulent, invalid, or otherwise set
aside under any bankruptcy, insolvency, receivership, fraudulent conveyance or
similar law, then the obligations so declared fraudulent, invalid or otherwise
set aside (and all other amounts that would come due with respect thereto had
such obligation not been affected) shall be deemed to be reinstated and
outstanding as Senior Debt for all purposes hereof as if such declaration,
invalidity or setting aside had not occurred.

Section 10.04.      DEFAULT ON DESIGNATED SENIOR DEBT.


                  Issuer also may not make any payment upon or in respect of the
Notes (except in Permitted Junior Securities or from the trust created pursuant
to Article 8 hereof) if:

                  (i) a payment default on Designated Senior Debt occurs
         and is continuing beyond any applicable grace period; or



                                      -92-



                 (ii) any other default occurs and is continuing on Designated
         Senior Debt that permits holders of the Designated Senior Debt to
         accelerate its maturity and the Trustee receives a notice of such
         default (a "PAYMENT BLOCKAGE NOTICE") from the holders of any
         Designated Senior Debt.

                  Payments on the Notes may and shall be resumed:

                  (i) in the case of a payment default, upon the date on
         which such default is cured or waived; and

                  (ii) in case of a nonpayment default, the earlier of the
         date on which such nonpayment default is cured or waived or 179 days
         after the date on which the applicable Payment Blockage Notice is
         received, unless the maturity of any Designated Senior Debt has been
         accelerated.

                  No new Payment Blockage Notice may be delivered under clause
(ii) above unless and until 360 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice.

                  No nonpayment default that existed or was continuing on the
date of delivery of any Payment Blockage Notice to the Trustee shall be, or be
made, the basis for a subsequent Payment Blockage Notice unless such default
shall have been cured or waived for a period of not less than 90 days. In the
event that Issuer or any Guarantor makes any payment to the Trustee or any
Holder of any Note prohibited by the foregoing, such payment will be required to
be held in trust for and paid over to the holders of Senior Debt (or the
Representative thereof). The Trustee and the Holders of the Notes will not
challenge or contest the enforceability or validity of the Senior Credit
Facility or any obligation, Lien or encumbrance thereunder.

Section 10.05.      ACCELERATION OF SECURITIES.


                  If payment of the Notes is accelerated because of an Event of
Default, Issuer shall promptly notify holders of Senior Debt of the
acceleration.

Section 10.06.      WHEN DISTRIBUTION MUST BE PAID OVER.


                  In the event that the Trustee or any Holder receives any
payment of any Obligations with respect to the Notes (other than payments in the
form of Permitted Junior Securities or payments made from the trust created
pursuant to Article 8 hereof) at a time when the Trustee or such Holder, as
applicable, has actual knowledge that such payment is prohibited by Section
10.04 hereof, such payment shall be held by the Trustee or such Holder, in trust
for the benefit of, and shall be paid forthwith over and delivered, upon written
request, to, the holders of Senior Debt as their interests may appear or their
Representative under the inden-




                                      -93-


ture or other agreement (if any) pursuant to which Senior Debt may have been
issued, as their respective interests may appear, for application to the payment
of all Obligations with respect to Senior Debt remaining unpaid to the extent
necessary to pay such Obligations in full in cash in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Debt.

                  With respect to the holders of Senior Debt, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article 10, and no implied covenants or
obligations with respect to the holders of Senior Debt shall be read into this
Indenture against the Trustee. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt, and shall not be liable to any
such holders if the Trustee shall pay over or distribute to or on behalf of
Holders or Issuer or any other Person money or assets to which any holders of
Senior Debt shall be entitled by virtue of this Article 10, except if such
payment is made as a result of the willful misconduct or gross negligence of the
Trustee.

Section 10.07.      NOTICE BY ISSUER.


                  Issuer shall promptly notify the Trustee and the Paying Agent
of any facts known to Issuer that would cause a payment of any Obligations with
respect to the Notes to violate this Article 10, but failure to give such notice
shall not affect the subordination of the Notes to the Senior Debt as provided
in this Article 10.

Section 10.08.      SUBROGATION.


                  After all Senior Debt is paid in full in cash and until the
Notes are paid in full, Holders of Notes shall be subrogated (equally and
ratably with all other Indebtedness PARI PASSU with the Notes) to the rights of
holders of Senior Debt to receive distributions applicable to Senior Debt to the
extent that distributions otherwise payable to the Holders of Notes have been
applied to the payment of Senior Debt. A distribution made under this Article 10
to holders of Senior Debt that otherwise would have been made to Holders of
Notes is not, as between Issuer and Holders, a payment by Issuer on the Notes.

Section 10.09.      RELATIVE RIGHTS.


                  This Article 10 defines the relative rights of Holders of
Notes and holders of Senior Debt. Nothing in this Indenture shall: (i) impair,
as between Issuer and Holders of Notes, the obligation of Issuer, which is
absolute and unconditional, to pay, when due, principal of, premium, if any, and
interest on the Notes in accordance with their terms; (ii) affect the relative
rights of Holders of Notes and creditors of Issuer other than their rights in
relation to holders of Senior Debt; or (iii) prevent the Trustee or any Holder
of Notes from exercising its available remedies upon a Default or Event of
Default, subject to the rights of holders and owners of Senior Debt to receive
distributions and payments otherwise payable to Holders of





                                      -94-


Notes. If Issuer fails because of this Article 10 to pay principal of or
interest on a Note on the due date, the failure is still a Default or Event of
Default.

Section 10.10.      SUBORDINATION MAY NOT BE IMPAIRED BY ISSUER.


                  No right of any holder of Senior Debt to enforce the
subordination of the Indebtedness evidenced by the Notes shall be impaired by
any act or failure to act by Issuer or any Holder or by the failure of Issuer or
any Holder to comply with this Indenture.

                  The Trustee and Holders agree that they will not challenge the
validity, enforceability or perfection of any Senior Debt or the liens,
guarantees and security interests securing the same and that as between the
holders of the Senior Debt on the one hand and the Trustee and Holders on the
other, the terms hereof shall govern even if all or part of the Senior Debt or
such liens and security interests are avoided, disallowed, subordinated, set
aside or otherwise invalidated in any judicial proceeding or otherwise,
regardless of the theory upon which such action is premised.

                  Without in any way limiting the generality of this Section
10.10, the holders of Senior Debt may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders, without
incurring responsibility to the Trustee or the Holders and without impairing or
releasing the subordination provided in this Article 10 or the obligations
hereunder of the Holders to the holders of Senior Debt, do any one or more of
the following: (a) change the manner, place or terms of payment or extend the
time of payment of, or renew or alter, Senior Debt, the Senior Credit Facility
or any instrument evidencing the same or any agreement under which Senior Debt
is outstanding or secured; (b) sell, exchange, release, foreclose against or
otherwise deal with any property pledged, mortgaged or otherwise securing Senior
Debt; (c) release any Person liable in any manner for the collection of Senior
Debt; and (d) exercise or refrain from exercising any rights against Issuer, any
Subsidiary thereof or any other Person.

Section 10.11.      DISTRIBUTION OR NOTICE TO REPRESENTATIVE.


                  Whenever a distribution is to be made or a notice given to
holders of any Senior Debt, the distribution may be made and the notice given to
their Representative.

                  Upon any payment or distribution of assets of Issuer referred
to in this Article 10, the Trustee and the Holders of Notes shall be entitled to
rely upon any order or decree made by any court of competent jurisdiction or
upon any certificate of such Representative(s) or of the liquidating trustee or
agent or other Person making any distribution to the Trustee or to the Holders
of Notes for the purpose of ascertaining the Persons entitled to participate in
such distribution, all holders of the Senior Debt and other Indebtedness of
Issuer, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article 10.



                                      -95-



Section 10.12.      RIGHTS OF TRUSTEE AND PAYING AGENT.

                  Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Notes, unless the Trustee shall have received at its
Corporate Trust Office at least two Business Days prior to the date of such
payment written notice of facts that would cause the payment of any Obligations
with respect to the Notes to violate this Article 10. Only Issuer or a
Representative may give the notice. Nothing in this Article 10 shall impair the
claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof.

                  The Trustee in its individual or any other capacity may hold
Senior Debt with the same rights it would have if it were not Trustee. Any Agent
may do the same with like rights.

Section 10.13.      AUTHORIZATION TO EFFECT SUBORDINATION.


                  Each Holder of Notes, by the Holder's acceptance thereof,
authorizes and directs the Trustee on such Holder's behalf to take such action
as may be necessary or appropriate to effectuate the subordination as provided
in this Article 10 and the subordination of the Note Guarantees as provided in
Section 11.02, and appoints the Trustee to act as such Holder's attorney-in-fact
for any and all such purposes, including, in the event of any dissolution,
winding up, liquidation or reorganization of Issuer or any Subsidiary (whether
in bankruptcy, insolvency, receivership, reorganization or similar proceedings
or upon an assignment for the benefit of creditors or otherwise), the filing of
a claim for the unpaid balance of its Notes in the form required in those
proceedings. If the Trustee does not file a proper proof of claim or proof of
debt in the form required in any proceeding referred to in Section 6.09 hereof
at least 30 days before the expiration of the time to file such claim, the
Representatives are hereby authorized to file an appropriate claim for and on
behalf of the Holders of the Notes.

Section 10.14.      AMENDMENTS.


                  The provisions of this Article 10 or Section 11.02 or 11.06
(including, without limitation, any definitions or other sections included by
reference or incorporation or the terms and conditions of the Note Guarantees)
shall not be amended or modified in any way adverse to any holder of Senior Debt
then outstanding without the written consent of the Representative under the
Senior Credit Facility or, in the absence thereof, of the holders of a majority
in aggregate principal amount of such Senior Debt.



                                      -96-



                                   ARTICLE 11.
                              SUBSIDIARY GUARANTEES


Section 11.01.      GUARANTEE.


                  Subject to this Article 11, each of the Guarantors hereby,
jointly and severally, unconditionally guarantees to each Holder of a Note
authenticated and delivered by the Trustee and to the Trustee and its successors
and assigns, irrespective of the validity and enforceability of this Indenture,
the Notes or the obligations of Issuer hereunder or thereunder, that: (a) the
principal of and interest on the Notes will be promptly paid in full when due,
whether at maturity, by acceleration, redemption or otherwise, and interest on
the overdue principal of and interest on the Notes, if any, if lawful, and all
other obligations of Issuer to the Holders or the Trustee hereunder or
thereunder will be promptly paid in full or performed, all in accordance with
the terms hereof and thereof; and (b) in case of any extension of time of
payment or renewal of any Notes or any of such other obligations, that same will
be promptly paid in full when due or performed in accordance with the terms of
the extension or renewal, whether at stated maturity, by acceleration or
otherwise. Failing payment when due of any amount so guaranteed or any
performance so guaranteed for whatever reason, the Guarantors shall be jointly
and severally obligated to pay the same immediately. Each Guarantor agrees that
this is a guarantee of payment and not a guarantee of collection.

                  The Guarantors hereby agree that their obligations hereunder
shall be unconditional, irrespective of the validity, regularity or
enforceability of the Notes or this Indenture, the absence of any action to
enforce the same, any waiver or consent by any Holder of the Notes with respect
to any provisions hereof or thereof, the recovery of any judgment against
Issuer, any action to enforce the same or any other circumstance which might
otherwise constitute a legal or equitable discharge or defense of a guarantor.
Each Guarantor hereby waives diligence, presentment, demand of payment, filing
of claims with a court in the event of insolvency or bankruptcy of Issuer, any
right to require a proceeding first against Issuer, protest, notice and all
demands whatsoever and covenant that this Note Guarantee shall not be discharged
except by complete performance of the obligations contained in the Notes and
this Indenture.

                  If any Holder or the Trustee is required by any court or
otherwise to return to Issuer, the Guarantors or any custodian, trustee,
liquidator or other similar official acting in relation to either Issuer or the
Guarantors, any amount paid by either to the Trustee or such Holder, this Note
Guarantee, to the extent theretofore discharged, shall be reinstated in full
force and effect.

                  Each Guarantor agrees that it shall not be entitled to any
right of subrogation in relation to the Holders in respect of any obligations
guaranteed hereby until payment in full of all obligations guaranteed hereby.
Each Guarantor further agrees that, as between the Guaran-




                                      -97-


tors, on the one hand, and the Holders and the Trustee, on the other hand, (x)
the maturity of the obligations guaranteed hereby may be accelerated as provided
in Article 6 hereof for the purposes of this Note Guarantee, notwithstanding any
stay, injunction or other prohibition preventing such acceleration in respect of
the obligations guaranteed hereby, and (y) in the event of any declaration of
acceleration of such obligations as provided in Article 6 hereof, such
obligations (whether or not due and payable) shall forthwith become due and
payable by the Guarantors for the purpose of this Note Guarantee. The Guarantors
shall have the right to seek contribution from any non-paying Guarantor so long
as the exercise of such right does not impair the rights of the Holders under
the Guarantee.

Section 11.02.      SUBORDINATION OF NOTE GUARANTEE.


                  The Obligations of each Guarantor under its Note Guarantee
pursuant to this Article 11 shall be junior and subordinated to the prior
payment in full in cash of the Senior Debt of such Guarantor on the same basis
as the Notes are junior and subordinated to Senior Debt of Issuer. For the
purposes of the foregoing sentence, the Trustee and the Holders shall have the
right to receive and/or retain payments by any of the Guarantors only at such
times as they may receive and/or retain payments in respect of the Notes
pursuant to this Indenture, including Article 10 hereof.

Section 11.03.      LIMITATION ON GUARANTOR LIABILITY.


                  Each Guarantor, and by its acceptance of Notes, each Holder,
hereby confirms that it is the intention of all such parties that the Note
Guarantee of such Guarantor not constitute a fraudulent transfer or conveyance
for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the
Uniform Fraudulent Transfer Act or any similar federal or state law to the
extent applicable to any Note Guarantee. To effectuate the foregoing intention,
the Trustee, the Holders and the Guarantors hereby irrevocably agree that the
obligations of such Guarantor under its Note Guarantee and this Article 11 shall
be limited to the maximum amount as will, after giving effect to such maximum
amount and all other contingent and fixed liabilities of such Guarantor that are
relevant under such laws, and after giving effect to any collections from,
rights to receive contribution from or payments made by or on behalf of any
other Guarantor in respect of the obligations of such other Guarantor under this
Article 11, result in the obligations of such Guarantor under its Note Guarantee
not constituting a fraudulent transfer or conveyance.

Section 11.04.      EXECUTION AND DELIVERY OF NOTE GUARANTEE.


                  To evidence its Note Guarantee set forth in Section 11.01,
each Guarantor hereby agrees that a notation of such Note Guarantee
substantially in the form included in Exhibit E shall be endorsed by an Officer
of such Guarantor on each Note authenticated and delivered by the Trustee and
that this Indenture shall be executed on behalf of such Guarantor by its
President, Executive or Senior Vice President, Treasurer or one of its Vice
Presidents.




                                      -98-


Further, Issuer shall cause all future Guarantors to execute a Supplemental
Indenture substantially in the form of EXHIBIT F.

                  Each Guarantor hereby agrees that its Note Guarantee set forth
in Section 11.01 shall remain in full force and effect notwithstanding any
failure to endorse on each Note a notation of such Note Guarantee.

                  If an Officer whose signature is on this Indenture or on the
Note Guarantee no longer holds that office at the time the Trustee authenticates
the Note on which a Note Guarantee is endorsed, the Note Guarantee shall be
valid nevertheless.

                  The delivery of any Note by the Trustee, after the
authentication thereof hereunder, shall constitute due delivery of the Note
Guarantee set forth in this Indenture on behalf of the Guarantors.

Section 11.05.      GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS.


                  A Guarantor may not sell, assign, lease, transfer, convey or
otherwise dispose of all or substantially all of its assets, or consolidate with
or merge with or into (whether or not such Guarantor is the surviving Person),
another Person unless: (i) immediately after giving effect to such transaction,
no Default exists; and (ii) either (a) the Person acquiring the assets in any
such sale or disposition or the Person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor under the Notes, this Indenture and the
Registration Rights Agreement pursuant to a supplemental indenture satisfactory
to the Trustee; or (b) the Net Proceeds of such sale or other disposition are
applied in accordance with the applicable provisions of this Indenture,
including, without limitation, Section 4.08 or Article 10 hereof.

Section 11.06.      RELEASES OF SUBSIDIARY GUARANTORS.


                  The Note Guarantee of a Guarantor will be released:

                  (1)      upon any sale or other disposition of all or
         substantially all of the assets of such Guarantor (including by way of
         merger or consolidation or any sale of all of the Capital Stock of that
         Guarantor); PROVIDED that Issuer applies the Net Proceeds of that sale
         or other disposition in accordance with the applicable provisions of
         this Indenture, including, without limitation, Section 4.08 or Article
         10 hereof; or

                  (2)      if Issuer designates such Guarantor as an
         Unrestricted Subsidiary in accordance with this Indenture;

PROVIDED, HOWEVER, in either case that any such termination shall occur only to
the extent that all obligations of such Guarantor under all of its Guarantees of
any Indebtedness of Issuer or



                                      -99-



any Indebtedness of any other Guarantor shall also terminate upon such release
and none of its Equity Interests are pledged for the benefit of any holder of
any Indebtedness of Issuer or any Indebtedness of any Restricted Subsidiary of
Issuer.

                  Upon delivery by Issuer to the Trustee of an Officers'
Certificate, to the effect that such sale or other disposition or that such
designation was made by the Company in accordance with the provisions of this
Indenture, the Trustee shall execute any documents reasonably required in order
to evidence the release of any such Guarantor from its obligations under its
Note Guarantee. The Trustee will provide any written confirmation or evidence of
the termination of such Note Guarantee as reasonably required by the
Representative.

                  Any Guarantor not released from its obligations under its Note
Guarantee shall remain liable for the full amount of principal of and interest
on the Notes and for the other obligations of any Guarantor under this Indenture
as provided in this Article 11.


                                   ARTICLE 12.
                                  MISCELLANEOUS


Section 12.01.      TRUST INDENTURE ACT CONTROLS.


                  If any provision of this Indenture limits, qualifies or
conflicts with the duties imposed by TIA Section 318(c), the imposed duties
shall control.

Section 12.02.      NOTICES.


                  Any notice or communication by Issuer, any Guarantor or the
Trustee to the others is duly given if in writing and delivered in person or
mailed by first class mail (registered or certified, return receipt requested),
or sent by telecopier or overnight courier guaranteeing next day delivery, to
the other's address.

                  If to Issuer and/or any Guarantor:

                           PETCO Animal Supplies, Inc.
                           9125 Rehco Road
                           San Diego, CA  92121
                           Telecopier No.:  (858) 657-2085
                           Attention:  Chief Financial Officer




                                      -100-


                  With a copy to:

                           Skadden, Arps, Slate, Meagher & Flom LLP
                           300 South Grand Avenue, 34th Floor
                           Los Angeles, CA  90071
                           Telecopier No.:  (213) 687-5600
                           Attention:  Nick Saggese, Esq.

                  If to the Trustee:

                           U.S. Bank N.A.
                           180 East Fifth Street
                           St. Paul, Minnesota  55101
                           Telecopier No.:  (651) 244-0711
                           Attention:  Corporate Trust Department

                  Issuer, any Guarantor or the Trustee, by notice to the others
may designate additional or different addresses for subsequent notices or
communications.

                  All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered by hand,
if personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the
next Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery.

                  Any notice or communication to a Holder shall be mailed by
first class mail, or by overnight air courier guaranteeing next day delivery
to its address shown on the register kept by the Registrar. Any notice or
communication shall also be so mailed to any Person described in TIA Section
313(c), to the extent required by the TIA. Failure to mail a notice or
communication to a Holder or any defect in it shall not affect its
sufficiency with respect to other Holders.

                  If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the addressee
receives it.

                  If Issuer mails a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.



                                     -101-



Section 12.03.      COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS
                    OF NOTES.


                  Holders may communicate pursuant to TIA Section 312(b) with
other Holders with respect to their rights under this Indenture or the Notes.
Issuer, the Trustee, the Registrar and anyone else shall have the protection
of TIA Section 312(c).

Section 12.04.      CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.


                  Upon any request or application by Issuer to the Trustee to
take any action under this Indenture, Issuer shall furnish to the Trustee:

                  (a) an Officers' Certificate in form and substance reasonably
         satisfactory to the Trustee (which shall include the statements set
         forth in Section 12.05 hereof) stating that, in the opinion of the
         signers, all conditions precedent and covenants, if any, provided for
         in this Indenture relating to the proposed action have been satisfied;
         and

                  (b) an Opinion of Counsel in form and substance reasonably
         satisfactory to the Trustee (which shall include the statements set
         forth in Section 12.05 hereof) stating that, in the opinion of such
         counsel, all such conditions precedent and covenants have been
         satisfied.

Section 12.05.      STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.


                  Each certificate or opinion with respect to compliance with
a condition or covenant provided for in this Indenture (other than a
certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the
provisions of TIA Section 314(e) and shall include:

                  (a)      a statement that the Person making such certificate
         or opinion has read such covenant or condition;

                  (b)      a brief statement as to the nature and scope of the
         examination or investigation upon which the statements or opinions
         contained in such certificate or opinion are based;

                  (c)      a statement that, in the opinion of such Person, he
         or she has made such examination or investigation as is necessary to
         enable him to express an informed opinion as to whether or not such
         covenant or condition has been satisfied; and

                  (d)      a statement as to whether or not, in the opinion of
         such Person, such condition or covenant has been satisfied.




                                     -102-


Section 12.06.      RULES BY TRUSTEE AND AGENTS.


                  The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar or Paying Agent may make reasonable rules and
set reasonable requirements for its functions.

Section 12.07.      NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES
                    AND STOCKHOLDERS.


                  No director, officer, employee, incorporator or stockholder of
Issuer or any Guarantor, as such, shall have any liability for any obligations
of Issuer or any Guarantor under the Notes, this Indenture, the Note Guarantees,
the Registration Rights Agreement or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes.

Section 12.08.      GOVERNING LAW.


                  THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE
USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE NOTE GUARANTEES WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.

Section 12.09.      NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.


                  This Indenture may not be used to interpret any other
indenture, loan or debt agreement of Issuer or its Subsidiaries or of any other
Person. Any such indenture, loan or debt agreement may not be used to interpret
this Indenture.

Section 12.10.      SUCCESSORS.


                  All agreements of Issuer in this Indenture and the Notes shall
bind its successors. All agreements of the Trustee in this Indenture shall bind
its successors.

Section 12.11.      SEVERABILITY.


                  In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.




                                     -103-


Section 12.12.      COUNTERPART ORIGINALS; ACCEPTANCE BY TRUSTEE.


                  The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement. U.S. Bank N.A. hereby accepts the trusts in this Indenture
declared or provided, upon the terms and conditions hereinabove set forth.

Section 12.13.      TABLE OF CONTENTS, HEADINGS, ETC.


                  The Table of Contents, Cross-Reference Table and Headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part of this Indenture and shall
in no way modify or restrict any of the terms or provisions hereof.

                            [Signature pages follow]


                                     -103-


                                   SIGNATURES

Dated as of October 26, 2001

                                PETCO ANIMAL SUPPLIES, INC.


                                By:  /s/ BRIAN K. DEVINE
                                   ---------------------------------
                                Name:     Brian K. Devine
                                Title:    President and Chief Executive
                                          Officer


                                GUARANTORS:

                                PETCO Southwest, L.P.,
                                  as Guarantor

                                By:    PETCO ANIMAL SUPPLIES, INC.,
                                         its General Partner


                                By:  /s/ BRIAN K. DEVINE
                                   ---------------------------------
                                Name:   Brian K. Devine
                                Title:  President and Chief Executive
                                        Officer


                                PM Management Incorporated
                                Pet Concepts International
                                INTERNATIONAL PET SUPPLIES &
                                  DISTRIBUTION, INC.
                                PETCO SOUTHWEST, INC.,
                                  each as Guarantor


                                By:  /s/ JAMES M. MYERS
                                   ---------------------------------
                                Name:    James M. Myers
                                Title:   Senior Vice President, Secretary,
                                         Chief Financial Officer, and
                                         Treasurer



                                U.S. BANK N.A.,
                                  as Trustee


                                By: /s/ FRANK P. LESLIE III
                                   ---------------------------------
                                Name:   Frank P. Leslie III
                                Title:  Vice President



                                      A-1-3
                                   EXHIBIT A-1
                                 (Face of Note)

================================================================================


                                              CUSIP:
                                                     -------------------------

                    10.75% Senior Subordinated Notes due 2011

No.:                                                $
                                                     -------------------------

                           PETCO Animal Supplies, Inc.

promises to pay to
                  --------------------------------------------------------------

or registered assigns,

the principal sum of
                    ------------------------------------------------------------

Dollars on November 1, 2011.

Interest Payment Dates:  May 1 and November 1, commencing May 1, 2002.

Record Dates:  April 15 and October 15.

                                                     Dated:
                                                            --------------------


                                                     PETCO Animal Supplies, Inc.


                                                     By:
                                                         -----------------------
                                                         Name:
                                                         Title:


This is one of the Notes referred to in the within-mentioned Indenture:

U.S. Bank N.A.,
as Trustee

By:
    -------------------------------------------------
      Authorized Signatory

================================================================================


                                     A-1-1



                                 (Back of Note)

                    10.75% Senior Subordinated Notes due 2011

   [INSERT THE GLOBAL NOTE LEGEND, IF APPLICABLE PURSUANT TO THE PROVISIONS
                                OF THE INDENTURE]

     [INSERT THE PRIVATE PLACEMENT LEGEND, IF APPLICABLE PURSUANT TO THE
                          PROVISIONS OF THE INDENTURE]

                  Capitalized terms used herein shall have the meanings assigned
to them in the Indenture referred to below unless otherwise indicated.

                  1.       INTEREST. PETCO Animal Supplies, Inc., a Delaware
corporation ("Issuer"), promises to pay interest on the principal amount of this
Note at 10.75% per annum from October 26, 2001 until maturity. Issuer will pay
interest semi-annually on May 1 and November 1 of each year, or if any such day
is not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance; PROVIDED that if there is no existing Default in the payment
of interest, and if this Note is authenticated between a record date referred to
on the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such next succeeding Interest Payment Date; PROVIDED, FURTHER, that
the first Interest Payment Date shall be May 1, 2002. Issuer shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue principal and premium, if any, from time to time on demand to the extent
lawful at the interest rate applicable to the Notes; it shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace
periods) from time to time on demand at the same rate to the extent lawful.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.

                  2.       METHOD OF PAYMENT. Issuer will pay interest on the
Notes (except defaulted interest) to the Persons who are registered Holders of
Notes at the close of business on the April 15 or October 15 next preceding the
Interest Payment Date, even if such Notes are canceled after such record date
and on or before such Interest Payment Date, except as provided in Section 2.12
of the Indenture with respect to defaulted interest. Principal, premium, if any,
and interest on the Notes will be payable at the office or agency of Issuer
maintained for such purpose or, at the option of Issuer, payment of interest may
be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of Notes; PROVIDED that all
payments of principal, premium and interest with respect to Notes the Holders of
which have given wire transfer instructions to Issuer prior to the Record Date
will be required to be made by wire transfer of immediately available funds to
the accounts specified by the Holders thereof. Until otherwise designated by
Issuer, Issuer's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of $1,000
and integral multiples thereof. Such payment shall be in


                                     A-1-2



such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts.

                  3.       PAYING AGENT AND REGISTRAR. Initially, U.S. Bank
N.A., the Trustee under the Indenture, will act as Paying Agent and Registrar.
Issuer may change any Paying Agent or Registrar without notice to any Holder.
Issuer or any of its Subsidiaries may act in any such capacity.

                  4.       INDENTURE AND SUBORDINATION. Issuer issued the Notes
under an Indenture dated as of October 26, 2001 ("Indenture") by and among
Issuer, the Guarantors and the Trustee. The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb) (the
"TIA"). The Notes are subject to all such terms, and Holders are referred to the
Indenture and the TIA for a statement of such terms. To the extent any provision
of this Note conflicts with the express provisions of the Indenture, the
provisions of the Indenture shall govern and be controlling. The payment of the
Notes will, to the extent set forth in the Indenture, be subordinated in right
of payment to the prior payment in full in cash or Cash Equivalents of all
Senior Debt.

                  5.       OPTIONAL REDEMPTION. Except as set forth in the
 following paragraph, the Notes will not be redeemable at Issuer's option prior
to November 1, 2006. On or after November 1, 2006, the Notes will be subject to
redemption at any time at the option of Issuer, in whole or in part, upon not
less than 30 nor more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on November 1 of the years indicated below:



YEAR                                                PERCENTAGE
- ----                                                ----------
                                                 
2006..........................................             105.375%
2007..........................................             103.583%
2008..........................................             101.792%
2009 and thereafter...........................             100.000%



                  Notwithstanding the foregoing, at any time on or prior to
November 1, 2004, Issuer may on any one or more occasions redeem up to 35% of
the aggregate principal amount of Notes at a redemption price equal to 110.75%
of the principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the redemption date, with the net cash proceeds of Public Equity
Offerings by Issuer; PROVIDED that (i) at least 65% of the aggregate principal
amount of Notes issued under the Indenture remains outstanding immediately after
the occurrence of such redemption (excluding Notes held by Issuer and its
Subsidiaries) and (ii) such redemption shall occur within 90 days of the date of
the closing of such Public Equity Offering.


                                     A-1-3



                  6.       MANDATORY REDEMPTION. For the avoidance of doubt, an
offer to purchase pursuant to paragraph 7 shall not be deemed a redemption.
Issuer shall not be required to make mandatory redemption payments with respect
to the Notes.

                  7.       REPURCHASE AT OPTION OF HOLDER. If a Change of
Control occurs, each Holder of Notes will have the right to require Issuer to
make an offer to all Holders to repurchase Notes on the terms, in accordance
with the procedures and subject to the limitations set forth in the Indenture.
If Issuer or a Restricted Subsidiary consummates any Asset Sales, when the
aggregate amount of Excess Proceeds exceeds $10.0 million, Issuer will be
required to make an offer to all Holders of Notes and all holders of other PARI
PASSU Indebtedness, containing provisions similar to those set forth in the
Indenture with respect to offers to purchase or redeem with the proceeds of
sales of assets, to purchase the maximum principal amount of Notes and such
other PARI PASSU Indebtedness that may be purchased out of the Excess Proceeds
on the terms, in accordance with the procedures and subject to the limitations
set forth in the Indenture and such other PARI PASSU Indebtedness.

                  8.       NOTICE OF REDEMPTION. Notice of redemption will be
mailed by first class mail at least 30 days but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. Notes in denominations larger than $1,000 may be redeemed in part. If
any Note is to be redeemed in part only, the notice of redemption that relates
to such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Note. On and after the redemption date interest ceases to accrue on
Notes or portions thereof called for redemption.

                  9.       DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in
registered form without coupons in denominations of $1,000 and integral
multiples of $1,000. The transfer of Notes may be registered and Notes may be
exchanged as provided in the Indenture. The Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and Issuer may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. Issuer or the Registrar is not
required to transfer or exchange any Note selected for redemption. Also, Issuer
or the Registrar is not required to transfer or exchange any Notes for a period
of 15 days before a selection of Notes to be redeemed.

                  10.      PERSONS DEEMED OWNERS. The registered Holder of a
Note may be treated as its owner for all purposes.


                  11.      AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain
exceptions, the Indenture, the Notes or the Note Guarantees may be amended or
supplemented with the consent of the Holders of at least a majority in principal
amount of the Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Notes) and any existing Default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in


                                     A-1-4



principal amount of the then outstanding Notes (including, without limitation,
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, Notes). Without the consent of any Holder of Notes, Issuer and the
Trustee may amend or supplement the Indenture or the Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption of
the obligations of Issuer or any Guarantor to Holders of the Notes in case of a
merger or consolidation or sale of all or substantially all assets in accordance
with Article 5 of the Indenture or Section 11.05 thereof, to make any change
that would provide any additional rights or benefits to the Holders of the Notes
or that does not adversely affect the legal rights under the Indenture of any
such Holder, to comply with the requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the TIA, to make any change in
Article 10 of the Indenture that would limit or terminate the benefits available
to any holder of Senior Debt (or any Representative) under the Indenture, to add
additional Note Guarantees, to secure the Notes, to add to the covenants of
Issuer for the benefit of the Holders or to surrender any right or power herein
conferred upon Issuer, to comply with the procedures of the Trustee, The
Depository Trust Company or other applicable entity with respect to the
provisions of the Indenture and the Notes relating to transfers of the Notes or
to provide for the issuance of the Exchange Notes, which shall have terms
substantially identical in all material respects to the Notes (except that the
transfer restrictions contained in the Notes shall be modified or eliminated, as
appropriate), and which shall be treated, together with any outstanding Notes,
as a single issue of securities, or to change the name or title of the Notes and
make any non-substantive conforming changes related thereto.

                  12.      DEFAULTS AND REMEDIES. If any Event of Default occurs
and is continuing, the Trustee or the Holders of at least 25% in principal
amount of the then outstanding Notes generally may declare all the Notes to be
due and payable immediately. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency as set
forth in the Indenture, with respect to Issuer or any Significant Subsidiary,
all outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest. The
Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, or the premium on, the Notes.

                  13.      TRUSTEE DEALINGS WITH ISSUER. The Trustee, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for Issuer or its Affiliates, and may otherwise deal with
Issuer or its Affiliates, as if it were not the Trustee; however, if it acquires
any conflicting interest it must eliminate such conflict within 90 days, apply
to the SEC for permission to continue or resign.


                                     A-1-5



                  14.      NO RECOURSE AGAINST OTHERS. No director, officer,
employee, incorporator or stockholder of Issuer or any Guarantor, as such, shall
have any liability for any obligations of Issuer or any Guarantor under the
Notes, the Indenture, the Note Guarantees, the Registration Rights Agreement or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of Notes by accepting a Note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the Notes.

                  15.      GUARANTEES. This Note will be entitled to the
benefits of certain Guarantees made for the benefit of the Holders. Reference is
hereby made to the Indenture for a statement of the respective rights,
limitations of rights, duties and obligations thereunder of the Guarantors, the
Trustee and the Holders.

                  16.      AUTHENTICATION. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.

                  17.      ABBREVIATIONS. Customary abbreviations may be used in
the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN
ENT (= tenants by the entirety), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A
(= Uniform Gifts to Minors Act).

                  18.      ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL
NOTES AND RESTRICTED DEFINITIVE Notes. In addition to the rights provided to
Holders of Notes under the Indenture, Holders of Restricted Global Notes and
Restricted Definitive Notes shall have all the rights set forth in the
Registration Rights Agreement dated as of the date of the Indenture, between
Issuer and the parties named on the signature pages thereof (the "Registration
Rights Agreement").

                  19.      CUSIP NUMBERS. Pursuant to a recommendation
promulgated by the Committee on Uniform Security Identification Procedures,
Issuer has caused CUSIP numbers to be printed on the Notes and the Trustee may
use CUSIP numbers in notices of redemption as a convenience to Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Notes or as contained in any notice of redemption and reliance may be placed
only on the other identification numbers placed thereon.

                  20.      GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW
YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS NOTE WITHOUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.

                  Issuer will furnish to any Holder upon written request and
without charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to: PETCO Animal Supplies, Inc., 9125 Rehco Road, San
Diego, CA 92121, Attention: Chief Financial Officer.


                                     A-1-6



                                 ASSIGNMENT FORM

To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to


- -------------------------------------------------------------------------------
                  (Insert assignee's soc. sec. or tax I.D. no.)

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
                  (Print or type assignee's name, address and zip code)

and irrevocably appoint
                        --------------------------------------------------------
to transfer this Note on the books of Issuer.  The agent may substitute another
to act for him.


- --------------------------------------------------------------------------------

Date:
       -----------------------------

                                  Your Signature:
                                                -------------------------------
                                                (Sign exactly as your name
                                                 appears on the Note)

SIGNATURE GUARANTEE


- -------------------------
Participant in a Recognized Signature
Guarantee Medallion Program


                                     A-1-7



                       OPTION OF HOLDER TO ELECT PURCHASE

                  If you want to elect to have this Note purchased by Issuer
pursuant to Section 4.07 or 4.08 of the Indenture, check the box below:

                  [ ] Section 4.07              [ ] Section 4.08


                  If you want to elect to have only part of this Note purchased
by Issuer pursuant to Section 4.07 or Section 4.08 of the Indenture, state the
amount you elect to have purchased:
$
 -------------------------------

Date:                                   Your Signature:
     ----------------------                            -------------------------
                                                       (Sign exactly as your
                                                        name appears on the
Note)

                                        Tax Identification No:
                                                              ------------------

SIGNATURE GUARANTEE

- --------------------------------
Participant in a Recognized Signature
Guarantee Medallion Program


                                     A-1-8




SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE(1)

                  The following exchanges of a part of this Global Note for an
interest in another Global Note or for a Definitive Note, or exchanges of a part
of another Global Note or Definitive Note for an interest in this Global Note,
have been made:



                          Amount of decrease      Amount of             Principal Amount
                             in                  increase in                of this               Signature of
                          Principal               Principal               Global Note         authorized signatory
                         Amount of                Amount of              following such           of Trustee or
   Date of Exchange      this Global Note      this Global Note      decrease (or increase)         Custodian
   ----------------      ----------------      ----------------      ----------------------         ---------
                                                                                        







1. THIS SHOULD BE INCLUDED ONLY IF THE NOTE IS ISSUED IN GLOBAL FORM.

                                     A-1-9




                                   EXHIBIT A-2
                   (Face of Regulation S Temporary Global Note)

===============================================================================

                                                          CUSIP:      U7149MAA3

                    10.75% Senior Subordinated Notes due 2011

No.:___                                               $
                                                       -------------------------

                           PETCO Animal Supplies, Inc.

promises to pay to
                  --------------------------------------------------------------

or registered assigns,

the principal sum of
                    ------------------------------------------------------------

Dollars on November 1, 2011.

Interest Payment Dates:  May 1 and November 1, commencing May 1, 2002.

Record Dates: April 15 and October 15.

                                                Dated: ___________


                                                PETCO Animal Supplies, Inc.


                                                 By:
                                                    ----------------------------
                                                    Name:
                                                    Title:


This is one of the
Notes referred to in the
within-mentioned Indenture:

U.S. Bank N.A.,
as Trustee

By:
    -------------------------------------------------
      Authorized Signatory

================================================================================


                                     A-2-1



                   (Back of Regulation S Temporary Global Note)

                    10.75% Senior Subordinated Notes due 2011

                  THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL
NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED
NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN).

                  THIS GLOBAL NOTE IS HELD BY THE DEPOSITORY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE
BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY
CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY
BE REQUIRED PURSUANT TO THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN
WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS
GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION
2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A
SUCCESSOR DEPOSITORY WITH THE PRIOR WRITTEN CONSENT OF ITS ISSUER.

                  THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A) (1) TO A PERSON WHOM
THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR
THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION MEETING THE
REQUIREMENTS OF RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT,
(3) TO AN INSTITUTIONAL ACCREDITED INVESTOR AS DEFINED IN RULE 501(a)(1), (2),
(3) OR (7) OF REGULATION D IN A TRANSACTION EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, (4) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
AVAILABLE), (5) PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION AVAILABLE UNDER
THE SECURITIES ACT OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF
THE STATES OF THE UNITED STATES.


                                     A-2-2



                  Capitalized terms used herein shall have the meanings assigned
to them in the Indenture referred to below unless otherwise indicated.

                  1.       INTEREST. PETCO Animal Supplies, Inc., a Delaware
corporation ("Issuer"), promises to pay interest on the principal amount of this
Note at 10.75% per annum from October 26, 2001 until maturity. Issuer will pay
interest semi-annually on May 1 and November 1 of each year, or if any such day
is not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance; PROVIDED that if there is no existing Default in the payment
of interest, and if this Note is authenticated between a record date referred to
on the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such next succeeding Interest Payment Date; PROVIDED, FURTHER, that
the first Interest Payment Date shall be May 1, 2002. Issuer shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue principal and premium, if any, from time to time on demand to the extent
lawful at the interest rate applicable to the Notes; it shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace
periods) from time to time on demand at the same rate to the extent lawful.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.

                  Until this Regulation S Temporary Global Note is exchanged for
one or more Regulation S Permanent Global Notes, the Holder hereof shall not be
entitled to receive payments of interest hereon; until so exchanged in full,
this Regulation S Temporary Global Note shall in all other respects be entitled
to the same benefits as other Notes under the Indenture.

                  2.       METHOD OF PAYMENT. Issuer will pay interest on the
Notes (except defaulted interest) to the Persons who are registered Holders of
Notes at the close of business on the April 15 and October 15 next preceding the
Interest Payment Date, even if such Notes are canceled after such record date
and on or before such Interest Payment Date, except as provided in Section 2.12
of the Indenture with respect to defaulted interest. Principal, premium, if any,
and interest on the Notes will be payable at the office or agency of Issuer
maintained for such purpose or, at the option of Issuer, payment of interest may
be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of Notes; PROVIDED that all
payments of principal, premium and interest with respect to Notes the Holders of
which have given wire transfer instructions to Issuer prior to the Record Date
will be required to be made by wire transfer of immediately available funds to
the accounts specified by the Holders thereof. Until otherwise designated by
Issuer, Issuer's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of $1,000
and integral multiples thereof. Such payment shall be in such coin or currency
of the United States of America as at the time of payment is legal tender for
payment of public and private debts.

                  3.       PAYING AGENT AND REGISTRAR. Initially, U.S. Bank
N.A., the Trustee under the Indenture, will act as Paying Agent and Registrar.
Issuer may change any Paying



                                     A-2-3



Agent or Registrar without notice to any Holder. Issuer or any of its
Subsidiaries may act in any such capacity.

                  4.       INDENTURE AND SUBORDINATION. Issuer issued the
Notes under an Indenture dated as of October 26, 2001 ("Indenture") by and
among Issuer, the Guarantors and the Trustee. The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code
Sections 77aaa-77bbbb) (the "TIA"). The Notes are subject to all such terms,
and Holders are referred to the Indenture and the TIA for a statement of such
terms. To the extent any provision of this Note conflicts with the express
provisions of the Indenture, the provisions of the Indenture shall govern and
be controlling. The payment of the Notes will, to the extent set forth in the
Indenture, be subordinated in right of payment to the prior payment in full
in cash or Cash Equivalents of all Senior Debt.

                  5.       OPTIONAL REDEMPTION. Except as set forth in the
following paragraph, the Notes will not be redeemable at Issuer's option prior
to November 1, 2006. On or November 1, 2006, the Notes will be subject to
redemption at any time at the option of Issuer, in whole or in part, upon not
less than 30 nor more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on November 1 of the years indicated below:




YEAR                                                PERCENTAGE
- ----                                                ----------
                                                 

2006..........................................             105.375%
2007..........................................             103.583%
2008..........................................             101.792%
2009 and thereafter...........................             100.000%


                  Notwithstanding the foregoing, at any time on or prior to
November 1, 2004, Issuer may on any one or more occasions redeem up to 35% of
the aggregate principal amount of Notes at a redemption price equal to 110.75%
of the principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the redemption date, with the net cash proceeds of Public Equity
Offerings by Issuer; PROVIDED that (i) at least 65% of the aggregate principal
amount of Notes issued under the Indenture remains outstanding immediately after
the occurrence of such redemption (excluding Notes held by Issuer and its
Subsidiaries) and (ii) such redemption shall occur within 90 days of the date of
the closing of such Public Equity Offering.

                  6.       MANDATORY REDEMPTION. For the avoidance of doubt, an
offer to purchase pursuant to paragraph 7 shall not be deemed a redemption.
Issuer shall not be required to make mandatory redemption payments with respect
to the Notes.

                  7.       REPURCHASE AT OPTION OF HOLDER. If a Change of
Control occurs, each Holder of Notes will have the right to require Issuer to
make an offer to all Holders to repur-


                                     A-2-4



chase Notes on the terms, in accordance with the procedures and subject to the
limitations set forth in the Indenture. If Issuer or a Restricted Subsidiary
consummates any Asset Sales, when the aggregate amount of Excess Proceeds
exceeds $10.0 million, Issuer will be required to make an offer to all Holders
of Notes and all holders of other PARI PASSU Indebtedness, containing provisions
similar to those set forth in the Indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets, to purchase the maximum
principal amount of Notes and such other PARI PASSU Indebtedness that may be
purchased out of the Excess Proceeds on the terms, in accordance with the
procedures and subject to the limitations set forth in the Indenture and such
other PARI PASSU Indebtedness.

                  8.       NOTICE OF REDEMPTION. Notice of redemption will be
mailed by first class mail at least 30 days but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. Notes in denominations larger than $1,000 may be redeemed in part. If
any Note is to be redeemed in part only, the notice of redemption that relates
to such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Note. On and after the redemption date interest ceases to accrue on
Notes or portions thereof called for redemption.

                  9.       DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in
registered form without coupons in denominations of $1,000 and integral
multiples of $1,000. The transfer of Notes may be registered and Notes may be
exchanged as provided in the Indenture. The Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and Issuer may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. Issuer or the Registrar is not
required to transfer or exchange any Note selected for redemption. Also, Issuer
or the Registrar is not required to transfer or exchange any Notes for a period
of 15 days before a selection of Notes to be redeemed.

                  This Regulation S Temporary Global Note is exchangeable in
whole or in part for one or more Global Notes only (i) on or after the
termination of the 40-day restricted period (as defined in Regulation S) and
(ii) upon presentation of certificates (accompanied by an Opinion of Counsel, if
applicable) required by Article 2 of the Indenture. Upon exchange of this
Regulation S Temporary Global Note for one or more Global Notes, the Trustee
shall cancel this Regulation S Temporary Global Note.

                  10.      PERSONS DEEMED OWNERS. The registered Holder of a
Note may be treated as its owner for all purposes.

                  11.      AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain
exceptions, the Indenture, the Notes or the Note Guarantees may be amended or
supplemented with the consent of the Holders of at least a majority in principal
amount of the Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Notes) and any existing Default or compliance with any provision



                                     A-2-5



of the Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Notes). Without the consent of any Holder of Notes,
Issuer and the Trustee may amend or supplement the Indenture or the Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes
in addition to or in place of certificated Notes, to provide for the assumption
of the obligations of Issuer or any Guarantor to Holders of the Notes in case of
a merger or consolidation or sale of all or substantially all assets in
accordance with Article 5 of the Indenture or Section 11.05 thereof, to make any
change that would provide any additional rights or benefits to the Holders of
the Notes or that does not adversely affect the legal rights under the Indenture
of any such Holder, to comply with the requirements of the SEC in order to
effect or maintain the qualification of the Indenture under the TIA, to make any
change in Article 10 of the Indenture that would limit or terminate the benefits
available to any holder of Senior Debt (or any Representative) under the
Indenture, to add additional Note Guarantees, to secure the Notes, to add to the
covenants of Issuer for the benefit of the Holders or to surrender any right or
power herein conferred upon Issuer, to comply with the procedures of the
Trustee, The Depository Trust Company or other applicable entity with respect to
the provisions of the Indenture and the Notes relating to transfers of the Notes
or to provide for the issuance of the Exchange Notes, which shall have terms
substantially identical in all material respects to the Notes (except that the
transfer restrictions contained in the Notes shall be modified or eliminated, as
appropriate), and which shall be treated, together with any outstanding Notes,
as a single issue of securities, or to change the name or title of the Notes and
make any non-substantive conforming changes related thereto.

                  12.      DEFAULTS AND REMEDIES. If any Event of Default occurs
and is continuing, the Trustee or the Holders of at least 25% in principal
amount of the then outstanding Notes generally may declare all the Notes to be
due and payable immediately. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency as set
forth in the Indenture, with respect to Issuer or any Significant Subsidiary,
all outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest. The
Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, or the premium, if any, on, the Notes.

                  13. TRUSTEE DEALINGS WITH ISSUER. The Trustee, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for Issuer or its Affiliates, and may otherwise deal with
Issuer or its Affiliates, as if it were not the Trustee;


                                     A-2-6



however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.

                  14.      NO RECOURSE AGAINST OTHERS. No director, officer,
employee, incorporator or stockholder of Issuer or any Guarantor, as such, shall
have any liability for any obligations of Issuer or any Guarantor under the
Notes, the Indenture, the Note Guarantees, the Registration Rights Agreement or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of Notes by accepting a Note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the Notes.

                  15.      GUARANTEES. This Note will be entitled to the
benefits of certain Guarantees made for the benefit of the Holders. Reference
is hereby made to the Indenture for a statement of the respective rights,
limitations of rights, duties and obligations thereunder of the Guarantors,
the Trustee and the Holders.

                  16.      AUTHENTICATION. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating
agent.

                  17.      ABBREVIATIONS. Customary abbreviations may be used in
the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN
ENT (= tenants by the entirety), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).

                  18.      ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL
NOTES AND RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to
Holders of Notes under the Indenture, Holders of Restricted Global Notes and
Restricted Definitive Notes shall have all the rights set forth in the
Registration Rights Agreement dated as of the date of the Indenture, between
Issuer and the parties named on the signature pages thereof (the "Registration
Rights Agreement").

                  19.      CUSIP NUMBERS. Pursuant to a recommendation
promulgated by the Committee on Uniform Security Identification Procedures,
Issuer has caused CUSIP numbers to be printed on the Notes and the Trustee may
use CUSIP numbers in notices of redemption as a convenience to Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Notes or as contained in any notice of redemption and reliance may be placed
only on the other identification numbers placed thereon.

                  20.      GOVERNING LAW. THE INTERNAL LAW OF THE STATE OF NEW
YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS NOTE WITHOUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.

                  Issuer will furnish to any Holder upon written request and
without charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:


                                     A-2-7



PETCO Animal Supplies, Inc., 9125 Rehco Road, San Diego, CA 92121, Attention:
Chief Financial Officer.


                                       A-2-8



                                 ASSIGNMENT FORM

To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to


- --------------------------------------------------------------------------------
                  (Insert assignee's soc. sec. or tax I.D. no.)

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
                  (Print or type assignee's name, address and zip code)

and irrevocably appoint
                        --------------------------------------------------------
to transfer this Note on the books of Issuer.  The agent may substitute another
to act for him.


- --------------------------------------------------------------------------------

Date:
       -----------------------------

                                Your Signature:
                                               ---------------------------------
                                               (Sign exactly as your
                                                name appears on the Note)

SIGNATURE GUARANTEE


- -------------------------
Participant in a Recognized Signature
Guarantee Medallion Program


                                     A-2-9




                       OPTION OF HOLDER TO ELECT PURCHASE

                  If you want to elect to have this Note purchased by Issuer
pursuant to Section 4.07 or 4.08 of the Indenture, check the box below:

                  [ ] Section 4.07              [ ] Section 4.08


                  If you want to elect to have only part of this Note purchased
by Issuer pursuant to Section 4.07 or Section 4.08 of the Indenture, state the
amount you elect to have purchased:
$
 -----------------------------


- -------------------------------------------------------------------------------

Date:                                   Your Signature:
     ----------------------                           --------------------------
                                                      (Sign exactly as your
                                                       name appears on the Note)

                                         Tax Identification No:
                                                               -----------------

SIGNATURE GUARANTEE

- --------------------------------
Participant in a Recognized Signature
Guarantee Medallion Program


                                     A-2-10



             SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE(1)

                  The following exchanges of a part of this Global Note for an
interest in another Global Note or for a Definitive Note, or exchanges of a part
of another Global Note or Definitive Note for an interest in this Global Note,
have been made:




                       Amount of decrease         Amount of            Principal Amount
                              in                 increase in                of this               Signature of
                           Principal              Principal               Global Note         authorized signatory
                           Amount of              Amount of               following such           of Trustee or
   Date of Exchange     this Global Note       this Global Note       decrease (or increase)        Custodian
   ----------------   ------------------       ----------------      ----------------------         ---------

                                                                                   


























- ------------------------
1.       THIS SHOULD BE INCLUDED ONLY IF THE NOTE IS ISSUED IN GLOBAL FORM.

                                     A-2-11




                                    EXHIBIT B
                         FORM OF CERTIFICATE OF TRANSFER


PETCO Animal Supplies, Inc.
9125 Rehco Road
San Diego, CA  92121

[Registrar address block]

                  Re: 10.75% SENIOR SUBORDINATED NOTES DUE 2011

                              (CUSIP _____________)

                  Reference is hereby made to the Indenture, dated as of October
26, 2001 (the "INDENTURE"), by and among PETCO Animal Supplies, Inc., as issuer
("ISSUER"), the Guarantors and U.S. Bank N.A., as trustee. Capitalized terms
used but not defined herein shall have the meanings given to them in the
Indenture.

                  ______________ (the "TRANSFEROR") owns and proposes to
transfer the Note[s] or interest in such Note[s] specified in Annex A hereto, in
the principal amount of $___________ in such Note[s] or interests (the
"TRANSFER"), to __________ (the "TRANSFEREE"), as further specified in Annex A
hereto. In connection with the Transfer, the Transferor hereby certifies that:

[CHECK ALL THAT APPLY]

1.       [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN
A 144A GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO RULE 144A. The Transfer is
being effected pursuant to and in accordance with Rule 144A under the United
States Securities Act of 1933, as amended (the "SECURITIES ACT"), and,
accordingly, the Transferor hereby further certifies that the beneficial
interest or Definitive Note is being transferred to a Person that the Transferor
reasonably believed and believes is purchasing the beneficial interest or
Definitive Note for its own account, or for one or more accounts with respect to
which such Person exercises sole investment discretion, and such Person and each
such account is a "qualified institutional buyer" within the meaning of Rule
144A in a transaction meeting the requirements of Rule 144A and such Transfer is
in compliance with any applicable securities laws of any state of the United
States. Upon consummation of the proposed Transfer in accordance with the terms
of the Indenture, the transferred beneficial interest or Definitive Note will be
subject to the restrictions on transfer enumerated in the Private Placement
Legend printed on the 144A Global Note and/or the Definitive Note and in the
Indenture and the Securities Act.

2.       [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN
A REGULATION S GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO REGULATION S. The
Transfer is being effected pursuant to and in accordance with Rule 903 or Rule
904 under the Securities Act and, accordingly, the Transferor hereby further
certifies that (i) the Transfer is not being made to a


                                       B-1



person in the United States and (x) at the time the buy order was originated,
the Transferee was outside the United States or such Transferor and any Person
acting on its behalf reasonably believed and believes that the Transferee was
outside the United States or (y) the transaction was executed in, on or through
the facilities of a designated offshore securities market and neither such
Transferor nor any Person acting on its behalf knows that the transaction was
prearranged with a buyer in the United States, (ii) no directed selling efforts
have been made in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S under the Securities Act, (iii) the transaction is not
part of a plan or scheme to evade the registration requirements of the
Securities Act and (iv) if the proposed transfer is being made prior to the
expiration of the Restricted Period, the transfer is not being made to a U.S.
Person or for the account or benefit of a U.S. Person (other than an initial
purchaser). Upon consummation of the proposed transfer in accordance with the
terms of the Indenture, the transferred beneficial interest or Definitive Note
will be subject to the restrictions on Transfer enumerated in the Private
Placement Legend printed on the Regulation S Global Note and/or the Definitive
Note and in the Indenture and the Securities Act.

3.       [ ] CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL
INTEREST IN THE GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO ANY PROVISION OF
THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The Transfer is being
effected in compliance with the transfer restrictions applicable to beneficial
interests in Restricted Global Notes and Restricted Definitive Notes and
pursuant to and in accordance with the Securities Act and any applicable
securities laws of any state of the United States, and accordingly the
Transferor hereby further certifies that (check one):

                  (a)      [ ] such Transfer is being effected pursuant to and
            in accordance with Rule 144 under the Securities Act;

                                       or

                  (b)      [ ] such Transfer is being effected to Issuer or a
            Subsidiary thereof;

                                       or

                  (c)      [ ] such Transfer is being effected pursuant to an
            effective registration statement under the Securities Act and in
            compliance with the prospectus delivery requirements of the
            Securities Act;

                                       or

                  (d)      [ ] such Transfer is being effected to an
            Institutional Accredited Investor and pursuant to an exemption from
            the registration requirements of the Securities Act other than Rule
            144A, Rule 144 or Rule 904, and the Transferor hereby further
            certifies that it has not engaged in any general solicitation within
            the meaning of Regulation D under the Securities Act and the
            Transfer complies with the transfer restrictions applicable to
            beneficial interests in a Restricted Global Note or Restricted
            Definitive Notes and the requirements of the exemption claimed,
            which certification is


                                      B-2



            supported by (1) a certificate executed by the Transferee in the
            form of Exhibit D to the Indenture and (2) if such Transfer is in
            respect of a principal amount of Notes at the time of transfer of
            less than $250,000, an Opinion of Counsel provided by the
            Transferor or the Transferee (a copy of which the Transferor has
            attached to this certification), to the effect that such Transfer is
            in compliance with the Securities Act. Upon consummation of the
            proposed transfer in accordance with the terms of the Indenture, the
            transferred beneficial interest or Definitive Note will be subject
            to the restrictions on transfer enumerated in the Private Placement
            Legend printed on the Global Note and/or the Definitive Notes and in
            the Indenture and the Securities Act.

                  4.       [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A
BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE OR AN UNRESTRICTED DEFINITIVE
NOTE.

                  (a)      [ ] CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i)
The Transfer is being effected pursuant to and in accordance with Rule 144 under
the Securities Act and in compliance with the transfer restrictions contained in
the Indenture and any applicable securities laws of any state of the United
States and (ii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act. Upon consummation of the proposed Transfer in accordance
with the terms of the Indenture, the transferred beneficial interest or
Definitive Note will no longer be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Notes, on Restricted Definitive Notes and in the Indenture.

                  (b)      [ ] CHECK IF TRANSFER IS PURSUANT TO REGULATION S.
(i) The Transfer is being effected pursuant to and in accordance with Rule 903
or Rule 904 under the Securities Act and in compliance with the transfer
restrictions contained in the Indenture and any applicable securities laws of
any state of the United States and (ii) the restrictions on transfer contained
in the Indenture and the Private Placement Legend are not required in order to
maintain compliance with the Securities Act. Upon consummation of the proposed
Transfer in accordance with the terms of the Indenture, the transferred
beneficial interest or Definitive Note will no longer be subject to the
restrictions on transfer enumerated in the Private Placement Legend printed on
the Restricted Global Notes, on Restricted Definitive Notes and in the
Indenture.

                  (c)      [ ] CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION.
(i) The Transfer is being effected pursuant to and in compliance with an
exemption from the registration requirements of the Securities Act other than
Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions
contained in the Indenture and any applicable securities laws of any State of
the United States and (ii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transferred beneficial
interest or Definitive Note will not be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Notes or Restricted Definitive Notes and in the Indenture.


                                      B-3



                  This certificate and the statements contained herein are made
for your benefit and the benefit of Issuer.

                       ---------------------------------------------------------
                           [Insert Name of Transferor]


                      By:
                             ---------------------------------------------------
                             Name:
                             Title:


Dated:
      ------------------------------


                                      B-4



                       ANNEX A TO CERTIFICATE OF TRANSFER

1.       The Transferor owns and proposes to transfer the following:

                                   [CHECK ONE]

         (a)      [ ]  a beneficial interest in the:

                  (i)      [ ]  144A Global Note (CUSIP          ), or
                                                        ---------

                  (ii)     [ ]  Regulation S Global Note (CUSIP          ), or
                                                                ---------

         (b)      [ ]  a Restricted Definitive Note.

2.       After the Transfer the Transferee will hold:

                                   [CHECK ONE]

         (a)      [ ]  a beneficial interest in the:

                  (i)      [ ]  144A Global Note (CUSIP         ), or
                                                        --------

                  (ii)     [ ]  Regulation S Global Note (CUSIP         ), or
                                                                --------

                  (iii)    [ ]  Unrestricted Global Note (CUSIP         ); or
                                                               ---------
         (b)      [ ]  a Restricted Definitive Note; or

         (c)      [ ]  an Unrestricted Definitive Note,

         in accordance with the terms of the Indenture.


                                      B-5




                                    EXHIBIT C
                         FORM OF CERTIFICATE OF EXCHANGE


PETCO Animal Supplies, Inc.
9125 Rehco Road
San Diego, CA  92121

[Registrar address block]

                  Re: 10.75% SENIOR SUBORDINATED NOTES DUE 2011

                              (CUSIP______________)

                  Reference is hereby made to the Indenture, dated as of October
26, 2001 (the "INDENTURE"), by and among PETCO Animal Supplies, Inc., as issuer
("ISSUER"), the Guarantors and U.S. Bank N.A., as trustee. Capitalized terms
used but not defined herein shall have the meanings given to them in the
Indenture.

                  ____________ (the "OWNER") owns and proposes to exchange the
Note[s] or interest in such Note[s] specified herein, in the principal amount of
$____________ in such Note[s] or interests (the "EXCHANGE"). In connection with
the Exchange, the Owner hereby certifies that:

1. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN A
RESTRICTED GLOBAL NOTE FOR UNRESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS
IN AN UNRESTRICTED GLOBAL NOTE

                  (a)      [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN
A RESTRICTED GLOBAL NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE.
In connection with the Exchange of the Owner's beneficial interest in a
Restricted Global Note for a beneficial interest in an Unrestricted Global Note
in an equal principal amount, the Owner hereby certifies (i) the beneficial
interest is being acquired for the Owner's own account without transfer, (ii)
such Exchange has been effected in compliance with the transfer restrictions
applicable to the Global Notes and pursuant to and in accordance with the United
States Securities Act of 1933, as amended (the "SECURITIES ACT"), (iii) the
restrictions on transfer contained in the Indenture and the Private Placement
Legend are not required in order to maintain compliance with the Securities Act
and (iv) the beneficial interest in an Unrestricted Global Note is being
acquired in compliance with any applicable securities laws of any state of the
United States.

                  (b)      [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE
NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with
the Owner's Exchange of a Restricted Definitive Note for a beneficial interest
in an Unrestricted Global Note, the Owner hereby certifies (i) the beneficial
interest is being acquired for the Owner's own account without transfer, (ii)
such Exchange has been effected in compliance with the transfer restrictions
applicable to Restricted Definitive Notes and pursuant to and in accordance with


                                        C-1



the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the beneficial interest is being
acquired in compliance with any applicable securities laws of any state of the
United States.

                  (c)      [ ] CHECK IF EXCHANGE IS FROM RESTRICTED
DEFINITIVE NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the
Owner's Exchange of a Restricted Definitive Note for an Unrestricted
Definitive Note, the Owner hereby certifies (i) the Unrestricted Definitive
Note is being acquired for the Owner's own account without transfer, (ii)
such Exchange has been effected in compliance with the transfer restrictions
applicable to Restricted Definitive Notes and pursuant to and in accordance
with the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to
maintain compliance with the Securities Act and (iv) the Unrestricted
Definitive Note is being acquired in compliance with any applicable
securities laws of any state of the United States.

                  2.       EXCHANGE OF RESTRICTED DEFINITIVE NOTES FOR
RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN RESTRICTED GLOBAL NOTES

                  (a)      [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE
NOTE TO BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE. In connection with the
Exchange of the Owner's Restricted Definitive Note for a beneficial interest in
the [CHECK ONE] __144A Global Note, __Regulation S Global Note with an equal
principal amount, the Owner hereby certifies (i) the beneficial interest is
being acquired for the Owner's own account without transfer and (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to the Restricted Global Notes and pursuant to and in accordance with
the Securities Act, and in compliance with any applicable securities laws of any
state of the United States. Upon consummation of the proposed Exchange in
accordance with the terms of the Indenture, the beneficial interest issued will
be subject to the restrictions on transfer enumerated in the Private Placement
Legend printed on the relevant Restricted Global Note and in the Indenture and
the Securities Act.


                                      C-2




                  This certificate and the statements contained herein are made
for your benefit and the benefit of Issuer.

                                ----------------------------------------------
                                [Insert Name of Owner]


                             By:
                                    ------------------------------------------
                                    Name:
                                    Title:


Dated: ________________


                                      C-3





                                    EXHIBIT D
                            FORM OF CERTIFICATE FROM
                   ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR

PETCO Animal Supplies, Inc.
9125 Rehco Road
San Diego, CA  92121

[Registrar address block]

                  Re: 10.75% SENIOR SUBORDINATED NOTES DUE 2011

                              (CUSIP _____________)

                  Reference is hereby made to the Indenture, dated as of October
26, 2001 (the "INDENTURE"), by and among PETCO Animal Supplies, Inc., as issuer
("ISSUER"), the Guarantors and U.S. Bank N.A., as trustee. Capitalized terms
used but not defined herein shall have the meanings given to them in the
Indenture.

                  In connection with our proposed purchase of $____________
aggregate principal amount of:

                  (a)      [ ]      a beneficial interest in a Global Note, or

                  (b)      [ ]      a Definitive Note,

                  we confirm that:

                  1.       We understand that any subsequent transfer of the
Notes or any interest therein is subject to certain restrictions and conditions
set forth in the Indenture and the undersigned agrees to be bound by, and not to
resell, pledge or otherwise transfer the Notes or any interest therein except in
compliance with, such restrictions and conditions and the United States
Securities Act of 1933, as amended (the "SECURITIES ACT").

                  2.       We understand that the offer and sale of the Notes
have not been registered under the Securities Act, and that the Notes and any
interest therein may not be offered or sold except as permitted in the following
sentence. We agree, on our own behalf and on behalf of any accounts for which we
are acting as hereinafter stated, that if we should sell the Notes or any
interest therein, we will do so only (A) to Issuer or any subsidiary thereof,
(B) in accordance with Rule 144A under the Securities Act to a "qualified
institutional buyer" (as defined therein), (c) to an institutional "accredited
investor" (as defined below) that, prior to such transfer, furnishes (or has
furnished on its behalf by a U.S. broker-dealer) to you and to Issuer a signed
letter substantially in the form of this letter and, if such transfer is in
respect of a principal amount of Notes, at the time of transfer, of less than
$250,000, an Opinion of Counsel in form reasonably acceptable to Issuer to the
effect that such transfer is in compliance with the Securities Act, (D) outside
the United States in accordance with Rule 904 of


                                      D-1



Regulation S under the Securities Act, (E) pursuant to the provisions of Rule
144(k) under the Securities Act, (F) pursuant to another applicable exemption
from the Securities Act or (G) pursuant to an effective registration statement
under the Securities Act, and we further agree to provide to any person
purchasing the Definitive Note or beneficial interest in a Global Note from us
in a transaction meeting the requirements of clauses (A) through (F) of this
paragraph a notice advising such purchaser that resales thereof are restricted
as stated herein.

                  3.       We understand that, on any proposed resale of the
Notes or beneficial interest therein, we will be required to furnish to you and
Issuer such certifications, legal opinions and other information as you and
Issuer may reasonably require to confirm that the proposed sale complies with
the foregoing restrictions. We further understand that the Notes purchased by us
will bear a legend to the foregoing effect.

                  4.       We are an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities
Act) and have such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of our investment in the Notes,
and we and any accounts for which we are acting are each able to bear the
economic risk of our or its investment.

                  5.       We are acquiring the Notes or beneficial interest
therein purchased by us for our own account or for one or more accounts (each of
which is an institutional "accredited investor") as to each of which we exercise
sole investment discretion.

                  You and Issuer are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby.


                        --------------------------------------------------------
                           [Insert Name of Accredited Owner]


                        By:
                               ----------------------------------------------
                               Name:
                               Title:


Dated: ________________


                                      D-2




                                    EXHIBIT E
                   FORM OF SENIOR SUBORDINATED NOTE GUARANTEE


                  For value received, the undersigned (including any successor
Person under the Indenture) has, jointly and severally, unconditionally
guaranteed, to the extent set forth in the Indenture and subject to the
provisions in the Indenture dated as of October 26, 2001 (the "Indenture") by
and among PETCO Animal Supplies, Inc. ("Issuer"), the Guarantors listed on the
signature page thereto and U.S. Bank N.A., as trustee (the "Trustee"), (a) the
due and punctual payment of the principal of, premium, if any, and interest on
the Notes (as defined in the Indenture), whether at maturity, by acceleration,
redemption or otherwise, the due and punctual payment of interest on overdue
principal and premium, and, to the extent permitted by law, interest, and the
due and punctual performance of all other obligations of Issuer to the Holders
or the Trustee all in accordance with the terms of the Indenture and (b) in case
of any extension of time of payment or renewal of any Notes or any of such other
obligations, that the same will be promptly paid in full when due or performed
in accordance with the terms of the extension or renewal, whether at stated
maturity, by acceleration or otherwise. The obligations of the undersigned to
the Holders of Notes and to the Trustee pursuant to this Note Guarantee and the
Indenture are expressly set forth in Article 11 of the Indenture and reference
is hereby made to the Indenture for the precise terms of this Note Guarantee.
Each Holder of a Note, by accepting the same, (a) agrees to and shall be bound
by such provisions, (b) authorizes and directs the Trustee, on behalf of such
Holder, to take such action as may be necessary or appropriate to effectuate the
subordination as provided in the Indenture and (c) appoints the Trustee
attorney-in-fact of such Holder for such purpose.

                  The terms of the Indenture, including, without limitation,
Articles 10 and 11 of the Indenture, are incorporated herein by reference.
Capitalized terms used herein shall have the meanings assigned to them in the
Indenture unless otherwise indicated.

                         [Name of Guarantor]


                         By:
                                ------------------------------------------
                                Name:
                                Title:


                                       E-1




                                    EXHIBIT F
                         FORM OF SUPPLEMENTAL INDENTURE
                    TO BE DELIVERED BY SUBSEQUENT GUARANTORS


                  Supplemental Indenture (this "SUPPLEMENTAL INDENTURE"), dated
as of ________________, among __________________ (the "GUARANTEEING
SUBSIDIARY"), a subsidiary of PETCO Animal Supplies, Inc. (or its permitted
successor), a Delaware corporation ("ISSUER"), the other Guarantors (as defined
in the Indenture referred to below) and U.S. Bank N.A., as trustee under the
indenture referred to below (the "TRUSTEE").

                              W I T N E S S E T H

                  WHEREAS, Issuer has heretofore executed and delivered to the
Trustee an indenture (the "INDENTURE"), dated as of October 26, 2001, providing
for the issuance of 10.75% Senior Subordinated Notes due 2011 (the "NOTES");

                  WHEREAS, the Indenture provides that under certain
circumstances the Guaranteeing Subsidiary shall execute and deliver to the
Trustee a supplemental indenture pursuant to which the Guaranteeing Subsidiary
shall unconditionally guarantee all of Issuer's Obligations under the Notes and
the Indenture on the terms and conditions set forth herein (the "NOTE
GUARANTEE"); and

                  WHEREAS, pursuant to Section 9.01 of the Indenture, the
Trustee is authorized to execute and deliver this Supplemental Indenture.

                  NOW THEREFORE, in consideration of the foregoing and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the Guaranteeing Subsidiary and the Trustee mutually covenant and agree for the
equal and ratable benefit of the Holders of the Notes as follows:

                  1.       CAPITALIZED TERMS. Capitalized terms used herein
without definition shall have the meanings assigned to them in the Indenture.

                  2.       AGREEMENT TO GUARANTEE. The Guaranteeing Subsidiary
hereby agrees as follows:

                  (a)      Along with all Guarantors named in the Indenture, to
                           jointly and severally Guarantee to each Holder of a
                           Note authenticated and delivered by the Trustee and
                           to the Trustee and its successors and assigns,
                           irrespective of the validity and enforceability of
                           the Indenture, the Notes or the obligations of Issuer
                           hereunder or thereunder, that:

                           (i)      the principal of and interest on the Notes
                                    will be promptly paid in full when due,
                                    whether at maturity, by acceleration,
                                    redemption or otherwise, and interest on the
                                    overdue principal of and


                                      F-1



                                    interest on the Notes, if any, if lawful,
                                    and all other obligations of Issuer to the
                                    Holders or the Trustee hereunder or
                                    thereunder will be promptly paid in full or
                                    performed, all in accordance with the terms
                                    hereof and thereof; and

                           (ii)     in case of any extension of time of payment
                                    or renewal of any Notes or any of such other
                                    obligations, that same will be promptly paid
                                    in full when due or performed in accordance
                                    with the terms of the extension or renewal,
                                    whether at stated maturity, by acceleration
                                    or otherwise. Failing payment when due of
                                    any amount so guaranteed or any performance
                                    so guaranteed for whatever reason, the
                                    Guarantors shall be jointly and severally
                                    obligated to pay the same immediately.

                  (b)      The obligations hereunder shall be unconditional,
                           irrespective of the validity, regularity or
                           enforceability of the Notes or the Indenture, the
                           absence of any action to enforce the same, any waiver
                           or consent by any Holder of the Notes with respect to
                           any provisions hereof or thereof, the recovery of any
                           judgment against Issuer, any action to enforce the
                           same or any other circumstance which might otherwise
                           constitute a legal or equitable discharge or defense
                           of a guarantor.

                  (c)      The following is hereby waived: diligence,
                           presentment, demand of payment, filing of claims with
                           a court in the event of insolvency or bankruptcy of
                           Issuer, any right to require a proceeding first
                           against Issuer, protest, notice and all demands
                           whatsoever.

                  (d)      This Note Guarantee shall not be discharged except by
                           complete performance of the obligations contained in
                           the Notes and the Indenture.

                  (e)      If any Holder or the Trustee is required by any court
                           or otherwise to return to Issuer, the Guarantors, or
                           any Custodian, Trustee, liquidator or other similar
                           official acting in relation to either Issuer or the
                           Guarantors, any amount paid by either to the Trustee
                           or such Holder, this Note Guarantee, to the extent
                           theretofore discharged, shall be reinstated in full
                           force and effect.

                  (f)      The Guaranteeing Subsidiary shall not be entitled to
                           any right of subrogation in relation to the Holders
                           in respect of any obligations guaranteed hereby until
                           payment in full of all obligations guaranteed hereby.

                  (g)      As between the Guarantors, on the one hand, and the
                           Holders and the Trustee, on the other hand, (x) the
                           maturity of the obligations guaranteed hereby may be
                           accelerated as provided in Article 6 of the Indenture
                           for the purposes of this Note Guarantee,
                           notwithstanding any stay,


                                      F-2



                           injunction or other prohibition preventing such
                           acceleration in respect of the obligations guaranteed
                           hereby, and (y) in the event of any declaration of
                           acceleration of such obligations as provided in
                           Article 6 of the Indenture, such obligations (whether
                           or not due and payable) shall forthwith become due
                           and payable by the Guarantors for the purpose of this
                           Note Guarantee.

                  (h)      The Guarantors shall have the right to seek
                           contribution from any non-paying Guarantor so long as
                           the exercise of such right does not impair the rights
                           of the Holders under the Guarantee.

                  (i)      The obligations hereunder shall be subject to the
                           subordination provisions set forth in Article 10 of
                           the Indenture.

                  3.       EXECUTION AND DELIVERY. Each Guaranteeing Subsidiary
agrees that the Note Guarantees shall remain in full force and effect
notwithstanding any failure to endorse on each Note a notation of such Note
Guarantee.

                  4.       GUARANTEEING SUBSIDIARY MAY CONSOLIDATE, ETC. ON
CERTAIN TERMS. The Guaranteeing Subsidiary may not sell or otherwise dispose of
all or substantially all of its assets, or consolidate with or merge with or
into (whether or not such Guarantor is the surviving Person) another
corporation, Person or entity whether or not affiliated with such Guarantor
except in accordance with the provisions set forth in the Indenture, including,
without limitation, Section 11.05 of the Indenture.

                  5.       RELEASES. The Note Guarantee of the Guaranteeing
Subsidiary will be released in accordance with the provisions set forth in the
Indenture, including, without limitation, Section 11.06 of the Indenture. The
Trustee will provide any written confirmation or evidence of the termination of
such Note Guarantee as reasonably required by the Representative. Any Guarantor
not released from its obligations under its Note Guarantee shall remain liable
for the full amount of principal of and interest on the Notes and for the other
obligations of any Guarantor under the Indenture as provided in Article 11 of
the Indenture.

                  6.       NO RECOURSE AGAINST OTHERS. No director, officer,
employee, incorporator or stockholder of the Guaranteeing Subsidiary, as such,
shall have any liability for any obligations of Issuer or any Guaranteeing
Subsidiary under the Notes, the Indenture, any Note Guarantee, the Registration
Rights Agreement or this Supplemental Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
Notes by accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes and execution of
this Supplemental Indenture.

                  7.       NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE
OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT
WITHOUT GIVING EFFECT TO APPLICABLE PRINCI-


                                      F-3



PLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.

                  8.       COUNTERPARTS. The parties may sign any number of
copies of this Supplemental Indenture. Each signed copy shall be an original,
but all of them together represent the same agreement.

                  9.       EFFECT OF HEADINGS. The Section headings herein are
for convenience only and shall not affect the construction hereof.

                  10.      THE TRUSTEE. The Trustee shall not be responsible in
any manner whatsoever for or in respect of the validity or sufficiency of this
Supplemental Indenture or for or in respect of the recitals contained herein,
all of which recitals are made solely by the Guaranteeing Subsidiary and Issuer.

                  IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed and attested, all as of the date
first above written.

Dated: ________________

                      [Guaranteeing Subsidiary]


                      By:
                             ---------------------------------------------------
                             Name:
                             Title:


                                       F-4

EX-4.6

                                                                     Exhibit 4.6



                           PETCO Animal Supplies, Inc.

                    10.75% Senior Subordinated Notes due 2011

                              guaranteed as to the
                         payment of principal, premium,
                             if any, and interest by

               the Guarantors listed on the signature pages hereof


                   EXCHANGE AND REGISTRATION RIGHTS AGREEMENT

                                                                October 26, 2001

Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004

Ladies and Gentlemen:

                  PETCO Animal Supplies, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the Purchaser (as defined herein) upon
the terms set forth in the Purchase Agreement (as defined herein) $200,000,000
aggregate principal amount of its 10.75% Senior Subordinated Notes due 2011,
which are guaranteed by the subsidiaries of the Company listed on the signature
pages hereof. As an inducement to the Purchaser to enter into the Purchase
Agreement and in satisfaction of a condition to the obligations of the Purchaser
thereunder, the Company agrees with the Purchaser for the benefit of holders (as
defined herein) from time to time of the Registrable Securities (as defined
herein) as follows:

                  1. CERTAIN DEFINITIONS. For purposes of this Exchange and
Registration Rights Agreement, the following terms shall have the following
respective meanings:

                  The term "BROKER-DEALER" shall mean any broker or dealer
         registered with the Commission under the Exchange Act.

                  "CLOSING DATE" shall mean the date on which the Securities are
         initially issued.

                  "COMMISSION" shall mean the United States Securities and
         Exchange Commission, or any other federal agency at the time
         administering the Exchange Act or the Securities Act, whichever is the
         relevant statute for the particular purpose.



                  "EFFECTIVE TIME," in the case of (i) an Exchange Registration,
         shall mean the time and date as of which the Commission declares the
         Exchange Registration Statement effective or as of which the Exchange
         Registration Statement otherwise becomes effective and (ii) a Shelf
         Registration, shall mean the time and date as of which the Commission
         declares the Shelf Registration Statement effective or as of which the
         Shelf Registration Statement otherwise becomes effective.

                  "ELECTING HOLDER" shall mean any holder of Registrable
         Securities that has returned a completed and signed Notice and
         Questionnaire to the Company in accordance with Section 3(d)(ii) or
         3(d)(iii) hereof.

                  "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
         or any successor thereto, as the same shall be amended from time to
         time.

                  "EXCHANGE OFFER" shall have the meaning assigned thereto in
         Section 2(a) hereof.

                  "EXCHANGE REGISTRATION" shall have the meaning assigned
         thereto in Section 3(c) hereof.

                  "EXCHANGE REGISTRATION STATEMENT" shall have the meaning
         assigned thereto in Section 2(a) hereof.

                  "EXCHANGE SECURITIES" shall have the meaning assigned thereto
         in Section 2(a) hereof.

                  "GUARANTORS" shall have the meaning assigned thereto in the
         Indenture.

                  The term "HOLDER" shall mean the Purchaser and other persons
         who acquire Registrable Securities from time to time (including any
         successors or assigns), in each case for so long as such person owns
         any Registrable Securities.

                  "INDENTURE" shall mean the Indenture, dated as of October 26,
         2001 among the Company, the Guarantors and U.S. Bank N.A., as Trustee,
         as the same shall be amended from time to time.

                  "LIQUIDATED DAMAGES" shall have the meaning assigned thereto
         in Section 2(c) hereof.

                  "NOTICE AND QUESTIONNAIRE" means a Notice of Registration
         Statement and Selling Securityholder Questionnaire substantially in the
         form of Exhibit A hereto.

                  The term "PERSON" shall mean a corporation, association,
         partnership, organization, business, individual, government or
         political subdivision thereof or governmental agency.


                                       2


                  "PURCHASE AGREEMENT" shall mean the Purchase Agreement, dated
         as of October 23, 2001 among the Purchaser, the Guarantors and the
         Company relating to the Securities.

                  "PURCHASER" shall mean Goldman, Sachs & Co.

                  "REGISTRABLE SECURITIES" shall mean the Securities; provided,
         however, that a Security shall cease to be a Registrable Security when
         (i) in the circumstances contemplated by Section 2(a) hereof, the
         Security has been exchanged for an Exchange Security in an Exchange
         Offer as contemplated in Section 2(a) hereof (provided that any
         Exchange Security that, pursuant to the last two sentences of Section
         2(a), is included in a prospectus for use in connection with resales by
         broker-dealers shall be deemed to be a Registrable Security with
         respect to Sections 5, 6 and 9 until resale of such Registrable
         Security has been effected within the 180-day period referred to in
         Section 2(a)); (ii) in the circumstances contemplated by Section 2(b)
         hereof, a Shelf Registration Statement registering such Security under
         the Securities Act has been declared or becomes effective and such
         Security has been sold or otherwise transferred by the holder thereof
         pursuant to and in a manner contemplated by such effective Shelf
         Registration Statement; (iii) such Security is sold pursuant to Rule
         144 under circumstances in which any legend borne by such Security
         relating to restrictions on transferability thereof, under the
         Securities Act or otherwise, is removed by the Company or pursuant to
         the Indenture; (iv) such Security is eligible to be sold pursuant to
         paragraph (k) of Rule 144; or (v) such Security shall cease to be
         outstanding.

                  "REGISTRATION DEFAULT" shall have the meaning assigned thereto
         in Section 2(c) hereof.

                  "REGISTRATION EXPENSES" shall have the meaning assigned
         thereto in Section 4 hereof.

                  "RESALE PERIOD" shall have the meaning assigned thereto in
         Section 2(a) hereof.

                  "RESTRICTED HOLDER" shall mean (i) a holder that is an
         affiliate of the Company within the meaning of Rule 405, (ii) a holder
         who acquires Exchange Securities outside the ordinary course of such
         holder's business, (iii) a holder who has arrangements or
         understandings with any person to participate in the Exchange Offer for
         the purpose of distributing Exchange Securities and (iv) a holder that
         is a broker-dealer, but only with respect to Exchange Securities
         received by such broker-dealer pursuant to an Exchange Offer in
         exchange for Registrable Securities acquired by the broker-dealer
         directly from the Company.

                  "RULE 144," "RULE 405" and "RULE 415" shall mean, in each
         case, such rule promulgated under the Securities Act (or any successor
         provision), as the same shall be amended from time to time.


                                       3


                  "SECURITIES" shall mean, collectively, the 10.75% Senior
         Subordinated Notes due 2011 of the Company to be issued and sold to the
         Purchaser, and securities issued in exchange therefor or in lieu
         thereof pursuant to the Indenture. Each Security is entitled to the
         benefit of the guarantees provided for in the Indenture (the
         "Guarantees") and, unless the context otherwise requires, any reference
         herein to a "Security," an "Exchange Security" or a "Registrable
         Security" shall include a reference to the related Guarantees.

                  "SECURITIES ACT" shall mean the Securities Act of 1933, or any
         successor thereto, as the same shall be amended from time to time.

                  "SHELF REGISTRATION" shall have the meaning assigned thereto
         in Section 2(b) hereof.

                  "SHELF REGISTRATION STATEMENT" shall have the meaning assigned
         thereto in Section 2(b) hereof.

                  "TRUST INDENTURE ACT" shall mean the Trust Indenture Act of
         1939.

                  Unless the context otherwise requires, any reference herein to
a "Section" or "clause" refers to a Section or clause, as the case may be, of
this Exchange and Registration Rights Agreement, and the words "herein,"
"hereof" and "hereunder" and other words of similar import refer to this
Exchange and Registration Rights Agreement as a whole and not to any particular
Section or other subdivision.

                  2.       REGISTRATION UNDER THE SECURITIES ACT.

                  (a) Except as set forth in Section 2(b) below, the Company and
the Guarantors agree to file under the Securities Act, as soon as practicable,
but no later than 150 days after the Closing Date, a registration statement
relating to an offer to exchange (such registration statement, the "Exchange
Registration Statement", and such offer, the "Exchange Offer") any and all of
the Securities for a like aggregate principal amount of debt securities issued
by the Company and guaranteed by the Guarantors which debt securities and
guarantees are substantially identical to the Securities and the related
Guarantees, respectively (and are entitled to the benefits of a trust indenture
which is substantially identical to the Indenture or is the Indenture and which
has been qualified under the Trust Indenture Act), except that they have been
registered pursuant to an effective registration statement under the Securities
Act (such new debt securities hereinafter called "Exchange Securities"). The
Company agrees to use its reasonable best efforts to cause the Exchange
Registration Statement to become effective under the Securities Act as soon as
practicable, but no later than 240 days after the Closing Date. The Exchange
Offer will be registered under the Securities Act on the appropriate form and
will comply with all applicable tender offer rules and regulations under the
Exchange Act. The Company further agrees to use its reasonable best efforts to
commence and complete the Exchange Offer promptly, but no later than 30 days
after such registration statement has become effective, hold the Exchange Offer
open for at least 30 days and exchange Exchange Securities for all Registrable
Securities that have


                                       4


been properly tendered and not withdrawn on or prior to the expiration of the
Exchange Offer. The Exchange Offer will be deemed to have been "completed" only
if the debt securities and related guarantees received by holders other than
Restricted Holders in the Exchange Offer for Registrable Securities are, upon
receipt, transferable by each such holder without restriction under the
Securities Act and the Exchange Act. The Exchange Offer shall be deemed to have
been completed upon the earlier to occur of (i) the Company having exchanged the
Exchange Securities for all outstanding Registrable Securities pursuant to the
Exchange Offer and (ii) the Company having exchanged, pursuant to the Exchange
Offer, Exchange Securities for all Registrable Securities that have been
properly tendered and not withdrawn before the expiration of the Exchange Offer,
which shall be on a date that is at least 30 days following the commencement of
the Exchange Offer. The Company agrees (x) to include in the Exchange
Registration Statement a prospectus for use in any resales by any holder of
Exchange Securities that is a broker-dealer and (y) to keep such Exchange
Registration Statement effective for a period (the "Resale Period") beginning
when Exchange Securities are first issued in the Exchange Offer and ending upon
the earlier of the expiration of the 180th day after the Exchange Offer has been
completed or such time as such broker-dealers no longer own any Registrable
Securities. With respect to such Exchange Registration Statement, such holders
shall have the benefit of the rights of indemnification and contribution set
forth in Sections 6(a), (c), (d) and (e) hereof.

                  (b) If (i) on or prior to the time the Exchange Offer is
completed existing Commission interpretations are changed such that the debt
securities or the related guarantees received by holders other than Restricted
Holders in the Exchange Offer for Registrable Securities are not or would not
be, upon receipt, transferable by each such holder without restriction under the
Securities Act, (ii) the Exchange Offer has not been completed within 270 days
following the Closing Date or (iii) the Exchange Offer is not available to any
holder of the Securities (provided that such holder notifies the Company of its
inability to participate in the Exchange Offer within 20 business days after the
completion of the Exchange Offer), the Company shall, in lieu of (or, in the
case of clause (iii), in addition to) conducting the Exchange Offer contemplated
by Section 2(a), file under the Securities Act as soon as practicable, but no
later than the later of 30 days after the time such obligation to file arises, a
"shelf" registration statement providing for the registration of, and the sale
on a continuous or delayed basis by the holders of, all of the Registrable
Securities, pursuant to Rule 415 or any similar rule that may be adopted by the
Commission (such filing, the "Shelf Registration" and such registration
statement, the "Shelf Registration Statement"). The Company agrees to use its
reasonable best efforts (x) to cause the Shelf Registration Statement to become
or be declared effective no later than 90 days after such Shelf Registration
Statement is filed and to keep such Shelf Registration Statement continuously
effective for a period ending on the earlier of the second anniversary of the
Effective Time or such time as there are no longer any Registrable Securities
outstanding, provided, however, that no holder shall be entitled to be named as
a selling securityholder in the Shelf Registration Statement or to use the
prospectus forming a part thereof for resales of Registrable Securities unless
such holder is an Electing Holder, and (y) after the Effective Time of the Shelf
Registration Statement, promptly upon the request of any holder of Registrable
Securities that is not then an Electing Holder, to take any action reasonably
necessary to enable such holder to use the prospectus forming


                                       5


a part thereof for resales of Registrable Securities, including, without
limitation, any action necessary to identify such holder as a selling
securityholder in the Shelf Registration Statement, provided, however, that
nothing in this Clause (y) shall relieve any such holder of the obligation to
return a completed and signed Notice and Questionnaire to the Company in
accordance with Section 3(d)(iii) hereof. The Company further agrees to
supplement or make amendments to the Shelf Registration Statement, as and when
required by the rules, regulations or instructions applicable to the
registration form used by the Company for such Shelf Registration Statement or
by the Securities Act or rules and regulations thereunder for shelf
registration, and the Company agrees to furnish to each Electing Holder copies
of any such supplement or amendment prior to its being used or promptly
following its filing with the Commission.

                  (c) In the event that (i) the Company has not filed the
Exchange Registration Statement or Shelf Registration Statement on or before the
date on which such registration statement is required to be filed pursuant to
Section 2(a) or 2(b), respectively, or (ii) such Exchange Registration Statement
or Shelf Registration Statement has not become effective or been declared
effective by the Commission on or before the date on which such registration
statement is required to become or be declared effective pursuant to Section
2(a) or 2(b), respectively, or (iii) the Exchange Offer has not been completed
within 30 days after the initial effective date of the Exchange Registration
Statement relating to the Exchange Offer (if the Exchange Offer is then required
to be made) or (iv) any Exchange Registration Statement or Shelf Registration
Statement required by Section 2(a) or 2(b) hereof is filed and declared
effective but shall thereafter either be withdrawn by the Company or shall
become subject to an effective stop order issued pursuant to Section 8(d) of the
Securities Act suspending the effectiveness of such registration statement
(except as specifically permitted herein) without being succeeded immediately by
an additional registration statement filed and declared effective (each such
event referred to in clauses (i) through (iv), a "Registration Default" and each
period during which a Registration Default has occurred and is continuing, a
"Registration Default Period"), then, as liquidated damages for such
Registration Default, subject to the provisions of Section 9(b), liquidated
damages ("Liquidated Damages") shall accrue at a per annum rate of 0.50% on the
principal amount of the Registrable Securities for the first 90 days of the
Registration Default Period, at a per annum rate of 1.00% for the second 90 days
of the Registration Default Period, at a per annum rate of 1.50% for the third
90 days of the Registration Default Period and at a per annum rate of 2.00%
thereafter for the remaining portion of the Registration Default Period;
provided that the amount of Liquidated Damages payable shall not increase
because more than one Registration Default has occurred and is continuing.
Notwithstanding anything to the contrary set forth herein, (1) upon filing of
the Exchange Registration Statement (and/or, if applicable, the Shelf
Registration Statement), in the case of (i) above, (2) upon the effectiveness of
the Exchange Registration Statement (and/or, if applicable, the Shelf
Registration Statement), in the case of (ii) above, (3) upon completion of the
Exchange Offer, in the case of (iii) above, or (4) upon the filing of a
post-effective amendment to the Registration Statement or an additional
Registration Statement that causes the Exchange Registration Statement (and/or,
if applicable, the Shelf Registration Statement) to again be declared effective
or made usable in the case of (iv) above, the


                                       6


Liquidated Damages payable with respect to the Registrable Securities as a
result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease to
accrue.

                  All accrued Liquidated Damages shall be paid to holders of the
Securities entitled thereto, in the manner provided for the payment of interest
in the Indenture, on each Interest Payment Date, as more fully set forth in the
Indenture. All obligations of the Issuers set forth in the preceding paragraph
that are outstanding with respect to any Registrable Security at the time such
Security ceases to be a Registrable Security shall survive until such time as
all such obligations with respect to such Security have been satisfied in full.

                  (d) The Company and the Guarantors shall take all reasonable
actions necessary or advisable to be taken by them to ensure that the
transactions contemplated herein are effected as so contemplated, including all
actions necessary or desirable to register the Guarantees under the registration
statement contemplated in Section 2(a) or 2(b) hereof, as applicable.

                  (e) Any reference herein to a registration statement as of any
time shall be deemed to include any document incorporated, or deemed to be
incorporated, therein by reference as of such time and any reference herein to
any post-effective amendment to a registration statement as of any time shall be
deemed to include any document incorporated, or deemed to be incorporated,
therein by reference as of such time.

                  3.       REGISTRATION PROCEDURES.

                  If the Company files a registration statement pursuant to
Section 2(a) or Section 2(b), the following provisions shall apply:

                  (a) At or before the Effective Time of the Exchange Offer or
the Shelf Registration, as the case may be, the Company shall qualify the
Indenture under the Trust Indenture Act of 1939.

                  (b) In the event that such qualification would require the
appointment of a new trustee under the Indenture, the Company shall appoint a
new trustee thereunder pursuant to the applicable provisions of the Indenture.

                  (c) In connection with the Company's obligations with respect
to the registration of Exchange Securities as contemplated by Section 2(a) (the
"Exchange Registration"), if applicable, the Company shall, as soon as
practicable (or as otherwise specified):

                           (i) prepare and file with the Commission, as soon as
                  practicable but no later than 150 days after the Closing Date,
                  an Exchange Registration Statement on any form which may be
                  utilized by the Company and which shall permit the Exchange
                  Offer and resales of Exchange Securities by broker-dealers
                  during the Resale Period to be effected as contemplated by
                  Section 2(a), and use its best efforts to cause such Exchange
                  Registration Statement


                                       7


                  to become effective as soon as practicable thereafter, but no
                  later than 240 days after the Closing Date;

                           (ii) as soon as practicable prepare and file with the
                  Commission such amendments and supplements to such Exchange
                  Registration Statement and the prospectus included therein as
                  may be necessary to effect and maintain the effectiveness of
                  such Exchange Registration Statement for the periods and
                  purposes contemplated in Section 2(a) hereof and as may be
                  required by the applicable rules and regulations of the
                  Commission and the instructions applicable to the form of such
                  Exchange Registration Statement, and promptly provide each
                  broker-dealer holding Exchange Securities with such number of
                  copies of the prospectus included therein (as then amended or
                  supplemented), in conformity in all material respects with the
                  requirements of the Securities Act and the Trust Indenture Act
                  and the rules and regulations of the Commission thereunder, as
                  such broker-dealer reasonably may request prior to the
                  expiration of the Resale Period, for use in connection with
                  resales of Exchange Securities;

                           (iii) promptly notify each broker-dealer that has
                  requested or received copies of the prospectus included in
                  such registration statement, and confirm such advice in
                  writing, (A) when such Exchange Registration Statement or the
                  prospectus included therein or any prospectus amendment or
                  supplement or post-effective amendment has been filed, and,
                  with respect to such Exchange Registration Statement or any
                  post-effective amendment, when the same has become effective,
                  (B) of any comments by the Commission and by the blue sky or
                  securities commissioner or regulator of any state with respect
                  thereto or any request by the Commission for amendments or
                  supplements to such Exchange Registration Statement or
                  prospectus or for additional information, (C) of the issuance
                  by the Commission of any stop order suspending the
                  effectiveness of such Exchange Registration Statement or the
                  initiation or threatening of any proceedings for that purpose,
                  (D) if at any time the representations and warranties of the
                  Company contemplated by Section 5 cease to be true and correct
                  in all material respects, (E) of the receipt by the Company of
                  any notification with respect to the suspension of the
                  qualification of the Exchange Securities for sale in any
                  jurisdiction or the initiation or threatening of any
                  proceeding for such purpose, or (F) at any time during the
                  Resale Period when a prospectus is required to be delivered
                  under the Securities Act, that such Exchange Registration
                  Statement, prospectus, prospectus amendment or supplement or
                  post-effective amendment does not conform in all material
                  respects to the applicable requirements of the Securities Act
                  and the Trust Indenture Act and the rules and regulations of
                  the Commission thereunder or contains an untrue statement of a
                  material fact or omits to state any material fact required to
                  be stated therein or necessary to make the statements therein
                  not misleading in light of the circumstances then existing;


                                       8


                           (iv) in the event that the Company would be required,
                  pursuant to Section 3(e)(iii)(F) above, to notify any
                  broker-dealers holding Exchange Securities, without delay
                  prepare and furnish to each such holder a reasonable number of
                  copies of a prospectus supplemented or amended so that, as
                  thereafter delivered to purchasers of such Exchange Securities
                  during the Resale Period, such prospectus shall conform in all
                  material respects to the applicable requirements of the
                  Securities Act and the Trust Indenture Act and the rules and
                  regulations of the Commission thereunder and shall not contain
                  an untrue statement of a material fact or omit to state a
                  material fact required to be stated therein or necessary to
                  make the statements therein not misleading in light of the
                  circumstances then existing;

                           (v) use its best efforts to obtain the withdrawal of
                  any order suspending the effectiveness of such Exchange
                  Registration Statement or any post-effective amendment thereto
                  at the earliest practicable date;

                           (vi) use its best efforts to (A) register or qualify
                  the Exchange Securities under the securities laws or blue sky
                  laws of such jurisdictions as are contemplated by Section 2(a)
                  no later than the commencement of the Exchange Offer, (B) keep
                  such registrations or qualifications in effect and comply with
                  such laws so as to permit the continuance of offers, sales and
                  dealings therein in such jurisdictions until the expiration of
                  the Resale Period and (C) take any and all other actions as
                  may be reasonably necessary or advisable to enable each
                  broker-dealer holding Exchange Securities to consummate the
                  disposition thereof in such jurisdictions; provided, however,
                  that neither the Company nor the Guarantors shall be required
                  for any such purpose to (1) qualify as a foreign corporation
                  in any jurisdiction wherein it would not otherwise be required
                  to qualify but for the requirements of this Section 3(c)(vi),
                  (2) consent to general service of process in any such
                  jurisdiction or (3) make any changes to its certificate of
                  incorporation or by-laws or any agreement between it and its
                  stockholders;

                           (vii) use its best efforts to obtain the consent or
                  approval of each governmental agency or authority, whether
                  federal, state or local, which may be required to effect the
                  Exchange Registration, the Exchange Offer and the offering and
                  sale of Exchange Securities by broker-dealers during the
                  Resale Period;

                           (viii) provide a CUSIP number for all Exchange
                  Securities, not later than the applicable Effective Time;

                           (ix) comply with all applicable rules and regulations
                  of the Commission, and make generally available to its
                  securityholders as soon as practicable but no later than
                  eighteen months after the effective date of such Exchange
                  Registration Statement, an earning statement of the Company
                  and its subsidiaries


                                       9


                  complying with Section 11(a) of the Securities Act (including,
                  at the option of the Company, Rule 158 thereunder).

                  (d) In connection with the Company's obligations with respect
to the Shelf Registration, if applicable, the Company shall, as soon as
practicable (or as otherwise specified):

                           (i) prepare and file with the Commission, as soon as
                  practicable but in any case within the time periods specified
                  in Section 2(b), a Shelf Registration Statement on any form
                  which may be utilized by the Company and which shall register
                  all of the Registrable Securities for resale by the holders
                  thereof in accordance with such method or methods of
                  disposition as may be specified by such of the holders as,
                  from time to time, may be Electing Holders and use its best
                  efforts to cause such Shelf Registration Statement to become
                  effective as soon as practicable but in any case within the
                  time periods specified in Section 2(b);

                           (ii) not less than 30 calendar days prior to the
                  Effective Time of the Shelf Registration Statement, mail the
                  Notice and Questionnaire to the holders of Registrable
                  Securities; no holder shall be entitled to be named as a
                  selling securityholder in the Shelf Registration Statement as
                  of the Effective Time, and no holder shall be entitled to use
                  the prospectus forming a part thereof for resales of
                  Registrable Securities at any time, unless such holder has
                  returned a completed and signed Notice and Questionnaire to
                  the Company by the deadline for response set forth therein;
                  provided, however, holders of Registrable Securities shall
                  have at least 28 calendar days from the date on which the
                  Notice and Questionnaire is first mailed to such holders to
                  return a completed and signed Notice and Questionnaire to the
                  Company;

                           (iii) after the Effective Time of the Shelf
                  Registration Statement, upon the request of any holder of
                  Registrable Securities that is not then an Electing Holder,
                  promptly send a Notice and Questionnaire to such holder;
                  provided that the Company shall not be required to take any
                  action to name such holder as a selling securityholder in the
                  Shelf Registration Statement or to enable such holder to use
                  the prospectus forming a part thereof for resales of
                  Registrable Securities until such holder has returned a
                  completed and signed Notice and Questionnaire to the Company;

                           (iv) as soon as practicable prepare and file with the
                  Commission such amendments and supplements to such Shelf
                  Registration Statement and the prospectus included therein as
                  may be necessary to effect and maintain the effectiveness of
                  such Shelf Registration Statement for the period specified in
                  Section 2(b) hereof and as may be required by the applicable
                  rules and regulations of the Commission and the instructions
                  applicable to the form of such Shelf Registration Statement,
                  and furnish to the Electing Holders copies of any


                                       10


                  such supplement or amendment simultaneously with or prior to
                  its being used or filed with the Commission;

                           (v) comply with the provisions of the Securities Act
                  with respect to the disposition of all of the Registrable
                  Securities covered by such Shelf Registration Statement in
                  accordance with the intended methods of disposition by the
                  Electing Holders provided for in such Shelf Registration
                  Statement;

                           (vi) provide (A) the Electing Holders, (B) the
                  underwriters (which term, for purposes of this Exchange and
                  Registration Rights Agreement, shall include a person deemed
                  to be an underwriter within the meaning of Section 2(a)(11) of
                  the Securities Act), if any, thereof, (C) any sales or
                  placement agent therefor, (D) counsel for any such underwriter
                  or agent and (E) not more than one counsel for all the
                  Electing Holders the opportunity to participate in the
                  preparation of such Shelf Registration Statement, each
                  prospectus included therein or filed with the Commission and
                  each amendment or supplement thereto;

                           (vii) for a reasonable period prior to the filing of
                  such Shelf Registration Statement, and throughout the period
                  specified in Section 2(b), make available at reasonable times
                  at the Company's principal place of business or such other
                  reasonable place for inspection by the persons referred to in
                  Section 3(d)(vi) who shall certify to the Company that they
                  have a current intention to sell the Registrable Securities
                  pursuant to the Shelf Registration such financial and other
                  information and books and records of the Company, and cause
                  the officers, employees, counsel and independent certified
                  public accountants of the Company to respond to such
                  inquiries, as shall be reasonably necessary, in the judgment
                  of the respective counsel referred to in such Section, to
                  conduct a reasonable investigation within the meaning of
                  Section 11 of the Securities Act; provided, however, that each
                  such party shall be required to maintain in confidence and not
                  to disclose to any other person any information or records
                  reasonably designated by the Company as being confidential,
                  until such time as (A) such information becomes a matter of
                  public record (whether by virtue of its inclusion in such
                  registration statement or otherwise), or (B) such person shall
                  be required so to disclose such information pursuant to a
                  subpoena or order of any court or other governmental agency or
                  body having jurisdiction over the matter (subject to the
                  requirements of such order, and only after such person shall
                  have given the Company prompt prior written notice of such
                  requirement), or (C) such information is required to be set
                  forth in such Shelf Registration Statement or the prospectus
                  included therein or in an amendment to such Shelf Registration
                  Statement or an amendment or supplement to such prospectus in
                  order that such Shelf Registration Statement, prospectus,
                  amendment or supplement, as the case may be, complies with
                  applicable requirements of the federal securities laws and the
                  rules and regulations of the Commission and does not contain
                  an untrue statement of a ma-


                                       11


                  terial fact or omit to state therein a material fact required
                  to be stated therein or necessary to make the statements
                  therein not misleading in light of the circumstances then
                  existing;

                           (viii) promptly notify each of the Electing Holders,
                  any sales or placement agent therefor and any underwriter
                  thereof (which notification may be made through any managing
                  underwriter that is a representative of such underwriter for
                  such purpose) and confirm such advice in writing, (A) when
                  such Shelf Registration Statement or the prospectus included
                  therein or any prospectus amendment or supplement or
                  post-effective amendment has been filed, and, with respect to
                  such Shelf Registration Statement or any post-effective
                  amendment, when the same has become effective, (B) of any
                  comments by the Commission and by the blue sky or securities
                  commissioner or regulator of any state with respect thereto or
                  any request by the Commission for amendments or supplements to
                  such Shelf Registration Statement or prospectus or for
                  additional information, (C) of the issuance by the Commission
                  of any stop order suspending the effectiveness of such Shelf
                  Registration Statement or the initiation or threatening of any
                  proceedings for that purpose, (D) if at any time the
                  representations and warranties of the Company contemplated by
                  Section 3(d)(xvii) or Section 5 cease to be true and correct
                  in all material respects, (E) of the receipt by the Company of
                  any notification with respect to the suspension of the
                  qualification of the Registrable Securities for sale in any
                  jurisdiction or the initiation or threatening of any
                  proceeding for such purpose, or (F) if at any time when a
                  prospectus is required to be delivered under the Securities
                  Act, that such Shelf Registration Statement, prospectus,
                  prospectus amendment or supplement or post-effective amendment
                  does not conform in all material respects to the applicable
                  requirements of the Securities Act and the Trust Indenture Act
                  and the rules and regulations of the Commission thereunder or
                  contains an untrue statement of a material fact or omits to
                  state any material fact required to be stated therein or
                  necessary to make the statements therein not misleading in
                  light of the circumstances then existing;

                           (ix) use its reasonable best efforts to obtain the
                  withdrawal of any order suspending the effectiveness of such
                  registration statement or any post-effective amendment thereto
                  at the earliest practicable date;

                           (x) if requested by any managing underwriter or
                  underwriters, any placement or sales agent or any Electing
                  Holder, promptly incorporate in a prospectus supplement or
                  post-effective amendment such information as is required by
                  the applicable rules and regulations of the Commission and as
                  such managing underwriter or underwriters, such agent or such
                  Electing Holder specifies should be included therein relating
                  to the terms of the sale of such Registrable Securities,
                  including information with respect to the principal amount of
                  Registrable Securities being sold by such Electing Holder or
                  agent or to any underwriters, the name and description of such
                  Electing Holder,


                                       12


                  agent or underwriter, the offering price of such Registrable
                  Securities and any discount, commission or other compensation
                  payable in respect thereof, the purchase price being paid
                  therefor by such underwriters and with respect to any other
                  terms of the offering of the Registrable Securities to be sold
                  by such Electing Holder or agent or to such underwriters; and
                  make all required filings of such prospectus supplement or
                  post-effective amendment promptly after notification of the
                  matters to be incorporated in such prospectus supplement or
                  post-effective amendment;

                           (xi) furnish to each Electing Holder, each placement
                  or sales agent, if any, therefor, each underwriter, if any,
                  thereof and the respective counsel referred to in Section
                  3(d)(vi) an executed copy (or, in the case of an Electing
                  Holder, a conformed copy) of such Shelf Registration
                  Statement, each such amendment and supplement thereto (in each
                  case including all exhibits thereto (in the case of an
                  Electing Holder of Registrable Securities, upon request) and
                  documents incorporated by reference therein) and such number
                  of copies of such Shelf Registration Statement (excluding
                  exhibits thereto and documents incorporated by reference
                  therein unless specifically so requested by such Electing
                  Holder, agent or underwriter, as the case may be) and of the
                  prospectus included in such Shelf Registration Statement
                  (including each preliminary prospectus and any summary
                  prospectus), in conformity in all material respects with the
                  applicable requirements of the Securities Act and the Trust
                  Indenture Act and the rules and regulations of the Commission
                  thereunder, and such other documents, as such Electing Holder,
                  agent, if any, and underwriter, if any, may reasonably request
                  in order to facilitate the offering and disposition of the
                  Registrable Securities owned by such Electing Holder, offered
                  or sold by such agent or underwritten by such underwriter and
                  to permit such Electing Holder, agent and underwriter to
                  satisfy the prospectus delivery requirements of the Securities
                  Act; and the Company hereby consents to the use of such
                  prospectus (including such preliminary and summary prospectus)
                  and any amendment or supplement thereto by each such Electing
                  Holder and by any such agent and underwriter, in each case in
                  the form most recently provided to such person by the Company,
                  in connection with the offering and sale of the Registrable
                  Securities covered by the prospectus (including such
                  preliminary and summary prospectus) or any supplement or
                  amendment thereto;

                           (xii) use best efforts to (A) register or qualify the
                  Registrable Securities to be included in such Shelf
                  Registration Statement under such securities laws or blue sky
                  laws of such jurisdictions as any Electing Holder and each
                  placement or sales agent, if any, therefor and underwriter, if
                  any, thereof shall reasonably request, (B) keep such
                  registrations or qualifications in effect and comply with such
                  laws so as to permit the continuance of offers, sales and
                  dealings therein in such jurisdictions during the period the
                  Shelf Registration is required to remain effective under
                  Section 2(b) above and for so long as may


                                       13


                  be necessary to enable any such Electing Holder, agent or
                  underwriter to complete its distribution of Securities
                  pursuant to such Shelf Registration Statement and (C) take any
                  and all other actions as may be reasonably necessary or
                  advisable to enable each such Electing Holder, agent, if any,
                  and underwriter, if any, to consummate the disposition in such
                  jurisdictions of such Registrable Securities; provided,
                  however, that neither the Company nor the Guarantors shall not
                  be required for any such purpose to (1) qualify as a foreign
                  corporation in any jurisdiction wherein it would not otherwise
                  be required to qualify but for the requirements of this
                  Section 3(d)(xii), (2) consent to general service of process
                  in any such jurisdiction or (3) make any changes to its
                  certificate of incorporation or by-laws or any agreement
                  between it and its stockholders;

                           (xiii) use its best efforts to obtain the consent or
                  approval of each governmental agency or authority, whether
                  federal, state or local, which may be required to effect the
                  Shelf Registration or the offering or sale in connection
                  therewith or to enable the selling holder or holders to offer,
                  or to consummate the disposition of, their Registrable
                  Securities;

                           (xiv) Unless any Registrable Securities shall be in
                  book-entry only form, cooperate with the Electing Holders and
                  the managing underwriters, if any, to facilitate the timely
                  preparation and delivery of certificates representing
                  Registrable Securities to be sold, which certificates, if so
                  required by any securities exchange upon which any Registrable
                  Securities are listed, shall be penned, lithographed or
                  engraved, or produced by any combination of such methods, on
                  steel engraved borders, and which certificates shall not bear
                  any restrictive legends; and, in the case of an underwritten
                  offering, enable such Registrable Securities to be in such
                  denominations and registered in such names as the managing
                  underwriters may request at least two business days prior to
                  any sale of the Registrable Securities;

                           (xv) provide a CUSIP number for all Registrable
                  Securities, not later than the applicable Effective Time;

                           (xvi) enter into one or more underwriting agreements,
                  engagement letters, agency agreements, "best efforts"
                  underwriting agreements or similar agreements, as appropriate,
                  including customary provisions relating to indemnification and
                  contribution, and take such other actions in connection
                  therewith as any Electing Holders aggregating at least 20% in
                  aggregate principal amount of the Registrable Securities at
                  the time outstanding shall request in order to expedite or
                  facilitate the disposition of such Registrable Securities;

                           (xvii) whether or not an agreement of the type
                  referred to in Section 3(d)(xvi) hereof is entered into and
                  whether or not any portion of the offering contemplated by the
                  Shelf Registration is an underwritten offering or is made


                                       14


                  through a placement or sales agent or any other entity, (A)
                  make such representations and warranties to the Electing
                  Holders and the placement or sales agent, if any, therefor and
                  the underwriters, if any, thereof in form, substance and scope
                  as are customarily made in connection with an offering of debt
                  securities pursuant to any appropriate agreement or to a
                  registration statement filed on the form applicable to the
                  Shelf Registration; (B) obtain an opinion of counsel to the
                  Company in customary form and covering such matters, of the
                  type customarily covered by such an opinion, as the managing
                  underwriters, if any, or any Electing Holders constituting at
                  least 20% in aggregate principal amount of the Registrable
                  Securities at the time outstanding request, addressed to such
                  Electing Holder or Electing Holders and the placement or sales
                  agent, if any, therefor and the underwriters, if any, thereof
                  and dated the effective date of such Shelf Registration
                  Statement (and if such Shelf Registration Statement
                  contemplates an underwritten offering of a part or all of the
                  Registrable Securities, dated the date of the closing under
                  the underwriting agreement relating thereto) (it being agreed
                  that the matters to be covered by such opinion shall include
                  the due incorporation and good standing of the Company and its
                  subsidiaries; the qualification of the Company and its
                  subsidiaries to transact business as foreign corporations; the
                  due authorization, execution and delivery of the relevant
                  agreement of the type referred to in Section 3(d)(xvi) hereof;
                  the due authorization, execution, authentication and issuance,
                  and the validity and enforceability, of the Securities; the
                  absence of material legal or governmental proceedings
                  involving the Company; the absence of a breach by the Company
                  or any of its subsidiaries of, or a default under, material
                  agreements binding upon the Company or any subsidiary of the
                  Company; the absence of governmental approvals required to be
                  obtained in connection with the Shelf Registration, the
                  offering and sale of the Registrable Securities, this Exchange
                  and Registration Rights Agreement or any agreement of the type
                  referred to in Section 3(d)(xvi) hereof, except such approvals
                  as may be required under state securities or blue sky laws;
                  the material compliance as to form of such Shelf Registration
                  Statement and any documents incorporated by reference therein
                  and of the Indenture with the requirements of the Securities
                  Act and the Trust Indenture Act and the rules and regulations
                  of the Commission thereunder, respectively; and, as of the
                  date of the opinion and of the Shelf Registration Statement or
                  most recent post-effective amendment thereto, as the case may
                  be, the absence from such Shelf Registration Statement and the
                  prospectus included therein, as then amended or supplemented,
                  and from the documents incorporated by reference therein (in
                  each case other than the financial statements and other
                  financial information contained therein) of an untrue
                  statement of a material fact or the omission to state therein
                  a material fact necessary to make the statements therein not
                  misleading (in the case of such documents, in the light of the
                  circumstances existing at the time that such documents were
                  filed with the Commission under the Exchange Act)); (C) obtain
                  a "cold comfort" letter or letters from the independent
                  certified public accountants of the Company ad-


                                       15


                  dressed to the selling Electing Holders, the placement or
                  sales agent, if any, therefor or the underwriters, if any,
                  thereof, dated (i) the effective date of such Shelf
                  Registration Statement and (ii) the effective date of any
                  prospectus supplement to the prospectus included in such Shelf
                  Registration Statement or post-effective amendment to such
                  Shelf Registration Statement which includes unaudited or
                  audited financial statements as of a date or for a period
                  subsequent to that of the latest such statements included in
                  such prospectus (and, if such Shelf Registration Statement
                  contemplates an underwritten offering pursuant to any
                  prospectus supplement to the prospectus included in such Shelf
                  Registration Statement or post-effective amendment to such
                  Shelf Registration Statement which includes unaudited or
                  audited financial statements as of a date or for a period
                  subsequent to that of the latest such statements included in
                  such prospectus, dated the date of the closing under the
                  underwriting agreement relating thereto), such letter or
                  letters to be in customary form and covering such matters of
                  the type customarily covered by letters of such type; (D)
                  deliver such customary documents and certificates, including
                  officers' certificates, as may be reasonably requested by any
                  Electing Holders of at least 20% in aggregate principal amount
                  of the Registrable Securities at the time outstanding or the
                  placement or sales agent, if any, therefor and the managing
                  underwriters, if any, thereof to evidence the accuracy of the
                  representations and warranties made pursuant to clause (A)
                  above or those contained in Section 5(a) hereof and the
                  compliance with or satisfaction of any agreements or
                  conditions contained in the underwriting agreement or other
                  agreement entered into by the Company or the Guarantors; and
                  (E) undertake such obligations relating to expense
                  reimbursement, indemnification and contribution as are
                  provided in Section 6 hereof;

                           (xviii) notify in writing each holder of Registrable
                  Securities of any proposal by the Company to amend or waive
                  any provision of this Exchange and Registration Rights
                  Agreement pursuant to Section 9(h) hereof and of any amendment
                  or waiver effected pursuant thereto, each of which notices
                  shall contain the text of the amendment or waiver proposed or
                  effected, as the case may be;

                           (xix) in the event that any broker-dealer registered
                  under the Exchange Act shall underwrite any Registrable
                  Securities or participate as a member of an underwriting
                  syndicate or selling group or "assist in the distribution"
                  (within the meaning of the Conduct Rules (the "Conduct Rules)
                  of the National Association of Securities Dealers, Inc.
                  ("NASD") or any successor thereto, as amended from time to
                  time) thereof, whether as a holder of such Registrable
                  Securities or as an underwriter, a placement or sales agent or
                  a broker or dealer in respect thereof, or otherwise, assist
                  such broker-dealer in complying with the requirements of such
                  Conduct Rules, including by (A) if such Conduct Rules shall so
                  require, engaging a "qualified independent underwriter" (as
                  defined in such Conduct Rules) to participate in the
                  preparation of the Shelf Reg-


                                       16


                  istration Statement relating to such Registrable Securities,
                  to exercise usual standards of due diligence in respect
                  thereto and, if any portion of the offering contemplated by
                  such Shelf Registration Statement is an underwritten offering
                  or is made through a placement or sales agent, to recommend
                  the yield of such Registrable Securities, (B) indemnifying any
                  such qualified independent underwriter to the extent of the
                  indemnification of underwriters provided in Section 6 hereof
                  (or to such other customary extent as may be requested by such
                  underwriter), and (C) providing such information to such
                  broker-dealer as may be required in order for such
                  broker-dealer to comply with the requirements of the Conduct
                  Rules; and

                           (xx) comply with all applicable rules and regulations
                  of the Commission, and make generally available to its
                  securityholders as soon as practicable but in any event not
                  later than eighteen months after the effective date of such
                  Shelf Registration Statement, an earning statement of the
                  Company and its subsidiaries complying with Section 11(a) of
                  the Securities Act (including, at the option of the Company,
                  Rule 158 thereunder).

                  (e) In the event that the Company would be required, pursuant
to Section 3(d)(viii)(F) above, to notify the Electing Holders, the placement or
sales agent, if any, therefor and the managing underwriters, if any, thereof,
the Company shall without delay prepare and furnish to each of the Electing
Holders, to each placement or sales agent, if any, and to each such underwriter,
if any, a reasonable number of copies of a prospectus supplemented or amended so
that, as thereafter delivered to purchasers of Registrable Securities, such
prospectus shall conform in all material respects to the applicable requirements
of the Securities Act and the Trust Indenture Act and the rules and regulations
of the Commission thereunder and shall not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing. Each Electing Holder agrees that upon receipt of
any notice from the Company pursuant to Section 3(d)(viii)(F) hereof, such
Electing Holder shall forthwith discontinue the disposition of Registrable
Securities pursuant to the Shelf Registration Statement applicable to such
Registrable Securities until such Electing Holder shall have received copies of
such amended or supplemented prospectus, and if so directed by the Company, such
Electing Holder shall deliver to the Company (at the Company's expense) all
copies, other than permanent file copies, then in such Electing Holder's
possession of the prospectus covering such Registrable Securities at the time of
receipt of such notice.

                  (f) In the event of a Shelf Registration, in addition to the
information required to be provided by each Electing Holder in its Notice
Questionnaire, the Company may require such Electing Holder to furnish to the
Company such additional information regarding such Electing Holder and such
Electing Holder's intended method of distribution of Registrable Securities as
may be required in order to comply with the Securities Act. Each such Electing
Holder agrees to notify the Company as promptly as practicable of any inaccuracy
or change in information previously furnished by such Electing Holder to the
Company or of the


                                       17


occurrence of any event in either case as a result of which any prospectus
relating to such Shelf Registration contains or would contain an untrue
statement of a material fact regarding such Electing Holder or such Electing
Holder's intended method of disposition of such Registrable Securities or omits
to state any material fact regarding such Electing Holder or such Electing
Holder's intended method of disposition of such Registrable Securities required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances then existing, and promptly to furnish to the
Company any additional information required to correct and update any previously
furnished information or required so that such prospectus shall not contain,
with respect to such Electing Holder or the disposition of such Registrable
Securities, an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing.

                  (g) Until the expiration of three years after the Closing
Date, the Company will not, and will not permit any of its "affiliates" (as
defined in Rule 144) to, resell any of the Securities that have been reacquired
by any of them except pursuant to an effective registration statement under the
Securities Act.

                  4.       REGISTRATION EXPENSES.

                  The Company agrees to bear and to pay or cause to be paid
promptly all expenses incident to the Company's performance of or compliance
with this Exchange and Registration Rights Agreement, including (a) all
Commission and any NASD registration, filing and review fees and expenses
including fees and disbursements of counsel for the placement or sales agent or
underwriters in connection with such registration, filing and review, (b) all
fees and expenses in connection with the qualification of the Securities for
offering and sale under state securities and blue sky laws referred to in
Section 3(d)(xii) hereof and determination of their eligibility for investment
under the laws of such jurisdictions as any managing underwriters or the
Electing Holders may designate, including any fees and disbursements of counsel
for the Electing Holders or underwriters in connection with such qualification
and determination, (c) all reasonable expenses relating to the preparation,
printing, production, distribution and reproduction of each registration
statement required to be filed hereunder, each prospectus included therein or
prepared for distribution pursuant hereto, each amendment or supplement to the
foregoing, the expenses of preparing the Securities for delivery and the
expenses of printing or producing any underwriting agreements, agreements among
underwriters, selling agreements and blue sky or legal investment memoranda and
all other documents in connection with the offering, sale or delivery of
Securities to be disposed of (including certificates representing the
Securities), (d) messenger, telephone and delivery expenses relating to the
offering, sale or delivery of Securities and the preparation of documents
referred in clause (c) above, (e) reasonable fees and expenses of the Trustee
under the Indenture, any agent of the Trustee and any counsel for the Trustee
and of any collateral agent or custodian, (f) internal expenses (including all
salaries and expenses of the Company's officers and employees performing legal
or accounting duties), (g) reasonable fees, disbursements and expenses of
counsel and independent certified public accountants of the Company (including
the expenses of any opinions or "cold comfort" letters required by


                                       18


or incident to such performance and compliance), (h) fees, disbursements and
expenses of any "qualified independent underwriter" engaged pursuant to Section
3(d)(xix) hereof, (i) reasonable fees, disbursements and expenses of one counsel
for the Electing Holders retained in connection with a Shelf Registration, as
selected by the Electing Holders of at least a majority in aggregate principal
amount of the Registrable Securities held by Electing Holders (which counsel
shall be reasonably satisfactory to the Company), (j) any fees charged by
securities rating services for rating the Securities, and (k) fees, expenses and
disbursements of any other persons, including special experts, retained by the
Company in connection with such registration (collectively, the "Registration
Expenses"). To the extent that any Registration Expenses are incurred, assumed
or paid by any holder of Registrable Securities or any placement or sales agent
therefor or underwriter thereof, the Company shall reimburse such person for the
full amount of the Registration Expenses so incurred, assumed or paid promptly
after receipt of a request therefor. Notwithstanding the foregoing, the holders
of the Registrable Securities being registered shall pay all agency fees and
commissions and underwriting discounts and commissions attributable to the sale
of such Registrable Securities and the fees and disbursements of any counsel or
other advisors or experts retained by such holders (severally or jointly), other
than the counsel and experts specifically referred to above.

                  5.       REPRESENTATIONS AND WARRANTIES.

                  Each of the Company and the Guarantors represents and warrants
to, and agrees with, each Purchaser and each of the holders from time to time of
Registrable Securities that:

                  (a) Each registration statement covering Registrable
Securities and each prospectus (including any preliminary or summary prospectus)
contained therein or furnished pursuant to Section 3(d) or Section 3(c) hereof
and any further amendments or supplements to any such registration statement or
prospectus, when it becomes effective or is filed with the Commission, as the
case may be, and, in the case of an underwritten offering of Registrable
Securities, at the time of the closing under the underwriting agreement relating
thereto, will conform in all material respects to the requirements of the
Securities Act and the Trust Indenture Act and the rules and regulations of the
Commission thereunder and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and at all times subsequent to
the Effective Time when a prospectus would be required to be delivered under the
Securities Act, other than from (i) such time as a notice has been given to
holders of Registrable Securities pursuant to Section 3(d)(viii)(F) or Section
3(c)(iii)(F) hereof until (ii) such time as the Company furnishes an amended or
supplemented prospectus pursuant to Section 3(e) or Section 3(c)(iv) hereof,
each such registration statement, and each prospectus (including any summary
prospectus) contained therein or furnished pursuant to Section 3(d) or Section
3(c) hereof, as then amended or supplemented, will conform in all material
respects to the requirements of the Securities Act and the Trust Indenture Act
and the rules and regulations of the Commission thereunder and will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to


                                       19


make the statements therein not misleading in the light of the circumstances
then existing; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in conformity
with information furnished in writing to the Company by a holder of Registrable
Securities expressly for use therein.

                  (b) Any documents incorporated by reference in any prospectus
referred to in Section 5(a) hereof, when they become or became effective or are
or were filed with the Commission, as the case may be, will conform or conformed
in all material respects to the requirements of the Securities Act or the
Exchange Act, as applicable, and none of such documents will contain or
contained an untrue statement of a material fact or will omit or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company by a
holder of Registrable Securities expressly for use therein.

                  (c) The compliance by each of the Company and the Guarantors
with all of the provisions of this Exchange and Registration Rights Agreement
and the consummation of the transactions herein contemplated will not conflict
with or result in a breach of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any subsidiary of the Company is
a party or by which the Company or any subsidiary of the Company is bound or to
which any of the property or assets of the Company or any subsidiary of the
Company is subject, nor will such action result in any violation of the
provisions of the certificate of incorporation, as amended, or the by-laws of
the Company or any of the Guarantors or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or any subsidiary of the Company or any of their properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
consummation by the Company and the Guarantors of the transactions contemplated
by this Exchange and Registration Rights Agreement, except the registration
under the Securities Act of the Securities, qualification of the Indenture under
the Trust Indenture Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under State securities or
blue sky laws in connection with the offering and distribution of the
Securities.

                  (d) This Exchange and Registration Rights Agreement has been
duly authorized, executed and delivered by each of the Company and Guarantors.

                  6.       INDEMNIFICATION.

                  (a) INDEMNIFICATION BY THE COMPANY AND THE GUARANTORS. The
Company and the Guarantors, jointly and severally, will indemnify and hold
harmless each of the holders of Registrable Securities included in an Exchange
Registration Statement, each of the Electing Holders of Registrable Securities
included in a Shelf Registration Statement and each person who participates as a
placement or sales agent or as an underwriter in any of-


                                       20


fering or sale of such Registrable Securities against any losses, claims,
damages or liabilities, joint or several, to which such holder, agent or
underwriter may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Exchange Registration Statement or Shelf
Registration Statement, as the case may be, under which such Registrable
Securities were registered under the Securities Act, or any preliminary, final
or summary prospectus contained therein or furnished by the Company to any such
holder, Electing Holder, agent or underwriter, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse such holder, such
Electing Holder, such agent and such underwriter for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that
neither the Company nor the Guarantors shall be liable to any such person in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, or
preliminary, final or summary prospectus, or amendment or supplement thereto, in
reliance upon and in conformity with written information furnished to the
Company by such person expressly for use therein.

                  (b) INDEMNIFICATION BY THE HOLDERS AND ANY AGENTS AND
UNDERWRITERS. The Company may require, as a condition to including any
Registrable Securities in any registration statement filed pursuant to Section
2(b) hereof and to entering into any underwriting agreement with respect
thereto, that the Company shall have received an undertaking reasonably
satisfactory to it from the Electing Holder of such Registrable Securities and
from each underwriter named in any such underwriting agreement, severally and
not jointly, to (i) indemnify and hold harmless the Company and all other
holders of Registrable Securities, against any losses, claims, damages or
liabilities to which the Company or such other holders of Registrable Securities
may become subject, under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in such registration statement, or any preliminary,
final or summary prospectus contained therein or furnished by the Company to any
such Electing Holder, agent or underwriter, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Electing Holder or underwriter
expressly for use therein, and (ii) reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that no such Electing Holder shall be required to undertake liability
to any person under this Section 6(b) for any amounts in excess of the dollar
amount


                                       21


of the proceeds to be received by such Electing Holder from the sale of such
Electing Holder's Registrable Securities pursuant to such registration.

                  (c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
indemnified party under subsection (a) or (b) above of written notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against an indemnifying party pursuant to the
indemnification provisions of or contemplated by this Section 6, notify such
indemnifying party in writing of the commencement of such action; but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party otherwise than under the
indemnification provisions of or contemplated by Section 6(a) or 6(b) hereof. In
case any such action shall be brought against any indemnified party and it shall
notify an indemnifying party of the commencement thereof, such indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party (who shall not, except with the consent of the indemnified party, be
counsel to the indemnifying party), and, after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, such indemnifying party shall not be liable to such indemnified party
for any legal expenses of other counsel or any other expenses, in each case
subsequently incurred by such indemnified party, in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment with
respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.

                  (d) CONTRIBUTION. If for any reason the indemnification
provisions contemplated by Section 6(a) or Section 6(b) are unavailable to or
insufficient to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative fault of the indemnifying party and the indemnified
party in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by such indemnifying party or by such indemnified party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The parties hereto
agree that it would not be just and equitable if contributions pursuant to this
Section 6(d) were determined by pro rata allocation (even if the holders or any
agents or underwriters


                                       22


or all of them were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to in this Section 6(d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, or liabilities (or actions in
respect thereof) referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(d), no holder shall be required to contribute any
amount in excess of the amount by which the dollar amount of the proceeds
received by such holder from the sale of any Registrable Securities (after
deducting any fees, discounts and commissions applicable thereto) exceeds the
amount of any damages which such holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission, and no underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Registrable
Securities underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The holders' and any underwriters' obligations in this
Section 6(d) to contribute shall be several in proportion to the principal
amount of Registrable Securities registered or underwritten, as the case may be,
by them and not joint.

                  (e) The obligations of the Company and the Guarantors under
this Section 6 shall be in addition to any liability which the Company or the
Guarantors may otherwise have and shall extend, upon the same terms and
conditions, to each officer, director and partner of each holder, agent and
underwriter and each person, if any, who controls any holder, agent or
underwriter within the meaning of the Securities Act; and the obligations of the
holders and any agents or underwriters contemplated by this Section 6 shall be
in addition to any liability which the respective holder, agent or underwriter
may otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company or the Guarantors (including any person who,
with his consent, is named in any registration statement as about to become a
director of the Company or the Guarantors) and to each person, if any, who
controls the Company within the meaning of the Securities Act.

                  7.       UNDERWRITTEN OFFERINGS.

                  (a) SELECTION OF UNDERWRITERS. If any of the Registrable
Securities covered by the Shelf Registration are to be sold pursuant to an
underwritten offering, the managing underwriter or underwriters thereof shall be
designated by the Requesting Holders, provided that such designated managing
underwriter or underwriters is or are reasonably acceptable to the Company.

                  (b) PARTICIPATION BY HOLDERS. Each holder of Registrable
Securities hereby agrees with each other such holder that no such holder may
participate in any underwritten offering hereunder unless such holder (i) agrees
to sell such holder's Registrable Securities


                                       23


on the basis provided in any underwriting arrangements approved by the persons
entitled hereunder to approve such arrangements and (ii) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements.

                  8.       RULE 144.

                  The Company covenants to the holders of Registrable Securities
that to the extent it shall be required to do so under the Exchange Act, the
Company shall timely file the reports required to be filed by it under the
Exchange Act or the Securities Act (including the reports under Section 13 and
15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144 adopted
by the Commission under the Securities Act) and the rules and regulations
adopted by the Commission thereunder, and shall take such further action as any
holder of Registrable Securities may reasonably request, all to the extent
required from time to time to enable such holder to sell Registrable Securities
without registration under the Securities Act within the limitations of the
exemption provided by Rule 144 under the Securities Act, as such Rule may be
amended from time to time, or any similar or successor rule or regulation
hereafter adopted by the Commission. Upon the request of any holder of
Registrable Securities in connection with that holder's sale pursuant to Rule
144, the Company shall deliver to such holder a written statement as to whether
it has complied with such requirements.

                  9.       MISCELLANEOUS.

                  (a) NO INCONSISTENT AGREEMENTS. The Company represents,
warrants, covenants and agrees that it has not granted, and shall not grant,
registration rights with respect to Registrable Securities or any other
securities which would be inconsistent with the terms contained in this Exchange
and Registration Rights Agreement.

                  (b) SPECIFIC PERFORMANCE. The parties hereto acknowledge that
there would be no adequate remedy at law if the Company fails to perform any of
its obligations hereunder and that the Purchaser and the holders from time to
time of the Registrable Securities may be irreparably harmed by any such
failure, and accordingly agree that the Purchaser and such holders, in addition
to any other remedy to which they may be entitled at law or in equity, shall be
entitled to compel specific performance of the obligations of the Company under
this Exchange and Registration Rights Agreement in accordance with the terms and
conditions of this Exchange and Registration Rights Agreement, in any court of
the United States or any State thereof having jurisdiction.

                  (c) NOTICES. All notices, requests, claims, demands, waivers
and other communications hereunder shall be in writing and shall be deemed to
have been duly given when delivered by hand, if delivered personally or by
courier, or three days after being deposited in the mail (registered or
certified mail, postage prepaid, return receipt requested) as follows: If to the
Company, to it at 9125 Rehco Road, San Diego, California 92121 and if to a
holder, to the address of such holder set forth in the security register or
other records of the Company, or to such other address as the Company or any
such holder may have furnished


                                       24


to the other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.

                  (d) PARTIES IN INTEREST. All the terms and provisions of this
Exchange and Registration Rights Agreement shall be binding upon, shall inure to
the benefit of and shall be enforceable by the parties hereto and the holders
from time to time of the Registrable Securities and the respective successors
and assigns of the parties hereto and such holders. In the event that any
transferee of any holder of Registrable Securities shall acquire Registrable
Securities, in any manner, whether by gift, bequest, purchase, operation of law
or otherwise, such transferee shall, without any further writing or action of
any kind, be deemed a beneficiary hereof for all purposes and such Registrable
Securities shall be held subject to all of the terms of this Exchange and
Registration Rights Agreement, and by taking and holding such Registrable
Securities such transferee shall be entitled to receive the benefits of, and be
conclusively deemed to have agreed to be bound by all of the applicable terms
and provisions of this Exchange and Registration Rights Agreement. If the
Company shall so request, any such successor, assign or transferee shall agree
in writing to acquire and hold the Registrable Securities subject to all of the
applicable terms hereof.

                  (e) SURVIVAL. The respective indemnities, agreements,
representations, warranties and each other provision set forth in this Exchange
and Registration Rights Agreement or made pursuant hereto shall remain in full
force and effect regardless of any investigation (or statement as to the results
thereof) made by or on behalf of any holder of Registrable Securities, any
director, officer or partner of such holder, any agent or underwriter or any
director, officer or partner thereof, or any controlling person of any of the
foregoing, and shall survive delivery of and payment for the Registrable
Securities pursuant to the Purchase Agreement and the transfer and registration
of Registrable Securities by such holder and the consummation of an Exchange
Offer.

                  (f) GOVERNING LAW. This Exchange and Registration Rights
Agreement shall be governed by and construed in accordance with the laws of the
State of New York.

                  (g) HEADINGS. The descriptive headings of the several Sections
and paragraphs of this Exchange and Registration Rights Agreement are inserted
for convenience only, do not constitute a part of this Exchange and Registration
Rights Agreement and shall not affect in any way the meaning or interpretation
of this Exchange and Registration Rights Agreement.

                  (h) ENTIRE AGREEMENT; AMENDMENTS. This Exchange and
Registration Rights Agreement and the other writings referred to herein
(including the Indenture and the form of Securities) or delivered pursuant
hereto which form a part hereof contain the entire understanding of the parties
with respect to its subject matter. This Exchange and Registration Rights
Agreement supersedes all prior agreements and understandings between the parties
with respect to its subject matter. This Exchange and Registration Rights
Agreement may be amended and the observance of any term of this Exchange and
Registration Rights Agreement may be waived (either generally or in a particular
instance and either retroactively


                                       25


or prospectively) only by a written instrument duly executed by the Company and
the holders of at least a majority in aggregate principal amount of the
Registrable Securities at the time outstanding. Each holder of any Registrable
Securities at the time or thereafter outstanding shall be bound by any amendment
or waiver effected pursuant to this Section 9(h), whether or not any notice,
writing or marking indicating such amendment or waiver appears on such
Registrable Securities or is delivered to such holder.

                  (i) INSPECTION. For so long as this Exchange and Registration
Rights Agreement shall be in effect, this Exchange and Registration Rights
Agreement and a complete list of the names and addresses of all the holders of
Registrable Securities shall be made available for inspection and copying on any
business day by any holder of Registrable Securities for proper purposes only
(which shall include any purpose related to the rights of the holders of
Registrable Securities under the Securities, the Indenture and this Agreement)
at the offices of the Company at the address thereof set forth in Section 9(c)
above and at the office of the Trustee under the Indenture.

                  (j) COUNTERPARTS. This agreement may be executed by the
parties in counterparts, each of which shall be deemed to be an original, but
all such respective counterparts shall together constitute one and the same
instrument.


                                       26




                  If the foregoing is in accordance with your understanding,
please sign and return to us one counterpart hereof for the Company plus one
counterpart hereof for each counsel, and upon the acceptance hereof by you, this
letter and such acceptance hereof shall constitute a binding agreement among the
Purchaser, the Guarantors and the Company.

                             Very truly yours,

                             PETCO Animal Supplies, Inc.


                             By:      /s/ BRIAN K. DEVINE
                                      ---------------------------------------
                                     Name:    Brian K. Devine
                                     Title:   President and Chief Executive
                                              Officer

                             International Pet Supplies and Distribution, Inc.
                             PETCO Southwest, Inc.
                             Pet Concepts International
                             PM Management Incorporated


                             By:      /s/ JAMES M. MYERS
                                      ---------------------------------------
                                     Name:    James M. Myers
                                     Title:   Senior Vice President,
                                              Secretary, Chief Financial
                                              Officer, and Treasurer

                             PETCO Southwest, L.P.

                             By:  PETCO Animal Supplies, Inc.,
                                     its General Partner


                             By:      /s/ JAMES M. MYERS
                                      ---------------------------------------
                                     Name: James M. Myers
                                     Title:   Executive Vice President and
                                              Chief Financial Officer



                   EXCHANGE AND REGISTRATION RIGHTS AGREEMENT






Accepted as of the date hereof:

GOLDMAN, SACHS & CO.


By:      /s/ GOLDMAN, SACHS & CO.
         ------------------------------------------------------------
                                 (Goldman, Sachs & Co.)









                                   Schedule A

International Pet Supplies and Distribution, Inc.
PETCO Southwest, Inc.
Pet Concepts International
PM Management Incorporated
PETCO Southwest, L.P.


                                       A-1







                                                                       Exhibit A


                           PETCO Animal Supplies, Inc.


                         INSTRUCTION TO DTC PARTICIPANTS


                                (Date of Mailing)



                     URGENT - IMMEDIATE ATTENTION REQUESTED


                         DEADLINE FOR RESPONSE: [DATE](a)


The Depository Trust Company ("DTC") has identified you as a DTC Participant
through which beneficial interests in the PETCO Animal Supplies, Inc. (the
"Company") 10.75% Senior Subordinated Notes due 2011 (the "Securities") are
held.

The Company is in the process of registering the Securities under the Securities
Act of 1933 for resale by the beneficial owners thereof. In order to have their
Securities included in the registration statement, beneficial owners must
complete and return the enclosed Notice of Registration Statement and Selling
Securityholder Questionnaire.

IT IS IMPORTANT THAT BENEFICIAL OWNERS OF THE SECURITIES RECEIVE A COPY OF THE
ENCLOSED MATERIALS AS SOON AS POSSIBLE as their rights to have the Securities
included in the registration statement depend upon their returning the Notice
and Questionnaire by [Deadline For Response]. Please forward a copy of the
enclosed documents to each beneficial owner that holds interests in the
Securities through you. If you require more copies of the enclosed materials or
have any questions pertaining to this matter, please contact PETCO Animal
Supplies, Inc., 9125 Rehco Road, San Diego, California 92121, telephone (858)
453-7845, Attention: Chief Financial Officer.



- --------
(a)     Not less than 28 calendar days from date of mailing.


                                       A-2




                           PETCO Animal Supplies, Inc.


                        Notice of Registration Statement
                                       and
                      SELLING SECURITYHOLDER QUESTIONNAIRE


                                     (Date)


Reference is hereby made to the Exchange and Registration Rights Agreement (the
"Exchange and Registration Rights Agreement") between PETCO Animal Supplies,
Inc. (the "Company") and the Purchaser named therein. Pursuant to the Exchange
and Registration Rights Agreement, the Company has filed with the United States
Securities and Exchange Commission (the "Commission") a registration statement
on Form [__] (the "Shelf Registration Statement") for the registration and
resale under Rule 415 of the Securities Act of 1933, as amended (the "Securities
Act"), of the Company's 10.75% Senior Subordinated Notes due 2011 (the
"Securities"). A copy of the Exchange and Registration Rights Agreement is
attached hereto. All capitalized terms not otherwise defined herein shall have
the meanings ascribed thereto in the Exchange and Registration Rights Agreement.

Each beneficial owner of Registrable Securities (as defined below) is entitled
to have the Registrable Securities beneficially owned by it included in the
Shelf Registration Statement. In order to have Registrable Securities included
in the Shelf Registration Statement, this Notice of Registration Statement and
Selling Securityholder Questionnaire ("Notice and Questionnaire") must be
completed, executed and delivered to the Company's counsel at the address set
forth herein for receipt ON OR BEFORE [Deadline for Response]. Beneficial owners
of Registrable Securities who do not complete, execute and return this Notice
and Questionnaire by such date (i) will not be named as selling securityholders
in the Shelf Registration Statement and (ii) may not use the Prospectus forming
a part thereof for resales of Registrable Securities.

Certain legal consequences arise from being named as a selling securityholder in
the Shelf Registration Statement and related Prospectus. Accordingly, holders
and beneficial owners of Registrable Securities are advised to consult their own
securities law counsel regarding the consequences of being named or not being
named as a selling securityholder in the Shelf Registration Statement and
related Prospectus.

The term "REGISTRABLE SECURITIES" is defined in the Exchange and Registration
Rights Agreement.


                                       A-3




                                    ELECTION

The undersigned holder (the "Selling Securityholder") of Registrable Securities
hereby elects to include in the Shelf Registration Statement the Registrable
Securities beneficially owned by it and listed below in Item (3). The
undersigned, by signing and returning this Notice and Questionnaire, agrees to
be bound with respect to such Registrable Securities by the terms and conditions
of this Notice and Questionnaire and the Exchange and Registration Rights
Agreement, including, without limitation, Section 6 of the Exchange and
Registration Rights Agreement, as if the undersigned Selling Securityholder were
an original party thereto.(10)

Upon any sale of Registrable Securities pursuant to the Shelf Registration
Statement, the Selling Securityholder will be required to deliver to the Company
and Trustee the Notice of Transfer set forth in Appendix A to the Prospectus and
as Exhibit B to the Exchange and Registration Rights Agreement.

The Selling Securityholder hereby provides the following information to the
Company and represents and warrants that such information is accurate and
complete:


                                       A-4




                                  QUESTIONNAIRE

(1)   (a)         Full Legal Name of Selling Securityholder:

      (b)         Full Legal Name of Registered Holder (if not the same as in
                  (a) above) of Registrable Securities Listed in Item (3) below:

      (c)         Full Legal Name of DTC Participant (if applicable and if not
                  the same as (b) above) Through Which Registrable Securities
                  Listed in Item (3) below are Held:

(2)               Address for Notices to Selling Securityholder:


                                    --------------------------------------------


                                    --------------------------------------------


                                    --------------------------------------------

                  Telephone:
                                    --------------------------------------------

                  Fax:
                                    --------------------------------------------

                  Contact Person:
                                    --------------------------------------------

(3)      Beneficial Ownership of Securities:

         Except as set forth below in this Item (3), the undersigned does not
         beneficially own any Securities.

         (a)      Principal amount of Registrable Securities beneficially owned:

                  ------------------------
                  CUSIP No(s). of such Registrable Securities:

                  --------------------------------------------------------------

         (b)      Principal amount of Securities other than Registrable
                  Securities beneficially owned:
                                                 -------------------------------
                  CUSIP No(s). of such other Securities:

                  --------------------------------------------------------------

         (c)      Principal amount of Registrable Securities which the
                  undersigned wishes to be included in the Shelf Registration
                  Statement:
                             ----
                  CUSIP No(s). of such Registrable Securities to be included in
                  the Shelf Registration Statement:

(4)      Beneficial Ownership of Other Securities of the Company:


                                       A-5



         Except as set forth below in this Item (4), the undersigned Selling
         Securityholder is not the beneficial or registered owner of any other
         securities of the Company, other than the Securities listed above in
         Item (3).

         State any exceptions here:

(5)      Relationships with the Company:

         Except as set forth below, neither the Selling Securityholder nor any
         of its affiliates, officers, directors or principal equity holders (5%
         or more) has held any position or office or has had any other material
         relationship with the Company (or its predecessors or affiliates)
         during the past three years.

         State any exceptions here:

(6)      Plan of Distribution:

         Except as set forth below, the undersigned Selling Securityholder
         intends to distribute the Registrable Securities listed above in Item
         (3) only as follows (if at all): Such Registrable Securities may be
         sold from time to time directly by the undersigned Selling
         Securityholder or, alternatively, through underwriters, broker-dealers
         or agents. Such Registrable Securities may be sold in one or more
         transactions at fixed prices, at prevailing market prices at the time
         of sale, at varying prices determined at the time of sale, or at
         negotiated prices. Such sales may be effected in transactions (which
         may involve crosses or block transactions) (i) on any national
         securities exchange or quotation service on which the Registered
         Securities may be listed or quoted at the time of sale, (ii) in the
         over-the-counter market, (iii) in transactions otherwise than on such
         exchanges or services or in the over-the-counter market, or (iv)
         through the writing of options. In connection with sales of the
         Registrable Securities or otherwise, the Selling Securityholder may
         enter into hedging transactions with broker-dealers, which may in turn
         engage in short sales of the Registrable Securities in the course of
         hedging the positions they assume. The Selling Securityholder may also
         sell Registrable Securities short and deliver Registrable Securities to
         close out such short positions, or loan or pledge Registrable
         Securities to broker-dealers that in turn may sell such securities.

         State any exceptions here:

By signing below, the Selling Securityholder acknowledges that it understands
its obligation to comply, and agrees that it will comply, with the provisions of
the Exchange Act and the rules and regulations thereunder, particularly
Regulation M.

In the event that the Selling Securityholder transfers all or any portion of the
Registrable Securities listed in Item (3) above after the date on which such
information is provided to the Company, the Selling Securityholder agrees to
notify the transferee(s) at the time of the


                                       A-6


transfer of its rights and obligations under this Notice and Questionnaire and
the Exchange and Registration Rights Agreement.

By signing below, the Selling Securityholder consents to the disclosure of the
information contained herein in its answers to Items (1) through (6) above and
the inclusion of such information in the Shelf Registration Statement and
related Prospectus. The Selling Securityholder understands that such information
will be relied upon by the Company in connection with the preparation of the
Shelf Registration Statement and related Prospectus.

In accordance with the Selling Securityholder's obligation under Section 3(d) of
the Exchange and Registration Rights Agreement to provide such information as
may be required by law for inclusion in the Shelf Registration Statement, the
Selling Securityholder agrees to promptly notify the Company of any inaccuracies
or changes in the information provided herein which may occur subsequent to the
date hereof at any time while the Shelf Registration Statement remains in
effect. All notices hereunder and pursuant to the Exchange and Registration
Rights Agreement shall be made in writing, by hand-delivery, first-class mail,
or air courier guaranteeing overnight delivery as follows:

         (i)      To the Company:

                  PETCO Animal Supplies, Inc.
                  9125 Rehco Road
                  San Diego, California  92121
                  (858) 453-7845

         (ii)     With a copy to:

                  Skadden, Arps, Slate, Meagher & Flom LLP
                  300 South Grand Avenue
                  Los Angeles, California  90071
                  Attention:  Nick Saggese
                  (213) 687-5000

Once this Notice and Questionnaire is executed by the Selling Securityholder and
received by the Company's counsel, the terms of this Notice and Questionnaire,
and the representations and warranties contained herein, shall be binding on,
shall inure to the benefit of and shall be enforceable by the respective
successors, heirs, personal representatives, and assigns of the Company and the
Selling Securityholder (with respect to the Registrable Securities beneficially
owned by such Selling Securityholder and listed in Item (3) above. This
Agreement shall be governed in all respects by the laws of the State of New
York.

IN WITNESS WHEREOF, the undersigned, by authority duly given, has caused this
Notice and Questionnaire to be executed and delivered either in person or by its
duly authorized agent.


                                       A-7


Dated:
        ---------------------------------------------


                  --------------------------------------------------------------
                  Selling Securityholder
                  (Print/type full legal name of beneficial owner of Registrable
                  Securities)


                  By:
                       ---------------------------------------------------------
                           Name:
                           Title:


                                       A-8




PLEASE RETURN THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE FOR RECEIPT ON
OR BEFORE [DEADLINE FOR RESPONSE] TO THE COMPANY'S COUNSEL AT:

                         Skadden, Arps, Slate, Meagher & Flom LLP
                         300 South Grand Avenue
                         Los Angeles, California  90071
                         Attention:  Nick Saggese
                         (213) 687-5000


                                       A-9





                                                                       Exhibit B

              NOTICE OF TRANSFER PURSUANT TO REGISTRATION STATEMENT

U.S. Bank N.A.
PETCO Animal Supplies, Inc.
c/o U.S. Bank N.A.
Corporate Trust Administration
180 East Fifth Street
St. Paul, Minnesota  55101
Attention:  Corporate Trust Department

         Re:      PETCO Animal Supplies, Inc. (the "Company")
                  10.75% Senior Subordinated Notes due 2011


Dear Sirs:

Please be advised that ______________ has transferred $____________ aggregate
principal amount of the above-referenced Notes pursuant to an effective
Registration Statement on Form [___] (File No. 333-____ ) filed by the Company.

We hereby certify that the prospectus delivery requirements, if any, of the
Securities Act of 1933, as amended, have been satisfied and that the above-named
beneficial owner of the Notes is named as a "Selling Holder" in the Prospectus
dated [date] or in supplements thereto, and that the aggregate principal amount
of the Notes transferred are the Notes listed in such Prospectus opposite such
owner's name.

Dated:

                                 Very truly yours,

                                 -----------------------------------------------
                                                       (Name)

                                 By:
                                        ----------------------------------------
                                                       (Authorized Signature)


                                       F-1

EX-5.1

    BOSTON                     LATHAM & WATKINS                  NEW YORK
    CHICAGO                    ATTORNEYS AT LAW              NORTHERN VIRGINIA
   FRANKFURT                      www.lw.com                   ORANGE COUNTY
    HAMBURG                                                       PARIS
   HONG KONG                 ____________________         SAN DIEGO NORTH COUNTY
    LONDON                                                    SAN FRANCISCO
  LOS ANGELES                                                SILICON VALLEY
    MOSCOW                                                      SINGAPORE
  NEW JERSEY                                                      TOKYO
                                                            WASHINGTON, D.C.

                              ______________, 2002


PETCO Animal Supplies, Inc.
9125 Recho Road
San Diego, California 92121

         Re: Registration Statement on Form S-1 (File No. 333-75830);
             16,675,000 shares of Common Stock, par value $0.001 per share
             --------------------------------------------------------------

Ladies and Gentlemen:

                  In connection with the registration by PETCO Animal
Supplies, Inc., a Delaware corporation (the "Company"), of up to 16,675,000
shares of common stock of the Company, par value $0.001 per share (the
"Shares"), up to 15,500,000 Shares of which are being sold by the Company
(the "Company Shares") and up to 1,175,000 Shares of which are being sold by
the selling stockholders named therein (the "Selling Stockholder Shares"),
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 filed with the Securities and Exchange Commission (the "Commission")
on December 21, 2001 (File No. 333-75830), as amended by Amendment No. 1
filed with the Commission on January 31, 2002 (collectively, the
"Registration Statement"), you have requested our opinion with respect to the
matters set forth below.

                  In our capacity as your counsel in connection with such
registration, we are familiar with the proceedings taken and proposed to be
taken by the Company in connection with the authorization, issuance and sale
of the Company Shares, and for the purposes of this opinion, have assumed
such proceedings will be timely completed in the manner presently proposed.
In addition, we have made such legal and factual examinations and inquiries,
including an examination of originals or copies certified or otherwise
identified to our satisfaction of such documents, corporate records and
instruments, as we have deemed necessary or appropriate for purposes of this
opinion.

                  In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity to authentic original documents of all documents submitted to us
as copies.

                  We are opining herein as to the effect on the subject
transaction only of the General Corporation Law of the State of Delaware, and we
express no opinion with respect to the applicability thereto, or the effect
thereon, of the laws of any other jurisdiction or, in the case of Delaware, any
other laws, or as to any matters of municipal law or the laws of any local
agencies within any state.



- --------------------------------------------------------------------------------
           701 B Street, Suite 2100 o San Diego, California 92101-8197
               TELEPHONE: (619) 236-1234 o FAX: (619) 696-7419



LATHAM & WATKINS

PETCO Animal Supplies, Inc.
______________, 2002
Page 2



                  Subject to the foregoing, it is our opinion that:


        1.        The Company Shares have been duly authorized, and, upon
issuance, delivery and payment therefor in the manner contemplated by the
Underwriting Agreement referred to in the Registration Statement, will be
validly issued, fully paid and nonassessable.

        2.        The Selling Stockholder Shares have been duly authorized
and validly issued and are fully paid and nonassessable.

                  We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters."

                                                          Very truly yours,

                                                          /s/  Latham & Watkins

EX-10.1

                      AMENDED AND RESTATED CREDIT AGREEMENT

                          DATED AS OF OCTOBER 26, 2001

                                      AMONG

                          PETCO ANIMAL SUPPLIES, INC.,
                                  AS BORROWER,

                           THE LENDERS LISTED HEREIN,
                                   AS LENDERS

                       GOLDMAN SACHS CREDIT PARTNERS L.P.
      AS JOINT LEAD ARRANGER, JOINT BOOK-RUNNER AND SOLE SYNDICATION AGENT

                                       AND

                   WELLS FARGO BANK, NATIONAL ASSOCIATION, AS
                 JOINT LEAD ARRANGER, JOINT BOOK-RUNNER AND SOLE
                              ADMINISTRATIVE AGENT


                              DOCUMENTATION AGENT:
                      GENERAL ELECTRIC CAPITAL CORPORATION



                           PETCO ANIMAL SUPPLIES, INC.

                      AMENDED AND RESTATED CREDIT AGREEMENT

                                TABLE OF CONTENTS



                                                                                            PAGE
                                                                                      
SECTION 1.       DEFINITIONS....................................................................2

       1.1       Certain Defined Terms..........................................................2

       1.2       Accounting Terms; Utilization of GAAP for Purposes of Calculations Under
                 Agreement.....................................................................31

       1.3       Other Definitional Provisions and Rules of Construction.......................31


SECTION 2.       AMOUNTS AND TERMS OF COMMITMENTS AND LOANS....................................32

       2.1       Commitments; Making of Loans; the Register; Optional Notes....................32

       2.2       Interest on the Loans.........................................................39

       2.3       Fees..........................................................................43

       2.4       Repayments, Prepayments and Reductions in Revolving Loan Commitments;
                 General Provisions Regarding Payments; Application of Proceeds of
                 Collateral and Payments Under Guaranties......................................44

       2.5       Use of Proceeds...............................................................53

       2.6       Special Provisions Governing Eurodollar Rate Loans............................53

       2.7       Increased Costs; Taxes; Capital Adequacy......................................55

       2.8       Obligation of Lenders and Issuing Lenders to Mitigate.........................59

       2.9       Substitute Lenders............................................................60


SECTION 3.       LETTERS OF CREDIT.............................................................60

       3.1       Issuance of Letters of Credit and Lenders' Purchase of Participations
                 Therein.......................................................................60

       3.2       Letter of Credit Fees.........................................................63

       3.3       Drawings and Reimbursement of Amounts Paid Under Letters of Credit............64

       3.4       Obligations Absolute..........................................................66

       3.5       Indemnification; Nature of Issuing Lenders' Duties............................67

       3.6       Increased Costs and Taxes Relating to Letters of Credit.......................68

       3.7       Confirmation of Letters of Credit Issued Under Existing Credit Agreement......69


                                       i


SECTION 4.       CONDITIONS TO LOANS AND LETTERS OF CREDIT AND EFFECTIVENESS OF AGREEMENT......69

       4.1       Conditions to Term Loans and Initial Revolving Loans and Swing Line Loans
                 under Existing Credit Agreement...............................................69

       4.2       Conditions to Effectiveness of the Agreement..................................76

       4.3       Conditions to All Loans.......................................................78

       4.4       Conditions to Letters of Credit...............................................78


SECTION 5.       COMPANY'S REPRESENTATIONS AND WARRANTIES......................................79

       5.1       Organization, Powers, Qualification, Good Standing, Business, Sponsors
                 and Subsidiaries..............................................................79

       5.2       Authorization of Borrowing, etc...............................................80

       5.3       Financial Condition...........................................................81

       5.4       No Material Adverse Change; No Restricted Junior Payments.....................82

       5.5       Title to Properties...........................................................82

       5.6       Litigation; Adverse Facts.....................................................82

       5.7       Payment of Taxes..............................................................83

       5.8       Performance of Agreements; Materially Adverse Agreements; Material
                 Contracts.....................................................................83

       5.9       Governmental Regulation.......................................................83

       5.10      Securities Activities.........................................................83

       5.11      Employee Benefit Plans........................................................83

       5.12      Certain Fees..................................................................84

       5.13      Environmental Protection......................................................84

       5.14      Employee Matters..............................................................85

       5.15      Solvency......................................................................85

       5.16      Matters Relating to Collateral................................................85

       5.17      Related Agreements............................................................86

       5.18      Disclosure....................................................................86

       5.19      Intellectual Property.........................................................87


SECTION 6.       AFFIRMATIVE COVENANTS OF COMPANY..............................................87

       6.1       Financial Statements and Other Reports........................................87

       6.2       Corporate Existence, etc......................................................92

       6.3       Payment of Taxes and Claims; Tax Consolidation................................92


                                       ii


       6.4       Maintenance of Properties; Insurance; Application of Net
                 Insurance/Condemnation Proceeds...............................................93

       6.5       Inspection Rights.............................................................94

       6.6       Compliance with Laws, etc.....................................................95

       6.7       Environmental Disclosure......................................................95

       6.8       Execution of Guaranty and Personal Property Collateral Documents by
                 Certain Subsidiaries and Future Subsidiaries..................................96

       6.9       Matters Relating to Real Property Collateral..................................97

       6.10      [Intentionally Omitted.]......................................................97

       6.11      Distribution Centers Collateral Access Agreements.............................97

       6.12      Cash Management System........................................................98


SECTION 7.       NEGATIVE COVENANTS OF COMPANY.................................................98

       7.1       Indebtedness..................................................................98

       7.2       Liens and Related Matters....................................................100

       7.3       Investments; Joint Ventures..................................................101

       7.4       Contingent Obligations.......................................................103

       7.5       Restricted Junior Payments...................................................104

       7.6       Financial Covenants..........................................................104

       7.7       Restriction on Fundamental Changes; Asset Sales and Acquisitions.............107

       7.8       Consolidated Capital Expenditures............................................108

       7.9       Sales and Lease-Backs........................................................109

       7.10      Sale or Discount of Receivables..............................................109

       7.11      Transactions with Sponsors and Affiliates....................................109

       7.12      Conduct of Business..........................................................110

       7.13      Amendments or Waivers of Related Agreements; Amendments of Documents
                 Relating to Certain Indebtedness; Limitation on Restrictions on
                 Amendments or Waivers of Loan Documents......................................110

       7.14      Fiscal Year..................................................................111


SECTION 8.       EVENTS OF DEFAULT............................................................111

       8.1       Failure to Make Payments When Due............................................111

       8.2       Default in Other Agreements..................................................111

       8.3       Breach of Certain Covenants..................................................112

       8.4       Breach of Warranty...........................................................112

       8.5       Other Defaults Under Loan Documents..........................................112


                                      iii


       8.6       Involuntary Bankruptcy; Appointment of Receiver, etc.........................112

       8.7       Voluntary Bankruptcy; Appointment of Receiver, etc...........................112

       8.8       Judgments and Attachments....................................................113

       8.9       Dissolution..................................................................113

       8.10      Employee Benefit Plans.......................................................113

       8.11      Change in Control............................................................113

       8.12      Invalidity of Subsidiary Guaranty; Failure of Security; Repudiation of
                 Obligations..................................................................114

       8.13      Failure to Consummate Acquisition............................................114

       8.14      Action Relating to Subordinated Indebtedness.................................114


SECTION 9.       ADMINISTRATIVE AGENT.........................................................115

       9.1       Appointment..................................................................115

       9.2       Powers and Duties; General Immunity..........................................117

       9.3       Representations and Warranties; No Responsibility For Appraisal of
                 Creditworthiness.............................................................118

       9.4       Right to Indemnity...........................................................118

       9.5       Successor Agent and Swing Line Lender........................................119

       9.6       Collateral Documents and Guaranties..........................................120

       9.7       Co-Agents....................................................................120


SECTION 10.      MISCELLANEOUS................................................................121

       10.1      Assignments and Participations in Loans and Letters of Credit................121

       10.2      Expenses.....................................................................123

       10.3      Indemnity....................................................................124

       10.4      Set-Off......................................................................125

       10.5      Ratable Sharing..............................................................125

       10.6      Amendments and Waivers.......................................................126

       10.7      Independence of Covenants....................................................127

       10.8      Notices......................................................................128

       10.9      Survival of Representations, Warranties and Agreements.......................128

       10.10     Failure or Indulgence Not Waiver; Remedies Cumulative........................128

       10.11     Marshalling; Payments Set Aside..............................................128

       10.12     Severability.................................................................129

       10.13     Obligations Several; Independent Nature of Lenders' Rights...................129


                                       iv


       10.14     Headings.....................................................................129

       10.15     Applicable Law...............................................................129

       10.16     Successors and Assigns.......................................................129

       10.17     Consent to Jurisdiction and Service of Process...............................130

       10.18     Waiver of Jury Trial.........................................................130

       10.19     Confidentiality..............................................................131

       10.20     Maximum Amount...............................................................131

       10.21     Counterparts; Effectiveness; Effect if Agreement Does Not Become Effective...132



                                       v




EXHIBITS
         
I           FORM OF NOTICE OF BORROWING
II          FORM OF NOTICE OF CONVERSION/CONTINUATION
III         FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT
IV          FORM OF TRANCHE B TERM NOTE
V           FORM OF REVOLVING NOTE
VI          FORM OF SWING LINE NOTE
VII         FORM OF COMPLIANCE CERTIFICATE
VIII-A      FORM OF CLOSING DATE OPINION OF COMPANY COUNSEL
VIII-B      FORM OF RESTATEMENT EFFECTIVE DATE OPINION OF COMPANY COUNSEL
IX-A        FORM OF CLOSING DATE OPINION OF O'MELVENY & MYERS LLP
IX-B        FORM OF RESTATEMENT EFFECTIVE DATE OPINION OF O'MELVENY & MYERS, LLP
X           FORM OF ASSIGNMENT AGREEMENT
XI          FORM OF CERTIFICATE RE NON-BANK STATUS
XII         FORM OF CLOSING DATE COMPLIANCE CERTIFICATE
XIII        FORM OF SUBSIDIARY GUARANTY
XIV         FORM OF PLEDGE AND SECURITY AGREEMENT
XV          FORM OF HOLDINGS PLEDGE AGREEMENT
XVI         FORM OF MASTER CONFIRMATION



                                       vi


                                    SCHEDULES

     
1.1A    NON-RECURRING COSTS
2.1     LENDERS' TRANCHE B TERM LOANS, REVOLVING COMMITMENTS AND PRO RATA SHARES
4.1E    CORPORATE AND CAPITAL STRUCTURE; OWNERSHIP
5.1A    SUBSIDIARIES OF COMPANY
5.1E    OPTIONS AND OTHER RIGHTS
5.2B    CONFLICTS
5.6     LITIGATION
5.7     TAXES NOT FILED
5.8B    MATERIAL CONTRACTS
5.11C   CERTAIN EMPLOYEE BENEFIT PLANS
5.13    ENVIRONMENTAL MATTERS
5.19A   INTELLECTUAL PROPERTY
7.1     CERTAIN EXISTING INDEBTEDNESS
7.2     CERTAIN EXISTING LIENS
7.3     CERTAIN EXISTING INVESTMENTS
7.4     CERTAIN EXISTING CONTINGENT OBLIGATIONS




                                      vii


                           PETCO ANIMAL SUPPLIES, INC.

                      AMENDED AND RESTATED CREDIT AGREEMENT


                  This AMENDED AND RESTATED CREDIT AGREEMENT is dated as of
October 26, 2001, and entered into by and among PETCO ANIMAL SUPPLIES, INC., a
Delaware corporation ("COMPANY"), THE FINANCIAL INSTITUTIONS LISTED ON THE
SIGNATURE PAGES HEREOF (each individually referred to herein as a "LENDER" and
collectively as "LENDERS"), GOLDMAN SACHS CREDIT PARTNERS L.P., as joint lead
arranger, joint book-runner and sole syndication agent (in such capacity,
"SYNDICATION AGENT") and WELLS FARGO BANK, NATIONAL ASSOCIATION ("WELLS FARGO"),
as joint lead arranger, joint book-runner and sole administrative agent for
Lenders (in such capacity, "ADMINISTRATIVE AGENT").

                                 R E C I T A L S

                  WHEREAS, pursuant to that certain Credit Agreement dated as of
October 2, 2000, by and among Company, Lenders, Syndication Agent and
Administrative Agent (the "EXISTING CREDIT AGREEMENT"), Lenders extended the
credit facilities set forth in the Existing Credit Agreement to Company which
were used for the purposes of providing funds for (i) the Acquisition Financing
Requirements and (ii) working capital and other general purposes of Company and
its Subsidiaries, and issuing Letters of Credit for the purposes set forth
therein;

                  WHEREAS, the parties to the Existing Credit Agreement desire
to amend and restate the Existing Credit Agreement in order to (i) provide for
the repayment in full of the Tranche A Term Loans under the Existing Credit
Agreement, (ii) reduce the principal amount of Tranche B Term Loans to
$195,000,000 and apply the principal amount so prepaid to the final installment
of principal payable on the Tranche B Term Loans, (iii) reduce the Revolving
Loan Commitments from $80,000,000 to $75,000,000 and (iv) provide for certain
other amendments as specified herein;

                  WHEREAS, it is the intention of Company, Syndication Agent and
Administrative Agent and each of the Lenders that this amendment and restatement
of the Existing Credit Agreement shall not constitute a refinancing of the Loans
outstanding on the Restatement Effective Date and that all Obligations hereunder
and under the other Loan Documents, shall continue to be secured by the grant to
Administrative Agent, on behalf of Lenders, of a First Priority Lien on the
Collateral and that the Subsidiary Guaranty previously executed by each
Subsidiary of the Company shall continue in full force in effect and that each
Subsidiary shall continue to secure all of the Obligations under the Subsidiary
Guaranty by reaffirming the grant to Administrative Agent, on behalf of Lenders,
of a First Priority Lien on the Collateral, and Company and the other Loan
Parties shall execute and deliver a Master Confirmation evidencing such
intention.

                  NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, Company, Lenders,
Syndication Agent and Administrative Agent agree as follows:


                                CREDIT AGREEMENT


SECTION 1. DEFINITIONS

1.1      CERTAIN DEFINED TERMS.

                  The following terms used in this Agreement shall have the
following meanings:

                  "ACQUISITION FINANCING REQUIREMENTS" means the aggregate of
all amounts necessary (i) to pay the Merger Consideration, (ii) to finance the
Retirement of Debt and (iii) to pay Transaction Costs.

                  "ADJUSTED EURODOLLAR RATE" means, for any Interest Rate
Determination Date with respect to an Interest Period for a Eurodollar Rate
Loan, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of
1%) obtained by DIVIDING (i) the rate of interest equal to (a) the interest rate
per annum for deposits in Dollars in an amount approximately equal to the amount
of Wells Fargo's Eurodollar Rate Loan and for a period approximately equal to
such Interest Period which appears on page 3750 of the Dow Jones Telerate Screen
as of 11:00 A.M. (London time) two Business Days prior to the beginning of such
Interest Period for delivery on the first day of such Interest Period, or (b) if
such a rate does not appear on page 3750 of the Dow Jones Telerate Screen, the
average (rounded upwards, if necessary, to the nearest 1/100 of 1%) of the rates
per annum at which Dollar deposits in immediately available funds are offered to
Wells Fargo in the London interbank market at or about 9:00 A.M. (Los Angeles
time) two Business Days prior to the beginning of such Interest Period for
delivery on the first day of such Interest Period, and in an amount
approximately equal to the amount of Wells Fargo's Eurodollar Rate Loan and for
a period approximately equal to such Interest Period BY (ii) a percentage equal
to 100% MINUS the stated maximum rate (expressed as a decimal) of all reserve
requirements (including any marginal, emergency, supplemental, special or other
reserves) applicable on such Interest Rate Determination Date to any member bank
of the Federal Reserve System in respect of "Eurocurrency liabilities" as
defined in Regulation D (or any successor category of liabilities under
Regulation D).

                  "ADMINISTRATIVE AGENT" has the meaning assigned to that term
in the introduction to this Agreement and also means and includes any successor
Administrative Agent appointed pursuant to subsection 9.5A.

                  "ADMINISTRATIVE AGENT'S OFFICE" means (i) the office of
Administrative Agent and Swing Line Lender located at 201 Third Street, 8th
Floor, San Francisco, California 94103 or (ii) such other office of
Administrative Agent and Swing Line Lender as may from time to time hereafter be
designated as such in a written notice delivered by Administrative Agent and
Swing Line Lender to Company and each Lender.

                  "AFFECTED LENDER" has the meaning assigned to that term in
subsection 2.6C.

                  "AFFECTED LOANS" has the meaning assigned to that term in
subsection 2.6C.

                  "AFFILIATE", as applied to any Person, means any other Person
directly or indirectly controlling, controlled by, or under common control with,
that Person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling", "controlled by" and "under common
control with"), as applied to any Person,


                                       2
                     AMENDED AND RESTATED CREDIT AGREEMENT


means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of that Person, whether through the
ownership of voting securities or by contract or otherwise.

                  "AGGREGATE AMOUNTS DUE" has the meaning assigned to that term
in subsection 10.5.

                  "AGREEMENT" means this Amended and Restated Credit Agreement
dated as of October 26, 2001.

                  "ANNUALIZED" means (i) with respect to the Fiscal Quarter of
Company ending November 3, 2001, the applicable amount for such Fiscal Quarter
multiplied by four, (ii) with respect to the Fiscal Quarter of Company ending
February 2, 2002, the applicable amount for such Fiscal Quarter and the
immediately preceding Fiscal Quarter multiplied by two, and (iii) with respect
to the Fiscal Quarter of Company ending May 4, 2002 the applicable amount for
such Fiscal Quarter and the immediately preceding two Fiscal Quarters multiplied
by one and one-third.

                  "APPLICABLE BASE RATE MARGIN" means, as at any date of
determination, the percentage per annum set forth below opposite the applicable
Consolidated Total Leverage Ratio:



                                                              APPLICABLE BASE
          CONSOLIDATED TOTAL LEVERAGE RATIO                     RATE MARGIN
          ---------------------------------                     -----------
                                                           
           greater than or equal to 3.75:1.00                     2.25 %

           less than 3.75:1.00                                    2.00 %
           but greater than or equal to 3.25:1.00

           less than 3.25:1.00                                    1.75 %
           but greater than or equal to 2.75:1.00

           less than 2.75:1.00                                    1.50 %
           but greater than or equal to 2.25:1.00

           less than 2.25:1.00                                    1.00 %


; PROVIDED that until the delivery of the first Margin Determination Certificate
by Company to Administrative Agent pursuant to subsection 6.1 (xviii) for the
Fiscal Year ending February 2, 2002, the Applicable Base Rate Margin for
Revolving Loans that are Base Rate Loans shall be 2.00% per annum.

                  "APPLICABLE EURODOLLAR RATE MARGIN" means, as at any date of
determination, the percentage per annum set forth below opposite the applicable
Consolidated Total Leverage Ratio:


                                       3




           CONSOLIDATED TOTAL LEVERAGE                  APPLICABLE EURODOLLAR
                      RATIO                                  RATE MARGIN
                      -----                                  -----------
                                                         
         greater than or equal to 3.75:1.00                   3.25 %

         less than 3.75:1.00                                  3.00 %
         but greater than or equal to 3.25:1.00

         less than 3.25:1.00                                  2.75 %
         but greater than or equal to 2.75:1.00

         less than 2.75:1.00                                  2.50 %
         but greater than or equal to 2.25:1.00

         less than 2.25:1.00                                  2.00 %


; PROVIDED that until the delivery of the first Margin Determination Certificate
by Company to Administrative Agent pursuant to subsection 6.1(xviii) for the
Fiscal Year ending February 2, 2002, the Applicable Eurodollar Rate Margin for
Revolving Loans that are Eurodollar Rate Loans shall be 3.00% per annum.

                  "APPLIED AMOUNT" has the meaning assigned to that term in
subsection 2.4B(iv)(b).

                  "ASSET SALE" means the sale by Company or any of its
Subsidiaries to any Person other than Company or any wholly-owned Subsidiary of
(i) any of the outstanding Capital Stock of any of Company's Subsidiaries, (ii)
substantially all of the assets of any division or line of business of Company
or any of its Subsidiaries, or (iii) any other assets (whether tangible or
intangible) of Company or any of its Subsidiaries (other than (a) Inventory or
other assets sold in the ordinary course of business, (b) in connection with an
exchange of equipment or Inventory for like equipment or Inventory of
substantially equivalent value, (c) obsolete, worn out or surplus property sold
in the ordinary course of business, (d) the license of intellectual property in
the ordinary course of business, and (e) any other assets to the extent that the
aggregate value of such assets sold in any single transaction or related series
of transactions is equal to $1,000,000 or less during any Fiscal Year).

                  "ASSIGNMENT AGREEMENT" means an Assignment Agreement in
substantially the form of EXHIBIT X annexed hereto.

                  "ASSUMED INDEBTEDNESS" means Indebtedness of a Person which
(i) is in existence at the time such Person becomes a Subsidiary of Company, or
(ii) is assumed in connection with an Investment in or acquisition of such
Person or of the assets of such Person, and has not been incurred or created by
such Person in connection with, or in anticipation or contemplation of, such
Person becoming a Subsidiary of Company or such Investment or acquisition.

                  "BANKRUPTCY CODE" means Title 11 of the United States Code
entitled "Bankruptcy", as now and hereafter in effect, or any successor statute.


                                       4


                  "BASE RATE" means, at any time, the higher of (i) the Prime
Rate or (ii) the rate which is 1/2 of 1% in excess of the Federal Funds
Effective Rate.

                  "BASE RATE LOANS" means Loans bearing interest at rates
determined by reference to the Base Rate as provided in subsection 2.2A.

                  "BUSINESS DAY" means (i) for all purposes other than as
covered by clause (ii) below, any day excluding Saturday, Sunday and any day
which is a legal holiday under the laws of the States of California or New York
or is a day on which banking institutions located in such state are authorized
or required by law or other governmental action to close, and (ii) with respect
to all notices, determinations, fundings and payments in connection with the
Adjusted Eurodollar Rate or any Eurodollar Rate Loans, any day that is a
Business Day described in clause (i) above and that is also a day for trading by
and between banks in Dollar deposits in the London interbank market.

                  "CAPITAL LEASE", as applied to any Person, means any lease of
any property (whether real, personal or mixed) by that Person as lessee that, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that Person.

                  "CAPITAL STOCK" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited), (iv) in the case of a limited liability
company, membership interests and (v) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distribution of assets of, the issuing Person.

                  "CASH" means money, currency or a credit balance in a Deposit
Account.

                  "CASH EQUIVALENTS" means, as at any date of determination, (i)
marketable securities (a) issued or directly and unconditionally guaranteed as
to interest and principal by the United States Government or (b) issued by any
agency of the United States the obligations of which are backed by the full
faith and credit of the United States, in each case maturing within one year
after such date; (ii) marketable direct obligations issued by any state of the
United States or any political subdivision of any such state or any public
instrumentality thereof, in each case maturing within one year after such date
and having, at the time of the acquisition thereof, the highest rating
obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("MOODY'S"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and having, at the time of the
acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from
Moody's; (iv) certificates of deposit or bankers' acceptances maturing within
one year after such date and issued or accepted by any Lender or by any
commercial bank organized under the laws of the United States or any state
thereof or the District of Columbia that (a) is at least "adequately
capitalized" (as defined in the regulations of its primary Federal banking
regulator) and (b) has Tier 1 capital (as defined in such regulations) of not
less than $100,000,000; and (v) shares of any money market mutual fund that (a)
has at least 95% of its assets invested continuously in the types of investments
referred to in clauses (i) and (ii) above, (b) has net assets of not less than
$500,000,000, and (c) has the highest rating obtainable from either S&P or
Moody's.


                                       5


                  "CASUALTY INSURANCE" means insurance that protects the insured
against property loss or damage.

                  "CERTIFICATE RE NON-BANK STATUS" means a certificate
substantially in the form of Exhibit XI annexed hereto delivered by a Lender to
Administrative Agent pursuant to subsection 2.7B(iii).

                  "CLASS" means, as applied to Lenders, each of the following
two classes of Lenders: (i) Lenders having Revolving Loan Exposure and (ii)
Lenders having Tranche B Term Loan Exposure.

                  "CLOSING DATE" means the date on which the initial Loans (as
that term is defined in the Existing Credit Agreement) were made and on which
the Existing Credit Agreement was executed and delivered, which date was October
2, 2000.

                  "CLOSING DATE COMPLIANCE CERTIFICATE" means a certificate
substantially in the form of EXHIBIT XII annexed hereto delivered to
Administrative Agent by Company on the Closing Date.

                  "COLLATERAL" means, collectively, all of the Company's and/or
its Subsidiaries' right, title and interest in and to the real, personal and
mixed (if any) property (including Capital Stock) in which Liens are purported
to be granted pursuant to the Collateral Documents as security for the
Obligations.

                  "COLLATERAL ACCESS AGREEMENT" means any landlord waiver,
mortgagee waiver, bailee letter or any similar acknowledgement or agreement of
any landlord or mortgagee in respect of any real property leased by any Loan
Party where any Collateral is located or any warehouseman or processor in
possession of any Inventory of any Loan Party, reasonably satisfactory to
Administrative Agent.

                  "COLLATERAL DOCUMENTS" means the Pledge and Security
Agreement, the Holdings Pledge Agreement, the Mortgages (if any) and all other
instruments or documents delivered by any Loan Party pursuant to the Existing
Credit Agreement, this Agreement or any of the other Loan Documents in order to
grant to Administrative Agent, on behalf of Lenders, a Lien on any real (if
any), personal or mixed (if any) property of that Loan Party as security for the
Obligations.

                  "COMMERCIAL LETTER OF CREDIT" means any letter of credit or
similar instrument issued for the purpose of providing the primary payment
mechanism in connection with the purchase of any materials, goods or services by
Company or any of its Subsidiaries in the ordinary course of business of Company
or such Subsidiary.

                  "COMMITMENTS" means the commitments of Lenders to make Loans
as set forth in subsection 2.1A.

                  "COMPANY" has the meaning assigned to that term in the
introduction to this Agreement.


                                       6


                  "COMPANY COMMON STOCK" means the common stock of Company, par
value $0.0001 per share.

                  "COMPANY PREFERRED STOCK" means the "12% Series B Junior
Redeemable Cumulative Preferred Stock" of the Company, par value $.01, and the
"14% Series A Senior Redeemable Exchangeable Cumulative Preferred Stock" of the
Company, par value $.01.

                  "COMPLIANCE CERTIFICATE" means a certificate substantially in
the form of EXHIBIT VII annexed hereto delivered to Administrative Agent and to
Syndication Agent by Company pursuant to subsection 6.1(iv).

                  "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the
aggregate of all expenditures (whether paid in cash or other consideration or
accrued as a liability and including that portion of Capital Leases which is
capitalized on the consolidated balance sheet of Company and its Subsidiaries)
by Company and its Subsidiaries during that period that, in conformity with
GAAP, are included in "additions to fixed assets" reflected in the statements of
cash flows of Company and its Subsidiaries; PROVIDED, HOWEVER, that Consolidated
Capital Expenditures shall not include any Excluded Expenditures.

                  "CONSOLIDATED CURRENT ASSETS" means, as at any date of
determination, the total assets of Company and its Subsidiaries on a
consolidated basis which may properly be classified as current assets in
conformity with GAAP, EXCLUDING Cash and Cash Equivalents.

                  "CONSOLIDATED CURRENT LIABILITIES" means, as at any date of
determination, the total liabilities of Company and its Subsidiaries on a
consolidated basis which may properly be classified as current liabilities in
conformity with GAAP, EXCLUDING the current portion of Consolidated Total Funded
Debt.

                  "CONSOLIDATED EBITDA" means, for any period, the sum of the
amounts for such period, without duplication, of (i) Consolidated Net Income,
(ii) Consolidated Interest Expense plus any Excluded Non-Cash Accruals, (iii)
provisions for taxes based on income, (iv) total depreciation expense, (v) total
amortization expense, (vi) annual management fees paid to the Sponsors or their
Affiliates in accordance with the Management Agreement to the extent permitted
by this Agreement under clause (iii) of subsection 7.11, (vii) non-recurring
costs as set forth in SCHEDULE 1.1A annexed hereto, (viii) non-cash charges
relating to the exercise of options, (ix) Transaction Costs; (x) non-cash
write-downs taken for Petopia in an aggregate amount not to exceed the value of
such investment appearing on the Company's balance sheet as of the Closing Date;
(xi) losses (or minus gains) from foreign currency translation, (xii) customary
fees and professional expenses incurred as of the consummation of a Permitted
Acquisition, (xiii) non-cash dividends on Company Preferred Stock, (xiv)
settlements of certain shareholder lawsuits described in the proxy statement for
the Merger in an aggregate amount not exceeding $4,000,000, (xv) any historical
extraordinary non-recurring costs or expenses or other verifiable costs or
expenses incurred in connection with Permitted Acquisitions that will not
continue after the integration of the business acquired not to exceed $4,000,000
for such period; and (xvi) other extraordinary or non-recurring non-cash items
that do not require an accrual or reserve for future cash expenses to the extent
such items do not relate to items increasing Consolidated Net Income for any
prior period (in the case of clauses (ii) through (xvi) above, to the extent
subtracted in calculating Consolidated Net Income) LESS (y) other non-cash items
increasing Consolidated Net


                                       7


Income and (z) net extraordinary gains increasing Consolidated Net Income, all
of the foregoing as determined on a consolidated basis for Company and its
Subsidiaries in conformity with GAAP.

                  "CONSOLIDATED EXCESS CASH FLOW" means, for any period, an
amount (if positive) equal to (i) the sum, without duplication, of the amounts
for such period of (a) Consolidated EBITDA and (b) the Consolidated Working
Capital Adjustment MINUS (ii) the sum, without duplication, of the amounts for
such period of (a) voluntary and scheduled repayments of Consolidated Total
Funded Debt (excluding repayments of Revolving Loans except to the extent the
Revolving Loan Commitments are permanently reduced in connection with such
repayments), (b) Consolidated Capital Expenditures (net of any proceeds of any
related financings with respect to such expenditures), (c) Consolidated Interest
Expense, (d) the provision for current taxes based on income of Company and its
Subsidiaries and payable in cash with respect to such period, (e) the aggregate
amount of permanent principal repayments of Indebtedness (other than Loans) of
Company and its Subsidiaries during such period, (f) repayments of the principal
component of Capital Leases during such period, (g) the aggregate amount of
Permitted Acquisitions made during such period by Company and its Subsidiaries,
less the amount of the proceeds of any financing incurred or assumed in
connection therewith, (h) expenditures made in connection with Company's
investment in Petcetera to the extent permitted by subsection 7.3(ii), and (i)
the aggregate amount of common stock of Company purchased by the Company during
such period to the extent permitted under this Agreement.

                   "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, as of the
last day of any Fiscal Quarter, the ratio of (i)(a) Consolidated EBITDA for the
four-Fiscal Quarter period ending on such date MINUS (b) Consolidated Capital
Expenditures for such four-Fiscal Quarter period to (ii) the sum of (a)
Consolidated Interest Expense for such four-Fiscal Quarter period, PLUS (b)
scheduled repayments of principal under all Indebtedness (including that portion
attributable to Capital Leases in accordance with GAAP but excluding payments of
principal made for such period under the Company's existing credit agreement
referred to in subsection 4.1I(i) hereof and payments of principal made for such
period on Tranche A Term Loans under the Existing Credit Agreement) of Company
or any of its Subsidiaries for such four-Fiscal Quarter period, all of the
foregoing as determined on a consolidated basis for Company and its Subsidiaries
in conformity with GAAP.

                  "CONSOLIDATED INTEREST EXPENSE" means, for any period, total
interest expense (including that portion attributable to Capital Leases in
accordance with GAAP) of Company and its Subsidiaries on a consolidated basis
with respect to all outstanding Indebtedness of Company and its Subsidiaries,
including all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and net costs
under Interest Rate Agreements (and MINUS net amounts received under Interest
Rate Agreements), but EXCLUDING, HOWEVER, any Excluded Non-Cash Accruals.

                  "CONSOLIDATED INTEREST EXPENSE COVERAGE RATIO" means, as of
the last day of any Fiscal Quarter, the ratio of (i) Consolidated EBITDA for the
four-Fiscal Quarter period ending on such date to (ii) Consolidated Interest
Expense for such period.

                  "CONSOLIDATED NET INCOME" means, for any period, the net
earnings (or loss) of Company and its Subsidiaries on a consolidated basis for
such period taken as a single


                                       8


accounting period determined in conformity with GAAP and before any reduction in
respect of preferred stock dividends paid through the issuance of additional
preferred stock (to the extent decreasing Consolidated Net Income); PROVIDED
that there shall be excluded (i) the earnings (or loss) of any Person (other
than a Subsidiary of Company) in which any other Person (other than Company or
any of its Subsidiaries) has a joint interest, except to the extent of the
amount of dividends or other distributions actually paid to Company or any of
its Subsidiaries by such Person during such period, (ii) the earnings (or loss)
of any Person accrued prior to the date it becomes a Subsidiary of Company or is
merged into or consolidated with Company or any of its Subsidiaries or that
Person's assets are acquired by Company or any of its Subsidiaries, (iii) the
earnings of any Subsidiary of Company to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that income
is not at the time permitted by operation of the terms of its charter or any
agreement or instrument applicable to that Subsidiary and (iv) any after-tax
gains or losses attributable to asset sales or returned surplus assets of any
Pension Plan.

                  "CONSOLIDATED PRO FORMA EBITDA" means, for any consecutive
four Fiscal Quarter period, (a) Consolidated EBITDA for such four Fiscal Quarter
period plus (b) for any business acquired during such four Fiscal Quarter
period, (i) Consolidated EBITDA of such acquired business determined as though
such business or operations were acquired as of the first day of such period by
Company and its Subsidiaries, plus (ii) any historical extraordinary
non-recurring costs or expenses or other verifiable costs or expenses that will
not continue after the integration and other expenses and cost reductions
reflected on a basis consistent with Regulation S-X promulgated by the
Securities and Exchange Commission minus (c) Consolidated EBITDA of all business
or operations divested during such four Fiscal Quarter period as though such
business were divested as of the first day of such period by Company and its
Subsidiaries.

                  "CONSOLIDATED PRO FORMA SENIOR LEVERAGE RATIO" means, as at
any date of determination, the ratio of (i) Consolidated Senior Debt as at such
date to (ii) Consolidated Pro Forma EBITDA for the most recently ended
four-Fiscal Quarter period; PROVIDED, HOWEVER, that for purposes of calculating
the Consolidated Pro Forma Senior Leverage Ratio, Consolidated Senior Debt with
respect to Revolving Loans shall be deemed to be the daily average amount of
Revolving Loans outstanding during the most recently ended Fiscal Quarter plus,
without duplication in such averaging, Revolving Loans outstanding on the last
day of such Fiscal Quarter incurred to make Permitted Acquisitions during that
Fiscal Quarter.

                  "CONSOLIDATED PRO FORMA TOTAL LEVERAGE RATIO" means, as at any
date of determination, the ratio of (i) Consolidated Total Funded Debt as at
such date to (ii) Consolidated Pro Forma EBITDA for the most recently ended four
Fiscal-Quarter period; PROVIDED, HOWEVER, that for purposes of calculating the
Consolidated Pro Forma Total Leverage Ratio, Consolidated Total Funded Debt with
respect to Revolving Loans shall be deemed to be the daily average amount of
Revolving Loans outstanding during the most recently ended Fiscal Quarter plus,
without duplication in such averaging, Revolving Loans outstanding on the last
day of such Fiscal Quarter incurred to make Permitted Acquisitions during that
Fiscal Quarter.

                  "CONSOLIDATED SENIOR DEBT" means, as at any date of
determination, the principal amount of all Indebtedness of Company and its
Subsidiaries, determined on a


                                       9


consolidated basis in accordance with GAAP, except (i) the principal amount of
Subordinated Indebtedness and (ii) the amount of Contingent Obligations of
Company and its Subsidiaries described in clause (ii) of the definition of
Contingent Obligations.

                  "CONSOLIDATED TOTAL FUNDED DEBT" means, as at any date of
determination, the sum of (i) the aggregate stated balance sheet amount of all
Indebtedness of Company and its Subsidiaries (including that portion
attributable to Capital Leases in accordance with GAAP) and (ii) the aggregate
amount of Contingent Obligations of Company and its Subsidiaries described in
clause (ii) of the definition of Contingent Obligations contained herein, all as
determined on a consolidated basis in accordance with GAAP.

                  "CONSOLIDATED TOTAL LEVERAGE RATIO" means, as at any date of
determination, the ratio of (i) Consolidated Total Funded Debt as at such date
to (ii) Consolidated EBITDA for the most recently ended four-Fiscal Quarter
period; PROVIDED, HOWEVER, that for purposes of calculating the Consolidated
Total Leverage Ratio, Consolidated Total Funded Debt with respect to Revolving
Loans shall be deemed to be the daily average amount of Revolving Loans
outstanding during the most recently ended Fiscal Quarter.

                  "CONSOLIDATED WORKING CAPITAL" means, as at any date of
determination, the excess (or deficit) of Consolidated Current Assets over
Consolidated Current Liabilities.

                  "CONSOLIDATED WORKING CAPITAL ADJUSTMENT" means, for any
period on a consolidated basis, the amount (which may be a negative number) by
which Consolidated Working Capital as of the beginning of such period exceeds
Consolidated Working Capital as of the end of such period.

                  "CONTINGENT OBLIGATION", as applied to any Person, means any
direct or indirect liability, contingent or otherwise, of that Person (i) with
respect to any Indebtedness, lease or other obligation of another if the primary
purpose or intent thereof by the Person incurring the Contingent Obligation is
to provide assurance to the obligee of such obligation of another that such
obligation of another will be paid or discharged, or that any agreements
relating thereto will be complied with, or that the holders of such obligation
will be protected (in whole or in part) against loss in respect thereof, (ii)
with respect to any letter of credit issued for the account of that Person or as
to which that Person is otherwise liable for reimbursement of drawings, or (iii)
under Hedge Agreements. Contingent Obligations shall include (a) the direct or
indirect guaranty, endorsement (otherwise than for collection or deposit in the
ordinary course of business), co-making, discounting with recourse or sale with
recourse by such Person of the obligation of another, (b) the obligation to make
take-or-pay or similar payments if required regardless of non-performance by any
other party or parties to an agreement, and (c) any liability of such Person for
the obligation of another through any agreement (contingent or otherwise) (1) to
purchase, repurchase or otherwise acquire such obligation or any security
therefor, or to provide funds for the payment or discharge of such obligation
(whether in the form of loans, advances, stock purchases, capital contributions
or otherwise) or (2) to maintain the solvency or any balance sheet item, level
of income or financial condition of another if, in the case of any agreement
described under subclauses (1) or (2) of this sentence, the primary purpose or
intent thereof is as described in the preceding sentence. The amount of any
Contingent Obligation shall be equal to the lower of (x) an amount equal to the
stated or determinable principal amount of the primary obligation in respect of
which such Contingent Obligation is made and (y) the maximum


                                       10


amount for which such Person incurring the Contingent Obligation may be liable
pursuant to the terms of the instrument embodying such Contingent Obligation,
unless such primary obligation and the maximum amount for which the Person
incurring such Contingent Obligation may be liable are not stated or
determinable, in which case the amount of such Contingent Obligation shall be
such Person's maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith.

                  "CONTINUING DIRECTORS" means, as of any date of determination,
any member of the Board of Directors of Company who (i) was a member of such
Board of Directors immediately after consummation of the Merger or (ii) was
nominated for election or elected to such Board of Directors with the approval,
recommendation or endorsement of a majority of the Continuing Directors who were
members of such Board of Directors at the time of such nomination or election.

                  "CONTRACTUAL OBLIGATION", as applied to any Person, means any
provision of any Security issued by that Person or of any material indenture,
mortgage, deed of trust, contract, undertaking, agreement or other instrument to
which that Person is a party or by which it or any of its properties is bound or
to which it or any of its properties is subject other than those entered into
pursuant to the Existing Credit Agreement, this Agreement or the Loan Documents.

                  "CURRENCY AGREEMENT" means any foreign exchange contract,
currency swap agreement, futures contract, option contract, synthetic cap or
other similar agreement or arrangement.

                  "DEPOSIT ACCOUNT" means a demand, time, savings, passbook or
like account with a bank, savings and loan association, credit union or like
organization, other than an account evidenced by a negotiable certificate of
deposit.

                  "DOLLARS" and the sign "$" mean the lawful money of the United
States.

                  "DOMESTIC SUBSIDIARY" means a direct or indirect Subsidiary of
Company that is incorporated or organized under the laws of a state of the
United States of America.

                  "EARN-OUT OBLIGATIONS" means any unsecured contingent
liability of Company or any of its Subsidiaries owed to any seller in connection
with a Permitted Acquisition that (a) constitutes a portion of the purchase
price for such Permitted Acquisition but is not an amount certain on the date of
incurrence thereof and is not subject to any right of acceleration by such
seller and (b) is only payable upon the achievement of performance standards by
the Person or other property acquired in such Permitted Acquisition and in an
amount based upon such achievement provided that the maximum aggregate amount of
such liability shall be fixed at a specified amount or percentage on the date of
such Permitted Acquisition.

                  "ELIGIBLE ASSIGNEE" means (i) (a) a commercial bank organized
under the laws of the United States or any state thereof having a combined
capital and surplus of at least $100,000,000; (b) a savings and loan association
or savings bank organized under the laws of the United States or any state
thereof having a combined capital and surplus of at least $100,000,000; (c) a
commercial bank organized under the laws of any other country or a political
subdivision thereof having a combined capital and surplus of at least
$100,000,000; PROVIDED


                                       11


that (1) such bank is acting through a branch or agency located in the United
States or (2) such bank is organized under the laws of a country that is a
member of the Organization for Economic Cooperation and Development or a
political subdivision of such country; and (d) except with respect to an
assignment of Revolving Loans or Revolving Loan Commitments, any other Person
which is an "accredited investor" (as defined in Regulation D under the
Securities Act) which extends credit or buys loans as one of its businesses,
including insurance companies, mutual funds and lease financing companies; and
(ii) any Lender and any Affiliate of any Lender or, with respect to any Lender
that is a fund that invests in bank loans (except with respect to the assignment
of Revolving Loans or Revolving Loan Commitments), any other fund that invests
in bank loans and is advised or managed by the same investment advisor as such
Lender or by an Affiliate of such Lender; PROVIDED that no Affiliate of Company
shall be an Eligible Assignee.

                  "EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as
defined in Section 3(3) of ERISA which is or was maintained or contributed to by
Company, any of its Subsidiaries or any of their respective ERISA Affiliates.

                  "ENVIRONMENTAL CLAIM" means any investigation, notice, notice
of violation, claim, action, suit, proceeding, demand, abatement order or other
order or directive (conditional or otherwise), by any governmental authority or
any other Person, arising (i) pursuant to or in connection with any actual or
alleged violation of any Environmental Law or (ii) in connection with any
Hazardous Materials or any actual or alleged Hazardous Materials Activity.

                  "ENVIRONMENTAL LAWS" means any and all current statutes,
ordinances, orders, rules, regulations, judgments, Governmental Authorizations,
or any other requirements of governmental authorities relating to (i)
environmental matters, including those relating to any Hazardous Materials
Activity, or (ii) the generation, use, storage, transportation or disposal of
Hazardous Materials, applicable to Company or any of its Subsidiaries or any
Facility, including the Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C.ss. 9601 ET SEQ.), the Hazardous Materials
Transportation Act (49 U.S.C.ss. 1801 ET SEQ.), the Resource Conservation and
Recovery Act (42 U.S.C.ss. 6901 ET SEQ.), the Federal Water Pollution Control
Act (33 U.S.C.ss. 1251 ET SEQ.), the Clean Air Act (42 U.S.C.ss. 7401 ET SEQ.),
the Toxic Substances Control Act (15 U.S.C.ss. 2601 ET SEQ.), the Federal
Insecticide, Fungicide and Rodenticide Act (7 U.S.C.ss.136 ET SEQ.), the Oil
Pollution Act (33 U.S.C.ss. 2701 ET SEQ.) and the Emergency Planning and
Community Right-to-Know Act (42 U.S.C.ss. 11001 ET SEQ.), each as amended or
supplemented, any applicable analogous state or local statutes or laws.

                  "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor thereto.

                  "ERISA AFFILIATE" means, as applied to any Person, (i) any
corporation which is a member of a controlled group of corporations within the
meaning of Section 414(b) of the Internal Revenue Code of which that Person is a
member; (ii) any trade or business (whether or not incorporated) which is a
member of a group of trades or businesses under common control within the
meaning of Section 414(c) of the Internal Revenue Code of which that Person is a
member; and (iii) any member of an affiliated service group within the meaning
of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any
corporation described in clause (i) above or any trade or business described in
clause (ii) above is a member. Any former ERISA Affiliate of Company or any of
its Subsidiaries shall continue to be considered an ERISA


                                       12


Affiliate of Company or such Subsidiary within the meaning of this definition
with respect to the period such entity was an ERISA Affiliate of Company or such
Subsidiary with respect to liabilities arising after such period for which
Company or such Subsidiary could be liable under the Internal Revenue Code or
ERISA.

                  "ERISA EVENT" means (i) a "reportable event" within the
meaning of Section 4043 of ERISA and the regulations issued thereunder with
respect to any Pension Plan (excluding those for which the provision for 30-day
notice to the PBGC has been waived by regulation or administrative procedure);
(ii) the failure to meet the minimum funding standard of Section 412 of the
Internal Revenue Code with respect to any Pension Plan (whether or not waived in
accordance with Section 412(d) of the Internal Revenue Code) or the failure to
make by its due date a required installment under Section 412(m) of the Internal
Revenue Code with respect to any Pension Plan or the failure to make any
required contribution to a Multiemployer Plan; (iii) the provision by the
administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a
notice of intent to terminate such Pension Plan in a distress termination
described in Section 4041(c) of ERISA; (iv) the withdrawal by Company, any of
its Subsidiaries or any of their respective ERISA Affiliates from any Pension
Plan with two or more contributing sponsors, or the termination of any such
Pension Plan, resulting in material liability to Company, any of its
Subsidiaries or any of their respective ERISA Affiliates pursuant to Section
4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to
terminate any Pension Plan, or the occurrence of any event or condition which
would constitute grounds under ERISA for the PBGC's termination of, or the
appointment of a trustee to administer, any Pension Plan; (vi) the imposition of
liability on Company, any of its Subsidiaries or any of their respective ERISA
Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the
application of Section 4212(c) of ERISA; (vii) the withdrawal of Company, any of
its Subsidiaries or any of their respective ERISA Affiliates in a complete or
partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from
any Multiemployer Plan if there is any potential material liability to Company,
any of its Subsidiaries or any of their respective ERISA Affiliates therefor, or
the receipt by Company, any of its Subsidiaries or any of their respective ERISA
Affiliates of notice from any Multiemployer Plan that it is in reorganization or
insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to
terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the
occurrence of an act or omission which could give rise to the imposition on
Company, any of its Subsidiaries or any of their respective ERISA Affiliates of
material fines, penalties, taxes or related charges under Chapter 43 of the
Internal Revenue Code or under Section 409, Section 502(c), (i) or (l), or
Section 4071 of ERISA in respect of any Employee Benefit Plan; or (ix) the
imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal
Revenue Code or pursuant to ERISA with respect to any Pension Plan on the assets
of Company or any of its Subsidiaries.

                  "EURODOLLAR RATE LOANS" means Loans bearing interest at rates
determined by reference to the Adjusted Eurodollar Rate as provided in
subsection 2.2A.

                  "EVENT OF DEFAULT" means each of the events set forth in
Section 8.

                  "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor statute.


                                       13


                  "EXCHANGE ASSETS" has the meaning assigned to that term in
subsection 2.4B(iii)(a).

                  "EXCHANGE RATE" means, on any date when an amount expressed in
a currency other than Dollars is to be determined with respect to any Letter of
Credit, the nominal rate of exchange of the applicable Issuing Lender in the New
York foreign exchange market for the purchase by such Issuing Lender (by cable
transfer) of such currency in exchange for Dollars at 12:00 Noon (New York time)
one Business Day prior to such date, expressed as a number of units of such
currency per one Dollar.

                  "EXCLUDED EXPENDITURES" means, (i) expenditures to the extent
they are made with the proceeds of the issuance of Capital Stock of any Loan
Party or of any capital contribution to any Loan Party after the Closing Date or
with Net Casualty/Condemnation Proceeds, (ii) expenditures used for Permitted
Acquisitions and (iii) expenditures made in connection with Company's investment
in Petcetera and 17187 Yukon to the extent permitted by subsection 7.3(ii).

                  "EXCLUDED NON-CASH ACCRUALS" means (i) accruals for any
non-recurring financing costs related to the Merger, the related financings and
other transactions contemplated by the Loan Documents and the Related Agreements
and any amortization thereof during such period and (ii) any interest expense
not required to be paid currently in cash, except to the extent actually paid in
cash.

                  "EXISTING CREDIT AGREEMENT" has the meaning assigned to that
term in the Recitals.

                  "EXISTING SENIOR SUBORDINATED NOTES" means Company's
$120,000,000 in aggregate principal amount of Senior Subordinated Notes due
2010.

                  "FACILITIES" means any and all real property (including all
buildings, fixtures or other improvements located thereon) now, hereafter or
heretofore owned, leased, operated or used by Company or any of its Subsidiaries
or any of their respective predecessors or Affiliates.

                  "FEDERAL FUNDS EFFECTIVE RATE" means, for any period, a
fluctuating interest rate equal for each day during such period to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for such day
on such transactions received by Administrative Agent from three Federal funds
brokers of recognized standing selected by Administrative Agent.

                  "FINANCIAL PLAN" has the meaning assigned to that term in
subsection 6.1(xiii).

                  "FIRST PRIORITY" means, with respect to any Lien purported to
be created in any Collateral pursuant to any Collateral Document, that (i) such
Lien has priority over any other Lien on such Collateral (other than Permitted
Encumbrances and Liens permitted pursuant to subsections 7.2(iii) and 7.2(iv))
and (ii) such Lien is the only Lien (other than Permitted


                                       14


Encumbrances and Liens permitted pursuant to subsections 6.9 and 7.2) to which
such Collateral is subject.

                  "FISCAL QUARTER" means a fiscal quarter of any Fiscal Year.

                  "FISCAL YEAR" means the fiscal year of Company and its
Subsidiaries ending on the Fiscal Year End.

                  "FISCAL YEAR END" means, for any Fiscal Year, the Saturday
closest to January 31 of the following calendar year.

                  "FLOOD HAZARD PROPERTY" means a Mortgaged Property located in
an area designated by the Federal Emergency Management Agency as having special
flood or mud slide hazards.

                  "FOREIGN SUBSIDIARY" means a direct or indirect Subsidiary of
Company which is incorporated or organized under the laws of any government or
sovereignty other than any state of the United States of America.

                  "FUNDING DATE" means the date of the funding of a Loan (but
not a date on which only continuations or conversions of existing Loans occur).

                  "FUNDING OFFICE" means (i) the office of The Chase Manhattan
Bank located at 4 New York Plaza, New York, New York, or (ii) such other office
in the State of New York as may from time to time hereafter be designated as
such in a written notice delivered by Company to Administrative Agent and Swing
Line Lender.

                  "GAAP" means, subject to the limitations on the application
thereof set forth in subsection 1.2, generally accepted accounting principles
set forth in opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board, in each case as the
same are applicable to the circumstances as of the date of determination.

                  "GSCP" means Goldman Sachs Credit Partners L.P.

                  "GOVERNMENT ACTS" has the meaning assigned to that term in
subsection 3.5A.

                  "GOVERNMENTAL AUTHORIZATION" means any permit, license,
authorization, plan, directive, consent order or consent decree of or from any
federal, state or local governmental authority, agency or court.

                  "HAZARDOUS MATERIALS" means (i) any chemical, material or
substance at any time defined as or included in the definition of "hazardous
substances", "hazardous wastes", "hazardous materials", "extremely hazardous
waste", acutely hazardous waste", "radioactive waste", "biohazardous waste",
"pollutant", "toxic pollutant", "contaminant", "restricted hazardous waste",
"infectious waste", "toxic substances", or any other term or expression intended
to define, list or classify substances by reason of properties harmful to
health, safety or the indoor or outdoor environment (including harmful
properties such as ignitability, corrosivity,


                                       15


reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or
"EP toxicity" or words of similar import under any applicable Environmental
Laws); (ii) any oil, petroleum, petroleum fraction or petroleum derived
substance; (iii) any drilling fluids, produced waters and other wastes
associated with the exploration, development or production of crude oil, natural
gas or geothermal resources; (iv) any radioactive materials; (v) any
asbestos-containing materials; (vi) urea formaldehyde foam insulation; (vii)
electrical equipment which contains any oil or dielectric fluid containing
polychlorinated biphenyls; and (viii) any other chemical, material or substance,
exposure to which is prohibited, limited or regulated by any governmental
authority.

                  "HAZARDOUS MATERIALS ACTIVITY" means any past or current
activity, event or occurrence involving any Hazardous Materials, including the
use, manufacture, possession, storage, Release, threatened Release, discharge,
generation, transportation, processing, treatment, abatement, removal,
remediation, disposal or handling of any Hazardous Materials, and any corrective
action or response action with respect to any of the foregoing.

                  "HEDGE AGREEMENT" means an Interest Rate Agreement or a
Currency Agreement designed to hedge against fluctuations in interest rates or
currency values, respectively.

                  "HOLDINGS" means BD Recapitalization Holdings LLC, a Delaware
limited liability company.

                  "HOLDINGS MEMBERSHIP INTERESTS" means the membership interests
of Holdings.

                  "HOLDINGS PLEDGE AGREEMENT" means the Holdings Pledge
Agreement executed and delivered by Holdings on the Closing Date, substantially
in the form of EXHIBIT XV annexed hereto, as such Holdings Pledge Agreement may
thereafter be amended, supplemented or otherwise modified from time to time.

                  "INCREASED AMOUNT DATE" has the meaning assigned to that term
in subsection 2.1(A)(ii)(A).

                  "INDEBTEDNESS", as applied to any Person, means (i) all
indebtedness for borrowed money, (ii) that portion of obligations with respect
to Capital Leases that is properly classified as a liability on a balance sheet
in conformity with GAAP, (iii) notes payable and drafts accepted representing
extensions of credit whether or not representing obligations for borrowed money,
(iv) any obligation owed for all or any part of the deferred purchase price of
property or services (excluding any such obligations incurred under ERISA),
which purchase price is (a) due more than six months from the date of incurrence
of the obligation in respect thereof or (b) evidenced by a note or similar
written instrument, and (v) all indebtedness secured by any Lien on any property
or asset owned or held by that Person regardless of whether the indebtedness
secured thereby shall have been assumed by that Person or is nonrecourse to the
credit of that Person to the extent such indebtedness is included as a liability
on the balance sheet of such Person in accordance with GAAP. Obligations under
Interest Rate Agreements and Currency Agreements constitute (1) in the case of
Hedge Agreements, Contingent Obligations, and (2) in all other cases,
Investments, and in neither case constitute Indebtedness.


                                       16


                  "INDEMNIFIED LIABILITIES" has the meaning assigned to that
term in subsection 10.3.

                  "INDEMNITEE" has the meaning assigned to that term in
subsection 10.3.

                  "INSURANCE EXCHANGE ASSETS" has the meaning assigned to that
term in subsection 2.4B(iii)(b).

                  "INTELLECTUAL PROPERTY" means all patents, trademarks,
tradenames, copyrights, technology, know-how and processes used in or necessary
for the conduct of the business of Company and its Subsidiaries.

                  "INTEREST PAYMENT DATE" means (i) with respect to any Base
Rate Loan, the last Business Day of each of March, June, September and December
of each year, commencing on the first such date to occur after the first full
calendar quarter following the Closing Date, and (ii) with respect to any
Eurodollar Rate Loan, the last day of each Interest Period applicable to such
Loan; PROVIDED that in the case of each Interest Period of six months, "Interest
Payment Date" shall also include the date that is three months after the
commencement of such Interest Period.

                  "INTEREST PERIOD" has the meaning assigned to that term in
subsection 2.2B.

                  "INTEREST RATE AGREEMENT" means any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement or arrangement.

                  "INTEREST RATE DETERMINATION DATE" means, with respect to any
Interest Period, the second Business Day prior to the first day of such Interest
Period.

                  "INTERNAL REVENUE CODE" means the Internal Revenue Code of
1986, as amended to the date hereof and from time to time hereafter, and any
successor statute.

                  "INVENTORY" means, with respect to any Person as of any date
of determination, all goods, merchandise and other personal property which are
then held by such Person for sale or lease, including raw materials and work in
process used in the production of goods held for sale or lease.

                  "INVESTMENT" means (i) any direct or indirect purchase or
other acquisition by Company or any of its Subsidiaries of, or of a beneficial
interest in, any Securities of any other Person (including any Subsidiary of
Company), (ii) any direct or indirect redemption, retirement, purchase or other
acquisition for value, by any Subsidiary of Company from any Person other than
Company or any of its Subsidiaries, of any equity Securities of such Subsidiary,
(iii) any direct or indirect loan, advance (other than advances to employees for
moving, entertainment and travel expenses, drawing accounts and similar
expenditures in the ordinary course of business) or capital contribution by
Company or any of its Subsidiaries to any other Person, including all
indebtedness and accounts receivable from that other Person that are not current
assets or did not arise from sales to that other Person in the ordinary course
of business, or (iv) Interest Rate Agreements or Currency Agreements not
constituting Hedge Agreements. The amount of any Investment shall be the
original cost of such Investment PLUS the cost of all additions thereto,


                                       17


without any adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment MINUS any return of
capital with respect to such Investment.

                  "ISSUING LENDER" means, with respect to any Letter of Credit,
the Lender which agrees or is otherwise obligated to issue such Letter of
Credit, determined as provided in subsection 3.1B(ii).

                  "JOINT VENTURE" means a joint venture, partnership or other
similar arrangement, whether in corporate, partnership or other legal form;
PROVIDED that in no event shall any corporate Subsidiary of any Person be
considered to be a Joint Venture to which such Person is a party.

                  "LENDER" and "LENDERS" means the persons identified as
"Lenders" and listed on the signature pages of this Agreement, together with
their successors and permitted assigns pursuant to subsection 10.1, and the term
"Lenders" shall include Swing Line Lender unless the context otherwise requires;
PROVIDED that the term "Lenders", when used in the context of a particular
Commitment, shall mean Lenders having that Commitment.

                  "LETTER OF CREDIT" or "LETTERS OF CREDIT" means Commercial
Letters of Credit and Standby Letters of Credit issued or to be issued by
Issuing Lenders for the account of Company pursuant to subsection 3.1.

                  "LETTER OF CREDIT USAGE" means, as at any date of
determination, the sum of (i) the maximum aggregate amount which is or at any
time thereafter may become available for drawing under all Letters of Credit
then outstanding PLUS (ii) the aggregate amount of all drawings under Letters of
Credit honored by Issuing Lenders and not theretofore reimbursed by Company
(including any such reimbursement out of the proceeds of Revolving Loans
pursuant to subsection 3.3B). For purposes of this definition, any amount
described in clause (i) or (ii) of the preceding sentence which is denominated
in a currency other than Dollars shall be valued based on the applicable
Exchange Rate for such currency as of the applicable date of determination.

                  "LGP INVESTORS" means Green Equity Investors III, L.P., a
Delaware limited partnership.

                  "LIEN" means any lien, mortgage, deed of trust, pledge,
assignment, security interest, charge or encumbrance of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest) and any option, trust
or other preferential arrangement having the practical effect of any of the
foregoing.

                  "LOAN" or "LOANS" means one or more of the Tranche B Term
Loans, Revolving Loans or Swing Line Loans or any combination thereof.

                  "LOAN DOCUMENTS" means this Agreement, the Notes, the Letters
of Credit (and any applications for, or reimbursement agreements or other
documents or certificates executed by Company in favor of an Issuing Lender
relating to, the Letters of Credit), the Subsidiary Guaranty and the Collateral
Documents, each as may be amended from time to time.


                                       18


                  "LOAN PARTY" means each of Company and any of its Subsidiaries
from time to time executing a Loan Document, and "LOAN PARTIES" means all such
Persons, collectively.

                  "MANAGEMENT AGREEMENT" means the Management Services
Agreement, dated as of October 2, 2000 by and among Company and Leonard Green &
Partners, L.P., a Delaware limited partnership and TPG GenPar III, L.P.

                  "MARGIN DETERMINATION CERTIFICATE" means a Margin
Determination Certificate of Company delivered pursuant to 6.1(xvii) setting
forth in reasonable detail the calculation of the Consolidated Total Leverage
Ratio for the four-Fiscal Quarter period ending as of the last day of the Fiscal
Quarter immediately preceding the Fiscal Quarter in which such certificate is
delivered.

                  "MARGIN STOCK" has the meaning assigned to that term in
Regulation U of the Board of Governors of the Federal Reserve System as in
effect from time to time.

                  "MASTER CONFIRMATION" means the Master Confirmation to be
delivered by Company and the other Loan Parties on the Restatement Effective
Date, substantially in the form of EXHIBIT XVI annexed hereto as it may be
amended, supplemented or otherwise modified from time to time.

                  "MATERIAL ADVERSE EFFECT" shall mean, with respect to Company,
any event, circumstance, change, condition, development or occurrence either
individually or in the aggregate with all other events, circumstances, changes,
conditions, developments or occurrences, resulting in or reasonably likely to
result in a material adverse effect on (i) the business, results of operations,
financial condition, or prospects of Company and its Subsidiaries, taken as a
whole or (ii) the ability of the Loan Parties to perform, or the ability of
Administrative Agent or Lenders to enforce, the Obligations.

                  "MATERIAL CONTRACT" means any contract or other arrangement to
which Company or any of its Subsidiaries is a party (other than the Loan
Documents) for which breach, nonperformance, cancellation or failure to renew
could reasonably be expected to have a Material Adverse Effect.

                  "MATERIAL SUBSIDIARY" means each Subsidiary of Company now
existing or hereafter acquired or formed by Company which, on a consolidated
basis for such Subsidiary and its Subsidiaries, (i) for the most recent Fiscal
Year accounted for more than 5% of the consolidated revenues of Company and its
Subsidiaries or (ii) as at the end of such Fiscal Year, was the owner of more
than 5% of the consolidated assets of Company and its Subsidiaries.

                  "MAXIMUM AMOUNT" has the meaning assigned to that term in
subsection 10.20A.

                  "MAXIMUM EXPENDITURE AMOUNT" has the meaning assigned to that
term in subsection 7.8.

                  "MAXIMUM FOREIGN INVESTMENT AMOUNT" has the meaning assigned
to that term in subsection 7.3(ii).


                                       19


                  "MAXIMUM MANAGEMENT FEES" has the meaning assigned to that
term in subsection 7.11.

                  "MERGER" means the merger of MergerSub with and into the
Company pursuant to the Merger Agreement, with Company as the surviving
corporation.

                  "MERGER AGREEMENT" means the Agreement and Plan of Merger
dated as of May 17, 2000 by and among Company and MergerSub, as such agreement
may be amended from time to time to the extent permitted under this Agreement.

                  "MERGER CONSIDERATION" means the payment of $22.00 for each
share of Company Stock acquired in the Merger for an aggregate payment of
approximately $488.1 million (net of proceeds from exercise of options).

                  "MERGERSUB" means BD Recapitalization Corp., a Delaware
corporation and wholly owned subsidiary of Holdings.

                  "MORTGAGE" means a security instrument (whether designated as
a deed of trust or a mortgage or by any similar title) executed and delivered by
any Loan Party, in such form as may be approved by Administrative Agent in its
reasonable discretion, in each case with such changes thereto as may be
appropriate based on local laws or customary local mortgage or deed of trust
practices.

                  "MORTGAGED PROPERTY" has the meaning assigned to that term in
subsection 6.9.

                  "MULTIEMPLOYER PLAN" means any Employee Benefit Plan which is
a "multiemployer plan" as defined in Section 3(37) of ERISA.

                  "NET ASSET SALE PROCEEDS" means, with respect to any Asset
Sale, Cash payments (including any Cash received by way of deferred payment
pursuant to, or by monetization of, a note receivable or otherwise, but only as
and when so received) received from such Asset Sale, net of any bona fide direct
costs incurred in connection with such Asset Sale, including (i) income taxes
reasonably estimated to be actually payable within two years of the date of such
Asset Sale as a result of any gain recognized in connection with such Asset
Sale, (ii) payment of the outstanding principal amount of, premium or penalty,
if any, and interest on any Indebtedness (other than the Loans) that is secured
by a Lien on the stock or assets in question and that is required to be repaid
under the terms thereof as a result of such Asset Sale, and (iii) reasonable
amounts to be provided as a reserve, in accordance with GAAP, against any
liabilities associated with such Asset Sale.

                  "NET DEBT SECURITIES PROCEEDS" has the meaning assigned to
that term in subsection 2.4B(iii)(c).

                  "NET EQUITY SECURITIES PROCEEDS" has the meaning assigned to
that term in subsection 2.4B(iii)(d).

                  "NET INSURANCE/CONDEMNATION PROCEEDS" means any Cash payments
or proceeds received by Company or any of its Subsidiaries and not payable to
any third party


                                       20


(other than Administrative Agent as loss payee) pursuant to any Contractual
Obligation (i) under any business interruption or Casualty Insurance policy in
respect of a covered loss thereunder or (ii) as a result of the taking of any
assets of Company or any of its Subsidiaries by any Person pursuant to the power
of eminent domain, condemnation or otherwise, or pursuant to a sale of any such
assets to a purchaser with such power under threat of such a taking, in each
case net of any actual and reasonable documented costs incurred by Company or
any of its Subsidiaries in connection with the adjustment or settlement of any
claims of Company or such Subsidiary in respect thereof.

                  "NET PROCEEDS AMOUNT" has the meaning assigned to that term in
subsection 2.4B(iii)(f).

                  "NEW SENIOR SUBORDINATED NOTE INDENTURE" means that certain
Indenture dated as of October 23, 2001 among Company, the guarantors party
thereto and Goldman Sachs & Co., as Initial Purchaser, pursuant to which the
Senior Subordinated Notes are issued, as such Senior Subordinated Note Indenture
may be amended from time to time to the extent permitted under subsection 7.13B.

                  "NEW SENIOR SUBORDINATED NOTES" means the $200,000,000 in
aggregate principal amount of 10.75% Senior Subordinated Notes Due 2011 of
Company issued pursuant to the Senior Subordinated Note Indenture and any
exchange notes issued in replacement therefor.

                  "NEW TRANCHE B TERM LOAN COMMITMENTS" has the meaning assigned
to that term in subsection 2.1(A)(ii).

                  "NEW TRANCHE B TERM LOAN LENDER" has the meaning assigned to
that term in subsection 2.1(A)(ii)(B).

                  "NEW TRANCHE B TERM LOANS" has the meaning assigned to that
term in subsection 2.1(A)(ii)(A).

                  "NON-US LENDER" has the meaning assigned to that term in
subsection 2.7B(iii).

                  "NOTES" means one or more of the Tranche B Term Notes,
Revolving Notes or Swing Line Note or any combination thereof.

                  "NOTICE OF BORROWING" means a notice substantially in the form
of EXHIBIT I annexed hereto delivered by Company to Administrative Agent
pursuant to subsection 2.1B.

                  "NOTICE OF CONVERSION/CONTINUATION" means a notice
substantially in the form of EXHIBIT II annexed hereto delivered by Company to
Administrative Agent pursuant to subsection 2.2D.

                  "NOTICE OF ISSUANCE OF LETTER OF CREDIT" means a notice
substantially in the form of EXHIBIT III annexed hereto delivered by Company to
Administrative Agent pursuant to subsection 3.1B(i).


                                       21


                  "OBLIGATIONS" means all obligations of every nature of each
Loan Party from time to time owed to Administrative Agent, Lenders or any of
them under the Loan Documents, whether for principal, interest, reimbursement of
amounts drawn under Letters of Credit, fees, expenses, indemnification or
otherwise.

                  "OFFICER'S CERTIFICATE" means, as applied to any corporation,
a certificate executed on behalf of such corporation by one of its chief
executive officer, chief financial officer, president, treasurer, secretary,
controller or its vice president-finance; PROVIDED that every Officer's
Certificate with respect to the compliance with a condition precedent to the
making of any Loans hereunder shall include (i) a statement that the officer
making or giving such Officer's Certificate has read such condition and any
definitions or other provisions contained in this Agreement relating thereto,
(ii) a statement that, in the opinion of the signer, such signer has made or has
caused to be made such examination or investigation as is necessary to enable
such signer to express an informed opinion as to whether or not such condition
has been complied with, and (iii) a statement as to whether, in the opinion of
the signer, such condition has been complied with.

                  "OPERATING LEASE" means, as applied to any Person, any lease
under which such Person is lessee or sublessee (including leases that may be
terminated by the lessee at any time) of any property (whether real, personal or
mixed) that is not a Capital Lease.

                  "ORGANIZATIONAL DOCUMENTS" means (i) with respect to any
corporation, its certificate or articles of incorporation and its bylaws, (ii)
with respect to any limited partnership, its certificate of limited partnership
and its partnership agreement, (iii) with respect to any general partnership,
its partnership agreement, (iv) with respect to any limited liability company,
its articles or certificate of organization and its operating agreement and (v)
with respect to any other entity, its equivalent organizational, governing
documents.

                  "PAYMENT OFFICE" means (i) the office of Citibank, N.A.
located in New York, New York, for the account of Wells Fargo Bank, N.A., as
Administrative Agent or (ii) such other office in the State of New York of
Administrative Agent and Swing Line Lender as may from time to time hereafter be
designated as such in a written notice delivered by Administrative Agent and
Swing Line Lender to Company and each Lender.

                  "PBGC" means the Pension Benefit Guaranty Corporation or any
successor thereto.

                  "PENSION PLAN" means any Employee Benefit Plan, other than a
Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code
or Section 302 of ERISA.

                  "PERMITTED ACQUISITION" means the acquisition of a business
(whether through the purchase of assets or of shares of Capital Stock) by
Company or any of its wholly-owned Subsidiaries which is in a line of business
similar or related to the lines of business of Company and its Subsidiaries;
PROVIDED that (i) (a) the aggregate total consideration (including cash purchase
price, deferred or financed purchase price and the assumption of Indebtedness,
including Assumed Indebtedness, and other liabilities) for Permitted
Acquisitions funded with the proceeds of equity contributions from the Sponsors
shall not exceed $15,000,000 for each Fiscal Year, and (b) the aggregate total
consideration (including cash purchase price, deferred or


                                       22


financed purchase price and the assumption of Indebtedness, including Assumed
Indebtedness, and other liabilities) for Permitted Acquisitions made after the
date of this Agreement shall not exceed $13,000,000 for each Fiscal Year
(excluding Permitted Acquisitions covered by clause (a) above and excluding the
acquisition of Petcetera to the extent Company's Investment therein is permitted
by subsection 7.3(ii)) plus up to an additional amount (the "EXCESS ACQUISITION
AMOUNT") not exceeding $10,000,000 for such Fiscal Year; PROVIDED that the
Excess Acquisition Amount shall reduce the Maximum Expenditure Amount for such
Fiscal Year by an equal amount; (ii) reasonably promptly following the
consummation of such Permitted Acquisition, Company shall have complied with the
provisions of subsections 6.8 and 6.9 with respect thereto to the extent
applicable, (iii) immediately prior to, and after giving effect thereto, no
Event of Default shall have occurred and be continuing or would result
therefrom, (iv) all transactions in connection therewith shall be consummated,
in all material respects, in accordance with all applicable laws and in
conformity with all applicable Governmental Authorizations, (v) in the case of
the acquisition of capital stock, at least 85% of the Capital Stock (except for
any such Securities in the nature of director's qualifying shares required
pursuant to applicable law) acquired or otherwise issued by such Person or any
newly formed Subsidiary of Company in connection with such acquisition shall be
owned by Company or a Subsidiary Guarantor thereof, and (vi) any Person or
assets so acquired shall be located exclusively in the United States or Canada.

                  "PERMITTED ENCUMBRANCES" means the following types of Liens
(excluding any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the
Internal Revenue Code or by ERISA, any such Lien relating to or imposed in
connection with any Environmental Claim):

                  (i)      Liens for taxes, assessments or governmental charges
         or claims the payment of which is not, at the time, required by
         subsection 6.3;

                  (ii)     statutory or contractual Liens of landlords,
         statutory Liens of banks and rights of set-off, statutory Liens of
         carriers, warehousemen, mechanics, repairmen, workmen and materialmen,
         and other Liens imposed by law, in each case incurred in the ordinary
         course of business (a) for amounts not yet overdue or (b) for amounts
         that are overdue and that (in the case of any such amounts overdue for
         a period in excess of 5 days) are being contested in good faith by
         appropriate proceedings, so long as (1) such reserves or other
         appropriate provisions, if any, as shall be required by GAAP shall have
         been made for any such contested amounts, and (2) in the case of a Lien
         with respect to any material portion of the Collateral, such contest
         proceedings conclusively operate to stay the sale of any portion of the
         Collateral on account of such Lien;

                  (iii)    Liens incurred or deposits made in the ordinary
         course of business in connection with workers' compensation,
         unemployment insurance and other types of social security, or to secure
         the performance of tenders, statutory obligations, surety and appeal
         bonds, bids, leases, government contracts, trade contracts, performance
         and return-of-money bonds and other similar obligations (exclusive of
         obligations for the payment of borrowed money), so long as no
         foreclosure, sale or similar proceedings have been commenced with
         respect to any material portion of the Collateral on account thereof;


                                       23


                  (iv)     any attachment or judgment Lien not constituting an
         Event of Default under subsection 8.8;

                  (v)      leases or subleases granted to third parties in
         accordance with any applicable terms of the Collateral Documents and
         not interfering in any material respect with the ordinary conduct of
         the business of Company or any of its Subsidiaries or resulting in a
         material diminution in the value of any Collateral as security for the
         Obligations;

                  (vi)     easements, rights-of-way, restrictions,
         encroachments, and other minor defects or irregularities in title, in
         each case which do not and will not interfere in any material respect
         with the ordinary conduct of the business of Company or any of its
         Subsidiaries or result in a material diminution in the value of any
         Collateral;

                  (vii)    any (a) interest or title of a lessor or sublessor
         under any lease not prohibited by this Agreement, (b) Lien or
         restriction that the interest or title of such lessor or sublessor may
         be subject to, or (c) subordination of the interest of the lessee or
         sublessee under such lease to any Lien or restriction referred to in
         the preceding clause (b);

                  (viii)   Liens arising from filing UCC financing statements
         relating solely to leases permitted by this Agreement;

                  (ix)     Liens in favor of customs and revenue authorities
         arising as a matter of law to secure payment of customs duties in
         connection with the importation of goods;

                  (x)      any zoning, land use or similar law or right reserved
         to or vested in any governmental office or agency to control or
         regulate the use of any real property;

                  (xi)     Liens securing obligations (other than obligations
         representing Indebtedness for borrowed money) under operating,
         reciprocal easement or similar agreements entered into in the ordinary
         course of business of Company and its Subsidiaries;

                  (xii)    licenses of patents, trademarks and other
         intellectual property rights granted by Company or any of its
         Subsidiaries in the ordinary course of business and not interfering in
         any material respect with the ordinary conduct of the business of
         Company or such Subsidiary;

                  (xiii)   Liens securing Assumed Indebtedness:

                  (xiv)    Liens in favor of a banking institution arising as a
         matter of law encumbering deposits (including the right of set-off)
         held by such banking institutions incurred in the ordinary course of
         business and which are within the general parameters customary in the
         banking industry; and


                                       24


                  (xv)     Liens arising out of conditional sale, title
         retention, consignment or similar arrangements for sale of goods
         entered into by the Company or any of its Subsidiaries in the ordinary
         course of business.

                  "PERSON" means and includes natural persons, corporations,
limited partnerships, general partnerships, limited liability companies, limited
liability partnerships, joint stock companies, Joint Ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts or other
organizations, whether or not legal entities, and governments (whether federal,
state or local, domestic or foreign, and including political subdivisions
thereof) and agencies or other administrative or regulatory bodies thereof.

                  "PETCETERA" means Canadian Petcetera Limited Partnership, a
Canadian limited partnership and its successors.

                  "PETOPIA" means Petopia.com or any successor E-commerce
business.

                  "PLEDGE AND SECURITY AGREEMENT" means the Pledge and Security
Agreement executed and delivered by Company on the Closing Date granting a
security interest in substantially all Company's tangible and intangible assets
and pledging 100% of the shares in its Domestic Subsidiaries and 66% of the
shares of its first-tier Foreign Subsidiaries (limited to 60% in the case of
Canadian Subsidiaries) or any Pledge and Security Agreement to be executed and
delivered by any Subsidiary Guarantor from time to time thereafter in accordance
with subsection 6.8, in each case substantially in the form of EXHIBIT XIV
annexed hereto, as such Pledge and Security Agreement may be amended,
supplemented or otherwise modified from time to time.

                  "PLEDGED COLLATERAL" means, collectively, the "Pledged
Collateral" as defined in the Pledge and Security Agreement.

                  "POTENTIAL EVENT OF DEFAULT" means a condition or event that,
after notice or lapse of time or both, would constitute an Event of Default.

                  "PRIME RATE" means the rate most recently announced by Wells
Fargo at its principal office in San Francisco from time to time as its "Prime
Rate." The Prime Rate is one of Wells Fargo's base rates and serves as the basis
upon which effective rates of interest are calculated for those loans making
reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Wells Fargo may
designate. Wells Fargo or any other Lender may make commercial loans or other
loans at rates of interest at, above or below the Prime Rate. Any change in the
interest rate resulting from a change in such Prime Rate shall become effective
as of 12:01 A.M. (San Francisco time) of the Business Day on which each change
in Prime Rate is announced by Wells Fargo.

                  "PRO RATA SHARE" means (i) with respect to all payments,
computations and other matters relating to the Term Loan Commitment or the Term
Loan of any Lender, the percentage obtained by dividing (a) the Term Loan
Exposure of that Lender by (b) the aggregate Term Loan Exposure of all Lenders,
(ii) with respect to all payments, computations and other matters relating to
the Revolving Loan Commitment or the Revolving Loans of any Lender or any
Letters of Credit issued or participations therein purchased by any Lender or
any participations in


                                       25


any Swing Line Loans purchased by any Lender, the percentage obtained by
dividing (a) the Revolving Loan Exposure of that Lender by (b) the aggregate
Revolving Loan Exposure of all Lenders, and (iii) for all other purposes with
respect to each Lender, the percentage obtained by dividing (a) the sum of the
Term Loan Exposure of that Lender plus the Revolving Loan Exposure of that
Lender by (b) the sum of the aggregate Term Loan Exposure of all Lenders plus
the aggregate Revolving Loan Exposure of all Lenders, in any such case as the
applicable percentage may be adjusted by assignments permitted pursuant to
subsection 10.1. The initial Pro Rata Share of each Lender for purposes of each
of clauses (i), (ii) and (iii) of the preceding sentence is set forth opposite
the name of that Lender in Schedule 2.1 annexed hereto.

                  "PROCEEDINGS" has the meaning assigned to that term in
subsection 6.1(x).

                  "REFINANCINGS" means, with respect to any Indebtedness, any
Indebtedness of Company or any of its Subsidiaries issued in exchange for, or
the net proceeds of which are used to refinance, other Indebtedness of any such
Persons; PROVIDED, HOWEVER, that the principal amount of such Refinancings does
not exceed the principal amount, plus accrued interest (if any), of the
Indebtedness so refinanced (plus the amount of reasonable fees and expenses
incurred in connection therewith).

                  "REFUNDED SWING LINE LOANS" has the meaning assigned to that
term in subsection 2.1A(iv).

                  "REGISTER" has the meaning assigned to that term in subsection
2.1D.

                  "REGULATION D" means Regulation D of the Board of Governors of
the Federal Reserve System, as in effect from time to time.

                  "REIMBURSEMENT DATE" has the meaning assigned to that term in
subsection 3.3B.

                  "RELATED AGREEMENTS" means, collectively the Merger Agreement,
the New Senior Subordinated Note Indenture and the New Senior Subordinated
Notes.

                  "RELATED PARTY" with respect to any Sponsor means (i) any
controlling stockholder of such Sponsor, any Subsidiary of such Sponsor or any
general partner of such Sponsor, and (ii) any Affiliate of such Sponsor and any
investment fund or investment partnership managed by any Person that is, or is
an Affiliate of, such Sponsor.

                  "RELEASE" means any release, spill, emission, leaking,
pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal,
dumping, leaching or migration of Hazardous Materials into the indoor or outdoor
environment (including the abandonment or disposal of any barrels, containers or
other closed receptacles containing any Hazardous Materials), including the
movement of any Hazardous Materials through the air, soil, surface water or
groundwater.

                  "REQUISITE CLASS LENDERS" means, at any time of determination,
(i) for the Class of Lenders having Tranche B Term Loan Exposure, Lenders having
or holding more than 50% of the sum of aggregate Tranche B Term Loan Exposure of
all Lenders and (ii) for the Class of


                                       26


Lenders having Revolving Loan Exposure, Lenders having or holding more than 50%
of the sum of the aggregate Revolving Loan Exposure of all Lenders.

                  "REQUISITE LENDERS" means Lenders having or holding more than
50% of the sum of the aggregate Tranche B Term Loan Exposure of all Lenders and
Revolving Loan Exposure of all Lenders.

                  "RESTATEMENT EFFECTIVE DATE" means the date on or before
October 26, 2001 on which the conditions to effectiveness set forth in
subsection 4.2 are satisfied.

                  "RESTRICTED JUNIOR PAYMENT" means (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class of stock
of Company now or hereafter outstanding, except a dividend payable solely in
shares of stock to the holders of that class, (ii) any redemption, retirement,
sinking fund or similar payment, purchase or other acquisition for value, direct
or indirect, of any shares of any class of stock of Company now or hereafter
outstanding, except any such payment payable solely in shares of stock, (iii)
any payment made to retire, or to obtain the surrender of, any outstanding
warrants, options or other rights to acquire shares of any class of stock of
Company now or hereafter outstanding, and (iv) any payment or prepayment of
principal of, premium, if any, or interest on, or redemption, purchase,
retirement, defeasance (including in-substance or legal defeasance), sinking
fund or similar payment with respect to, any Subordinated Indebtedness, except
any such payment payable solely in shares of stock or pay-in-kind securities.
For the avoidance of doubt, payments under the Management Agreement shall not
constitute Restricted Junior Payments.

                  "RETIREMENT OF DEBT" means the repayment on the Closing Date
of all existing Indebtedness of Company and its Subsidiaries other than
approximately $20,000,000 of Capital Leases and other obligations.

                  "REVOLVING LOAN COMMITMENT" means the commitment of a Lender
to make Revolving Loans to Company pursuant to subsection 2.1A(iii), and
"REVOLVING LOAN COMMITMENTS" means such commitments of all Lenders in the
aggregate.

                  "REVOLVING LOAN COMMITMENT TERMINATION DATE" means October 2,
2006.

                  "REVOLVING LOAN EXPOSURE" means, with respect to any Lender as
of any date of determination (i) prior to the termination of the Revolving Loan
Commitments, that Lender's Revolving Loan Commitment and (ii) after the
termination of the Revolving Loan Commitments, the sum of (a) the aggregate
outstanding principal amount of the Revolving Loans of that Lender PLUS (b) in
the event that Lender is an Issuing Lender, the aggregate Letter of Credit Usage
in respect of all Letters of Credit issued by that Lender (in each case net of
any participations purchased by other Lenders in such Letters of Credit or any
unreimbursed drawings thereunder) PLUS (c) the aggregate amount of all
participations purchased by that Lender in any outstanding Letters of Credit or
any unreimbursed drawings under any Letters of Credit PLUS (d) in the case of
Swing Line Lender, the aggregate outstanding principal amount of all Swing Line
Loans (net of any participations therein purchased by other Lenders) PLUS (e)
the aggregate amount of all participations purchased by that Lender in any
outstanding Swing Line Loans.


                                       27


                  "REVOLVING LOANS" means the Loans made by Lenders to Company
pursuant to subsection 2.1A(iii).

                  "REVOLVING NOTES" means any promissory notes of Company issued
pursuant to subsection 2.1E to evidence the Revolving Loans of any Lenders,
substantially in the form of EXHIBIT V annexed hereto, as they may be amended,
supplemented or otherwise modified from time to time.

                  "SECURITIES" means any stock, shares, partnership interests,
voting trust certificates, certificates of interest or participation in any
profit-sharing agreement or arrangement, options, warrants, bonds, debentures,
notes, or other evidences of indebtedness, secured or unsecured, convertible,
subordinated or otherwise, or in general any instruments commonly known as
"securities" or any certificates of interest, shares or participations in
temporary or interim certificates for the purchase or acquisition of, or any
right to subscribe to, purchase or acquire, any of the foregoing.

                  "SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time, and any successor statute.

                  "SOLVENT" means, with respect to any Person, that as of the
date of determination both (i) (a) the then fair saleable value of the property
of such Person is (1) greater than the total amount of liabilities of such
Person (including its expected obligations in respect of contingent liabilities)
and (2) not less than the amount that will be required to pay the probable
liabilities on such Person's then existing debts as they become absolute and
matured considering all financing alternatives, potential asset sales and rights
against co-obligors available to such Person; (b) such Person's capital is not
unreasonably small in relation to its business or any contemplated or undertaken
transaction; and (c) such Person does not intend to incur, or believe that it
will incur, debts beyond its ability to pay such debts as they become due; and
(ii) such Person is "solvent" within the meaning given that term and similar
terms under applicable laws relating to fraudulent transfers and conveyances.
For purposes of this definition, the amount of any contingent liability at any
time shall be computed as the amount that, in light of all of the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.

                  "SPONSOR" means either the LGP Investors or Affiliates of TPG
Partners III, L.P., and "SPONSORS" means both such groups, collectively.

                  "STANDBY LETTER OF CREDIT" means any standby letter of credit
or similar instrument; PROVIDED that Standby Letters of Credit may be issued for
any purpose other than to support trade payables.

                  "SUBORDINATED INDEBTEDNESS" means the Indebtedness evidenced
by the New Senior Subordinated Notes and any other Indebtedness of Company or
its Subsidiaries subordinated in right of payment to the Obligations pursuant to
documentation containing maturities, amortization schedules, covenants,
defaults, remedies, subordination provisions and other material terms in form
and substance reasonably satisfactory to Administrative Agent.


                                       28


                  "SUBSIDIARY" means, with respect to any Person, any
corporation, partnership, limited liability company, association or other
business entity of which more than 50% of the total voting power of shares of
stock or other ownership interests entitled (without regard to the occurrence of
any contingency) to vote in the election of the Person or Persons (whether
directors, managers, trustees or other Persons performing similar functions)
having the power to direct or cause the direction of the management and policies
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof.

                  "SUBSIDIARY GUARANTOR" means any Domestic Subsidiary of
Company that executes and delivers a counterpart of the Subsidiary Guaranty on
the Closing Date or from time to time after the Closing Date pursuant to
subsection 6.8.

                  "SUBSIDIARY GUARANTY" means the Subsidiary Guaranty to be
executed and delivered by Domestic Subsidiaries of Company on the Closing Date
or from time to time after the Closing Date in accordance with subsection 6.8,
substantially in the form of EXHIBIT XIII annexed hereto, as such Subsidiary
Guaranty may hereafter be amended, supplemented or otherwise modified from time
to time.

                  "SUPPLEMENTAL COLLATERAL AGENT" has the meaning assigned to
that term in subsection 9.1B.

                  "SWING LINE LENDER" means Wells Fargo, or any Person serving
as a successor Administrative Agent hereunder, in its capacity as Swing Line
Lender hereunder.

                  "SWING LINE LOAN COMMITMENT" means the commitment of Swing
Line Lender to make Swing Line Loans to Company pursuant to subsection 2.1A(iv).

                  "SWING LINE LOANS" means the Loans made by Swing Line Lender
to Company pursuant to subsection 2.1A(iv).

                  "SWING LINE NOTE" means any promissory note of Company issued
pursuant to subsection 2.1E to evidence the Swing Line Loans of Swing Line
Lenders, substantially in the form of EXHIBIT VI annexed hereto, as it may be
amended, supplemented or otherwise modified from time to time.

                  "SYNDICATION AGENT" has the meaning assigned to that term in
the introduction to this Agreement.

                  "TAX" or "TAXES" means any present or future tax, levy,
impost, duty, charge, fee, deduction or withholdings of any nature imposed,
levied, collected, withheld or assessed in respect of any payment hereunder or
under the Notes by any Governmental Authority; PROVIDED that "TAX ON THE OVERALL
NET INCOME" of a Person shall be construed as a reference to a tax imposed by
the jurisdiction in which that Person is organized or in which that Person's
principal office (and/or, in the case of a Lender, its lending office) is
located or in which that Person (and/or, in the case of a Lender, its lending
office) is deemed to be doing business on all or part of the net income, profits
or gains (whether worldwide, or only insofar as such income, profits or


                                       29


gains are considered to arise in or to relate to a particular jurisdiction, or
otherwise) of that Person (and/or, in the case of a Lender, its lending office).

                  "TCW PARTIES" means those investment companies managed by TCW
or its Affiliates.

                   "TERM LOAN EXPOSURE" means the Tranche B Term Loan Exposure.

                  "TERM LOANS" means the Tranche B Term Loans.

                  "TITLE COMPANY" means one or more title insurance companies
reasonably satisfactory to Administrative Agent.

                  "TPG INVESTORS" means TPG Partners III, L.P., TPG Parallel
III, L.P., TPG Dutch Parallel, C.V., TPG Investors III, L.P., FOF Partners III,
L.P., FOF Partners III-B, L.P.

                  "TOTAL UTILIZATION OF REVOLVING LOAN COMMITMENTS" means, as at
any date of determination, the sum of (i) the aggregate principal amount of all
outstanding Revolving Loans (other than Revolving Loans made for the purpose of
repaying any Refunded Swing Line Loans or reimbursing the applicable Issuing
Lender for any amount drawn under any Letter of Credit but not yet so applied)
PLUS (ii) the aggregate principal amount of all outstanding Swing Line Loans
PLUS (iii) the Letter of Credit Usage.

                  "TRANCHE A TERM LOANS" means the Loans made by Lenders to
Company pursuant to subsection 2.1A(i) of the Existing Credit Agreement.

                  "TRANCHE A TERM NOTES" means any promissory notes of Company
issued pursuant to subsection 2.1E of the Existing Credit Agreement to evidence
the Tranche A Term Loans of any Lenders.

                  "TRANCHE B TERM LOAN EXPOSURE" means the outstanding principal
amount of the Tranche B Term Loan of that Lender.

                  "TRANCHE B TERM LOANS" means the Loans made by Lenders to
Company pursuant to subsection 2.1A(ii) of the Existing Credit Agreement and
continued hereunder and any New Tranche B Term Loans.

                  "TRANCHE B TERM NOTES" means any promissory notes of Company
issued pursuant to subsection 2.1E to evidence the Tranche B Term Loans of any
Lenders, substantially in the form of EXHIBIT IV annexed hereto, as they may be
amended, supplemented or otherwise modified from time to time.

                  "TRANSACTION COSTS" means the fees, costs and expenses payable
or reimbursable by Company or any of its Subsidiaries in connection with the
transactions contemplated by the Loan Documents and the Related Agreements and
the refinancing of the Existing Senior Subordinated Notes.


                                       30


                  "UCC" means the Uniform Commercial Code (or any similar or
equivalent legislation) as in effect in any applicable jurisdiction.

                  "WAIVABLE MANDATORY PREPAYMENT" has the meaning assigned to
that term in subsection 2.4B(iv)(c).

                  "WAIVABLE VOLUNTARY PREPAYMENT" has the meaning assigned to
that term in subsection 2.4B(iv)(a).

                  "WELLS FARGO" has the meaning assigned to that term in the
introduction to this Agreement.

                  "YUKON" means 17187 Yukon Inc., a Yukon (Canada) corporation.

1.2      ACCOUNTING TERMS; UTILIZATION OF GAAP FOR PURPOSES OF CALCULATIONS
         UNDER AGREEMENT.

                  Except as otherwise expressly provided in this Agreement, all
accounting terms not otherwise defined herein shall have the meanings assigned
to them in conformity with GAAP. Financial statements and other information
required to be delivered by Company to Lenders pursuant to clauses (i), (ii),
(iii) and (xiii) of subsection 6.1 shall be prepared in accordance with GAAP as
in effect at the time of such preparation (and delivered together with the
reconciliation statements provided for in subsection 6.1(v)). Calculations in
connection with the definitions, covenants and other provisions of this
Agreement shall utilize accounting principles and policies in conformity with
those used to prepare the financial statements referred to in subsection 5.3.

1.3      OTHER DEFINITIONAL PROVISIONS AND RULES OF CONSTRUCTION.

         A.       Any of the terms defined herein may, unless the context
otherwise requires, be used in the singular or the plural, depending on the
reference.

         B.       References to "Sections" and "subsections" shall be to
Sections and subsections, respectively, of this Agreement unless otherwise
specifically provided.

         C.       The use in any of the Loan Documents of the word "include" or
"including", when following any general statement, term or matter, shall not be
construed to limit such statement, term or matter to the specific items or
matters set forth immediately following such word or to similar items or
matters, whether or not nonlimiting language (such as "without limitation" or
"but not limited to" or words of similar import) is used with reference thereto,
but rather shall be deemed to refer to all other items or matters that fall
within the broadest possible scope of such general statement, term or matter.

SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS

2.1      COMMITMENTS; MAKING OF LOANS; THE REGISTER; OPTIONAL NOTES.

         A.       COMMITMENTS. Subject to the terms and conditions of this
Agreement and in reliance upon the representations and warranties of Company
herein set forth, each Lender


                                       31


hereby severally agrees to make or maintain the Loans described in subsections
2.1A(ii) and 2.1A(iii) and Swing Line Lender hereby agrees to make the Loans
described in subsection 2.1A(iv).

                  (i)      TRANCHE A TERM LOANS. Each Lender, which had a
         "Tranche A Term Loan Commitment" under the Existing Credit Agreement,
         loaned its ratable share of $70,000,000 on the Closing Date. All
         Tranche A Term Loans made under the Existing Credit Agreement shall be
         repaid in full on the Restatement Effective Date.

                  (ii)     TRANCHE B TERM LOANS. Each Lender, which had a
         Tranche B Term Loan Commitment under the Existing Credit Agreement on
         the Closing Date, loaned to Company its Pro Rata Share of $200,000,000
         in Tranche B Loans under the Existing Credit Agreement. Tranche B Term
         Loans shall be paid on the Restatement Effective date to the extent
         necessary to reduce the aggregate principal amount thereof to
         $195,000,000 and shall thereafter continue to be maintained under and
         governed by this Agreement. The amount of each Lender's Tranche B Term
         Loans to be outstanding on the Restatement Effective Date is set forth
         opposite its name on Schedule 2.1 annexed hereto.

                  Company may by written notice to Administrative Agent elect to
         request an increase to the existing Tranche B Term Loan Commitments
         ("NEW TRANCHE B TERM LOAN COMMITMENTS") by an amount not in excess of
         $30,000,000 in the aggregate. Each such notice shall specify (A) the
         date (each, an "INCREASED AMOUNT DATE") on which Company proposes that
         the New Tranche B Term Loan Commitments shall be effective and that
         Loans made pursuant to the New Tranche B Term Loan Commitments ("NEW
         TRANCHE B TERM LOANS") be issued, which shall be a date not less than
         10 Business Days after the date on which such notice is delivered to
         Administrative Agent and (B) the identity of each Lender or other
         Person (each, a "NEW TRANCHE B TERM LOAN LENDER") to whom Company
         proposes any portion of such New Tranche B Term Loan Commitments shall
         be allocated and the amounts of such allocations; PROVIDED that such
         New Tranche B Term Loan Commitments shall not be made available to
         Company until after the Agents shall have declared that the syndication
         of the Commitments has been successfully completed and unless Requisite
         Lenders shall have consented to the making of the New Tranche B Term
         Loans; PROVIDED FURTHER that any Lender or other Person approached to
         provide all or a portion of the New Tranche B Term Loan Commitments may
         elect or decline, in its sole discretion, to provide a New Tranche B
         Term Loan Commitment. Company hereby appoints Syndication Agent and
         Administrative Agent as sole agents with respect to the syndication of
         the New Tranche B Term Loans. Such New Tranche B Term Loan Commitments
         shall be come effective and any such New Tranche B Term Loans shall be
         made as of such Increased Amount Date; PROVIDED that (1) no Event of
         Default or Potential Event of Default shall exist on such Increased
         Amount Date before or after giving effect to such New Tranche B Term
         Loan Commitments; (2) both before and after giving effect to the making
         of any New Tranche B Term Loans each of the conditions set forth in
         Section 4.3 shall be satisfied; (3) each increase in the New Tranche B
         Term Loan Commitments shall be effected pursuant to one or more joinder
         agreements in form and substance satisfactory to Agents, executed and
         delivered to Administrative Agent, and each shall be recorded in the


                                       32


         Register; (4) Company shall make any payments of fees required by the
         New Tranche B Term Loan Lenders in connection with the New Tranche B
         Term Loan Commitments; and (5) Company shall deliver or cause to be
         delivered any legal opinions or other documents reasonably requested by
         Administrative Agent in connection with any such transaction. On any
         Increased Amount Date on which any New Tranche B Term Loan Commitments
         are effective, subject to the satisfaction of the foregoing terms and
         conditions, each New Tranche B Term Loan Lender shall make a New
         Tranche B Term Loan to Company in an amount equal to its New Tranche B
         Term Loan Commitment. Administrative Agent shall notify the Lenders
         promptly upon receipt of Company's notice of each Increased Amount Date
         and in respect thereof the New Tranche B Term Loan Commitments. The
         terms and provisions of the New Tranche B Term Loans and New Tranche B
         Term Loan Commitments shall be identical to the Tranche B Term Loans
         and shall be deemed Tranche B Term Loans for all purposes of this
         Agreement.

                  (iii)    REVOLVING LOANS. Each Lender severally agrees,
         subject to the limitations set forth below with respect to the maximum
         amount of Revolving Loans permitted to be outstanding from time to
         time, to lend to Company from time to time during the period from the
         Closing Date to but excluding the Revolving Loan Commitment Termination
         Date an aggregate amount not exceeding its Pro Rata Share of the
         aggregate amount of the Revolving Loan Commitments to be used for the
         purposes identified in subsection 2.5B. The original amount of the
         Revolving Loan Commitments under the Existing Credit Agreement was
         $80,000,000 and on the Restatement Effective Date the aggregate amount
         of the Revolving Loan Commitments shall be reduced to $75,000,000 and
         each Lender's Revolving Loan Commitment as of the Restatement Effective
         Date is set forth opposite its name on SCHEDULE 2.1 annexed hereto;
         PROVIDED that the Revolving Loan Commitments of Lenders shall be
         adjusted to give effect to any assignments of the Revolving Loan
         Commitments pursuant to subsection 10.1B; and PROVIDED FURTHER that the
         amount of the Revolving Loan Commitments shall be reduced from time to
         time by the amount of any reductions thereto made pursuant to
         subsections 2.4B(ii) and 2.4B(iii). Each Lender's Revolving Loan
         Commitment shall expire on the Revolving Loan Commitment Termination
         Date and all Revolving Loans and all other amounts owed hereunder with
         respect to the Revolving Loans and the Revolving Loan Commitments shall
         be paid in full no later than that date. Amounts borrowed under this
         subsection 2.1A(iii) may be repaid and reborrowed to but excluding the
         Revolving Loan Commitment Termination Date. For the avoidance of doubt,
         all Revolving Loans made and Letters of Credit issued under the
         Existing Credit Agreement and outstanding as of the Restatement
         Effective Date shall continue to be maintained under and governed by
         this Agreement.

                  Anything contained in this Agreement to the contrary
         notwithstanding, the Revolving Loan and the Revolving Loan Commitments
         shall be subject to the limitation that in no event shall the Total
         Utilization of Revolving Loan Commitments at any time exceed the
         Revolving Loan Commitments then in effect.

                  (iv)     SWING LINE LOANS. Swing Line Lender hereby agrees,
         subject to the limitations set forth below with respect to the maximum
         amount of Swing Line Loans permitted to be outstanding from time to
         time, to make a portion of the Revolving Loan


                                       33


         Commitments available to Company from time to time during the period
         from the Closing Date to but excluding the Revolving Loan Commitment
         Termination Date by making Swing Line Loans to Company in an aggregate
         amount not exceeding the amount of the Swing Line Loan Commitment to be
         used for the purposes identified in subsection 2.5B, notwithstanding
         the fact that such Swing Line Loans, when aggregated with Swing Line
         Lender's outstanding Revolving Loans and Swing Line Lender's Pro Rata
         Share of the Letter of Credit Usage then in effect, may exceed Swing
         Line Lender's Revolving Loan Commitment. The aggregate amount of the
         Swing Line Loan Commitment as of the Restatement Effective Date is
         $10,000,000; PROVIDED that any reduction of the Revolving Loan
         Commitments made pursuant to subsection 2.4B(ii) or 2.4B(iii) which
         reduces the aggregate Revolving Loan Commitments to an amount less than
         the then current amount of the Swing Line Loan Commitment shall result
         in an automatic corresponding reduction of the Swing Line Loan
         Commitment to the amount of the Revolving Loan Commitments, as so
         reduced, without any further action on the part of Company,
         Administrative Agent or Swing Line Lender. The Swing Line Loan
         Commitment shall expire on the Revolving Loan Commitment Termination
         Date and all Swing Line Loans and all other amounts owed hereunder with
         respect to the Swing Line Loans shall be paid in full no later than
         that date. Amounts borrowed under this subsection 2.1A(iv) may be
         repaid and reborrowed to but excluding the Revolving Loan Commitment
         Termination Date.

                  Anything contained in this Agreement to the contrary
         notwithstanding, the Swing Line Loans and the Swing Line Loan
         Commitment shall be subject to the limitation that in no event shall
         the Total Utilization of Revolving Loan Commitments at any time exceed
         the Revolving Loan Commitments then in effect.

                  With respect to any Swing Line Loans which have not been
         voluntarily prepaid by Company pursuant to subsection 2.4B(i), Swing
         Line Lender may deliver to Administrative Agent (with a copy to
         Company), no later than 1:00 P.M. (New York time) on any day that is at
         least five Business Days after the making of such Swing Line Loan a
         notice (which shall be deemed to be a Notice of Borrowing given by
         Company) requesting Lenders to make Revolving Loans that are Base Rate
         Loans on such Funding Date in an amount equal to the amount of such
         Swing Line Loans (the "REFUNDED SWING LINE LOANS") outstanding on the
         date such notice is given which Swing Line Lender requests Lenders to
         prepay; PROVIDED HOWEVER, that in the event that Swing Line Loans are
         outstanding in an aggregate principal amount equal to or in excess of
         $1,000,000 as of the close of business on any Thursday, Swing Line
         Lender shall deliver to Administrative Agent (with a copy to Company),
         no later than 1:00 P.M. (New York time) on the following Business Day
         the notice described above requesting Lenders to make Revolving Loans
         in accordance with the procedures set forth above in an amount equal to
         the amount of such Swing Line Loans (which shall constitute Refunded
         Swing Line Loans) outstanding as of the close of business on such
         Thursday. Anything contained in this Agreement to the contrary
         notwithstanding, (i) the proceeds of such Revolving Loans made by
         Lenders other than Swing Line Lender shall be immediately delivered by
         Administrative Agent to Swing Line Lender (and not to Company) and
         applied to repay a corresponding portion of the Refunded Swing Line
         Loans and (ii) on the day such Revolving Loans are made, Swing Line
         Lender's Pro Rata Share of the Refunded Swing


                                       34


         Line Loans shall be deemed to be paid with the proceeds of a Revolving
         Loan made by Swing Line Lender, and such portion of the Swing Line
         Loans deemed to be so paid shall no longer be outstanding as Swing Line
         Loans and shall no longer be due under the Swing Line Note, if any, of
         Swing Line Lender but shall instead constitute part of Swing Line
         Lender's outstanding Revolving Loans and shall be due under the
         Revolving Note, if any, of Swing Line Lender. Company hereby authorizes
         Administrative Agent and Swing Line Lender to charge Company's accounts
         with Administrative Agent and Swing Line Lender (up to the amount
         available in each such account) in order to immediately pay Swing Line
         Lender the amount of the Refunded Swing Line Loans to the extent the
         proceeds of such Revolving Loans made by Lenders, including the
         Revolving Loan deemed to be made by Swing Line Lender, are not
         sufficient to repay in full the Refunded Swing Line Loans. If any
         portion of any such amount paid (or deemed to be paid) to Swing Line
         Lender should be recovered by or on behalf of Company from Swing Line
         Lender in bankruptcy, by assignment for the benefit of creditors or
         otherwise, the loss of the amount so recovered shall be ratably shared
         among all Lenders in the manner contemplated by subsection 10.5.

                  If for any reason (a) Revolving Loans are not made upon the
         request of Swing Line Lender as provided in the immediately preceding
         paragraph in an amount sufficient to repay any amounts owed to Swing
         Line Lender in respect of any outstanding Swing Line Loans or (b) the
         Revolving Loan Commitments are terminated at a time when any Swing Line
         Loans are outstanding, each Lender shall be deemed to, and hereby
         agrees to, have purchased a participation in such outstanding Swing
         Line Loans in an amount equal to its Pro Rata Share (calculated, in the
         case of the foregoing clause (b), immediately prior to such termination
         of the Revolving Loan Commitments) of the unpaid amount of such Swing
         Line Loans together with accrued interest thereon. Upon one Business
         Day's notice from Swing Line Lender, each Lender shall deliver to Swing
         Line Lender an amount equal to its respective participation in same day
         funds at the Administrative Agent's Office. In order to further
         evidence such participation (and without prejudice to the effectiveness
         of the participation provisions set forth above), each Lender agrees to
         enter into a separate participation agreement at the request of Swing
         Line Lender in form and substance reasonably satisfactory to Swing Line
         Lender. In the event any Lender fails to make available to Swing Line
         Lender the amount of such Lender's participation as provided in this
         paragraph, Swing Line Lender shall be entitled to recover such amount
         on demand from such Lender together with interest thereon at the rate
         customarily used by Swing Line Lender for the correction of errors
         among banks for three Business Days and thereafter at the Base Rate. In
         the event Swing Line Lender receives a payment of any amount in which
         other Lenders have purchased participations as provided in this
         paragraph, Swing Line Lender shall promptly distribute to each such
         other Lender its Pro Rata Share of such payment.

                  Anything contained herein to the contrary notwithstanding,
         each Lender's obligation to make Revolving Loans for the purpose of
         repaying any Refunded Swing Line Loans pursuant to the second preceding
         paragraph and each Lender's obligation to purchase a participation in
         any unpaid Swing Line Loans pursuant to the immediately preceding
         paragraph shall be absolute and unconditional and shall not be affected
         by any circumstance, including (a) any set-off, counterclaim,
         recoupment, defense or other right


                                       35


         which such Lender may have against Swing Line Lender, Company or any
         other Person for any reason whatsoever; (b) the occurrence or
         continuation of an Event of Default or a Potential Event of Default;
         (c) the occurrence or existence of any Material Adverse Effect; (d) any
         breach of this Agreement or any other Loan Document by any party
         thereto; or (e) any other circumstance, happening or event whatsoever,
         whether or not similar to any of the foregoing; PROVIDED that such
         obligations of each Lender are subject to the condition that (1) Swing
         Line Lender believed in good faith that all conditions under Section 4
         to the making of the applicable Refunded Swing Line Loans or other
         unpaid Swing Line Loans, as the case may be, were satisfied at the time
         such Refunded Swing Line Loans or unpaid Swing Line Loans were made or
         (2) the satisfaction of any such condition not satisfied had been
         waived in accordance with subsection 10.6 prior to or at the time such
         Refunded Swing Line Loans or other unpaid Swing Line Loans were made.

         B.       BORROWING MECHANICS. Revolving Loans made on any Funding Date
(other than Revolving Loans made pursuant to a request by Swing Line Lender
pursuant to subsection 2.1A(iv) for the purpose of repaying any Refunded Swing
Line Loans or Revolving Loans made pursuant to subsection 3.3B for the purpose
of reimbursing any Issuing Lender for the amount of a drawing under a Letter of
Credit issued by it) and Term Loans made on any Funding Date shall be in an
aggregate minimum amount of $1,000,000 and integral multiples of $100,000 in
excess of that amount; PROVIDED that Revolving Loans made on any Funding Date as
Eurodollar Rate Loans with a particular Interest Period shall be in an aggregate
minimum amount of $1,000,000 and integral multiples of $500,000 in excess of
that amount. Swing Line Loans made on any Funding Date shall be in an aggregate
minimum amount of $100,000 and integral multiples of $25,000 in excess of that
amount.

                  Whenever Company desires that Lenders make Revolving Loans it
shall deliver to Administrative Agent a Notice of Borrowing no later than 1:30
P.M. (New York time) at least three Business Days in advance of the proposed
Funding Date (in the case of a Eurodollar Rate Loan) or at least one Business
Day in advance of the proposed Funding Date (in the case of a Base Rate Loan).
Whenever Company desires that Swing Line Lender make a Swing Line Loan, it shall
deliver to Administrative Agent a Notice of Borrowing no later than 3:00 P.M.
(New York time) on the proposed Funding Date. The Notice of Borrowing shall
specify (i) the proposed Funding Date (which shall be a Business Day), (ii) the
amount and type of Loans requested, (iii) in the case of Swing Line Loans that
such Loans shall be Base Rate Loans, (iv) whether such Loans shall be Base Rate
Loans or Eurodollar Rate Loans, and (v) in the case of any Loans requested to be
made as Eurodollar Rate Loans, the initial Interest Period requested therefor.
Term Loans and Revolving Loans may be continued as or converted into Base Rate
Loans and Eurodollar Rate Loans in the manner provided in subsection 2.2D. In
lieu of delivering the above-described Notice of Borrowing, Company may give
Administrative Agent telephonic notice by the required time of any proposed
borrowing under this subsection 2.1B; PROVIDED that such notice shall be
promptly confirmed in writing by delivery of a Notice of Borrowing to
Administrative Agent on or before the applicable Funding Date.

                  Neither Administrative Agent nor any Lender shall incur any
liability to Company in acting upon any telephonic notice referred to above that
Administrative Agent believes in good faith to have been given by a duly
authorized officer or other person authorized to borrow


                                       36


on behalf of Company or for otherwise acting in good faith under this subsection
2.1B, and upon funding of Loans by Lenders in accordance with this Agreement
pursuant to any such telephonic notice Company shall have effected Loans
hereunder.

                  Company shall notify Administrative Agent prior to the funding
of any Loans in the event that any of the matters to which Company is required
to certify in the applicable Notice of Borrowing is no longer true and correct
as of the applicable Funding Date, and the acceptance by Company of the proceeds
of any Loans shall constitute a re-certification by Company, as of the
applicable Funding Date, as to the matters to which Company is required to
certify in the applicable Notice of Borrowing.

                  Except as otherwise provided in subsections 2.6B, 2.6C and
2.6G, a Notice of Borrowing for a Eurodollar Rate Loan (or telephonic notice in
lieu thereof) shall be irrevocable on and after the related Interest Rate
Determination Date, and Company shall be bound to make a borrowing in accordance
therewith.

         C.       DISBURSEMENT OF FUNDS. All Loans under this Agreement shall be
made by Lenders simultaneously and proportionately to their respective Pro Rata
Shares, it being understood that no Lender shall be responsible for any default
by any other Lender in that other Lender's obligation to make a Loan requested
hereunder nor shall the Commitment of any Lender to make the particular type of
Loan requested be increased or decreased as a result of a default by any other
Lender in that other Lender's obligation to make a Loan requested hereunder.
Promptly after receipt by Administrative Agent of a Notice of Borrowing pursuant
to subsection 2.1B (or telephonic notice in lieu thereof), Administrative Agent
shall notify each Lender or Swing Line Lender, as the case may be, of the
proposed borrowing. Each Lender shall make the amount of its Loan available to
Administrative Agent not later than 3:30 P.M. (New York time) on the applicable
Funding Date, and Swing Line Lender shall make the amount of its Swing Line Loan
available to Administrative Agent not later than 3:30 P.M. (New York time) on
the applicable Funding Date, in each case in same day funds in Dollars, at the
Administrative Agent's Office. Except as provided in subsection 2.1A(iv) or
subsection 3.3B with respect to Revolving Loans used to repay Refunded Swing
Line Loans or to reimburse any Issuing Lender for the amount of a drawing under
a Letter of Credit issued by it, upon satisfaction or waiver of the conditions
precedent specified in subsections 4.1 (in the case of the Loans, including the
Tranche A Term Loans, that were made on the Closing Date) and 4.3 (in the case
of all Loans), Administrative Agent shall make the proceeds of such Loans
available to Company by 4:00 P.M. on the applicable Funding Date by causing an
amount of same day funds in Dollars equal to the proceeds of all such Loans
received by Administrative Agent from Lenders or Swing Line Lender, as the case
may be, to be transferred to the account of Company at the Funding Office.

                  Unless Administrative Agent shall have been notified by any
Lender prior to the Funding Date for any Loans that such Lender does not intend
to make available to Administrative Agent the amount of such Lender's Loan
requested on such Funding Date, Administrative Agent may assume that such Lender
has made such amount available to Administrative Agent on such Funding Date and
Administrative Agent may, in its sole discretion, but shall not be obligated to,
make available to Company a corresponding amount on such Funding Date. If such
corresponding amount is not in fact made available to Administrative Agent by
such Lender, Administrative Agent shall be entitled to recover such


                                       37


corresponding amount on demand from such Lender together with interest thereon,
for each day from such Funding Date until the date such amount is paid to
Administrative Agent, at the customary rate set by Administrative Agent for the
correction of errors among banks for three Business Days and thereafter at the
Base Rate. If such Lender does not pay such corresponding amount forthwith upon
Administrative Agent's demand therefor, Administrative Agent shall promptly
notify Company and Company shall immediately pay such corresponding amount to
Administrative Agent together with interest thereon, for each day from such
Funding Date until the date such amount is paid to Administrative Agent, at the
rate payable under this Agreement applicable to such Loans. Nothing in this
subsection 2.1C shall be deemed to relieve any Lender from its obligation to
fulfill its Commitments hereunder or to prejudice any rights that Company may
have against any Lender as a result of any default by such Lender hereunder.

         D.       THE REGISTER.

                  (i)      Administrative Agent shall maintain, at its address
         referred to in subsection 10.8, a register for the recordation of the
         names and addresses of Lenders and the Commitments and Loans of each
         Lender from time to time (the "REGISTER"). The Register shall be
         available for inspection by Company or any Lender at any reasonable
         time and from time to time upon reasonable prior notice.

                  (ii)     Administrative Agent shall record in the Register the
         Revolving Loan Commitment and the Tranche B Term Loan and Revolving
         Loans from time to time of each Lender, the Swing Line Loan Commitment
         and the Swing Line Loans from time to time of Swing Line Lender, and
         each repayment or prepayment in respect of the principal amount of the
         Tranche B Term Loan or Revolving Loans of each Lender or the Swing Line
         Loans of Swing Line Lender. Any such recordation shall be conclusive
         and binding on Company and each Lender, absent manifest error; PROVIDED
         that failure to make any such recordation, or any error in
         such recordation, shall not affect any Lender's Commitments or
         Company's Obligations in respect of any applicable Loans.

                  (iii)    Each Lender shall record on its internal records
         (including the Notes, if any, held by such Lender) the amount of the
         Tranche B Term Loan and each Revolving Loan made by it and each payment
         in respect thereof. Any such recordation shall be conclusive and
         binding on Company, absent manifest error; PROVIDED that failure to
         make any such recordation, or any error in such recordation, shall not
         affect any Lender's Commitments or Company's Obligations in respect of
         any applicable Loans; and PROVIDED, FURTHER that in the event of any
         inconsistency between the Register and any Lender's records, the
         recordations in the Register shall govern.

                  (iv)     Company, Administrative Agent and Lenders shall deem
         and treat the Persons listed as Lenders in the Register as the holders
         and owners of the corresponding Commitments and Loans listed therein
         for all purposes hereof, and no assignment or transfer of any such
         Commitment or Loan shall be effective, in each case unless and until an
         Assignment Agreement effecting the assignment or transfer thereof shall
         have been accepted by Administrative Agent and recorded in the Register
         as provided in subsection 10.1B(ii). Prior to such recordation, all
         amounts owed with respect to the applicable Commitment or Loan shall be
         owed to the Lender listed in the Register as the owner thereof, and any
         request, authority or consent of any Person who, at the time of making


                                       38


         such request or giving such authority or consent, is listed in the
         Register as a Lender shall be conclusive and binding on any subsequent
         holder, assignee or transferee of the corresponding Commitments or
         Loans.

                  (v)      Company hereby affirms its designation of Wells Fargo
         to serve as Company's agent solely for purposes of maintaining the
         Register as provided in this subsection 2.1D, and Company hereby agrees
         that, to the extent Wells Fargo serves in such capacity, Wells Fargo
         and its officers, directors, employees, agents and affiliates shall
         constitute Indemnitees for all purposes under subsection 10.3.

         E.       NOTES. Company executed and delivered promissory notes on the
Closing Date to evidence Loans made by the Lenders under the Existing Credit
Agreement. On the Restatement Effective Date, Company will execute and deliver
(i) a Tranche B Term Note substantially in the form of EXHIBIT IV annexed hereto
to evidence that Lender's Tranche B Term Loans, with appropriate insertions,
(ii) a Revolving Note substantially in the form of EXHIBIT V annexed hereto to
evidence that Lender's Revolving Loans, with appropriate insertions and (iii) a
Swing Line Note substantially in the form of EXHIBIT VI annexed hereto, with
appropriate insertions. If requested by any Lender by written notice to Company
(with a copy to Administrative Agent), Company shall execute and deliver to such
Lender (and/or, if applicable and if so specified in such notice, to any Person
who is an assignee of such Lender pursuant to subsection 10.1) promptly after
Company's receipt of such notice a promissory note or promissory notes to
evidence such Lender's Tranche B Term Loan, Revolving Loans or Swing Line Loans,
substantially in the form of EXHIBIT IV, EXHIBIT V or EXHIBIT VI annexed hereto,
respectively, with appropriate insertions.

                  Administrative Agent may deem and treat the payee of any Note
as the owner thereof for all purposes hereof unless and until an Assignment
Agreement effecting the assignment or transfer thereof shall have been accepted
by Administrative Agent as provided in subsection 10.1B(ii). Any request,
authority or consent of any person or entity who, at the time of making such
request or giving such authority or consent, is the holder of any Note shall be
conclusive and binding on any subsequent holder, assignee or transferee of that
Note or of any Note or Notes issued in exchange therefor.

2.2      INTEREST ON THE LOANS.

         A.       RATE OF INTEREST. Subject to the provisions of subsections 2.6
and 2.7, each Term Loan and each Revolving Loan shall bear interest on the
unpaid principal amount thereof from the date made through maturity (whether by
acceleration or otherwise) at a rate determined by reference to the Base Rate or
the Adjusted Eurodollar Rate. Subject to the provisions of subsection 2.7, each
Swing Line Loan shall bear interest on the unpaid principal amount thereof from
the date made through maturity (whether by acceleration or otherwise) at a rate
determined by reference to the Base Rate. The applicable basis for determining
the rate of interest with respect to any Term Loan or any Revolving Loan shall
be selected by Company initially at the time a Notice of Borrowing is given with
respect to such Loan pursuant to subsection 2.1B, and the basis for determining
the interest rate with respect to any Term Loan or any Revolving Loan may be
changed from time to time pursuant to subsection 2.2D. If on any day a Term Loan
or Revolving Loan is outstanding with respect to which notice has not been
delivered to Administrative Agent in accordance with the terms of this Agreement
specifying the applicable


                                       39


basis for determining the rate of interest, then for that day that Loan shall
bear interest determined by reference to the Base Rate.

                  From Closing Date through the Restatement Effective Date (i)
the Tranche A Term Loans and the Revolving Loans bore interest and shall bear
interest, (y) if a Base Rate Loan, then at the sum of the Base Rate plus 2.25%
and (z) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar
Rate plus 3.25% per annum, and (ii) the Tranche B Term Loans bore interest and
shall bear interest (y) if a Base Rate Loan, then at the sum of the Base Rate
plus 3.00% per annum and (2) if a Eurodollar Rate Loans, then at the sum of the
Adjusted Eurodollar Rate plus 4.00% per annum.

                  (i)      Subject to the provisions of subsections 2.2E and
         2.7, the Revolving Loans shall bear interest on and after the
         Restatement Effective Date through maturity as follows:

                           (a)      if a Base Rate Loan, then at the sum of the
                  Base Rate PLUS the Applicable Base Rate Margin; or

                           (b)      if a Eurodollar Rate Loan, then at the sum
                  of the Adjusted Eurodollar Rate PLUS the Applicable Eurodollar
                  Rate Margin.

                  (ii)     Subject to the provisions of subsections 2.2E and
         2.7, the Tranche B Term Loans shall bear interest on and after the
         Restatement Effective Date through maturity as follows:

                           (a)      if a Base Rate Loan, then at the sum of the
                  Base Rate PLUS 2.50%; or

                           (b)      if a Eurodollar Rate Loan, then at the sum
                  of the Adjusted Eurodollar Rate PLUS 3.50%.

                  (iii)    Subject to the provisions of subsections 2.2E and
         2.7, the Swing Line Loans shall bear interest through maturity at
         the sum of the Base Rate MINUS 0.50% PLUS the Applicable Base Rate
         Margin for Revolving Loans.

         B.       INTEREST PERIODS. In connection with each Eurodollar Rate
Loan, Company may, pursuant to the applicable Notice of Borrowing or Notice of
Conversion/Continuation, as the case may be, select an interest period (each an
"INTEREST PERIOD") to be applicable to such Loan, which Interest Period shall
be, at Company's option, either a one, two, three or six month period; PROVIDED
that:

                  (i)      the initial Interest Period for any Eurodollar Rate
         Loan shall commence on the Funding Date in respect of such Loan, in the
         case of a Loan initially made as a Eurodollar Rate Loan, or on the date
         specified in the applicable Notice of Conversion/Continuation, in the
         case of a Loan converted to a Eurodollar Rate Loan;

                  (ii)     in the case of immediately successive Interest
         Periods applicable to a Eurodollar Rate Loan continued as such pursuant
         to a Notice of


                                       40


         Conversion/Continuation, each successive Interest Period shall commence
         on the day on which the next preceding Interest Period expires;

                  (iii)    if an Interest Period would otherwise expire on a day
         that is not a Business Day, such Interest Period shall expire on the
         next succeeding Business Day; PROVIDED that, if any Interest Period
         would otherwise expire on a day that is not a Business Day but is a day
         of the month after which no further Business Day occurs in such month,
         such Interest Period shall expire on the next preceding Business Day;

                  (iv)     any Interest Period that begins on the last Business
         Day of a calendar month (or on a day for which there is no numerically
         corresponding day in the calendar month at the end of such Interest
         Period) shall, subject to clause (v) of this subsection 2.2B, end on
         the last Business Day of a calendar month;

                  (v)      no Interest Period with respect to any portion of the
         Tranche B Term Loans shall extend beyond October 2, 2008, and no
         Interest Period with respect to any portion of the Revolving Loans
         shall extend beyond October 2, 2006;

                  (vi)     no Interest Period with respect to any portion of the
         Tranche B Term Loans shall extend beyond a date on which Company is
         required to make a scheduled payment of principal of the Tranche B Term
         Loans unless the sum of (a) the aggregate principal amount of Tranche B
         Term Loans that are Base Rate Loans PLUS (b) the aggregate principal
         amount of Tranche B Term Loans that are Eurodollar Rate Loans with
         Interest Periods expiring on or before such date equals or exceeds the
         principal amount required to be paid on the Tranche B Term Loans on
         such date;

                  (vii)    there shall be no more than twelve Interest Periods
         outstanding at any time;

                  (viii)   in the event Company fails to specify an Interest
         Period for any Eurodollar Rate Loan in the applicable Notice of
         Borrowing or Notice of Conversion/Continuation, Company shall be deemed
         to have selected an Interest Period of one month; and

                  (ix)     until the earlier of (x) the completion to the
         satisfaction of Agents of the primary syndication of the Loans and
         Commitments or (y) the day that is 90 days after the Restatement
         Effective Date, no Interest Period for any Eurodollar Rate Loan may
         extend beyond one month.

         C.       INTEREST PAYMENTS. Subject to the provisions of subsection
2.2E, interest on each Loan shall be payable in arrears on and to each Interest
Payment Date applicable to that Loan, upon any prepayment of that Loan (to the
extent accrued on the amount being prepaid) and at maturity (including final
maturity); PROVIDED that in the event any Swing Line Loans or any Revolving
Loans that are Base Rate Loans are prepaid pursuant to subsection 2.4B(i),
interest accrued on such Swing Line Loans or Revolving Loans through the date of
such prepayment shall be payable on the next succeeding Interest Payment Date
applicable to Base Rate Loans (or, if earlier, at final maturity).


                                       41


         D.       CONVERSION OR CONTINUATION. Subject to the provisions of
subsection 2.6, Company shall have the option (i) to convert at any time all or
any part of its outstanding Tranche B Term Loans or Revolving Loans equal to
$1,000,000 and integral multiples of $500,000 in excess of that amount from Base
Rate Loans to Eurodollar Rate Loans, (ii) to convert at any time all or any part
of its outstanding Tranche B Term Loans or Revolving Loans equal to $1,000,000
and integral multiple of $100,000 in excess of that amount from Eurodollar Rate
Loans to Base Rate Loans or (iii) upon the expiration of any Interest Period
applicable to a Eurodollar Rate Loan, to continue all or any portion of such
Loan equal to $1,000,000 and integral multiples of $500,000 in excess of that
amount as a Eurodollar Rate Loan; PROVIDED, HOWEVER, that a Eurodollar Rate Loan
may only be converted into a Base Rate Loan on the expiration date of an
Interest Period applicable thereto.

                  Company shall deliver a Notice of Conversion/Continuation to
Administrative Agent no later than 1:30 P.M. (New York time) at least one
Business Day in advance of the proposed conversion date (in the case of a
conversion to a Base Rate Loan) and at least three Business Days in advance of
the proposed conversion/continuation date (in the case of a conversion to, or a
continuation of, a Eurodollar Rate Loan). A Notice of Conversion/Continuation
shall specify (i) the proposed conversion/continuation date (which shall be a
Business Day), (ii) the amount and type of the Loan to be converted/continued,
(iii) the nature of the proposed conversion/continuation, (iv) in the case of a
conversion to, or a continuation of, a Eurodollar Rate Loan, the requested
Interest Period, and (v) in the case of a conversion to, or a continuation of, a
Eurodollar Rate Loan, that no Potential Event of Default or Event of Default has
occurred and is continuing. In lieu of delivering the above-described Notice of
Conversion/Continuation, Company may give Administrative Agent telephonic notice
by the required time of any proposed conversion/continuation under this
subsection 2.2D; PROVIDED that such notice shall be promptly confirmed in
writing by delivery of a Notice of Conversion/Continuation to Administrative
Agent on or before the proposed conversion/continuation date. Upon receipt of
written or telephonic notice of any proposed conversion/continuation under this
subsection 2.2D, Administrative Agent shall promptly transmit such notice by
telefacsimile or telephone to each Lender.

                  Neither Administrative Agent nor any Lender shall incur any
liability to Company in acting upon any telephonic notice referred to above that
Administrative Agent believes in good faith to have been given by a duly
authorized officer or other person authorized to act on behalf of Company or for
otherwise acting in good faith under this subsection 2.2D, and upon conversion
or continuation of the applicable basis for determining the interest rate with
respect to any Loans in accordance with this Agreement pursuant to any such
telephonic notice Company shall have effected a conversion or continuation, as
the case may be, hereunder.

                  Except as otherwise provided in subsections 2.6B, 2.6C and
2.6G, a Notice of Conversion/Continuation for conversion to, or continuation of,
a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be
irrevocable on and after the related Interest Rate Determination Date, and
Company shall be bound to effect a conversion or continuation in accordance
therewith.

         E.       DEFAULT RATE. Upon the occurrence and during the continuation
of any Event of Default under subsection 8.1 or, upon demand by Administrative
Agent at the request of


                                       42


Requisite Lenders, upon the occurrence and during the continuation of any other
Event of Default, the outstanding principal amount of all Loans and, to the
extent permitted by applicable law, any interest payments thereon not paid when
due and any fees and other amounts then due and payable hereunder, shall
thereafter bear interest (including post-petition interest in any proceeding
under the Bankruptcy Code or other applicable bankruptcy laws) payable upon
demand at a rate that is 2% per annum in excess of the interest rate otherwise
payable under this Agreement with respect to the applicable Loans (or, in the
case of any such fees and other amounts, at a rate which is 2% per annum in
excess of the interest rate otherwise payable under this Agreement for Base Rate
Loans); PROVIDED that, in the case of Eurodollar Rate Loans, upon the expiration
of the Interest Period in effect at the time any such increase in interest rate
is effective such Eurodollar Rate Loans shall thereupon become Base Rate Loans
and shall thereafter bear interest payable upon demand at a rate which is 2% per
annum in excess of the interest rate otherwise payable under this Agreement for
Base Rate Loans. Payment or acceptance of the increased rates of interest
provided for in this subsection 2.2E is not a permitted alternative to timely
payment and shall not constitute a waiver of any Event of Default or otherwise
prejudice or limit any rights or remedies of Administrative Agent or any Lender.

         F.       COMPUTATION OF INTEREST. Interest on the Loans shall be
computed (i) in the case of Base Rate Loans, on the basis of a 365-day or
366-day year, as the case may be, and (ii) in the case of Eurodollar Rate Loans,
on the basis of a 360-day year, in each case for the actual number of days
elapsed in the period during which it accrues; PROVIDED, HOWEVER, that for each
day that the Base Rate is calculated by reference to the Federal Funds Effective
Rate, interest on Base Rate Loans shall be computed on the basis of a 360-day
year and the actual number of days elapsed. In computing interest on any Loan,
the date of the making of such Loan or the first day of an Interest Period
applicable to such Loan or, with respect to a Base Rate Loan being converted
from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan
to such Base Rate Loan, as the case may be, shall be included, and the date of
payment of such Loan or the expiration date of an Interest Period applicable to
such Loan or, with respect to a Base Rate Loan being converted to a Eurodollar
Rate Loan, the date of conversion of such Base Rate Loan to such Eurodollar Rate
Loan, as the case may be, shall be excluded; PROVIDED that if a Loan is repaid
on the same day on which it is made, one day's interest shall be paid on that
Loan.

2.3      FEES.

         A.       COMMITMENT FEES. Company agrees to pay to Administrative
Agent, for distribution to each Lender in proportion to that Lender's Pro Rata
Share, commitment fees for the period from and including the Closing Date to and
excluding the Revolving Loan Commitment Termination Date equal to the average of
the daily excess of the Revolving Loan Commitments over the sum of (i) the
aggregate principal amount of outstanding Revolving Loans (but not any
outstanding Swing Line Loans) PLUS (ii) the Letter of Credit Usage MULTIPLIED by
0.50% per annum. Such commitment fees to be calculated on the basis of a 365-day
year or 366-day year, as the case may be, and the actual number of days elapsed
and to be payable quarterly in arrears on the last Business Day of each of
March, June, September and December of each year, commencing on the first such
date to occur after the Closing Date, and on the Revolving Loan Commitment
Termination Date.


                                       43


         B.       OTHER FEES. Company agrees to pay to Administrative Agent such
other fees in the amounts and at the times separately agreed upon between
Company and Administrative Agent.

2.4      REPAYMENTS, PREPAYMENTS AND REDUCTIONS IN REVOLVING LOAN COMMITMENTS;
         GENERAL PROVISIONS REGARDING PAYMENTS; APPLICATION OF PROCEEDS OF
         COLLATERAL AND PAYMENTS UNDER GUARANTIES.

         A.       SCHEDULED PAYMENTS OF TERM LOANS.

                  (i)      PAYMENT OF TRANCHE A TERM LOANS. Company shall pay in
         full all Tranche A Term Loans as of the Restatement Effective Date.

                  (ii)     SCHEDULED PAYMENTS OF TRANCHE B TERM LOANS. Company
         shall make principal payments on the Tranche B Term Loans in
         installments on the dates and in the amounts set forth below:



                                                  Scheduled Repayment
                                                of Tranche B Term Loans
                                                 (Percentage of Amount
                                                  Outstanding on the
                   DATE                              closing date)
                   ----                             ---------------
                                                     
                 December 31, 2000                         0.25%
                 March 31, 2001                            0.25%
                 June 30, 2001                             0.25%
                 September 30, 2001                        0.25%

                 December 31, 2001                         0.25%
                 March 31, 2002                            0.25%
                 June 30, 2002                             0.25%
                 September 30, 2002                        0.25%

                 December 31, 2002                         0.25%
                 March 31, 2003                            0.25%
                 June 30, 2003                             0.25%
                 September 30, 2003                        0.25%

                 December 31, 2003                         0.25%
                 March 31, 2004                            0.25%
                 June 30, 2004                             0.25%
                 September 30, 2004                        0.25%

                 December 31, 2004                         0.25%
                 March 31, 2005                            0.25%
                 June 30, 2005                             0.25%
                 September 30, 2005                        0.25%


                                       44


                 December 31, 2005                         0.25%
                 March 31, 2006                            0.25%
                 June 30, 2006                             0.25%
                 September 30, 2006                        0.25%

                 December 31, 2006                        11.75%
                 March 31, 2007                           11.75%
                 June 30, 2007                            11.75%
                 September 30, 2007                       11.75%

                 December 31, 2007                        11.75%
                 March 31, 2008                           11.75%
                 June 30, 2008                            11.75%
                 October 2, 2008                          11.75%
                                                          ------

                                 TOTAL                      100%


         PROVIDED that the installment due on October 2, 2008 shall be reduced
         to the extent of the principal payment made on the Restatement
         Effective Date pursuant to subsection 2.1A(ii) and the scheduled
         installments of principal of the Tranche B Term Loans set forth above
         shall be reduced in connection with any other voluntary or mandatory
         prepayments of the Tranche B Term Loans in accordance with subsection
         2.4B(iv); and PROVIDED, FURTHER that the Tranche B Term Loans
         (including any New Tranche B Term Loans) and all other amounts owed
         hereunder with respect to the Tranche B Term Loans (including any New
         Tranche B Term Loans) shall be paid in full no later than October 2,
         2008, and the final installment payable by Company in respect of the
         Tranche B Term Loans (including any New Tranche B Term Loans) on such
         date shall be in an amount, if such amount is different from that
         specified above, sufficient to repay all amounts owing by Company under
         this Agreement with respect to the Tranche B Term Loans.

         B.       PREPAYMENTS AND UNSCHEDULED REDUCTIONS IN REVOLVING LOAN
                  COMMITMENTS.

                  (i)      VOLUNTARY PREPAYMENTS. Company may, upon written or
         telephonic notice to Administrative Agent on or prior to 1:30 P.M. (New
         York time) on the date of prepayment, which notice, if telephonic,
         shall be promptly confirmed in writing, at any time and from time to
         time prepay any Swing Line Loan on any Business Day in whole or in
         part. Company may, upon not less than one Business Day's prior written
         or telephonic notice, in the case of Base Rate Loans, and three
         Business Days' prior written or telephonic notice, in the case of
         Eurodollar Rate Loans, in each case given to Administrative Agent by
         1:30 P.M. (New York time) on the date required and, if given by
         telephone, promptly confirmed in writing to Administrative Agent (which
         original written or telephonic notice Administrative Agent will
         promptly transmit by telefacsimile or telephone to each Lender), at any
         time and from time to time prepay any Tranche B Term Loans or Revolving
         Loans on any Business Day in whole or in part in an aggregate minimum
         amount of $1,000,000 and integral multiples of $100,000 in excess of
         that amount in the case of Base Rate Loans and in an aggregate minimum
         amount of $1,000,000 and integral multiples of $500,000 in excess of
         that amount in the case of


                                       45


         Eurodollar Rate Loans. Notice of prepayment having been given as
         aforesaid, the principal amount of the Loans specified in such notice
         shall become due and payable on the prepayment date specified therein.
         Any such voluntary prepayment shall be applied as specified in
         subsection 2.4B(iv).

                  (ii)     VOLUNTARY REDUCTIONS OF REVOLVING LOAN COMMITMENTS.
         Company may, upon not less than three Business Days' prior written or
         telephonic notice confirmed in writing to Administrative Agent (which
         original written or telephonic notice Administrative Agent will
         promptly transmit by telefacsimile or telephone to each Lender), at any
         time and from time to time terminate in whole or permanently reduce in
         part, without premium or penalty, the Revolving Loan Commitments in an
         amount up to the amount by which the Revolving Loan Commitments exceed
         the Total Utilization of Revolving Loan Commitments at the time of such
         proposed termination or reduction; PROVIDED that any such partial
         reduction of the Revolving Loan Commitments shall be in an aggregate
         minimum amount of $1,000,000 and integral multiples of $1,000,000 in
         excess of that amount. Company's notice to Administrative Agent shall
         designate the date (which shall be a Business Day) of such termination
         or reduction and the amount of any partial reduction, and such
         termination or reduction of the Revolving Loan Commitments shall be
         effective on the date specified in Company's notice and shall reduce
         the Revolving Loan Commitment of each Lender proportionately to its Pro
         Rata Share. A notice of termination of the Revolving Loan Commitments
         delivered by the Company may state that such notice is conditioned upon
         the effectiveness of other credit facilities, in which case such notice
         may be revoked by the Company by notice to the Administrative Agent on
         or prior to the specified date if such condition is not satisfied.

                  (iii)    MANDATORY PREPAYMENTS AND MANDATORY REDUCTIONS OF
         REVOLVING LOAN COMMITMENTS. The Loans shall be prepaid and/or the
         Revolving Loan Commitments shall be permanently reduced in the amounts
         and under the circumstances set forth below, all such prepayments
         and/or reductions to be applied as set forth below or as more
         specifically provided in subsection 2.4B(iv):

                           (a)      PREPAYMENTS AND REDUCTIONS FROM NET ASSET
                  SALE PROCEEDS. No later than the fifteenth Business Day
                  following the date of receipt by Company or any of its
                  Subsidiaries of any Net Asset Sale Proceeds in respect of any
                  Asset Sale, Company shall prepay the Loans and/or the
                  Revolving Loan Commitments shall be permanently reduced in an
                  aggregate amount equal to such Net Asset Sale Proceeds;
                  PROVIDED, HOWEVER, that in the event Company notifies
                  Administrative Agent in writing on or before the date of
                  receipt of such Net Asset Sale Proceeds that Company or such
                  Subsidiary intends to replace any assets sold ("EXCHANGE
                  ASSETS") with assets which are to be used in a business
                  engaged in by Company and its Subsidiaries at the time of any
                  such replacement or any business or activity substantially
                  similar or related thereto, Company shall prepay the Loans
                  and/or the Revolving Loan Commitments shall be permanently
                  reduced in an aggregate amount equal to the excess of (1) the
                  aggregate amount of such Net Asset Sale Proceeds over (2) an
                  amount equal to the amount of cash expected to be expended by
                  Company and its Subsidiaries to acquire such Exchange Assets
                  during the 270-day period following the date of receipt by
                  Company or any of its


                                       46


                  Subsidiaries of such Net Asset Sale Proceeds. Any amounts not
                  expended by Company and its Subsidiaries within such 270-day
                  period shall be applied pursuant to clause (f) below. Nothing
                  contained in this clause (a) shall be construed to permit any
                  sale of assets prohibited by subsection 7.7.

                           (b)      PREPAYMENTS AND REDUCTIONS FROM NET
                  INSURANCE/CONDEMNATION PROCEEDS. No later than the third
                  Business Day following the date of receipt by Administrative
                  Agent or by Company or any of its Subsidiaries of any Net
                  Insurance/Condemnation Proceeds that are required to be
                  applied pursuant to the provisions of subsection 6.4C, Company
                  shall prepay the Loans and/or the Revolving Loan Commitments
                  shall be permanently reduced in an aggregate amount equal to
                  the amount of such Net Insurance/Condemnation Proceeds;
                  PROVIDED, HOWEVER, that in the event Company intends to
                  replace any assets in respect of which such Net
                  Insurance/Condemnation Proceeds were received ("INSURANCE
                  EXCHANGE ASSETS") with assets which are to be used in a
                  business engaged in by the Company and its Subsidiaries at the
                  time of any such replacement or any business or activity
                  substantially similar or related thereto, Company shall prepay
                  the Loans and/or the Revolving Loan Commitments shall be
                  permanently reduced in an aggregate amount equal to the excess
                  of (1) such Net Insurance/Condemnation Proceeds over (2) an
                  amount equal to the amount of cash expected to be expended by
                  the Company and its Subsidiaries to acquire such Insurance
                  Exchange Assets during the 270-day period following the date
                  of receipt by Company or any of its Subsidiaries of such Net
                  Insurance/Condemnation Proceeds. Any amounts not expended by
                  Company and its Subsidiaries within such 270-day period shall
                  be prepaid pursuant to clause (f) below.

                           (c)      PREPAYMENTS AND REDUCTIONS DUE TO ISSUANCE
                  OF DEBT SECURITIES. One day following receipt by Company or
                  any of its Subsidiaries of the Cash proceeds (any such
                  proceeds, net of underwriting discounts and commissions and
                  other reasonable costs and expenses associated therewith,
                  including reasonable legal fees and expenses, being "NET DEBT
                  SECURITIES PROCEEDS") from the issuance of any debt Securities
                  of Company or any of its Subsidiaries (other than any
                  Indebtedness permitted by subsection 7.1), Company shall
                  prepay the Loans and/or the Revolving Loan Commitments shall
                  be permanently reduced in an aggregate amount equal to such
                  Net Debt Securities Proceeds.

                           (d)      PREPAYMENTS AND REDUCTIONS DUE TO ISSUANCE
                  OF EQUITY SECURITIES. One day following receipt by Company or
                  any of its Subsidiaries of the Cash proceeds (any such
                  proceeds, net of underwriting discounts and commissions and
                  other reasonable costs and expenses associated therewith,
                  including reasonable legal fees and expenses, being "NET
                  EQUITY SECURITIES PROCEEDS") from the issuance of any equity
                  Securities of Company or any of its Subsidiaries (other than
                  equity Securities of Company or any of its Subsidiaries issued
                  to their respective directors, officers and employees or to
                  their stockholders existing as of the Closing Date) or the
                  receipt of any equity contribution (other than from their
                  Stockholders existing as of the Closing Date), Company shall
                  prepay the Loans


                                       47


                  and/or the Revolving Loan Commitments shall be permanently
                  reduced in an aggregate amount equal to 75% of such Net Equity
                  Securities Proceeds; PROVIDED, that such percentage shall be
                  reduced to 50% if the Consolidated Total Leverage Ratio as at
                  the last day of the most recently ended four-Fiscal Quarters
                  (giving pro forma effect to the application of Net Equity
                  Securities Proceeds to pay Indebtedness) is less than 3.0:1.0.

                           (e)      PREPAYMENTS AND REDUCTIONS FROM CONSOLIDATED
                  EXCESS CASH FLOW. In the event that there shall be
                  Consolidated Excess Cash Flow for any Fiscal Year (commencing
                  with the Fiscal Year ending on the Fiscal Year End in 2002),
                  Company shall, no later than 100 days after such Fiscal Year
                  End, prepay the Loans and/or the Revolving Loan Commitments
                  shall be permanently reduced in an aggregate amount equal to
                  75% of such Consolidated Excess Cash Flow; PROVIDED, that such
                  percentage shall be reduced to 50% if the Consolidated Total
                  Leverage Ratio (giving pro forma effect to the application of
                  Consolidated Excess Cash Flow to pay Indebtedness) as at such
                  Fiscal Year End is less than 3.0:1.0.

                           (f)      CALCULATIONS OF NET PROCEEDS AMOUNTS;
                  ADDITIONAL PREPAYMENTS AND REDUCTIONS BASED ON SUBSEQUENT
                  CALCULATIONS. Concurrently with any prepayment of the Loans
                  and/or reduction of the Revolving Loan Commitments pursuant to
                  subsections 2.4B(iii)(a)-(e), Company shall deliver to
                  Administrative Agent an Officer's Certificate demonstrating
                  the calculation of the amount (the "NET PROCEEDS AMOUNT") of
                  the applicable Net Asset Sale Proceeds, Net
                  Insurance/Condemnation Proceeds, Net Debt Securities Proceeds,
                  Net Equity Securities Proceeds or Consolidated Excess Cash
                  Flow, as the case may be, that gave rise to such prepayment
                  and/or reduction. In the event that Company shall subsequently
                  determine that the actual Net Proceeds Amount was greater than
                  the amount set forth in such Officer's Certificate, Company
                  shall promptly make an additional prepayment of the Loans
                  (and/or, if applicable, the Revolving Loan Commitments shall
                  be permanently reduced) in an amount equal to the amount of
                  such excess to the extent required hereunder, and Company
                  shall concurrently therewith deliver to Administrative Agent
                  an Officer's Certificate demonstrating the derivation of the
                  additional Net Proceeds Amount resulting in such excess.

                  (g)      PREPAYMENTS DUE TO REDUCTIONS OR RESTRICTIONS OF
                  REVOLVING LOAN COMMITMENTS. Company shall from time to time
                  prepay FIRST the Swing Line Loans and SECOND the Revolving
                  Loans to the extent necessary so that the Total Utilization of
                  Revolving Loan Commitments shall not at any time exceed the
                  Revolving Loan Commitments then in effect.

                  (iv)     APPLICATION OF PREPAYMENTS.

                           (a)      APPLICATION OF VOLUNTARY PREPAYMENTS BY TYPE
                  OF LOANS AND ORDER OF MATURITY. Any voluntary prepayments
                  pursuant to subsection 2.4B(i) shall be applied as specified
                  by Company in the applicable notice of prepayment; PROVIDED
                  that in the event Company fails to specify the Loans to which
                  any such prepayment shall be applied, such prepayment shall be
                  applied FIRST to repay outstanding Swing Line Loans to the
                  full extent thereof, SECOND to repay


                                       48


                  outstanding Revolving Loans to the full extent thereof, and
                  THIRD to repay outstanding Term Loans to the full extent
                  thereof. Unless otherwise specified by Company in the
                  applicable notice of prepayment, any voluntary prepayments of
                  the Term Loans pursuant to subsection 2.4B(i) shall be applied
                  to prepay the Tranche B Term Loans on a pro rata basis (in
                  accordance with the outstanding principal amounts thereof) and
                  shall be applied on a pro rata basis (in accordance with the
                  outstanding principal amounts thereof) to each scheduled
                  installment of principal of the Tranche B Term Loans set forth
                  in subsection 2.4A(ii) that is unpaid at the time of such
                  prepayment. Notwithstanding anything under this subsection
                  2.4B(iv)(a) to the contrary, Tranche B Term Lenders shall have
                  the option to waive their rights to receive any voluntary
                  prepayment pursuant to subsection 2.4B(i) (a "WAIVABLE
                  VOLUNTARY PREPAYMENT"). In the event any such Tranche B Term
                  Lender desires to waive such Lender's right to receive such
                  Waivable Voluntary Prepayment, (1) such Tranche B Term Lender
                  shall so advise Administrative Agent in writing no later than
                  the close of business on the Business Day following the date
                  it receives notice of the prepayment from Administrative Agent
                  and (2) upon receipt of such written advice from such Tranche
                  B Term Lender, Administrative Agent shall apply the amount so
                  waived by such Tranche B Term Lender to prepay Tranche B Term
                  Loans held by Lenders which did not waive their right to such
                  prepayment (pro rata in accordance with the outstanding
                  principal amounts thereof) and then to the Revolving Loans
                  (without any corresponding reduction in Revolving Loan
                  Commitments); PROVIDED that in the event that prepayment of
                  Tranche B Term Loans held by Lenders not waiving their right
                  to prepayment and of Revolving Loans does not exhaust the
                  amount specified by Company in the applicable notice of
                  prepayment, Administrative Agent shall apply any remaining
                  amount to repay all other Tranche B Term Loans on a pro rata
                  basis (in accordance with the outstanding principal amounts
                  thereof). Company shall use its best efforts to notify
                  Administrative Agent (which shall promptly notify the Tranche
                  B Term Lenders) of any Waivable Voluntary Prepayment at least
                  three Business Days prior to the payment to Administrative
                  Agent of such Waivable Voluntary Prepayment.

                           (b)      APPLICATION OF MANDATORY PREPAYMENTS BY TYPE
                  OF LOANS. Any amount (the "APPLIED AMOUNT") required to be
                  applied as a mandatory prepayment of the Loans and/or a
                  reduction of the Revolving Loan Commitments pursuant to
                  subsections 2.4B(iii)(a)-(e) shall be applied FIRST to prepay
                  the Term Loans to the full extent thereof, SECOND, to the
                  extent of any remaining portion of the Applied Amount, to
                  prepay the Swing Line Loans to the full extent thereof and to
                  permanently reduce the Revolving Loan Commitments by the
                  amount of such prepayment, THIRD, to the extent of any
                  remaining portion of the Applied Amount, to prepay the
                  Revolving Loans to the full extent thereof and (unless such
                  prepayment is a Waivable Mandatory Prepayment) to further
                  permanently reduce the Revolving Loan Commitments by the
                  amount of such prepayment, FOURTH, to the extent of any
                  remaining portion of the Applied Amount, to cash collateralize
                  the Letters of Credit to the full extent thereof and (unless
                  such prepayment is a Waivable Mandatory Prepayment) to further
                  permanently reduce the Revolving


                                       49


                  Loan Commitments by the amount of such prepayment, and FIFTH,
                  to the extent of any remaining portion of the Applied Amount,
                  to further permanently reduce the Revolving Loan Commitments
                  to the full extent thereof.

                           (c)      APPLICATION OF MANDATORY PREPAYMENTS OF TERM
                  LOANS TO TRANCHE B TERM LOANS AND THE SCHEDULED INSTALLMENTS
                  OF PRINCIPAL THEREOF. Any mandatory prepayments of the Term
                  Loans pursuant to subsection 2.4B(iii) shall be applied to
                  prepay the Tranche B Term Loans on a pro rata basis (in
                  accordance with the outstanding principal amounts thereof) and
                  shall be applied on a pro rata basis (in accordance with the
                  outstanding principal amounts thereof) to each scheduled
                  installment of principal of the Tranche B Term Loans set forth
                  in subsection 2.4A(ii) that is unpaid at the time of such
                  prepayment; PROVIDED, HOWEVER, that Tranche B Term Lenders
                  shall have the option to waive their rights to receive any
                  such prepayment (a "WAIVABLE MANDATORY PREPAYMENT"). In the
                  event any such Tranche B Term Lender desires to waive such
                  Lender's right to receive such Waivable Mandatory Prepayment,
                  (1) such Tranche B Term Lender shall so advise Administrative
                  Agent in writing no later than the close of business on the
                  Business Day following the date it receives notice of the
                  prepayment from Administrative Agent and (2) upon receipt of
                  such written advice from such Tranche B Term Lender,
                  Administrative Agent shall apply the amount so waived by such
                  Tranche B Term Lender to prepay Tranche B Term Loans held by
                  Lenders which did not waive their right to such prepayment
                  (pro rata in accordance with the outstanding principal amounts
                  thereof) and then to the Revolving Loans (without any
                  corresponding reduction in the Revolving Loan Commitments).
                  Company shall use its best efforts to notify Administrative
                  Agent (which shall promptly notify the Tranche B Term Lenders)
                  of any Waivable Mandatory Prepayment at least three Business
                  Days prior to the payment to Administrative Agent of such
                  Waivable Mandatory Prepayment.

                           (d)      APPLICATION OF PREPAYMENTS TO BASE RATE
                  LOANS AND EURODOLLAR RATE LOANS. Considering Tranche B Term
                  Loans and Revolving Loans being prepaid separately, any
                  prepayment thereof shall be applied first to Base Rate Loans
                  to the full extent thereof before application to Eurodollar
                  Rate Loans, in each case in a manner which minimizes the
                  amount of any payments required to be made by Company pursuant
                  to subsection 2.6D.

         C.       GENERAL PROVISIONS REGARDING PAYMENTS.

                  (i)      MANNER AND TIME OF PAYMENT. All payments by Company
         of principal, interest, fees and other Obligations hereunder and under
         the Notes shall be made in Dollars in same day funds, without defense,
         setoff or counterclaim, free of any restriction or condition, and
         delivered to the account of Administrative Agent not later than 2:00
         P.M. (New York time) on the date due at the Payment Office for the
         account of Lenders; funds received by Administrative Agent after that
         time on such due date shall be deemed to have been paid by Company on
         the next succeeding Business Day. Company hereby authorizes
         Administrative Agent to charge its accounts with Administrative Agent
         in order to cause timely payment to be made to Administrative Agent of
         all principal,


                                       50


         interest, fees and expenses due hereunder (subject to sufficient funds
         being available in its accounts for that purpose).

                  (ii)     APPLICATION OF PAYMENTS TO PRINCIPAL AND INTEREST.
                           Except as provided in subsection 2.2C, all payments
         in respect of the principal amount of any Loan shall include payment of
         accrued interest on the principal amount being repaid or prepaid, and
         all such payments (and, in any event, any payments in respect of any
         Loan on a date when interest is due and payable with respect to such
         Loan) shall be applied to the payment of interest before application to
         principal.

                  (iii)    APPORTIONMENT OF PAYMENTS. Aggregate principal and
         interest payments in respect of Term Loans and Revolving Loans shall be
         apportioned among all outstanding Loans to which such payments relate,
         in each case proportionately to Lenders' respective Pro Rata Shares.
         Administrative Agent shall promptly distribute to each Lender, at its
         primary address set forth below its name on the appropriate signature
         page hereof or at such other address as such Lender may request, its
         Pro Rata Share of all such payments received by Administrative Agent
         and the commitment fees of such Lender when received by Administrative
         Agent pursuant to subsection 2.3. Notwithstanding the foregoing
         provisions of this subsection 2.4C(iii), if, pursuant to the provisions
         of subsection 2.6C, any Notice of Conversion/Continuation is withdrawn
         as to any Affected Lender or if any Affected Lender makes Base Rate
         Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans,
         Administrative Agent shall give effect thereto in apportioning payments
         received thereafter.

                  (iv)     PAYMENTS ON BUSINESS DAYS. Whenever any payment to be
         made hereunder shall be stated to be due on a day that is not a
         Business Day, such payment shall be made on the next succeeding
         Business Day and such extension of time shall be included in the
         computation of the payment of interest hereunder or of the commitment
         fees hereunder, as the case may be.

                  (v)      NOTATION OF PAYMENT. Each Lender agrees that before
         disposing of any Note held by it, or any part thereof (other than by
         granting participations therein), that Lender will make a notation
         thereon of all Loans evidenced by that Note and all principal payments
         previously made thereon and of the date to which interest thereon has
         been paid; PROVIDED that the failure to make (or any error in the
         making of) a notation of any Loan made under such Note shall not limit
         or otherwise affect the obligations of Company hereunder or under such
         Note with respect to any Loan or any payments of principal or interest
         on such Note.

         D.       APPLICATION OF PROCEEDS OF COLLATERAL AND PAYMENTS UNDER
                  SUBSIDIARY GUARANTY.

                  (i)      APPLICATION OF PROCEEDS OF COLLATERAL. Except as
         provided in subsection 2.4B(iii)(a) with respect to prepayments from
         Net Asset Sale Proceeds, all proceeds received by Administrative Agent
         in respect of any sale of, collection from, or other realization upon
         all or any part of the Collateral under any Collateral Document may, in
         the discretion of Administrative Agent, be held by Administrative Agent
         as Collateral for, and/or (then or at any time thereafter) applied in
         full or in part by Administrative Agent


                                       51


         against, the applicable Secured Obligations (as defined in such
         Collateral Document) in the following order of priority:

                           (a)      To the payment of all costs and expenses of
                  such sale, collection or other realization, including
                  reasonable compensation to Administrative Agent and its agents
                  and counsel, and all other expenses, liabilities and advances
                  made or incurred by Administrative Agent in connection
                  therewith, and all amounts for which Administrative Agent is
                  entitled to indemnification under such Collateral Document and
                  all advances made by Administrative Agent thereunder for the
                  account of the applicable Loan Party, and to the payment of
                  all costs and expenses paid or incurred by Administrative
                  Agent in connection with the exercise of any right or remedy
                  under such Collateral Document, all in accordance with the
                  terms of this Agreement and such Collateral Document;

                           (b)      thereafter, to the extent of any excess of
                  such proceeds, to the payment of all other such Secured
                  Obligations for the ratable benefit of the holders thereof;
                  and

                           (c)      thereafter, to the extent of any excess of
                  such proceeds, to the payment to or upon the order of such
                  Loan Party or to whomsoever may be lawfully entitled to
                  receive the same or as a court of competent jurisdiction may
                  direct.

                  (ii)     APPLICATION OF PAYMENTS UNDER SUBSIDIARY GUARANTY.
         All payments received by Administrative Agent under the Subsidiary
         Guaranty shall be applied promptly from time to time by Administrative
         Agent in the following order of priority:

                           (a)      To the payment of the costs and expenses of
                  any collection or other realization under the Subsidiary
                  Guaranty, including reasonable compensation to Administrative
                  Agent and its agents and counsel, and all expenses,
                  liabilities and advances made or incurred by Administrative
                  Agent in connection therewith, all in accordance with the
                  terms of this Agreement and the Subsidiary Guaranty;

                           (b)      thereafter, to the extent of any excess of
                  such payments, to the payment of all other Guarantied
                  Obligations (as defined in the Subsidiary Guaranty) for the
                  ratable benefit of the holders thereof; and

                           (c)      thereafter, to the extent of any excess of
                  such payments, to the payment to the applicable Subsidiary
                  Guarantor or to whomsoever may be lawfully entitled to receive
                  the same or as a court of competent jurisdiction may direct.

2.5      USE OF PROCEEDS.

         A.       TRANCHE A TERM LOANS, TRANCHE B TERM LOANS AND INITIAL
REVOLVING LOANS. The proceeds of the Tranche A Term Loans and the Tranche B Term
Loans, together with up to $20 million of Revolving Loans and the proceeds of
the debt and equity capitalization of


                                       52


Company described in subsection 4.1D(i), were applied on the Closing Date to
fund the Acquisition Financing Requirements.

         B.       REVOLVING LOANS; SWING LINE LOANS; NEW TRANCHE B TERM LOANS.
After the Closing Date and prior to the Restatement Effective Date, the proceeds
of Revolving Loans were applied by Company for working capital and general
corporate purposes. After the Restatement Effective Date, the proceeds of
Revolving Loans and any Swing Line Loans and New Tranche B Term Loans shall be
applied by Company for working capital and general corporate purposes.

         C.       MARGIN REGULATIONS. No portion of the proceeds of any
borrowing under this Agreement shall be used by Company or any of its
Subsidiaries in any manner that might cause the borrowing or the application of
such proceeds to violate Regulation U, Regulation T or Regulation X of the Board
of Governors of the Federal Reserve System or any other regulation of such Board
or to violate the Exchange Act, in each case as in effect on the date or dates
of such borrowing and such use of proceeds.

2.6      SPECIAL PROVISIONS GOVERNING EURODOLLAR RATE LOANS.

                  Notwithstanding any other provision of this Agreement to the
contrary, the following provisions shall govern with respect to Eurodollar Rate
Loans as to the matters covered:

         A.       DETERMINATION OF APPLICABLE INTEREST RATE. As soon as
practicable after 9:00 A.M. (LOS ANGELES TIME) on each Interest Rate
Determination Date, Administrative Agent shall determine (which determination
shall, absent manifest error, be final, conclusive and binding upon all parties)
the interest rate that shall apply to the Eurodollar Rate Loans for which an
interest rate is then being determined for the applicable Interest Period and
shall promptly give notice thereof (in writing or by telephone confirmed in
writing) to Company and each Lender.

         B.       INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event
that Administrative Agent shall have determined (which determination shall be
final and conclusive and binding upon all parties hereto), on any Interest Rate
Determination Date with respect to any Eurodollar Rate Loans, that by reason of
circumstances affecting the London interbank market adequate and fair means do
not exist for ascertaining the interest rate applicable to such Loans on the
basis provided for in the definition of Adjusted Eurodollar Rate, Administrative
Agent shall on such date give notice (by telefacsimile or by telephone confirmed
in writing) to Company and each Lender of such determination, whereupon (i) no
Loans may be made as, or converted to, Eurodollar Rate Loans until such time as
Administrative Agent notifies Company and Lenders that the circumstances giving
rise to such notice no longer exist and (ii) any Notice of Borrowing or Notice
of Conversion/Continuation given by Company with respect to the Loans in respect
of which such determination was made shall be deemed to be a request to make
such Loans as (or convert such Loan to, as the case may be) Base Rate Loans.

         C.       ILLEGALITY OR IMPRACTICABILITY OF EURODOLLAR RATE LOANS. In
the event that on any date any Lender shall have determined (which determination
shall be final and conclusive and binding upon all parties hereto but shall be
made only after consultation with Company and Administrative Agent) that the
making, maintaining or continuation of its Eurodollar Rate Loans (i) has become
unlawful as a result of compliance by such Lender in good faith with any law,


                                       53


treaty, governmental rule, regulation, guideline or order (or would conflict
with any such treaty, governmental rule, regulation, guideline or order not
having the force of law even though the failure to comply therewith would not be
unlawful) or (ii) has become impracticable, or would cause such Lender material
hardship, as a result of contingencies occurring after the date of this
Agreement which materially and adversely affect the London interbank market or
the position of such Lender in that market, then, and in any such event, such
Lender shall be an "AFFECTED LENDER" and it shall on that day give notice (by
telefacsimile or by telephone confirmed in writing) to Company and
Administrative Agent of such determination (which notice Administrative Agent
shall promptly transmit to each other Lender). Thereafter (a) the obligation of
the Affected Lender to make Loans as, or to convert Loans to, Eurodollar Rate
Loans shall be suspended until such notice shall be withdrawn by the Affected
Lender, (b) to the extent such determination by the Affected Lender relates to a
Eurodollar Rate Loan then being requested by Company pursuant to a Notice of
Borrowing or a Notice of Conversion/Continuation, the Affected Lender shall make
such Loan as (or convert such Loan to, as the case may be) a Base Rate Loan, (c)
the Affected Lender's obligation to maintain its outstanding Eurodollar Rate
Loans (the "AFFECTED LOANS") shall be terminated at the earlier to occur of the
expiration of the Interest Period then in effect with respect to the Affected
Loans or when required by law, and (d) the Affected Loans shall automatically
convert into Base Rate Loans on the date of such termination. Notwithstanding
the foregoing, to the extent a determination by an Affected Lender as described
above relates to a Eurodollar Rate Loan then being requested by Company pursuant
to a Notice of Borrowing or a Notice of Conversion/Continuation, Company shall
have the option, subject to the provisions of subsection 2.6D, to rescind such
Notice of Borrowing or Notice of Conversion/Continuation as to all Lenders by
giving notice (by telefacsimile or by telephone confirmed in writing) to
Administrative Agent of such rescission on the date on which the Affected Lender
gives notice of its determination as described above (which notice of rescission
Administrative Agent shall promptly transmit to each other Lender). Except as
provided in the immediately preceding sentence, nothing in this subsection 2.6C
shall affect the obligation of any Lender other than an Affected Lender to make
or maintain Loans as, or to convert Loans to, Eurodollar Rate Loans in
accordance with the terms of this Agreement.

         D.       COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST
PERIODS. Company shall compensate each Lender, upon written request by that
Lender for all reasonable losses, expenses and liabilities (including any
interest paid by that Lender to lenders of funds borrowed by it to make or carry
its Eurodollar Rate Loans and any loss, expense or liability (exclusive of any
expected profit on such Loans) sustained by that Lender in connection with the
liquidation or re-employment of such funds) which that Lender may sustain: (i)
if for any reason (other than a default by that Lender) a borrowing of any
Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of
Borrowing or a telephonic request for borrowing, or a conversion to or
continuation of any Eurodollar Rate Loan does not occur on a date specified
therefor in a Notice of Conversion/Continuation or a telephonic request for
conversion or continuation, (ii) if any prepayment (including any prepayment
pursuant to subsection 2.4B(i)) or other principal payment or any conversion of
any of its Eurodollar Rate Loans occurs on a date prior to the last day of an
Interest Period applicable to that Loan, (iii) if any prepayment of any of its
Eurodollar Rate Loans is not made on any date specified in a notice of
prepayment given by Company, or (iv) as a consequence of any other default by
Company in the repayment of its Eurodollar Rate Loans when required by the terms
of this Agreement. Such Lender shall deliver


                                       54


to Company (with a copy to Administrative Agent) a written statement, setting
forth in reasonable detail the basis for calculating the additional amounts owed
to such Lender under this subsection 2.6D, which statement shall be conclusive
and binding upon all parties hereto absent manifest error.

         E.       BOOKING OF EURODOLLAR RATE LOANS. Any Lender may make, carry
or transfer Eurodollar Rate Loans at, to, or for the account of any of its
branch offices or the office of an Affiliate of that Lender.

         F.       ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS.
Calculation of all amounts payable to a Lender under this subsection 2.6 and
under subsection 2.7A shall be made as though that Lender had actually funded
each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar
deposit bearing interest at the rate obtained pursuant to clause (i) of the
definition of Adjusted Eurodollar Rate in an amount equal to the amount of such
Eurodollar Rate Loan and having a maturity comparable to the relevant Interest
Period and through the transfer of such Eurodollar deposit from an offshore
office of that Lender to a domestic office of that Lender in the United States
of America; PROVIDED HOWEVER, that each Lender may fund each of its Eurodollar
Rate Loans in any manner it sees fit and the foregoing assumptions shall be
utilized only for the purposes of calculating amounts payable under this
subsection 2.6 and under subsection 2.7A.

         G.       EURODOLLAR RATE LOANS AFTER DEFAULT. After the occurrence of
and during the continuation of an Event of Default, (i) Company may not elect to
have a Loan be made or maintained as, or converted to, a Eurodollar Rate Loan
after the expiration of any Interest Period then in effect for that Loan and
(ii) subject to the provisions of subsection 2.6D, any Notice of Borrowing or
Notice of Conversion/Continuation given by Company with respect to a requested
borrowing or conversion/continuation that has not yet occurred shall be deemed
to be rescinded by Company.

2.7      INCREASED COSTS; TAXES; CAPITAL ADEQUACY.

         A.       COMPENSATION FOR INCREASED COSTS AND TAXES. Subject to the
provisions of subsection 2.7B (which shall be controlling with respect to the
matters covered thereby), in the event that any Lender shall determine that any
law, treaty or governmental rule, regulation or order, or any change therein or
in the interpretation, administration or application thereof (including the
introduction of any new law, treaty or governmental rule, regulation or order),
or any determination of a court or governmental authority, in each case that
becomes effective after the date hereof, or compliance by such Lender with any
guideline, request or directive issued or made after the date hereof by any
central bank or other governmental or quasi-governmental authority (whether or
not having the force of law):

                  (i)      subjects such Lender (or its applicable lending
         office) to any additional Tax (other than any Tax on the overall net
         income of such Lender) not covered by subsection 2.7B with respect to
         this Agreement or any of its obligations hereunder or any payments to
         such Lender (or its applicable lending office) of principal, interest,
         fees or any other amount payable hereunder;


                                       55


                  (ii)     imposes, modifies or holds applicable any reserve
         (including any marginal, emergency, supplemental, special or other
         reserve), special deposit, compulsory loan, FDIC insurance or similar
         requirement against assets held by, or deposits or other liabilities in
         or for the account of, or advances or loans by, or other credit
         extended by, or any other acquisition of funds by, any office of such
         Lender (other than any such reserve or other requirements with respect
         to Eurodollar Rate Loans that are reflected in the definition of
         Adjusted Eurodollar Rate); or

                  (iii)    imposes any other condition (other than with respect
         to a Tax matter) on or affecting such Lender (or its applicable lending
         office) or its obligations hereunder or the London interbank market;

and the result of any of the foregoing is to increase the cost to such Lender of
agreeing to make, making or maintaining Loans hereunder or to reduce any amount
received or receivable by such Lender (or its applicable lending office) with
respect thereto; then, in any such case, Company shall promptly pay to such
Lender, upon receipt of the statement referred to in the next sentence, such
additional amount or amounts (in the form of an increased rate of, or a
different method of calculating, interest or otherwise as such Lender in its
sole discretion shall determine) as may be necessary to compensate such Lender
for any such increased cost or reduction in amounts received or receivable
hereunder; PROVIDED, HOWEVER, that Company shall not be obligated to pay such
Lender any compensation attributable to any period prior to the date that is 90
days prior to the date on which such Lender gave notice to Company of the
circumstances entitling such Lender to compensation. Such Lender shall deliver
to Company (with a copy to Administrative Agent) a written statement, setting
forth in reasonable detail the basis for calculating the additional amounts owed
to such Lender under this subsection 2.7A, and stating that such Lender is, if
it is legally entitled to do so, generally charging similar amounts to borrowers
that are similarly situated, which statement shall be conclusive and binding
upon all parties hereto absent manifest error.

         B.       WITHHOLDING OF TAXES.

                  (i)      PAYMENTS TO BE FREE AND CLEAR. All sums payable by
         Company under this Agreement and the other Loan Documents shall (except
         to the extent required by law) be paid free and clear of, and without
         any deduction or withholding on account of, any Tax (other than a Tax
         on the overall net income of any Lender) imposed, levied, collected,
         withheld or assessed by or within the United States of America or any
         political subdivision in or of the United States of America or any
         other jurisdiction from or to which a payment is made by or on behalf
         of Company or by any federation or organization of which the United
         States of America or any such jurisdiction is a member at the time of
         payment.

                  (ii)     GROSSING-UP OF PAYMENTS. If Company or any other
         Person is required by law to make any deduction or withholding on
         account of any such Tax (other than a Tax on the overall net income of
         any Lender) from any sum paid or payable by Company to Administrative
         Agent or any Lender under any of the Loan Documents:


                                       56


                           (a)      Company shall notify Administrative Agent of
                  any such requirement or any change in any such requirement as
                  soon as Company becomes aware of it;

                           (b)      Company shall pay any such Tax before the
                  date on which penalties attach thereto, such payment to be
                  made (if the liability to pay is imposed on Company) for its
                  own account or (if that liability is imposed on Administrative
                  Agent or such Lender, as the case may be) on behalf of and in
                  the name of Administrative Agent or such Lender;

                           (c)      the sum payable by Company in respect of
                  which the relevant deduction, withholding or payment is
                  required shall be increased to the extent necessary to ensure
                  that, after the making of that deduction, withholding or
                  payment, Administrative Agent or such Lender, as the case may
                  be, receives on the due date a net sum equal to what it would
                  have received had no such deduction, withholding or payment
                  been required or made; and

                           (d)      within 30 days after paying any sum from
                  which it is required by law to make any deduction or
                  withholding, and within 30 days after the due date of payment
                  of any Tax which it is required by clause (b) above to pay,
                  Company shall deliver to Administrative Agent evidence
                  satisfactory to the other affected parties of such deduction,
                  withholding or payment and of the remittance thereof to the
                  relevant taxing or other authority;

         PROVIDED that no such additional amount shall be required to be paid to
         any Lender under clause (c) above except to the extent that any change
         after the date hereof (in the case of each Lender listed on the
         signature pages hereof) or after the date of the Assignment Agreement
         pursuant to which such Lender became a Lender (in the case of each
         other Lender) in any such requirement for a deduction, withholding or
         payment as is mentioned therein shall result in an increase in the rate
         of such deduction, withholding or payment from that in effect at the
         date of this Agreement or at the date of such Assignment Agreement, as
         the case may be, in respect of payments to such Lender.

                  (iii)    EVIDENCE OF EXEMPTION FROM U.S. WITHHOLDING TAX.

                           (a)      Each Lender that is organized under the laws
                  of any jurisdiction other than the United States or any state
                  or other political subdivision thereof (for purposes of this
                  subsection 2.7B(iii), a "NON-US LENDER") shall deliver to
                  Administrative Agent for transmission to Company, on or prior
                  to the Closing Date (in the case of each Lender listed on the
                  signature pages hereof) or on or prior to the date of the
                  Assignment Agreement pursuant to which it becomes a Lender (in
                  the case of each other Lender), and at such other times as may
                  be necessary in the determination of Company or Administrative
                  Agent (each in the reasonable exercise of its discretion), (1)
                  two original copies of Internal Revenue Service Form W-9,
                  W-8BEN or W-8ECI (as applicable to it), or any successor
                  forms, properly completed and duly executed by such Lender,
                  together with any other certificate or statement of exemption
                  required under the Internal Revenue Code or the regulations
                  issued thereunder to establish that such Lender is not


                                       57


                  subject to deduction or withholding of United States federal
                  income tax with respect to any payments to such Lender of
                  principal, interest, fees or other amounts payable under any
                  of the Loan Documents or (2) if such Lender is not a "bank" or
                  other Person described in Section 881(c)(3) of the Internal
                  Revenue Code and cannot deliver Internal Revenue Service Form
                  W-9, W-8BEN or W-8ECI pursuant to clause (1) above, a
                  Certificate re Non-Bank Status together with any other
                  certificate or statement of exemption required under the
                  Internal Revenue Code or the regulations issued thereunder to
                  establish that such Lender is not subject to deduction or
                  withholding of United States federal income tax with respect
                  to any payments to such Lender of interest payable under any
                  of the Loan Documents.

                           (b)      Each Lender required to deliver any forms,
                  certificates or other evidence with respect to United States
                  federal income tax withholding matters pursuant to subsection
                  2.7B(iii)(a) hereby agrees, from time to time after the
                  initial delivery by such Lender of such forms, certificates or
                  other evidence, whenever a lapse in time or change in
                  circumstances renders such forms, certificates or other
                  evidence obsolete or inaccurate in any material respect, that
                  such Lender shall promptly (1) deliver to Administrative Agent
                  for transmission to Company two new original copies of
                  Internal Revenue Service Form W-9, W-8BEN or W-8ECI, or
                  successor applicable forms, or a Certificate re Non-Bank
                  Status, as the case may be, properly completed and duly
                  executed by such Lender, together with any other certificate
                  or statement of exemption required in order to confirm or
                  establish that such Lender is not subject to deduction or
                  withholding of United States federal income tax with respect
                  to payments to such Lender under the Loan Documents or (2)
                  notify Administrative Agent and Company of its inability to
                  deliver any such forms, certificates or other evidence.

                           (c)      Company shall not be required to pay any
                  additional amount to any Non-US Lender under clause (b) or (c)
                  of subsection 2.7B(ii) if such Lender shall have failed to
                  satisfy the requirements of clause (a) or (b)(1) of this
                  subsection 2.7B(iii); PROVIDED that if such Lender shall have
                  satisfied the requirements of subsection 2.7B(iii)(a) on the
                  Closing Date (in the case of each Lender listed on the
                  signature pages hereof) or on the date of the Assignment
                  Agreement pursuant to which it became a Lender (in the case of
                  each other Lender), nothing in this subsection 2.7B(iii)(c)
                  shall relieve Company of its obligation to pay any additional
                  amounts pursuant to clause (b) or (c) of subsection 2.7B(ii)
                  in the event that, as a result of any change in any applicable
                  law, treaty or governmental rule, regulation or order, or any
                  change in the interpretation, administration or application
                  thereof, such Lender is no longer properly entitled to deliver
                  forms, certificates or other evidence at a subsequent date
                  establishing the fact that such Lender is not subject to
                  withholding as described in subsection 2.7B(iii)(a).

         C.       CAPITAL ADEQUACY ADJUSTMENT. If any Lender shall have
determined that the adoption, effectiveness, phase-in or applicability after the
date hereof of any law, rule or regulation (or any provision thereof) regarding
capital adequacy, or any change therein or in the interpretation or
administration thereof by any governmental authority, central bank, the National


                                       58


Association of Insurance Commissioners or comparable agency charged with the
interpretation or administration thereof, or compliance by any Lender (or its
applicable lending office) with any guideline, request or directive regarding
capital adequacy (whether or not having the force of law) of any such
governmental authority, central bank, the National Association of Insurance
Commissioners or comparable agency, has or would have the effect of reducing the
rate of return on the capital of such Lender or any corporation controlling such
Lender as a consequence of, or with reference to, such Lender's Loans or
Commitments or Letters of Credit or participations therein or other obligations
hereunder with respect to the Loans or the Letters of Credit to a level below
that which such Lender or such controlling corporation could have achieved but
for such adoption, effectiveness, phase-in, applicability, change or compliance
(taking into consideration the policies of such Lender or such controlling
corporation with regard to capital adequacy), then from time to time, Company
shall promptly pay to such Lender, upon receipt of the statement referred to in
the next sentence, such additional amount or amounts as will compensate such
Lender or such controlling corporation on an after-tax basis for such reduction;
PROVIDED HOWEVER, that Company shall not be obligated to pay such Lender any
compensation attributable to any period prior to the date that is 90 days prior
to the date on which such Lender gave notice to Company of the circumstances
entitling such Lender to compensation. Such Lender shall deliver to Company
(with a copy to Administrative Agent) a written statement, setting forth in
reasonable detail the basis for calculating the additional amounts owed to such
Lender under this subsection 2.7C and stating that such Lender is, if it is
legally entitled to do so, generally charging similar amounts to borrowers that
are similarly situated, which statement shall be conclusive and binding upon all
parties hereto absent manifest error.

2.8      OBLIGATION OF LENDERS AND ISSUING LENDERS TO MITIGATE.

                  Each Lender and Issuing Lender agrees that, as promptly as
practicable after the officer of such Lender or Issuing Lender responsible for
administering the Loans or Letters of Credit of such Lender or Issuing Lender,
as the case may be, becomes aware of the occurrence of an event or the existence
of a condition that would cause such Lender to become an Affected Lender or that
would entitle such Lender or Issuing Lender to receive payments under subsection
2.7 or subsection 3.6, it will, to the extent not inconsistent with the internal
policies of such Lender or Issuing Lender and any applicable legal or regulatory
restrictions, use reasonable efforts (i) to make, issue, fund or maintain the
Commitments of such Lender or the affected Loans or Letters of Credit of such
Lender or Issuing Lender through another lending or letter of credit office of
such Lender or Issuing Lender, or (ii) take such other measures as such Lender
or Issuing Lender may deem reasonable, if as a result thereof the circumstances
which would cause such Lender to be an Affected Lender would cease to exist or
the additional amounts which would otherwise be required to be paid to such
Lender or Issuing Lender pursuant to subsection 2.7 or subsection 3.6 would be
materially reduced and if, as determined by such Lender or Issuing Lender in its
sole discretion, the making, issuing, funding or maintaining of such Commitments
or Loans or Letters of Credit through such other lending or letter of credit
office or in accordance with such other measures, as the case may be, would not
otherwise materially adversely affect such Commitments or Loans or Letters of
Credit or the interests of such Lender or Issuing Lender; PROVIDED that such
Lender or Issuing Lender will not be obligated to utilize such other lending or
letter of credit office pursuant to this subsection 2.8 unless Company agrees to
pay all incremental expenses incurred by such Lender or Issuing Lender as a
result of utilizing such other lending or letter of credit office as described
in clause (i) above. A


                                       59


certificate as to the amount of any such expenses payable by Company pursuant to
this subsection 2.8 (setting forth in reasonable detail the basis for requesting
such amount) submitted by such Lender or Issuing Lender to Company (with a copy
to Administrative Agent) shall be conclusive absent manifest error.

2.9      SUBSTITUTE LENDERS.

                  In the event Company is required under the provisions of
subsection 2.7 or 3.6 to make payments in a material amount to any Lender or in
the event any Lender fails to lend to Company in accordance with this Agreement,
Company may, so long as no Event of Default or Potential Event of Default shall
have occurred and be continuing, elect to terminate such Lender as a party to
this Agreement; PROVIDED that, concurrently with such termination, (i) Company
shall pay that Lender all principal, interest and fees and other amounts
(including without limitation, amounts, if any, owed under subsection 2.7 and
3.6) owed to such Lender through such date of termination, (ii) another
financial institution satisfactory to Company and Administrative Agent (or if
Administrative Agent is also the Lender to be terminated, the successor
Administrative Agent) shall agree, as of such date, to become a Lender for all
purposes under this Agreement (whether by assignment or amendment) and to assume
all obligations of the Lender to be terminated as of such date, and (iii) all
documents and supporting materials necessary, in the judgment of Administrative
Agent (or if Administrative Agent is also the Lender to be terminated, the
successor Administrative Agent), to evidence the substitution of such Lender
shall have been received and approved by Administrative Agent as of such date.

SECTION 3.                 LETTERS OF CREDIT

3.1      ISSUANCE OF LETTERS OF CREDIT AND LENDERS' PURCHASE OF PARTICIPATIONS
         THEREIN.

         A.       LETTERS OF CREDIT. In addition to Company requesting that
Lenders make Revolving Loans pursuant to subsection 2.1A(iii) and that Swing
Line Lender make Swing Line Loans pursuant to subsection 2.1A(iv), Company may
request, in accordance with the provisions of this subsection 3.1, from time to
time during the period from the Closing Date to but excluding the Revolving Loan
Commitment Termination Date, that one or more Lenders issue Letters of Credit
for the account of Company for the purposes specified in the definitions of
Commercial Letters of Credit and Standby Letters of Credit. Subject to the terms
and conditions of this Agreement and in reliance upon the representations and
warranties of Company herein set forth, any one or more Lenders may, but (except
as provided in subsection 3.1B(ii)) shall not be obligated to, issue such
Letters of Credit in accordance with the provisions of this subsection 3.1;
PROVIDED that Company shall not request that any Lender issue (and no Lender
shall issue):

                  (i)      any Letter of Credit if, after giving effect to such
         issuance, the Total Utilization of Revolving Loan Commitments would
         exceed the Revolving Loan Commitments then in effect;

                  (ii)     any Letter of Credit if, after giving effect to such
         issuance, the Letter of Credit Usage would exceed $25,000,000;

                  (iii)    any Standby Letter of Credit having an expiration
         date later than the earlier of (a) the Revolving Loan Commitment
         Termination Date and (b) the date which


                                       60


         is one year from the date of issuance of such Standby Letter of Credit;
         PROVIDED that the immediately preceding clause (b) shall not prevent
         any Issuing Lender from agreeing that a Standby Letter of Credit will
         automatically be extended for one or more successive periods not to
         exceed one year each unless such Issuing Lender elects not to extend
         for any such additional period; and PROVIDED FURTHER that such Issuing
         Lender shall elect not to extend such Standby Letter of Credit if it
         has knowledge that an Event of Default has occurred and is continuing
         (and has not been waived in accordance with subsection 10.6) at the
         time such Issuing Lender must elect whether or not to allow such
         extension;

                  (iv)     any Commercial Letter of Credit having an expiration
         date (a) later than the earlier of (1) the date which is 30 days prior
         to the Revolving Loan Commitment Termination Date and (2) the date
         which is one year from the date of issuance of such Commercial Letter
         of Credit or (b) that is otherwise unacceptable to the applicable
         Issuing Lender in its reasonable discretion; or

                  (v)      any Letter of Credit denominated in a foreign
         currency which in the judgment of the applicable Issuing Lender is not
         readily and freely available.

         B.       MECHANICS OF ISSUANCE.

                  (i)      NOTICE OF ISSUANCE. Whenever Company desires the
         issuance of a Letter of Credit, it shall deliver to Administrative
         Agent a Notice of Issuance of Letter of Credit substantially in the
         form of EXHIBIT III annexed hereto no later than 1:30 P.M. (New York
         time) at least three Business Days (in the case of Standby Letters of
         Credit), at least one Business Day (in the case of Commercial Letters
         of Credit), or in each case such shorter period as may be agreed to by
         the Issuing Lender in any particular instance, in advance of the
         proposed date of issuance. The Notice of Issuance of Letter of Credit
         shall specify (a) the proposed date of issuance (which shall be a
         Business Day), (b) whether the Letter of Credit is to be a Standby
         Letter of Credit or a Commercial Letter of Credit, (c) the face amount
         of the Letter of Credit, (d) in the case of a Letter of Credit which
         Company requests to be denominated in a currency other than Dollars,
         the currency in which Company requests such Letter of Credit to be
         issued, (e) the expiration date of the Letter of Credit, (f) the name
         and address of the beneficiary, and (f) either the verbatim text of the
         proposed Letter of Credit or the proposed terms and conditions thereof,
         including a precise description of any documents to be presented by the
         beneficiary which, if presented by the beneficiary prior to the
         expiration date of the Letter of Credit, would require the Issuing
         Lender to make payment under the Letter of Credit; PROVIDED that the
         Issuing Lender, in its reasonable discretion, may require changes in
         the text of the proposed Letter of Credit or any such documents; and
         PROVIDED FURTHER that no Letter of Credit shall require payment against
         a conforming draft to be made thereunder on the same business day
         (under the laws of the jurisdiction in which the office of the Issuing
         Lender to which such draft is required to be presented is located) that
         such draft is presented if such presentation is made after 10:30 A.M.
         (in the time zone of such office of the Issuing Lender) on such
         business day.

                  Company shall notify the applicable Issuing Lender (and
         Administrative Agent, if Administrative Agent is not such Issuing
         Lender) prior to the issuance of any Letter of Credit in the event that
         any of the matters to which Company is required to certify in the


                                       61


         applicable Notice of Issuance of Letter of Credit is no longer true and
         correct as of the proposed date of issuance of such Letter of Credit,
         and upon the issuance of any Letter of Credit Company shall be deemed
         to have re-certified, as of the date of such issuance, as to the
         matters to which Company is required to certify in the applicable
         Notice of Issuance of Letter of Credit.

                  (ii)     DETERMINATION OF ISSUING LENDER. Upon receipt by
         Administrative Agent of a Notice of Issuance of Letter of Credit
         pursuant to subsection 3.1B(i) requesting the issuance of a Letter of
         Credit, in the event Administrative Agent elects to issue such Letter
         of Credit, Administrative Agent shall promptly so notify Company, and
         Administrative Agent shall be the Issuing Lender with respect thereto.
         In the event that Administrative Agent, in its sole discretion, elects
         not to issue such Letter of Credit, Administrative Agent shall promptly
         so notify Company, whereupon Company may request any other Lender to
         issue such Letter of Credit by delivering to such Lender a copy of the
         applicable Notice of Issuance of Letter of Credit. Any Lender so
         requested to issue such Letter of Credit shall promptly notify Company
         and Administrative Agent whether or not, in its sole discretion, it has
         elected to issue such Letter of Credit, and any such Lender which so
         elects to issue such Letter of Credit shall be the Issuing Lender with
         respect thereto. In the event that all other Lenders shall have
         declined to issue such Letter of Credit, notwithstanding the prior
         election of Administrative Agent not to issue such Letter of Credit,
         Administrative Agent shall be obligated to issue such Letter of Credit
         and shall be the Issuing Lender with respect thereto, notwithstanding
         the fact that the Letter of Credit Usage with respect to such Letter of
         Credit and with respect to all other Letters of Credit issued by
         Administrative Agent, when aggregated with Administrative Agent's
         outstanding Revolving Loans and Swing Line Loans, may exceed
         Administrative Agent's Revolving Loan Commitment then in effect;
         PROVIDED that Administrative Agent shall not be obligated to issue any
         Letter of Credit denominated in a foreign currency which in the
         judgment of Administrative Agent is not readily and freely available.

                  (iii)    ISSUANCE OF LETTER OF CREDIT. Upon satisfaction or
         waiver (in accordance with subsection 10.6) of the conditions set forth
         in subsection 4.4, the Issuing Lender shall issue the requested Letter
         of Credit in accordance with the Issuing Lender's standard operating
         procedures.

                  (iv)     NOTIFICATION TO LENDERS. Upon the issuance of any
         Letter of Credit the applicable Issuing Lender shall promptly notify
         Administrative Agent and each other Lender of such issuance, which
         notice shall be accompanied by a copy of such Letter of Credit.
         Promptly after receipt of such notice (or, if Administrative Agent is
         the Issuing Lender, together with such notice), Administrative Agent
         shall notify each Lender of the amount of such Lender's respective
         participation in such Letter of Credit, determined in accordance with
         subsection 3.1C.

                  (v)      REPORTS TO LENDERS. Within 15 days after the end of
         each calendar quarter ending after the Closing Date, so long as any
         Letter of Credit shall have been outstanding during such calendar
         quarter, each Issuing Lender shall deliver to each other Lender a
         report setting forth for such calendar quarter the daily aggregate
         amount available to be


                                       62


         drawn under the Letters of Credit issued by such Issuing Lender that
         were outstanding during such calendar quarter.

         C.       LENDERS' PURCHASE OF PARTICIPATIONS IN LETTERS OF CREDIT.
Immediately upon the issuance of each Letter of Credit, each Lender shall be
deemed to, and hereby agrees to, have irrevocably purchased from the Issuing
Lender a participation in such Letter of Credit and any drawings honored
thereunder in an amount equal to such Lender's Pro Rata Share of the maximum
amount which is or at any time may become available to be drawn thereunder.

3.2      LETTER OF CREDIT FEES.

                  Company agrees to pay the following amounts with respect to
Letters of Credit issued hereunder:

                  (i)      with respect to each Standby Letter of Credit, (a) a
         fronting fee, payable directly to the applicable Issuing Lender for its
         own account, equal to the greater of (1) $500 and (2) 0.25% per annum
         of the daily amount available to be drawn under such Letter of Credit
         and (b) a letter of credit fee, payable to Administrative Agent for the
         account of Lenders, equal to the daily amount available to be drawn
         under such Standby Letter of Credit MULTIPLIED by the Applicable
         Eurodollar Rate Margin (as determined in accordance with subsection
         2.2A), each such fronting fee or letter of credit fee to be payable in
         arrears on and to (but excluding) the last Business Day of each of
         March, June, September and December of each year and computed on the
         basis of a 360-day year for the actual number of days elapsed;

                  (ii)     with respect to each Commercial Letter of Credit,
         fronting and letter of credit fees, payable directly to the applicable
         Issuing Lender for its own account, at such times and in such amounts
         as are in accordance with such Issuing Lender's standard schedule for
         such charges in effect at the time of such issuance; and

                  (iii)    with respect to the issuance, amendment or transfer
         of each Letter of Credit and each payment of a drawing made thereunder
         (without duplication of the fees payable under clauses (i) and (ii)
         above), reasonable and customary documentary and processing charges
         payable directly to the applicable Issuing Lender for its own account
         in accordance with such Issuing Lender's standard schedule for such
         charges in effect at the time of such issuance, amendment, transfer or
         payment, as the case may be.

For purposes of calculating any fees payable under clauses (i) and (ii) of this
subsection 3.2, (1) the daily amount available to be drawn under any Letter of
Credit shall be determined as of the close of business on any date of
determination and (2) any amount described in such clauses which is denominated
in a currency other than Dollars shall be valued based on the applicable
Exchange Rate for such currency as of the applicable date of determination.
Promptly upon receipt by Administrative Agent of any amount described in clause
(i)(b) of this subsection 3.2, Administrative Agent shall distribute to each
Lender its Pro Rata Share of such amount.


                                       63


3.3      DRAWINGS AND REIMBURSEMENT OF AMOUNTS PAID UNDER LETTERS OF CREDIT.

         A.       RESPONSIBILITY OF ISSUING LENDER WITH RESPECT TO DRAWINGS. In
determining whether to honor any drawing under any Letter of Credit by the
beneficiary thereof, the Issuing Lender shall be responsible only to examine the
documents delivered under such Letter of Credit with reasonable care so as to
ascertain whether they appear on their face to be in accordance with the terms
and conditions of such Letter of Credit.

         B.       REIMBURSEMENT BY COMPANY OF AMOUNTS PAID UNDER LETTERS OF
CREDIT. In the event an Issuing Lender has determined to honor a drawing under a
Letter of Credit issued by it, such Issuing Lender shall immediately notify
Company and Administrative Agent, and Company shall reimburse such Issuing
Lender on or before the Business Day immediately following the date on which
such drawing is honored (the "REIMBURSEMENT DATE") in an amount in Dollars
(which amount, in the case of a drawing under a Letter of Credit which is
denominated in a currency other than Dollars, shall be calculated by reference
to the applicable Exchange Rate) and in same day funds equal to the amount of
such honored drawing; PROVIDED that, anything contained in this Agreement to the
contrary notwithstanding, (i) unless Company shall have notified Administrative
Agent and such Issuing Lender prior to 1:00 P.M. (New York time) on the date
such drawing is honored that Company intends to reimburse such Issuing Lender
for the amount of such honored drawing with funds other than the proceeds of
Revolving Loans, Company shall be deemed to have given a timely Notice of
Borrowing to Administrative Agent requesting Lenders to make Revolving Loans
that are Base Rate Loans on the Reimbursement Date in an amount in Dollars
(which amount, in the case of a drawing under a Letter of Credit which is
denominated in a currency other than Dollars, shall be calculated by reference
to the applicable Exchange Rate) equal to the amount of such honored drawing and
(ii) Lenders shall, on the Reimbursement Date, make Revolving Loans that are
Base Rate Loans in the amount of such honored drawing, the proceeds of which
shall be applied directly by Administrative Agent to reimburse such Issuing
Lender for the amount of such honored drawing; and PROVIDED, FURTHER that if for
any reason proceeds of Revolving Loans are not received by such Issuing Lender
on the Reimbursement Date in an amount equal to the amount of such honored
drawing, Company shall reimburse such Issuing Lender, on demand, in an amount in
same day funds equal to the excess of the amount of such honored drawing over
the aggregate amount of such Revolving Loans, if any, which are so received.
Nothing in this subsection 3.3B shall be deemed to relieve any Lender from its
obligation to make Revolving Loans on the terms and conditions set forth in this
Agreement, and Company shall retain any and all rights it may have against any
Lender resulting from the failure of such Lender to make such Revolving Loans
under this subsection 3.3B.

         C.       PAYMENT BY LENDERS OF UNREIMBURSED AMOUNTS PAID UNDER LETTERS
OF CREDIT.

                  (i)      PAYMENT BY LENDERS. In the event that Company shall
         fail for any reason to reimburse any Issuing Lender as provided in
         subsection 3.3B in an amount (calculated, in the case of a drawing
         under a Letter of Credit denominated in a currency other than Dollars,
         by reference to the applicable Exchange Rate) equal to the amount of
         any drawing honored by such Issuing Lender under a Letter of Credit
         issued by it, such Issuing Lender shall promptly notify each other
         Lender of the unreimbursed amount of


                                       64


         such honored drawing and of such other Lender's respective
         participation therein based on such Lender's Pro Rata Share. Each
         Lender shall make available to such Issuing Lender an amount equal to
         its respective participation, in Dollars and in same day funds, at the
         office of such Issuing Lender specified in such notice, not later than
         3:00 P.M. (New York time) on the first business day (under the laws of
         the jurisdiction in which such office of such Issuing Lender is
         located) after the date notified by such Issuing Lender. In the event
         that any Lender fails to make available to such Issuing Lender on such
         business day the amount of such Lender's participation in such Letter
         of Credit as provided in this subsection 3.3C, such Issuing Lender
         shall be entitled to recover such amount on demand from such Lender
         together with interest thereon at the rate customarily used by such
         Issuing Lender for the correction of errors among banks for three
         Business Days and thereafter at the Base Rate. Nothing in this
         subsection 3.3C shall be deemed to prejudice the right of any Lender to
         recover from any Issuing Lender any amounts made available by such
         Lender to such Issuing Lender pursuant to this subsection 3.3C in the
         event that it is determined by the final judgment of a court of
         competent jurisdiction that the payment with respect to a Letter of
         Credit by such Issuing Lender in respect of which payment was made by
         such Lender constituted gross negligence or willful misconduct on the
         part of such Issuing Lender.

                  (ii)     DISTRIBUTION TO LENDERS OF REIMBURSEMENTS RECEIVED
         FROM COMPANY. In the event any Issuing Lender shall have been
         reimbursed by other Lenders pursuant to subsection 3.3C(i) for all or
         any portion of any drawing honored by such Issuing Lender under a
         Letter of Credit issued by it, such Issuing Lender shall distribute to
         each other Lender which has paid all amounts payable by it under
         subsection 3.3C(i) with respect to such honored drawing such other
         Lender's Pro Rata Share of all payments subsequently received by such
         Issuing Lender from Company in reimbursement of such honored drawing
         when such payments are received. Any such distribution shall be made to
         a Lender at its primary address set forth below its name on the
         appropriate signature page hereof or at such other address as such
         Lender may request.

         D.       INTEREST ON AMOUNTS PAID UNDER LETTERS OF CREDIT.

                  (i)      PAYMENT OF INTEREST BY COMPANY. Company agrees to pay
         to each Issuing Lender, with respect to drawings honored under any
         Letters of Credit issued by it, interest on the amount paid by such
         Issuing Lender in respect of each such honored drawing from the date
         such drawing is honored to but excluding the date such amount is
         reimbursed by Company (including any such reimbursement out of the
         proceeds of Revolving Loans pursuant to subsection 3.3B) at a rate
         equal to (a) for the period from the date such drawing is honored to
         but excluding the Reimbursement Date, the rate then in effect under
         this Agreement with respect to Revolving Loans that are Base Rate Loans
         and (b) thereafter, a rate which is 2% per annum in excess of the rate
         of interest otherwise payable under this Agreement with respect to
         Revolving Loans that are Base Rate Loans. Interest payable pursuant to
         this subsection 3.3D(i) shall be computed on the basis of a 365-day
         year for the actual number of days elapsed in the period during which
         it accrues and shall be payable on demand or, if no demand is made, on
         the date on which the related drawing under a Letter of Credit is
         reimbursed in full.


                                       65


                  (ii)     DISTRIBUTION OF INTEREST PAYMENTS BY ISSUING LENDER.
         Promptly upon receipt by any Issuing Lender of any payment of interest
         pursuant to subsection 3.3D(i) with respect to a drawing honored under
         a Letter of Credit issued by it, (a) such Issuing Lender shall
         distribute to each other Lender, out of the interest received by such
         Issuing Lender in respect of the period from the date such drawing is
         honored to but excluding the date on which such Issuing Lender is
         reimbursed for the amount of such drawing (including any such
         reimbursement out of the proceeds of Revolving Loans pursuant to
         subsection 3.3B), the amount that such other Lender would have been
         entitled to receive in respect of the letter of credit fee that would
         have been payable in respect of such Letter of Credit for such period
         pursuant to subsection 3.2 if no drawing had been honored under such
         Letter of Credit, and (b) in the event such Issuing Lender shall have
         been reimbursed by other Lenders pursuant to subsection 3.3C(i) for all
         or any portion of such honored drawing, such Issuing Lender shall
         distribute to each other Lender which has paid all amounts payable by
         it under subsection 3.3C(i) with respect to such honored drawing such
         other Lender's Pro Rata Share of any interest received by such Issuing
         Lender in respect of that portion of such honored drawing so reimbursed
         by other Lenders for the period from the date on which such Issuing
         Lender was so reimbursed by other Lenders to but excluding the date on
         which such portion of such honored drawing is reimbursed by Company.
         Any such distribution shall be made to a Lender at its primary address
         set forth below its name on the appropriate signature page hereof or at
         such other address as such Lender may request.

3.4      OBLIGATIONS ABSOLUTE.

                  The obligation of Company to reimburse each Issuing Lender for
drawings honored under the Letters of Credit issued by it and to repay any
Revolving Loans made by Lenders pursuant to subsection 3.3B and the obligations
of Lenders under subsection 3.3C(i) shall be unconditional and irrevocable and
shall be paid strictly in accordance with the terms of this Agreement under all
circumstances including any of the following circumstances:

                  (i)      any lack of validity or enforceability of any Letter
         of Credit;

                  (ii)     the existence of any claim, set-off, defense or other
         right which Company or any Lender may have at any time against a
         beneficiary or any transferee of any Letter of Credit (or any Persons
         for whom any such transferee may be acting), any Issuing Lender or
         other Lender or any other Person or, in the case of a Lender, against
         Company, whether in connection with this Agreement, the transactions
         contemplated herein or any unrelated transaction (including any
         underlying transaction between Company or one of its Subsidiaries and
         the beneficiary for which any Letter of Credit was procured);

                  (iii)    any draft or other document presented under any
         Letter of Credit proving to be forged, fraudulent, invalid or
         insufficient in any respect or any statement therein being untrue or
         inaccurate in any respect;

                  (iv)     payment by the applicable Issuing Lender under any
         Letter of Credit against presentation of a draft or other document
         which does not substantially comply with the terms of such Letter of
         Credit;


                                       66


                  (v)      the occurrence or existence of any Material Adverse
         Effect;

                  (vi)     any breach of this Agreement or any other Loan
         Document by any party thereto; or

                  (vii)    the fact that an Event of Default or a Potential
         Event of Default shall have occurred and be continuing;

PROVIDED, in each case, that payment by the applicable Issuing Lender under the
applicable Letter of Credit shall not have constituted gross negligence or
willful misconduct of such Issuing Lender under the circumstances in question
(as determined by a final judgment of a court of competent jurisdiction).

3.5      INDEMNIFICATION; NATURE OF ISSUING LENDERS' DUTIES.

         A.       INDEMNIFICATION. In addition to amounts payable as provided in
subsection 3.6, Company hereby agrees to protect, indemnify, pay and save
harmless each Issuing Lender from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including reasonable
fees, expenses and disbursements of counsel) which such Issuing Lender may incur
or be subject to as a consequence, direct or indirect, of (i) the issuance of
any Letter of Credit by such Issuing Lender, other than as a result of (a) the
gross negligence or willful misconduct of such Issuing Lender as determined by a
final judgment of a court of competent jurisdiction or (b) subject to the
following clause (ii), the wrongful dishonor by such Issuing Lender of a proper
demand for payment made under any Letter of Credit issued by it or (ii) the
failure of such Issuing Lender to honor a drawing under any such Letter of
Credit as a result of any act or omission, whether rightful or wrongful, of any
present or future de jure or de facto government or governmental authority (all
such acts or omissions herein called "GOVERNMENTAL ACTS").

         B.       NATURE OF ISSUING LENDERS' DUTIES. As between Company and any
Issuing Lender, Company assumes all risks of the acts and omissions of, or
misuse of the Letters of Credit issued by such Issuing Lender by, the respective
beneficiaries of such Letters of Credit. In furtherance and not in limitation of
the foregoing, such Issuing Lender shall not be responsible for: (i) the form,
validity, sufficiency, accuracy, genuineness or legal effect of any document
submitted by any party in connection with the application for and issuance of
any such Letter of Credit, even if it should in fact prove to be in any or all
respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the
validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any such Letter of Credit or the rights or
benefits thereunder or proceeds thereof, in whole or in part, which may prove to
be invalid or ineffective for any reason; (iii) failure of the beneficiary of
any such Letter of Credit to comply fully with any conditions required in order
to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or
delays in transmission or delivery of any messages, by mail, cable, telegraph,
telex or otherwise, whether or not they be in cipher; (v) errors in
interpretation of technical terms; (vi) any loss or delay in the transmission or
otherwise of any document required in order to make a drawing under any such
Letter of Credit or of the proceeds thereof; (vii) the misapplication by the
beneficiary of any such Letter of Credit of the proceeds of any drawing under
such Letter of Credit; or (viii) any consequences arising from causes beyond the
control of


                                       67


such Issuing Lender, including any Governmental Acts, and none of the above
shall affect or impair, or prevent the vesting of, any of such Issuing Lender's
rights or powers hereunder.

                  In furtherance and extension and not in limitation of the
specific provisions set forth in the first paragraph of this subsection 3.5B,
any action taken or omitted by any Issuing Lender under or in connection with
the Letters of Credit issued by it or any documents and certificates delivered
thereunder, if taken or omitted in good faith, shall not put such Issuing Lender
under any resulting liability to Company.

                  Notwithstanding anything to the contrary contained in this
subsection 3.5, Company shall retain any and all rights it may have against any
Issuing Lender for any liability arising solely out of the gross negligence or
willful misconduct of such Issuing Lender, as determined by a final judgment of
a court of competent jurisdiction.

3.6      INCREASED COSTS AND TAXES RELATING TO LETTERS OF CREDIT.

                  Subject to the provisions of subsection 2.7B (which shall be
controlling with respect to the matters covered thereby), in the event that any
Issuing Lender or Lender shall determine (which determination shall, absent
manifest error, be final and conclusive and binding upon all parties hereto)
that any law, treaty or governmental rule, regulation or order, or any change
therein or in the interpretation, administration or application thereof
(including the introduction of any new law, treaty or governmental rule,
regulation or order), or any determination of a court or governmental authority,
in each case that becomes effective after the date hereof, or compliance by any
Issuing Lender or Lender with any guideline, request or directive issued or made
after the date hereof by any central bank or other governmental or
quasi-governmental authority (whether or not having the force of law):

                  (i)      subjects such Issuing Lender or Lender (or its
         applicable lending or letter of credit office) to any additional Tax
         (other than any Tax on the overall net income of such Issuing Lender or
         Lender) with respect to the issuing or maintaining of any Letters of
         Credit or the purchasing or maintaining of any participations therein
         or any other obligations under this Section 3, whether directly or by
         such being imposed on or suffered by any particular Issuing Lender;

                  (ii)     imposes, modifies or holds applicable any reserve
         (including any marginal, emergency, supplemental, special or other
         reserve), special deposit, compulsory loan, FDIC insurance or similar
         requirement in respect of any Letters of Credit issued by any Issuing
         Lender or participations therein purchased by any Lender; or

                  (iii)    imposes any other condition (other than with respect
         to a Tax matter) on or affecting such Issuing Lender or Lender (or its
         applicable lending or letter of credit office) regarding this Section 3
         or any Letter of Credit or any participation therein;

and the result of any of the foregoing is to increase the cost to such Issuing
Lender or Lender of agreeing to issue, issuing or maintaining any Letter of
Credit or agreeing to purchase, purchasing or maintaining any participation
therein or to reduce any amount received or receivable by such Issuing Lender or
Lender (or its applicable lending or letter of credit office) with respect
thereto; then, in any case, Company shall promptly pay to such Issuing Lender or
Lender, upon receipt of


                                       68


the statement referred to in the next sentence, such additional amount or
amounts as may be necessary to compensate such Issuing Lender or Lender for any
such increased cost or reduction in amounts received or receivable hereunder;
PROVIDED, HOWEVER, that Company shall not be obligated to pay such Issuing
Lender or Lender any compensation attributable to any period prior to the date
that is 90 days prior to the date on which such Issuing Lender or Lender gave
notice to Company of the circumstances entitling such Issuing Lender or Lender
to compensation. Such Issuing Lender or Lender shall deliver to Company a
written statement, setting forth in reasonable detail the basis for calculating
the additional amounts owed to such Issuing Lender or Lender under this
subsection 3.6, which statement shall be conclusive and binding upon all parties
hereto absent manifest error.

3.7      CONFIRMATION OF LETTERS OF CREDIT ISSUED UNDER EXISTING CREDIT
         AGREEMENT.

                  All Letters of Credit issued under the Existing Credit
Agreement outstanding on the Restatement Effective Date shall be deemed Letters
of Credit issued hereunder.

SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT AND EFFECTIVENESS OF
AGREEMENT

                  The conditions to the making of the initial Loans, to the
effectiveness of this Agreement and to the making of subsequent Loans and the
issuance of Letters of Credit are set forth herein as follows:

4.1      CONDITIONS TO TERM LOANS AND INITIAL REVOLVING LOANS AND SWING LINE
         LOANS UNDER EXISTING CREDIT AGREEMENT.

                  The obligations of Lenders to make the Term Loans and any
Revolving Loans and Swing Line Loans made on the Closing Date were, in addition
to the conditions precedent specified in subsection 4.2 of the Existing Credit
Agreement, subject to prior or concurrent satisfaction or waiver of the
following conditions:

         A.       LOAN PARTY DOCUMENTS. On the Closing Date, Company delivered,
and caused each other Loan Party to deliver, to Lenders (or to Administrative
Agent for Lenders with sufficient originally executed copies, where appropriate,
for each Lender and its counsel) the following with respect to Company or such
Loan Party, as the case may be, each, unless otherwise noted, dated the Closing
Date:

                  (i)      Copies of the Organizational Documents of such
         Person, certified by the Secretary of State of its jurisdiction of
         organization if such certification is generally available and in each
         other case, by such Person's secretary or assistant secretary;

                  (ii)     To the extent generally available, a good standing
         certificate from the Secretary of State of its jurisdiction of
         organization and a certificate or other evidence of good standing as to
         payment of any applicable franchise or similar taxes from the
         appropriate taxing authority of such jurisdiction, each dated a recent
         date prior to the Closing Date;


                                       69


                  (iii)    Resolutions of the Board of Directors of such Person
         approving and authorizing the execution, delivery and performance of
         the Loan Documents and Related Agreements to which it is a party,
         certified as of the Closing Date by the corporate secretary or an
         assistant secretary of such Person as being in full force and effect
         without modification or amendment;

                  (iv)     Signature and incumbency certificates of the officers
         of such Person executing the Loan Documents to which it is a party;

                  (v)      Executed originals of the Notes and the other Loan
         Documents to which such Person is a party; and

                  (vi)     Such other documents as Administrative Agent may
         reasonably request.

         B.       HOLDINGS DOCUMENTS. On the Closing Date, Company delivered, or
caused to be delivered, to Lenders (or to Administrative Agent for Lenders with
sufficient originally executed copies, where appropriate, for each Lender and
its counsel) the following with respect to Holdings, each, unless otherwise
noted, dated the Closing Date:

                  (i)      executed originals of the Holdings Pledge Agreement;

                  (ii)     with respect to Holdings, evidence (which may be a
         legal opinion), reasonably satisfactory in form and substance to
         Administrative Agent, of the due authorization, execution and delivery
         by Holdings of the Holdings Pledge Agreement and of the enforceability
         of the Holdings Pledge Agreement against Holdings;

                  (iii)    with respect to Holdings, signature and incumbency
         certificates of the officers of Holdings executing the Holdings Pledge
         Agreement; and

                  (iv)     such other documents as Administrative Agent may
         reasonably request.

         C.       CLOSING DATE. The Closing Date was October 2, 2000.

         D.       NO MATERIAL ADVERSE EFFECT. Since January 29, 2000 there had
occurred no Material Adverse Effect.

         E.       CORPORATE AND CAPITAL STRUCTURE, OWNERSHIP, ETC.

                  (i)      CORPORATE STRUCTURE. The corporate organizational
         structure of Company and its Subsidiaries, after giving effect to the
         Merger, was as set forth in SCHEDULE 4.1E annexed hereto.

                  (ii)     CAPITAL STRUCTURE AND OWNERSHIP. The capital
         structure and ownership of Company and its Subsidiaries, after giving
         effect to the Merger, was as set forth in SCHEDULE 4.1E annexed hereto.

                  (iii)    EMPLOYMENT CONTRACTS. Administrative Agent and
         Lenders received copies of any and all employment contracts with senior
         management of Company.


                                       70


F.       PROCEEDS OF DEBT AND EQUITY CAPITALIZATION OF COMPANY.

                  (i)      DEBT AND EQUITY CAPITALIZATION OF COMPANY. On or
         before the Closing Date, (a) the LGP Investors and the TPG Investors
         had purchased Holdings Membership Interests for cash consideration of
         not less than $190,000,000 and (b) Holdings and TCW had purchased
         shares of the Capital Stock of Merger Sub for cash consideration of not
         less than $195,000,000. An additional $3,200,000 of Company Stock had
         been retained through "rollovers" by existing management shareholders.

                  (ii)     OTHER DEBT CAPITALIZATION OF COMPANY. On or before
         the Closing Date the Existing Senior Subordinated Notes had been sold
         for gross proceeds of not less than $120,000,000 and the Existing
         Senior Subordinated Note Agreement was in full force and effect and was
         not amended, supplemented, waived or otherwise modified without the
         consent of Agents, and executed or conformed copies thereof (including
         all exhibits and schedules thereto) and any amendments thereto and all
         documents executed in connection therewith were delivered to Agents.

                  (iii)    USE OF PROCEEDS OF CAPITALIZATION. Company provided
         evidence reasonably satisfactory to Administrative Agent that the
         proceeds of the debt and equity capitalization of Company described in
         clause (i) above had been irrevocably committed, prior to the
         application of the proceeds of the Term Loans and a portion of the
         Revolving Loans, to the payment of a portion of the Acquisition
         Financing Requirements.

         G.       MERGER MATTERS.

                  (i)      MERGER AGREEMENT AND CERTAIN OTHER RELATED
         AGREEMENTS. Administrative Agent had received fully executed or
         conformed copies of the Merger Agreement and any documents executed in
         connection therewith, and the Merger Agreement was in full force and
         effect and no provision thereof had been amended, supplemented, waived
         or otherwise modified in any respect determined by Administrative Agent
         to be material (including, without limitation, any increase in the
         price to be paid for the Company Stock to an amount in excess of $22.00
         per share), in each case without the consent of Administrative Agent;

                  (ii)     All conditions to the Merger set forth in the Merger
         Agreement were satisfied in all material respects or the fulfillment of
         any such conditions had been waived with the consent of Administrative
         Agent;

                  (iii)    The Merger became effective in accordance with the
         terms of the Merger Agreement and the Delaware General Corporation Law;
         and

                  (iv)     OFFICERS' CERTIFICATES. Administrative Agent received
         an Officers' Certificate from Company to the effect that (a) the
         representations and warranties of each of MergerSub and Company in the
         Merger Agreement were true, correct and complete in all material
         respects on and as of the Closing Date to the same extent as though
         made on and as of that date, (b) the Merger Agreement was in full force
         and effect and no provision thereof had been amended, supplemented,
         waived or otherwise modified in any material respect without the
         consent of Administrative Agent, (c) each of Borrower and


                                       71


         Merger Sub had complied with all agreements, terms and conditions
         contained in the Merger Agreement and any agreements or documents
         referred to therein required to be performed or complied with by each
         of them on or before the Closing Date, except where such failure to
         comply or perform could not reasonably be expected to have a Material
         Adverse Effect, and none of such Persons were in default in their
         performance or compliance with any of the terms or provisions thereof,
         except where such default could not reasonably be expected to have a
         Material Adverse Effect, and (d) the Merger has became effective in
         accordance with the terms of the Merger Agreement and the Delaware
         General Corporation Law. Administrative Agent received an Officer's
         Certificate of Company setting forth the sources and uses of funds with
         respect to the Merger and stating that Company would proceed to
         consummate the Merger immediately upon making of the initial loans.

         H.       RELATED AGREEMENTS.

                  (i)      APPROVAL OF RELATED AGREEMENTS. The Related
         Agreements were each reasonably satisfactory in form and substance to
         Administrative Agent.

                  (ii)     RELATED AGREEMENTS IN FULL FORCE AND EFFECT.
         Administrative Agent and Lenders received a fully executed or conformed
         copy of each Related Agreement and any documents executed in connection
         therewith, and each Related Agreement was in full force and effect and
         no provision thereof had been modified or waived if such modification
         or waiver would have a material adverse effect on the rights of Lenders
         hereunder, in each case without the consent of Administrative Agent.

         I.       MATTERS RELATING TO EXISTING INDEBTEDNESS. On the Closing
Date, (i) Company and its Subsidiaries (a) repaid in full all Indebtedness
outstanding under the then existing credit agreement, (b) terminated any
commitments to lend or make other extensions of credit thereunder, (c) delivered
to Administrative Agent all documents or instruments necessary to release all
Liens securing Indebtedness or other obligations of Company and its Subsidiaries
thereunder, and (d) made arrangements satisfactory to Administrative Agent with
respect to the cancellation or replacement of any letters of credit outstanding
thereunder or the issuance of Letters of Credit to support the obligations of
Company and its Subsidiaries with respect thereto and (ii) Company and its
Subsidiaries had no existing Indebtedness outstanding other than existing
Capital Leases and existing Indebtedness in an aggregate amount not exceeding
$20,000,000.

         J.       NECESSARY GOVERNMENTAL AUTHORIZATIONS AND THIRD PARTY
CONSENTS; EXPIRATION OF WAITING PERIODS, ETC. Company and each Sponsor had
obtained all Governmental Authorizations and all consents of other Persons, in
each case that were necessary or advisable in connection with the Merger and the
other transactions contemplated by the Loan Documents and the Related
Agreements, and each of the foregoing were in full force and effect, in each
case other than those the failure to obtain or maintain which, either
individually or in the aggregate, would not reasonably have been expected to
have had a Material Adverse Effect. All applicable waiting periods expired
without any action being taken or threatened by any competent authority which
would restrain, prevent or otherwise impose adverse conditions on the Merger or
the financing thereof. No action, request for stay, petition for review or
rehearing, reconsideration, or appeal with respect to any of the foregoing were


                                       72


pending, and the time for any applicable agency to take action to set aside its
consent on its own motion shall have expired.

         K.       SECURITY INTERESTS IN PERSONAL PROPERTY. Administrative Agent
received evidence satisfactory to it that Company and each Sponsor had taken or
had caused to be taken all such actions, executed and delivered or caused to be
executed and delivered all such agreements, documents and instruments, and made
or caused to be made all such filings and recordings (other than the filing or
recording of items described in clauses (iii) below) that were necessary or, in
the opinion of Administrative Agent, desirable in order to create in favor of
Administrative Agent, for the benefit of Lenders, a valid and (upon such filing
and recording) perfected First Priority security interest in the entire personal
property Collateral. Such actions included the following:

                  (i)      STOCK CERTIFICATES AND INSTRUMENTS. Delivery to
         Administrative Agent of (a) certificates (which certificates shall be
         accompanied by irrevocable undated stock powers, duly endorsed in blank
         and otherwise satisfactory in form and substance to Administrative
         Agent) representing all Capital Stock (other than the Company Preferred
         Stock) pledged pursuant to the Pledge and Security Agreement, and (b)
         all promissory notes or other instruments (duly endorsed, where
         appropriate, in a manner satisfactory to Administrative Agent)
         evidencing any Collateral with a fair market value or a face amount in
         excess of $250,000;

                  (ii)     LIEN SEARCHES AND UCC TERMINATION STATEMENTS.
         Delivery to Administrative Agent of (a) the results of a recent search,
         by a Person satisfactory to Administrative Agent, of all effective UCC
         financing statements and fixture filings and all judgment and tax lien
         filings which may have been made with respect to any personal or mixed
         property of any Loan Party, together with copies of all such filings
         disclosed by such search, and (b) UCC termination statements duly
         executed by all applicable Persons for filing in all applicable
         jurisdictions as may be necessary to terminate any effective UCC
         financing statements or fixture filings disclosed in such search (other
         than any such financing statements or fixture filings in respect of
         Liens permitted to remain outstanding pursuant to the terms of this
         Agreement); and

                  (iii)    UCC FINANCING STATEMENTS AND FIXTURE FILINGS.
         Delivery to Administrative Agent of UCC financing statements and, where
         appropriate, fixture filings, duly executed by each applicable Loan
         Party with respect to all personal and mixed property Collateral of
         such Loan Party, for filing in all jurisdictions as may be necessary
         or, in the opinion of Administrative Agent, desirable to perfect the
         security interests created in such Collateral pursuant to the
         Collateral Documents.

         L.       FINANCIAL STATEMENTS; PRO FORMA BALANCE SHEET. On or before
the Closing Date, Lenders received from Company (i) audited financial statements
for Company and its Subsidiaries for the Fiscal Year ended January 29, 2000,
consisting of balance sheets and the related consolidated statements of income,
stockholders' equity and cash flows for such Fiscal Year, setting forth in each
case in comparative form the corresponding figures for the previous Fiscal Year,
(ii) unaudited financial statements for Company and its Subsidiaries for the
Fiscal Quarter ended July 29, 2000 and any monthly fiscal period ended
subsequent to July 29, 2000 for which financial statements can be prepared, in
each case consisting of balance sheets and the


                                       73


related consolidated statements of income, stockholders' equity and cash flows
for such period, setting forth in each case in comparative form the
corresponding figures for the corresponding period of the previous Fiscal Year,
(iii) pro forma consolidated balance sheets of Company and its Subsidiaries as
at the Closing Date, prepared in accordance with GAAP and reflecting the
consummation of the Merger, the related financings and the other transactions
contemplated by the Loan Documents and the Related Agreements, which pro forma
financial statements were in form satisfactory to Administrative Agent and
Lenders and (iv) final projected financial statements of Company and its
Subsidiaries for the eight-year period immediately following the Closing Date,
consisting of balance sheets and the related statements of operations,
stockholders' equity and cash flows for such period, all of the foregoing in
form and substance reasonably satisfactory to Administrative Agent.

         M.       SOLVENCY LETTER. On the Closing Date, Administrative Agent and
Lenders received a letter, dated the Closing Date, from Valuation Research
Corporation, to the effect that, after giving effect to the consummation of the
Merger, the related financings and the other transactions contemplated by the
Loan Documents and the Related Agreements, Company would be Solvent, and
otherwise in form and substance reasonably satisfactory to Administrative Agent.

         N.       EVIDENCE OF INSURANCE. Administrative Agent received insurance
binders evidencing that all insurance required to be maintained pursuant to
subsection 6.4 is in full force and effect and that Administrative Agent on
behalf of Lenders has been named as additional insured and/or loss payee
thereunder to the extent required under subsection 6.4.

         O.       OPINIONS OF COUNSEL TO LOAN PARTIES. Lenders received
originally executed copies of one or more favorable written opinions of Latham &
Watkins and/or Skadden, Arps, Slate, Meagher & Flom LLP, counsel for Loan
Parties, in form and substance reasonably satisfactory to Administrative Agent
and its counsel, dated as of the Closing Date and setting forth substantially
the matters in the opinions designated in EXHIBIT VIII-A annexed hereto.

         P.       OPINIONS OF ADMINISTRATIVE AGENT'S COUNSEL. Lenders received
originally executed copies of one or more favorable written opinions of
O'Melveny & Myers LLP, counsel to Administrative Agent, dated as of the Closing
Date, substantially in the form of EXHIBIT IX annexed hereto.

         Q.       FEES. Company paid to Administrative Agent, for distribution
(as appropriate) to Administrative Agent and Lenders, the fees payable on the
Closing Date referred to in subsection 2.3.

         R.       REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF AGREEMENTS.
Company delivered to Administrative Agent and Lenders an Officer's Certificate,
in form and substance satisfactory to Administrative Agent, to the effect that
the representations and warranties in Section 5 are true, correct and complete
in all material respects on and as of the Closing Date to the same extent as
though made on and as of that date (or, to the extent such representations and
warranties specifically relate to an earlier date, that such representations and
warranties were true, correct and complete in all material respects on and as of
such earlier date) and that Company had performed in all material respects all
agreements and satisfied all conditions which this Agreement provides shall have
been performed or satisfied by it on or before the Closing


                                       74


Date except as otherwise disclosed to and agreed to in writing by Administrative
Agent and Lenders.

         S.       REVOLVING LOANS. As of the Closing Date, the Total Utilization
of Revolving Loan Commitments, after giving effect to the Merger, did not exceed
$20,000,000 except for outstanding Letters of Credit.

         T.       CLOSING DATE FINANCIAL PERFORMANCE. On the Closing Date,
Company delivered to Administrative Agent a Closing Date Compliance Certificate
demonstrating in reasonable detail compliance with the following conditions:

                  (i)      Consolidated Pro Forma EBITDA of the Company and its
         Subsidiaries for the four-Fiscal Quarter period ended July 29, 2000 was
         at least $97,000,000.

                  (ii)     As of the Closing Date the Company had senior secured
         debt ratings from Moody's Investors Service, Inc. and Standard & Poor's
         Rating Service.

         U.       TRANSACTION COSTS. The aggregate of all amounts necessary to
pay Transaction Costs did not exceed an amount disclosed to and reasonably
acceptable to the Administrative Agent and the Syndication Agent prior to the
Closing Date.

         V.       LEASEHOLD MORTGAGES AND COLLATERAL ACCESS AGREEMENTS. On the
Closing Date, Administrative Agent received leasehold mortgages or Collateral
Access Agreements on as many of the distribution centers operated by Company and
its Subsidiaries as the Company could obtain consent from the landlords thereof
using commercially reasonable efforts and approximately 50 retail stores
identified by Agents and Company.

         W.       COMPLETION OF PROCEEDINGS. All corporate and other proceedings
taken or to be taken in connection with the transactions contemplated hereby and
all documents incidental thereto not previously found acceptable by
Administrative Agent, acting on behalf of Lenders, and its counsel were
reasonably satisfactory in form and substance to Administrative Agent and such
counsel, and Administrative Agent and such counsel received all such counterpart
originals or certified copies of such documents as Administrative Agent may
reasonably request.

4.2      CONDITIONS TO EFFECTIVENESS OF THE AGREEMENT.

                  The conditions to the effectiveness of this Agreement are, in
addition to the conditions precedent specified in subsection 4.3:

         A.       COMPANY DOCUMENTS. On or before the Restatement Effective
Date, Company shall deliver to Lenders (or to Administrative Agent for Lenders
with sufficient originally executed copies, where appropriate, for each Lender
and its counsel) the following with respect to Company, each, unless otherwise
noted, dated the Restatement Effective Date:

                  (i)      A certificate of the Secretary or Assistant Secretary
         of Company certifying that the Organizational Documents of Company have
         not been amended, supplemented or otherwise modified since the Closing
         Date;


                                       75


                  (ii)     To the extent generally available, a good standing
         certificate from the Secretary of State of its jurisdiction of
         organization and a certificate or other evidence of good standing as to
         payment of any applicable franchise or similar taxes from the
         appropriate taxing authority of such jurisdiction, each dated a recent
         date prior to the Restatement Effective Date;

                  (iii)    Resolutions of the Board of Directors of Company
         approving and authorizing the execution, delivery and performance of
         the Loan Documents being executed on the Restatement Effective Date to
         which it is a party, certified as of the Restatement Effective Date by
         the corporate secretary or an assistant secretary of such Person as
         being in full force and effect without modification or amendment;

                  (iv)     Signature and incumbency certificates of the officers
         of Company executing the Loan Documents being executed on the
         Restatement Effective Date to which it is a party;

                  (v)      Executed originals of the Notes and the other Loan
         Documents being executed on the Restatement Effective Date to which
         Company is a party; and

                  (vi)     Such other documents as Administrative Agent may
         reasonably request.

         B.       MASTER CONFIRMATION. Company shall, and shall cause each other
Loan Party to, deliver to Lenders (or to Administrative Agent for Lenders)
executed originals of the Master Confirmation.

         C.       PAYMENT OF LOANS.

                  (i)      PAYMENT OF TRANCHE A TERM LOANS. The Tranche A Term
         Loans made under the Existing Credit Agreement, including all interest
         thereon, shall have paid in full.

                  (ii)     PAYMENT OF TRANCHE B TERM LOAN. The Tranche B Term
         Loans, as made under the Existing Credit Agreement and continued
         hereunder, shall be paid to the extent necessary such that the
         aggregate principal amount thereof upon the effectiveness of this
         Agreement shall not exceed $195,000,000 and any interest on any such
         amount so paid shall be paid.

                  (iii)    PAYMENT OF REVOLVING LOANS. The Revolving Loans, as
         made under the Existing Credit Agreement and continued hereunder, shall
         be paid to the extent necessary such that the Total Utilization of
         Revolving Loan Commitments shall not exceed $75,000,000.

         D.       ISSUANCE OF NEW SENIOR SUBORDINATED NOTES AND REPAYMENT OF
EXISTING SENIOR SUBORDINATED NOTES.

                  (i)      NEW SENIOR SUBORDINATED NOTES. On or before the
         Restatement Effective Date the New Senior Subordinated Notes shall have
         been sold for gross cash proceeds of


                                       76


         not less than $200,000,000, and the New Senior Subordinated Note
         Indenture shall have been executed and delivered; and

                  (ii)     REPAYMENT OF EXISTING SENIOR SUBORDINATED NOTES.
         Concurrently with the sale of the New Senior Subordinated Notes, the
         Existing Senior Subordinated Notes shall have been paid in full.

         E.       OPINIONS OF COUNSEL TO LOAN PARTIES. Lenders shall have
received originally executed copies of one or more favorable written opinions of
Latham & Watkins and/or Skadden, Arps, Slate, Meagher & Flom LLP, counsel for
Loan Parties, in form and substance reasonably satisfactory to Administrative
Agent and its counsel, dated as of the Restatement Effective Date and setting
forth substantially the matters in the opinions designated in EXHIBIT VIII-B
annexed hereto, and as to such other matters as Administrative Agent acting on
behalf of Lenders may reasonably request.

         F.       OPINIONS OF ADMINISTRATIVE AGENT'S COUNSEL. Lenders shall have
received originally executed copies of one or more favorable written opinions of
O'Melveny & Myers LLP, counsel to Administrative Agent, dated as of the
Restatement Effective Date, substantially in the form of EXHIBIT IX-B annexed
hereto and as to such other matters as Administrative Agent acting on behalf of
Lenders may reasonably request.

         G.       FEES. Company shall have paid to Administrative Agent, for
distribution (as appropriate) to Administrative Agent and Lenders, the fees
payable on the Restatement Effective Date referred to in subsection 2.3.

         H.       OFFICER'S CERTIFICATE. Company shall have delivered to
Administrative Agent and Lenders an Officer's Certificate, in form and substance
satisfactory to Administrative Agent, to the effect that the representations and
warranties in Section 5 are true, correct and complete in all material respects
on and as of the Restatement Effective Date to the same extent as though made on
and as of that date (or, to the extent such representations and warranties
specifically relate to an earlier date, that such representations and warranties
were true, correct and complete in all material respects on and as of such
earlier date) and that Company shall have performed in all material respects all
agreements and satisfied all conditions which this Agreement provides shall be
performed or satisfied by it on or before the Restatement Effective Date except
as otherwise disclosed to and agreed to in writing by Administrative Agent and
Lenders.

4.3      CONDITIONS TO ALL LOANS.

                  The obligations of Lenders to make Loans on each Funding Date
are subject to the following further conditions precedent:

         A.       Administrative Agent shall have received before that Funding
Date, in accordance with the provisions of subsection 2.1B, an originally
executed Notice of Borrowing, in each case signed by the chief financial officer
or the treasurer of Company or by any executive officer of Company designated by
any of the above-described officers on behalf of Company in a writing delivered
to Administrative Agent.


                                       77


         B.       As of that Funding Date:

                  (i)      The representations and warranties contained herein
         and in the other Loan Documents shall be true, correct and complete in
         all material respects on and as of that Funding Date to the same extent
         as though made on and as of that date, except to the extent such
         representations and warranties specifically relate to an earlier date,
         in which case such representations and warranties shall have been true,
         correct and complete in all material respects on and as of such earlier
         date;

                  (ii)     No event shall have occurred and be continuing or
         would result from the consummation of the borrowing contemplated by
         such Notice of Borrowing that would constitute an Event of Default or a
         Potential Event of Default;

                  (iii)    Each Loan Party shall have performed in all material
         respects all agreements and satisfied all conditions which this
         Agreement provides shall be performed or satisfied by it on or before
         that Funding Date;

                  (iv)     No order, judgment or decree of any court, arbitrator
         or governmental authority shall purport to enjoin or restrain any
         Lender from making the Loans to be made by it on that Funding Date; and

                  (v)      The making of the Loans requested on such Funding
         Date shall not violate any law including Regulation T, Regulation U or
         Regulation X of the Board of Governors of the Federal Reserve System.

4.4      CONDITIONS TO LETTERS OF CREDIT.

                  The issuance of any Letter of Credit hereunder (whether or not
the applicable Issuing Lender is obligated to issue such Letter of Credit) is
subject to the following conditions precedent:

         A.       On or before the date of issuance of the initial Letter of
Credit pursuant to this Agreement, the initial Loans shall have been made.

         B.       On or before the date of issuance of such Letter of Credit,
Administrative Agent shall have received, in accordance with the provisions of
subsection 3.1B(i), an originally executed Notice of Issuance of Letter of
Credit, in each case signed by the chief financial officer or the treasurer of
Company or by any executive officer of Company designated by any of the
above-described officers on behalf of Company in a writing delivered to
Administrative Agent, together with all other information specified in
subsection 3.1B(i) and such other documents or information as the applicable
Issuing Lender may reasonably require in connection with the issuance of such
Letter of Credit.

         C.       On the date of issuance of such Letter of Credit, all
conditions precedent described in subsection 4.3B shall be satisfied to the same
extent as if the issuance of such Letter of Credit were the making of a Loan and
the date of issuance of such Letter of Credit were a Funding Date.


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SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES

                  In order to induce Lenders to enter into this Agreement and to
make or continue the Loans, as applicable, and to induce the Issuing Lender to
issue Letters of Credit and to induce other Lenders to purchase participations
therein, Company represents and warrants to each Lender, on the date of this
Agreement, on each Funding Date and on the date of issuance of each Letter of
Credit, that the following statements are true, correct and complete in all
material respects:

5.1      ORGANIZATION, POWERS, QUALIFICATION, GOOD STANDING, BUSINESS, SPONSORS
         AND SUBSIDIARIES.

         A.       ORGANIZATION AND POWERS. Each Loan Party is a corporation
validly existing and in good standing under the laws of its jurisdiction of
incorporation as specified in SCHEDULE 5.1A annexed hereto. Each Loan Party has
all requisite corporate power and authority to own and operate its properties,
to carry on its business as now conducted and as proposed to be conducted, to
enter into the Loan Documents and Related Agreements to which it is a party and
to carry out the transactions contemplated thereby.

         B.       QUALIFICATION AND GOOD STANDING. Each Loan Party is qualified
to do business and in good standing in every jurisdiction where its assets are
located and wherever necessary to carry out its business and operations, except
in jurisdictions where the failure to be so qualified or in good standing has
not had and will not have a Material Adverse Effect.

         C.       CONDUCT OF BUSINESS. Company and its Subsidiaries are engaged
only in the businesses permitted to be engaged in pursuant to subsection 7.13.

         D.       SPONSORS AND SUBSIDIARIES. All of the Sponsors and all of the
Subsidiaries of Company, as well as the ownership interests of each in their
respective Subsidiaries, are identified in SCHEDULE 5.1A annexed hereto, as said
SCHEDULE 5.1A may be supplemented from time to time pursuant to the provisions
of subsection 6.1(xv). The number of shares of Company Common Stock and Company
Preferred Stock indirectly owned by each such Sponsor is identified in SCHEDULE
5.1A annexed hereto (as so supplemented). The Capital Stock of Company and of
each of the Subsidiaries of Company identified in SCHEDULE 5.1A annexed hereto
(as so supplemented) is duly authorized, validly issued, fully paid and
nonassessable and none of such Capital Stock constitutes Margin Stock. Each of
the Subsidiaries of Company identified in SCHEDULE 5.1A annexed hereto (as so
supplemented) is duly organized, validly existing and in good standing under the
laws of its respective jurisdiction of organization set forth therein, has all
requisite power and authority to own and operate its properties and to carry on
its business as now conducted and as proposed to be conducted, and is qualified
to do business and in good standing in every jurisdiction where its assets are
located and wherever necessary to carry out its business and operations, in each
case except where failure to be so qualified or in good standing or a lack of
such power and authority has not had and would not reasonably be expected to
have a Material Adverse Effect.

         E.       OPTIONS AND OTHER RIGHTS. As of the Restatement Effective
Date, except as set forth in SCHEDULE 5.1E, there are no outstanding
subscriptions, warrants, calls, options, rights (including unsatisfied
preemptive rights), commitments or agreements to which Company or any


                                       79


of its Subsidiaries is bound that permit or entitle any Person to purchase or
otherwise receive from or to be issued any shares of Capital Stock of Company or
any of its Subsidiaries or any security or obligation of any kind convertible
into any class of Capital Stock of Company or any of its Subsidiaries. Neither
Company nor any of its Subsidiaries is subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
Capital Stock.

5.2      AUTHORIZATION OF BORROWING, ETC.

         A.       AUTHORIZATION OF BORROWING. The execution, delivery and
performance of the Loan Documents and the Related Agreements have been duly
authorized by all necessary corporate action on the part of each Loan Party that
is a party thereto.

         B.       NO CONFLICT. The execution, delivery and performance by Loan
Parties of the Loan Documents and the Related Agreements to which they are
parties and the consummation of the transactions contemplated by the Loan
Documents and such Related Agreements do not and will not (i) violate any
provision of any law or any governmental rule or regulation applicable to
Company or any of its Subsidiaries, the Organizational Documents of Company or
any of its Subsidiaries or any order, judgment or decree of any court or other
agency of government binding on Company or any of its Subsidiaries, (ii) except
as set forth in SCHEDULE 5.2B annexed hereto, conflict with, result in a breach
of or constitute (with due notice or lapse of time or both) a default under any
Contractual Obligation of Company or any of its Subsidiaries, which breach or
default could reasonably be expected to have a Material Adverse Effect, (iii)
result in or require the creation or imposition of any Lien upon any of the
properties or assets of Company or any of its Subsidiaries (other than any Liens
created under any of the Loan Documents in favor of Administrative Agent on
behalf of Lenders), or (iv) except as set forth in SCHEDULE 5.2B annexed hereto,
require any approval of stockholders or any approval or consent of any Person
under any Contractual Obligation of Company or any of its Subsidiaries, except
for such approvals or consents which will be obtained on or before the
Restatement Effective Date and disclosed in writing to Lenders or for which the
failure to obtain would not reasonably be expected to result in a Material
Adverse Effect.

         C.       GOVERNMENTAL CONSENTS. The execution, delivery and performance
by Loan Parties of the Loan Documents and the Related Agreements to which they
are parties and the consummation of the transactions contemplated by the Loan
Documents and such Related Agreements do not and will not require any
registration with, consent or approval of, or notice to, or other action to,
with or by, any federal, state or other governmental authority or regulatory
body, except for those registrations, consents, approvals, notices or other
actions which have been obtained on or before the Restatement Effective Date.

         D.       BINDING OBLIGATION. Each of the Loan Documents and Related
Agreements has been duly executed and delivered by each Loan Party that is a
party thereto and is the legally valid and binding obligation of such Loan
Party, enforceable against such Loan Party in accordance with its respective
terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or limiting creditors' rights generally
or by equitable principles relating to enforceability.


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         E.       VALID ISSUANCE OF COMPANY STOCK, COMPANY PREFERRED STOCK AND
SENIOR SUBORDINATED NOTES.

                  (i)      COMPANY STOCK. The Company Stock is duly and validly
         issued, fully paid and nonassessable. The issuance and sale of such
         Company Stock either (a) has been registered or qualified under
         applicable federal and state securities laws or (b) was exempt
         therefrom.

                  (ii)     NEW SENIOR SUBORDINATED NOTES. The New Senior
         Subordinated Notes when issued and paid for, will be the legally valid
         and binding obligations of Company, enforceable against Company in
         accordance with their respective terms, except as may be limited by
         bankruptcy, insolvency, reorganization, moratorium or similar laws
         relating to or limiting creditors' rights generally or by equitable
         principles relating to enforceability. The subordination provisions of
         the New Senior Subordinated Notes will be enforceable against the
         holders thereof and the Loans and all other monetary Obligations
         hereunder are and will be within the definition of "Senior
         Indebtedness" included in such provisions.

5.3      FINANCIAL CONDITION.

                  Company has heretofore delivered to Lenders, at Lenders'
request, the following financial statements and information: (i) the audited
consolidated balance sheets of Company and its Subsidiaries as at February 3,
2001, and the related consolidated statements of income, and cash flows of
Company and its Subsidiaries for the Fiscal Year then ended; and (ii) the
unaudited consolidated balance sheets of Company and its Subsidiaries as at
August 4, 2001, and the related unaudited consolidated statements of income, and
cash flows of Company and its Subsidiaries for the six months then ended. All
such statements were prepared in conformity with GAAP and fairly present, in all
material respects, the financial position (on a consolidated basis) of the
entities described in such financial statements as at the respective dates
thereof and the results of operations and cash flows (on a consolidated basis)
of the entities described therein for each of the periods then ended, subject,
in the case of any such unaudited financial statements, to changes resulting
from audit and normal year-end adjustments. None of Company or any of its
Subsidiaries has (and will not following the funding of the initial Loans have)
any Contingent Obligation, contingent liability or liability for taxes,
long-term lease or unusual forward or long-term commitment that is required in
accordance with GAAP to be reflected in the foregoing financial statements or
the notes thereto and that is not so reflected and which in any such case is
material in relation to the business, operations, properties, assets, financial
condition or prospects of Company and its Subsidiaries taken as a whole.

5.4      NO MATERIAL ADVERSE CHANGE; NO RESTRICTED JUNIOR PAYMENTS.

                  Since February 3, 2001, no event or change has occurred that
has caused or evidences, either in any case or in the aggregate, a Material
Adverse Effect. Except as disclosed in the Merger Agreement and the schedules
annexed thereto, neither Company nor any of its Subsidiaries has directly or
indirectly declared, ordered, paid or made, or set apart any sum or property
for, any Restricted Junior Payment or agreed to do so except as permitted by
subsection 7.5.


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5.5      TITLE TO PROPERTIES.

                  Company and its Subsidiaries have (i) good and valid title to
(in the case of fee interests in real property), (ii) valid leasehold or
subleasehold, as applicable, interests in (in the case of leasehold or
subleasehold, as applicable, interests in material real or personal property)
subject to customary subordinations, if any, in favor of the lender of the fee
owner of such property except to the extent that the failure to have valid title
would not reasonably be expected to have a Material Adverse Effect, or (iii)
good title to (in the case of all other personal property), all of their
respective properties and assets reflected in the financial statements referred
to in subsection 5.3 or in the most recent financial statements delivered
pursuant to subsection 6.1, in each case except for assets disposed of since the
date of such financial statements in the ordinary course of business or as
otherwise permitted under subsection 7.7. Except as permitted by this Agreement,
all such properties and assets are free and clear of Liens other than Liens
which do not materially interfere with the present use thereof.

5.6      LITIGATION; ADVERSE FACTS.

                  Except as set forth in SCHEDULE 5.6, there are no actions,
suits, proceedings, arbitrations or governmental investigations (whether or not
purportedly on behalf of Company or any of its Subsidiaries) at law or in
equity, or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign (including any Environmental Claims) that are pending or, to the
knowledge of Company, threatened against Company or any of its Subsidiaries or
any property of Company or any of its Subsidiaries and that, individually or in
the aggregate, could reasonably be expected to result in a Material Adverse
Effect. Neither Company nor any of its Subsidiaries (i) is in violation of any
applicable laws (including Environmental Laws) that, individually or in the
aggregate, could reasonably be expected to result in a Material Adverse Effect,
or (ii) is subject to or in default with respect to any final judgments, writs,
injunctions, decrees, rules or regulations of any court or any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, that, individually or in the aggregate,
could reasonably be expected to result in a Material Adverse Effect.

5.7      PAYMENT OF TAXES.

                  Except to the extent permitted by subsection 6.3 and except as
set forth on SCHEDULE 5.7, all material tax returns and reports of Company and
its Subsidiaries required to be filed by any of them have been timely filed
(taking into account all available extensions), and all taxes shown on such tax
returns to be due and payable and all assessments, fees and other governmental
charges upon Company and its Subsidiaries and upon their respective properties,
assets, income, businesses and franchises which are due and payable have been
paid (other than any taxes the amount or validity of which is being contested in
a manner consistent with subsection 6.3A) except to the extent that the failure
to file such returns or pay such taxes would not reasonably be expected to have
a Material Adverse Effect.


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5.8      PERFORMANCE OF AGREEMENTS; MATERIALLY ADVERSE AGREEMENTS; MATERIAL
         CONTRACTS.

         A.       Neither Company nor any of its Subsidiaries is a party to or
is otherwise subject to any agreements or instruments or any charter or other
internal restrictions which, individually or in the aggregate, could reasonably
be expected to result in a Material Adverse Effect.

         B.       SCHEDULE 5.8B contains a true, correct and complete list of
all the Material Contracts in effect on the Restatement Effective Date. Except
as set forth on SCHEDULE 5.8B, all such Material Contracts are in full force and
effect and no material defaults currently exist thereunder.

5.9      GOVERNMENTAL REGULATION.

                  Neither Company nor any of its Subsidiaries is subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or
under any other federal or state statute or regulation which may limit its
ability to incur Indebtedness or which may otherwise render all or any portion
of the Obligations unenforceable.

5.10     SECURITIES ACTIVITIES.

         A.       Neither Company nor any of its Subsidiaries is engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying any Margin Stock.

         B.       Following application of the proceeds of each Loan, not more
than 25% of the value of the assets (either of Company only or of Company and
its Subsidiaries on a consolidated basis) subject to the provisions of
subsection 7.2 or 7.7 or subject to any restriction contained in any agreement
or instrument, between Company or any of its Subsidiaries and any Lender or any
Affiliate of any Lender, relating to Indebtedness and within the scope of
subsection 8.2, will be Margin Stock.

5.11     EMPLOYEE BENEFIT PLANS.

         A.       Company, each of its Subsidiaries and each of their respective
ERISA Affiliates are in compliance with all applicable provisions and
requirements of ERISA and the regulations and published interpretations
thereunder with respect to each Employee Benefit Plan, and have performed all
their obligations under each Employee Benefit Plan except to the extent that any
non-compliance or failure to perform would not reasonably be expected to have a
Material Adverse Effect.

         B.       No ERISA Event that is reasonably likely to result in a
Material Adverse Effect has occurred or is reasonably expected to occur.

         C.       As of the most recent valuation date for any Pension Plan, the
amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of
ERISA), individually or in the aggregate for all Pension Plans (excluding for
purposes of such computation any Pension Plans


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with respect to which assets exceed benefit liabilities), does not exceed
$5,000,000. SCHEDULE 5.11C sets forth a complete list of the Company's Employee
Benefit Plans.

         D.       As of the most recent valuation date for each Multiemployer
Plan for which the actuarial report is available and based solely on
information, if any, provided to Company by such Multiemployer Plan, the
potential liability of Company, its Subsidiaries and their respective ERISA
Affiliates for a complete withdrawal from such Multiemployer Plan (within the
meaning of Section 4203 of ERISA), when aggregated with such potential liability
for a complete withdrawal from all Multiemployer Plans, based on information
available pursuant to Section 4221(e) of ERISA, does not exceed an amount that
would reasonably be expected to have a Material Adverse Effect.

5.12     CERTAIN FEES.

                  Except for Transaction Costs disclosed and reasonably
acceptable to the Administrative Agent and the Syndication Agent, no broker's or
finder's fee or commission will be payable by Company or any of its Subsidiaries
with respect to this Agreement or any of the transactions contemplated hereby,
and Company hereby indemnifies Lenders against, and agrees that it will hold
Lenders harmless from, any claim, demand or liability for any such broker's or
finder's fees alleged to have been incurred in connection herewith or therewith
and any expenses (including reasonable fees, expenses and disbursements of
counsel) arising in connection with any such claim, demand or liability.

5.13     ENVIRONMENTAL PROTECTION.

                  Except as set forth in SCHEDULE 5.13 annexed hereto:

                  (i)      neither Company nor any of its Subsidiaries nor any
         of their respective Facilities or operations are subject to any
         outstanding written order, consent decree or settlement agreement with
         any Person relating to (a) any Environmental Law, (b) any Environmental
         Claim, or (c) any Hazardous Materials Activity that, individually or in
         the aggregate, could reasonably be expected to have a Material Adverse
         Effect;

                  (ii)     neither Company nor any of its Subsidiaries has
         received any letter or request for information under Section 104 of the
         Comprehensive Environmental Response, Compensation, and Liability Act
         (42 U.S.C. Section 9604) or any comparable state law;

                  (iii)    there are and, to Company's knowledge, have been no
         conditions, occurrences, or Hazardous Materials Activities which could
         reasonably be expected to form the basis of an Environmental Claim
         against Company or any of its Subsidiaries that, individually or in the
         aggregate, could reasonably be expected to have a Material Adverse
         Effect;

                  (iv)     neither Company nor any of its Subsidiaries nor, to
         Company's knowledge, any predecessor of Company or any of its
         Subsidiaries has filed any notice under any Environmental Law
         indicating past or present treatment of Hazardous Materials at any
         Facility, and none of Company or any of its Subsidiaries' operations


                                       84


         involves the generation, transportation, treatment, storage or disposal
         of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any
         state equivalent which individually or in the aggregate could
         reasonably be expected to have a Material Adverse Effect; and

                  (v)      compliance with all current requirements pursuant to
         or under Environmental Laws will not, individually or in the aggregate,
         have a reasonable possibility of giving rise to a Material Adverse
         Effect.

                  Notwithstanding anything in this subsection 5.13 to the
contrary, no event or condition is occurring, or to Company's knowledge has
occurred, with respect to Company or any of its Subsidiaries relating to any
Environmental Law, any Release of Hazardous Materials, or any Hazardous
Materials Activity, including any matter disclosed on SCHEDULE 5.13 annexed
hereto, which individually or in the aggregate could reasonably be expected to
have a Material Adverse Effect.

5.14     EMPLOYEE MATTERS.

                  There is no strike or work stoppage in existence or threatened
involving Company or any of its Subsidiaries that could reasonably be expected
to have a Material Adverse Effect.

5.15     SOLVENCY.

                  Each Loan Party is and, upon the incurrence of any Obligations
by such Loan Party on any date on which this representation is made, will be,
Solvent.

5.16     MATTERS RELATING TO COLLATERAL.

         A.       CREATION, PERFECTION AND PRIORITY OF LIENS. The execution and
delivery of the Collateral Documents by Loan Parties and Sponsors, together with
(i) the actions taken on or prior to the date hereof pursuant to subsections
4.1, 4.2, 6.8 and 6.9 and (ii) the delivery to Administrative Agent of any
Pledged Collateral not delivered to Administrative Agent at the time of
execution and delivery of the applicable Collateral Document (all of which
Pledged Collateral has been so delivered) are effective to create in favor of
Administrative Agent for the benefit of Lenders, as security for the respective
Secured Obligations (as defined in the applicable Collateral Document in respect
of any Collateral), a valid and perfected First Priority Lien on all of the
Collateral, and all filings and other actions necessary or desirable to perfect
and maintain the perfection and First Priority status of such Liens have been
duly made or taken and remain in full force and effect, other than the filing of
any UCC financing statements or Mortgages delivered to Administrative Agent for
filing or recording, as applicable (but not yet filed or recorded) and the
periodic filing of UCC continuation statements in respect of UCC financing
statements filed by or on behalf of Administrative Agent.

         B.       GOVERNMENTAL AUTHORIZATIONS. No authorization, approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body is required for either (i) the pledge or grant by any Loan Party
or any Sponsors of the Liens purported to be created in favor of Administrative
Agent pursuant to any of the Collateral Documents or (ii) the exercise by
Administrative Agent of any rights or remedies in respect of any Collateral
(whether specifically granted or created pursuant to any of the Collateral
Documents or created or


                                       85


provided for by applicable law), except for filings or recordings contemplated
by subsection 5.16A and except as may be required, in connection with the
disposition of any Pledged Collateral, by laws generally affecting the offering
and sale of securities.

         C.       ABSENCE OF THIRD-PARTY FILINGS. Except such as may have been
filed in favor of Administrative Agent as contemplated by subsection 5.16A or as
permitted by subsection 7.2, (i) no effective UCC financing statement, fixture
filing or other instrument similar in effect covering all or any part of the
Collateral is on file in any filing or recording office and (ii) no document
granting any rights to any third party with respect to any Intellectual Property
has been recorded with the United States Patent and Trademark Office or any
successor or substitute office.

         D.       MARGIN REGULATIONS. The pledge of the Pledged Collateral
pursuant to the Collateral Documents does not violate Regulation T, U or X of
the Board of Governors of the Federal Reserve System.

         E.       INFORMATION REGARDING COLLATERAL. All information supplied to
Administrative Agent by or on behalf of any Loan Party or any Sponsors with
respect to any of the Collateral (in each case taken as a whole with respect to
any particular Collateral) is accurate and complete in all material respects.

5.17     RELATED AGREEMENTS.

                  Company has delivered to Lenders complete and correct copies
of each Related Agreement and of all exhibits and schedules thereto.

5.18     DISCLOSURE.

                  The information furnished to Lenders by or on behalf of
Company in connection with the transactions contemplated by this Agreement,
together with the representations and warranties of Company and its Subsidiaries
contained in the Loan Documents and the Related Agreements and in any other
documents, certificates and written statements furnished to Lenders by or on
behalf of Company or any of its Subsidiaries or for use in connection with the
transactions contemplated by this Agreement, taken as a whole, do not contain
any untrue statement of a material fact or omit to state a material fact (known
to Company, in the case of any document not furnished by it) necessary in order
to make the statements contained herein or therein not misleading in light of
the circumstances in which the same were made (in each case taken as a whole).
Any projections and PRO FORMA financial information contained in such materials
are based upon good faith estimates and assumptions believed by Company to be
reasonable at the time made, it being recognized by Lenders that such
projections as to future events are not to be viewed as facts and that actual
results during the period or periods covered by any such projections may differ
from the projected results.

5.19     INTELLECTUAL PROPERTY.

         A.       All patents and patent applications, trademark registrations
and applications, and copyright registrations and applications included in the
Intellectual Property are listed in SCHEDULE 5.19A annexed hereto, as such
SCHEDULE 5.19A may be supplemented from time to


                                       86


time pursuant to subsection 6.1(xvii). Company and its Subsidiaries own, or are
licensed (to the extent required to be so licensed) to use, all Intellectual
Property, and the Loan Parties own all of the right, title and interest in and
to all Intellectual Property under the applicable laws of the United States of
America free and clear of any Lien (other than Liens permitted under this
Agreement), in each case except where the failure to do or have the foregoing
could not reasonably be expected to result in a Material Adverse Effect.

         B.       No material claim has been asserted by any Person with respect
to the use of any Intellectual Property, or challenging the validity or
effectiveness of any Intellectual Property. The use of any Intellectual Property
by Company or any of its Subsidiaries does not infringe on the rights of any
Person, subject to such claims and infringements as do not, individually or in
the aggregate, give rise to any liabilities on the part of Company or any of its
Subsidiaries that are material to Company and its Subsidiaries, taken as a
whole. The consummation of the transactions contemplated by this Agreement will
not in any material manner or to any material extent impair the ownership of (or
the license to use, as the case may be) any Intellectual Property by Company or
any of its Subsidiaries.

SECTION 6. AFFIRMATIVE COVENANTS OF COMPANY

                  Company covenants and agrees that, so long as any of the
Commitments hereunder shall remain in effect and until payment in full of all of
the Loans and other Obligations and the cancellation or expiration of all
Letters of Credit, unless the Requisite Lenders shall otherwise give prior
written consent, Company shall perform, and shall cause each of its Subsidiaries
to perform, all covenants in this Section 6.

6.1      FINANCIAL STATEMENTS AND OTHER REPORTS.

                  Company will maintain, and cause each of its Subsidiaries to
maintain, a system of accounting established and administered in accordance with
sound business practices to permit preparation of financial statements in
conformity with GAAP. Company will deliver to Administrative Agent and to
Syndication Agent:

                  (i)      MONTHLY FINANCIALS: as soon as available and in any
         event within 45 days after the end of each month ending after the
         Restatement Effective Date, the consolidated balance sheet of Company
         and its Subsidiaries as at the end of such month and the related
         consolidated statements of earnings and cash flows of Company and its
         Subsidiaries for such month and for the period from the beginning of
         the then current Fiscal Year to the end of such month, setting forth in
         each case in comparative form the corresponding figures for the
         corresponding periods of the previous Fiscal Year and the corresponding
         figures from the Financial Plan for the current Fiscal Year, to the
         extent prepared on a monthly basis, all in reasonable detail and
         certified by the chief financial officer of Company that they fairly
         present, in all material respects, the financial condition of Company
         and its Subsidiaries as at the dates indicated and the results of their
         operations and their cash flows for the periods indicated, subject to
         changes resulting from audit and normal year-end adjustments;

                  (ii)     QUARTERLY FINANCIALS: within 45 days after the end of
         each Fiscal Quarter, (a) the consolidated balance sheets of Company and
         its Subsidiaries as at the end of such

                                       87


         Fiscal Quarter and the related consolidated statements of earnings and
         cash flows of Company and its Subsidiaries for such Fiscal Quarter and
         for the period from the beginning of the then current Fiscal Year to
         the end of such Fiscal Quarter, setting forth in each case in
         comparative form the corresponding figures for the corresponding
         periods of the previous Fiscal Year and the corresponding figures from
         the Financial Plan for the current Fiscal Year, all in reasonable
         detail and certified by the chief financial officer of Company that
         they fairly present, in all material respects, the financial condition
         of Company and its Subsidiaries, as the case may be, as at the dates
         indicated and the results of their operations and their cash flows for
         the periods indicated, subject to changes resulting from audit and
         normal year-end adjustments, and (b) a narrative report describing the
         operations of Company and its Subsidiaries in a form reasonably
         satisfactory to Administrative Agent; PROVIDED, that such financial
         statements for the fourth Fiscal Quarter of each Fiscal Year may be
         marked "Draft" and the narrative report described in clause (b) of this
         paragraph (ii) need not be delivered with respect to such fourth Fiscal
         Quarter financial statements.

                  (iii)    YEAR-END FINANCIALS: within 90 days after the end of
         each Fiscal Year, (a) the consolidated balance sheets of Company and
         its Subsidiaries as at the end of such Fiscal Year and the related
         consolidated statements of earnings, stockholders' equity and cash
         flows of Company and its Subsidiaries for such Fiscal Year, setting
         forth in each case in comparative form the corresponding figures for
         the previous Fiscal Year and the corresponding figures from the
         Financial Plan for the Fiscal Year covered by such financial
         statements, all in reasonable detail and certified by the chief
         financial officer of Company that they fairly present, in all material
         respects, the financial condition of Company and its Subsidiaries, as
         the case may be, as at the dates indicated and the results of their
         operations and their cash flows for the periods indicated, (b) a
         narrative report describing the operations of Company and its
         Subsidiaries in a form reasonably satisfactory to Administrative Agent,
         and (c) in the case of such consolidated financial statements, a report
         thereon of KPMG or other independent certified public accountants of
         recognized national standing selected by Company and reasonably
         satisfactory to Administrative Agent, which report shall be unqualified
         as to scope of audit, shall express no doubts about the ability of
         Company and its Subsidiaries to continue as a going concern, and shall
         state that such consolidated financial statements fairly present, in
         all material respects, the consolidated financial position of Company
         and its Subsidiaries as at the dates indicated and the results of their
         operations and their cash flows for the periods indicated in conformity
         with GAAP applied on a basis consistent with prior years (except as
         otherwise disclosed in such financial statements) and that the
         examination by such accountants in connection with such consolidated
         financial statements has been made in accordance with generally
         accepted auditing standards;

                  (iv)     OFFICER'S AND COMPLIANCE CERTIFICATES: together with
         each delivery of financial statements of Company and its Subsidiaries
         pursuant to subdivisions (ii) and (iii) above, (a) an Officer's
         Certificate of Company stating that the signer has reviewed the terms
         of this Agreement and has made, or caused to be made under such
         signer's supervision, a review in reasonable detail of the transactions
         and condition of Company and its Subsidiaries during the accounting
         period covered by such financial statements and that such review has
         not disclosed the existence during or at the end of such


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         accounting period, and that the signer does not have knowledge of the
         existence as at the date of such Officer's Certificate, of any
         condition or event that constitutes an Event of Default or Potential
         Event of Default, or, if any such condition or event existed or exists,
         specifying the nature and period of existence thereof and what action
         Company has taken, is taking and proposes to take with respect thereto;
         and (b) a Compliance Certificate demonstrating in reasonable detail
         compliance during and at the end of the applicable accounting periods
         with the restrictions contained in Section 7, in each case to the
         extent compliance with such restrictions is required to be tested at
         the end of the applicable accounting period;

                  (v)      RECONCILIATION STATEMENTS: if, as a result of any
         change in accounting principles and policies from those used in the
         preparation of the audited financial statements referred to in
         subsection 5.3 (other than as a result of FAS 141 and 142), the
         consolidated financial statements of Company and its Subsidiaries
         delivered pursuant to subdivisions (i), (ii), (iii) or (xiii) of this
         subsection 6.1 will differ in any material respect from the
         consolidated financial statements that would have been delivered
         pursuant to such subdivisions had no such change in accounting
         principles and policies been made, then (a) together with the first
         delivery of financial statements pursuant to subdivision (i), (ii),
         (iii) or (xiii) of this subsection 6.1 following such change,
         consolidated financial statements of Company and its Subsidiaries, as
         the case may be, for (y) the current Fiscal Year to the effective date
         of such change and (z) the two full Fiscal Years immediately preceding
         the Fiscal Year in which such change is made, in each case prepared on
         a pro forma basis as if such change had been in effect during such
         periods, and (b) together with each delivery of financial statements
         pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection
         6.1 following such change, a written statement of the chief accounting
         officer or chief financial officer of Company setting forth the
         differences (including any differences that would affect any
         calculations relating to the financial covenants set forth in
         subsection 7.6) which would have resulted if such financial statements
         had been prepared without giving effect to such change;

                  (vi)     ACCOUNTANTS' CERTIFICATION: together with each
         delivery of consolidated financial statements of Company and its
         Subsidiaries pursuant to subdivision (iii) above, a written statement
         by the independent certified public accountants giving the report
         thereon stating whether, in connection with their audit examination,
         any condition or event that constitutes an Event of Default or
         Potential Event of Default under Section 7 has come to their attention
         and, if such a condition or event has come to their attention,
         specifying the nature and period of existence thereof; PROVIDED that
         such accountants shall not be liable by reason of any failure to obtain
         knowledge of any such Event of Default or Potential Event of Default
         that would not be disclosed in the course of their audit examination;

                  (vii)    ACCOUNTANTS' REPORTS: upon request (unless restricted
         by applicable professional standards), copies of all reports submitted
         to Company by independent certified public accountants in connection
         with each annual, interim or special audit of the financial statements
         of Company and its Subsidiaries made by such accountants, including any
         comment letter submitted by such accountants to management in
         connection with their annual audit;


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                  (viii)   SEC FILINGS AND PRESS RELEASES: promptly upon their
         becoming available, copies of (a) all financial statements, reports,
         notices and proxy statements sent or made available generally by
         Company to its security holders or by any Subsidiary of Company to its
         security holders other than Company or another Subsidiary of Company,
         (b) all regular and periodic reports and all registration statements
         (other than on Form S-8 or a similar form) and prospectuses, if any,
         filed by Company or any of its Subsidiaries with any securities
         exchange or with the Securities and Exchange Commission or any
         governmental or private regulatory authority, and (c) all press
         releases and other statements made available generally by Company or
         any of its Subsidiaries to the public concerning material developments
         in the business of Company or any of its Subsidiaries;

                  (ix)     EVENTS OF DEFAULT, ETC.: promptly upon any officer of
         Company obtaining knowledge (a) of any condition or event that
         constitutes an Event of Default or Potential Event of Default, (b) that
         any Person has given any notice to Company or any of its Subsidiaries
         or taken any other action with respect to a claimed default or event or
         condition of the type referred to in subsection 8.2, or (c) of the
         occurrence of any event or change that has caused or evidences, either
         in any case or in the aggregate, a Material Adverse Effect, an
         Officer's Certificate specifying the nature and period of existence of
         such condition, event or change, or specifying the notice given or
         action taken by any such Person and the nature of such claimed Event of
         Default, Potential Event of Default, default, event or condition, and
         what action Company has taken, is taking and proposes to take with
         respect thereto;

                  (x)      LITIGATION OR OTHER PROCEEDINGS: (a) promptly upon
         any officer of Company obtaining knowledge of (X) the institution of,
         or non-frivolous threat of, any action, suit, proceeding (whether
         administrative, judicial or otherwise), governmental investigation or
         arbitration against or affecting Company or any of its Subsidiaries or
         any property of Company or any of its Subsidiaries (collectively,
         "PROCEEDINGS") not previously disclosed in writing by Company to
         Lenders or (Y) any material development in any Proceeding that, in any
         case:

                           (a)      if adversely determined, has a reasonable
                  possibility of giving rise to a Material Adverse Effect; or



                           (b)      seeks to enjoin or otherwise prevent the
                  consummation of, or to recover any damages or obtain relief as
                  a result of, the transactions contemplated hereby;

                  written notice thereof together with such other information as
                  may be reasonably available to Company to enable Lenders and
                  their counsel to evaluate such matters; and (b) within twenty
                  days after the end of each Fiscal Quarter, a schedule of all
                  Proceedings involving an alleged liability of, or claims
                  against or affecting, Company or any of its Subsidiaries equal
                  to or greater than $5,000,000, and promptly after request by
                  Administrative Agent such other information as may be
                  reasonably requested by Administrative Agent to enable
                  Administrative Agent and its counsel to evaluate any of such
                  Proceedings;


                                       90


                  (xi)     ERISA EVENTS: promptly upon becoming aware of the
         occurrence of or forthcoming occurrence of any ERISA Event, a written
         notice specifying the nature thereof, what action Company, any of its
         Subsidiaries or any of their respective ERISA Affiliates has taken, is
         taking or proposes to take with respect thereto and, when known, any
         action taken or threatened by the Internal Revenue Service, the
         Department of Labor or the PBGC with respect thereto;

                  (xii)    ERISA NOTICES: with reasonable promptness, copies of
         (a) each Schedule B (Actuarial Information) to the annual report (Form
         5500 Series) filed by Company, any of its Subsidiaries or any of their
         respective ERISA Affiliates with the Internal Revenue Service with
         respect to each Pension Plan; (b) all notices received by Company, any
         of its Subsidiaries or any of their respective ERISA Affiliates from a
         Multiemployer Plan sponsor concerning an ERISA Event; and (c) copies of
         such other documents or governmental reports or filings relating to any
         Employee Benefit Plan as Administrative Agent shall reasonably request;

                  (xiii)   FINANCIAL PLANS: as soon as practicable and in any
         event no later than 45 days after the beginning of each Fiscal Year, a
         consolidated plan and financial forecast for such Fiscal Year (the
         "FINANCIAL PLAN" for such Fiscal Year), including (a) forecasted
         consolidated balance sheets and forecasted consolidated statements of
         income and cash flows of Company and its Subsidiaries for such Fiscal
         Year, together with a PRO FORMA Compliance Certificate for such Fiscal
         Year and an explanation of the assumptions on which such forecasts are
         based, (b) forecasted consolidated statements of income and cash flows
         of Company and its Subsidiaries for each quarter of such Fiscal Year,
         together with an explanation of the assumptions on which such forecasts
         are based, and (c) such other information and projections as any Lender
         may reasonably request;

                  (xiv)    INSURANCE: as soon as practicable and in any event by
         the last day of each Fiscal Year, a report outlining all material
         insurance coverage maintained as of the date of such report by Company
         and its Subsidiaries and all material insurance coverage planned to be
         maintained by Company and its Subsidiaries in the immediately
         succeeding Fiscal Year;



                  (xv)     NEW SUBSIDIARIES: promptly upon any Person becoming a
         Subsidiary of Company (unless such Subsidiary will be immediately
         merged out of existence), a written notice setting forth with respect
         to such Person (a) the date on which such Person became a Subsidiary of
         Company and (b) all of the data required to be set forth in SCHEDULE
         5.1A annexed hereto with respect to all Subsidiaries of Company (it
         being understood that such written notice shall be deemed to supplement
         SCHEDULE 5.1A annexed hereto for all purposes of this Agreement);

                  (xvi)    INTELLECTUAL PROPERTY: annually provide written
         notice of any change in the Intellectual Property set forth in SCHEDULE
         5.19A (it being understood that such written notice shall be deemed to
         supplement SCHEDULE 5.19A annexed hereto for all purposes of this
         Agreement);


                                       91


                  (xvii)   MARGIN DETERMINATION CERTIFICATE: together with each
         delivery of financial statements pursuant to subdivisions (ii) and
         (iii) above, a Margin Determination Certificate demonstrating in
         reasonable detail the calculation of the Consolidated Total Leverage
         Ratio for the four consecutive Fiscal Quarters ending on the day of the
         accounting period covered by such financial statements; and

                  (xviii)  OTHER INFORMATION: with reasonable promptness, such
         other information and data with respect to Company or any of its
         Subsidiaries as from time to time may be reasonably requested by any
         Lender.

6.2      CORPORATE EXISTENCE, ETC.

                  Except as permitted under subsection 7.7, Company will, and
will cause each of its Subsidiaries to, at all times preserve and keep in full
force and effect its corporate existence and all rights and franchises material
to its business; PROVIDED, HOWEVER, that neither Company nor any of its
Subsidiaries shall be required to preserve any such right or franchise if the
Board of Directors of Company or such Subsidiary shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
Company or such Subsidiary, as the case may be, and that the loss thereof is not
disadvantageous in any material respect to Company, such Subsidiary or Lenders.

6.3      PAYMENT OF TAXES AND CLAIMS; TAX CONSOLIDATION.

         A.       Company will, and will cause each of its Subsidiaries to, pay
all taxes, assessments and other governmental charges imposed upon it or any of
its properties or assets or in respect of any of its income, businesses or
franchises before any penalty accrues thereon, and all claims (including claims
for labor, services, materials and supplies) for sums that have become due and
payable and that by law have or may become a Lien upon any of its properties or
assets, prior to the time when any penalty or fine shall be incurred with
respect thereto; PROVIDED that no such charge or claim need be paid if it is
being contested in good faith by appropriate proceedings promptly instituted and
diligently conducted, so long as (i) such reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor and (ii) in the case of a charge or claim which has or may become
a Lien

         against any of the Collateral, such contest proceedings conclusively
         operate to stay the sale of any portion of the Collateral to satisfy
         such charge or claim.

         B.       Company will not, nor will it permit any of its Subsidiaries
to, file or consent to the filing of any consolidated income tax return with any
Person (other than Company or any of its Subsidiaries).

6.4      MAINTENANCE OF PROPERTIES; INSURANCE; APPLICATION OF NET
         INSURANCE/CONDEMNATION PROCEEDS.

         A.       MAINTENANCE OF PROPERTIES. Company will, and will cause each
of its Subsidiaries to, maintain or cause to be maintained in good repair,
working order and condition, ordinary wear and tear and loss or damage from
casualty excepted, all material properties used or useful in the business of
Company and its Subsidiaries (including all Intellectual Property) and


                                       92


from time to time will make or use its reasonable efforts to cause to be made
all appropriate repairs, renewals and replacements thereof.

         B.       INSURANCE. Company will maintain or cause to be maintained,
with financially sound and reputable insurers, such public liability insurance,
third party property damage insurance, business interruption insurance and
Casualty Insurance with respect to liabilities, losses or damage in respect of
the assets, properties and businesses of Company and its Subsidiaries as may
customarily be carried or maintained under similar circumstances by corporations
of established reputation engaged in similar businesses, in each case in such
amounts (giving effect to self-insurance), with such deductibles, covering such
risks and otherwise on such terms and conditions as shall be customary for
corporations similarly situated in the industry. Each such policy of insurance
shall (a) name Administrative Agent for the benefit of Lenders as an additional
insured thereunder as its interests may appear and (b) in the case of each
business interruption and Casualty Insurance policy, contain a loss payable
clause or endorsement, reasonably satisfactory in form and substance to
Administrative Agent, in the case of losses over $250,000, that names
Administrative Agent for the benefit of Lenders as a loss payee thereunder and
provides for at least 30 days prior written notice to Administrative Agent of
any cancellation of such policy.

         C.       APPLICATION OF NET INSURANCE/CONDEMNATION PROCEEDS.

                  (i)      BUSINESS INTERRUPTION INSURANCE. Upon receipt by
         Company or any of its Subsidiaries of any Net Insurance/Condemnation
         Proceeds from business interruption insurance, (a) so long as no Event
         of Default shall have occurred and be continuing, Company or such
         Subsidiary may retain and apply such Net Insurance/Condemnation
         Proceeds for working capital or general corporate purposes, and (b) if
         an Event of Default shall have occurred and be continuing, Company
         shall, upon demand made therefor by Administrative Agent, apply an
         amount equal to such Net Insurance/Condemnation Proceeds to prepay the
         Loans (and/or the Revolving Loan Commitments shall be reduced) as
         provided in subsection 2.4B(iii)(b);

                  (ii)     CASUALTY INSURANCE/CONDEMNATION PROCEEDS. Upon
         receipt by Company or any of its Subsidiaries of any Net
         Insurance/Condemnation Proceeds other than from

                  business interruption insurance, (a) so long as no Event of
                  Default shall have occurred and be continuing, Company shall,
                  or shall cause one or more of its Subsidiaries to, promptly
                  and diligently (and in any event within 12 months of the date
                  of receipt of such Net Insurance/Condemnation Proceeds) apply
                  all such Net Insurance/Condemnation Proceeds in excess of
                  $250,000 to pay or reimburse the costs of repairing, restoring
                  or replacing the assets in respect of which such Net
                  Insurance/Condemnation Proceeds were received or, to the
                  extent not so applied within such 12 month period (other than
                  as a result of the costs of repairing, restoring or replacing
                  such assets being less than the amount of such excess Net
                  Insurance Condemnation Proceeds, so long as Company has
                  applied Net Insurance/Condemnation Proceeds adequate to pay or
                  reimburse such costs) as provided in subsection 2.4B(iii)(b),
                  and (b) if an Event of Default shall have occurred and be
                  continuing, Company shall, upon demand made therefor by
                  Administrative Agent, apply an amount equal to such Net


                                       93


                  Insurance/Condemnation Proceeds to prepay the Loans (and/or
                  the Revolving Loan Commitments shall be reduced) as provided
                  in subsection 2.4B(iii)(b).

                  (iii)    NET INSURANCE/CONDEMNATION PROCEEDS RECEIVED BY
         ADMINISTRATIVE AGENT. Upon receipt by Administrative Agent of any Net
         Insurance/Condemnation Proceeds as loss payee, (a) if and to the extent
         Company would have been required to apply such Net
         Insurance/Condemnation Proceeds (if it had received them directly) to
         prepay the Loans and/or reduce the Revolving Loan Commitments,
         Administrative Agent shall, and Company hereby authorizes
         Administrative Agent to, apply such Net Insurance/Condemnation Proceeds
         to prepay the Loans (and/or the Revolving Loan Commitments shall be
         reduced) as provided in subsection 2.4B(iii)(b), and (b) to the extent
         the foregoing clause (a) does not apply, Administrative Agent shall
         deliver such Net Insurance/Condemnation Proceeds to Company, and
         Company shall, or shall cause one or more of its Subsidiaries to,
         promptly and diligently apply all such Net Insurance/Condemnation
         Proceeds in excess of $250,000 to pay or reimburse the costs of
         repairing, restoring or replacing the assets in respect of which such
         Net Insurance/Condemnation Proceeds were received or, to the extent not
         so applied (other than as a result of the costs of repairing, restoring
         or replacing such assets being less than the amount of such excess Net
         Insurance Condemnation Proceeds, so long as Company has applied Net
         Insurance/Condemnation Proceeds adequate to pay or reimburse such
         costs), as provided in subsection 2.4B(iii)(b).

6.5      INSPECTION RIGHTS.

                  Company shall, and shall cause each of its Subsidiaries to,
permit any authorized representatives designated by any Lender to visit and
inspect any of the properties of Company or of any of its Subsidiaries subject
to the rights of any lessor or lessee of such property and provided that such
visit and inspection does not unreasonably interfere with (i) the business of
the Company at such property and (ii) any customers or other third parties at
such properties, to inspect, copy and take extracts from its and their financial
and accounting records, and to discuss its and their affairs, finances and
accounts with its and their officers and independent public accountants
(provided that Company or any of its Subsidiaries may, if it so chooses, be
present at or participate in any such discussion), all upon reasonable notice
and at such reasonable times during normal business hours and as often as may
reasonably be requested.

6.6      COMPLIANCE WITH LAWS, ETC.

                  Company shall comply, and shall cause each of its Subsidiaries
to comply, with the requirements of all applicable laws, rules, regulations and
orders of any governmental authority (including all Environmental Laws),
noncompliance with which could reasonably be expected to cause, individually or
in the aggregate, a Material Adverse Effect.

6.7      ENVIRONMENTAL DISCLOSURE.

                  Company will deliver to Administrative Agent and to
Syndication Agent:

                  (i)      ENVIRONMENTAL AUDITS AND REPORTS. As soon as
         practicable following receipt thereof, copies of all environmental
         audits, investigations, analyses and reports of


                                       94


         any kind or character, whether prepared by personnel of Company or any
         of its Subsidiaries or by independent consultants, governmental
         authorities or any other Persons, with respect to significant
         environmental matters at any Facility which, individually or in the
         aggregate, could reasonably be expected to result in a Material Adverse
         Effect or with respect to any Environmental Claims which, individually
         or in the aggregate, could reasonably be expected to result in a
         Material Adverse Effect.

                  (ii)     NOTICE OF CERTAIN RELEASES, REMEDIAL ACTIONS, ETC.
         Promptly upon the occurrence thereof, written notice describing in
         reasonable detail (a) any emergency Release required to be reported to
         any federal, state or local governmental or regulatory agency, or other
         Release that is reasonably likely to require investigation or remedial
         action, under any applicable Environmental Laws that, individually or
         in the aggregate, have a reasonable possibility of resulting in a
         Material Adverse Effect and (b) any remedial action taken by Company or
         any other Person in response to (1) any Hazardous Materials Activities
         the existence of which has a reasonable possibility of resulting in one
         or more Environmental Claims having, individually or in the aggregate,
         a Material Adverse Effect, or (2) any Environmental Claims that,
         individually or in the aggregate, have a reasonable possibility of
         resulting in a Material Adverse Effect.

                  (iii)    WRITTEN COMMUNICATIONS REGARDING ENVIRONMENTAL
         CLAIMS, RELEASES, ETC. As soon as practicable following the sending or
         receipt thereof by Company or any of its Subsidiaries, a copy of any
         and all written communications with respect to (a) any Environmental
         Claims that, individually or in the aggregate, have a reasonable
         possibility of giving rise to a Material Adverse Effect, (b) any
         emergency Release required to be reported to any federal, state or
         local governmental or regulatory agency, or other Release that is
         reasonably likely to require investigation or remedial action that,
         individually or in the aggregate, have a reasonable possibility of
         giving rise to a Material Adverse Effect, and (c) any request for
         information from any governmental agency that suggests such agency is
         investigating whether Company or any of its Subsidiaries may be
         potentially responsible for any Hazardous Materials Activity that,
         individually or in the aggregate, have a reasonable possibility of
         giving rise to a Material Adverse Effect.

                  (iv)     NOTICE OF CERTAIN PROPOSED ACTIONS HAVING
         ENVIRONMENTAL IMPACT. Prompt written notice describing in reasonable
         detail (a) any proposed acquisition of Capital Stock, assets, or
         property by Company or any of its Subsidiaries that could reasonably be
         expected to (1) expose Company or any of its Subsidiaries to, or result
         in, Environmental Claims that could reasonably be expected to have,
         individually or in the aggregate, a Material Adverse Effect or (2)
         affect the ability of Company or any of its Subsidiaries to maintain in
         full force and effect all material Governmental Authorizations required
         under any Environmental Laws for their respective operations and (b)
         any proposed action to be taken by Company or any of its Subsidiaries
         to commence manufacturing or other industrial operations or to modify
         current operations in a manner that could reasonably be expected to
         subject Company or any of its Subsidiaries to any additional
         obligations or requirements under any Environmental Laws that could
         reasonably be expected to have, individually or in the aggregate, a
         Material Adverse Effect.


                                       95


                  (v)      OTHER INFORMATION. With reasonable promptness, such
         other documents and information as from time to time may be reasonably
         requested by Administrative Agent in relation to any matters disclosed
         pursuant to this subsection 6.7.

6.8      EXECUTION OF GUARANTY AND PERSONAL PROPERTY COLLATERAL DOCUMENTS BY
         CERTAIN SUBSIDIARIES AND FUTURE SUBSIDIARIES.

         A.       EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY
COLLATERAL DOCUMENTS. In the event that any Person becomes a Subsidiary of
Company after the date hereof and such Subsidiary has assets or revenues in
excess of $1,000,000, Company will promptly notify Administrative Agent of that
fact and (i) deliver a Pledge Amendment (as defined in the Pledge and Security
Agreement), together with the certificates or instruments, if any, representing
(i) all of the Capital Stock of such Subsidiary if such Subsidiary is a Domestic
Subsidiary and (ii) 66% of the Capital Stock of such Subsidiary if such
Subsidiary is a first-tier Foreign Subsidiary (limited to 60% of Canadian
Subsidiaries), in each case accompanied by irrevocable undated instruments of
transfer, duly endorsed in blank and otherwise in form and substance
satisfactory to Administrative Agent, (ii) cause any such Domestic Subsidiary to
execute and deliver to Administrative Agent a counterpart of the Subsidiary
Guaranty and the Pledge and Security Agreement, and (iii) take, or cause any
such Domestic Subsidiary to take, all such further actions and execute all such
further documents and instruments (including actions, documents and instruments
comparable to those described in subsection 4.1K) as may be necessary or, in the
opinion of Administrative Agent, desirable to create in favor of Administrative
Agent, for the benefit of Lenders, a valid and perfected First Priority Lien on
all or 66% (limited to 60% of Canadian Subsidiaries), as the case may be, of the
Capital Stock of such Subsidiary, and subject to Section 6.9 hereof on all the
real, personal and mixed property assets of such Domestic Subsidiary described
in the applicable Collateral Documents.

         B.       SUBSIDIARY ORGANIZATIONAL DOCUMENTS, LEGAL OPINIONS, ETC.
Company shall deliver to Administrative Agent, together with such Loan
Documents, (i) copies of the Organizational Documents of each Subsidiary
referred to in subsection 6.8A certified by the Secretary of State of its
jurisdiction of organization, if such certification is generally available, and
in each other case by its secretary or assistant secretary, together with a good
standing certificate from the Secretary of State of the jurisdiction of its
incorporation and, to the extent generally available, a certificate or other
evidence of good standing as to payment of any applicable franchise or similar
taxes from the appropriate taxing authority of such jurisdiction, each to be
dated a recent date prior to their delivery to Administrative Agent, (ii) a
certificate executed by the secretary or an assistant secretary of such
Subsidiary as to (a) the fact that the attached resolutions of the Board of
Directors of such Subsidiary approving and authorizing the execution, delivery
and performance of such Loan Documents are in full force and effect and have not
been modified or amended and (b) the incumbency and signatures of the officers
of such Subsidiary executing such Loan Documents.

6.9      MATTERS RELATING TO REAL PROPERTY COLLATERAL.

                  From and after the Restatement Effective Date, in the event
that (i) Company or any Subsidiary Guarantor acquires any fee interest in real
property or (ii) at the time any Person becomes a Subsidiary Guarantor, such
Person owns or holds any fee interest in real property, in either case excluding
any such real property asset the encumbrancing of which requires the


                                       96


consent of any applicable lessor or (in the case of clause (ii) above)
then-existing senior lienholder, where Company and its Subsidiaries are unable,
despite using commercially reasonable efforts, to obtain such lessor's or senior
lienholder's consent (any such non-excluded real property asset described in the
foregoing clause (i) or (ii) being a "MORTGAGED PROPERTY"), Company or such
Subsidiary Guarantor shall, if requested by Administrative Agent, deliver to
Administrative Agent, as soon as practicable after such Person acquires such
Mortgaged Property or becomes a Subsidiary Guarantor, as the case may be, the
following:

                  (i)      MORTGAGE. A fully executed and notarized Mortgage in
         proper form for recording in all appropriate places in all applicable
         jurisdictions, encumbering the interest of such Loan Party in such
         Mortgaged Property;

                  (ii)     TITLE REPORT. A title report issued by the Title
         Company with respect to such Mortgaged Property, dated not more than 30
         days prior to the date such Mortgage is to be recorded and satisfactory
         in form and substance to Administrative Agent;

                  (iii)    COPIES OF DOCUMENTS RELATING TO TITLE EXCEPTIONS.
         Copies of all recorded documents listed as exceptions to title or
         otherwise referred to in the title report delivered pursuant to clause
         (iii) above;

                  (iv)     ENVIRONMENTAL AUDIT. If reasonably requested by
         Administrative Agent, reports and other information, in form, scope and
         substance reasonably satisfactory to Administrative Agent and prepared
         by environmental consultants reasonably satisfactory to Administrative
         Agent, concerning any environmental hazards or liabilities to which
         Company or any of its Subsidiaries are likely to be subject with
         respect to such Mortgaged Property.

6.10     [INTENTIONALLY OMITTED.].

6.11     DISTRIBUTION CENTERS COLLATERAL ACCESS AGREEMENTS.

                  If requested by Administrative Agent, Company shall, and shall
cause each of its Subsidiaries to, use its commercially reasonable efforts to
obtain a Collateral Access Agreement with respect to any distribution center not
owned by Company or any of its Subsidiaries upon which any Collateral is
located.

6.12     CASH MANAGEMENT SYSTEM.

                  If requested by Administrative Agent, Company shall, and shall
cause each of its Subsidiaries to, establish a cash management system,
reasonably satisfactory to Administrative Agent. In the event that the cash
management system of Company is with a Person other than any Lender, Company
shall cause such Person to take such action and to execute and deliver to
Administrative Agent such documents and instruments as may be necessary or, in
the reasonable opinion of Administrative Agent, desirable to create in favor of
Administrative Agent, for the benefit of Lenders, a valid and perfected First
Priority Lien in the Deposit Accounts, securities accounts or like accounts of
Company and its Subsidiaries maintained with such Person.


                                       97


SECTION 7. NEGATIVE COVENANTS OF COMPANY

                  Company covenants and agrees that, so long as any of the
Commitments hereunder shall remain in effect and until payment in full of all of
the Loans and other Obligations and the cancellation or expiration of all
Letters of Credit, unless Requisite Lenders shall otherwise give prior written
consent, Company shall perform, and shall cause each of its Subsidiaries to
perform, all covenants in this Section 7.

7.1      INDEBTEDNESS.

                  Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or
otherwise become or remain directly or indirectly liable with respect to, any
Indebtedness, except:

                  (i)      Company may become and remain liable with respect to
         the Obligations;

                  (ii)     Company and its Subsidiaries may become and remain
         liable with respect to Contingent Obligations permitted by subsection
         7.4 and, upon any matured obligations actually arising pursuant
         thereto, the Indebtedness corresponding to the Contingent Obligations
         so extinguished;

                  (iii)    Company and its Subsidiaries may become and remain
         liable with respect to Indebtedness in respect of Capital Leases and
         Indebtedness secured by Liens permitted under subsection 7.2A(v) and
         any Refinancings thereof; PROVIDED that the aggregate principal amount
         of all such Indebtedness shall not exceed $10,000,000 at any time
         outstanding and that such Capital Leases are permitted under this
         Agreement;

                  (iv)     Company may become and remain liable with respect to
         Indebtedness to any of its Subsidiaries, and any Subsidiary of Company
         may become and remain liable with respect to Indebtedness to Company or
         any wholly-owned Subsidiary of Company; PROVIDED that (a) all such
         intercompany Indebtedness owed by Company to any of its Subsidiaries
         that are not Subsidiary Guarantors shall be subordinated in right of
         payment to the payment in full of the Obligations pursuant to
         documentation in form and substance satisfactory to Administrative
         Agent and (b) upon demand by Administrative



                  Agent, all such intercompany Indebtedness owed by Company to
                  any Subsidiary Guarantor shall be subordinated in right of
                  payment to the payment in full of the Obligations pursuant to
                  documentation in form and substance satisfactory to
                  Administrative Agent; and PROVIDED FURTHER that such
                  intercompany Indebtedness owed by all Foreign Subsidiaries to
                  Company and all other Subsidiaries shall be subject to the
                  limitations imposed by subsection 7.3(ii);

                  (v)      Company and its Subsidiaries, as applicable, may
         remain liable with respect to Indebtedness described in SCHEDULE 7.1
         annexed hereto and any Refinancings thereof;


                                       98


                  (vi)     Company may become and remain liable with respect to
         Indebtedness evidenced by the New Senior Subordinated Notes and the
         agreements entered into in connection therewith; PROVIDED that the
         proceeds thereof are applied to repay the Loans and the Existing Senior
         Subordinated Notes to the extent required by subsections 4.2C and 4.2D.

                  (vii)    So long as no Event of Default or Potential Event of
         Default shall have occurred and be continuing or shall be caused
         thereby, Company and its Subsidiaries may become liable with respect to
         Assumed Indebtedness in connection with a Permitted Acquisition and any
         Refinancings thereof and Company and such Subsidiaries may thereafter
         remain liable with respect to such Assumed Indebtedness; PROVIDED that
         Company and its Subsidiaries shall be in compliance on a consolidated
         basis with each of the financial covenants set forth in subsection 7.6
         after giving effect to the incurrence or assumption of such Assumed
         Indebtedness as stated on the consolidated balance sheet of Company and
         its Subsidiaries;

                  (viii)   Indebtedness of the Company or its Subsidiaries in
         respect of performance bonds, bid bonds, appeal bonds, surety bonds,
         bankers' acceptances, workers compensation claims and similar
         obligations and trade-related letters of credit issued under this
         Agreement, in each case provided in the ordinary course of business,
         and any extension, renewal or refinancing thereof to the extent not
         provided to secure the repayment of other Indebtedness and to the
         extent that the amount of refinancing Indebtedness is not greater than
         the amount of Indebtedness being refinanced;

                  (ix)     Indebtedness arising from the honoring by a bank or
         other financial institution of a check, draft or similar instrument
         drawn against sufficient funds in the ordinary course of business,
         PROVIDED that such Indebtedness is extinguished within five Business
         Days of its incurrence;

                  (x)      Unsecured and Subordinated Indebtedness of Company or
         its Subsidiaries consisting of Earn-Out Obligations and Indebtedness
         issued to sellers of business in an amount not to exceed $5,000,000
         outstanding at any time and any Refinancings thereof;

                  (xi)     Indebtedness in the form of a mortgage on real
         property acquired by the Company for use as a new corporate
         headquarters in an amount not to exceed $15,000,000 and any
         Refinancings thereof; and

                  (xii)    Company and its Subsidiaries may become and remain
         liable with respect to other Indebtedness in an aggregate principal
         amount not to exceed $10,000,000 at any time outstanding and any
         Refinancings thereof.

7.2      LIENS AND RELATED MATTERS.

         A.       PROHIBITION ON LIENS. Company shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
permit to exist any Lien on any Indebtedness on or with respect to any property
or asset of any kind (including any document or instrument in respect of goods
or accounts receivable) of Company or any of its Subsidiaries, whether now owned
or hereafter acquired, or any income or profits therefrom, or file or permit


                                       99


the filing of, or permit to remain in effect, any financing statement or other
similar notice of any Lien with respect to any such property, asset, income or
profits under the Uniform Commercial Code of any State or under any similar
recording or notice statute, except:

                  (i)      Permitted Encumbrances;

                  (ii)     Liens granted pursuant to the Collateral Documents;

                  (iii)    Liens described in SCHEDULE 7.2 annexed hereto;

                  (iv)     Liens permitted by subsection 6.9;

                  (v)      Liens created to secure the purchase price of
         property or assets; PROVIDED that (a) any such Lien shall attach only
         to the property or assets purchased, (b) the Indebtedness secured by
         any such Lien shall not exceed 100% of the purchase price of the
         property or assets purchased, (c) any such Lien shall be created within
         12 months following the acquisition of such property or assets and (d)
         the principal amount of Indebtedness secured by such Liens does not
         exceed $10,000,000 in the aggregate at any time; and

                  (vi)     Liens in connection with Indebtedness permitted under
         subsections 7.1(iii), (v), (vii), (xi) and (xii).

         B.       EQUITABLE LIEN IN FAVOR OF LENDERS. If Company or any of its
Subsidiaries shall create or assume any Lien upon any of its properties or
assets, whether now owned or hereafter acquired, other than Liens permitted by
the provisions of subsection 7.2A, it shall make or cause to be made effective
provision whereby the Obligations will be secured by such Lien equally and
ratably with any and all other Indebtedness secured thereby as long as any such
Indebtedness shall be so secured; PROVIDED that, notwithstanding the foregoing,
this covenant shall not be construed as a consent by Requisite Lenders to the
creation or assumption of any such Lien not permitted by the provisions of
subsection 7.2A.

         C.       NO FURTHER NEGATIVE PLEDGES. Except with respect to specific
property encumbered to secure payment of particular Indebtedness or to be sold
pursuant to an executed agreement with respect to an Asset Sale, neither Company
nor any of its Subsidiaries shall enter into any agreement, prohibiting the
creation or assumption of any Lien upon any of its properties or assets, whether
now owned or hereafter acquired to secure Company's principal bank credit
agreement outstanding at any time.

         D.       NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS TO COMPANY OR ITS
SUBSIDIARIES. Except as provided herein, Company will not, and will not permit
any of its Subsidiaries to, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction of any kind on the
ability of any such Subsidiary to (i) pay dividends or make any other
distributions on any of such Subsidiary's Capital Stock owned by Company or any
other Subsidiary of Company, (ii) repay or prepay any Indebtedness owed by such
Subsidiary to Company or any other Subsidiary of Company, (iii) make loans or
advances to Company or any other Subsidiary of Company, or (iv) transfer any of
its property or assets to Company or any other Subsidiary of Company (other than
(a) customary restrictions on the assignment of real or


                                      100


personal property leases, (b) customary restrictions on the transfer of property
or assets included in any instrument or agreement relating to Indebtedness
permitted under subsection 7.1A(iii), (c) restrictions under applicable law, (d)
restrictions contained in the Senior Subordinated Note Agreement, (e)
restrictions contained in joint venture arrangements applicable to assets of the
joint venture, (f) restrictions contained in Assumed Indebtedness or Capital
Stock of Persons acquired pursuant to Permitted Acquisitions relating to assets
acquired and (g) restrictions in contracts for sales or dispositions permitted
hereby; provided that such restrictions relate only to the assets being disposed
of).

7.3      INVESTMENTS; JOINT VENTURES.

                  Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, make or own any Investment in any
Person, including any Joint Venture, except:

                  (i)      Company and its Subsidiaries may make and own
         Investments in Cash Equivalents;

                  (ii)     Company and its Subsidiaries may make and own
         Investments in any Subsidiaries of Company and in Petcetera (including
         Investments consisting of the acquisition of Persons which own minority
         interests in Petcetera); PROVIDED that (a) any such new Subsidiary is
         wholly-owned by Company or one of its Subsidiaries and the provisions
         of subsection 6.8 have been complied with or (b) in the case of any
         Subsidiary of Company that is not a wholly-owned Subsidiary Guarantor,
         such creation or acquisition is permitted pursuant to clause (vi) of
         this subsection 7.3; and PROVIDED FURTHER that the aggregate new
         Investments in all Foreign Subsidiaries and in Petcetera (including
         Investments made through one or more Subsidiaries and including
         Investments consisting of the acquisition of Persons which own minority
         interests in Petcetera) shall not exceed $15,000,000 from the Closing
         Date until the Fiscal Year ending on the Fiscal Year End in 2002 and
         $3,000,000 each Fiscal Year thereafter (each such amount the "MAXIMUM
         FOREIGN INVESTMENT AMOUNT" for such Fiscal Year); PROVIDED FURTHER that
         (x) the Maximum Foreign Investment Amount for any Fiscal Year shall be
         increased by an amount equal to the excess, if any, of the Maximum
         Foreign Investment Amount for the previous year (without giving effect
         to any previous adjustment made in accordance with this proviso) over
         the actual amount of Investments in Foreign Subsidiaries and in
         Petcetera (including Investments consisting of the acquisition of
         Persons which own minority interests in Petcetera) for such previous
         Fiscal Year and (y) with respect to Investments in Petcetera (including
         Investments consisting of the acquisition of Persons which own minority
         interests in Petcetera) made after the date hereof, to the extent that
         the amount of any such Investments is thereafter distributed by
         Petcetera directly or indirectly to Company, then during the period of
         one year from the date of such distribution the amount available for
         Investments in Petcetera under this subsection 7.3(ii) shall be
         increased by the amount of such distribution; PROVIDED STILL FURTHER
         that any repayment of notes receivable held by Company or its
         Subsidiaries on the Closing Date by any Canadian Persons may be used by
         Company or its Subsidiaries to make a concurrent Investment in Foreign
         Subsidiaries in an amount not to exceed $7,000,000;

                  (iii)    Company and its Subsidiaries may make intercompany
         loans to the extent permitted under subsection 7.1(iv);


                                      101


                  (iv)     Company and its Subsidiaries may make loans and
         advances to employees, officers and Sponsors of Company and any of its
         Subsidiaries in an aggregate amount not to exceed (a) $1,872,000 at any
         time outstanding, which shall be used for the purpose of acquiring
         Company Stock and (b) $2,000,000 at any time outstanding, which may be
         used for any other purpose;

                  (v)      Company and its Subsidiaries may continue to own the
         Investments owned by them and described in SCHEDULE 7.3 annexed hereto;

                  (vi)     Investments made by Company or any of its
         Subsidiaries in Permitted Acquisitions;

                  (vii)    Investments received in settlement of debts,
         liabilities or other obligations owing to the Company or any of its
         Subsidiaries;

                  (viii)   Investments received as consideration in Asset Sales;

                  (ix)     Investments of a Person that becomes a Subsidiary or
         is merged, consolidated or amalgamated with or into or transfers all or
         substantially all of its assets to, or is liquidated into, the Company
         or any of its other Subsidiaries, or is otherwise acquired pursuant to
         a Permitted Acquisition;

                  (x)      Investments funded through capital contributions made
         by the Sponsors or any of their Affiliates;

                  (xi)     additional Investments made in Petopia, or any
         successor E-Commerce Investment, after the Restatement Effective Date
         (a) not to exceed $3,000,000 in the aggregate or (b) funded with the
         proceeds of equity contributions from the Sponsors made after the
         Closing Date;

                  (xii)    Company and its Subsidiaries may make and own
         Investments representing amounts held for employees of Company and its
         Subsidiaries under Company's non-qualified deferred compensation plan,
         PROVIDED the amount of such Investments (excluding income earned
         thereon) shall not exceed the amount otherwise payable to such
         employees the payment of which was deferred under such plan and any
         amounts matched by Company under such plan; and

                  (xiii)   Company and its Subsidiaries may make and own other
         Investments in an aggregate amount not to exceed at any time
         $3,000,000.

7.4      CONTINGENT OBLIGATIONS.

                  Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create or become or remain liable with
respect to any Contingent Obligation, except:

                  (i)      Subsidiaries of Company may become and remain liable
         with respect to Contingent Obligations in respect of the Subsidiary
         Guaranty;


                                      102


                  (ii)     Company and its Subsidiaries may become and remain
         liable with respect to Contingent Obligations in respect of Letters of
         Credit;

                  (iii)    Company and its Subsidiaries may become and remain
         liable with respect to Contingent Obligations under Hedge Agreements
         with respect to Indebtedness in the ordinary course of business;

                  (iv)     Company and its Subsidiaries may become and remain
         liable with respect to Contingent Obligations in respect of customary
         indemnification and purchase price adjustment obligations incurred in
         connection with sales of assets;

                  (v)      Company and its Subsidiaries may become and remain
         liable with respect to Contingent Obligations in respect of any
         Indebtedness of Company and any of its Subsidiaries permitted by
         subsection 7.1;

                  (vi)     Company and its Subsidiaries, as applicable, may
         remain liable with respect to Contingent Obligations described in
         SCHEDULE 7.4 annexed hereto;

                  (vii)    Subsidiary Guarantors may become and remain liable
         with respect to Contingent Obligations arising under their subordinated
         guaranties of the New Senior Subordinated Notes as set forth in the New
         Senior Subordinated Note Indenture;

                  (viii)   Company and its Subsidiaries may become and remain
         liable with respect to Contingent Obligations under guarantees in the
         ordinary course of business of the obligations of suppliers, customers,
         franchisees and licensees of Company and its Subsidiaries in an
         aggregate amount not to exceed at any time $2,000,000; and

                  (ix)     Company and its Subsidiaries may become and remain
         liable with respect to other Contingent Obligations; PROVIDED that the
         maximum aggregate liability, contingent or otherwise, of Company and
         its Subsidiaries in respect of all such Contingent Obligations shall at
         no time exceed $5,000,000.

7.5      RESTRICTED JUNIOR PAYMENTS.

                  Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart
any sum for any Restricted Junior Payment; PROVIDED that (i) Company may make
regularly scheduled payments of interest in respect of Subordinated Indebtedness
in accordance with the terms of, and subject to the subordination provisions
contained in, the New Senior Subordinated Note Indenture or other applicable
documentation pursuant to which such Subordinated Indebtedness is issued, and
Company may repay the Existing Senior Subordinated Notes from the proceeds of
the New Senior Subordinated Notes. (ii) Company may redeem or otherwise
repurchase stock, stock equivalents or stock options issued by Company owned by
former employees, former directors or former officers of Company and its
Subsidiaries for an aggregate purchase price for all such stock, stock
equivalents and stock options not to exceed (a) $3,000,000 in any consecutive
12-month period PLUS for such consecutive 12-month period the aggregate amount
of Net Equity Securities Proceeds received by Company during such consecutive
12-month period from the reissuance by Company of Securities to employees,
directors or officers of Company and its Subsidiaries, and


                                      103


(b) $5,000,000 in the aggregate for the term of this Agreement PLUS the
aggregate amount of Net Equity Securities Proceeds received by Company following
the Closing Date from the reissuance by Company of Securities to employees,
directors or officers of Company and its Subsidiaries; PROVIDED, HOWEVER, that
in no event shall the aggregate dollar amount of all such redemptions and
repurchases exceed $7,000,000 during the term of this Agreement; PROVIDED,
FURTHER that notwithstanding the limitations contained herein, Company may
redeem and repurchase additional stock, stock equivalents and stock options in
any Fiscal Year in an additional aggregate amount equal to key man life
insurance proceeds which it receives in such Fiscal Year, (iii) any Subsidiary
may declare and pay dividends to the Company or to a wholly owned Subsidiary of
the Company, and (iv) Company and its Subsidiaries may prepay Subordinated Debt
(other than the New Senior Subordinated Notes) incurred pursuant to subsection
7.1.

7.6      FINANCIAL COVENANTS.

         A.       MINIMUM CONSOLIDATED INTEREST EXPENSE COVERAGE RATIO. Company
shall not permit, as of the end of any Fiscal Quarter commencing with the Third
Fiscal Quarter 2001, the Consolidated Interest Expense Coverage Ratio for the
four-Fiscal Quarter period ending on such date during any of the periods set
forth below to be less than the correlative ratio indicated:



                                                       Minimum Consolidated Interest
                     Period Ending Last Day of            Expense Coverage Ratio
                     -------------------------            ----------------------
                                                              
         Third Fiscal Quarter 2001                               2.35:1.00
         Fourth Fiscal Quarter 2001                              2.35:1.00
         First Fiscal Quarter 2002                               2.35:1.00
         Second Fiscal Quarter 2002                              2.35:1.00
         Third Fiscal Quarter 2002                               2.40:1.00
         Fourth Fiscal Quarter 2002                              2.50:1.00
         First Fiscal Quarter 2003                               2.50:1.00
         Second Fiscal Quarter 2003                              2.50:1.00
         Third Fiscal Quarter 2003                               2.65:1.00
         Fourth Fiscal Quarter 2003                              2.80:1.00
         First Fiscal Quarter 2004                               2.80:1.00
         Second Fiscal Quarter 2004                              2.80:1.00
         Third Fiscal Quarter 2004                               2.90:1.00
         Fourth Fiscal Quarter 2004                              3.00:1.00
         First Fiscal Quarter 2005                               3.00:1.00
         Second Fiscal Quarter 2005                              3.00:1.00
         Third Fiscal Quarter 2005                               3.00:1.00
         Fourth Fiscal Quarter 2005                              3.00:1.00
         First Fiscal Quarter 2006                               3.00:1.00
         Second Fiscal Quarter 2006                              3.00:1.00
         Third Fiscal Quarter 2006                               3.00:1.00
         Fourth Fiscal Quarter 2006                              3.00:1.00
         First Fiscal Quarter 2007                               3.00:1.00
         Second Fiscal Quarter 2007                              3.00:1.00


                                      104


         Third Fiscal Quarter 2007                               3.00:1.00
         Fourth Fiscal Quarter 2007 and thereafter               3.00:1.00




         B.       MINIMUM FIXED CHARGE COVERAGE RATIO. Company shall not permit,
as of the end of any Fiscal Quarter commencing with the Third Fiscal Quarter
2001, the Consolidated Fixed Charge Coverage Ratio for the four-Fiscal Quarter
period ending on such date during any of the periods set forth below to be less
than the correlative ratio indicated:



                                                               Minimum Fixed
                     Period Ending Last Day of             Charge Coverage Ratio
                     -------------------------             ---------------------
                                                              
         Third Fiscal Quarter 2001                               1.00:1.00
         Fourth Fiscal Quarter 2001                              1.00:1.00
         First Fiscal Quarter 2002                               1.00:1.00
         Second Fiscal Quarter 2002                              1.00:1.00
         Third Fiscal Quarter 2002                               1.00:1.00
         Fourth Fiscal Quarter 2002                              1.00:1.00
         First Fiscal Quarter 2003                               1.05:1.00
         Second Fiscal Quarter 2003                              1.05:1.00
         Third Fiscal Quarter 2003                               1.10:1.00
         Fourth Fiscal Quarter 2003                              1.10:1.00
         First Fiscal Quarter 2004                               1.15:1.00
         Second Fiscal Quarter 2004                              1.15:1.00
         Third Fiscal Quarter 2004                               1.20:1.00
         Fourth Fiscal Quarter 2004                              1.25:1.00
         First Fiscal Quarter 2005                               1.30:1.00
         Second Fiscal Quarter 2005                              1.30:1.00
         Third Fiscal Quarter 2005                               1.35:1.00
         Fourth Fiscal Quarter 2005                              1.35:1.00
         First Fiscal Quarter 2006                               1.40:1.00
         Second Fiscal Quarter 2006                              1.40:1.00
         Third Fiscal Quarter 2006                               1.40:1.00
         Fourth Fiscal Quarter 2006                              1.40:1.00
         First Fiscal Quarter 2007                               1.40:1.00
         Second Fiscal Quarter 2007                              1.40:1.00
         Third Fiscal Quarter 2007                               1.40:1.00
         Fourth Fiscal Quarter 2007 and thereafter               1.40:1.00


         C.       MAXIMUM CONSOLIDATED PRO FORMA SENIOR LEVERAGE RATIO. Company
shall not permit at any time the Consolidated Pro Forma Senior Leverage Ratio at
the end of the Fiscal Quarters set forth below to exceed the correlative ratio
indicated:


                                      105




                                                     Maximum Consolidated Pro Forma
                     Period Ending Last Day of            Senior Leverage Ratio
                     -------------------------            ---------------------
                                                             
         Third Fiscal Quarter 2001                              2.500:1.00
         Fourth Fiscal Quarter 2001                             2.250:1.00
         First Fiscal Quarter 2002                              2.250:1.00
         Second Fiscal Quarter 2002                             2.250:1.00
         Third Fiscal Quarter 2002                              2.250:1.00
         Fourth Fiscal Quarter 2002                             2.000:1.00
         First Fiscal Quarter 2003                              2.000:1.00
         Second Fiscal Quarter 2003                             2.000:1.00
         Third Fiscal Quarter 2003                              2.000:1.00
         Fourth Fiscal Quarter 2003                             1.750:1.00
         First Fiscal Quarter 2004                              1.750:1.00
         Second Fiscal Quarter 2004                             1.750:1.00
         Third Fiscal Quarter 2004                              1.750:1.00
         Fourth Fiscal Quarter 2004                             1.625:1.00
         First Fiscal Quarter 2005                              1.625:1.00
         Second Fiscal Quarter 2005                             1.625:1.00
         Third Fiscal Quarter 2005                              1.625:1.00
         Fourth Fiscal Quarter 2005                             1.500:1.00
         First Fiscal Quarter 2006                              1.500:1.00
         Second Fiscal Quarter 2006                             1.500:1.00
         Third Fiscal Quarter 2006                              1.500:1.00
         Fourth Fiscal Quarter 2006                             1.500:1.00
         First Fiscal Quarter 2007                              1.500:1.00
         Second Fiscal Quarter 2007                             1.500:1.00
         Third Fiscal Quarter 2007                              1.500:1.00
         Fourth Fiscal Quarter 2007 and thereafter              1.500:1.00


         D.       MAXIMUM CONSOLIDATED PRO FORMA TOTAL LEVERAGE RATIO. Company
shall not permit Consolidated Pro Forma Total Leverage Ratio at the end of the
Fiscal Quarters set forth below to exceed the correlative ratio indicated:



                                                      Maximum Consolidated Pro Forma
                     Period Ending Last Day of             Total Leverage Ratio
                     -------------------------             --------------------
                                                              
         Third Fiscal Quarter 2001                               4.50:1.00
         Fourth Fiscal Quarter 2001                              4.25:1.00
         First Fiscal Quarter 2002                               4.25:1.00
         Second Fiscal Quarter 2002                              4.25:1.00
         Third Fiscal Quarter 2002                               4.25:1.00
         Fourth Fiscal Quarter 2002                              4.00:1.00
         First Fiscal Quarter 2003                               4.00:1.00
         Second Fiscal Quarter 2003                              4.00:1.00
         Third Fiscal Quarter 2003                               3.75:1.00


                                      106


         Fourth Fiscal Quarter 2003                              3.50:1.00
         First Fiscal Quarter 2004                               3.50:1.00
         Second Fiscal Quarter 2004                              3.50:1.00
         Third Fiscal Quarter 2004                               3.50:1.00
         Fourth Fiscal Quarter 2004                              3.25:1.00
         First Fiscal Quarter 2005                               3.25:1.00
         Second Fiscal Quarter 2005                              3.00:1.00
         Third Fiscal Quarter 2005                               3.00:1.00
         Fourth Fiscal Quarter 2005                              3.00:1.00
         First Fiscal Quarter 2006                               3.00:1.00
         Second Fiscal Quarter 2006                              3.00:1.00
         Third Fiscal Quarter 2006                               2.75:1.00
         Fourth Fiscal Quarter 2006                              2.50:1.00
         First Fiscal Quarter 2007                               2.50:1.00
         Second Fiscal Quarter 2007                              2.50:1.00
         Third Fiscal Quarter 2007                               2.50:1.00
         Fourth Fiscal Quarter 2007 and thereafter               2.50:1.00


         E.       FIRST YEAR INTEREST EXPENSE CALCULATIONS. For purposes of
calculations in subsections 7.6A and 7.6B, for any four-Fiscal Quarter period
which includes the Restatement Effective Date, Consolidated Interest Expense
shall be Annualized.

7.7      RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS.

                  Company shall not, and shall not permit any of its
Subsidiaries to, or enter into any transaction of merger or consolidation, or
liquidate, wind-up or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, lease or sub-lease (as lessor or sublessor),
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or any part of its business, property or assets, whether now
owned or hereafter acquired, or acquire by purchase or otherwise all or
substantially all the business, property or fixed assets of, or stock or other
evidence of beneficial ownership of, any Person or any division or line of
business of any Person, except:

                  (i)      any Subsidiary of Company may be merged with or into
         Company or any Subsidiary Guarantor, or be liquidated, wound up or
         dissolved, or all or any part of its business, property or assets may
         be conveyed, sold, leased, transferred or otherwise disposed of, in one
         transaction or a series of transactions, to Company or any Subsidiary
         Guarantor; PROVIDED that, in the case of such a merger, Company or such
         Subsidiary Guarantor shall be the continuing or surviving entity;
         PROVIDED FURTHER that Petcetera may merge with and into Yukon;

                  (ii)     Company and its Subsidiaries may make Consolidated
         Capital Expenditures permitted under subsection 7.8;

                  (iii)    Company and its Subsidiaries may make Investments
         permitted under subsection 7.3;


                                      107


                  (iv)     Company and its Subsidiaries may dispose of obsolete,
         worn out or surplus property, and may close stores and distribution
         centers, in the ordinary course of business;

                  (v)      Company and its Subsidiaries may sell or otherwise
         dispose of assets in transactions that do not constitute Asset Sales;
         PROVIDED that the consideration received for such assets shall be in an
         amount at least equal to the fair market value thereof;

                  (vi)     Company and its wholly-owned Subsidiaries may make
         Permitted Acquisitions; and

                  (vii)    subject to subsection 7.12, Company and its
         Subsidiaries may make Asset Sales (a) of assets having a fair market
         value not in excess of $5,000,000 per Fiscal Year; PROVIDED that (x)
         the consideration received for such assets shall be in an amount at
         least equal to the fair market value thereof; and (y) at least 80% of
         the consideration received shall be cash; (b) of assets relating to
         Petopia and Petcetera so long as the proceeds of such Asset Sales are
         applied in accordance with subsection 2.4B(iii)(a), without giving
         effect to Company's right otherwise to acquire Exchange Assets in
         connection therewith; and (c) of assets comprising Company's corporate
         headquarters, so long as the proceeds of such Asset Sales are applied
         in accordance with subsection 2.4B(iii)(a); PROVIDED that any Exchange
         Assets acquired by Company in connection therewith shall comprise a new
         corporate headquarters facility.

7.8      CONSOLIDATED CAPITAL EXPENDITURES.

                  Company shall not, and shall not permit its Subsidiaries to,
make or incur (i) Consolidated Capital Expenditures in an aggregate amount in
excess of (x) $60,000,000 for any Fiscal Year through the Fiscal Year ending on
the Saturday closest to January 31 in 2003, and (y) $65,000,000 for each Fiscal
Year thereafter (such amount, for each such Fiscal Year, the "MAXIMUM
EXPENDITURE AMOUNT"), PROVIDED that the Maximum Expenditure Amount for any
Fiscal Year, beginning with the Fiscal Year ending in 2004, shall be increased
by an amount equal to the excess, if any, of the Maximum Expenditure Amount for
the previous year (without giving effect to any previous adjustment made in
accordance with this proviso) over the actual amount of Consolidated Capital
Expenditures for such previous Fiscal Year, but in no event shall such increase
exceed 10% of the Maximum Expenditure Amount for such previous Fiscal Year.





7.9      SALES AND LEASE-BACKS.

                  Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, become or remain liable as lessee or as
a guarantor or other surety with respect to any lease, whether an Operating
Lease or a Capital Lease, of any property (whether real, personal or mixed),
whether now owned or hereafter acquired, (i) which Company or any of its
Subsidiaries has sold or transferred or is to sell or transfer to any other
Person (other than Company or any of its Subsidiaries) or (ii) which Company or
any of its Subsidiaries intends to use for substantially


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the same purpose as any other property which has been or is to be sold or
transferred by Company or any of its Subsidiaries to any Person (other than
Company or any of its Subsidiaries) in connection with such lease; PROVIDED,
HOWEVER, that Company may engage in such sale-leaseback transactions to the
extent that all leases entered into by Company and its Subsidiaries in
connection therewith are Capital Leases permitted pursuant to subsection
7.1(iii) of this Agreement; and PROVIDED FURTHER that, with respect to Company's
corporate headquarters, Company may engage in sale-leaseback transactions (x) to
the extent that all leases entered into in connection therewith are Capital
Leases permitted pursuant to subsection 7.1(iii), or (y) if such transactions
are Asset Sales, so long as the proceeds of such Asset Sales are applied in
accordance with subsection 2.4B(iii)(a), without giving effect to Company's
right otherwise to acquire Exchange Assets in connection therewith.

7.10     SALE OR DISCOUNT OF RECEIVABLES.

                  Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, sell with recourse, or discount or
otherwise sell for less than the face value thereof, any of its notes or
accounts receivable other than (i) in connection with trade discounts in the
ordinary course of business and consistent with past practice, and (ii) in aid
of collection.

7.11     TRANSACTIONS WITH SPONSORS AND AFFILIATES.

                  Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property or
the rendering of any service) with any holder of 10% or more of any class of
equity Securities of Company or with any Affiliate of Company or of any such
holder, on terms that are less favorable to such Person than those that might be
obtained at the time from Persons who are not such a holder or Affiliate;
PROVIDED that the foregoing restriction shall not apply to (i) any transaction
between Company and any of its Subsidiaries or between any of its Subsidiaries;
(ii) reasonable and customary fees and expenses paid to members of the Boards of
Directors of Company and its Subsidiaries, and customary indemnification
arrangements with such officers and directors, (iii) management fees payable
pursuant to the Management Agreement; provided that (a) the aggregate amount of
such fees paid during any consecutive 12-month period shall not exceed 1.6% of
the total cash equity investment of the Sponsors and the TCW Parties (to the
extent of their $5,000,000 investment in Company Capital Stock) in Company at
the time of any payment of such fees and out-of-pocket expenses (the "MAXIMUM
MANAGEMENT FEES"); PROVIDED that the Maximum Management Fees permitted to be
paid hereunder for any consecutive 12-month period shall be increased by an
amount equal to the excess, if any, of the Maximum Management Fees for the
previous consecutive 12-month period (after giving effect to any adjustment made
in accordance with this proviso) over the actual amount of management fees paid
pursuant to the Management Agreement during such previous period, and (b) no
Event of Default or Potential Event of Default shall have occurred and be
continuing or shall occur as a result of such payment; PROVIDED that the
restriction set forth in this clause (iii) shall not apply to payments on
account of significant services provided by Sponsors and their respective
Affiliates in connection with a specific transaction, as to which such Person
may receive a reasonable and customary one-time fee for such services, and (iv)
Transaction Expenses paid to the Sponsors on the Closing Date, in accordance
with subsection 4.1U.


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7.12     CONDUCT OF BUSINESS.

                  From and after the Closing Date, Company shall not, and shall
not permit any of its Subsidiaries to, engage in any business other than (i) the
businesses engaged in by Company and its Subsidiaries on the Closing Date and
any business reasonably related, complimentary or ancillary thereto or any
reasonable expansion of any of the foregoing and (ii) such other lines of
business as may be consented to by Requisite Lenders.

7.13     AMENDMENTS OR WAIVERS OF RELATED AGREEMENTS; AMENDMENTS OF DOCUMENTS
         RELATING TO CERTAIN INDEBTEDNESS; LIMITATION ON RESTRICTIONS ON
         AMENDMENTS OR WAIVERS OF LOAN DOCUMENTS.

         A.       AMENDMENTS OR WAIVERS OF RELATED AGREEMENTS. Neither Company
nor any of its Subsidiaries will agree to any material amendment to, or waive
any of its material rights under, any Related Agreement (other than the New
Senior Subordinated Note Indenture and the documents delivered in connection
therewith) after the Closing Date without in each case obtaining the prior
written consent of Requisite Lenders to such amendment or waiver if such
amendment or waiver would be materially adverse to the rights of Company or
Lenders.

         B.       AMENDMENTS OF DOCUMENTS RELATING TO CERTAIN INDEBTEDNESS.
Company shall not, and shall not permit any of its Subsidiaries to, amend or
otherwise change the terms of the New Senior Subordinated Notes, or make any
payment consistent with an amendment thereof or change thereto, if the effect of
such amendment or change is to increase the interest rate on the New Senior
Subordinated Notes, change (to earlier dates) any dates upon which payments of
principal or interest are due thereon, change any event of default or condition
to an event of default with respect thereto (other than to eliminate any such
event of default or increase any grace period related thereto), change the
prepayment provisions thereof, change the subordination provisions thereof (or
any guaranty thereof), or change any collateral therefor (other than to release
such collateral), or if the effect of such amendment or change, together with
all other amendments or changes made, is to increase materially the obligations
of the obligor thereunder or to confer any additional rights on the holders of
the New Senior Subordinated Notes (or a trustee or other representative on their
behalf) which would be materially adverse to Company or Lenders; PROVIDED that
this subsection 7.14B shall not prohibit the exchange of New Senior Subordinated
Notes for Exchange Notes (as defined in the New Senior Subordinated Note
Indenture pursuant to Section 9.16 of the New Senior Subordinated Note
Agreement.

         C.       AMENDMENTS OF COMPANY PREFERRED STOCK. Company shall not amend
or otherwise change the terms of the Company Preferred Stock, or make any
payment consistent with an amendment thereof or change thereto, if the effect of
such amendment or change is to increase the dividend rate on such Company
Preferred Stock, change in a manner adverse to Company the redemption or
prepayment provisions thereof, or if the effect of such amendment or change,
together with all other amendments or changes made, is to increase materially
the obligations of Company thereunder or to confer any additional rights on the
holders of such Company Preferred Stock that would be adverse to Company or
Lenders.

         D.       LIMITATION ON RESTRICTIONS ON AMENDMENTS OR WAIVERS OF LOAN
DOCUMENTS. Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, enter


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into, suffer to exist or become or remain subject to any agreement or
instrument, except for the Loan Documents, that would prohibit or restrict
(including by way of a covenant, representation or warranty or event of
default), or require the consent of any Person to, any amendment to, or waiver
or consent to departure from the terms of, any of the Loan Documents.

7.14     FISCAL YEAR.

                  Company shall not change its Fiscal Year End.

SECTION 8. EVENTS OF DEFAULT

                  If any of the following conditions or events ("EVENTS OF
DEFAULT") shall occur:

8.1      FAILURE TO MAKE PAYMENTS WHEN DUE.

                  Failure by Company to pay any installment of principal of any
Loan when due, whether at stated maturity, by acceleration, by mandatory
prepayment or otherwise; failure by Company to pay when due any amount payable
to an Issuing Lender in reimbursement of any drawing under a Letter of Credit;
or failure by Company to pay any interest on any Loan or any fee or any other
amount due under this Agreement within five days after the date due; or

8.2      DEFAULT IN OTHER AGREEMENTS.

                  (i) Failure of Company or any of its Material Subsidiaries to
pay when due any principal of or interest on or any other amount payable in
respect of one or more items of Indebtedness (other than Indebtedness referred
to in subsection 8.1) or Contingent Obligations in an individual principal
amount of $3,000,000 or more or with an aggregate principal amount of $6,000,000
or more, in each case beyond the end of any grace period provided therefor; or
(ii) breach or default by Company or any of its Subsidiaries with respect to any
other material term of (a) one or more items of Indebtedness or Contingent
Obligations in the individual or aggregate principal amounts referred to in
clause (i) above or (b) any loan agreement, mortgage, indenture or other
agreement relating to such item(s) of Indebtedness or Contingent Obligation(s),
if the effect of such breach or default is to cause, or to permit the holder or
holders of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf
of such holder or holders) to cause, that Indebtedness or Contingent
Obligation(s) to become or be declared due and payable prior to its stated
maturity or the stated maturity of any underlying obligation, as the case may
be; or

8.3      BREACH OF CERTAIN COVENANTS.

                  Failure of Company to perform or comply with any term or
condition contained in subsection 2.5, 6.1(ix) or 6.2 or Section 7 of this
Agreement; or

8.4      BREACH OF WARRANTY.

                  Any representation, warranty, certification or other statement
made by any Loan Party in any Loan Document or in any certificate at any time
given by any Loan Party in writing pursuant hereto or thereto or in connection
herewith or therewith shall be false in any material respect on the date as of
which made; or


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8.5      OTHER DEFAULTS UNDER LOAN DOCUMENTS.

                  Any Loan Party shall default in the performance of or
compliance with any term contained in this Agreement or any of the other Loan
Documents, other than any such term referred to in any other subsection of this
Section 8, and such default shall not have been remedied or waived within 30
days after the earlier of (i) the date a senior executive officer of Company
knew or, in the orderly conduct of its business, should have known of such
failure and (ii) the receipt by Company of notice from Administrative Agent of
such default; or

8.6      INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.

                  (i)      A court having jurisdiction in the premises shall
enter a decree or order for relief in respect of Company or any of its Material
Subsidiaries in an involuntary case under the Bankruptcy Code or under any other
applicable bankruptcy, insolvency or similar law now or hereafter in effect,
which decree or order is not stayed; or any other similar relief shall be
granted under any applicable federal or state law; or (ii) an involuntary case
shall be commenced against Company or any of its Material Subsidiaries under the
Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar
law now or hereafter in effect; or a decree or order of a court having
jurisdiction in the premises for the appointment of a receiver, liquidator,
sequestrator, trustee, custodian or other officer having similar powers over
Company or any of its Material Subsidiaries, or over all or a substantial part
of its property, shall have been entered; or there shall have occurred the
involuntary appointment of an interim receiver, trustee or other custodian of
Company or any of its Material Subsidiaries for all or a substantial part of its
property; or a warrant of attachment, execution or similar process shall have
been issued against any substantial part of the property of Company or any of
its Material Subsidiaries, and any such event described in this clause (ii)
shall continue for 60 days unless dismissed, bonded or discharged; or

8.7      VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.

                  (i)      Company or any if its Material Subsidiaries shall
have an order for relief entered with respect to it or commence a voluntary case
under the Bankruptcy Code or under any other applicable bankruptcy, insolvency
or similar law now or hereafter in effect, or shall consent to the entry of an
order for relief in an involuntary case, or to the conversion of an involuntary
case to a voluntary case, under any such law, or shall consent to the
appointment of or taking possession by a receiver, trustee or other custodian
for all or a substantial part of its property; or Company or any of its Material
Subsidiaries shall make any assignment for the benefit of creditors; or (ii)
Company or any of its Material Subsidiaries shall be unable, or shall fail
generally, or shall admit in writing its inability, to pay its debts as such
debts become due; or the Board of Directors of Company or any of its Material
Subsidiaries (or any committee thereof) shall adopt any resolution or otherwise
authorize any action to approve any of the actions referred to in clause (i)
above or this clause (ii); or

8.8      JUDGMENTS AND ATTACHMENTS.

                  Any money judgment involving (i) in any individual case an
amount in excess of $3,000,000 or (ii) in the aggregate at any time an amount in
excess of $6,000,000 (in either case net of insurance) shall be entered or filed
against Company or any of its Material Subsidiaries or


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any of their respective assets and shall remain undischarged, unvacated,
unbonded or unstayed for a period of 45 days (or in any event later than five
days prior to the date of any proposed sale thereunder); or

8.9      DISSOLUTION.

                  Any order, judgment or decree shall be entered against Company
or any of its Material Subsidiaries decreeing the dissolution or split up of
Company or that Material Subsidiary and such order shall remain undischarged or
unstayed for a period in excess of 30 days; or

8.10     EMPLOYEE BENEFIT PLANS.

                  There shall occur one or more ERISA Events which individually
or in the aggregate results in or might reasonably be expected to result in a
Material Adverse Effect on the Company during the term of this Agreement; or

8.11     CHANGE IN CONTROL.

                  (i) Prior to the initial public offering of Company Common
Stock, any of the Sponsors and their respective Related Parties shall cease
collectively to beneficially own and control at least 51% of the issued and
outstanding shares of Capital Stock of Company entitled (without regard to the
occurrence of any contingency) to vote for the election of members of the Board
of Directors of Company; (ii) after the initial public offering of Company
Common Stock, (a) any Person or any two or more Persons acting in concert, other
than any of the Sponsors and their respective Related Parties, becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act), directly or indirectly, of more than 35% of the voting stock
of Company, (b) Sponsors and their respective Related Parties no longer
collectively beneficially own (as defined in such Rules), directly or
indirectly, at least 35% of the voting stock of Company or cease to own,
directly or indirectly, a greater percentage, on a fully diluted basis, of the
issued and outstanding shares of Capital Stock of Company entitled (without
regard to the occurrence of any contingency) to vote for the election of the
Board of Directors of Company, than the percentage of such Capital Stock
beneficially owned by any other Person or any two or more other Persons acting
in concert, or (c) any of the Sponsors and their respective Related Parties
shall cease collectively to beneficially own and control a percentage of the
voting stock of the Company greater than the percentage beneficially owned and
controlled by any Person or any two or more Persons acting in concert, other
than any of the Sponsors and their respective Related Parties; or (iii) the
first day on which the majority of the members of the Board of Directors of
Company are not Continuing Directors; or

8.12     INVALIDITY OF SUBSIDIARY GUARANTY; FAILURE OF SECURITY; REPUDIATION OF
         OBLIGATIONS.

                  At any time after the execution and delivery thereof, (i) the
Subsidiary Guaranty of any Material Subsidiary for any reason, other than the
satisfaction in full of all Obligations, shall cease to be in full force and
effect (other than in accordance with its terms) or shall be declared to be null
and void, (ii) any Collateral Document shall cease to be in full force and
effect (other than by reason of a release of Collateral thereunder in accordance
with the terms hereof or thereof, the satisfaction in full of the Obligations or
any other termination of such


                                      113


Collateral Document in accordance with the terms hereof or thereof) or shall be
declared null and void, or Administrative Agent shall not have or shall cease to
have a valid and perfected First Priority Lien in any Collateral purported to be
covered thereby having a fair market value, individually or in the aggregate,
exceeding $1,000,000, in each case for any reason other than the failure of
Administrative Agent or any Lender to take any action within its control (unless
the Administrative Agent has determined that it is not economical to maintain a
First Priority Lien on such Collateral), or (iii) any Loan Party shall contest
the validity or enforceability of any Loan Document in writing or deny in
writing that it has any further liability, including with respect to future
advances by Lenders, under any Loan Document to which it is a party; or

8.13     FAILURE TO CONSUMMATE ACQUISITION.

                  The Merger shall be unwound, reversed or otherwise rescinded
in whole or in part for any reason; or

8.14     ACTION RELATING TO SUBORDINATED INDEBTEDNESS.

                  Any event shall occur which, under the terms of the New Senior
Subordinated Note Indenture or any other agreement pursuant to which
Subordinated Indebtedness is issued, shall require Company or any of its
Subsidiaries to prepay or otherwise acquire, or offer to prepay or otherwise
acquire, all or any portion of any Subordinated Indebtedness or Company or any
of its Subsidiaries shall for any other reason prepay or otherwise acquire, or
offer to prepay or otherwise acquire, or make any other payments in respect of,
all or any portion of any Subordinated Indebtedness except to the extent
expressly permitted by subsection 7.5;

THEN (i) upon the occurrence of any Event of Default described in subsection 8.6
or 8.7, each of (a) the unpaid principal amount of and accrued interest on the
Loans, (b) an amount equal to the maximum amount that may at any time be drawn
under all Letters of Credit then outstanding (whether or not any beneficiary
under any such Letter of Credit shall have presented, or shall be entitled at
such time to present, the drafts or other documents or certificates required to
draw under such Letter of Credit), and (c) all other Obligations shall
automatically become immediately due and payable, without presentment, demand,
protest or other requirements of any kind, all of which are hereby expressly
waived by Company, and the obligation of each Lender to make any Loan, the
obligation of Administrative Agent to issue any Letter of Credit and the right
of any Lender to issue any Letter of Credit hereunder shall thereupon terminate,
and (ii) upon the occurrence and during the continuation of any other Event of
Default, Administrative Agent shall, upon the written request or with the
written consent of Requisite Lenders, by written notice to Company, declare all
or any portion of the amounts described in clauses (a) through (c) above to be,
and the same shall forthwith become, immediately due and payable, and the
obligation of each Lender to make any Loan, the obligation of Administrative
Agent to issue any Letter of Credit and the right of any Lender to issue any
Letter of Credit hereunder shall thereupon terminate; PROVIDED that the
foregoing shall not affect in any way the obligations of Lenders under
subsection 3.3C(i) or the obligations of Lenders to purchase participations in
any unpaid Swing Line Loans as provided in subsection 2.1A(iii).

                  Any amounts described in clause (b) above, when received by
Administrative Agent, shall be held by Administrative Agent as cash collateral
pursuant to the terms of Section 17(c) of the Pledge and Security Agreement and
shall be applied as therein provided.


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                  Notwithstanding anything contained in the second preceding
paragraph, if at any time within 90 days after an acceleration of the Loans
pursuant to clause (ii) of such paragraph Company shall pay all arrears of
interest and all payments on account of principal which shall have become due
otherwise than as a result of such acceleration (with interest on principal and,
to the extent permitted by law, on overdue interest, at the rates specified in
this Agreement) and all Events of Default and Potential Events of Default (other
than non-payment of the principal of and accrued interest on the Loans, in each
case which is due and payable solely by virtue of acceleration) shall be
remedied or waived pursuant to subsection 10.6, then Requisite Lenders, by
written notice to Company, may at their option rescind and annul such
acceleration and its consequences; but such action shall not affect any
subsequent Event of Default or Potential Event of Default or impair any right
consequent thereon. The provisions of this paragraph are intended merely to bind
Lenders to a decision which may be made at the election of Requisite Lenders and
are not intended, directly or indirectly, to benefit Company, and such
provisions shall not at any time be construed so as to grant Company the right
to require Lenders to rescind or annul any acceleration hereunder or to preclude
Administrative Agent or Lenders from exercising any of the rights or remedies
available to them under any of the Loan Documents, even if the conditions set
forth in this paragraph are met.

SECTION 9. ADMINISTRATIVE AGENT

9.1      APPOINTMENT.

         A.       APPOINTMENT OF AGENT. Wells Fargo is hereby appointed
Administrative Agent hereunder and under the other Loan Documents and each
Lender hereby authorizes Administrative Agent to act as its agent in accordance
with the terms of this Agreement and the other Loan Documents. Administrative
Agent agrees to act upon the express conditions contained in this Agreement and
the other Loan Documents, as applicable. The provisions of this Section 9 are
solely for the benefit of Administrative Agent and Lenders and Company shall
have no rights as a third party beneficiary of any of the provisions thereof. In
performing its functions and duties under this Agreement, Administrative Agent
shall act solely as an agent of Lenders and does not assume and shall not be
deemed to have assumed any obligation towards or relationship of agency or trust
with or for Company or any of its Subsidiaries. Syndication Agent, without
consent of or notice to any party hereto, may assign any and all of its rights
or obligations hereunder to any of its respective Affiliates.

         B.       APPOINTMENT OF SUPPLEMENTAL COLLATERAL AGENTS. It is the
purpose of this Agreement and the other Loan Documents that there shall be no
violation of any law of any jurisdiction denying or restricting the right of
banking corporations or associations to transact business as agent or trustee in
such jurisdiction. It is recognized that in case of litigation under this
Agreement or any of the other Loan Documents, and in particular in case of the
enforcement of any of the Loan Documents, or in case Administrative Agent deems
that by reason of any present or future law of any jurisdiction it may not
exercise any of the rights, powers or remedies granted herein or in any of the
other Loan Documents or take any other action which may be desirable or
necessary in connection therewith, it may be necessary that Administrative Agent
appoint an additional individual or institution as a separate trustee,
co-trustee, collateral agent or collateral co-agent (any such additional
individual or institution being referred to herein


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individually as a "SUPPLEMENTAL COLLATERAL AGENT" and collectively as
"SUPPLEMENTAL COLLATERAL AGENTS").

                  In the event that Administrative Agent appoints a Supplemental
Collateral Agent with respect to any Collateral, (i) each and every right,
power, privilege or duty expressed or intended by this Agreement or any of the
other Loan Documents to be exercised by or vested in or conveyed to
Administrative Agent with respect to such Collateral shall be exercisable by and
vest in such Supplemental Collateral Agent to the extent, and only to the
extent, necessary to enable such Supplemental Collateral Agent to exercise such
rights, powers and privileges with respect to such Collateral and to perform
such duties with respect to such Collateral, and every covenant and obligation
contained in the Loan Documents and necessary to the exercise or performance
thereof by such Supplemental Collateral Agent shall run to and be enforceable by
either Administrative Agent or such Supplemental Collateral Agent, and (ii) the
provisions of this Section 9 and of subsections 10.2 and 10.3 that refer to
Administrative Agent shall inure to the benefit of such Supplemental Collateral
Agent and all references therein to Administrative Agent shall be deemed to be
references to Administrative Agent and/or such Supplemental Collateral Agent, as
the context may require.

                  Should any instrument in writing from Company or any other
Loan Party be required by any Supplemental Collateral Agent so appointed by
Administrative Agent for more fully and certainly vesting in and confirming to
him or it such rights, powers, privileges and duties, Company shall, or shall
cause such Loan Party to, execute, acknowledge and deliver any and all such
instruments promptly upon request by Administrative Agent. In case any
Supplemental Collateral Agent, or a successor thereto, shall die, become
incapable of acting, resign or be removed, all the rights, powers, privileges
and duties of such Supplemental Collateral Agent, to the extent permitted by
law, shall vest in and be exercised by Administrative Agent until the
appointment of a new Supplemental Collateral Agent.

9.2      POWERS AND DUTIES; GENERAL IMMUNITY.

         A.       POWERS; DUTIES SPECIFIED. Each Lender irrevocably authorizes
Administrative Agent to take such action on such Lender's behalf and to exercise
such powers, rights and remedies hereunder and under the other Loan Documents as
are specifically delegated or granted to Administrative Agent by the terms
hereof and thereof, together with such powers, rights and remedies as are
reasonably incidental thereto. Administrative Agent shall have only those duties
and responsibilities that are expressly specified in this Agreement and the
other Loan Documents. Administrative Agent may exercise such powers, rights and
remedies and perform such duties by or through its agents or employees.
Administrative Agent shall not have, by reason of this Agreement or any of the
other Loan Documents, a fiduciary relationship in respect of any Lender; and
nothing in this Agreement or any of the other Loan Documents, expressed or
implied, is intended to or shall be so construed as to impose upon
Administrative Agent any obligations in respect of this Agreement or any of the
other Loan Documents except as expressly set forth herein or therein.

         B.       NO RESPONSIBILITY FOR CERTAIN MATTERS. Administrative Agent
shall not be responsible to any Lender for the execution, effectiveness,
genuineness, validity, enforceability, collectibility or sufficiency of this
Agreement or any other Loan Document or for any representations, warranties,
recitals or statements made herein or therein or made in any written


                                      116


or oral statements or in any financial or other statements, instruments, reports
or certificates or any other documents furnished or made by Administrative Agent
to Lenders or by or on behalf of Company to Administrative Agent or any Lender
in connection with the Loan Documents and the transactions contemplated thereby
or for the financial condition or business affairs of Company or any other
Person liable for the payment of any Obligations, nor shall Administrative Agent
be required to ascertain or inquire as to the performance or observance of any
of the terms, conditions, provisions, covenants or agreements contained in any
of the Loan Documents or as to the use of the proceeds of the Loans or the use
of the Letters of Credit or as to the existence or possible existence of any
Event of Default or Potential Event of Default. Anything contained in this
Agreement to the contrary notwithstanding, Administrative Agent shall not have
any liability arising from confirmations of the amount of outstanding Loans or
the Letter of Credit Usage or the component amounts thereof.

         C.       EXCULPATORY PROVISIONS. Neither Administrative Agent nor any
of its officers, directors, employees or agents shall be liable to Lenders for
any action taken or omitted by Administrative Agent under or in connection with
any of the Loan Documents except to the extent caused by Administrative Agent's
gross negligence or willful misconduct. Administrative Agent shall be entitled
to refrain from any act or the taking of any action (including the failure to
take an action) in connection with this Agreement or any of the other Loan
Documents or from the exercise of any power, discretion or authority vested in
it hereunder or thereunder unless and until Administrative Agent shall have
received instructions in respect thereof from Requisite Lenders (or such other
Lenders as may be required to give such instructions under subsection 10.6) and,
upon receipt of such instructions from Requisite Lenders (or such other Lenders,
as the case may be), Administrative Agent shall be entitled to act or (where so
instructed) refrain from acting, or to exercise such power, discretion or
authority, in accordance with such instructions. Without prejudice to the
generality of the foregoing, (i) Administrative Agent shall be entitled to rely,
and shall be fully protected in relying, upon any communication, instrument or
document believed by it to be genuine and correct and to have been signed or
sent by the proper person or persons, and shall be entitled to rely and shall be
protected in relying on opinions and judgments of attorneys (who may be
attorneys for Company and its Subsidiaries), accountants, experts and other
professional advisors selected by it; and (ii) no Lender shall have any right of
action whatsoever against Administrative Agent as a result of Administrative
Agent acting or (where so instructed) refraining from acting under this
Agreement or any of the other Loan Documents in accordance with the instructions
of Requisite Lenders (or such other Lenders as may be required to give such
instructions under subsection 10.6).

         D.       ADMINISTRATIVE AGENT ENTITLED TO ACT AS LENDER. The agency
hereby created shall in no way impair or affect any of the rights and powers of,
or impose any duties or obligations upon, Administrative Agent in its individual
capacity as a Lender hereunder. With respect to its participation in the Loans
and the Letters of Credit, Administrative Agent shall have the same rights and
powers hereunder as any other Lender and may exercise the same as though it were
not performing the duties and functions delegated to it hereunder, and the term
"Lender" or "Lenders" or any similar term shall, unless the context clearly
otherwise indicates, include Administrative Agent in its individual capacity.
Administrative Agent and its Affiliates may accept deposits from, lend money to
and generally engage in any kind of banking, trust, financial advisory or other
business with Company or any of its Affiliates as if it were not performing the
duties specified herein, and may accept fees and other consideration from any


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Loan Party for services in connection with this Agreement and otherwise without
having to account for the same to Lenders.

9.3      REPRESENTATIONS AND WARRANTIES; NO RESPONSIBILITY FOR APPRAISAL OF
         CREDITWORTHINESS.

                  Each Lender represents and warrants that it has made its own
independent investigation of the financial condition and affairs of Company and
its Subsidiaries in connection with the making of the Loans and the issuance of
Letters of Credit hereunder and that it has made and shall continue to make its
own appraisal of the creditworthiness of Company and its Subsidiaries.
Administrative Agent shall not have any duty or responsibility, either initially
or on a continuing basis, to make any such investigation or any such appraisal
on behalf of Lenders or to provide any Lender with any credit or other
information with respect thereto, whether coming into its possession before the
making of the Loans or at any time or times thereafter, and Administrative Agent
shall not have any responsibility with respect to the accuracy of or the
completeness of any information provided to Lenders.

9.4      RIGHT TO INDEMNITY.

                  Each Lender, in proportion to its Pro Rata Share, severally
agrees to indemnify Administrative Agent, to the extent that Administrative
Agent shall not have been reimbursed by Company, for and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses (including reasonable counsel fees and disbursements) or
disbursements of any kind or nature whatsoever which may be imposed on, incurred
by or asserted against Administrative Agent in exercising its powers, rights and
remedies or performing its duties hereunder or under the other Loan Documents or
otherwise in its capacity as Administrative Agent in any way relating to or
arising out of this Agreement or the other Loan Documents; PROVIDED that no
Lender shall be liable for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from Administrative Agent's gross negligence or willful misconduct. If
any indemnity furnished to Administrative Agent for any purpose shall, in the
opinion of Administrative Agent, be insufficient or become impaired,
Administrative Agent may call for additional indemnity and cease, or not
commence, to do the acts indemnified against until such additional indemnity is
furnished; provided that in no event shall this sentence require any Lender to
indemnify any Agent against any liability, obligation, loss, damage, penalty,
action, judgment, suit, cost, expense or disbursement in excess of such Lender's
Pro Rata Share thereof; and provided, further, that this sentence shall not be
deemed to require any Lender to indemnify any Agent against any liability,
obligation, loss, damage, penalty, action, judgment, suit, cost, expense or
disbursement described in the proviso in the immediately preceding sentence.

9.5      SUCCESSOR AGENT AND SWING LINE LENDER.

         A.       SUCCESSOR AGENT. Administrative Agent may resign at any time
by giving 30 days' prior written notice thereof to Lenders and Company, and
Administrative Agent may be removed at any time with or without cause by an
instrument or concurrent instruments in writing delivered to Company and
Administrative Agent and signed by Requisite Lenders. Upon any such notice of
resignation or any such removal, Requisite Lenders shall have the right, upon
five Business Days' notice to Company, to appoint a successor Administrative
Agent reasonably


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acceptable to Company, the consent of Company not to be unreasonably withheld;
PROVIDED, HOWEVER, that the consent of the Company shall not be required (i) to
appoint any Lender as successor Administrative Agent, or (ii) upon the
occurrence of and during the continuation of an Event of Default. Upon the
acceptance of any appointment as Administrative Agent hereunder by a successor
Administrative Agent, that successor Administrative Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring or removed Administrative Agent and the retiring or removed
Administrative Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring or removed Administrative Agent's resignation
or removal hereunder as Administrative Agent, the provisions of this Section 9
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Administrative Agent under this Agreement.

         B.       SUCCESSOR SWING LINE LENDER. Any resignation or removal of
Administrative Agent pursuant to subsection 9.5A shall also constitute the
resignation or removal of Wells Fargo or its successor as Swing Line Lender, and
any successor Administrative Agent appointed pursuant to subsection 9.5A shall,
upon its acceptance of such appointment, become the successor Swing Line Lender
for all purposes hereunder. In such event (i) Company shall prepay any
outstanding Swing Line Loans made by the retiring or removed Administrative
Agent in its capacity as Swing Line Lender, (ii) upon such prepayment, the
retiring or removed Administrative Agent and Swing Line Lender shall surrender
the Swing Line Note held by it to Company for cancellation, and (iii) Company
shall issue a new Swing Line Note to the successor Administrative Agent and
Swing Line Lender substantially in the form of EXHIBIT VI annexed hereto, in the
principal amount of the Swing Line Loan Commitment then in effect and with other
appropriate insertions.

9.6      COLLATERAL DOCUMENTS AND GUARANTIES.

                  Each Lender hereby further authorizes Administrative Agent, on
behalf of and for the benefit of Lenders, to enter into each Collateral Document
as secured party, and to continue as the Administrative Agent for and
representative of Lenders under the Subsidiary Guaranty and each Lender agrees
to be bound by the terms of each Collateral Document and the Subsidiary
Guaranty; PROVIDED that Administrative Agent shall not (i) enter into or consent
to any material amendment, modification, termination or waiver of any provision
contained in any Collateral Document or the Subsidiary Guaranty or (ii) release
any Collateral (except as otherwise expressly permitted or required pursuant to
the terms of this Agreement or the applicable Collateral Document), in each case
without the prior consent of Requisite Lenders (or, if required pursuant to
subsection 10.6, all Lenders); PROVIDED FURTHER, HOWEVER, that, without further
written consent or authorization from Lenders, Administrative Agent may execute
any documents or instruments necessary to (a) release any Lien encumbering any
item of Collateral that is the subject of a sale or other disposition of assets
permitted by this Agreement or to which Requisite Lenders have otherwise
consented or (b) release any Subsidiary Guarantor from the Subsidiary Guaranty
if all of the Capital Stock of such Subsidiary Guarantor is sold to any Person
(other than an Affiliate of Company) pursuant to a sale or other disposition
permitted hereunder or to which Requisite Lenders have otherwise consented.
Anything contained in any of the Loan Documents to the contrary notwithstanding,
Company, Administrative Agent and each Lender hereby agree that (1) no Lender
shall have any right individually to realize upon any of the Collateral under
any Collateral Document or to enforce the Subsidiary Guaranty, it being


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understood and agreed that all powers, rights and remedies under the Collateral
Documents and the Subsidiary Guaranty may be exercised solely by Administrative
Agent for the benefit of Lenders in accordance with the terms thereof, and (2)
in the event of a foreclosure by Administrative Agent on any of the Collateral
pursuant to a public or private sale, Administrative Agent or any Lender may be
the purchaser of any or all of such Collateral at any such sale and
Administrative Agent, as agent for and representative of Lenders (but not any
Lender or Lenders in its or their respective individual capacities unless
Requisite Lenders shall otherwise agree in writing) shall be entitled, for the
purpose of bidding and making settlement or payment of the purchase price for
all or any portion of the Collateral sold at any such public sale, to use and
apply any of the Obligations as a credit on account of the purchase price for
any collateral payable by Administrative Agent at such sale.

9.7      CO-AGENTS.

                  The parties hereto hereby acknowledge and agree that in
connection with the syndication of the Commitments and Loans, certain financial
institutions that become Lenders hereunder may be designated by GSCP, as
Syndication Agent and Arranger, Wells Fargo, as Administrative Agent and
Arranger, as a "Co-Agent" or as the "Documentation Agent." None of the Lenders
so designated as a "Co-Agent" or "Documentation Agent" shall have any right,
power, obligation, liability, responsibility or duty under this Agreement other
than those applicable to all Lenders as such. Without limiting the foregoing,
none of the Lenders so designated as a "Co-Agent" or "Documentation Agent" shall
have or be deemed to have any fiduciary relationship with any Lender. Each
Lender acknowledges that it has not relied, and will not rely, on any of the
Lenders so designated in deciding to enter into this Agreement or in taking or
not taking action hereunder.

SECTION 10.                MISCELLANEOUS

10.1     ASSIGNMENTS AND PARTICIPATIONS IN LOANS AND LETTERS OF CREDIT.

         A.       GENERAL. Subject to subsection 10.1B, each Lender shall have
the right at any time to (i) sell, assign or transfer to any Eligible Assignee,
or (ii) sell participations to any Person in, all or any part of its Commitments
or any Loan or Loans made by it or its Letters of Credit or participations
therein or any other interest herein or in any other Obligations owed to it;
PROVIDED that no such sale, assignment, transfer or participation shall, without
the consent of Company, require Company to file a registration statement with
the Securities and Exchange Commission or apply to qualify such sale,
assignment, transfer or participation under the securities laws of any state;
PROVIDED, FURTHER that no such sale, assignment or transfer described in clause
(i) above shall be effective unless and until an Assignment Agreement effecting
such sale, assignment or transfer shall have been accepted by Administrative
Agent and recorded in the Register as provided in subsection 10.1B(ii);
PROVIDED, FURTHER that no such sale, assignment, transfer or participation of
any Letter of Credit or any participation therein may be made separately from a
sale, assignment, transfer or participation of a corresponding interest in the
Revolving Loan Commitment and the Revolving Loans of the Lender effecting such
sale, assignment, transfer or participation; and PROVIDED, FURTHER that,
anything contained herein to the contrary notwithstanding, the Swing Line Loan
Commitment and the Swing Line Loans of Swing Line Lender may not be sold,
assigned or transferred as described in clause (i) above to any Person other
than a successor Administrative Agent and Swing Line Lender to the extent
contemplated


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by subsection 9.5. Except as otherwise provided in this subsection 10.1, no
Lender shall, as between Company and such Lender, be relieved of any of its
obligations hereunder as a result of any sale, assignment or transfer of, or any
granting of participations in, all or any part of its Commitments or the Loans,
the Letters of Credit or participations therein, or the other Obligations owed
to such Lender.

         B.       ASSIGNMENTS.

                  (i)      AMOUNTS AND TERMS OF ASSIGNMENTS. Each Commitment,
         Loan, Letter of Credit or participation therein, or other Obligation
         may (a) be assigned in any amount to another Lender, or to an Affiliate
         of the assigning Lender or another Lender, with the giving of notice to
         Company and Administrative Agent or (b) be assigned in an aggregate
         amount of not less than $5,000,000 in respect of the Revolving Loans
         and $1,000,000 in respect of the Tranche B Term Loans (or such lesser
         amount as shall constitute the aggregate amount of the Commitments,
         Loans, Letters of Credit and participations therein, and other
         Obligations of the assigning Lender) to any other Eligible Assignee
         with the consent of Administrative Agent and, except in the event any
         Event of Default or Potential Event of Default shall have occurred and
         be continuing, Company (which consent of Company and Administrative
         Agent shall not be unreasonably withheld or delayed). To the extent of
         any such assignment in accordance with either clause (a) or (b) above,
         the assigning Lender shall be relieved of its obligations with respect
         to its Commitments, Loans, Letters of Credit or participations therein,
         or other Obligations or the portion thereof so assigned. The parties to
         each such assignment shall execute and deliver to Administrative Agent,
         for its acceptance and recording in the Register an Assignment
         Agreement, together with a processing and recordation fee of $2,000
         (provided that for any assignment to a Lender, an Affiliate of a
         Lender, or to Administrative Agent, or made by or to GSCP, the
         processing and recordation fee shall be $500) and such forms,
         certificates or other evidence, if any, with respect to United States
         federal income tax withholding matters as the assignee under such
         Assignment Agreement may be required to deliver to Administrative Agent
         pursuant to subsection 2.7B(iii)(a). Upon such execution, delivery,
         acceptance and recordation from and after the effective date specified
         in such Assignment Agreement, (y) the assignee thereunder shall be a
         party hereto and, to the extent that rights and obligations hereunder
         have been assigned to it pursuant to such Assignment Agreement, shall
         have the rights and obligations of a Lender hereunder and (z) the
         assigning Lender thereunder shall, to the extent that rights and
         obligations hereunder have been assigned by it pursuant to such
         Assignment Agreement, relinquish its rights (other than any rights
         which survive the termination of this Agreement under subsection 10.9B)
         and be released from its obligations under this Agreement (and, in the
         case of an Assignment Agreement covering all or the remaining portion
         of an assigning Lender's rights and obligations under this Agreement,
         such Lender shall cease to be a party hereto; PROVIDED that, anything
         contained in any of the Loan Documents to the contrary notwithstanding,
         if such Lender is the Issuing Lender with respect to any outstanding
         Letters of Credit such Lender shall continue to have all rights and
         obligations of an Issuing Lender with respect to such Letters of Credit
         until the cancellation or expiration of such Letters of Credit and the
         reimbursement of any amounts drawn thereunder). The Commitments
         hereunder shall be modified to reflect the Commitment of


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         such assignee and any remaining Commitment of such assigning Lender
         and, if any such assignment occurs after the issuance of any Notes
         hereunder, the assigning Lender shall, upon the effectiveness of such
         assignment or as promptly thereafter as practicable, surrender its
         applicable Notes, if any, to Administrative Agent for cancellation, and
         thereupon new Notes shall, if so requested by the assignee and/or the
         assigning Lender in accordance with subsection 2.1E, be issued to the
         assignee and to the assigning Lender, substantially in the form of
         EXHIBIT IV-B, EXHIBIT V or EXHIBIT VI annexed hereto, as the case may
         be, with appropriate insertions, to reflect the new Commitments and/or
         outstanding Term Loans of the assignee and the assigning Lender.

                  (ii)     ACCEPTANCE BY ADMINISTRATIVE AGENT; RECORDATION IN
         REGISTER. Upon its receipt of an Assignment Agreement executed by an
         assigning Lender and an assignee representing that it is an Eligible
         Assignee, together with the processing and recordation fee referred to
         in subsection 10.1B(i) and any forms, certificates or other evidence
         with respect to United States federal income tax withholding matters
         that such assignee may be required to deliver to Administrative Agent
         pursuant to subsection 2.7B(iii)(a), Administrative Agent shall, if
         Administrative Agent and Company have consented to the assignment
         evidenced thereby (in each case to the extent such consent is required
         pursuant to subsection 10.1B(i)), (a) accept such Assignment Agreement
         by executing a counterpart thereof as provided therein (which
         acceptance shall evidence any required consent of Administrative Agent
         to such assignment), (b) record the information contained therein in
         the Register, and (c) give prompt notice thereof to Company.
         Administrative Agent shall maintain a copy of each Assignment Agreement
         delivered to and accepted by it as provided in this subsection
         10.1B(ii).

         C.       PARTICIPATIONS. The holder of any participation, other than an
Affiliate of the Lender granting such participation, shall not be entitled to
require such Lender to take or omit to take any action hereunder except action
directly affecting (i) the extension of the scheduled final maturity date of any
Loan allocated to such participation or (ii) a reduction of the principal amount
of or the rate of interest payable on any Loan allocated to such participation,
and all amounts payable by Company hereunder (including amounts payable to such
Lender pursuant to subsections 2.6D, 2.7 and 3.6) shall be determined as if such
Lender had not sold such participation.

         D.       ASSIGNMENTS TO FEDERAL RESERVE BANKS. In addition to the
assignments and participations permitted under the foregoing provisions of this
subsection 10.1, any Lender may assign and pledge all or any portion of its
Loans, the other Obligations owed to such Lender, and its Notes to any Federal
Reserve Bank as collateral security pursuant to Regulation A of the Board of
Governors of the Federal Reserve System and any operating circular issued by
such Federal Reserve Bank; PROVIDED that (i) no Lender shall, as between Company
and such Lender, be relieved of any of its obligations hereunder as a result of
any such assignment and pledge and (ii) in no event shall such Federal Reserve
Bank be considered to be a "Lender" or be entitled to require the assigning
Lender to take or omit to take any action hereunder.

         E.       INFORMATION. Each Lender may furnish any information
concerning Company and its Subsidiaries in the possession of that Lender from
time to time to assignees and participants (including prospective assignees and
participants), subject to subsection 10.19.


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         F.       REPRESENTATIONS OF LENDERS. Each Lender listed on the
signature pages hereof hereby represents and warrants (i) that it is an Eligible
Assignee described in clause (i) of the definition thereof; (ii) that it has
experience and expertise in the making of loans such as the Loans; and (iii)
that it will make its Loans for its own account in the ordinary course of its
business and without a view to distribution of such Loans within the meaning of
the Securities Act or the Exchange Act or other federal securities laws (it
being understood that, subject to the provisions of this subsection 10.1, the
disposition of such Loans or any interests therein shall at all times remain
within its exclusive control). Each Lender that becomes a party hereto pursuant
to an Assignment Agreement shall be deemed to agree that the representations and
warranties of such Lender contained in Section 2(c) of such Assignment Agreement
are incorporated herein by this reference.

10.2     EXPENSES.

                  Whether or not the transactions contemplated hereby shall be
consummated, Company agrees to pay promptly (i) all the actual and reasonable
out-of-pocket costs and expenses of preparation of the Loan Documents and any
consents, amendments, waivers or other modifications thereto; (ii) all the
reasonable costs of furnishing all opinions by counsel for Company and its
Subsidiaries (including any opinions reasonably requested by Lenders as to any
legal matters arising hereunder) and of Company's performance of and compliance
with all agreements and conditions on its part to be performed or complied with
under this Agreement and the other Loan Documents including with respect to
confirming compliance with environmental, insurance and solvency requirements;
(iii) the reasonable fees, expenses and disbursements of counsel to
Administrative Agent in connection with the negotiation, preparation and
execution and administration of the Loan Documents and any consents, amendments,
waivers or other modifications thereto and any other documents or matters
requested by Company; (iv) all the actual costs and reasonable out-of-pocket
expenses of creating and perfecting Liens in favor of Administrative Agent on
behalf of Lenders pursuant to any Collateral Document, including filing and
recording fees, expenses and taxes, stamp or documentary taxes, search fees,
title insurance premiums, and reasonable fees, expenses and disbursements of
counsel to Administrative Agent and of counsel providing any opinions that
Administrative Agent or Requisite Lenders may reasonably request in respect of
the Collateral Documents or the Liens created pursuant thereto; (v) all the
actual costs and reasonable out-of-pocket expenses (including the reasonable
fees, expenses and disbursements of any auditors, accountants or appraisers and
any environmental or other consultants, advisors and agents employed or retained
by Administrative Agent or its counsel) of obtaining and reviewing any
environmental audits or reports provided for under subsection 6.9(vi); (vi) all
costs incurred in connection with the custody or preservation of any of the
Collateral; (vii) all other actual and reasonable costs and expenses incurred by
Administrative Agent in connection with the syndication of the Commitments and
the negotiation, preparation and execution of the Loan Documents and any
consents, amendments, waivers or other modifications thereto and the
transactions contemplated thereby; and (viii) after the occurrence of an Event
of Default, all costs and expenses, including reasonable attorneys' fees and
costs of settlement, reasonably incurred by Administrative Agent and Lenders in
enforcing any Obligations of or in collecting any payments due from any Loan
Party hereunder or under the other Loan Documents by reason of such Event of
Default (including in connection with the sale of, collection from, or other
realization upon any of the Collateral or the enforcement of the Guaranties) or
in connection with


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any refinancing or restructuring of the credit arrangements provided under this
Agreement in the nature of a "work-out" or pursuant to any insolvency or
bankruptcy proceedings. Administrative Agent shall provide to Company a written
statement setting forth in reasonable detail the basis for requesting Company to
pay amounts under this subsection 10.2.

10.3     INDEMNITY.

                  In addition to the payment of expenses pursuant to subsection
10.2, whether or not the transactions contemplated hereby shall be consummated,
Company agrees to defend (subject to Indemnitees' selection of counsel),
indemnify, pay and hold harmless Administrative Agent and Lenders, and the
officers, directors, employees, agents and affiliates of Administrative Agent
and Lenders (collectively called the "INDEMNITEES"), from and against any and
all Indemnified Liabilities (as hereinafter defined); PROVIDED that Company
shall not have any obligation to any Indemnitee hereunder with respect to any
Indemnified Liabilities to the extent such Indemnified Liabilities arise from
the gross negligence, willful misconduct or breach of contract of that
Indemnitee as determined by a final judgment of a court of competent
jurisdiction.

                  As used herein, "INDEMNIFIED LIABILITIES" means, collectively,
any and all liabilities, obligations, losses, damages (including natural
resource damages), penalties, actions, judgments, suits, claims (including
Environmental Claims), costs (including the costs of any investigation, study,
sampling, testing, abatement, cleanup, removal, remediation or other response
action necessary to remove, remediate, clean up or abate any Hazardous Materials
Activity), expenses and disbursements of any kind or nature whatsoever
(including the reasonable fees and disbursements of counsel for Indemnitees in
connection with any investigative, administrative or judicial proceeding
commenced or threatened by any Person, whether or not any such Indemnitee shall
be designated as a party or a potential party thereto, and any fees or expenses
incurred by Indemnitees in enforcing this indemnity), whether direct, indirect
or consequential and whether based on any federal, state or foreign laws,
statutes, rules or regulations (including securities and commercial laws,
statutes, rules or regulations and Environmental Laws), on common law or
equitable cause or on contract or otherwise, that may be imposed on, incurred
by, or asserted against any such Indemnitee, in any manner relating to or
arising out of (i) this Agreement or the other Loan Documents or the Related
Agreements or the transactions contemplated hereby or thereby (including
Lenders' agreement to make the Loans hereunder or the use or intended use of the
proceeds thereof or the issuance of Letters of Credit hereunder or the use or
intended use of any thereof), or any enforcement of any of the Loan Documents
(including any sale of, collection from, or other realization upon any of the
Collateral or the enforcement of the Subsidiary Guaranty), or (ii) any
Environmental Claim or any Hazardous Materials Activity relating to or arising
from, directly or indirectly, any past or present activity, operation, or land
ownership of Company or any of its Subsidiaries.

                  To the extent that the undertakings to defend, indemnify, pay
and hold harmless set forth in this subsection 10.3 may be unenforceable in
whole or in part because they are violative of any law or public policy, Company
shall contribute the maximum portion that it is permitted to pay and satisfy
under applicable law to the payment and satisfaction of all Indemnified
Liabilities incurred by Indemnitees or any of them.


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10.4     SET-OFF.

                  In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of and during the continuation of any Event of Default each Lender is
hereby authorized by Company at any time or from time to time, without notice to
Company or to any other Person, any such notice being hereby expressly waived,
to set off and to appropriate and to apply any and all deposits (general or
special, including Indebtedness evidenced by certificates of deposit, whether
matured or unmatured, but not including trust accounts) and any other
Indebtedness at any time held or owing by that Lender to or for the credit or
the account of Company against and on account of the obligations and liabilities
of Company then due and owing to that Lender under this Agreement, the Letters
of Credit and participations therein and the other Loan Documents, including all
claims of any nature or description arising out of or connected with this
Agreement, the Letters of Credit and participations therein or any other Loan
Document, irrespective of whether or not that Lender shall have made any demand
hereunder.

10.5     RATABLE SHARING.

                  Lenders hereby agree among themselves that if any of them
shall, whether by voluntary payment (other than a voluntary prepayment of Loans
made and applied in accordance with the terms of this Agreement), by realization
upon security, through the exercise of any right of set-off or banker's lien, by
counterclaim or cross action or by the enforcement of any right under the Loan
Documents or otherwise, or as adequate protection of a deposit treated as cash
collateral under the Bankruptcy Code, receive payment or reduction of a
proportion of the aggregate amount of principal, interest, amounts payable in
respect of Letters of Credit, fees and other amounts then due and owing to that
Lender hereunder or under the other Loan Documents (collectively, the "AGGREGATE
AMOUNTS DUE" to such Lender) which is greater than the proportion received by
any other Lender in respect of the Aggregate Amounts Due to such other Lender,
then the Lender receiving such proportionately greater payment shall (i) notify
Administrative Agent and each other Lender of the receipt of such payment and
(ii) apply a portion of such payment to purchase participations (which it shall
be deemed to have purchased from each seller of a participation simultaneously
upon the receipt by such seller of its portion of such payment) in the Aggregate
Amounts Due to the other Lenders so that all such recoveries of Aggregate
Amounts Due shall be shared by all Lenders in proportion to the Aggregate
Amounts Due to them; PROVIDED that if all or part of such proportionately
greater payment received by such purchasing Lender is thereafter recovered from
such Lender upon the bankruptcy or reorganization of Company or otherwise, those
purchases shall be rescinded and the purchase prices paid for such
participations shall be returned to such purchasing Lender ratably to the extent
of such recovery, but without interest. Company expressly consents to the
foregoing arrangement and agrees that any holder of a participation so purchased
may exercise any and all rights of banker's lien, set-off or counterclaim with
respect to any and all monies owing by Company or any of its Subsidiaries to
that holder with respect thereto as fully as if that holder were owed the amount
of the participation held by that holder.

10.6     AMENDMENTS AND WAIVERS.

         A.       No amendment, modification, termination or waiver of any
provision of the Loan Documents, or consent to any departure by Company
therefrom, shall in any event be effective


                                      125


without the written concurrence of Requisite Lenders; provided that no such
amendment, modification, termination, waiver or consent shall, without the
consent of each Lender (with Obligations directly affected in the case of the
following clause (i)): (i) postpone the date or reduce the amount of any
scheduled payment (but not any mandatory prepayment pursuant to subsection
2.4B(iii)) of principal of any of the Loans, or extend the stated expiration
date of any Letter of Credit beyond the Revolving Loan Commitment Termination
Date, or reduce the rate of interest on any Loan (other than any waiver of any
increase in the interest rate applicable to any Loan pursuant to subsection
2.2E) or any commitment fees or letter of credit fees payable hereunder, or
extend the time for payment of any such interest or fees, or reduce the
principal amount of any Loan or any reimbursement obligation in respect of any
Letter of Credit, (ii) amend, modify, terminate or waive any provision of this
subsection 10.6, (iii) reduce the percentage specified in the definition of
"Requisite Lenders" (it being understood that, with the consent of Requisite
Lenders, additional extensions of credit pursuant to this Agreement may be
included in the determination of "Requisite Lenders" on substantially the same
basis as the Term Loan Commitments, the Term Loans, the Revolving Loan
Commitments and the Revolving Loans are included on the Closing Date), (iv)
consent to the assignment or transfer by Company of any of its rights and
obligations under this Agreement or (v) release all or substantially all of the
Collateral or all or substantially all of the Subsidiary Guarantors from the
Subsidiary Guaranty except as expressly provided in the Loan Documents;
provided, further that no such amendment, modification, termination or waiver
shall (a) increase the Commitments of any Lender over the amount thereof then in
effect without the consent of such Lender (it being understood that no
amendment, modification or waiver of any condition precedent, covenant,
Potential Event of Default or Event of Default shall constitute an increase in
the Commitment of any Lender, and that no increase in the available portion of
any Commitment of any Lender shall constitute an increase in such Commitment of
such Lender); (b) amend, modify, terminate or waive any provision of subsection
2.1A(iv) or any other provision of this Agreement relating to the Swing Line
Loan Commitment or the Swing Line Loans without the consent of Swing Line
Lender; (c) amend the definition of "Requisite Class Lenders" without the
consent of Requisite Class Lenders of each Class, or alter the required
application of any repayments or prepayments as between Classes pursuant to
subsection 2.4B(iv) without the consent of Requisite Class Lenders of each Class
which is being allocated a lesser repayment or prepayment as a result thereof
(although Requisite Lenders may waive, in whole or in part, any mandatory
prepayment so long as the application, as between Classes, of any portion of
such prepayment which is still required to be made is not altered); and (d)
amend, modify, terminate or waive any obligation of Lenders relating to the
purchase of participations in Letters of Credit as provided in subsection 3.1C
without the written concurrence of Administrative Agent and of each Issuing
Lender which has a Letter of Credit then outstanding or which has not been
reimbursed for a drawing under a Letter of Credit issued by it; or (e) amend,
modify, terminate or waive any provision of Section 9 as the same applies to any
Agent, or any other provision of this Agreement as the same applies to the
rights or obligations of any Agent, in each case without the consent of such
Agent. Administrative Agent may, but shall have no obligation to, with the
concurrence of any Lender, execute amendments, modifications, waivers or
consents on behalf of that Lender. Any waiver or consent shall be effective only
in the specific instance and for the specific purpose for which it was given. No
notice to or demand on Company in any case shall entitle Company to any other or
further notice or demand in similar or other circumstances. Any amendment,
modification, termination, waiver or consent effected in accordance with this
subsection 10.6 shall be binding


                                      126


upon each Lender at the time outstanding, each future Lender and, if signed by
Company, on Company.

         B.       If, in connection with any proposed change, waiver, discharge
or termination to any of the provisions of this Agreement as contemplated by the
proviso in the first sentence of subsection 10.6A, the consent of Requisite
Lenders is obtained but consent of one or more of such other Lenders whose
consent is required is not obtained, then Company may, so long as all
non-consenting Lenders are so treated, elect to terminate such Lender as a party
to this Agreement; provided that, concurrently with such termination, (i)
Company shall pay that Lender all principal, interest and fees and other amounts
owed to such Lender through such date of termination, (ii) another financial
institution satisfactory to Company and Administrative Agent (or if
Administrative Agent is also the Lender to be terminated, the successor
Administrative Agent) shall agree, as of such date, to become a Lender for all
purposes under this Agreement (whether by assignment or amendment) and to assume
all obligations of the Lender to be terminated as of such date, and (iii) all
documents and supporting materials necessary, in the judgment of Administrative
Agent (or if Administrative Agent is also the Lender to be terminated, the
successor Administrative Agent), to evidence the substitution of such Lender
shall have been received and approved by Administrative Agent as of such date.

10.7     INDEPENDENCE OF COVENANTS.

                  All covenants hereunder shall be given independent effect so
that if a particular action or condition is not permitted by any of such
covenants, the fact that it would be permitted by an exception to, or would
otherwise be within the limitations of, another covenant shall not avoid the
occurrence of an Event of Default or Potential Event of Default if such action
is taken or condition exists.

10.8     NOTICES.

                  Unless otherwise specifically provided herein, any notice or
other communication herein required or permitted to be given shall be in writing
and may be personally served, telexed or sent by telefacsimile or United States
mail or courier service and shall be deemed to have been given when delivered in
person or by courier service, upon receipt of telefacsimile or telex, or three
Business Days after depositing it in the United States mail with postage prepaid
and properly addressed; PROVIDED that notices to Administrative Agent shall not
be effective until received. For the purposes hereof, the address of each party
hereto shall be as set forth under such party's name on the signature pages
hereof or (i) as to Company and Administrative Agent, such other address as
shall be designated by such Person in a written notice delivered to the other
parties hereto and (ii) as to each other party, such other address as shall be
designated by such party in a written notice delivered to Administrative Agent.

10.9     SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.

         A.       All representations, warranties and agreements made herein
shall survive the execution and delivery of this Agreement and the making of the
Loans and the issuance of the Letters of Credit hereunder.


                                      127


         B.       Notwithstanding anything in this Agreement or implied by law
to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7,
3.5A, 3.6, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in
subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Loans, the
cancellation or expiration of the Letters of Credit and the reimbursement of any
amounts drawn thereunder, and the termination of this Agreement.

10.10    FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE.

                  No failure or delay on the part of Administrative Agent or any
Lender in the exercise of any power, right or privilege hereunder or under any
other Loan Document shall impair such power, right or privilege or be construed
to be a waiver of any default or acquiescence therein, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other power, right or privilege. All rights and
remedies existing under this Agreement and the other Loan Documents are
cumulative to, and not exclusive of, any rights or remedies otherwise available.

10.11    MARSHALLING; PAYMENTS SET ASIDE.

                  Neither Administrative Agent nor any Lender shall be under any
obligation to marshal any assets in favor of Company or any other party or
against or in payment of any or all of the Obligations. To the extent that
Company makes a payment or payments to Administrative Agent or Lenders (or to
Administrative Agent for the benefit of Lenders), or Administrative Agent or
Lenders enforce any security interests or exercise their rights of setoff, and
such payment or payments or the proceeds of such enforcement or setoff or any
part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy law, any other state or federal law, common
law or any equitable cause, then, to the extent of such recovery, the obligation
or part thereof originally intended to be satisfied, and all Liens, rights and
remedies therefor or related thereto, shall be revived and continued in full
force and effect as if such payment or payments had not been made or such
enforcement or setoff had not occurred.

10.12    SEVERABILITY.

                  In case any provision in or obligation under this Agreement or
the Notes shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction, shall
not in any way be affected or impaired thereby.

10.13    OBLIGATIONS SEVERAL; INDEPENDENT NATURE OF LENDERS' RIGHTS.

                  The obligations of Lenders hereunder are several and no Lender
shall be responsible for the obligations or Commitments of any other Lender
hereunder. Nothing contained herein or in any other Loan Document, and no action
taken by Lenders pursuant hereto or thereto, shall be deemed to constitute
Lenders as a partnership, an association, a joint venture or any other kind of
entity. The amounts payable at any time hereunder to each Lender shall be a
separate and independent debt, and subject to the provisions of this Agreement
and the other Loan Documents each Lender shall be entitled to protect and
enforce its rights arising out of this


                                      128


Agreement and it shall not be necessary for any other Lender to be joined as an
additional party in any proceeding for such purpose.

10.14    HEADINGS.

                  Section and subsection headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose or be given any substantive effect.

10.15    APPLICABLE LAW.

                  THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION
5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES.

10.16    SUCCESSORS AND ASSIGNS.

                  This Agreement shall be binding upon the parties hereto and
their respective successors and assigns and shall inure to the benefit of the
parties hereto and the successors and assigns of Lenders (it being understood
that Lenders' rights of assignment are subject to subsection 10.1). Neither
Company's rights or obligations hereunder nor any interest therein may be
assigned or delegated by Company without the prior written consent of all
Lenders.

10.17    CONSENT TO JURISDICTION AND SERVICE OF PROCESS.

                  ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE PARTIES TO THIS
AGREEMENT ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL
COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK BY
EXECUTING AND DELIVERING THIS AGREEMENT, EACH PARTY HERETO, FOR ITSELF AND IN
CONNECTION WITH ITS PROPERTIES, IRREVOCABLY

                  (I)      ACCEPTS GENERALLY AND UNCONDITIONALLY THE
                  NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS;

                  (II)     WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;

                  (III)    AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH
                  PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR
                  CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH PARTY, AS
                  THE CASE MAY BE, AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH
                  SUBSECTION 10.8;


                                      129


                  (IV)     AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE
                  IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER COMPANY, AS
                  THE CASE MAY BE, IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND
                  OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY
                  RESPECT;

                  (V)      AGREES THAT THE OTHER PARTIES HERETO RETAIN THE RIGHT
                  TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
                  BRING PROCEEDINGS AGAINST SUCH PARTY, AS THE CASE MAY BE, IN
                  THE COURTS OF ANY OTHER JURISDICTION; AND

                  (VI)     AGREES THAT THE PROVISIONS OF THIS SUBSECTION 10.17
                  RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND
                  ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK
                  GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE.

10.18    WAIVER OF JURY TRIAL.

                  EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE
ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR
THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this
waiver is intended to be all-encompassing of any and all disputes that may be
filed in any court and that relate to the subject matter of this transaction,
including contract claims, tort claims, breach of duty claims and all other
common law and statutory claims. Each party hereto acknowledges that this waiver
is a material inducement to enter into a business relationship, that each has
already relied on this waiver in entering into this Agreement, and that each
will continue to rely on this waiver in their related future dealings. Each
party hereto further warrants and represents that it has reviewed this waiver
with its legal counsel and that it knowingly and voluntarily waives its jury
trial rights following consultation with legal counsel. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING
(OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION
10.18 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY
TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR
AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation,
this Agreement may be filed as a written consent to a trial by the court.

10.19    CONFIDENTIALITY.

                  Each Lender shall hold all non-public information obtained
pursuant to the requirements of this Agreement in accordance with such Lender's
customary procedures for


                                      130


handling confidential information of this nature and in accordance with safe and
sound banking practices, it being understood and agreed by Company that in any
event a Lender may make disclosures to Affiliates of such Lender or disclosures
reasonably required by any bona fide assignee, transferee or participant in
connection with the contemplated assignment or transfer by such Lender of any
Loans or any participations therein or disclosures required or requested by any
governmental agency or representative thereof or pursuant to legal process;
PROVIDED that, unless specifically prohibited by applicable law or court order,
each Lender shall notify Company of any request by any governmental agency or
representative thereof (other than any such request in connection with any
examination of the financial condition of such Lender by such governmental
agency) for disclosure of any such non-public information prior to disclosure of
such information; and PROVIDED, FURTHER that in no event shall any Lender be
obligated or required to return any materials furnished by Company or any of its
Subsidiaries.

10.20    MAXIMUM AMOUNT.

         A.       It is the intention of Company and Lenders to conform strictly
to the usury and similar laws relating to interest from time to time in force,
and all agreements between Company, Administrative Agent and Lenders, whether
now existing or hereafter arising and whether oral or written, are hereby
expressly limited so that in no contingency or event whatsoever, whether by
acceleration of maturity hereof or otherwise, shall the amount paid or agreed to
be paid in the aggregate to Lenders or to Administrative Agent on behalf of
Lenders as interest hereunder or under the other Loan Documents or in any other
security agreement given to secure the Obligations, or in any other document
evidencing, securing or pertaining to the indebtedness evidenced hereby or
thereby, exceed the maximum amount permissible under applicable usury or such
other laws (the "MAXIMUM AMOUNT"). If under any circumstances whatsoever
fulfillment of any provision hereof, or of any of the other Loan Documents, at
the time performance of such provision shall be due, shall involve exceeding the
Maximum Amount, then, IPSO FACTO, the obligation to be fulfilled shall be
reduced to the Maximum Amount. For the purposes of calculating the actual amount
of interest paid and/or payable hereunder in respect of laws pertaining to usury
or such other laws, all sums paid or agreed to be paid to Lenders for the use,
forbearance or detention of the indebtedness of Company evidenced hereby,
outstanding from time to time shall, to the extent permitted by applicable law,
be amortized, pro rated, allocated and spread from the date of disbursement of
the proceeds of the Loans until payment in full of all of such indebtedness, so
that the actual rate of interest on account of such indebtedness is uniform
throughout the term hereof. The terms and provisions of this subsection shall
control and supersede every other provision of all agreements between Company,
Administrative Agent and Lenders.

         B.       If under any circumstances Lenders shall receive an amount
which would exceed the Maximum Amount, such amount shall be deemed a payment in
reduction of the principal amount of the Loans and shall be treated as a
voluntary prepayment under subsection 2.4B(i), and shall be so applied in
accordance with subsection 2.4B(iv) hereof, or if such amount exceeds the unpaid
balance of the Loans and any other indebtedness of Company in favor of Lenders,
the excess shall be deemed to have been a payment made by mistake and shall be
refunded to Company.


                                      131


10.21    COUNTERPARTS; EFFECTIVENESS; EFFECT IF AGREEMENT DOES NOT BECOME
         EFFECTIVE.

                  This Agreement and any amendments, waivers, consents or
supplements hereto or in connection herewith may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document. This Agreement shall become effective upon the execution of a
counterpart hereof by each of the parties hereto and receipt by Company and
Administrative Agent of written or telephonic notification of such execution and
authorization of delivery thereof and the satisfaction of each of the conditions
set forth in subsection 4.2. Until this Agreement becomes effective, the
Existing Credit Agreement remains in full force and effect and, in the event
this Agreement does not become effective on or before November 15, 2001, the
execution and delivery of this Agreement shall be disregarded and this Agreement
shall be deemed null and void for all purposes.

                  [Remainder of page intentionally left blank]


                                      132


                  IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.


                  COMPANY:

                           PETCO ANIMAL SUPPLIES, INC.


                           By:       /s/ JAMES M. MYERS
                                     -------------------------------------------
                           Name.     James M. Myers
                           Title:    Executive Vice President and Chief
                                     Financial Officer

                           Notice Address:

                                   PETCO ANIMAL SUPPLIES, INC.
                                   9125 Rehco Road
                                   San Diego, California  92121-2270
                                   Telephone:  858/453-7845
                                   Facsimile:  858/657-2085
                                   Attention:  Mr. James M. Myers

                                   with copies to:

                                   Leonard Green & Partners, L.P.
                                   11111 Santa Monica Boulevard, Suite 2000
                                   Los Angeles, California 90025
                                   Telephone: 310/954-0444
                                   Facsimile: 310/954-0404
                                   Attention: Mr. John G. Danhakl

                                   and

                                   Texas Pacific Group
                                   345 California Street
                                   Suite 3300
                                   San Francisco, California  94104
                                   Telephone: 415/743-1500
                                   Facsimile: 415/743-1501
                                   Attention: Mr. Jonathan Coslet


                                CREDIT AGREEMENT



                  LENDERS:

                           GOLDMAN SACHS CREDIT PARTNERS L.P.,
                           individually and as Syndication Agent


                           By:     /s/ MARK DENATALE
                                   ---------------------------------------------


                           Notice Address:

                                   Goldman Sachs Credit Partners L.P.
                                   85 Broad Street
                                   New York, New York  10004
                                   Telephone:  212/902-1021
                                   Facsimile:  212/357-0932
                                   Attention:  Elizabeth Fischer

                                   with a copy to:

                                   Goldman Sachs Credit Partners L.P.
                                   85 Broad Street
                                   New York, New York  10004
                                   Telephone:  212/357-6708
                                   Facsimile:  212/346-2608
                                   Attention:  Lisa Perrotto


                           WELLS FARGO BANK, NATIONAL ASSOCIATION,
                           individually and as Administrative Agent

                           By:     /s/ KEVIN J. MCKHANN
                                   ---------------------------------------------
                           Name:  Kevin J. McKhann
                           Title: Vice President


                           Notice Address:

                                   Wells Fargo Bank, National Association
                                   333 South Grand Avenue, 9th Floor
                                   Los Angeles, California  90071
                                   Telephone:  213/253-6257
                                   Facsimile:  213/628-9694
                                   Attention:  Kevin J. McKhann



                           GENERAL ELECTRIC CAPITAL CORPORATION,
                           individually and as Documentation
                           Agent pursuant to Subsection 9.7 of
                           this Agreement

                           By:     /s/ ALLAN J. PAGNOTTA
                                   ---------------------------------------------
                           Name:  Allan J. Pagnotta
                           Title: Senior Risk Manager


                                           Notice Address:



                           NORTHWOODS CAPITAL LTD.,



                           By:       /s/ JOHN W. FRASER
                                     -------------------------------------------
                           Name.     John W. Fraser
                           Title:    Managing Director




                           NORTHWOODS CAPITAL ii, LTD.,



                           By:       /s/ JOHN W. FRASER
                                     -------------------------------------------
                           Name.     John W. Fraser
                           Title:    Managing Director

EX-10.2

                         INDUSTRIAL REAL ESTATE LEASE

                                   BETWEEN


                KNICKERBOCKER INDUSTRIAL PROPERTIES EAST, L.P.
                                   LANDLORD


                                      AND


                          PETCO ANIMAL SUPPLIES, INC.
                                    TENANT





                           DATED AS OF JUNE 23, 1997



                         INDUSTRIAL REAL ESTATE LEASE


                              TABLE OF CONTENTS





Article                                                                   Page
- -------                                                                   ----
                                                                  
One            Basic Terms .............................................1

Two            Premises ................................................3

Three          Lease Term ..............................................3

Four           Rent ....................................................6

Five           Property Taxes ..........................................7

Six            Utilities ...............................................8

Seven          Insurance ...............................................9

Eight          Common Areas ............................................12

Nine           Use of Premises .........................................14

Ten            Condition and Maintenance of Premises ...................16

Eleven         Damage or Destruction ...................................21

Twelve         Condemnation ............................................22

Thirteen       Assignment and Subletting ...............................22

Fourteen       Defaults and Remedies ...................................24

Fifteen        Protection of Lenders ...................................28

Sixteen        Legal Costs .............................................29

Seventeen      Miscellaneous Provisions ................................32



                           ARTICLE ONE: BASIC TERMS

The following terms used in this lease shall have the meanings set forth
below.

1.01   Date Of Lease:                       June 23, 1997

1.02   Landlord (legal entity)              Knickerbocker Industrial
                                            Properties East, L.P.

1.03   Tenant (legal entity)                Petco Animal Supplies, Inc.

1.04   Tenant's Guarantor:                  None

1.05   Address of Premises:                 152 Dayton Jamesburg Road,
                                            South Brunswick, New Jersey

1.06   Intentionally deleted

1.07   Approximate Size of
          Building:                         211,450 square feet.

1.08   Tenant's Initial
          Prorata Share:                    100%

1.09   Lease Term;                          Commencing on the Lease
                                            Commencement Date and expiring
                                            on June 30, 2002.

1.10   (a) Lease Commencement Date:         July 1, 1997
       (b) Rent Commencement Date:          August 1, 1997

1.11   Permitted Uses;                      Warehouse and ancillary offices

1.12   Broker(s):                           Colliers Houston & Co.

1.13   Intentionally Omitted

1.14   Parking Spaces Allocated
          to Tenant:                        100%

1.15   Base Rent:                           (i)   August 1, 1997 through
                                                  June 30, 2000 the Base
                                                  Rent shall be $761,220
                                                  per year, in equal
                                                  monthly installments of
                                                  $63,435.00



                                            (ii)  July 1, 2000 through
                                                  June 30, 2002 the Base
                                                  Rent shall be $845,800
                                                  per year in equal monthly
                                                  installments of $70,483.53

1.16   Other Charges Payable
          by Tenant:                        (i)   Real Property Taxes
                                                  (Article Five)
                                            (ii)  Utilities (Article Six)
                                            (iii) Insurance Premiums
                                                  (Article Seven)
                                            (iv)  CAM Expenses (Article
                                                  Eight)

1.17   Address of Landlord
          for Notices:                      c/o Cabot Partners Limited
                                            Partnership
                                            Two Center Plaza
                                            Boston, MA 02108

1.18   Address of Tenant
          for Notices:                      9125 Rehco Road
                                            San Diego, CA 92121
                                            Attention:  Property Manager

1.19   Exhibits:                            A:  The Premises
                                            B:  Rules & Regulations
                                            C:  Memorandum of Acceptance
                                            D:  Landlord's Release and
                                                Waiver
                                            E:  Additional Provisions
                                            Relating to Parking Spaces


                                       2


ARTICLE TWO: PREMISES

2.01  Premises. The Premises are described in Exhibit A. The Premises includes
the building thereon (the "Building"), including the racking system located
therein.

2.02  Condition of Premises. Prior to the Lease Commencement Date, Landlord will
broom clean the Building and ensure that the gas unit heaters and loading docks
are in good working order and that the roof is watertight. Except as provided in
the preceding sentence or as otherwise expressly provided herein, Tenant shall
accept the Premises in its "as-is" condition on the Lease Commencement Date, and
Landlord shall have no obligation to perform any work therein to prepare the
Premises for Tenant.

ARTICLE THREE: LEASE TERM

3.01  Lease of Premises for Lease Term. Landlord leases the Premises to Tenant
and Tenant leases the Premises from Landlord for the Lease Term, commencing on
the Lease Commencement Date, subject to all terms and provisions of this Lease,
except for the payment of Base Rent (which shall commence on the Rent
Commencement Date). The Lease Term shall be the period stated in Article One and
shall begin on the Lease Commencement Date set forth in Article One.

3.02  Options to Extend Term. Tenant shall have two (2) options to extend the
term of this Lease, each for a five (5) year period (an "Option Period"),
provided (a) Tenant shall give notice to Landlord of its exercise of an option
not less than nine (9) months prior to the expiration of the Lease Term or the
first Option Period, as the case may be, (b) no default beyond any applicable
grace period in the obligations of Tenant under this Lease shall exist at the
time such notice is given and (c) Tenant shall not have been in default under
this Lease beyond any applicable grace period on more than two (2) occasions
during the entire preceding Lease Term. All of the terms and provisions of this
Lease shall be applicable during each Option Period except that (a) Tenant shall
have no option to extend the term of this Lease beyond the second Option Period
and (b) the Base Rent for each Option Period shall be the greater of (i) the
Base Rent for the last year of the Lease Term or the first Option Period, as the
case may be, or (iii) Market Rent, as defined below, as of the first day of such
Option Period.

      "Market Rent" shall be computed as of the applicable date at the then
current rentals being charged to new tenants for comparable space located in
comparable buildings, taking into


                                       3


account and giving effect to, in determining comparability, without limitation,
such considerations as size, location and condition of premises and lease term.

      Landlord shall designate Market Rent for the next Option Period within
thirty (30) days after Tenant's written request, therefor (such request to be
made no earlier than one (1) year before such Option Period).

      If Landlord shall not have previously designated Market Rent, after Tenant
shall exercise an option to extend for an Option Period, Landlord shall
initially designate Market Rent and shall furnish data in support of such
designation. If Tenant shall have exercised its option to extend for the Option
Period but shall disagree with Landlord's designation of the Market Rent, then
Tenant shall have the right, by notice given within fourteen (14) days after
Tenant's receipt of Landlord's designation, to submit such Market Rent to
arbitration as follows. Market Rent shall be determined by arbitrators, one
chosen by Tenant, one chosen by Landlord and a third selected, if necessary, as
below provided. All arbitrators selected under this Section shall be experienced
real estate appraisers with substantial experience with properties in the
vicinity of the Premises. If within fourteen (14) days after Tenant's notice the
parties shall agree upon a single arbitrator or if one party shall fail to
select an arbitrator, the arbitrator selected by the other shall be the sole
arbitrator, and Market Rent shall be determined by such arbitrator. The
unanimous written decision of the two first chosen (or the decision of the
first, if a second arbitrator is not chosen) without selection and participation
of a third arbitrator, or otherwise the written decision of a majority of the
three arbitrators chosen and selected as provided herein, shall be conclusive
and binding upon Landlord and Tenant. Landlord and Tenant shall each notify the
other of its chosen arbitrator within fourteen (14) days following the call for
arbitration, and, unless such two arbitrators shall have either reached a
unanimous decision within thirty (30) days after their designation or jointly
selected a third arbitrator, they shall so notify the then President of the
local Real Estate Board and request him to select an impartial third arbitrator
to act hereunder, or if such individual does not exist or is unavailable, then
they shall apply to a court of competent jurisdiction to select an impartial
third arbitrator. Such third arbitrator and the first two chosen shall hear the
parties and their evidence and render their decision within thirty (30) days
following the conclusion of such hearing and notify Landlord and Tenant thereof.
Landlord and Tenant shall bear the expense of the third arbitrator (if any)
equally. If the dispute between


                                       4


the parties as to Market Rent shall not have been resolved before the
commencement of Tenant's obligation to pay rent based upon Market Rent, then
Tenant shall pay rent based upon the Market Rent designated by Landlord until
either the agreement of the parties as to the Market Rent or the decision of the
arbitrators, as the case may be, at which time Tenant shall pay any underpayment
of rent to Landlord or Landlord shall refund any overpayment of rent to Tenant.

3.03  Intentionally Omitted.

3.04  Holding Over. Tenant shall vacate the Premises upon the expiration or
earlier termination of this Lease. Tenant shall reimburse Landlord for and
indemnify Landlord against all damages, costs, liabilities and expenses,
including attorneys' fees, which Landlord shall incur on account of Tenant's
delay in so vacating the Premises. If Tenant shall not vacate The Premises upon
the expiration or earlier termination of this lease, the Base Rent shall be
increased to 250% of the Base Rent then in effect and Tenant's obligation to pay
Additional Rent shall continue, but nothing herein shall limit any of Landlord's
rights or Tenant's obligations arising from, Tenant's failure to vacate the
Premises, including, without limitation, Landlord's right to repossess the
Premises and remove Tenant therefrom at any time after the expiration or earlier
termination of this Lease and Tenant's obligation to reimburse and indemnify
Landlord as provided in the preceding sentence.

3.05  Tenant's Termination Option. Tenant shall have the right, to terminate
this Lease effective June 30, 2000 (Tenant's Termination Option), provided that
(i) Tenant shall give notice to Landlord of the exercise of Tenant's option
("Tenant's Termination Notice") not later than January 1, 2000, the time of
exercise being of the essence; (ii) Tenant shall pay to Landlord, as an early
termination penalty, the sum of one month's Base Rent, simultaneously with the
delivery of Tenant's Termination Notice; (iii) this Lease shall be in full force
and effect as of the date of Tenant's Termination Notice and on June 30, 2000;
and (iv) Tenant shall not be in default hereunder, beyond any applicable notice
or grace period on the date Tenant sends the Tenant Termination Notice and on
June 30, 2000. If Tenant shall have complied with the foregoing provisions of
this Article 3.05, this Lease and the Lease Term shall expire on June 30, 2000,
with the same force and effect as though said date were the expiration date.


                                       5


ARTICLE FOUR: RENT

4.01  Base Rent. On the first day of each month during the Lease Term, Tenant
shall pay to Landlord the Base Rent as described in Section 1.15 in lawful money
of the United States, in advance and without offset, deduction, or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place or
to such other person as Landlord may designate in writing from time to time.

4.02  Additional Rent. All sums payable by Tenant under this Lease other than
Base Rent shall be deemed "Additional Rent;" the term "Rent" shall mean Base
Rent and Additional Rent. Landlord shall estimate in advance and charge to
Tenant the following costs, TO BE PAID WITH THE BASE RENT ON A MONTHLY BASIS
THROUGHOUT THE LEASE TERM; (i) ALL REAL PROPERTY TAXES for which Tenant is
liable under Section 5.01 and 5.02 of the Lease, (ii) ALL UTILITY COSTS (IF
UTILITIES ARE NOT SEPARATELY METERED) for which Tenant is liable under Section
6.01 of the Lease, (iii) ALL INSURANCE PREMIUMS for which Tenant is liable under
Sections 7.01 and 7.08 of the Lease, (iv) ALL CAM EXPENSES FOR which Tenant is
liable under Section 8.04 of the Lease.  Collectively, the aforementioned Real
Property Taxes, insurance, utility, and CAM Expenses shall be referred to as the
"Total Operating Costs." Landlord may adjust its estimate of Total Operating
Costs at any time based upon Landlord's experience and reasonable anticipation
of costs. Such adjustments shall be effective as of the next Rent payment date
after notice to Tenant. WITHIN 120 DAYS AFTER THE END OF EACH FISCAL YEAR (which
shall be the calendar year for this Lease) during the Lease Term, Landlord shall
deliver to Tenant a statement prepared in ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES SETTING FORTH, IN REASONABLE DETAIL, the Total Operating
Costs paid or incurred by Landlord during the preceding fiscal year and Tenant's
Pro Rata Share of such expenses. Within thirty (30) days after Tenant's receipt
of such statement, there shall be an adjustment between Landlord and Tenant,
with payment to or credit given by Landlord (as the case may be) in order that
Landlord shall receive the entire amount of Tenant's share of such costs and
expenses for such period. In addition to its obligation to pay Base Rent and its
Pro Rata Share of Total Operating Expenses, Tenant is required hereunder to pay
directly to suppliers, vendors, carriers, contractors, etc. certain insurance
premiums, utility costs, personal property taxes, maintenance and repair, costs
and other expenses, collectively "Additional Expenses." If Landlord pays for any
Additional Expenses in accordance with the terms of this Lease, Tenant's
obligation to reimburse such costs shall be an Additional Rent obligation
payable in full with the


                                       6


next monthly Rent payment. Unless this Lease provides otherwise, Tenant shall
pay all Additional Rent then due with the next monthly installment of Base Rent.

4.03  Late Charge. Tenant hereby acknowledges that late payment by Tenant to
Landlord of Rent and other amounts due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any loan secured by the Building. Accordingly, if any
installment of Rent or any other sums due from Tenant shall not be received by
Landlord within five days following the due date, Tenant shall pay to Landlord a
late charge equal to five percent of such overdue amount. The parties hereby
agree that such late charge represents a fair and reasonable estimate of the
costs Landlord will incur by reason of late payment by Tenant. Acceptance of
such late charge by Landlord shall in no event constitute a waiver of Tenant's
default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies granted hereunder.

4.04  Interest. Any Rent or other amount due to Landlord, if not paid when due,
shall bear interest from the date due until paid at the rate of 15% per annum or
the highest rate permitted by law, whichever is less, provided that interest
shall not be payable on late charges incurred by Tenant nor on any amounts upon
which late charges are paid by Tenant to the extent such interest would cause
the total interest to be in excess of that legally permitted. Payment of
interest shall not excuse or cure any default hereunder by Tenant.

4.05  Tenant's Pro Rata Share. Tenant's Pro Rata Share shall be 100%.

ARTICLE FIVE: PROPERTY TAXES

5.01  Real Property Taxes. Tenant shall pay Tenant's Pro Rata Share of Real
Property Taxes on the Premises payable during the Lease Term. Tenant shall make
such payments in accordance with Section 4.02. If Landlord shall receive a
refund of any Real Property Taxes with respect to which Tenant shall have paid
Tenant's Pro Rata Share, Landlord shall refund to Tenant Tenant's Pro Rata Share
of such refund after deducting therefrom the costs and expenses incurred in
connection therewith.


                                       7


5.02  Definition of "Real Property Tax." "Real Property Tax" shall mean taxes,
assessments (special, betterment, or otherwise), levies, fees, rent taxes,
excises, impositions, charges water and sewer rents and charges, and all other
government levies and charges, general and special, ordinary and extraordinary,
foreseen and unforeseen, which are imposed or levied upon or assessed against
the Premises or any Rent or other sums payable by any tenants or occupants
thereof. Real Property Tax shall include Landlord's costs and expenses of
contesting any Real Property Tax. If at any time during the term the present
system of ad valorem taxation of real property shall be changed so that in lieu
of the whole or any part of the ad valorem tax on real property, or in lieu of
increases therein, there shall be assessed on Landlord a capital levy or other
tax on the gross rents received with respect to the Premises or a federal,
state, county, municipal, or other local income, franchise, excise or similar
tax, assessment, levy, or charge (distinct from any now in effect) measured by
or based, in whole or in part, upon gross rents, then all of such taxes,
assessments, levies, or charges, to the extent so measured or based ("Substitute
Taxes"), shall be deemed to be a Real Property Tax.

5.03  Personal Property Taxes. Tenant shall pay directly all taxes charged
against trade fixtures furnishings, equipment, inventory, or any other personal
property belonging to Tenant. Tenant shall use its best efforts to have personal
property taxed separately from the Premises. If any of Tenant's personal
property shall be taxed with the Premises, Tenant shall pay Landlord the taxes
for such personal property within fifteen (15) days after Tenant receives a
written statement from Landlord for such personal Property taxes.

ARTICLE SIX: UTILITIES

6.01  Utilities. Tenant shall promptly pay, directly to the appropriate
supplier, the cost of all natural gas, heat, cooling energy, light, power, sewer
service, telephone, water, refuse disposal and other utilities and services
supplied to the Premises, allocable to the Lease Term together with any related
Installation or connection charges or deposits (collectively "Utility Costs").
Landlord shall not be liable for damages, consequential or otherwise, nor shall
there be any rent abatement arising out of any curtailment or interruption
whatsoever in utility services.


                                       8


ARTICLE SEVEN: INSURANCE

7.01. Liability Insurance. From the time Tenant shall first enter the Premises,
throughout the Lease Term and thereafter as long as Tenant shall remain in the
Premises (collectively, "the Occupancy Period"), Tenant shall maintain in effect
commercial general liability insurance insuring Tenant against liability for
bodily injury, property damage (including loss of use of Premises) and personal
injury at the Premises, including contractual liability. Such insurance shall
name Landlord, its Premises manager, any mortgagee, and Cabot Partners Limited
Partnership, as additional insureds. The initial amount of such insurance shall
be Three Million Dollars ($3,000,000) per occurrence and shall be subject to
increase once during the Option Period specified by Landlord based upon
inflation, increased liability awards, recommendation of Landlord's professional
insurance advisers, and other relevant factors. The liability insurance obtained
by Tenant under this Section 7.01 shall (i) be primary; and (ii) insure Tenant's
obligations to Landlord under Section 7.09. The amount and coverage of such
insurance shall not limit Tenant's liability nor relieve Tenant of any other
obligation under this Lease. Landlord may also obtain commercial general
liability insurance in an amount and with coverage determined by Landlord
insuring Landlord against liability with respect to the Premises. The policy
obtained by Landlord shall not provide primary insurance, shall not be
contributory and shall be excess over any insurance maintained by Tenant.

7.02  Worker's Compensation Insurance. During the Occupancy Period, Tenant shall
maintain in effect Worker's Compensation Insurance (including Employers'
Liability Insurance) in the statutory amount covering all employees of Tenant
employed or performing services at the Premises, in order to provide the
statutory benefits required by the laws of the state in which the Premises are
located.

7.03  Automobile Liability Insurance. During the Occupancy Period, Tenant shall
maintain in effect Automobile Liability Insurance, including but not limited to,
passenger liability, on all owned, non-owned, and hired vehicles used in
connection with Tenant's use of the Premises, with a combined single limit per
occurrence of not less than One Million Dollars ($1,000,000) per vehicle for
injuries or death of one or more persons or loss of damage to property.

7.04  Personal Premises Insurance. During the Occupancy Period, Tenant shall
maintain in effect Personal Property Insurance


                                       9


covering leasehold improvements paid for by Tenant and Tenant's personal
property and fixtures from time to time in, on, or at the premises, in an amount
not less than 100% of the full replacement cost, without deduction for
depreciation, providing protection against events protected under Direct Risk of
Physical Loss (All Risk), as well as against sprinkler damage, vandalism, and
malicious mischief. Any proceeds from the Personal Property insurance shall be
used for the repair or replacement of the property damaged or destroyed, unless
this Lease is terminated under an applicable provision herein. Tenant may
satisfy the requirement for insurance under this Section 7.04 by self insuring,
provided that at all times while so self insuring (i) Tenant maintains a net
worth of at least $150,000,000 and (ii) promptly upon written request from
Landlord (which may be given from time to time), Tenant shall deliver to
Landlord evidence reasonably satisfactory to Landlord that Tenant has such net
worth.

7.05  Intentionally Deleted.

7.06  Premises and Rental Income Insurance. During the Lease Term, Landlord
shall maintain in effect Direct Risk of Physical Loss (all risk) insurance
covering loss of or damage to the Premises in the amount of its replacement
value with such endorsements and deductibles as Landlord shall determine from
time to time. Landlord shall have the right to obtain flood, and such other
insurance as Landlord shall determine from time to time or shall be required by
any lender holding a security interest in the Premises. Landlord shall not
obtain insurance for Tenant's fixtures or equipment or building improvements
installed by Tenant. During the Lease Term, Landlord shall also maintain a
rental income insurance policy, with loss payable to Landlord, in an amount
equal to one (1) year's Base Rent, plus estimated Real Property Taxes, CAM
Expenses, Utility Costs and insurance premiums for one (1) year. Tenant shall be
liable for the payment of any deductible amount under Landlord's insurance
maintained pursuant to this Article Seven, in an amount not to exceed
Twenty-Five Thousand Dollars ($25,000). Tenant shall not do or permit anything
to be done which shall invalidate any such insurance.

7.07  Payment of Insurance Premiums. Landlord shall pay the premiums of the
insurance policies maintained by Landlord under Section 7.06 and Section 7.01
(if applicable), and Tenant shall reimburse Landlord for Tenant's Pro Rata Share
of such premiums in accordance with Section 4.02. Tenant shall pay directly the
premiums of the insurance policies maintained by Tenant under Sections 7.01,
7.02, 7.03, 7.04, and 7.05.


                                      10


7.08  General Insurance Provisions.

      7.08(a)  Any insurance which Tenant shall be required to maintain under
      this Lease shall include a provision which requires the insurance carrier
      to give Landlord not less than thirty (30) days' written notice prior to
      any cancellation or modification of such coverage.

      7.08(b)  Prior to the earlier of Tenant's entry into the Premises or the
      commencement of the Lease Term, Tenant shall deliver to Landlord an
      insurance company certificate that Tenant maintains the insurance required
      by Sections 7.01, 7.02, 7.03, 7.04 and 7.05 and not less than thirty (30)
      days prior to the expiration or termination of any such insurance, Tenant
      shall deliver to Landlord renewal certificates therefor. Tenant shall
      provide Landlord with copies of the policies promptly upon request from
      time to time. If Tenant shall fail to deliver any certificate or renewal
      certificate to Landlord required under this Lease within the prescribed
      time period or if any such policy shall be canceled or modified during the
      Lease Term without Landlord's consent, Landlord may obtain such insurance,
      in which case Tenant shall reimburse Landlord, as Additional Rent, for
      110% of the cost of such insurance within ten (10) days after receipt of a
      statement of the cost of such insurance.

      7.08(c)  Tenant shall maintain all insurance required under this Lease
      with companies legally qualified to issue such insurance in New Jersey and
      reasonably acceptable to Landlord.

      7.08(d)  Landlord and Tenant, on behalf of themselves and their insurers,
      each hereby waive any and all rights of recovery against the other, or
      against the officers, partners, employees, agents, or representatives of
      the other, for loss of or damage to its property or the property of others
      under its control, if such loss or damage shall be covered by any
      insurance policy in force (whether or not described in this Lease) at the
      time of such loss or damage, or required to be carried under this Article
      Seven. All property insurance carried by either party shall contain a
      waiver of subrogation against the other party to the extent such right
      shall have been waived by the insured party prior to the occurrence of
      loss or injury.


                                      11


7.09  Indemnity. As such waiver does not violate public policy and insurance is
available to protect it, Tenant hereby waives all claims against Landlord, its
agents, employees, officers, directors, partners and shareholders, (collectively
"the Indemnitees") for damage to any property or injury to or death of any
person in, upon or about the Premises arising at any time and from any cause,
and Tenant shall hold Indemnitees harmless from and defend Indemnitees from and
against all claims, liabilities, judgments, demands, causes of action, losses,
damages, costs and expenses including seasonable attorney's fees for damage to
any property or injury to or death of any person arising in or from the
negligence or willful misconduct of Tenant, its employees, agents, contractors,
or invitees in, upon or about the Premises. The foregoing shall include
investigation cost; and all the costs and expenses incurred by Landlord from the
first notice that any claim or demand is to be made or may be made. The
provisions of this Section 7.08 shall survive the expiration or termination of
this Lease with respect to any damage, injury, or death occurring prior to such
time.

7.10  Landlord's Indemnity. Landlord shall defend, with counsel reasonably
approved by Tenant, all actions against Tenant, its agents, employees, officers,
directors, partners and shareholders (collectively "the Indemnitees") with
respect to, and shall pay, protect, indemnify and save harmless to the extent
permitted by law the Indemnitees from and against, all liabilities, losses,
damages, costs and expenses (including reasonable attorneys' fees and expenses),
causes of action, suits, claims, demands or judgments of any nature arising from
injury to or death of any person or damage to or loss of property occurring at
the Property caused by the negligence or willful misconduct of Landlord to the
extent the same shall not be covered by any insurance maintained or required to
be maintained by any of the Indemnitees.

ARTICLE EIGHT: COMMON AREAS

8.01  Common Areas. As used in this Lease, "Common Areas" shall mean all areas
within the Premises outside the Building, including, but not limited to, parking
areas, driveways, sidewalks, access roads, landscaping, and planted areas.

8.02  Use of Common Areas. The Common Areas are part of the Premises, and Tenant
shall have the exclusive right to use the Common Areas for the purposes
intended, subject to such reasonable rules and regulations ("Rules and
Regulations") as Landlord may establish or modify from time to time and as
initially set forth in Exhibit "B". Tenant shall abide by all such Rules and
Regulations and shall use its best efforts to


                                      12


cause others who use the Common Areas with Tenant's express or implied
permission to abide by Landlord's Rules and Regulations.

8.03  Vehicle Parking. Tenant shall be entitled to use all vehicle parking
spaces on the Premises, without paying any additional rent. Vehicles shall be
parked only in striped parking spaces and not in driveways, other locations not
specifically designated for parking. Handicapped spaces shall only be used by
those legally permitted to use them. The additional spaces shall be in locations
designated by Landlord subject to the approval of Tenant, which approval shall
not unreasonably be withheld. Tenant, at its expense, may construct additional
parking spaces on the Premises provided (a) Tenant shall first obtain Landlord's
approval of plans and specifications therefor, (b) such additional parking shall
comply with all legal requirements, including, without limitation, zoning
requirements, and (c) the construction of such additional parking spaces shall
comply with Section 10.05 hereof. See Exhibit E for additional provisions, if
any, relating to parking spaces.

8.04  Common Area Maintenance. Subject to Articles Eleven and Twelve, Landlord
shall maintain the Common Areas in good order, condition, and repair. Common
Area Maintenance expenses ("CAM Expenses") are all costs and expenses associated
with the operation and maintenance of the Common Areas and THE REPAIR AND
MAINTENANCE OF THE HEATING, VENTILATION, AIR CONDITIONING, PLUMBING, ELECTRICAL,
UTILITY, AND SAFETY SYSTEMS (TO THE EXTENT NOT PERFORMED BY TENANT), including,
but not limited to, the following: gardening and landscaping; snow removal;
utility water and sewage services for the Common Area; maintenance of signs
(other than Tenant's signs); worker's compensation insurance; personal property
taxes; rental or lease payments paid by Landlord for rented or leased personal
property used in the operation or maintenance of the Common Areas; fees for
required licenses and permits; routine maintenance and REPAIR OF ROOF MEMBRANE,
FLASHINGS, GUTTERS, DOWNSPOUTS, ROOF DRAINS, SKYLIGHTS AND WATERPROOFING;
maintenance of paving (including sweeping, striping, repairing, RESURFACING, AND
REPAVING); general maintenance Painting; lighting; cleaning; refuse removal;
security and similar items; reserves for roof replacement, exterior painting and
other appropriate reserves; AND A PROPERTY MANAGEMENT FEE (NOT TO EXCEED THREE
PERCENT (3%) OF THE GROSS RENTS OF THE PREMISES FOR THE CALENDAR YEAR). Landlord
may cause any or all of such services to be provided by third parties and the
cost of such services shall be included in CAM Expenses with respect to any CAM
Expenses which are included for the benefit of the Premises and other property,
Landlord shall make a reasonable


                                      13


allocation of such cost between the Premises and such other property. CAM
EXPENSES SHALL NOT INCLUDE: (a) THE COST OF CAPITAL REPAIRS AND REPLACEMENTS,
provided, however, that the ANNUAL DEPRECIATION (based on the useful life of the
item under generally accepted accounting principles) of any such capital repair
or replacement to the Common Areas or the heating, ventilating,
air-conditioning, plumbing, electrical, utility and safety systems serving the
Premises SHALL BE INCLUDED IN THE CAM EXPENSES EACH YEAR during the term of this
Lease; and (b) the COST OF CAPITAL IMPROVEMENTS, provided, however, that the
annual DEPRECIATION (based on the useful life of the item under generally
accepted accounting principles) OF ANY CAPITAL IMPROVEMENT UNDERTAKEN TO REDUCE
CAM EXPENSES or made in order to comply with legal requirements SHALL BE
INCLUDED IN CAM EXPENSES each year during the term of this Lease.

8.05  Tenant's Payment of CAM Expense.  Tenant shall pay Tenant's Pro Rata Share
(100%) of all CAM Expenses in accordance with Section 4.02.

ARTICLE NINE: USE OF PREMISES

9.01  Permitted Uses. Tenant may use the Premises only for the Permitted uses
set forth in Section 1.11 above.

9.02  Manner of Use. Tenant shall not cause or permit the Premises to be used in
any way which shall constitute a violation of any law, ordinance, restrictive
covenants, governmental regulation or order, or which shall constitute a
nuisance or waste. Tenant shall obtain and pay for all permits, including a
certificate of occupancy and shall promptly take all actions necessary to comply
with all applicable statutes, ordinances, notes, regulations, orders and
requirements regulating the use by Tenant of the Premises, including the
Occupational Safety and Health Act.

9.03  Hazardous Materials. As used in this Lease, the term "Hazardous Material"
shall mean any flammable items, explosives, radioactive materials, oil,
hazardous or toxic substances, material or waste or related materials, including
any substances defined as or included in the definition of "hazardous
substances", "hazardous wastes", "hazardous materials" or "toxic substances" now
or subsequently regulated under any applicable federal, state or local laws or
regulations, including without limitation petroleum-based products, paints,
solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia
compounds and other chemical products, asbestos, PCBs and similar compounds, and
including any different products and materials


                                      14


which are subsequently found to have adverse effects on the environment or the
health and safety of persons. Tenant shall not cause or permit any Hazardous
Material to be generated, produced, brought upon, used, stored, treated or
disposed of in or about the Premises by Tenant, its agents, employees,
contractors, sublessees or invitees without complying with all applicable
Federal, State and Local laws or ordinances pertaining to the transportation,
storage, use or disposal of such Hazardous Materials, including but not limited
to obtaining proper permits. In no event, however, shall Tenant install or use
any storage tanks on the Premises.

If Tenant's transportation, storage, use or disposal of Hazardous Materials on
the Premises results in the contamination of the soil or surface or ground water
or loss or damage to person(s) or property, then Tenant agrees to: (a) notify
Landlord immediately of any contamination, claim of contamination, loss or
damage, (b) after consultation with the Landlord, clean up the contamination in
full compliance with all applicable statutes, regulations and standards and (c)
indemnify, defend and hold Landlord harmless from and against any claims, suits,
causes of action, costs and fees, including reasonable attorney's fees and
costs, arising from or connected with any such contamination, claim of
contamination, loss or damage. Tenant agrees to fully cooperate with Landlord
and provide such documents, affidavits and information as may be requested by
Landlord (i) to comply with any environmental law, (ii) to comply with the
request of any lender, purchaser or tenant, and/or (iii) for any other reason
deemed necessary by Landlord in its sole discretion. Tenant shall notify
Landlord promptly in the event of any spill or other release of any Hazardous
Material at, in, on, under or about the Premises which is required to be
reported to a governmental authority under any environmental law, will promptly
forward to Landlord copies of any notices received by Tenant relating to alleged
violations of any environmental law and will promptly pay when due any fine or
assessment against Landlord, Tenant or the Premises relating to any violation of
an environmental law during the term of this Lease. If a lien is filed against
the Premises by any governmental authority resulting from the need to expend or
the actual expending of monies arising from an act or omission, whether
intentional or unintentional, of Tenant, its agents, employees or invitees, or
for which Tenant is responsible, resulting in the releasing, spilling, leaking,
leaching, pumping, emitting, pouring, emptying or dumping of any Hazardous
Material into the water or onto land located within the State where the Premises
is located, then Tenant shall, within thirty (30) days from the date that Tenant
is first given notice that such lien has been placed against the


                                      15


Premises (or within such shorter period of time as may be specified by Landlord
if such governmental authority has commenced steps to cause the Premises to be
sold pursuant to such lien) either (i) pay the claim and remove the lien, or
(ii) furnish a cash deposit, bond, or such other security with respect thereto
as is satisfactory in all respects to Landlord and is sufficient to effect a
complete discharge of such lien on the Premises. The provisions of this Section
9.03 shall survive the expiration or earlier termination of this Lease.

      Notwithstanding anything to the contrary herein, any environmental
remediation or response action required in or around the Premises resulting
directly or indirectly from any acts or omissions of other parties for whom
Tenant is not responsible prior to the Lease Commencement Date or during the
term of this Lease shall not be the obligation, duty or responsibility of
Tenant.

      Notwithstanding the foregoing, Landlord shall indemnify Tenant against and
hold Tenant harmless from any and all costs, claims, liabilities or damages,
including reasonable attorneys' fees and expenses, arising from the presence or
use of Hazardous Materials caused by Landlord, its agents or employees.

9.04  Signs and Auctions. Tenant shall not place any signs on the Premises
without Landlord's prior written consent, which shall not be unreasonably
withheld (subject to the Park Covenants and Landlord's sign standards). Tenant
shall not conduct or permit any auctions or sheriff's sales at the Premises.

9.05  Landlord's Access. Landlord or its agents may enter the Premises upon
prior notice (which may be oral) at all reasonable times to show the Premises to
potential buyers, investors or tenants or other parties; to do any other act or
to inspect and conduct tests in order to monitor Tenant's compliance with all
applicable environmental laws and all laws governing the presence and use of
Hazardous Material; or for any other purpose Landlord deems necessary. Landlord
shall give Tenant prior notice (which may be oral) of such entry, except in the
case of an emergency, in which event Landlord shall make reasonable efforts to
notify Tenant. Landlord may place customary "For Sale" or "For Lease" signs on
the Premises.

ARTICLE TEN: CONDITION AND MAINTENANCE OF PREMISES

10.01 Existing Conditions. Tenant shall accept the Premises in its condition as
of the execution of the Lease, subject to all recorded matters, laws,
ordinances, and governmental regulations


                                      16


and orders. Except as provided herein, Tenant acknowledges that neither Landlord
nor any agent of Landlord has made any representation as to the condition of the
Premises or the suitability of the Premises for Tenant's intended use. Tenant
represents and warrants that Tenant has made its own inspection of and inquiry
regarding the condition of the Premises Tenant agrees to execute promptly a
memorandum of Acceptance of Premises in the form set forth in Exhibit "C" to
this Lease.

10.02 Exemption of Landlord from Liability. Tenant shall insure its personal
property under an all risk full replacement cost property insurance policy.
Landlord shall not be liable for any damage or injury to the person, business
(or any loss of income therefrom), goods, wares, merchandise or other property
of Tenant, Tenant's employees, invitees, customers or any other person or about
the Premises, whether such damage or injury is caused by or results from: (a)
fire, steam, electricity, water, gas or rain; (b) the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures or any other cause; (c) conditions arising
in or about Premises, or from other sources or places. Landlord shall not be
liable for any such damage or injury even though the cause of or the means of
repairing such damage or injury are not accessible to Tenant. The provisions of
this Section 10.02 shall not, however, exempt Landlord from liability for
Landlord's gross negligence or willful misconduct.

10.03 Landlord's Obligations. Subject to the provisions of Article Eleven
(Damage or Destruction) and Article Twelve (Condemnation), and except for
damages caused by any act or omission of Tenant, or Tenant's employees, agents,
contractors or invitees, Landlord at its expense (subject to Section 4.02) shall
keep the foundation, roof, building systems (other than the heating, ventilating
and air conditioning system), structural supports and exterior walls of the
improvements on the Premises in good order, condition and repair. However,
Landlord shall not be obligated to maintain or repair windows, doors, plate
glass or the surfaces of wells. Tenant shall promptly report in writing to
Landlord any defective condition known to it which Landlord is required to
repair. Notwithstanding anything to the contrary contained in Section 10.01
above, or Section 10.04(a) below, Landlord shall deliver the Premises to Tenant
with all operating and mechanical systems (including heating, ventilating and
air conditioning) in good working order and shall maintain the same in said
condition for one (1) year.


                                      17


10.04 Tenant's Obligations

      10.04  (a) Repair and Maintenance. Except as provided in Section 10.03,
      Article Eleven (Damage or Destruction) and Article Twelve (Condemnation),
      and the last sentence of Section 10.03 above, Tenant shall keep all
      portions of the Premises (including systems and equipment) and the
      heating, ventilating and air conditioning system in good order, condition
      and repair (including repainting and refinishing, as needed). If any
      portion of the Premises or any system or equipment in the Premises which
      Tenant shall be obligated to repair can not be fully repaired or restored,
      Tenant shall promptly replace such portion of the Premises or system or
      equipment, regardless of whether the benefit of such replacement extends
      beyond the Lease Term; but if the benefit or useful life of such
      replacement extends beyond the Lease Term, the useful life of such
      replacement shall be prorated over the remaining portion of the Lease
      Term. Tenant shall maintain a preventive maintenance contract providing
      for the regular inspection and maintenance of the heating and air
      conditioning system by a heating and air conditioning contractor, such
      contract and such contractor to be approved by Landlord. Landlord shall
      have the right, upon written notice to Tenant, to undertake the
      responsibility for maintenance of the heating and air conditioning system
      at Tenant's expense. Landlord shall, at Tenant's expense, repair any
      damage to the portions of the Premises Landlord shall be required to
      maintain caused by Tenant's acts or omissions.

      10.04  (b) Tenant's Expense. Tenant shall fulfill all of Tenant's
      obligations under this Section 10.04 at Tenant's sole expense. If Tenant
      shall fail to maintain, repair or replace the Premises as required by this
      Section 10.04, Landlord may, upon ten (10) days' prior notice to Tenant
      (except that no notice shall be required in the case of an emergency),
      enter the Premises and perform such maintenance or repair (including
      replacement, as needed) on behalf of Tenant. In such case, Tenant shall
      reimburse Landlord for all costs reasonably incurred in performing such
      maintenance, repair or replacement within ten (10) days after demand.

10.05 Alterations, Additions, and Improvements

      10.05  (a) Tenant's Work. Tenant shall not make any installations,
      alterations, additions, or improvements in or to the Premises, including,
      without limitation, any


                                      18


      apertures in the walls, partitions, ceilings or floors, without on each
      occasion obtaining the prior consent of Landlord. Landlord agrees that it
      will not unreasonably withhold, condition or delay its consent to any
      alterations, improvements or installations which do not affect the
      structure of the Building or any systems serving the Building. Any such
      work so approved by Landlord shall be performed only in accordance with
      plans and specifications therefor approved by Landlord. Tenant shall
      procure at Tenant's sole expense all necessary permits and licenses before
      undertaking any work on the Premises and shall Perform all such work in a
      good and workmanlike manner employing materials of good quality and so as
      to conform with all applicable zoning, building, fire, health and other
      codes, regulations, ordinances and laws and with all applicable insurance
      requirements. If requested by Landlord, Tenant shall furnish to Landlord
      prior to commencement of any such work a bond or other security acceptable
      to Landlord assuring that any work by Tenant will be completed in
      accordance with the approved plans and specifications and that all
      subcontractors will be paid. Tenant shall employ for such work only
      contractors approved by Landlord and shall require all contractors
      employed by Tenant to carry worker's compensation insurance in accordance
      with statutory requirements and commercial general liability insurance
      covering such contractors on or about the Premises with a combined single
      limit not less than $3,000,000 and shall submit certificates evidencing
      such coverage to Landlord prior to the commencement of such work. Tenant
      shall indemnify and hold harmless Landlord from all injury, loss, claims
      or damage to any person or Premises occasioned by or growing out of such
      work. Landlord may inspect the work of Tenant at reasonable times and
      given notice of observed defects. Upon completion of any such work, Tenant
      shall provide Landlord with "as built" plans, copies of all construction
      contracts and proof of payment for all labor and materials.

      10.05  (b) No Liens. Tenant shall pay when due all claims for labor and
      material furnished to the Premises and shall at all times keep the
      Premises free from liens for labor and materials. Tenant shall give
      Landlord at least twenty (20) days' prior written notice of the
      commencement of any work on the Premises, regardless of whether Landlord's
      consent to such work is required. Landlord may record and post notices of
      non-responsibility on the Premises.


                                      19


10.06 Condition upon Termination. Upon the expiration or termination of this
Lease, Tenant shall surrender the Premises to Landlord broom clean and in the
condition which Tenant shall have been required to maintain the Premises under
this Lease. Tenant shall not be obligated to repair any damage which Landlord is
required to repair under Article Seven (Damage or Destruction). Landlord (by so
designating at the time it approves the same) may require Tenant to remove any
alterations, additions or improvements at the expiration of the Lease and to
restore the Premises to their prior condition, all at Tenant's expense. Any
alterations, additions or improvements not required to be removed by Tenant
shall become Landlord's property and shall be surrendered to Landlord upon the
expiration or earlier termination of the Lease, except that Tenant may remove
any of Tenant's machinery or equipment which can be removed without damage to
the Premises. Tenant shall repair, at Tenant's expense, any damage to the
Premises caused by the removal of any such machinery or equipment. In no event,
however, shall Tenant remove any of the following materials or equipment (which
shall be deemed Landlord's property), without Landlord's prior written consent;
unless the same shall have been installed by Tenant at its expense; any power
wiring or wiring panels; lighting or lighting fixtures; wall coverings; drapes,
blinds or other window coverings; carpets or other floor coverings; heaters, air
conditioners or any other heating or air conditioning equipment; fencing or
security gates; or other similar building operating equipment.

10.07 Landlord's Contribution. Landlord shall reimburse Tenant in accordance
with this Section 10.07 for its initial cost of improving or remodeling existing
office space within the Building or expanding such office space ("Tenant's
Initial Office Work") as approved by Landlord in accordance with Section 10.05
above. Landlord shall reimburse Tenant for the costs of Tenant's Initial Work
upon completion of such work, to the extent of the lesser of (i) $20,000.00, or
(ii) the actual out of pocket cost to Tenant for such work ("Landlord's
Contribution"). Landlord shall make such payment within 30 days after its
receipt of (a) receipts (or such other proofs of payment as Landlord shall
reasonably require) from Tenant for work done in connection with Tenant's
Initial Office Work, (b) a written statement from Tenant's architect, engineer,
contractor, or any other person employed by Tenant to perform work, that the
work described on any such invoices has been completed in accordance with the
final plans and specifications approved by Landlord pursuant to Section 10.05
above and (c) a lien waiver executed by the contractors, material men and
suppliers engaged by or on behalf of Tenant in connection with Tenant's Initial
Office Work. Landlord shall not be


                                      20


required to make any payment hereunder to Tenant during the continuation of any
default by Tenant hereunder beyond any applicable notice and grace periods.

ARTICLE ELEVEN: DAMAGE OR DESTRUCTION

11.01 Damage to Premises

      11.01  (a) If the Premises shall be destroyed or rendered untenantable,
      either wholly or in part, by fire or other casualty ("Casualty"). Tenant
      shall immediately notify Landlord in writing upon the occurrence of such
      Casualty. In the event of any Casualty, Landlord may elect either to (i)
      repair the damage caused by such casualty as soon as reasonably possible,
      in which case this Lease shall remain in full force and effect, or (ii)
      terminate this Lease as of the date the casualty occurred. Landlord shall
      notify Tenant within thirty (30) days after receipt of notice of the
      occurrence of the casualty whether Landlord elects to repair the damage or
      terminate this Lease. If Landlord shall elect to repair the damage, Tenant
      shall pay Landlord the portion of the "deductible amount" (if any) under
      Landlord's insurance allocable to the damage to the Premises and, if the
      damage shall have been due to an act or omission of Tenant, or Tenant's
      employees, agents, contractors or Invitees, the difference between the
      actual cost of repair and any insurance proceeds received by Landlord.

      11.01  (b) If the casualty to the Premises shall occur during the last six
      (6) months of the Lease Term and the damage shall be estimated by Landlord
      to require more than thirty (30) days to repair, either Landlord or Tenant
      may elect to terminate this Lease as of the date the casualty shall have
      occurred, regardless of the sufficiency of any insurance proceeds. The
      party electing to terminate this lease shall give written notification to
      the other Party of such election within ten (10) days after Tenant's
      notice to Landlord of the occurrence of the casualty.

11.01 Temporary Reduction of Rent. If the Premises shall be destroyed or damaged
by casualty and Landlord shall determine to repair or restore the Premises
pursuant to the provisions of this Article Eleven, any Rent payable during the
period of such damage, repair and/or restoration shall be reduced according to
the degree, if any, to which Tenant's use of the Premises shall be impaired.
Such reduction shall not exceed the sum of one year's payment of Base Rent,
insurance premiums and Real Property


                                       21


Taxes. Except for such possible reduction in Base Rent, insurance premiums and
Real Property Taxes. Tenant shall not be entitled to any compensation, reduction
or reimbursement from Landlord as a result of any damage, destruction, repair,
or restoration of the Premises.

11.03 Waiver. Tenant waives the protection of any statute, code or judicial
decision which shall grant a tenant the right to terminate a lease in the event
of the damage or destruction of the leased property and the provisions of this
Article Eleven shall govern the rights and obligations of Landlord and Tenant in
the event of any damage or destruction of or to the Premises.

ARTICLE TWELVE: CONDEMNATION

12.01 Condemnation. If more than twenty percent (20%) of the floor area of the
building or more than twenty-five percent (25%) of the parking on the Premises,
shall be taken by eminent domain either Landlord or Tenant may terminate this
Lease as of the date the condemning authority takes title or possession, by
delivering notice to the other within ten (10) days after receipt of written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall take title or possession). If neither
Landlord nor Tenant shall terminate this Lease, this Lease shall remain in
effect as to the portion of the Premises not taken, except that the Bass Rent
shall be reduced in proportion to the reduction in the floor area of the
Building. If this Lease shall be terminated, any condemnation award or payment
shall be distributed to the Landlord. Tenant shall have no claim against
landlord for the value of the unexpired lease term or otherwise, except that
Tenant may file a separate claim for moving expenses and removal of trade
fixtures and other personal property as long as such claim does not reduce
Landlord's award.

ARTICLE THIRTEEN: ASSIGNMENT AND SUBLETTING

13.01 Landlord's Consent Required. No portion of the Premises or of Tenant's
interest in this Lease shall be acquired by any other person or entity, whether
by sale, assignment, mortgage, sublease, transfer, operation of law, or act of
Tenant, without Landlord's prior written consent, except as provided in Section
13.02 below. Landlord, acting reasonably, shall have the right to grant or
withhold its consent as provided in Section 13.04 below, which consent shall not
be unreasonably withheld or delayed. Any attempted transfer without consent
shall be void and shall constitute a non curable breach of this Lease.


                                      22


13.02 No Release of Tenant. No assignment or transfer shall release Tenant or
change Tenant's primary liability to pay the Rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of Rent from
Tenant or any other person shall not be a waiver of any provision or this
Article Thirteen. Consent to one transfer shall not be deemed a consent to any
subsequent transfer or a waiver of the obligation to obtain consent on
subsequent occasions. If Tenant's assignee or transferee shall default under
this Lease, Landlord may proceed directly against Tenant without pursuing
remedies against the assignee or transferee. Landlord may consent to subsequent
assignments or modifications of this Lease by Tenant's transferee without
notifying Tenant or obtaining its consent, and such action shall not release
Tenant from any of its obligations or liabilities under this Lease as so
assigned or modified.

13.03 Offer to Terminate. If Tenant shall desire to assign this Lease or
sublease all or any part of the Premises, Tenant shall offer to Landlord in
writing, the right to terminate this Lease as of the date specified in the
offer. If Landlord shall elect in writing to accept the offer to terminate
within twenty (20) days after receipt of notice of the offer, this Lease shall
terminate as of the date specified in such offer and all the terms and
provisions of this Lease governing termination shall apply. If Landlord shall
not so elect, Tenant shall then comply with the provisions of this Article
Thirteen applicable to such assignment of sublease.

13.04 Landlord's Consent. Tenant's request for consent under Section 13.01 shall
set forth the details of the proposed sublease, assignment or transfer,
including the name, business and financial condition of the prospective
transferee, financial details of the proposed transaction (e.g., the term of and
the rent and security deposit payable under any proposed assignment or
sublease), and any other information Landlord deems relevant. Landlord shall
have the right to withhold consent, reasonably exercised, or to grant consent,
based on the following factors: (i) the business of the proposed assignee or
subtenant and the proposed use of the Premises; (ii) the net worth and financial
condition of the proposed assignee or subtenant; (iii) Tenant's compliance with
all of its obligations under this Lease; and (iv) such other factors as Landlord
may reasonably deem relevant. If Tenant shall assign or sublease, the following
shall apply: Tenant shall pay to Landlord as Additional Rent fifty percent (50%)
of the Profit (defined below) on such transaction such amount being Landlord's
sharer as and when received by Tenant, unless Landlord shall give notice to
Tenant and the assignee or subtenant that Landlord's Share shall be paid by the
assignee or


                                      23


subtenant to Landlord directly. Profit shall mean (a) all rent and all fees and
other consideration paid for or in respect of the assignment or sublease,
including fees under any collateral agreements less (B) the rent and other sums
payable under this Lease (in the case of a sublease of less than all of the
Premises, allocable to the subleased premises) and all costs and expenses
directly incurred by Tenant in connection with the execution and performance of
such assignment or sublease for reasonable real estate broker's commissions and
reasonable costs of renovation or construction of tenant improvements required
under such assignment or sublease. Tenant shall be entitled to recover such
reasonable costs and expenses before Tenant shall be obligated to pay Landlord's
Share to Landlord. Tenant shall provide Landlord a written statement certifying
all amounts to be paid from any assignment or sublease of the Premises within
thirty (30) days after the transaction shall be signed and from time to time
thereafter on Landlord's request, and Landlord may inspect Tenant's books and
records to verify the accuracy of such statement. On written request, Tenant
shall promptly furnish to Landlord copies of all the transaction documentation,
all of which shall be certified by Tenant to be complete, true and correct.

ARTICLE FOURTEEN:  DEFAULTS AND REMEDIES

14.01 Covenants and Conditions. Tenant's performance of each of Tenant's
obligations under this Lease is a condition as well as a covenant. Tenant's
right to continue in possession of the Premises is conditioned upon such
performance. Time is of the essence in the performance by Tenant of all
covenants and conditions.

14.02 Defaults. Each of the following shall be an event of default under this
Lease:

      14.02(a)  Tenant shall abandon the Premises;

      14.02(b)  Tenant shall fail to Pay Rent or any other sum payable under
      this Lease within five (5) days after notice of non-payment:

      14.02(c)  Tenant shall fail to perform any of Tenant's other obligations
      under this Lease and such failure shall continue for a period of fifteen
      (15) days after notice from Landlord; provided that if more than fifteen
      (15) days shall be required to complete such performance, Tenant shall not
      be in default if Tenant shall commence such


                                      24


     performance within the fifteen (15) day period and shall thereafter
     diligently pursue its completion.

     14.02(d)(i) Tenant shall make a general assignment or general arrangement
     for the benefit of creditors: (ii) a petition for adjudication of
     bankruptcy or for reorganization or rearrangement shall be filed by or
     against Tenant and shall not be dismissed within sixty (60) days; (iii) a
     trustee or receiver shall be appointed to take possession of substantially
     all of Tenant's assets located at the Premises or Tenant's interest in this
     Lease and possession shall be subjected to attachment, execution or other
     judicial seizure which shall not be discharged within sixty (60) days. If a
     court of competent jurisdiction shall determine that any of the acts
     described in this subsection (d) is not a default under this Lease, and a
     trustee shall be appointed to take possession (or if Tenant shall remain a
     debtor in possession) and such trustee or Tenant shall assign, sublease, or
     transfer Tenant's interest hereunder, then Landlord shall receive, as
     Additional Rent, the excess, if any, of The rent for any other
     consideration) paid in connection with such assignment, transfer or
     sublease over the rent payable by Tenant under this Lease.

14.03 Remedies. On the occurrence of an event of default by Tenant, Landlord
may, at any time thereafter, with or without notice or demand (except as
provided in Section 14.02) and without limiting Landlord in the exercise of any
right or remedy which Landlord may have:

     14.03(a) Terminate this Lease by written notice to Tenant or by entry, at
     Landlord's option. Tenant shall then immediately quit and surrender the
     Premises to Landlord, but Tenant shall remain liable as hereinafter
     provided. Following termination, without prejudice to other remedies
     Landlord may have by reason of Tenant's default or of such termination,
     Landlord may (i) peaceably reenter the Premises upon voluntary surrender by
     Tenant or remove Tenant therefrom and any other persons occupying the
     Premises, using such legal proceedings as may be available; (ii) repossess
     the Premises or relet the Premises or any part thereof for such term (which
     may be for a term extending beyond the Lease Term), at such rental and upon
     such other terms and conditions as Landlord in Landlord's sole discretion
     shall determine, with the right to make alterations and repairs to the
     Premises; and (iii) remove all personal property therefrom. Following
     termination,


                                       25


     Landlord shall have all the rights and remedies of a landlord provided at
     law and in equity. The amount of damages Tenant shall pay to Landlord
     following termination shall include all Rent unpaid up to the termination
     of this Lease, costs and expenses incurred by Landlord due to such Event of
     Default and, in addition, Tenant shall pay to Landlord as damages, at the
     election of Landlord (if Landlord shall elect subsection (y) below, it may
     cease such election at any time), either (x) the discounted present values
     (at the then Federal Reserve Bank discount rate) of the aggregate Rent and
     other charges due during the period commencing with such termination and
     ending on the expiration date of this Lease, OR (y) amount equal to the
     Rent and other charges which would have been payable by Tenant had this
     Lease or Tenant's right to Possession not been so terminated, payable upon
     the due dates therefor specified herein following such termination and
     until the expiration date Of this Lease, provided, however, that if
     Landlord shall re-let the Premises during such period, Landlord shall
     credit Tenant with the net rents received by Landlord from such re-letting,
     such net rents to be determined by first deducting from the gross rents as
     and when received by Landlord from such re-letting the expenses incurred or
     paid by Landlord in terminating this Lease, and the expenses of reletting,
     including, without limitation, altering and preparing the premises for new
     tenants, brokers' commissions, legal fees and all other similar and
     dissimilar expenses properly chargeable against the Premises and the rental
     therefrom, it being understood that any such reletting may be for a period
     equal to or shorter or longer than the remaining Lease Term; and provided,
     further, that (i) in no event shall Tenant be entitled to receive any
     excess of such net rents over the sums payable by Tenant to Landlord
     hereunder and (ii) in no event shall Tenant be entitled in any suit for the
     collection of damages pursuant to this subsection (y) to a credit in
     respect of any net rents from a re-letting except to the extent that such
     net rents are actually received by Landlord prior to the commencement of
     such suit. If the Premises or any part thereof should be re-let in
     combination with other space, then proper apportionment on a square foot
     area basis shall be made of the rent received from such re-letting and of
     the expenses of re-letting. In calculating the Rent and other charges under
     subsection (x) above, there shall be included, in addition to the Rent
     other considerations agreed to be paid or performed by Tenant on the
     assumption that all such considerations would have remained constant
     (except as herein otherwise


                                       26


     provided) for the balance of the full term hereby granted. Landlord may,
     but need not, re-let the Premises or any part thereof for such rent and on
     such terms as it shall determine (including the right to re-let the
     Premises for a greater or lesser term than the Lease Term, the right to
     re-let the Premises as part of a larger area and the right to change the
     character or use made of the Premises). Suit or suits for the recovery of
     such damages, or any installments thereof, may be brought by Landlord from
     time to time at its election, and nothing contained herein shall be deemed
     to require Landlord to postpone suit until the date when the Term of this
     Lease would have expired if it had not been terminated hereunder.

     14.03(b) Maintain Tenant's right to possession, in which case this Lease
     shall continue in effect whether or not Tenant has abandoned the Premises.
     In such event, Landlord shall be enticed to enforce all of Landlord's
     rights and remedies under this Lease, including the right to recover the
     rent as it becomes due.

     14.03(c) Pursue any other remedy now or hereafter available to Landlord
     under the laws or judicial decisions of the state in which the Premises is
     located.

14.04 Landlord's Waiver. Landlord agrees to execute and deliver a Landlord's
Release and Waiver in the form of Exhibit D promptly upon Tenant's request with
respect to any equipment installed at the Premises by Tenant, which equipment
Tenant finances with an unaffiliated lender and which equipment is pledged to
such lender.

14.05 Automatic Termination: Damages. Notwithstanding any other term or
provision hereof to the contrary, this Lease shall terminate on the occurrence
of any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 14.03 hereof, including the filing of an unlawful detainer
action against Tenant. On any termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
shall incur in connection with the filing, commencement, pursuing and/or
defending of any action in any bankruptcy court or other court with respect to
the Lease the obtaining of relief from any stay in bankruptcy restraining any
action to evict Tenant or the pursuing of any action with respect to Landlord's
right to possession of the Premises. All such damages suffered (apart from Base
Rent and other Rent payable hereunder) shall constitute pecuniary damages which
shall be reimbursed to Landlord prior to


                                       27


assumption of the Lease by Tenant or any successor to Tenant in any bankruptcy
or other proceedings.

14.06 Cumulative Remedies. Except as otherwise expressly provided herein, any
and all rights and remedies which Landlord may have under this Lease and at law
and equity shall be cumulative and shall not be deemed inconsistent with each
other, and any two or more of all such rights and remedies may be exercised at
the same time to the greatest extent permitted by law.

ARTICLE FIFTEEN:  PROTECTION OF LENDERS

15.01 Subordination.  Landlord shall have the right to subordinate this Lease to
any ground lease, deed of trust or mortgage encumbering the Premises, any
advances made on the security thereof and any renewals, modifications,
consolidations, replacements or extensions thereof, whenever made or recorded.
Tenant shall cooperate with Landlord and any lender which shall acquire a
security interest in the Premises or the Lease. Tenant shall execute such
further documents and assurances as such lender may require, provided that
Tenant's obligations under this Lease shall not be increased in any material way
(the performance of ministerial acts shall not be deemed material), and Tenant
shall not be deprived of its rights under this Lease and Tenant's use or
Possession of the Premises shall not be disturbed thereby. If any ground lessor,
beneficiary or mortgagee elects to have this Lease prior to the lien of its
ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.

15.02 Attornment. If Landlord's interest in the Premises is acquired by any
ground lessor, beneficiary under a deed of trust, mortagagee, or purchaser at a
foreclosure sale, Tenant shall attorn to the transferee of or successor to the
Landlord's interest in the Premises and recognize such transferee or successor
as Landlord under this Lease.

15.03 Signing of Documents. Tenant shall sign and deliver any instrument or
documents reasonably satisfactory to Tenant

                                       28



necessary or appropriate to evidence any such attornment or subordination or
agreement to do so.

15.04 Estoppel Certificates. Within ten (10) days after Landlord's request,
Tenant shall execute, acknowledge and deliver to Landlord a written statement
certifying: (i) that none of the terms or provisions of this Lease have been
changed (or if they have been changed, stating how they have been changed); (ii)
that this Lease has not been canceled or terminated; (iii) the last date of
payment of the Base Rent and other charges and the time period covered by such
payment; (iv) that Landlord is not in default under this Lease (or if Landlord
is claimed to be in default, setting forth such default in reasonable detail)
and (v) such other information with respect to Tenant or this Lease as Landlord
may reasonably request or which any prospective purchaser or encumbrancer of the
Premises may require. Landlord may deliver any such statement by Tenant to any
prospective purchaser or encumbrancer of the Premises, and such purchaser or
encumbrancer may rely conclusively upon such statement as true and correct. If
Tenant shall not deliver such statement to Landlord within such ten (10) day
period, Landlord, and any prospective purchaser or encumbrancer, may
conclusively presume and rely upon the following facts: (i) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (ii) that this Lease has not been canceled or terminated except as
otherwise represented by Landlord; (iii) that not more than one month's Base
Rent or other charges have been paid in advance; and (iv) that Landlord is not
in default under this Lease. In such event, Tenant shall be estopped from
denying the truth of such facts.

15.05 Tenant's Financial Condition. Within ten (10) days after request from
Landlord from time to time, Tenant shall deliver to Landlord Tenant's audited
financial statements for the latest available fiscal year. Such financial
statements shall be delivered to Landlord's mortgagees and lenders and
prospective mortgagees, lenders and purchasers. Tenant represents and warrants
to Landlord that each such financial statement shall be true and accurate as of
the date of such statement. All financial statements shall be confidential and
shall be used only for the purposes set forth in this Lease.

ARTICLE SIXTEEN: LEGAL COSTS

16.01 Legal Proceedings. In the event of any litigation between the parties, the
prevailing party shall be entitled to its legal fees and expenses.


                                      29


16.02 Landlord's Consent. Tenant shall pay Landlord's reasonable fees and
expenses, including, without limitation, legal, engineering and other
consultants' fees and expenses, incurred in connection With Tenant's request for
Landlord's consent under Article Thirteen (Assignment and Subletting) or in
connection with any other act by Tenant which requires Landlord's consent or
approval under This Lease.

ARTICLE SEVENTEEN: MISCELLANEOUS PROVISIONS

17.01 Non-Discrimination. Tenant agrees that it will not permit any
discrimination against, or segregation of, any person or group of persons on the
basis of race, color, sex, creed, national origin or ancestry in the leasing,
subleasing, transferring, occupancy, tenure or use of the Premises or any
portion thereof.

17.02 Landlord's Liability; Certain Duties.

      17.02(a) Bind and Inure; Limitation of Landlord's Liability. The
      obligations of this Lease shall run with the land, and this Lease shall be
      binding upon and inure to the benefit of the parties hereto and their
      respective successors and assigns. No owner of the Premises shall be
      liable under this Lease except for breaches of Landlord's obligations
      occurring while owner of the Premises. The obligations of Landlord shall
      be binding upon the assets of Landlord which comprise the Premises but not
      upon other assets of Landlord. No individual partner, trustee,
      stockholder, officer, director, employee, or beneficiary of Landlord shall
      be personally liable under this Lease and Tenant shall look solely to
      Landlord's interest in the Premises in pursuit of its remedies upon an
      event of default hereunder, and the general assets of Landlord and its
      partners, trustees, stockholders, officers, employees or beneficiaries of
      Landlord shall not be subject to levy, execution or other enforcement
      procedure for the satisfaction of the remedies of Tenant.

      17.02 (b) Notice. Tenant shall give notice of any failure by Landlord to
      perform any of its obligations under this Lease to Landlord and to any
      ground lessor, mortgagee or beneficiary under any deed of trust
      encumbering the Premises whose name and address shall have been furnished
      to Tenant. Landlord shall not be in default under this Lease unless
      Landlord (or such ground lessor, mortgagee or beneficiary) shall fail to
      cure such non-performance within thirty (30) days after receipt of
      Tenant's notice.


                                      30


      However, if such non-performance shall reasonably require more than thirty
      (30) days to cure, Landlord shall not be in default if such cure shall be
      commenced within such thirty (30) day period and thereafter diligently
      pursued to completion.

17.03 Severability. A determination by a court of competent jurisdiction that
any provision of this Lease or any part thereof is illegal or unenforceable
shall not cancel or invalidate the remainder of such provision of this Lease,
which shall remain in full force and effect.

17.04 Interpretation. The captions of the Articles or Sections of this Lease are
not a part of the terms or provisions of this Lease. Whenever required by the
context of this Lease, the singular shall include the plural and the plural
shall include the singular. The masculine, feminine and neuter ganders shall
each include the other, in any provision relating to the conduct, acts or
omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees,
contractors, invitees, successors or others using the Premises with Tenant's
expressed or implied permission.

17.05 Incorporation of Prior Agreements; Modifications. This Lease is the only
agreement between the parties pertaining to the lease of the Premises and no
other agreements shall be effective. All amendments to this Lease shall be in
writing and signed by all parties. Any other attempted amendment shall be void.

17.06 Notices. All notices, requests and other communications required or
permitted under this Lease shall be in writing and shall be personally delivered
or sent by certified mail, return receipt requested, postage prepaid or by a
national overnight delivery service which maintains delivery records. Notices to
Tenant shall be delivered to the address specified in Section 1.18 above.
Notices to Landlord shall be delivered to the address specified in Section 1.17
above. All notices shall be effective upon delivery (or refusal to accept
delivery). Either party may change its notice address upon written notice to the
other party.

17.07 Waivers. All waivers shall be in writing and signed by the waiving party.
Landlord's failure to enforce any provision of this Lease or its acceptance of
Rent shall not be a waiver and shall not prevent Landlord from enforcing that
provision or any other provision of this Lease in the future. No statement on a
payment check from Tenant or in a letter accompanying a payment check shall be
binding on Landlord. Landlord may, with or


                                      31


without notice to Tenant, negotiate such check without being bound by to the
conditions of such statement.

17.08 No Recordation. Tenant shall not record this Lease. Either Landlord or
Tenant may require that a notice, short form or memorandum of this Lease
executed by both parties be recorded. The party requiring such recording shall
pay all transfer taxes and recording fees.

17.09 Binding Effect; Choice of Law. This Lease shall bind any party who shall
legally acquire any rights or interest in this Lease from Landlord or Tenant,
provided that Landlord shall have no obligation to Tenant's successor unless the
rights or interests of Tenant's successor are acquired in accordance with the
terms of this Lease. The laws of the state in which the Premises is located
shall govern this Lease.

17.10 Corporate Authority; Partnership Authority. If Tenant is a corporation,
each person signing this Lease on behalf of Tenant represents and warrants that
(s)he has full authority to do so and that this Lease binds the corporation.
Within thirty (30) days after this Lease is signed, Tenant shall deliver to
Landlord a certified copy of a resolution of Tenant's Board of Directors
authorizing the execution of this Lease or other evidence of such authority
reasonably acceptable to Landlord. If Tenant is a partnership, each person or
entity signing this Lease for Tenant represents and warrants that he or it is a
general partner of the partnership, that he or it has full authority to sign for
the partnership and that this Lease binds the partnership and all general
partners of the partnership. Tenant shall give prompt notice to Landlord of any
general partner's withdrawal or addition from time to time. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.

17.11 Joint and Several Liability. All parties signing this Lease as Tenant
shall be jointly and severally liable for all obligations of Tenant.

17.12 Force Majeure. If Landlord can not perform any of its obligations due to
events beyond Landlord's reasonable control, the time provided for performing
such obligations shall be extended by a period of time equal to the duration of
such events. Events beyond Landlord's reasonable control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of


                                      32


labor or material, government regulation or restriction and weather conditions.

17.13 Execution of Lease. This Lease may be executed in counterparts and, when
all counterpart documents are executed, the counterparts shall constitute a
single binding instrument. Landlord's delivery of this Lease to Tenant shall not
be deemed to be an offer to lease and shall not be binding upon either party
until executed and delivered by both parties.

17.14 Survival. All representations and warranties of Landlord and Tenant shall
survive the termination of this Lease.

17.15 Examination of Lease. Submission of this Lease to Tenant shall not
constitute an option to lease, and this Lease shall not be effective until
execution and delivery by both Landlord and Tenant.

17.16 Intentionally Deleted.

17.17 Limitation of Warranties. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE
ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, SUITABILITY, FITNESS
FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS Lease, AND
THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS
LEASE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, TENANT EXPRESSLY
ACKNOWLEDGES THAT LANDLORD HAS MADE NO WARRANTIES OR REPRESENTATIONS CONCERNING
ANY HAZARDOUS Materials OR OTHER ENVIRONMENTAL MATTERS AFFECTING ANY PART OF
THE Premises AND LANDLORD HEREBY EXPRESSLY DISCLAIMS AND TENANT WAIVES ANY
EXPRESS OR IMPLIED WARRANTIES WITH RESPECT TO ANY SUCH MATTERS.


                                       33


17.18 No Other Brokers. Tenant represents and warrants to Landlord that the
brokers named in Section 1.12 above are the only agents, brokers, finders or
other parties with whom Tenant has dealt who may be entitled to any commission
or fee with respect to this Lease or the Premises or the Premises. Tenant agrees
to indemnify and hold Landlord harmless from any claim, demand, cost or
liability, including, without limitation, attorneys' fees and expenses, asserted
by any party other than the brokers named in Section 1.12 based upon dealings of
that party with Tenant.

Signed on       July 14    , 1997       LANDLORD
          -----------------


at             Boston, MA               KNICKERBOCKER INDUSTRIAL
   -----------------------------
                                        PROPERTIES EAST, L.P.
                                           By:   Knickerbocker
                                                 Properties, Inc. XVIII,
                                                 its General Partner


                                        By: /s/ Gerald F. Ianetta
                                            ----------------------------
                                                Gerald F. Ianetta
                                        Its:     Vice President


Signed on      June 23     , 1997       TENANT
          -----------------


at          San Diego, CA               PETCO ANIMAL SUPPLIES, INC.
   ------------------------------

                                        By: /s/ James M. Myers
                                            ----------------------------
                                                   James M. Myers
                                        Its:   Senior Vice President - Finance





                                       34


                           FIRST AMENDMENT TO LEASE

      FIRST AMENDMENT made as of the 4th day of October, 2001, by and between
KNICKERBOCKER INDUSTRIAL PROPERTIES EAST, L.P., a Delaware limited partnership
("Landlord") and PETCO ANIMAL SUPPLIES, INC., a _________________ corporation
("Tenant").

                                 WITNESSETH:

      WHEREAS Landlord and Tenant entered into a certain Lease dated as of June
23, 1997 (the "Lease") whereby Tenant agreed to lease certain premises
consisting of a building containing approximately 211,450 square feet (the
"Premises") known as 152 Dayton Jamesburg Road, South Brunswick, New Jersey;

      WHEREAS, Tenant desires to extend the Lease for three additional months
from July 1, 2002 through September 30, 2002 (the "Extension Term"); and

      WHEREAS, Landlord and Tenant desire to memorialize their understanding
and modify the Lease consistent therewith;

      NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Landlord and Tenant agree that the Lease shall be
amended as follows:

1.  BASE RENT FOR EXTENSION TERM. The Base Rent for the Extension Term shall be
    $70,483.00 per month.

2.  TERM EXTENSION. Subject to the terms of the following sentence, the Term of
    the Lease is hereby extended for a period of three (3) months commencing on
    July 1, 2002 and continuing through September 30, 2002. Notwithstanding the
    foregoing, Tenant shall have the right to terminate the Lease effective as
    of August 31, 2002 provided that Tenant gives Landlord written notice of
    such termination on or before December 31, 2001. If Tenant fails to vacate
    the Premises within the time specified, the provisions of Section 3.04 of
    the Lease (Holding Over) shall apply.

3.  CONFIRMATION OF EXTENSION OPTION. The parties confirm that the modification
    of the Lease provided for in this First Amendment does not preclude Tenant
    from exercising its rights to extend the Lease Term pursuant to the terms of
    Section 3.02 of the Lease. Such right to extend is hereby amended to allow
    Tenant to exercise its option on or before December 31, 2001.

4.  CONDITION OF PREMISES. In connection with this First Amendment, Landlord
    shall have no obligation to perform any work or construction to the
    Premises.

5.  BROKERS. Each party represents and warrants that it has dealt with no
    broker, agent, or other person in connection with this transaction and that
    no broker, agent or other person brought



    about this transaction and each party agrees to indemnify and hold the other
    harmless from and against any claims by any other broker, agent or other
    person claiming a commission or other form of compensation by virtue of
    having dealt with the indemnifying party with regard to this leasing
    transaction. The provisions of this paragraph shall survive the termination
    of the Lease.

6.  NO OTHER AMENDMENTS. In all other respects, the terms and provisions of the
    Lease are ratified and reaffirmed hereby, are incorporated herein by this
    reference and shall be binding upon the parties to this First Amendment.

7.  DEFINITIONS.  All capitalized terms used and not otherwise defined herein,
    shall have the meanings ascribed to them in the Lease.

      IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment
to be duly executed, under seal, by persons hereunto duly authorized, in
multiple copies, each to be considered an original hereof, as of the day and
year first above written.

LANDLORD:

KNICKERBOCKER INDUSTRIAL PROPERTIES EAST, L.P.

By:   Knickerbocker Properties XVIII, Inc., General Partner

      By: /s/ Janine M. Cobb
          ----------------------------------------
          Name:  Janine M. Cobb
          Title: Vice President


TENANT:

PETCO ANIMAL SUPPLIES, INC.

By:   /s/ William M. Woodard
    -----------------------------------------------
    Name:  William M. Woodard
    Title: Sr. Vice-President, Business Development

EX-10.3

BUILD TO SUIT
LEASE AGREEMENT

BETWEEN

INDUSTRIAL DEVELOPMENTS INTERNATIONAL, INC.

AS LANDLORD

AND

PETCO ANIMAL SUPPLIES, INC.

AS TENANT

DATED FEBRUARY 20, 1998


LEASE INDEX



Section     Subject

   1        Basic Lease Provisions
   2        Demised Premises
   3        Term
   4        Minimum Rent
   5        Tenant's Right to Cease Operations
   6        Additional Rent
   7        Use of Demised Premises
   8        Insurance
   9        Utilities
   10       Taxes and Other Impositions
   11       Maintenance and Repairs
   12       Tenants' Personal Property; Indemnity
   13       Tenant's Fixtures
   14       Signs
   15       [INTENTIONALLY OMITTED]
   16       Governmental Regulations
   17       Environmental Matters
   18       Plans and Specifications for Construction of Demised Premises
   19       Tenant Alterations and Additions
   20       Services by Landlord
   21       Fire and Other Casualty
   22       Condemnation
   23       Tenant's Default


                                  Page 1



   24       Landlord's Right of Entry
   25       Mortgagee's Rights
   26       Estoppel Certificate
   27       Landlord Liability
   28       Notices and Payments
   29       Brokers
   30       Assignment and Subleasing
   31       Termination or Expiration
   32       Late Payments
   33       Protective Covenants
   34       Dispute Resolution Procedure
   35       Waiver of Landlord's Lien
   36       Quiet Enjoyment
   37       Miscellaneous

   Exhibit "A"       Legal Description
   Exhibit "A-1"     Site Plan
   Exhibit "B"       Permitted Encumbrances
   Exhibit "C"       Expansion Land
   Exhibit "C-1"     Alternate Expansion Land
   Exhibit "D"       Prevailing Market Rate
   Exhibit "E"       Allowance Work
   Exhibit "F"       Environmental Reports
   Exhibit "G"       Base Building Plans and Specifications
   Exhibit "G-1"     Additional Plans and Specifications
   Exhibit "G-2"     Tenant's Work
   Exhibit "H"       Subordination, Non-Disturbance and Attornment Agreement
   Exhibit "I"       Protective Covenants
   Exhibit "J"       Landlord's Agreement


BUILD TO SUIT
LEASE AGREEMENT


         THIS LEASE AGREEMENT (this "Lease") is made this 20th day of February,
1998 ("Lease Date"), by and between INDUSTRIAL DEVELOPMENTS INTERNATIONAL, INC.,
a Delaware corporation ("Landlord"), and PETCO ANIMAL SUPPLIES, INC., a
_______________________ corporation ("Tenant") (the words "Landlord" and
"Tenant" to include their respective legal representatives, successors and
permitted assigns where the context requires or permits).

W I T N E S S E T H:

         1.       Basic Lease Provisions. The following constitute the "Basic
Lease Provisions" of this Lease:


                                  Page 2



(a)      Demised Premises: As described in Section 2 of this Lease. The term
"Base Building", as used in this Lease, shall mean the Building (as
hereinafter defined) constructed by Landlord in accordance with this Lease
prior to construction of Expansion Improvements (as defined in Section 3.1),
if any.

(b)      Building Square Footage:  Approximately 258,000 square feet (subject
to adjustment pursuant to Section 18(j) of this Lease), as such amount may be
increased by the square footage of the Expansion Improvements, if any.

(c)      Annual Minimum Rent (subject to adjustment pursuant to Section 18(j)
of this Lease):

Lease Year one (1)         $745,620.00

Lease Year two (2)         $758,520.00

Lease Years three (3) through five (5)      $771,420.00

Lease Years six (6) and seven (7)           $879,780.00

The Annual Minimum Rent for the Base Building is sometimes referred to in this
Lease as the "Base Building Annual Minimum Rent".

(d)      Monthly Minimum Rent Installments (subject to adjustment pursuant to
Section 18(j) of this Lease):

Lease Year one (1)         $62,135.00

Lease Year two (2)         $63,210.00

Lease Years three (3) through five (5)      $64,285.00

Lease Years six (6) and seven (7)           $73,315.00


(e)      Lease Commencement Date: The date of Substantial Completion (as defined
in Section 3 of this Lease) or April 7, 1998, whichever is later.

(f)      Minimum Rent Commencement Date:  The Lease Commencement Date

(g)      Term: Seven (7) years following the Lease Commencement Date (subject to
adjustment in accordance with Section 3 of this Lease).


                                  Page 3



(h)      [INTENTIONALLY OMITTED]

                  (i)       Permitted Use: Storage, warehousing and
distribution of pet supplies, pet food and pet-related goods of all kinds and
general office use ancillary thereto (collectively, the "Primary Use") and (2)
subject to the limitations hereinafter specified in Section 7(a) of this Lease
and in this subsection (i), storage, warehousing and distribution permissible
under applicable laws and regulations of governmental authorities having
jurisdiction over the Demised Premises (collectively, "Governmental
Requirements") and under the Protective Covenants (as defined in Section 33),
and general office use ancillary thereto; the Permitted Use (a) shall never
include any use prohibited by Section 17 of this Lease, (b) shall never extend
to or allow the use of radioactive or biohazardous materials at the Demised
Premises, (c) shall never include any heavy manufacturing, the manufacture or
production of chemicals or petroleum (or distillates thereof) or any other use
wherein a Hazardous Substance (as defined in Section 17) constitutes the
principal or primary product of the business to be conducted at the Demised
Premises and (d) must not result in a material increase in the wear and tear
on the Demised Premises, as compared to the Primary Use; and with respect to
any Permitted Use other than the Primary Use, such Permitted Use must not, in
the reasonable judgment of Landlord, result in a material increase in the risk
of Contamination (as defined in Section 17) at the Demised Premises, as
compared to the Primary Use. The Primary Use may be altered only in accordance
with Section 7(a) of this Lease.



(j)      Addresses for notice:

Landlord:         Industrial Developments International, Inc.
Monarch Tower
3424 Peachtree Road, Suite 1500
Atlanta, Georgia 30326
Attention: Chief Operating Officer

Tenant: PETCO ANIMAL SUPPLIES, INC.
9125 Rehco Road
San Diego, California 92121-2270
Attn: Property Manager

         AND:

         PETCO ANIMAL SUPPLIES, INC.
         3801 Rock Creek Boulevard
         Joliet, Illinois 60431
         Attn: Property Manager


                                  Page 4



(k)      Address for rental payments:

Industrial Developments International, Inc.
P.O. Box 930190
Atlanta, Georgia 31193

(l)      Broker(s):        Lee & Associates
3535 Inland Empire Boulevard
Ontario, California 91764


         2.       Demised Premises. For and in consideration of the rent
hereinafter reserved and the mutual covenants hereinafter contained, Landlord
does hereby lease and demise unto Tenant, and Tenant does hereby lease and
accept from Landlord, that certain parcel of real property (the "Land")
containing approximately 13.23 acres, which Land is situated in DuPage County,
City of Joliet, Illinois, within Rock Run Business Park (the "Project") and is
more particularly described in Exhibit "A" attached hereto and by this
reference made a part hereof, together with and including all buildings,
structures, driveways, parking lots, walkways, landscaping and other
appurtenances thereto and all other improvements constructed or placed on the
Land in accordance with this Lease, at any time during the Term, including
specifically, but without limitation, a building (the "Building") containing
approximately 258,000 square feet of office and warehouse space, which is
located on the Land as shown on Exhibit "A-1" attached hereto (collectively,
the "Demised Premises"). This Lease and the rights of Landlord andTenant under
this Lease are subject to the matters set forth on Exhibit "B" attached hereto
(herein referred to as "Permitted Encumbrances").

         3.       Term.

                  (a)       To have and to hold the Demised Premises for a
term ("Term") which will commence on the Lease Date and shall expire seven (7)
years after the Lease Commencement Date; provided, however, that if the Lease
Commencement Date is a day other than the first day of a calendar month, the
first Lease Year (as hereinafter defined) will also include the period between
the Lease Commencement Date and the end of the calendar month in which the
Lease Commencement Date occurs and, thereafter, each Lease Year shall commence
on the anniversary of the first calendar day of the first full calendar month
after the Lease Commencement Date. The Term of this Lease shall end on the
final day thereof without the requirement of notice from either party to the
other. The term "Lease Year", as used in this Lease, shall mean the 12-month
period commencing on the Lease Commencement Date, and each 12-month period
thereafter during the Term. If this Lease terminates in


                                  Page 5



accordance with its terms on a day other than the last day of the final Lease
Year, Minimum Rent (as defined in Section 4) and Additional Rent (as defined
in Section 5) for the Lease Year in which such termination occurs shall be
prorated as of the date of such termination.

         3.1      Option to Expand and Extend. Landlord hereby grants to
Tenant a continuing right and option to expand the Demised Premises and to
extend the Term, upon and subject to the following terms and conditions:

                  (a)       At any time prior to the end of the third (3rd)
Lease Year, Tenant shall have the right and option ("Expansion Option") to
expand the Demised Premises by causing Landlord to construct the Expansion
Improvements (as that term is herein defined) in accordance with all the
provisions of this Section 3.1; provided that Tenant shall have the right to
extend the term ("Expansion Option Term") of the Expansion Option in the
manner provided in Section 3.2; provided further, however, that the right of
Tenant to exercise the Expansion Option shall be subject to the conditions
precedent set forth in Section 3.4. Tenant shall exercise the Expansion Option
by giving written notice ("Expansion Notice") to Landlord prior to expiration
of the Expansion Option Term. If Tenant fails to give the Expansion Notice
timely, the Expansion Option granted Tenant in this Section 3.1 shall lapse
unexercised and shall be of no further force or effect; provided, however,
that if Tenant fails to exercise the Expansion Option prior to the end of the
Expansion Option Term, the right of Tenant to exercise the Expansion Option
shall not finally lapse and terminate until the tenth (10th) business day
following the receipt of a written notice from Landlord (which may not be
given prior to the expiration of the Expansion Option Term) advising Tenant
that the Expansion Option Term has expired and Landlord did not receive the
Expansion Notice. The term "Expansion Improvements", as such term is used in
this Section 3.1, shall mean an expansion of the Building containing a maximum
of approximately 250,000 square feet (subject to limitations of applicable
zoning and other laws) and an absolute minimum of 100,000 square feet of
additional space, together with additional parking area as may be required by
applicable law or the Final Expansion Plans (as defined in Section 3.1(d) of
this Lease), whichever is greater; provided that such Expansion Improvements
shall otherwise be, in all respects, subject to then applicable laws. If
Tenant timely exercises the Expansion Option, and the Expansion Improvements
will exceed 100,000 square feet, the Demised Premises must expand to include
the 13.38 acres of land ("Expansion Land") more particularly described on
Exhibit "C" attached to this Lease and made a part hereof by this reference.
If Tenant exercises the Expansion Option, and elects to cause Landlord to
construct the minimum of 100,000 square feet of additional space, only that
portion of the Expansion Land containing 4.73 acres


                                  Page 6



and described on Exhibit C-1 attached to this Lease and made a part hereof by
this reference ("Alternate Expansion Land") shall become part of the Demised
Premises and the remaining acreage of the Expansion Land will no longer be
available to become part of the Demised Premises and will no longer be subject
to this Lease in any respect. Accordingly, the Expansion Land (or only the
Alternate Expansion Land, if applicable) shall become part of the Demised
Premises as of the Expansion Completion Date (as defined in Section 3.1(e),
below) and thereafter be subject to all of the terms and provisions of this
Lease. Landlord and Tenant stipulate and agree that the term "Expansion Land
Value", as used in this Section 3.1, shall mean a sum of money calculated by
multiplying the square footage of the Expansion Land (or so much thereof as
becomes part of the Demised Premises), as calculated to the nearest ten
thousandth of a foot, times the Expansion Land Cost Per Foot (as hereinafter
defined). The term "Expansion Land Cost Per Foot" shall mean the sum of $2.00.
So long as the Expansion Option remains in effect and unexercised by Tenant,
Landlord agrees that Landlord will not utilize or permit to be utilized the
Expansion Land for any purpose without the prior written consent of Tenant, to
be given or withheld by Tenant in its sole discretion.

                  (b)       The Expansion Notice shall include proposed
specifications and a proposed site plan, prepared at the expense of Tenant,
(i) describing the Expansion Improvements as contemplated by Tenant, (ii)
showing the location and configuration of the Expansion Improvements,
including, without limitation, the manner in which the Expansion Improvements
will be connected to the Building (collectively "Expansion Requirements") and
(iii) specifying an amount of money which Tenant authorizes Landlord to expend
to prepare the Preliminary Expansion Plans (the "Preliminary Plan Expenses").
The Expansion Notice must also include the financial information described in
Section 3.4.

                  (c)       Within forty-five (45) days after receipt of the
Expansion Notice, Landlord will, at the expense of Tenant, cause to be
prepared preliminary construction drawings and preliminary construction
specifications, including an estimated construction cost breakdown and a
construction schedule (collectively "Preliminary Expansion Plans") for the
Expansion Improvements. The Preliminary Plan Expenses actually and reasonably
incurred by Landlord in obtaining the Preliminary Expansion Plans shall either
(i) if Tenant withdraws its exercise of the Expansion Option in accordance
with subsection (c) below, be reimbursed to Landlord by Tenant within thirty
(30) calendar days after receipt from Landlord of a written request for
payment, supported by invoices or other reasonable documentation which
evidence the costs or (ii) be included in the Expansion Costs (as hereinafter
defined). Landlord agrees that the Preliminary Expansion Plans will be
prepared on the basis of the Expansion Requirements and such additional
requirements and comments as may be provided by Tenant to Landlord in


                                  Page 7



writing; provided, however, that Landlord shall have no duty or obligation to
incur any expense in obtaining the Preliminary Expansion Plans in excess of
the Preliminary Plan Expenses (as such sum may be increased in the discretion
of Tenant). Tenant will, in good faith, cooperate with Landlord in the
preparation of the Preliminary Expansion Plans and shall provide Landlord with
such additional information as Landlord may reasonably request in order to
prepare the Preliminary Expansion Plans in a manner which will be consistent
with the intended use by Tenant of the Expansion Improvements. The Preliminary
Expansion Plans shall be prepared with a level of detail sufficient to allow
computation of the Expansion Costs for the purpose of calculating the
Expansion Rent (as hereinafter defined). Landlord and Tenant agree that the
exterior appearance and general quality of the Expansion Improvements shall be
consistent with the exterior appearance and general quality of the Building;
in addition, the Expansion Improvements must (i) have bay size and clear
height the same as the Base Building, (ii) have no greater proportion of
office space than the Base Building, (iii) have the same level and quality of
sprinkler and fire safety systems as the Base Building, (iv) have no
improvements in the warehouse area other than improvements consistent with the
Base Building or mandated by Governmental Requirements and (v) provide for
truck docks such that the ratio of the number of truck docks to the total
square footage of the Expansion Improvements will not exceed the same ratio
for the Base Building. Not later than forty-five (45) calendar days after
receipt of the Expansion Notice, Landlord shall submit to Tenant the proposed
Preliminary Expansion Plans together with an estimated cost statement
associated therewith. With respect to the cost of the general construction
contract, Landlord shall include, as part of the estimated cost statement, not
less than three (3) competitive bids; the general contractors from whom bids
are solicited shall be subject to the approval of Tenant, such approval not to
be unreasonably withheld or delayed. Tenant shall have thirty (30) calendar
days from receipt of the proposed Preliminary Expansion Plans and estimated
cost statement to notify Landlord of approval or disapproval by Tenant. Any
such notice of disapproval shall set forth in detail and with specificity the
aspects of the Preliminary Expansion Plans which are not acceptable to Tenant.
Landlord shall make those changes in the Preliminary Expansion Plans which are
reasonably requested by Tenant and, within ten (10) business days after
receipt of the written notice from Tenant, submit the revised portion of the
Preliminary Expansion Plans to Tenant; as part of such revisions, Landlord
shall also revise, to the extent necessary as a result of the changes
requested by Tenant, and submit to Tenant the construction schedule and cost
estimate for the Expansion Improvements. Tenant shall have the right to
approve or disapprove any such resubmission for a period of ten (10) business
days after receipt; if no written notice of approval or disapproval is given
by Tenant, the resubmission shall conclusively be deemed to have been
disapproved. Tenant


                                  Page 8



shall have no obligation to accept the cost estimate of Landlord and Landlord
shall have no obligation to change its cost estimate except as a result of
manifest error; as set forth below, the estimated costs shall become the
"Expansion Costs" only on the basis of mutual approval of Landlord and Tenant.
Landlord shall (A) use its best efforts to obtain final, unappealable approval
of the Preliminary Expansion Plans and the Final Expansion Plans (as
hereinafter defined) by all governmental authorities having jurisdiction, and
by the Association to the extent required by the Protective Covenants and
otherwise satisfy all Governmental Requirements (as defined in Section 16)
applicable to the construction of the Expansion Improvements and development
of the Expansion Land, in accordance with the Final Expansion Plans, (B)
timely file all applications required to obtain such approvals and respond
timely to requests by the applicable authority for additional information and
otherwise diligently pursue such approvals, (C) keep Tenant generally apprised
of the status of the efforts by Landlord to obtain the approvals and (D) allow
Tenant to participate, at its own expense, in the efforts to obtain the
approvals. If a required approval is denied, Landlord shall diligently pursue
any available appeal process. If Tenant does not approve the cost estimates or
construction schedule submitted by Landlord to Tenant, or if Landlord is
unable to provide Tenant with assurance (which shall be described or set forth
in a written notice from Landlord) acceptable to Tenant that the Expansion
Improvements contemplated by the Preliminary Expansion Plans and the Final
Expansion Plans can be constructed in accordance with requirements of the
Association and all applicable Governmental Requirements, Tenant may, as its
exclusive remedy, by written notice to Landlord, withdraw its election to
exercise the Expansion Option. Upon such withdrawal, the Expansion Option
shall automatically be reinstated just as though the prior exercise of the
Expansion Option had not occurred. If Tenant approves in writing the
Preliminary Expansion Plans, cost estimate and construction schedule for the
Expansion Improvements, as submitted and resubmitted by Landlord in accordance
with this subsection (c), the cost estimate and construction schedule which
are so approved in writing by Tenant are hereinafter referred to as the
"Expansion Costs" and the "Expansion Construction Schedule", respectively. At
such time, if ever, that Tenant approves in writing the Preliminary Expansion
Plans, the Expansion Costs, and the Expansion Construction Schedule, Landlord
shall, if Landlord is not then the owner of the Expansion Land, proceed to
acquire title to the Expansion Land or the Alternate Expansion Land, as may be
required, in the manner described in Section 3.1(j). Tenant acknowledges that
the estimated cost of the Expansion Improvements to be submitted by Landlord
to Tenant (and which will become the Expansion Costs only when approved by
Tenant in accordance with this subsection (c)) will be the sum of (1) the
Expansion Land Value, plus (2) all costs and expenses of any nature, whether
generally characterized as "hard" or "soft" costs, which Landlord estimates
will be


                                  Page 9



incurred by Landlord and payable to a third party in connection with the
design and construction ("Construction Costs") of the Expansion Improvements
plus (3) interest on all Construction Costs, accruing from each particular
date the cost or expense is estimated to be paid, at a rate equal to the Prime
Rate (as defined in Section 32) plus one percent (1%), and plus (4) a
construction management fee payable to Landlord (which shall be in addition to
any fees payable to the general contractor) which will not exceed ten percent
(10%) of the Construction Costs. Landlord and Tenant agree that the Expansion
Costs shall constitute the basis for the calculation of Expansion Rent and
shall be subject to adjustment only for Change Orders (as defined in Section
18(a)) approved by Tenant. Landlord and Tenant shall each act in good faith in
their efforts to develop Preliminary Expansion Plans, Expansion Costs and an
Expansion Construction Schedule which are mutually acceptable.

                  (d)       After approval by Tenant of the Preliminary
Expansion Plans, the Expansion Construction Schedule and the Expansion Costs,
Landlord shall promptly and diligently proceed with preparation of final plans
and specifications for the Expansion Improvements. Within thirty (30) calendar
days after the occurrence of such approval by Tenant, Landlord shall prepare
(with the cost of such preparation being part of the Expansion Costs) and
submit to Tenant a set of proposed plans and specifications, based upon the
Preliminary Expansion Plans, covering all work to be performed by Landlord in
constructing the Expansion Improvements. Tenant shall have ten (10) business
days after receipt thereof to review the proposed plans and specifications and
give to Landlord a written notice of approval or disapproval; provided that
each day after the tenth (10th) business day that the notice is given by
Tenant shall constitute a day of Permitted Delay. Tenant acknowledges that the
Expansion Improvements will likely be constructed on a "fast track" basis and
that Landlord shall have the right and option to submit various parts of the
proposed plans and specifications from time to time during said 30-day period
and the time period for approval of any part of the proposed plans and
specifications shall commence upon receipt of each submission. If Tenant gives
written notice of disapproval of any of the proposed plans and specifications,
such notice of disapproval shall set forth in detail and with specificity the
aspects of the proposed plans and specifications which are not acceptable to
Tenant. Landlord shall make those changes which are reasonably requested by
Tenant and promptly submit the revised portion of the proposed plans and
specifications to Tenant. Landlord must, in any event, make such changes as
may be necessary to achieve conformance with the Preliminary Expansion Plans.
Tenant shall have no right to request any changes which would materially alter
the exterior appearance or basic nature of the Building or the Expansion
Improvements, as contemplated by the Preliminary Expansion Plans. If Tenant
fails to approve any portion of the proposed plans and


                                  Page 10



specifications so resubmitted to Tenant within seven (7) business days after
receipt of such resubmission, each day after the seventh (7th) business day
that the approval is given by Tenant shallconstitute a day of Permitted Delay.
Tenant may not disapprove the revisions of the proposed plans and
specifications unless Landlord has unreasonably failed to incorporate comments
of Tenant. Tenant shall, in its review of the proposed plans and
specifications, act reasonably and in good faith. The final plans and
specifications for the Expansion Improvements, as so approved by Tenant, are
hereinafter referred to as the "Final Expansion Plans." After approval by
Tenant of the Final Expansion Plans, Landlord shall proceed with construction
of the Expansion Improvements with reasonable diligence (and with the same
quality materials and workmanship that the Building was constructed), and
otherwise in accordance with this Lease, Governmental Requirements and the
Permitted Encumbrances, free of all liens arising in any manner out of such
construction. The Expansion Improvements will be constructed in accordance with
the Expansion Construction Schedule, subject to extension for Permitted Delay.
There shall be no material variation from the Final Expansion Plans and no
change in the Expansion Costs, except pursuant to Change Orders approved by
Tenant in the same manner as Change Orders for the Plans and Specifications
(and at the sole cost and expense of Tenant). In connection with construction
of the Expansion Improvements, Landlord and its contractors shall undertake all
such steps as may be reasonable and practicable to prevent interference of such
construction with the use and enjoyment by Tenant of the Demised Premises. If,
after determination of the Expansion Costs, the imposition or enactment of any
Governmental Requirement necessitates a change in either the Preliminary
Expansion Plans or the Final Expansion Plans which will increase the Expansion
Costs, Landlord shall pay such increase (without increasing the Expansion
Costs, the Minimum Rent or the Additional Rent) unless the required change is
necessary because of the particular use of the Demised Premises by Tenant; if
the required change is necessary because of the particular use of the Demised
Premises by Tenant, the increase in cost shall be included in the Expansion
Costs, in accordance with this subsection (d), and shall be payable by Landlord
in the same manner as all other Expansion Costs. Without limiting any of the
foregoing provisions of this subsection (d), the provisions of Sections 18(f)
and (h) shall, in the manner set forth therein, apply to the Expansion
Improvements.

                  (e) Upon the Expansion Completion Date (as that term is herein
defined), the Expansion Improvements and the Expansion Land (or the Phase I
Expansion Land, if applicable) shall become part of the Demised Premises and the
Expansion Improvements shall automatically be governed by all the terms and
provisions of this Lease, and shall be deemed to be included in the definition
of "Demised Premises" for all purposes, except that, commencing on the Expansion
Completion Date,

                                    Page 11



Tenant shall pay, in addition to the Base Building Annual Minimum Rent and as
part of the Minimum Rent, the Expansion Rent (as that term is hereinafter
defined). The Expansion Rent shall commence to accrue on the date (the
"Expansion Completion Date") on which the Expansion Improvements are
Substantially Completed (as defined in Section 18(i). Within ten (10)
calendar days after the Expansion Completion Date, the architect who prepared
the Final Expansion Plans shall execute and deliver to Landlord and Tenant a
written certification of the square footage contained in the Expansion
Improvements, such computation of square footage to be made on a "drip-line"
basis. The square footage so certified by such architect shall (subject to
the right of Tenant to dispute the measurement, as hereinafter provided)
conclusively determine the square footage of the Expansion Improvements for
all purposes under this Lease and such square footage shall become part of
the Building Square Footage. In the event Tenant shall dispute the
determination by such architect of the square footage of the Expansion
Improvements, the parties shall utilize the Dispute Resolution Procedure (as
defined in Section 34), with qualified architects serving as "Officials".

                  (f) If the Expansion Option is timely exercised by Tenant and
not thereafter withdrawn in accordance with subsection 3.1(c), above, prior to
written agreement by Landlord and Tenant regarding the Preliminary Expansion
Plans, the Expansion Construction Schedule and the Expansion Costs, then,
provided that the Expansion Improvements are Substantially Completed in
accordance with the terms of this Lease, the Term shall, if necessary,
automatically be extended for a period of time so that this Lease will expire
not less than five (5) years after the first day of the first full calendar
month following the Expansion Completion Date. The period of time between the
Expansion Completion Date and the end of such extended period is herein
sometimes referred to as the "Extension Term". If the Expansion Completion Date
occurs not later than the end of the second Lease Year, there will be no
Extension Term. The Extension Term shall be governed by all the terms and
provisions of this Lease, with the exception that, for the period between the
end of the initial Primary Term, i.e., the end of the seventh (7th) Lease Year,
and the end of the Extension Term, the Base Building Annual Minimum Rent (which
is in addition to the Expansion Rent) shall (to the extent necessary, depending
upon the expiration date of the Extension Term) escalate on the first day of the
eighth (8th) Lease Year by an amount equal to five and thirty-four one
hundredths percent (5.34%) of the Base Building Annual Minimum Rent in effect
during the sixth (6th) and seventh (7th) Lease Years and, if required because of
the duration of the Extension Term, again on the first day of the ninth (9th)
Lease Year and on the first day of each subsequent Lease Year during the
Extension Term, by an amount equal to two and sixty-seven one-hundredths percent
(2.67%) of the Base Building Annual Minimum Rent in effect during the
immediately preceding Lease Year.

                                    Page 12



                  (g) The term "Expansion Rent", as used in this Section 3.1,
shall be an amount calculated by multiplying the Expansion Costs times eleven
percent (11%). The Expansion Rent is an annual amount of Minimum Rent payable in
equal, monthly installments on the first day of each calendar month in the same
manner as Base Building Monthly Minimum Rent Installments.

                  (h) Landlord and Tenant agree to enter into an amendment to
this Lease to document the expansion of the Demised Premises, the Expansion
Completion Date, the extension of the Term pursuant to this Section 3.1 and the
Expansion Rent.

                  (i) Landlord acknowledges and agrees that Tenant shall have no
obligation of any kind to pay any fee or commission to any real estate broker or
agent in connection with expansion of the Demised Premises in accordance with
the Expansion Option.

                  (j) Tenant acknowledges that Landlord may, at any time prior
to incorporation of the Expansion Land (or, if applicable, the Alternate
Expansion Land) into the Demised Premises pursuant to this Section 3.1, sell and
convey to a third party the interest of Landlord in and to the Land and the
Demised Premises (subject to this Lease), and retain title to the Expansion
Land. In such event, Landlord shall, simultaneously with such sale of the Land
and the Demised Premises, grant and deliver to the purchaser or transferee an
exclusive, irrevocable option to acquire the Expansion Land at a purchase price
equal to the Expansion Land Value and otherwise upon such terms as will enable
the Landlord from time to time to carry out its obligations under this Lease
with respect to the Expansion Land ("Expansion Land Option"). After a sale and
conveyance of the Demised Premises to a third party, Industrial Development
International, Inc. ("IDI") shall not, except as hereinafter provided, sell,
transfer or convey the Expansion Land to any person or entity other than the
owner of the Demised Premises; IDI shall have the right to transfer or convey
the Expansion Land to any entity which owns or controls IDI, which is owned or
controlled by IDI or which is under common control with IDI (any such entity
being hereafter called an "IDI Affiliate"), and subsequently from one IDI
Affiliate to another. The Expansion Land Option shall run with the title to the
Land and shall not be assignable to any person other than the holder of the
Landlord interest under this Lease. The Expansion Land Option shall remain in
effect so long as the Expansion Option remains in effect. If, at the time Tenant
gives the Expansion Notice, the Expansion Land Option is then in effect,
Landlord shall, after written agreement by Landlord and Tenant regarding the
Preliminary Expansion Plans, the Expansion Construction Schedule and the
Expansion Costs, give such notices and take such action as may be necessary to
acquire,

                                    Page 13



pursuant to the Expansion Land Option, either the Expansion Land or the
Alternate Expansion Land, as may be required; Landlord shall exercise its
best efforts to carry out such acquisition in a manner which will enable
Landlord to achieve Substantial Completion of the Expansion Improvements in
accordance with the Expansion Construction Schedule.

         3.2 Extension of Expansion Option Term. So long as no Event of Default
(as defined in Section 23) has occurred and is then continuing, Tenant shall
have the right to extend the Expansion Option Term through and including the
last day of the fourth (4th) Lease Year by giving written notice to Landlord not
later than the last day of the third (3rd) Lease Year and by paying to Landlord,
with such written notice, a non-refundable fee in the amount of $51,500.00
(which shall be fully earned by Landlord when received and shall not constitute
a credit against either Minimum Rent or Addtional Rent). If Tenant timely and
properly exericses its right to extend the Expansion Option Term for the fourth
(4th) Lease Year, and so long as no Event of Default has occurred and is then
continuing, Tenant shall have the right to extend the Expansion Option Term
through and including the last day of the fifth (5th) Lease Year by giving
written notice to Landlord not later than the last day of the fourth (4th) Lease
Year and by paying to Landlord, with such written notice, a non-refundable fee
in the amount of $51,500.00 (which shall be fully-earned by Landlord when
received and shall not constitute a credit against either Minimum Rent or
Addtional Rent). Tenant shall have not be entitled to exercise its right under
this Section 3.2 to extend the Expansion Option Term whenever an Event of
Default has occurred and is continuing.

         3.4 Conditions Precedent. Notwithstanding anything to the contrary in
Section 3.1, Tenant shall not have the right to exercise the Expansion Option
if, at the time Tenant desires to exercise such right, either (i) an Event of
Default has occurred and is continuing or (ii) the stockholder equity of Tenant
is less than $150,000,000.00 (U.S.) ("Minimum Net Worth"). At such time as
Tenant may give the Expansion Notice, Tenant must provide simultaneously such
audited financial statements or other finacial information as may be reasonably
required by Landlord to establish to the reasonable satisfaction of Landlord
that, as of the date on which the Expansion Notice is received by Landlord, the
stockholder equity of Tenant equals or exceeds the Minimum Net Worth. If Tenant
fails to provide the financial information required by this Section 3.4 or if
such financial information fails to establish to the reasonable satisfaction of
Landlord that the stockholder equity of Tenant then equals or exceeds the
Minimum Net Worth, the exercise by Tenant shall be void and of no force or
effect.

         3.5.     Renewal Option.

                                    Page 14



                  (a) Provided that no Event of Default has ccurred and is then
continuing, Tenant shall have the right and option to extend the Primary Term
(as it may have been extended for the Extension Term in accordance with Section
3.1) of this Lease for three (3) successive additional periods of five (5) years
each (the "First Renewal Term", the "Second Renewal Term" and the "Third Renewal
Term", respectively). The option for the First Renewal Term may be exercised by
Tenant by written notice given to Landlord not less than six (6) months prior to
the end of the Primary Term. The option for the Second Renewal Term may be
exercised by Tenant by written notice given to Landlord not less than six (6)
months prior to the end of the First Renewal Term; provided, however, that
unless Tenant timely exercises its option to extend the Primary Term for the
First Renewal Term, Tenant will have no right to exercise its option for the
Second Renewal Term or the Third Renewal Term. The option for the Third Renewal
Term may be exercised by Tenant by written notice given to Landlord not less
than six (6) months prior to the end of the Second Renewal Term; provided,
however, that unless Tenant timely exercises its option to extend the First
Renewal Term for the Second Renewal Term, Tenant wil have no right to exercise
its option for the Third Renewal Term. Subject to the terms of subsection (b) of
this Section 4, all of the terms and provisions of this Lease (excluding any
allowances provided by Landlord and excluding any construction obligation of
Landlord whatsoever, whether relating to the Base Building or the Expansion
Improvements) shall govern and be applicable to the First Renewal Term, the
Second Renewal Term and the Third Renewal Term in accordance with and subject to
all the provisions of this subsection (a). The First Renewal Term, the Second
Renewal Term and the Third Renewal Term are hereinafter sometimes referred to
collectively as the "Renewal Terms".

                  (b) Tenant shall pay to Landlord as Minimum Rent during the
First Renewal Term (herein, the "First Renewal Minimum Rent") in lawful money of
the United States commencing at the commencement of the First Renewal Term, a
per annum amount equal to the greater of (i) ninety-five percent (95%) of the
product obtained by multiplying the Building Square Footage (including the
Expansion Improvements, if applicable) times an amount equal to the Prevailing
Market Rate calculated in the manner set forth in Exhibit "D" attached to this
Lease and made a part hereof by this reference or (ii) the Minimum Rent for the
Demised Premises in effect as of the expiration of the Primary Term, payable in
equal monthly installments of one twelfth 1/12th of said sum, in advance,
without demand and, except as expressly provided to the contrary in this Lease,
without abatement, reduction, set-off or deduction, on the first day of each
calendar month during the First Renewal Term. If Tenant timely and properly
exercises its right to the extend the Term for the Second Renewal Term, Tenant
shall pay to Landlord as Minimum Rent during the Second Renewal Term (herein,
the "Second Renewal Minimum Rent") in lawful money of the United States
commencing

                                    Page 15



at the commencement of the Second Renewal Term, a per annum amount equal to
the greater of (i) ninety-five percent (95%) of the product obtained by
multiplying the Building Square Footage (including the Expansion
Improvements, if applicable) times an amount equal to the Prevailing Market
Rate or (ii) the Minimum Rent for the Demised Premises in effect as of the
expiration of the First Renewal Term, payable in equal monthly installments
of one twelfth 1/12th of said sum, in advance, without demand and, except as
expressly provided to the contrary in this Lease, without abatement,
reduction, set-off or deduction, on the first day of each calendar month
during the Second Renewal Term. If Tenant timely and properly exercises its
right to the extend the Term for the Third Renewal Term, Tenant shall pay to
Landlord as Minimum Rent during the Third Renewal Term (herein, the "Third
Renewal Minimum Rent") in lawful money of the United States commencing at the
commencement of the Third Renewal Term, a per annum amount equal to the
greater of (i) ninety-five percent (95%) of the product obtained by
multiplying the Building Square Footage (including the Expansion
Improvements, if applicable) times an amount equal to the Prevailing Market
Rate or (ii) the Minimum Rent for the Demised Premises in effect as of the
expiration of the Second Renewal Term, payable in equal monthly installments
of one twelfth 1/12th of said sum, in advance, without demand and, except as
expressly provided to the contrary in this Lease, without abatement,
reduction, set-off or deduction, on the first day of each calendar month
during the Third Renewal Term.

         (c) If Tenant timely exercises its right to the First Renewal Term and
makes the first payment of Base Rent due after commencement of the First Renewal
Term, Landlord will, at any time during the First Renewal Term, provide an
allowance of $45,000.00 ("Refurbishment Allowance"), which will be applied as an
automatic credit against the first installment of Base Rent due after the
commencement of the First Renewal Term. Landlord will have no obligation to
perform any work of any nature in connection with the Refurbishment Allowance.

                  4. Minimum Rent. Tenant shall pay to Landlord at the address
set forth in Section 1(k) as base rent for the Demised Premises, commencing on
the Minimum Rent Commencement Date and continuing throughout the Term in lawful
money of the United States the annual amount set forth in Section 1(c) payable
in equal monthly installments as set forth in Section 1(d) (the "Minimum Rent"),
payable in advance, without demand and, except as expressly provided to the
contrary in this Lease, without abatement, reduction, set-off or deduction, on
the first day of each calendar month during the Term. If the Minimum Rent
Commencement Date shall fall on a day other than the first day of a calendar
month, the Minimum Rent shall be apportioned pro rata on a per diem basis for
the period between such Minimum Rent Commencement Date and the first day of the
following calendar month and such apportioned

                                    Page 16



sum shall be paid on the Minimum Rent Commencement Date.

                  4.1 Allowance. Landlord is providing to Tenant an allowance in
the amount of $369,000.00 ("Maximum Construction Allowance") for the
installation of general office space and a shipping/receiving office at the
Demised Premises, generally as described on Exhibit E ("Allowance Work"), which
Allowance Work is part of the Landlord's Work (as defined in Section 18(b)). If
Tenant does not utilize the full Maximum Construction Allowance, the unused
portion ("Allowance Savings") may be applied by Tenant either to pay the cost of
Change Orders (as defined in Section 18(a)) requested by Tenant which increase
the cost of the Landlord's Work or as a credit against Base Rent which would
otherwise accrue in accordance with this Lease; provided, however, that the
Allowance Savings may never exceed $25,000.00. At any time after the occurrence
of Substantial Completion, Landlord and Tenant shall, within thirty (30) days
after receipt by Tenant of a written request from Landlord, execute and deliver
an amended and restated version of this Lease which will delete this Section 4.1
in its entirety and delete any other references in this Lease to this Section
4.1; such restated version of this Lease will not otherwise alter or modify any
provision of this Lease.

         5. Tenant's Right to Cease Operations. Notwithstanding any provision to
the contrary in this Lease, nothing herein shall be construed as an obligation
for Tenant to open or operate its business in the Demised Premises. Subject to
all the provisions of this Lease, Tenant shall determine in all instances its
methods and times of operation at the Demised Premises. Tenant shall have the
right to remove Tenant's personal property and cease operations at the Demised
Premises at any time and at Tenant's sole discretion. However, the right to
cease the operation of its business shall not affect Tenant's obligation to pay
all amounts due under this Lease and to perform all covenants and obligations
under this Lease. Landlord acknowledges that Tenant has notified Landlord that
Tenant would not enter into this Lease unless and until the rights contained in
this Section 5 were included and made a part of this Lease.

         6. Additional Rent. Any amounts required to be paid by Tenant under
this Lease (in addition to Minimum Rent) hereunder and any charges or expenses
incurred by Landlord on behalf of Tenant under the terms of this Lease,
including, without limitation, any expenses incurred for taxes, insurance,
maintenance, repairs, replacements and utilities which are the obligation of
Tenant hereunder, shall be considered additional rent (herein, "Additional
Rent") payable in the same manner and upon the same terms and conditions as
Minimum Rent reserved hereunder except as expressly set forth herein to the
contrary. Any failure on the part of Tenant to pay such Additional Rent when due
shall entitle Landlord to the remedies available to it for non-payment of
Minimum

                                    Page 17



Rent, including, without limitation, late charges and interest thereon at the
Interest Rate (as herein defined) pursuant to Section 32 hereof. Tenant's
obligations for payment of Additional Rent shall begin to accrue on the
Minimum Rent Commencement Date.

         7.       Use of Demised Premises.

                  (a) The Demised Premises shall be used for the Permitted Use
set forth in Section 1(i) and for no other purpose, except as hereinafter
provided to the contrary. If Tenant or any permitted assignee or subtenant
desires to use the Demised Premises for a Permitted Use other than the Primary
Use, Tenant shall submit to Landlord a written request setting forth in detail
the nature of the additional or altered Permitted Use proposed by Tenant or a
permitted or proposed assignee or subtenant. Landlord agrees that Landlord may
not unreasonably withhold, delay or condition its consent to the proposed
additional or altered Permitted Use, subject to the condition that the proposed
additional or altered Permitted Use must comply with the requirements and
conditions of Section 1(i) of this Lease. Landlord shall, within ten (10)
business days after receipt of the written notice from Tenant regarding a
proposed alteration of the Primary Use, give written notice to Tenant approving
or disapproving the proposal. A notice of approval may contain reasonable
conditions, based on the nature of the proposed use. If the written notice from
Landlord disapproves the proposed use, the reasons for such determination shall
be set forth in reasonable detail.

                  (b) Tenant will permit no liens to attach or exist against the
Demised Premises, if such liens are held by persons claiming through or under
Tenant. If any such lien is filed against the Demised Premises, Tenant shall
cause such lien to be discharged of record by payment or bonding within thirty
(30) calendar days after Tenant receives written notice from Landlord of the
existence of the lien. A written notice given by Landlord pursuant to this
subsection (b) may also constitute the written notice required by Section
23(a)(ii) so long as the notice expressly references both Sections of this
Lease. Tenant shall not commit any waste.

                  (c) The Demised Premises shall not be used for any illegal
purposes, and Tenant shall not cause any vibration, noise, odor, light or other
effect to occur within or around the Demised Premises that constitutes a
nuisance or trespass. Upon notice by Landlord to Tenant that any of the
aforesaid prohibited uses are occurring, Tenant agrees to promptly remove or
control the same.

                  (d) Tenant shall not in any way violate any law, ordinance or
any restrictive covenant affecting the Demised Premises as shown by and included
in the Permitted Encumbrances, including


                                    Page 18



specifically, but without limitation, the Protective Covenants (as defined in
Section 33), and shall not in any manner use the Demised Premises so as to
cause cancellation of, or impair coverage under the fire and extended
coverage insurance policy required pursuant to Section 8.

         8.       Insurance.

                  (a) Tenant covenants and agrees that from and after the date
of delivery of the Demised Premises from Landlord to Tenant, Tenant will carry
and maintain, at its sole cost and expense, the following types of insurance, in
the amounts specified and in the form hereinafter provided for:

                           (i)      Liability insurance in the commercial
general liability form covering the Demised Premises and Tenant's use thereof
against claims for personal injury or death, property damage and product
liability occurring upon, in or about the Demised Premises, such insurance to be
written on an occurrence basis (not a claims made basis), with combined single
limit primary coverage of not less than One Million Dollars ($1,000,000.00) and
umbrella coverage of not less than an additional Four Million Dollars
($4,000,000.00), for each policy year. The insurance coverage required under
this Section 8(a)(i) shall, in addition, extend to any liability of Tenant
arising out of the indemnities by Tenant in Section 11 and, if necessary, the
policy shall contain a contractual endorsement to that effect.

                           (ii)     (A)     insurance on the "All-Risk" or
equivalent form on a replacement cost basis against loss or damage to the
Building and all other improvements now or hereafter located on the Land
(including, without in any manner limiting the generality of the foregoing,
flood insurance if the Demised Premises are located in a flood hazard area),
exclusive of footings and foundation, having a deductible not greater than
Twenty-Five Thousand Dollars ($25,000.00); and in an amount sufficient to
prevent Landlord or Tenant from becoming a co-insurer of any loss, but in any
event in amounts not less than 100% of the actual replacement value of the
Building and such other improvements; provided, however, that whenever the
stockholder equity of Tenant equals or exceeds $100,000,000.00, as evidenced by
financial statements prepared and certified by independent public accountants
and delivered to Landlord, Tenant shall have the right to increase the
deductible to $250,000.00. Notwithstanding anything in this Section 8, Tenant
shall not be required to include, in any of the "All-Risk" insurance covering
the Building or any component thereof, any coverage against loss or damage
resulting from earthquake, unless such coverage is available without incremental
premium cost to Tenant or Landlord elects, at its option, to pay such
incremental cost.


                                 Page 19



                                    (B)     insurance on the "All-Risk" or
equivalent form against abatement or loss of rental by reason of the occurrences
covered by the insurance described in clause (A) above and by reason of any
utility service interruptions in an amount equal to Minimum Rent and all
Additional Rent for at least twelve (12) months following the occurrence of such
casualty;

                                    (C)     boiler and machinery insurance
covering losses to or from any steam boilers, pressure vessels or similar
apparatus requiring inspection under applicable state or municipal laws or
regulations which are located at the Demised Premises or on any other building
systems for which such coverage is available, in amounts determined by Tenant to
be appropriate or for such higher amounts as may at any time be reasonably
required by Landlord and having a deductible of not more than Twenty-Five
Thousand Dollars ($25,000.00)(provided, however, that whenever the stockholder
equity of Tenant equals or exceeds $100,000,000.00, as evidenced by financial
statements prepared and certified by independent public accountants and
delivered to Landlord, Tenant shall have the right to increase the deductible to
$250,000.00); coverage shall be on a broad form comprehensive basis, including
loss of income with a limit of coverage which is reasonably acceptable to
Landlord; and

                                    (D)     workmen's compensation and
employer's liability insurance to the extent required by the laws of the state
of Illinois.

                  (b) All policies of the insurance provided for in Section 8(a)
shall be issued in form acceptable to Landlord by insurance companies with a
rating of not less than "A," and financial size of not less than Class XII, in
the most current available "Best's Insurance Reports", and licensed to do
business in the state in which the Building is located. Tenant shall have the
right to increase the deductible amounts under the policies of insurance
required by Sections 8(a)(ii)(A) and (C) above, subject to the approval of
Landlord, such approval not to be unreasonably withheld; provided, however, that
Landlord shall be entitled to withhold such approval unless Tenant is able to
demonstrate that the requested increase in any such deductible is commercially
reasonable for improvements comparable to the Building. Each and every such
policy:

                           (i)      shall name Landlord as well as Landlord's
Mortgagee, as defined in Section 24, and any other party reasonably designated
by Landlord, as an additional insured. In addition, the coverage described in
Section 8(a)(ii) shall also name Landlord as "loss payee";

                           (ii)     shall be delivered to Landlord prior to


                                 Page 20



delivery of possession of the Demised Premises to Tenant and thereafter within
thirty (30) days prior to the expiration of each such policy, and, as often as
any such policy shall expire or terminate. Renewal or additional policies shall
be procured and maintained by Tenant in like manner and to like extent;

                           (iii)    shall contain a provision that the insurer
waives any right of subrogation against Landlord on account of any loss or
damage occasioned to Landlord, its property, the Demised Premises or its
contents arising from any risk covered by all risks fire and extended coverage
insurance of the type and amount required to be carried hereunder, provided that
such waiver does not invalidate such policies or prohibit recovery thereunder;

                           (iv)     shall contain a provision that the insurer
will give to Landlord and such other parties in interest at least ten (10) days
notice in writing in advance of any material change, cancellation, termination
or lapse, or the effective date of any reduction in the amounts of insurance;
and

                           (v)      shall be written as a primary policy which
does not contribute to and is not in excess of coverage which Landlord may
carry.

                  (c) Tenant shall, from and after the Lease Commencement Date,
carry and maintain, at its sole cost and expense, insurance on the "all-risk" or
equivalent form against loss or damage to the personal property of Tenant within
the Building including, without limitation, stored inventory, with companies,
amounts and terms of coverage reasonably deemed prudent by Tenant. Landlord
shall have no interest in or claim of any nature to the proceeds of any such
insurance. Any such policy of insurance covering personal property of Tenant
shall contain a provision that the insurer waives any right of subrogation
against Landlord. At the request of Landlord, Tenant shall provide Landlord with
a certificate of such insurance, issued by the carrier or its agent, setting
forth the terms of coverage. Tenant waives any claim against Landlord for damage
to the personal property of Tenant arising from negligence of Landlord only to
the extent such damage is covered by the insurance which Tenant is required to
maintain pursuant to this subsection (c).

                  (d) Any insurance provided for in Section 8(a) may be
maintained by means of a policy or policies of blanket insurance, covering
additional items or locations or insureds; provided, however, that:

                           (i)      Landlord and any other parties in interest
from time to time designated by Landlord to Tenant shall be named


                                 Page 21



as an additional insured thereunder as its interest may appear;

                           (ii)     the coverage afforded Landlord and any such
other parties in interest will not be reduced or diminished by reason of the use
of such blanket policy of insurance;

                           (iii)    any such policy or policies shall specify
therein the amount of the total insurance allocated to the Tenant's improvements
and property; and

                           (iv)     the requirements set forth in this Section 8
are otherwise satisfied.

                  (e) In the event that Tenant shall fail to carry and maintain
the insurance coverages set forth in this Section 8, Landlord may upon ten (10)
days written notice to Tenant (unless such coverages will lapse, in which event
no such notice shall be necessary) procure such policies of insurance and Tenant
shall promptly reimburse Landlord therefor; provided that no Event of Default
may occur until Landlord has given the written notice required by Section
23(a)(iv). A single written notice from Landlord may constitute the written
notice required by this subsection (e) and by Section 23(a)(iv) so long as the
notice expressly references both Sections.

                  (f) Each party may, at any time, but not more than one (1)
time in any three (3) year period, require a review of the insurance coverage
and limits of liability set forth in Section 8 to determine whether the coverage
and the limits are reasonable and adequate in the then existing circumstances.
The review shall be undertaken on a date and at a time set forth in a party's
notice requesting a review and shall be conducted at the Demised Premises. If
the parties are, after a review, unable to agree on either the coverage or the
limits, then the parties shall employ the Dispute Resolution Procedure (as
defined in Section 34) with insurance advisors having at least ten (10) years
experience in insurance for commercial and industrial properties serving as
Officials. In rendering the decision the Officials shall consider the
requirements of Section 8, the cost of the insurance to be obtained, inflation,
changes in condition, and the insurance then being carried by similar
light-industrial use developments in the area of the Project.

         9.       Utilities. Commencing on the Lease Commencement Date and
continuing through the remainder of the Term, Tenant shall be responsible for
maintaining the portion of the utility lines located between the Land
boundary line and the Building and shall promptly pay as billed to Tenant all
rents and charges for water and sewer services and all costs and charges for
gas, steam, electricity, fuel, light, power, telephone, heat and any other
utility or service used or consumed in


                                 Page 22



or servicing the Demised Premises and all other costs and expenses involved
in the care, management and use thereof to the extent charged by the
applicable utility companies. Landlord will cause separate meters to be
installed (to the extent not installed as of the Lease Date) at the Demised
Premises to measure usage by Tenant of water, electricity and natural gas. If
Tenant fails to pay any utility bills or charges, Landlord may, at its option
and upon reasonable notice to Tenant, pay the same and in such event, the
amount of such payment, together with interest thereon at the Interest Rate
as defined in Section 32 from the date of such payment by Landlord, will be
added to Tenant's next due payment, as Additional Rent.

         10.      Taxes and Other Impositions.

                  (a) Commencing on the Lease Commencement Date and continuing
through the remainder of the Term, Tenant shall be solely obligated to pay in
full all Real Estate Taxes and Other Impositions (as hereinafter defined) for
the Demised Premises, including the Building and the Land, which accrue during
the Term. Tenant acknowledges and agrees that Real Estate Taxes and other
Impositions are payable by Tenant on an accrual basis and, accordingly, Tenant
shall be liable for all Real Estate Taxes and Other Impositions which accrue
from and after the Lease Commencement Date and thereafter throughout the Term,
without regard for the date or dates on which installments of Real Estate Taxes
and Other Impositions may, in fact, be due. With respect to any Real Estate
Taxes or Impositions, Tenant shall have the right to file with or against the
authority imposing such tax or imposition a protest or challenge of the validity
of any such sum provided that (i) Tenant shall timely file and diligently pursue
to protest or challenge and keep Landlord apprised in writing of the status
thereof, and (ii) neither Landlord nor the Demised Premises will be subject to
levy or other legal action of any kind resulting from non-payment so long as
Tenant is pursuing the protest or challenge.

                  (b) The term "Real Estate Taxes and Other Impositions", as
used in this Lease shall mean all ad valorem taxes, water and sanitary taxes,
assessments, liens, licenses and permit fees or any other taxes imposed,
assessed or levied against the Land and the Demised Premises, and all other
charges, impositions or burdens of whatever kind and nature, whether or not
particularized by name, and whether general or special, ordinary or
extraordinary, foreseen or unforeseen, which at any time during the Term may be
created, assessed, confirmed, adjudged, imposed or charged upon or with respect
to the Demised Premises, the Land, or any improvements made thereto, or on any
part of the foregoing or any appurtenances thereto, or directly upon this Lease
or the rent payable hereunder or amounts payable by any subtenants or other
occupants of the Demised Premises, or upon this transaction or any documents to
which Tenant is a party or successor-in-interest, or against


                                 Page 23



Landlord because of Landlord's estate or interest herein, by any governmental
authority, or under any law, including among others, all rental, sales, use,
inventory or other similar taxes and any special tax bills and general,
special or other assessments and liens or charges made on local or general
improvements or any governmental or public power or authority whatsoever.

                  (c) Notwithstanding the foregoing, if any Real Estate Taxes or
Other imposition shall be created, levied, assessed, adjudged, imposed, charged
or become a lien with respect to a period of time which commences before the
Lease Commencement Date or ends after the expiration date of the Term (other
than an expiration date of the Term by reason of breach of any of the terms
hereof by Tenant), then Tenant shall only be required to pay that portion which
accrues during the Term. If Tenant is permitted to pay (by the assessing and
collecting authorities) and elects to pay any imposition in installments, Tenant
shall nevertheless pay any and all installments thereof which are due prior to
the expiration of the Term or sooner termination of the Term. Nothing contained
in this Lease shall require Tenant to pay any income or excess profits or taxes
assessed against Landlord, or any corporation, capital stock, franchise,estate,
single business, inheritance, succession or transfer taxes imposed upon
Landlord. Landlord agrees to deliver to Tenant copies of all notices of Real
Estate Other Taxes and impositions which Landlord receives.

                  (d) Tenant agrees to pay all Real Estate Taxes and Other
Impositions directly to the appropriate authority prior to the delinquency
thereof. Tenant acknowledges that ad valorem real property taxes for the Demised
Premises are payable in arrears. Accordingly, the property taxes (or a portion
thereof) which will accrue during the final Lease Year will not be payable until
a date after the end of the Term. During the final Lease Year of the Term,
Tenant shall, after receipt of prior written notice from Landlord making
specific reference to this Section 10(d), pay to Landlord, in addition to
making the payments which are due to the taxing authority during the Term, an
amount equal to 1/12th of the Real Estate Taxes and Other Impositions which will
accrue during such final Lease Year, but will not be due and payable until a
date after the end of the Term. Landlord shall estimate the amount of such
monthly installments, based on the most recent information officially available
from the relevant taxing authorities and shall give written notice to Tenant of
the amount of the required payment. Tenant acknowledges and agrees that the
installments payable pursuant to this Section 10(d) are in addition to the
Minimum Rent and Additional Rent otherwise required by this Lease. At such time
as the actual tax bill or bills (to the extent that the tax year or years
covered by such bill or bills are within the final Lease Year) become available
for the final Lease Year, Landlord shall send to Tenant copies of such bills. To
the extent, if any, that the amounts paid


                                 Page 24



to Landlord may be insufficient to pay such bill or bills, Tenant shall pay
any deficiency to Landlord within thirty (30) calendar days after receipt of
a copy of the tax bill from Landlord, establishing the amount of the
deficiency. After payment in full of the actual tax bill or bills for the tax
year or years covered by the final Lease Year, the amount, if any, by which
the estimated payments by Tenant exceed the actual taxes shall be refunded to
Tenant within thirty (30) calendar days after the date Landlord receives the
applicable tax bill. The provisions of this Section 10(d) shall survive
expiration of this Lease.

                  (e) Tenant shall furnish Landlord, within thirty (30) days
after receipt of a written request from Landlord, evidence of the payment of all
Real Estate Taxes and Other Impositions during the twelve (12) months preceding
recipt of the notice.

         11.      Maintenance and Repairs.

         (a) From and after the Lease Commencement Date and throughout the Term,
Tenant shall, at its own cost and expense, but subject to all of the obligations
of Landlord under Sections 11(b), 18(f) and 18(h) of this Lease, maintain the
Demised Premises, exterior and interior (but excluding maintenance and repair
which is the obligation of the Landlord under subsection (b) of this Section 11
and under Sections 18(f)), in good condition and repair, including, without
limitation, repair, maintenance and replacement (except as hereinafter provided
to the contrary with respect to certain replacement obligations of Landlord) of
the exterior walls (maintenance only, and not replacement, which is the
responsibility of Landlord under subsection (b) of this Section 11), the floor
(including both maintenance and replacement except as expressly provided to the
contrary in subsection (b) of this Section 11), floor coverings, non-load
bearing walls and columns of the Building and the interior of the Building,
including but not limited to the electrical systems, heating, air conditioning
and ventilation systems, plate glass, windows and doors, sprinkler and plumbing
systems (but only to the extent such systems serve only the Demised Premises).
Tenant shall maintain in full force and effect a service contract for the
heating, ventilation and air conditioning systems. Tenant's obligations to
repair and maintain the Demised Premises shall also include, without limitation,
repair, maintenance and replacement of all plumbing and sewage facilities within
and about the Demised Premises (including, specifically, but without limitation,
the portion of water and sewer lines between the boundary of the Land and
Building), fixtures, interior walls, floors, ceilings, windows, doors,
storefronts, plate glass, skylights, all electrical facilities and equipment
including, without limitation, lighting fixtures, lamps, fans and any exhaust
equipment and systems, electrical motors, and all other appliances and equipment
of every kind and nature located


                                 Page 25



in, upon or about the Demised Premises including, without limitation,
exterior lighting and fencing, and any sidewalks, parking areas and access
ways (including, without limitation, curbs and striping) upon the Demised
Premises and the landscaping and grounds surrounding the Building. All glass,
both interior and exterior, is at the sole risk of Tenant; and any broken
glass shall be promptly replaced at Tenant's expense by glass of like kind,
size and quality. Unless the same is caused solely by the negligence or
willful misconduct of Landlord or its agents, employees or contractors,
Landlord shall not be liable to Tenant or to any other person for any damage
occasioned by failure in any utility system or by the bursting or leaking of
any vessel or pipe in or about the Demised Premises, or for any damage
occasioned by water coming into the Demised Premises or arising from the acts
or neglects of occupants of adjacent property or the public.

                  (b) Landlord acknowledges and agrees that, during the Warranty
Period (as defined in Section 18(h), below), Landlord shall be responsible for
performing, and shall promptly perform, all repairs and maintenance of the
Landlord's Work (as defined in Section 18(b)), other than repairs and
maintenance required because of improper operation, misuse or negligence of
Tenant (or its employees, agents or contractors) or third parties other than
Landlord (or its employees, agents or contractors). Tenant acknowledges that
Landlord is not required, at the end of the Warranty Period, to have maintained
the Demised Premises in a "like-new" condition and that the Demised Premises
will, during the Warranty Period, be subject to normal wear and tear from use by
Tenant and that Landlord has no duty or responsiblilty with respect to such wear
and tear. Notwithstanding the expiration of the Warranty Period, Landlord, at
its own cost and expense, shall continue to be responsible throughout the Term
for, and shall promptly perform as necessary, all maintenance, repair and
replacement of the floor slab (but not floor coverings, which are the exclusive
responsibility of Tenant unless the damage is caused by Landlord or its agents,
employees or contractors or by a failure of Landlord to perform its obligations
under this Lease) to the extent that the need for such maintenance, repair or
replacement arises solely out of a failure of the floor slab to conform to the
Plans and Specifications or latent defects in the materials or workmanship used
or provided by Landlord in the original installation of the floor slab. After
the end of the Warranty Period, Landlord shall, at its own cost and expense,
remain responsible throughout the Term for the repair, maintenance and
replacement of the roof (and all components of the roof), foundation and
structural frame (including load-bearing walls) of the Building. After the end
of the Warranty Period, Landlord shall transfer and assign to Tenant, without
recourse (except for a warranty that there have been no previous assignments or
pledges of such warranties), all warranties held by Landlord which cover any
portion or component of the Demised Premises which must be maintained by Tenant
pursuant to


                                 Page 26



Section 11(a).

         12. Tenant's Personal Property; Indemnity.  All of Tenant's personal
property in the Demised Premises shall be and remain at Tenant's sole risk,
and Landlord shall not be liable for and Tenant hereby releases Landlord from
any and all liability for theft thereof or any damage thereto occasioned by
any acts or negligence of any third persons, or any act of God, except to the
extent caused by the acts or negligence of Landlord, its agents, employees
and contractors, or a failure of Landlord to perform its obligations under
this Lease. Tenant shall have the right at any time during the Term to remove
any and all personal property of Tenant from the Demised Premises. Each party
hereby agrees to indemnify, defend, protect and hold the other party harmless
from and against any and all losses, costs, liabilities, damages and
expenses, including, but not limited to, penalties, fines, reasonable
attorney's fees and costs actually incurred, but specifically excluding
consequential and indirect damages (collectively,"Claims"), to the extent
such Claims (i) are caused or result from the activities (including the
negligence or willful conduct) of the indemnifying party or its respective
agents, contractors or employees in or on the Demised Premises, Building or
Land, and (ii) are not insured (or required to be insured) by the indemnified
party pursuant to the provisions of this Lease; provided, however, that the
foregoing indemnity shall not extend to any Claims to the extent resulting
from the negligence or willful misconduct of the indemnified party. The
foregoing mutual indemnity is intended to be consistent with the waivers as
set forth in Section 8(e) of this Lease, pursuant to which (A) each party
has waived its respective rights against the other party to the extent any
losses, damages or other Claims are insured or required to be insured under
property damage policies by such party pursuant to the provisions of this
Lease, and (B) has agreed to cause such party's respective insurance carrier
to include a waiver of subrogation (to the extent obtainable) in their
respective property damage insurance policies. The foregoing indemnities, and
the waivers set forth in Section 8, are not intended to and shall not relieve
any insurance carrier of its obligations to provide insurance coverage
pursuant to insurance policies obtained pursuant to the provisions of this
Lease. The provisions of this Section 12 shall survive the expiration or
earlier termination of this Lease.

         13. Tenant's Fixtures. Tenant shall have the right to install in the
Demised Premises trade fixtures required by Tenant or used by it in its
business, and if installed by Tenant, to remove any or all such trade fixtures
from time to time during the Term and upon termination of this Lease; provided,
however, that Tenant shall repair and restore any damage or injury to the
Demised Premises (to the condition in which the Demised Premises existed prior
to such installation) caused by the installation and/or removal of any such
trade fixtures.


                                 Page 27




         14.   Signs. Tenant shall have the right to install interior and
exterior signs at the Demised Premises which comply with Governmental
Requirements and the Protective Covenants Any and all permitted signs shall
be installed, maintained and, upon expiration or termination of the Term,
removed by Tenant, at Tenant's sole expense.

         15.   [INTENTIONALLY OMITTED]

         16.   Governmental Regulations. From and after the Commencement Date,
Tenant shall, at Tenant's sole cost and expense, promptly comply (so long as
compliance is required (i) solely as a result of the specific use being made by
Tenant of the Demised Premises, as distinguished from a requirement applicable
to any warehouse-distribution building comparable to the Building irrespective
of the use thereof by any particular occupant, (ii) with respect to the Base
Building, solely as a result of construction of the Expansion Improvements or
(iii) with respect to the Base Building and, if applicable, the Expansion
Improvements, solely as a result of the installation or construction of any
"Tenant Change", as defined in Section 19) with all applicable Governmental
Requirements, and notices, orders, rules and regulations of the National Board
of Fire Underwriters, or any other body now or hereafter constituted exercising
similar functions, relating to all or any part of the Demised Premises. Without
limiting the generality of the foregoing, Tenant shall keep in force at all
times all licenses, consents and permits necessary for the lawful use of the
Demised Premises by Tenant. Tenant shall likewise observe and comply with the
requirements of all policies of public liability, fire and other policies of
insurance at any time in force with respect to the Demised Premises pursuant to
Section 8. Landlord shall, during the Primary Term, promptly comply at
Landlord's expense with Governmental Requirements which relate to all or any
part of the Demised Premises and which are applicable to any
warehouse-distribution building comparable to the Building irrespective of the
specific use thereof by any particular occupant. If Tenant exercises its right
under Section 3.5 to extend the Primary Term, Tenant will, from and after the
end of the Primary Term, be responsible for and shall perform, at the expense of
Tenant, the duties and obligations which were the responsibility of Landlord
during the Primary Term under the preceding sentence of this Section 16;
provided that Landlord shall, in all events, retain full and complete
responsibility under this Section 16 with respect to the components of the
Demised Premises which must be maintained by Landlord at its expense pursuant to
Section 11(b) after the end of the Warranty Period. Anything in this Section 16
to the contrary notwithstanding, Landlord shall, throughout the Term, be
responsible at its sole, cost and expense for compliance with Governmental
Requirements affecting the Demised Premises to the extent that the Demised
Premises did not comply with such Governmental Requirements at the time of


                                 Page 28



Substantial Completion (hereinafter be referred to as "Landlord Exclusive
Compliance Obligations"). Each of Landlord and Tenant shall have the right to
challenge the applicability or validity of any Governmental Requirement which
gives rise to a duty or obligation under this Section 16, subject to the
conditions that the party instituting such action shall maintain the challenge
diligently and continuously and that the challenge will prevent the imposition
of any fine, penalty or other sanction on the other party or, with respect to
challenges pursued by the Landlord, the closure of any portion of the Demised
Premises; provided, however, that, with respect to any fine, penalty or sanction
which involves only payment of a sum of money, the challenging party shall have
the right to provide a bond or other security reasonably acceptable to the other
party in the event of actual imposition of the fine, penalty or sanction.

         17.      Environmental Matters.

                  (a)      For purposes of this Lease:

                           (i)      "Contamination" as used herein means the
uncontained or uncontrolled presence of or release of Hazardous Substances (as
hereinafter defined) into any environmental media from, upon, within, below,
into or on any portion of the Demised Premises, the Building, or the Project so
as to require remediation, cleanup or investigation under any applicable
Environmental Law (as hereinafter defined).

                           (ii)     "Environmental Laws" as used herein means
all federal, state, and local laws, regulations, orders, permits, ordinances or
other requirements, concerning protection of human health, safety and the
environment, all as may be amended from time to time.

                           (iii)    "Hazardous Substances" as used herein means
any hazardous or toxic substance, material, chemical, pollutant, contaminant or
waste as those terms are defined by any applicable Environmental Laws
(including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. 9601 et seq. ("CERCLA") and the
Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. ["RCRA"]) and any
solid wastes, polychlorinated biphenyls, urea formaldehyde, asbestos,
radioactive materials, radon, explosives, petroleum products and oil.

                           (iv)     "Third Party Contamination" means
Contamination of the the Demised Premises which is caused by or arises out of
the acts or omissions of any person other than (i) Landlord or Tenant, (ii)
their respective employees, agents or contractors or (iii) subtenants or
assignees of the interest of Tenant under this Lease.


                                 Page 29



                  (b) Landlord represents that, except as set forth in
environmental reports delivered by Landlord to Tenant (i) Landlord has not
treated, stored or disposed of any Hazardous Substances upon or within the
Demised Premises, (ii) to Landlord's actual knowledge, without inquiry or
investigation, no Hazardous Substances are present on or under the Land as of
the date of this Lease, except as may be set forth in the environmental reports
described on Exhibit "E" attached to this Lease, copies of which have been
delivered to Tenant prior to the Lease Date, (iii) all activities of Landlord in
constructing the Landlord's Work pursuant to Section 17 of this Lease will be
conducted in compliance with Environmental Laws, (iv) Landlord has received no
written notices of any violation of Environmental laws pertaining to the Land or
the Building, and (v) Landlord will not treat, store or dispose of any Hazardous
Substances upon or within the Demised Premises in connection with the
construction of the Landlord's Work, except such Hazardous Substances which are
routinely used in connection with such construction work or activities, but then
only in compliance with Environmental Laws.

                  (c) Tenant represents that all its activities on the Demised
Premises or the Project during the course of this Lease will be conducted in
compliance with Environmental Laws. Tenant represents that, with respect to its
activities affecting the Demised Premises, it is currently in compliance with
all applicable Environmental Laws and that there are no pending or threatened
notices of deficiency, notices of violation, orders, or judicial or
administrative actions involving alleged violations by Tenant of any
Environmental Laws which could affect the Demised Premises or the performance by
Tenant of its obligations under this Lease. Tenant, at Tenant's sole cost and
expense, shall be responsible for obtaining all permits or licenses or approvals
under Environmental Laws necessary for Tenant's operation of its business on the
Demised Premises and shall make all notifications and registrations required by
any applicable Environmental Laws. Tenant, at Tenant's sole cost and expense,
shall at all times comply with the terms and conditions of all such permits,
licenses, approvals, notifications and registrations and with any other
applicable Environmental Laws affecting in any way the Demised Premises. Tenant
represents and agrees that it will obtain all such permits, licenses or
approvals and make all such notifications and registrations required by any
applicable Environmental Laws necessary for Tenant's operation of its business
on the Demised Premises.

                  (d) Tenant shall not cause or knowingly permit any Hazardous
Substances to be brought upon, kept, stored or used in or about the Demised
Premises, the Building, or the Project without the prior written consent of
Landlord, which consent may be granted or withheld in the absolute discretion of
Landlord; provided, however, that the


                                 Page 30



consent of Landlord shall not be required for the use at the Demised Premises
of (i) cleaning supplies, toner for photocopying machines and other similar
materials, in containers and quantities reasonably necessary for and
consistent with normal and ordinary use by Tenant, at the Demised Premises,
in the routine operation or maintenance of Tenant's office equipment or in
the routine janitorial service, cleaning and maintenance for the Demised
Premises and (ii) Hazardous Substances which are components of the products
associated with the Primary Use, e.g. (but not by way of limitation) pet
shampoos and flea treatments; provided that such products will be stored and
distributed in and from the Demised Premises only in bottles and other
containers which are filled at locations other than the Demised Premises.

                  (e) Tenant shall not cause or knowingly permit the release of
any Hazardous Substances by Tenant or its agents, contractors or employees into
any environmental media such as air, water or land, or into or on the Demised
Premises, the Building or the Project in any manner that violates any
Environmental Laws. If such release shall occur, Tenant shall (i) take all steps
reasonably necessary to contain and control such release and any associated
Contamination, (ii) clean up or otherwise remedy such release and any associated
Contamination to the extent required by, and take any and all other actions
required under, applicable Environmental Laws and (iii) notify and keep Landlord
reasonably informed of such release and response.

                  (f) Regardless of any consents granted by Landlord pursuant to
Section 17(d) allowing Hazardous Substances upon the Demised Premises, Tenant
shall under no circumstances whatsoever (i) cause or knowingly permit any
activity on the Demised Premises which would cause the Demised Premises to
become subject to regulation as a hazardous waste treatment, storage or disposal
facility under RCRA or the regulations promulgated thereunder; (ii) discharge
Hazardous Substances into the storm sewer system serving the Project; or (iii)
install any underground storage tank or underground piping on or under the
Demised Premises.

                  (g) Tenant shall and hereby does indemnify Landlord and hold
and defend Landlord harmless from and against any and all reasonable and actual
expense, loss, and liability suffered by Landlord (but excluding indirect or
consequential damages and excluding expenses, losses, and liabilities arising
from Landlord's own negligence or willful act), by reason of Tenant's storage,
generation, handling, treatment, transportation, disposal, or arrangement for
transportation or disposal, of any Hazardous Substances (whether accidental,
intentional, or negligent) or by reason of Tenant's breach of any of the
provisions of this Section 17. Such expenses, losses and liabilities shall
include, without limitation, (i) any and all reasonable expenses that Landlord
may incur to comply with any Environmental Laws as a result of


                                 Page 31



Tenant's failure to comply therewith; (ii) any and all reasonable costs that
Landlord may actually incur in studying or remedying any Contamination at or
arising from the Demised Premises as a result of a failure by Tenant to
comply with this Section 17 or Environmental Laws; (iii) any and all costs
that Landlord may incur in studying, removing, disposing or otherwise
addressing any Hazardous Substances which are present at the Demised Premises
as a result of a failure by Tenant to comply with this Section 17 or
Environmental Laws; (iv) any and all fines, penalties or other sanctions
assessed upon Landlord by reason of Tenant's failure to comply with
Environmental Laws; and (v) any and all reasonable legal and professional
fees and costs incurred by Landlord in connection with the foregoing.
Notwithstanding the foregoing, Tenant shall have the right and obligation to
undertake and perform all such studying, remedying, removing, disposing or
otherwise addressing any Hazardous Substances which are the responsibility of
Tenant under this subsection (g), and Landlord shall not perform such acts
unless Tenant has failed or refused to perform such acts within thirty (30)
calendar days after receipt of written notice from Landlord; provided that if
the condition requiring action by Tenant cannot be corrected or remediated
within such thirty (30) day period, Landlord shall not be entitled to act so
long as Tenant commences the required action within said thirty (30) day
period and thereafter diligently pursues such action to completion within a
reasonable time. The indemnity contained herein shall survive the termination
or expiration of this Lease.

                  (h) Landlord shall have the right, but not the obligation, to
enter the Demised Premises at reasonable times throughout the Term, after prior
written notice to Tenant, to audit and inspect the Demised Premises for Tenant's
compliance with this Section 17.

                  (i) Landlord hereby agrees to indemnify Tenant and hold Tenant
harmless from and against any and all reasonable and actual expense, loss and
liability suffered by Tenant (but excluding indirect or consequential damages
and excluding expenses, losses, and liabilities arising from Tenant's own
negligence or willful act) as a result of Landlord's breach of Section 17(b), or
by reason of storage, generation, handling, treatment, transportation or
disposal or arrangement for transportation or disposal of any Hazardous
Substances upon or within the Demised Premises by Landlord, its agents,
employees or contractors. For purposes of such indemnity, Tenant's permissible
expenses shall include only (A) any and all reasonable expenses which Tenant may
actually incur to comply with any Environmental Laws, (B) any and all reasonable
expenses which Tenant may actually incur in studying or remedying any
Contamination, (C) any and all reasonable costs which Tenant may actually incur
in studying, removing, disposing at the Demised Premises or otherwise addressing
any Hazardous Substances at the Demised Premises, (D) any and all fines,
penalties or other sanctions


                                 Page 32



assessed upon Tenant, and (E) any and all reasonable legal and reasonable
professional expenses which Tenant may actually incur in connection with the
foregoing. Notwithstanding the foregoing, Landlord shall have the right and
obligation to undertake and perform all such studying, remedying, removing,
disposing or otherwise addressing any Hazardous Substances which are the
responsibility of Landlord under this subsection (i), and Tenant shall not
perform such acts unless (x) Tenant is specifically required by Environmental
Laws to perform such acts, and (y) Landlord has failed or refused to perform
such acts within thirty (30) calendar daysafter receipt of written notice
from Tenant; provided that if the condition requiring action by Landlord
cannot be corrected or remediated within such thirty (30) day period, Tenant
shall not be entitled to act so long as Landlord commences the required
action within said thirty (30) day period and thereafter diligently pursues
such action to completion within a reasonable time. In addition to the
foregoing indemnity, if, as a result of Third Party Contamination, (1) Tenant
vacates the Demised Premises pursuant to subsection (j), below, and (2) a
federal, state or local governmental authority files suit against Landlord
and obtains a final judgment holding Landlord liable for the cost of
remediating the Third Party Contamination which caused Tenant to vacate,
Landlord shall and hereby does indemnify Tenant and hold and defend Tenant
harmless from and against (i) any and all reasonable out-of-pocket moving
expenses which Tenant actually incurred in relocating the business conducted
at the Demised Premises to another facility in the Chicago, Illinois
metropolitan area (but no consequential or indirect costs or damages of any
kind) and (ii) the unamortized value of the Tenant's Work, as calculated on a
straight-line basis over the Primary Term. After Substantial Completion,
Tenant shall, within thirty (30) calendar days after receipt of a written
request from Landlord, provide Landlord reasonable written evidence of the
original cost of the Tenant's Work (which may not include any cost for items
of movable personal property).The indemnities contained herein shall survive
the termination or expiration of this Lease.

                  (j) If Contamination not caused by Tenant is found to exist
in, on or under the Demised Premises and such Contamination actually prevents
(by virtue of the application or enforcement of applicable Environmental Laws by
a governmental authority or a demonstrable hazard to human health) Tenant from
occupying any material part of the Demised Premises for the conduct of Tenant's
normal business operations for a period of thirty (30) or more continuous
calendar days, then Tenant shall have the right to terminate this Lease by
giving written notice to Landlord; if such written notice is properly given,
this Lease shall terminate on the later to occur of the date on which Tenant
gives the written notice or actually vacates the Demised Premises. Unless the
Contamination is the result of facts or circumstances which constitute a breach
by Landlord of or material inaccuracy in the representations,


                                 Page 33



warranties and covenants of Landlord contained in subsection (b) of this
Section 17 or is otherwise within the scope of Landlord's indemnities of
Tenant in Section 17(i), above, the foregoing right to terminate this Lease
shall be the sole and exclusive remedy of Tenant with respect to the
existence of such Contamination. If the Contamination results from a breach
or material inaccuracy of the representations, warranties and covenants by
Landlord in subsection (b) of this Section 17 or is otherwise within the
scope of Landlord's indemnities of Tenant in Section 17(i), above, nothing
contained in this subsection (j) is intended to limit or impair the right of
Tenant to demand performance by Landlord of its indemnity and other
obligations under subsection (i) of this Section 17.

         18.      Plans and Specifications for Construction of Demised Premises.

                  (a) Tenant hereby approves the plans and specifications for
the base Building described on Exhibit G attached hereto and incorporated herein
by this reference ("Base Building Plans and Specifications"). Within thirty (30)
days after the Lease Date, Landlord shall prepare, at Landlord's sole cost and
expense, and submit to Tenant a set of plans and specifications and/or
construction drawings for the office improvements in the Building (collectively,
the "Additional Plans and Specifications") based on the preliminary plans and
specifications and/or preliminary floor plans set forth on Exhibit G-1 attached
hereto and incorporated herein, covering certain work to be performed by
Landlord in completing the Building and constructing interior improvements for
the Demised Premises. Tenant shall have ten (10) business days to approve the
proposed Additional Plans and Specifications. A failure of any proposed plans or
specifications to conform to Exhibit G-1 shall be a proper basis for
disapproval. Any subsequent changes to the Additional Plans and Specifications
requested by Tenant shall be at Tenant's sole cost and expense and subject to
Landlord's written approval. Any change in the Additional Plans and
Specifications initiated by a party other than Tenant shall be undertaken at the
expense of a party other than Tenant. Tenant shall have no right or power to
request or require any changes in the Base Building Plans and Specifications.
Landlord shall have the right to make substitutions for materials called for in
the Base Building Plans and Specifications without Tenant's written consent, so
long as any substituted materials have a quality equal to or higher than the
quality specified in the Base Building Plans and Specifications. Tenant shall
have the right to propose or request changes in the Additional Plans and
Specifications subject to Landlord's written approval which approval shall not
be unreasonably with held or delayed (herein referred to as a "Change Order");
provided that Tenant shall have no right to request any change which would
materially alter the scope of Landlord's Work, alter the exterior appearance of
the Building or result in


                                 Page 34



a delay in the occurrence of Substantial Completion. The cost to Tenant for
Change Orders shall be Landlord's cost plus ten percent (10%) of such amount
as Landlord's overhead.

                  (b) Landlord shall, at its sole cost and expense perform the
work contemplated by the Additional Plans and Specifications, and in accordance
with the terms and conditions of this Lease ("Landlord's Work"). Landlord shall
make no changes to the Additional Plans and Specifications without Tenant's
written consent, with the exception of immaterial details which will not affect
Tenant's use and occupancy of the Building. Landlord shall have the Additional
Plans and Specifications sealed by the Architect, obtain all required building
permits, certificates and licenses and thereafter, in accordance with all
applicable law and insurance requirements, perform Landlord's Work in a diligent
and good and workmanlike manner, subject to Permitted Delay and Tenant Delay (as
those terms are defined below).

                  (c) Landlord shall use reasonable speed and diligence to
achieve Substantial Completion, at Landlord's sole cost and expense, on or
before April 7, 1998, provided that, except for certain liquidated damages
hereinafter described, Landlord shall not be liable to Tenant in any way for
achieving Substantial Completion after such target date. In the event Landlord
fails to achieve Substantial Completion by April 7, 1998, as extended by
Permitted Delay, then, in such event, this Lease shall remain in full force and
effect and Tenant shall be entitled to the following:

(i) If Substantial Completion is achieved after April 7, 1998, as such date may
be extended by Permitted Delay, but not later than April 14, 1998, as such date
may be extended by Permitted Delay, Landlord shall pay to Tenant liquidated
damages, for late delivery, in the amount of $1125.00 per day for each calendar
day after April 7, 1998, through and including April 14, 1998, as extended by
Permitted Delay, that Substantial Completion is not achieved, payable to Tenant
in the form of a credit against Base Rent; and

(ii) If Substantial Completion is achieved on or after April 15, 1998, as such
date may be extended by Permitted Delay, Landlord shall pay to Tenant liquidated
damages, for late delivery, in the amount of $5,000.00 per day for each calendar
day after April 14, 1998, to but not including the date that Substantial
Completion is actually achieved, as those dates may be extended by Permitted
Delay, payable to Tenant in the form of a credit against Base Rent.

                  (d) Landlord acknowledges that Tenant desires to obtain access
to the Demised Premises prior to the occurrence of Substantial Completion for
the purpose of performing the work described on Exhibit "G-2" (collectively, the
"Tenant's Work"). Landlord shall exercise


                                 Page 35



a good faith effort to achieve, thirty (30) calendar days prior to
Substantial Completion, a level of completion of the Landlord's Work which
will allow the Tenant lawful access to the Demised Premises for the purpose
of performing Tenant's Work ("Partial Completion"). Landlord shall likewise
endeavor in good faith to give to Tenant reasonable prior notice of the
anticipated date of Partial Completion. Tenant shall have the right, upon the
occurrence of Partial Completion, to enter the Demised Premises in order to
perform the Tenant's Work. Prior to commencement of installation of Tenant's
Work, Tenant shall submit to Landlord reasonably detailed plans and
specifications for Tenant's Work, which shall be subject to the approval of
Landlord, not to be unreasonably withheld, delayed or conditioned. Landlord
shall have no liability for a failure to achieve Partial Completion by the
date specified in this subsection (d). In connection with entry by Tenant
after Partial Completion, (i) Tenant shall not interfere with Landlord's
completion of the Landlord's Work, provided that Landlord shall use
reasonable efforts to accommodate Tenant's Work, (ii) Tenant shall not begin
operation of its business or store any inventory or other personal propety in
the Demised Premises and (iii) Tenant shall enter the Demised Premises at its
sole risk, whether from personal injury, property damage, theft or otherwise.

                  (e)      The Substantial Completion target date of April 7,
l998, shall be extended for one (1) day for each day that Substantial
Completion is delayed:

                           (i)      solely as a result of the failure by Tenant
to timely approve or disapprove the Plans and Specifications, or as a result of
Change Orders or other changes requested by Tenant in the Additional Plans and
Specifications after the Tenant's approval thereof (collectively referred to
herein as "Tenant Delay"); or

                           (ii)     due to strikes or other labor troubles not
specific to the Demised Premises, governmental moratoria, war or other national
emergency, non-availability of materials or supplies, delay in transportation,
accidents, floods, fire, damage or other casualties, weather or acts or
omissions of Tenant, all beyond the reasonable control of Landlord (collectively
referred to herein as "Permitted Delay"). The inability or refusal of Landlord
to make any monetary payment shall not constitute or result in an Permitted
Delay. Any extension of time for Permitted Delay will be allowed only if the
party claiming the extension gives written notice to the other party of the
facts or circumstances which gave rise to the claim within ten (10) business
days after the occurrence of the event or circumstance.

                  (f)      On or prior to the date of Substantial Completion
of the Demised Premises, a representative of Landlord and a representative of
Tenant together shall inspect the Demised Premises and,


                                 Page 36



within fifteen (15) days thereafter, generate a punchlist of defective or
uncompleted items relating to the completion of construction of the
improvements within the Demised Premises, which punchlist shall indicate the
estimation by the parties of the cost of each item. Landlord shall, within a
reasonable time after such punchlist is prepared and agreed upon by Landlord
and Tenant, complete such incomplete work and remedy such defective work as
are set forth on the punchlist.

                  (g)      Upon the Lease Commencement Date, Tenant shall
execute and deliver to Landlord a letter confirming the Lease Commencement
Date and expiration date of this Lease.

                  (h)      Landlord hereby warrants to Tenant that the
materials and equipment furnished by Landlord's contractors in the completion
of Landlord's Work will be of good quality and new, that during the one (1)
year period following the date of Substantial Completion of Landlord's Work
("Warranty Period"), such materials and equipment and the work of such
contractors shall be free from defects not inherent in the quality required
or permitted hereunder, and that such work will conform to the Plans and
Specifications (the foregoing referred to herein as "Landlord's Warranty").
This warranty shall exclude damages or defects to the extent caused by abuse
by Tenant, its employees, invitees, licensees, contractors and agents,
improper or insufficient maintenance, improper operation, or normal wear and
tear under normal usage.

                  (i)      For purposes of this Lease, the term "Substantial
Completion" or any grammatical variation thereof shall mean sufficient
completion of construction of the Demised Premises in accordance with the Plans
(as defined in Section 18), so that Tenant can lawfully occupy the Demised
Premises, as evidenced by the delivery by Landlord to Tenant of a Certificate of
Occupancy or its equivalent (or Temporary Certificate of Occupancy or its
equivalent) for the Building issued by the appropriate governmental authority if
so required by applicable law. Tenant acknowledges that (i) because of weather
conditions at the time of Substantial Completion, the landscaping for the
Demised Premises will not be installed and a portion of the parking, dock and
trailer areas will not be paved, and (ii) the absence of landscaping and the
existence of the unpaved areas will not prevent the occurrence of Substantial
Completion. Landlord will cover the unpaved areas with gravel in a manner which
will permit use thereof by Tenant as of the time of Substantial Completion of
the Building. Landlord will cause the landscaping and paving to be completed in
accordance with the Plans and Specifications as soon as (1) weather permits and
(2) asphalt plants in the area reopen in the spring. In the event completion to
such extent is delayed because of Tenant Delay, as defined herein, then
Substantial Completion shall be deemed to mean the date when the Demised
Premises would have been completed to such extent but for such


                                 Page 37



Tenant Delay, as determined by Philip Prince & Associates ("Architect").
In the event Tenant shall dispute the determination of such date by the
Architect, the parties shall utilize the Dispute Resolution Procedure as
defined in Section 34, with Qualified Architects serving as Officials. For
purposes of this Lease, the Architect shall be deemed a "Qualified Architect"
for Landlord. Tenant shall be entitled to designate its "Qualified Architect"
at any time by written notice to Landlord.

                  (j)      Within thirty (30) calendar days after the Lease
Commencement Date, Tenant shall execute and deliver to Landlord a letter of
acceptance confirming that the Lease Commencement Date and Expiration Date
remain as set forth in Section 1, or if revised pursuant to the terms hereof,
setting forth such dates as so revised. Within thirty (30) calendar days after
Substantial Completion, Landlord shall deliver to Tenant a written
certification of an architect, duly licensed as such under the laws of the
State of Illinois, of the square footage contained in the Building, based on a
"drip-line" measurement from the outside of the exterior walls of the Building.
The square footage so certified by such architect shall determine the Building
Square Footage for all purposes under this Lease, including, without
limitation, calculation of Annual Minimum Rent, Monthly Minimum Rent
Installments and the amount of the Purchase Price. The Annual Minimum Rent and
Monthly Minimum Rent Installments shall be adjusted on the basis of the square
footage of the Building so certified by such architect, using the following
amount for calculation:

                  Lease Year one (1)        $2.89 per square foot

                  Lease Year two (2)        $2.94 per square foot

                  Lease Years three (3)
                  through five (5)          $2.99 per square foot

                  Lease Years six (6)
                  and seven (7)             $3.41 per square foot

Tenant shall have the right to accompany the Architect when the measurements are
being made. If Tenant is not reasonably satisfied with said measurements, Tenant
shall have the right to require a second set of measurements pursuant to the
Dispute Resolution Procedure (as defined in Section 34).

                  18.2     Landlord Warranties. In connection with the
performance by Landlord of its obligations under this Section 18, Landlord
hereby represents and warrants to Tenant as follows:

                  (a)      Landlord is the owner of the Demised Premises,


                                  Page 38


subject to the Permitted Encumbrances;

                  (b)      The Building, including the Landlord's Work, will,
upon achieving Substantial Completion, comply with all applicable Governmental
Requirements;

                  (c)      As of the Lease Date, the Primary Use is lawful under
all applicable Governmental Requirements and is permissible under the Protective
Covenants; and

                  (d)      As of the Lease Date, no default has occurred and is
continuing under the Protective Covenants with respect to the Demised Premises
(and no event has occurred which, with the passage of time or the giving of
notice, or both, would become a default) and Landlord has received no notice
(and has no actual knowledge) of any violation by the Demised Premises of any
Governmental Requirements.

         19.      Tenant Alterations and Additions.

                  (a)      Any alteration, improvement, or addition to the
Demised Premises performed by Tenant pursuant to this Section 19 is hereinafter
referred to as a "Tenant Change". Subject to compliance with the provisions of
this Section 19, Tenant shall, so long as Tenant maintains the Minimum Net
Worth, have the right to undertake Tenant Changes without the prior consent of
Landlord, but subject to compliance with all the provisions of this Section 19,
if, and only if, (i) the Tenant Change affects only the interior of the Demised
Premises, (ii) the Tenant Change does not affect the roof or any structural
element of the Demised Premises and (iii) the Tenant Change does not alter any
of the utility systems of the Building; provided, however, that, not less than
ten (10) calendar days prior to commencing the performance of any Tenant Change
which Tenant has determined does not require the prior consent of Landlord,
Tenant shall give Landlord prior written notice of the intended Tenant Change,
which notice must describe the nature of the work to be perfomed with
sufficient detail to enable Landlord to determine that the requirements of this
Section 19 have been satisfied. Tenant shall not make or permit to be made any
other Tenant Change without first obtaining on each occasion Landlord's prior
written consent (which consent Landlord agrees not unreasonably to withhold)
and Mortgagee's prior written consent (if such consent is required). With
respect to any such Tenant Change requiring Landlord's prior written consent,
Tenant shall furnish Landlord with a full set of plans and specifications for
any such Tenant Change prior to the commencement thereof together with an
original builder's risk policy of insurance in form and amount of coverage
reasonably acceptable to Landlord, showing Tenant as named insured, and
Landlord and Mortgagee (if applicable) as loss payees. If Landlord, at the time
of giving its approval to any Tenant Change, notifies Tenant that approval is
conditioned


                                  Page 39



upon restoration, then upon written request of Landlord, Tenant shall, at its
sole cost and expense and upon the termination of this Lease, remove the same
and restore the Demised Premises to its condition prior to such Tenant Change,
ordinary wear and tear excepted. Any Tenant Change not requiring the consent of
Landlord and which is performed or undertaken by Tenant must, absent written
agreement by Landlord to the contrary, be fully removed from the Demised
Premises prior to the end of the Term and the Demised Premises must be restored
to its condition prior to such Tenant Change, ordinary wear and tear excepted.
The term "Tenant Change", as used in this Lease, does not include either the
Allowance Work or the Tenant's Work.

                  (b)      All Tenant Changes shall be performed in accordance
with all legal requirements applicable thereto and in a good and workmanlike
manner with materials having a quality not lower than the quality of materials
used in the Building and, upon completion of any Tenant Change, Tenant shall
furnish to Landlord "as-built" drawings showing the location and type thereof.
No Tenant Change shall impair the structural strength of the Building or reduce
its value, Tenant shall take or cause to be taken all steps that are required
or permitted by law in order to avoid the imposition of any materialmen's or
mechanics' liens upon the Building or the Demised Premises, and Tenant shall
pay the full cost of any Tenant Change.If, but only if, the stockholder equity
of Tenant is less than the Minimum Net Worth, Landlord shall have the right to
require from Tenant, as a condition of granting its consent, reasonable
security, such as payment and performance bonds, to insure payment of the cost
of the requested Tenant Change. Subject to the obligation of Tenant to remove
Tenant Changes in the manner described above in this Section 19, Tenant Changes
shall immediately upon completion or installation thereof be and become part of
the Demised Premises and the property of Landlord without payment therefor by
Landlord and shall be surrendered to Landlord upon the expiration or earlier
termination of the Term. With respect to any Tenant Change, whether or not
requiring Landlord's prior consent, Landlord shall have no duty or obligation
to make any replacement or repair thereto, whether interior or exterior,
structural or non-structural, ordinary or extraordinary or as required to
comply with any law.

         20.      Services by Landlord. From and after the Lease Commencement
Date, Landlord shall be responsible for providing no services to the Demised
Premises whatsoever, except for the services for which Landlord is specifically
obligated pursuant to Section 11(b) and Sections 18(f) and (h).

         21.      Fire and Other Casualty.

                  (a)      If the Building or other improvements on the Land
shall be damaged or destroyed by fire or other casualty, Tenant, at


                                  Page 40



Tenant's sole cost and expense, shall promptly and diligently proceed to adjust
the loss with the insurance companies (subject to the approval of the Mortgagee
(if applicable) and of Landlord, not to be unreasonably withheld, delayed or
conditioned) and arrange for the disbursement of insurance proceeds, and
repair, rebuild or replace such Building and other improvements, so as to
restore the Demised Premises to the condition in which they were immediately
prior to such damage or destruction. The net proceeds of any insurance
recovered by reason of such damage or destruction in excess of the cost of
adjusting the insurance claim and collecting the insurance proceeds (such
excess being referred to herein as the "Net Insurance Proceeds") shall be held
by the Mortgagee (provided that such Mortgagee is a bank, savings association,
insurance company or other similar institutional lender; herein called
"Institutional Lender"), or, if no Institutional Lender then holds a mortgage
lien, or deed of trust on the Demised Premises, by any national or state
chartered bank which is reasonably acceptable to Landlord and Tenant; and the
Net Insurance Proceeds shall be released for the purpose of paying the fair and
reasonable cost of restoring such Building and other improvements. Such Net
Insurance Proceeds shall be released to Tenant, or to Tenant's contractors,
from time to time as the work progresses, pursuant to such requirements and
limitations as may be reasonably acceptable to Landlord and Mortgagee (if the
Mortgagee so requires), including, without limitation, lien waivers from each
of the contractors, subcontractors, materialmen and suppliers performing the
work. If the Net Insurance Proceeds (less any applicable deductible) are
insufficient to restore the Demised Premises, Tenant shall be obligated to pay
such deficiency and the amount of any such deductible. Notwithstanding the
foregoing, if the Net Insurance Proceeds are less than Twenty-Five Thousand
Dollars ($25,000.00)(which amount will automatically be increased to
$250,000.00 whenever the stockholder equity of Tenant equals or exceeds the
Minimum Net Worth), and if the Mortgagee agrees in writing, such Net Insurance
Proceeds may be held by Tenant and used by Tenant to pay the fair and
reasonable cost of restoring such Demised Premises and other improvements. If
the Net Insurance Proceeds exceed the full cost of the repair, rebuilding or
replacement of the damaged Building or other improvements, if the Mortgagee
does not retain such excess proceeds and apply the same on account of the debt
owed to it, then the amount of such excess Net Insurance Proceeds shall be paid
to Tenant upon the completion of such repair, rebuilding or replacement.
Landlord agrees not unreasonably to withhold or delay any approvals required to
be obtained by Tenant from Landlord pursuant to the provisions of this Section
21(a).

                  (b)      Whenever Tenant shall be required to carry out any
work or repair and restoration pursuant to this Section 21, Tenant, prior to
the commencement of such work, shall deliver to Landlord for Landlord's prior
approval (which shall not be unreasonably withheld


                                  Page 41



or delayed) a full set of the plans and specifications therefor, together with
a copy of all approvals and permits which shall be required from any
governmental authority having jurisdiction. After completion of any major
repair or restoration, Tenant shall, as soon as reasonably possible, obtain and
deliver to Landlord a Certificate of Substantial Completion from the inspecting
architect and a permanent Certificate of Occupancy (or amended Certificate of
Occupancy), if required by applicable laws, issued by the appropriate authority
with respect to the use of the Demised Premises, as thus repaired and restored.
Any such work or repair and restoration, in all cases, shall be carried out by
Tenant in a good and workmanlike manner with materials at least equal in
quality to the original materials used therefor prior to the damage or
destruction. If, after a default by Tenant, Landlord shall carry out any such
work or repair and restoration pursuant to the provisions of this Section 21,
then Landlord shall be entitled to withdraw monies held for application to the
costs of such work from time to time as such costs are incurred.

         22.      Condemnation.

                  (a)      If all of the Demised Premises is taken or condemned
for a public or quasi-public use, this Lease shall terminate as of the earlier
of the date title to the condemned real estate vests in the condemnor and the
date on which Tenant is deprived of possession of all of the Demised Premises.
In such event, the Minimum Rent herein reserved and all Additional Rent and
other sums payable hereunder shall be apportioned and paid in full by Tenant to
Landlord to that date, all Minimum Rent, Additional Rent and other sums payable
hereunder prepaid for periods beyond that date shall forthwith be repaid by
Landlord to Tenant, and neither party shall thereafter have any liability
hereunder, except that any obligation or liability of either party, actual or
contingent, under this Lease which has accrued on or prior to such termination
date shall survive.

                  (b)      In the event of a taking of "Substantially All of
the Demised Premises" (as herein defined), Tenant may, at its option, upon
thirty (30) days' written notice to Landlord, which shall be given no later
than sixty (60) days following the taking, have the right to terminate this
Lease. All Minimum Rent and other sums payable by Tenant hereunder shall be
apportioned and paid through and including the date of taking, and neither
Landlord nor Tenant shall have any rights in any compensation or damages
payable to the other in connection with such condemnation. For purposes of this
provision, "Substantially All of the Demised Premises" shall mean (i) so much
of the Demised Premises as, when taken, leaves the untaken portion unsuitable,
in the reasonable opinion of Tenant and Landlord, for the continued feasible
and economic operation of the Demised Premises by Tenant for the same purposes
as immediately prior to such taking or as contemplated herein,


                                  Page 42



or (ii) so many of the parking spaces on the Land as reduces the parking ratio
below that which is required by the zoning ordinance applicable to the Project,
and Landlord's failure to provide substantially similar alternative parking
reasonably acceptable to Tenant within sixty (60) days after such taking, or
(iii) so much of the Demised Premises that access to the Demised Premises is
materially impeded, as reasonably determined by Landlord and Tenant.

                  (c)      If only part of the Demised Premises is taken or
condemned for a public or quasi-public use and this Lease does not terminate
pursuant to Section 22(b) above, Tenant shall restore, using all reasonable
speed and diligence, the Demised Premises to a condition and to a size as
nearly comparable as reasonably possible to the condition and size thereof
immediately prior to the taking and Landlord, to the extent of the award it
receives in excess of the costs of collecting the award and value of the Land
taken (herein, the "Net Condemnation Proceeds"), shall release the Net
Condemnation Proceeds to Tenant for that purpose and Tenant shall have the
right to participate in any proceeding relating to the awarding of restoration
damages. Tenant shall not be required to expend more than the Net Condemnation
Proceeds disbursed by Landlord in connection with such restoration. There shall
be an equitable abatement of the Minimum Rent and Additional Rent according to
the loss of use of the Demised Premises after the taking. Determination of such
value of the Demised Premises after a partial taking shall be mutually agreed
to by the parties within sixty (60) days from the date of the taking and if the
parties can not so agree, then such value shall be determined in accordance
with the Dispute Resolution Procedure (as defined in Section 34), with real
estate appraisers having at lease ten (10) years experience appraising
commercial real estate, including build-to-suit leases, serving as Officials.
Pending such determination, Tenant shall continue to pay the Minimum Rent and
Additional Rent as herein originally specified, and upon such determination, if
Tenant is entitled to a refund because of an overpayment of Minimum Rent or
Additional Rent, Landlord shall make the same promptly, or in lieu thereof
credit the amount thereof to future installments of Minimum Rent or Additional
Rent as they become due.

                  (d)      Landlord shall be entitled to receive the entire
award in any proceeding with respect to any taking provided for in this Section
22, without deduction therefrom for any estate vested in Tenant by this Lease,
and Tenant shall receive no part of such award. Nothing herein contained shall
be deemed to prohibit Tenant from making a separate claim, against the
condemnor, to the extent permitted by law, for the value of the unamortized
tenant improvements (installed in accordance with Section 19 at Tenant's
expense), Tenant's moveable trade fixtures, machinery and moving expenses,
provided that, in any case, the making of such claim shall not and does not
adversely affect or diminish Landlord's award.


                                  Page 43



         23.      Tenant's Default.

                  (a)      The occurrence of any one or more of the following
events shall constitute an event of default (herein referred to as an "Event of
Default") of Tenant under this Lease:

                           (i)      if Tenant fails to pay Minimum Rent or any
Additional Rent hereunder as and when such rent becomes due and such failure
shall continue for more than ten (10) days after receipt of written notice from
Landlord of such failure;

                           (ii)     if Tenant permits to be done anything which
creates a lien upon the Demised Premises and fails either (A) to discharge or
bond such lien or (B) to post security with Landlord reasonably acceptable to
Landlord within thirty (30) calendar days after Landlord gives Tenant written
notice of such failure;

                           (iii)    if Tenant violates the provisions of Section
30 of this Lease by making an unpermitted assignment or sublease;

                           (iv)     if Tenant fails to maintain in force all
policies of insurance required by this Lease and such failure shall continue for
more than ten (10) calendar days after Landlord gives Tenant written notice of
such failure;

                           (v)      if any petition is filed by or against
Tenant or any guarantor of this Lease under any present or future section or
chapter of the Bankruptcy Code, or under any similar law or statute of the
United States or any state thereof (which, in the case of an involuntary
proceeding, is not permanently discharged, dismissed, stayed, or vacated, as the
case may be, within sixty (60) days of commencement), or if any order for relief
shall be entered against Tenant or any guarantor of this Lease in any such
proceedings;

                           (vi)     if Tenant or any guarantor of this Lease
becomes insolvent or makes a transfer in fraud of creditors or makes an
assignment for the benefit of creditors;

                           (vii)    if a receiver, custodian, or trustee is
appointed for the Demised Premises or for all or substantially all of the assets
of Tenant or of any guarantor of this Lease, which appointment is not vacated
within sixty (60) days following the date of such appointment; or

                           (viii)   if Tenant fails to perform or observe any
other term of this Lease and such failure shall continue for more


                                  Page 44



than thirty (30) days after Landlord gives Tenant notice of such failure, or,
if such failure cannot be corrected within such thirty (30) day period, if
Tenant does not commence to correct such default within said thirty (30) day
period and thereafter diligently prosecute the correction of same to completion
within a reasonable time and in any event prior to the time a failure to
complete such correction could cause Landlord to be subject to prosecution for
violation of any law, rule, ordinance or regulation or causes, or could cause a
default under any mortgage or other Permitted Encumbrance.

                  (b)      Upon the occurrence of any one or more of the
aforesaid Events of Default, or upon the occurrence of any other default or
defaults by Tenant under this Lease, Landlord may, at Landlord's option,
without any demand or notice whatsoever (except as expressly required in this
Section 23):

                           (i)      Terminate this Lease by giving Tenant notice
of termination, in which event this Lease shall expire and terminate on the date
specified in such notice of termination with the same force and effect as though
the date so specified were the date herein originally fixed as the termination
date of the Term, and all rights of Tenant under this Lease and in and to the
Demised Premises shall expire and terminate and Tenant shall remain liable for
all obligations under this Lease arising up to the date of such termination, and
Tenant shall surrender the Demised Premises to Landlord on the date specified in
such notice, and if Tenant fails to so surrender Landlord shall have the right,
without notice, to enter upon and take possession of the Demised Premises and to
expel or remove Tenant and its effects without being liable for prosecution or
any claim for damages therefor; or

                           (ii)     Terminate this Lease as provided in Section
23(b)(i) hereof and recover from Tenant all damages Landlord may incur by reason
of Tenant's default, including, without limitation, a sum which, at the date of
such termination, represents the value of the excess, if any, of (1) the Minimum
Rent, Additional Rent and all other sums which would have been payable hereunder
by Tenant for the period commencing with the day following the date of such
termination and ending with the expiration date had this Lease not been
terminated, over (2) the aggregate reasonable rental value of the Demised
Premises for the period commencing with the day following the date of such
termination and ending with the expiration date had this Lease not been
terminated, plus (3) the costs of recovering possession of the Demised Premises
and all other out-of-pocket expenses actually incurred by Landlord due to
Tenant's default, including, without limitation, reasonable attorney's fees,
plus (4) the unpaid Minimum Rent and Additional Rent earned as of the date of
termination plus any interest and late fees due hereunder, plus other sums of
money and damages owing on the date


                                  Page 45



of termination by Tenant to Landlord under this Lease or in connection with the
Demised Premises, all of which excess sum shall be deemed immediately due and
payable; provided, however, that such payments shall not be deemed a penalty
but shall merely constitute payment of liquidated damages, it being understood
and acknowledged by Landlord and Tenant that actual damages to Landlord are
extremely difficult, if not impossible, to ascertain. The excess, if any, of
subparagraph (ii)(1) over subparagraph (ii)(2) herein shall be discounted to
present value at the "Treasury Yield" rate. "Treasury Yield" shall mean the
rate of return in percent per annum of Treasury Constant Maturities for the
length of time specified as published in document H.15(519) (presently
published by the Board of Governors of the U.S. Federal Reserve System titled
"Federal Reserve Statistical Release") for the calendar week immediately
preceding the calendar week in which the termination occurs. If the rate of
return of Treasury Constant Maturities for the calendar week in question is not
published on or before the business day preceding the date of the Treasury
Yield in question is to become effective, then the Treasury Yield shall be
based upon the rate of return of Treasury Constant Maturities for the length of
time specified for the most recent calendar week for which such publication has
occurred. If no rate of return for Treasury Constant Maturities is published
for the specific length of time specified, the Treasury Yield for such length
of time shall be the weighted average of the rates of return of Treasury
Constant Maturities most nearly corresponding to the length of the applicable
period specified. If the publishing of the rate of return of Treasury Constant
Maturities is ever discontinued, then the Treasury Yield shall be based upon
the index which is published by the Board of Governors of the U.S. Federal
Reserve System in replacement thereof or, if no such replacement index is
published, the index which, in Landlord's reasonable determination, most nearly
corresponds to the rate of return of Treasury Constant Maturities. In
determining the aggregate reasonable rental value pursuant to subparagraph
(ii)(2) above, the parties hereby agree that, at the time Landlord seeks to
enforce this remedy, all relevant factors should be considered, including, but
not limited to, (a) the length of time remaining in the Term, (b) the then
current market conditions in the general area in which the Building is located,
(c) the likelihood of reletting the Demised Premises for a period of time equal
to the remainder of the Term, (d) the net effective rental rates then being
obtained by landlords for similar type space of similar size in similar type
buildings in the general area in which the Building is located, (e) the vacancy
levels in the general area in which the Building is located, (f) current levels
of new construction that will be completed during the remainder of the Term and
how this construction will likely affect vacancy rates and rental rates and (g)
inflation; or

                           (iii)    Without terminating this Lease, and with


                                  Page 46



or without notice to Tenant, Landlord may in its own name but as agent for
Tenant enter into and upon and take possession of the Demised Premises or any
part thereof, and, at Landlord's option, remove persons and property therefrom
and such property, if any, may be removed and stored in a warehouse or
elsewhere at the cost of, and for the account of Tenant, all without being
deemed guilty of trespass or becoming liable for any loss or damage which may
be occasioned thereby, and Landlord may rent the Demised Premises or any
portion thereof as the agent of Tenant with or without advertisement, and by
private negotiations and for any term upon such terms and conditions as
Landlord may deem necessary or desirable in order to relet the Demised
Premises. Landlord shall in no way be responsible or liable for any failure to
rent the Demised Premises or any part thereof, or for any failure to collect
any rent due upon such reletting. Upon each such reletting, all rentals
received by Landlord from such reletting shall be applied: first, to the
payment of any indebtedness (other than any rent due hereunder) from Tenant to
Landlord; second, to the payment of any costs and expenses of such reletting,
including, without limitation, brokerage fees and attorney's fees and costs of
alterations and repairs; third, to the payment of rent and other charges then
due and unpaid hereunder; and the residue, if any, shall be held by Landlord to
the extent of and for application in payment of future rent, if any becomes
owing, as the same may become due and payable hereunder. In reletting the
Demised Premises as aforesaid, Landlord may grant rent concessions and Tenant
shall not be credited therefor. If such rentals received from such reletting
shall at any time or from time to time be less than sufficient to pay to
Landlord the entire sums then due from Tenant hereunder, Tenant shall pay any
such deficiency to Landlord. Such deficiency shall, at Landlord's option, be
calculated and paid monthly. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to terminate this Lease
for any such previous default provided same has not been cured; or

                           (iv)     Without terminating this Lease, and with or
without notice to Tenant, Landlord may enter into and upon the Demised Premises
and without being liable for prosecution or any claim for damages therefor,
maintain the Demised Premises and repair or replace any damage thereto or do
anything or make any payment for which Tenant is responsible hereunder. Tenant
shall reimburse Landlord immediately upon demand for any expenses which Landlord
incurs in thus effecting Tenant's compliance under this Lease, and Landlord
shall not be liable to Tenant for any damages with respect thereto; or

                           (v)      Allow the Demised Premises to remain
unoccupied and collect rent from Tenant as it comes due; provided that nothing
contained in this Lease will relieve Landlord of its obligation under the laws
of the state of Illinois to mitigate its damages arising from any Event of
Default; or


                                  Page 47



                           (vi)     Pursue such other remedies as are available
at law or in equity.

                  (c)      If this Lease shall terminate as a result of or
while there exists a default hereunder, any funds of Tenant held by Landlord
may be applied by Landlord to any damages payable by Tenant (whether provided
for herein or by law) as a result of such termination or default.

                  (d)      Neither the commencement of any action or
proceeding, nor the settlement thereof, nor entry of judgment thereon shall bar
Landlord from bringing subsequent actions or proceedings from time to time, nor
shall the failure to include in any action or proceeding any sum or sums then
due be a bar to the maintenance of any subsequent actions or proceedings for
the recovery of such sum or sums so omitted.

                  (e)      If any statute or rule of law shall limit any of
Landlord's remedies as hereinabove set forth, Landlord shall nonetheless be
entitled to any and all other remedies hereinabove set forth.

                  (f)      No agreement to accept a surrender of the Demised
Premises and no act or omission by Landlord or Landlord's agents during the
Term shall constitute an acceptance or surrender of the Demised Premises unless
made in writing and signed by Landlord. No re-entry or taking possession of the
Demised Premises by Landlord shall constitute an election by Landlord to
terminate this Lease unless a written notice of such intention is given to
Tenant.

                  (g)      No provision of this Lease shall be deemed to have
been waived by either party unless such waiver is in writing and signed by the
party making such waiver. Landlord's acceptance of Minimum Rent or Additional
Rent following an Event of Default hereunder shall not be construed as a waiver
of such Event of Default. No custom or practice which may grow up between the
parties in connection with the terms of this Lease shall be construed to waive
or lessen either party's right to insist upon strict performance of the terms
of this Lease, without a written notice thereof the other party.

                  (h)      The rights granted to Landlord in this Section 23
shall be cumulative of every other right or remedy provided in this Lease or
which Landlord may otherwise have at law or in equity or by statute, and the
exercise of one or more rights or remedies shall not prejudice or impair the
concurrent or subsequent exercise of other rights or remedies or constitute a
forfeiture or waiver of Minimum Rent, Additional Rent or damages accruing to
Landlord by reason of any Event of Default. If an Event of Default shall occur,
Tenant shall pay to


                                  Page 48



Landlord, on demand, all reasonable expenses actually incurred by Landlord as a
result thereof, including reasonable attorneys' fees, court costs and expenses.
Other than in connection with a claim arising from the negligence, intentional
misconduct or other wrongful act of Landlord, its employees, agents or
representatives, if Landlord shall be made a party to any litigation commenced
against Tenant solely as a result of Landlord's ownership of the Demised
Premises or the relationship of Landlord and Tenant arising by virtue of this
Lease, Tenant shall pay all costs and reasonable attorneys' fees incurred by
Landlord in connection with such litigation.

                  23.1     Landlord Default. If Landlord fails to perform or
observe or otherwise breaches any term of this Lease and such failure shall
continue for more than thirty (30) days after Tenant gives Landlord written
notice of such failure, or, if such failure does not arise out of a failure by
Landlord to pay a sum of money and cannot reasonably be corrected within such
30-day period, if Landlord does not commence to correct such default within
such 30-day period and thereafter diligently prosecute the correction of same
to completion within a reasonable time, a "Landlord Event of Default" shall
exist under this Lease; provided that if a condition exists by virtue of a
failure of Landlord to perform an obligation of Landlord under this Lease which
interferes in a material manner with the use and occupancy by Tenant of the
Demised Premises and such interference continues for thirty (30) days after the
required written notice to Landlord, a Landlord Event of Default will exist
notwithstanding that Landlord may still be pursuing corrective efforts at the
end of such 30-day period. Upon the occurrence of a Landlord Event of Default,
Tenant may at Tenant's option, cure the Landlord Event of Default and the
actual cost of such cure shall be payable by Landlord to Tenant within thirty
(30) calendar days after written demand and shall bear interest at the Interest
Rate from the date paid by Tenant until repayment in full by Landlord occurs;
provided, however, that if a failure by Landlord to perform or observe any term
of this Lease gives rise to circumstances or conditions which constitute an
emergency threatening human health or safety or substantial damage to the
Demised Premises or Tenant's personal property, or materially impeding the
conduct of the business of Tenant at the Demised Premises, Tenant shall be
entitled to take immediate curative action (prior to the expiration of any
notice and cure period set forth above) to the extent necessary to eliminate
the emergency. If Landlord does not pay to Tenant the amount of such cost and
accrued interest, upon written demand, Tenant may set off such cost against
installments of Base Rent or other amounts due Landlord under this Lease. Such
cost must be reasonably incurred and must not exceed the scope of the Landlord
Event of Default in question; and if such costs are chargeable as a result of
labor or materials provided directly by Tenant, rather than by unrelated third
parties, the costs shall not exceed the amount which would have been charged by
a


                                  Page 49



qualified third party unrelated to Tenant. The quality of all work performed
by Tenant must equal or exceed the quality of Landlord's Work. Such costs must
be reasonably documented and copies of such documentation must be delivered to
Landlord with the written demand for reimbursement. Tenant shall be permitted
to continue to set off against succeeding installments of Base Rent or other
amounts due Landlord under this Lease until the total amount of such cost
actually incurred by Tenant has been recovered by Tenant. Once Tenant has fully
set off all of such cost, Landlord shall no longer be deemed to be in default
under this Lease with respect to the Landlord Event of Default that was the
subject of the set off. Nothing contained in this Section 23.1 shall create or
imply the existence of any obligation by Tenant to cure any Landlord Event of
Default.

         24.      Landlord's Right of Entry. Tenant agrees to permit Landlord
and the authorized representatives of Landlord and of the Mortgagee to enter
upon the Demised Premises at all reasonable times for the purposes of
inspecting them and making any necessary repairs thereto and performing any
work therein that may be necessary by reason of Tenant's failure to make such
repairs or perform any such work required of Tenant under this Lease; provided
that, except in the case of an emergency, Landlord shall give the Tenant
reasonable prior written notice not less than two (2) days in advance of
Landlord's intended entry upon the Demised Premises. Nothing herein shall imply
any duty upon the part of Landlord to do any such work, and the performance
thereof by Landlord shall not constitute a waiver of Tenant's default in
failing to perform it. Landlord shall not be liable for inconvenience,
annoyance, disturbance or other damage to Tenant by reason of making such
repairs or the performance of such work in the Demised Premises or on account
of bringing materials, supplies and equipment into or through the Demised
Premises during the course thereof, and the obligations of Tenant under this
Lease shall not thereby be affected; provided, however, that Landlord shall use
reasonable efforts not to annoy, disturb or otherwise interfere with Tenant's
operations in the Demised Premises in making such repairs or performing such
work. Landlord also shall have the right to enter the Demised Premises at all
reasonable times, upon not less than 48 hours prior notice to Tenant (which may
be given by telephone), to exhibit the Demised Premises to any prospective
purchaser or mortgagee or, during the last six months of the Term, prospective
tenant.

         25.      Mortgagee's Rights.

                  (a)      Landlord represents and warrants that no Mortgage
encumbers or will encumber the Demised Premises as of the Lease Commencement
Date. Subject to all the provisions of this Section 25, this Lease may be either
superior or subordinate to any "Mortgage". The term "Mortgage", as used in this
Lease, shall mean any and all mortgages,


                                  Page 50



deeds to secure debt, deeds of trust, or other instruments creating a lien or
conveying a security title at any time and from time to time, granted by
Landlord and affecting or encumbering the title of Landlord to the Demised
Premises or this Lease. The term "Mortgagee" refers to the holder of the
Mortgage. Landlord shall have no right to grant to any Mortgagee in any
Mortgage any rights which, if exercised, would violate the obligations of
Landlord or the rights of Tenant under this Lease.

                  (b)      Unless this Lease is subordinated to a Mortgage
pursuant to subsection (c), below, this Lease shall be superior to such
Mortgage. If the Lease is superior, any person or entity acquiring title to the
Demised Premises by virtue of foreclosure of a Mortgage would automatically be
subject to this Lease, and bound by the obligations of the Landlord, arising
under this Lease from and after the date of foreclosure and for so long as such
person or entity holds title, without execution of any form of non-disturbance
agreement. Upon the request by any Mortgagee, Tenant shall execute and deliver
a written instrument, in a form reasonably to Tenant and acceptable for
recording in the real estate records of DuPage County, Illinois, recognizing
that this Lease is superior to the Mortgage held by the requesting Mortgagee
and that, upon foreclosure of or exercise of the power of sale contained in the
Mortgage, Tenant shall recognize and attorn to the purchaser at the foreclosure
sale as the Landlord under this Lease, subject to all the terms and provisions
of this Lease.

                  (c)      If a Mortgagee desires for this Lease to be
subordinate to its Mortgage, Tenant agrees that it shall subordinate this Lease
by execution and delivery of the Subordination, Non-Disturbance and Attornment
Agreement attached to this Lease as Exhibit "H" and by this reference made a
part hereof in recordable form; provided, however, that, to be effective, such
Agreement must be fully executed by all parties thereto and properly recorded
in the real estate records of Will County, Illinois. This Lease will not be
subordinate to any Mortgage except in the manner provided in this subsection
(c). Tenant shall have no duty whatsoever to consider any amendment of Exhibit
H which would affect in any way the rights of Tenant under Section 23.1.

         26.      Estoppel Certificate. Landlord and Tenant agree, at any time,
and from time to time, within fifteen (15) days after written request from the
other, to execute, acknowledge and deliver to the requesting party and/or its
designee a statement in writing in recordable form certifying that: (i) this
Lease is unmodified and in full force and effect (or, if there have been
modifications, that the same is in full force and effect, as modified) and (ii)
the dates to which Minimum Rent, Additional Rent and other charges have been
paid, (iii) whether or not, to the best knowledge of the signer of such
certificate, there exists any failure by the requesting party to perform any
term,


                                  Page 51



covenant or condition contained in this Lease, and, if so, specifying
each such failure of which the signer may have knowledge, (iv) (if such be the
case) the Tenant has unconditionally accepted the Demised Premises, (v) and as
to such additional matters as may be reasonably requested by Landlord, it being
intended that any such statement delivered pursuant hereto may be relied upon
by the requesting party (or its designee) and by any purchaser of title to the
Demised Premises or by any Mortgagee or any assignee thereof or any party to
any sale-leaseback of the Demised Premises, or the landlord under a ground
lease affecting the Demised Premises.

         27.      Landlord Liability. No owner of the Demised Premises, whether
or not named herein, shall have liability hereunder after it ceases to hold
title to the Demised Premises, except for obligations which may have
theretofore accrued. Neither Landlord nor any officer, director, shareholder,
partner or principal of Landlord, whether disclosed or undisclosed, shall be
under any personal liability with respect to any of the provisions of this
Lease, and if Landlord is in breach or default with respect to Landlord's
obligations or otherwise under this Lease, Tenant shall look solely to the
equity of Landlord in the Demised Premises and insurance and condemnation
proceeds arising from the Building and the Land which are actually received by
Landlord and not applied in accordance with this Lease for the satisfaction of
Tenant's remedies. It is expressly understood and agreed that Landlord's
liability under the terms, covenants, conditions, warranties and obligations of
this Lease shall in no event exceed the loss of Landlord's equity interest in
the Demised Premises (and such insurance and condemnation proceeds).

         28.      Notices and Payments. Any notice or payment required or
permitted to be given or served by either party to this Lease shall be deemed
given when made in writing and either (i) personally delivered, (ii) deposited
with the United States Postal Service, postage prepaid, to be mailed by
certified or registered mail, return receipt requested, or (iii) delivered by
overnight delivery service providing proof of delivery, properly addressed to
the address set forth in Section 1(j) (as the same may be changed by giving
written notice of the aforesaid in accordance with this Section 28); provided,
however, that the time period allowed for a response to any notice so given
shall not commence until the date of actual receipt of the notice. Refusal to
accept delivery or inability to deliver as a result of a change of address as
to which no notice was properly given shall be deemed receipt.

         29.      Brokers. Neither Landlord nor Tenant has engaged any brokers
who would be entitled to any commission or fee based on the execution of this
Lease, other than as set forth in Section 1(l) (the "Broker") who shall be paid
pursuant to separate agreement. Further, neither Landlord nor Tenant have had
any conversations or negotiations


                                  Page 52



with any broker except the Broker concerning the leasing of the Demised
Premises to Tenant. Landlord and Tenant hereby indemnify each other against and
from any claims for any brokerage commissions (except those payable to the
Broker, all of which are payable pursuant to a separate agreement) and all
costs, expenses and liabilities in connection therewith, including, without
limitation, reasonable attorneys' fees and expenses, for any breach of the
foregoing. The foregoing indemnification shall survive the expiration or
termination of the Lease for any reason.

         30.      Assignment and Subleasing.

(a)      Tenant may not assign, mortgage, pledge, encumber or otherwise
transfer this Lease, or any interest hereunder, or sublet the Demised Premises,
in whole or in part, without on each occasion first obtaining the prior express
written consent of Landlord, which consent shall not be unreasonably withheld
or conditioned. In making a determination to grant or withhold such consent,
Landlord shall be entitled to consider the creditworthiness of the proposed
assignee or sublessee, the nature of the use of the Demised Premises
contemplated by the proposed assignee or sublessee (to the extent such use
amends or alters the Permitted Use then in effect) and whether or not the
proposed use will materially increase wear and tear on the Demised Premises.
Landlord shall never be required to consent to any proposed use involving heavy
manufacturing or chemical processing. In addition, if the intended use by the
proposed assignee or sublessee involves in any way different amounts or types
of Hazardous Substances than the Hazardous Substances then being used or stored
by Tenant at the Demised Premises, in accordance with Section 17 of this Lease,
at the time of the proposed assignment or sublease, which different or
additional Hazardous Substances create, in the reasonable judgment of Landlord
a materially increased risk of Contamination at the Demised Premises, Landlord
shall be unconditionally entitled to withhold consent of the proposed
assignment or sublease in its absolute discretion. Permitted subtenants or
assignees shall become liable directly to Landlord for all obligations of
Tenant hereunder, without, however, relieving Tenant of any of its liability
hereunder; provided, however, that Landlord will allow Tenant to collect all
amounts payable by any permitted assignee or sublessee so long as no Event of
Default has occurred and is continuing. No such assignment, subletting,
occupancy or collection shall be deemed the acceptance of the assignee, tenant
or occupant, as Tenant, or a release of Tenant from the further performance by
Tenant of Tenant's obligations under this Lease.

(b)      Notwithstanding subsections (a), (c), (d), (e) or (g) of this Section
30, provided that no Event of Default has occurred and is then continuing,
Tenant shall have the right, without the consent of Landlord but upon thirty
(30) days prior written notice to Landlord, (i) to


                                  Page 53



sublet all or part of the Demised Premises to any entity which is controlled
by, under common control with, or which controls Tenant (any of such entities
being herein called a "Petco Affiliate"); or (ii) to assign this Lease (x) to a
Petco Affiliate or to (y) a successor corporation into which or with which
Tenant is merged or consolidated or which acquired substantially all of
Tenant's assets and property, provided that, with respect to an assignment
pursuant to (ii)(y), such successor corporation assumes substantially all of
the obligations and liabilities of Tenant and, after such merger, shall have
total assets and stockholder equity at least equal to the total assets and
stockholder equity of Tenant immediately prior to the merger, as determined by
generally accepted accounting principles. With respect to any assignment,
Tenant shall provide in its notice to Landlord such information as may be
reasonably required by Landlord to determine that the requirements of this
subsection (b) have been satisfied. The terms "controls", "controlled by" or
"under common control with", as used in this subsection (b), shall mean the
ownership of a direct or indirect majority interest.

(c)      If Tenant should desire to assign this Lease or sublet the Demised
Premises (or any part thereof), Tenant shall give Landlord written notice no
later than thirty (30) days in advance of the proposed effective date of any
proposed assignment or sublease, specifying (i) the name and business of the
proposed assignee or sublessee, (ii) a detailed description of the intended use
of the Demised Premises by the proposed assignee or sublessee, with particular
detail regarding any Hazardous Substances which will be used in any manner at
the Demised Premises; (iii) the amount and location of the space within the
Demised Premises proposed to be so subleased, (iv) the proposed effective date
and duration of the assignment or subletting, and (v) the proposed rent or
consideration to be paid to Tenant by such assignee or sublessee. Tenant shall
promptly supply Landlord with available financial statements and other
information related to the decision being made by Landlord as Landlord may
reasonably request to evaluate the proposed assignment or sublease.

(d)      Landlord shall have a period of fifteen (15) days following receipt of
such notice and other information requested by Landlord within which to notify
Tenant in writing that Landlord elects: (i) to permit Tenant to assign or
sublet such space; or (ii) to refuse to consent to Tenant's assignment or
subleasing of such space and to continue this Lease in full force and effect as
to the entire Demised Premises; any such refusal shall state with reasonable
specificity the reasons for the refusal. If Landlord should fail to notify
Tenant in writing of such election within the aforesaid fifteen (15) day
period, Landlord shall be deemed to have consented to such assignment or
sublease. Tenant agrees to reimburse Landlord for reasonable legal fees and any
other reasonable costs actually incurred by Landlord in connection with any


                                  Page 54



requested assignment or subletting, not to exceed $1000 in the aggregate for
any one assignment or subletting. Tenant shall deliver to Landlord copies of
all documents executed in connection with any permitted assignment or
subletting, which documents shall be in form and substance reasonably
satisfactory to Landlord and which shall require such assignee to assume
performance of all terms of this Lease on Tenant's part to be performed. No
acceptance by Landlord of any rent or any other sum of money from any assignee,
sublessee or other category of transferee shall be deemed to constitute
Landlord's consent to any assignment, sublease, or transfer.

(e)      Any attempted assignment or sublease by Tenant in violation of the
terms and provisions of this Section 30 shall be void and such act shall
constitute a material breach of this Lease. In no event shall any assignment,
subletting or transfer, whether or not with Landlord's consent, relieve Tenant
of its primary liability under this Lease for the entire Term, and Tenant shall
in no way be released from the full and complete performance of all the terms
hereof. If Landlord takes possession of the Demised Premises before the
expiration of the Term of this Lease, Landlord shall have the right, at its
option to take over any sublease of the Demised Premises or any portion thereof
and such subtenant shall attorn to Landlord, as its landlord, under all the
terms and obligations of such sublease occurring from and after such date, but
excluding previous acts, omissions, negligence or defaults of Tenant and any
repair or obligation in excess of available net insurance proceeds or
condemnation award.

(f)      Landlord shall have the right to sell, transfer, assign, pledge, and
convey all or any part of the Demised Premises and any and all of Landlord's
rights under this Lease; provided, however, that Landlord shall not be entitled
to exercise such right, whether by operation or law or otherwise, prior to the
Lease Commencement Date without the prior written consent of Tenant. In the
event Landlord assigns or otherwise conveys its rights under this Lease,
Landlord shall be entirely freed and released from any obligations accruing
thereafter under this Lease (provided such obligations are assumed in writing
by the purchaser or transferee), and Tenant agrees to look solely to Landlord's
successor in interest for performance of such obligations.

(g)      If Tenant transfers or assigns this Lease or sublets the Demised
Premises in whole or in part to any permitted assignee or sublessee, Landlord
shall be entitled to receive, as Additional Rent, fifty percent (50%) of any
"Rental Profit" (as hereinafter defined) received by Tenant. The term "Rental
Profit" shall mean the amount, calculated on a per square foot basis and not on
an aggregate or cumulative basis, by which (i) the total rental and other
consideration of any nature whatsoever and however characterized paid or
delivered to Tenant by an assignee of the interest of Tenant or sublessee of
all or any part of


                                  Page 55



the Demised Premises, for the purpose of compensating Tenant directly or
indirectly for the assignment or sublease, exceeds (ii) the Monthly Minimum
Rent Installments paid by Tenant to Landlord pursuant to this Lease; provided,
however, that Landlord shall not be entitled to receive any Rental Profit until
Tenant has received an amount of Rental Profit equal to the sum of (x) the
actual, out-of-pocket cost of leasehold improvements installed by Tenant at its
expense specifically for and and as an inducement to the assignee or sublessee
(subject to the limitation hereinafter specified), plus (y) subject to the
limitation hereinafter specified, any other reasonable, documented expenses
actually paid by Tenant to a third party and "free rent" or similar concessions
granted by Tenant in connection with the assignment or subletting, including,
without limitation, reasonable attorneys' fees and expenses and brokerage
commissions (but expressly excluding any overhead or other internally charged
expenses of Tenant, or any amounts paid for tenant improvements, free rent or
other lease concessions given as an inducement to the assignee or sublessee
which materially exceed in the aggregate the tenant improvements, free rent or
other lease concessions given in aggregate on the basis of then prevailing
market conditions for a comparable sublease or assignment)(the sum of (x) and
(y) shall collectively constitute "Rental Expenses"). By way of example, if
Landlord grants the required written consent to a sublease by Tenant of 10,000
square feet of the Demised Premises and the total rental and other
consideration received by Tenant for the sublease equals a per annum rate of
$3.70 per square foot and the per annum rate per square foot for the Annual
Minimum Rent then payable by Tenant is $3.50 per square foot, the Rental Profit
would be 20(cent) per square foot and Landlord would be entitled to received
fifty percent (50%) of such Rental Profit concurrently with receipt of each
payment by the sublessee to Tenant; provided that Rental Profit would be
retained by Tenant until Tenant had fully recovered the amount of its Rental
Expenses. Landlord shall be entitled to receive payment of its share of Rental
Profit as and when payments are received by Tenant. Any dispute between
Landlord and Tenant regarding the calculation of Rental Expenses will be
resolved by the Dispute Resolution Procedure.

         31.      Termination or Expiration.

                  (a)      No termination of this Lease prior to the normal
ending thereof, by lapse of time or otherwise, shall affect Landlord's right to
collect rent for the period prior to termination thereof.

                  (b)      At the expiration or earlier termination of the
Term, Tenant shall surrender the Demised Premises and all improvements,
alterations and additions thereto, and keys therefor to Landlord, clean and
neat, and in the same condition as at the commencement of the


                                  Page 56



Term, ordinary wear and tear only excepted.

                  (c)      If Tenant remains in possession of the Demised
Premises after expiration of the Term, with or without Landlord's acquiescence
and without any express agreement of the parties, Tenant shall be a
tenant-at-sufference at the greater of (i) one hundred fifty percent (150%) of
the Minimum Rent in effect at the end of the Term or (ii) one hundred fifty
percent (150%) of the then current fair market rental value of the Demised
Premises. Tenant shall also continue to pay all other Additional Rent due
hereunder, and there shall be no renewal of this Lease by operation of law.

         32.      Late Payments. In the event any installment of rent,
inclusive of Base Rent, or Additional Rent or other sums due hereunder, if any,
is not paid (i) within ten (10) days after Tenant's receipt of written notice
of such failure to pay on the first two occasions during any twelve (12) month
period , or (ii) as and when due with respect to any subsequent late payments
in any twelve (12) month period, Tenant shall pay a late charge equal to three
percent (3%) of such past due amount. Any installment of Base Rent which is not
paid within sixty (60) calendar days after the date when such rent is due
shall, after such 60-day period, bear interest at the Interest Rate. The term
"Interest Rate", as used in this Lease, shall mean a per annum rate of interest
equal to five percent (5%) in excess of the Prime Rate (as herein defined) in
effect from time to time. The term "Prime Rate", as used in this Lease, shall
mean the prime rate of interest charged at the applicable time by Chase
Manhattan Bank, N.A. of New York. If Chase Manhattan Bank, N.A. ceases to
publish or announce the Prime Rate, Landlord shall designate a comparable
reference rate.

         33.      Protective Covenants. Tenant agrees to abide by the
Declaration of Covenants for the Project, attached hereto as Exhibit "I" as it
may be amended from time to time in accordance with the terms thereof (herein,
the "Protective Covenants"), which Protective Covenants shall run with the Land
and be binding on Tenant, its successors and permitted assigns. The non-profit
corporation which acts as the owners' association under the Protective
Covenants is referred to in this Lease as the "Association". Without limiting
the foregoing, Tenant shall pay, as Additional Rent, all assessments imposed
upon the Demised Premises pursuant to the Protective Covenants. Landlord agrees
that Landlord will not, at any time during the Term, in its capacity as an
owner of land subject to the Protective Covenants, execute or vote in favor of
any amendment of the Protective Covenants which would increase the assessments
or other amounts due by Tenant pursuant to this Section 33 or would materially
and adversely affect in any way the Primary Use, access to the Demised Premises
or the right of Tenant to use and enjoy the Demised Premises in accordance with
this Lease.


                                  Page 57



         34.      Dispute Resolution Procedure.

                  (a) In the event that a dispute arises between Landlord and
Tenant under the Lease, and only if the Lease specifically provides that the
dispute resolution procedure outlined in this Section 34 (herein referred to as
the "Dispute Resolution Procedure") shall be utilized, the parties shall proceed
as follows:

                           (i)      The party electing to proceed under the
procedures outlined herein (the "Electing Party") shall give written notice of
such election to the other party (the "Other Party"), and shall designate in
writing the Electing Party's selection of an individual with the qualifications
outlined in the section of the Lease giving rise to this remedy (the "Official")
who shall act on the Electing Party's behalf in determining the disputed fact.

                           (ii)     Within twenty (20) days after the Other
Party's receipt of the Electing Party's selection of an Official, the Other
Party, by written notice to the Electing Party, shall designate an Official who
shall act on the Other Party's behalf in determining the disputed fact.

                           (iii)    Within twenty (20) days of the selection of
the Other Party's Official, the two (2) Officials shall render a joint written
determination of the disputed fact. If the two (2) Officials are unable to agree
upon a joint written determination within such twenty (20) day period, each
Official shall render his or her own written determination and the two Officials
shall select a third Official within such twenty (20) day period. In the event
the two Officials are unable to select a third Official within such twenty (20)
day period, then either party may apply to a court of original jurisdiction in
DuPage County, Illinois for appointment by such court of such third Official.

                           (iv)     Within twenty (20) days after the
appointment of the third Official, the third Official shall select one of the
determinations of the two (2) Officials originally selected, without
modification or qualification.

                           (v)      If either Landlord or Tenant fails or
refuses to select an Official, the Official selected shall alone determine the
disputed fact. Landlord and Tenant agree that they shall be bound by the
determination of disputed fact pursuant to this subsection. Landlord shall bear
the fee and expenses of its Official, Tenant shall bear the fee and expenses of
its Official, and Landlord and Tenant shall share equally the fee and expense of
the third Official, if any.


                                 Page 58



         35.      Waiver of Landlord's Lien.  Landlord hereby waives and
releases any lien or claim of lien, statutory or otherwise, which Landlord
may be entitled to assert under the laws of the State of California upon or
against any personal property and trade fixtures of tenant situated in and
upon the Demised Premises. From time to time during the Term, Landlord shall,
within ten (10) business days after receipt of written request from Tenant,
execute and deliver the form of Landlord's Agreement attached to this Lease
as Exhibit "J" to any lender providing financing to Tenant for personal
property or trade fixtures or any equipment lessor leasing personal property
or trade fixtures to Tenant which will be located in the Demised Premises.
Landlord will not unreasonably withhold its approval of an alternative form
of Landlord's Agreement proposed by such lender or equipment lessor, provided
such alternative Landlord's Agreement contains provisions substantially the
same as Exhibit J.

         36.      Quiet Enjoyment. Landlord covenants with Tenant that,
during the periods that no Event of Default has occurred and is continuing,
Tenant shall have the right to quiet and peaceful use and enjoyment of the
Demised Premises, subject to the Permitted Encumbrances and all the
provisions of this Lease.

         37.      Miscellaneous.

                  (a) The parties hereto hereby covenant and agree that Landlord
shall receive the Minimum Rent and Additional Rent and all other sums payable by
Tenant hereinabove provided as net income from the Demised Premises, without any
abatement, reduction, set-off, counterclaim, defense or deduction, except as
expressly provided to the contrary in this Lease.

                  (b) If any clause or provision of this Lease is determined to
be illegal, invalid or unenforceable under present or future laws effective
during the Term, then and in that event, it is the intention of the parties
hereto that the remainder of this Lease shall not be affected thereby, and that
in lieu of such illegal, invalid or unenforceable clause or provision there
shall be substituted a clause or provision as similar in terms to such illegal,
invalid or unenforceable clause or provision as may be possible and be legal,
valid and enforceable. If such invalidity is essential to the rights of either
or both parties, then the affected party shall have the right to terminate this
Lease on written notice to the other.

                  (c) All rights, powers, and privileges conferred hereunder
upon the parties hereto shall be cumulative, but not restrictive to those given
by law, except as may be expressly provided to the contrary in this Lease.


                                 Page 59



                  (d) Time is of the essence of this agreement.

                  (e) No failure of Landlord or Tenant to exercise any power
given Landlord or Tenant hereunder or to insist upon strict compliance by
Landlord or Tenant with its obligations hereunder, and no custom or practice of
the parties at variance with the terms hereof shall constitute a waiver of
Landlord's or Tenant's rights to demand exact compliance with the terms hereof.

                  (f) This Lease contains the entire agreement of the parties
hereto and no representations, inducements, promises or agreements, oral or
otherwise, between the parties not embodied herein shall be of any force and
effect. The masculine (or neuter) pronoun, singular number shall include the
masculine, feminine and neuter gender and the singular and plural number.

                  (g) This contract shall create the relationship of Landlord
and Tenant between Landlord and Tenant; no estate shall pass out of Landlord;
Tenant has a usufruct, not subject to levy and sale, and not assignable by
Tenant except as expressly set forth herein.

                  (h) Landlord and Tenant agree to execute, upon request of the
other, a short form memorandum of this Lease in recordable form and the
requesting party shall pay the costs and charges for the recording of such short
form memorandum of lease. Under no circumstances shall Tenant have the right to
record this Lease (other than a short form memorandum of Lease, as approved by
Landlord), and should Tenant do so, Tenant shall be in default hereunder.

                  (i) The captions of this Lease are for convenience only and
are not a part of this Lease, and do not in any way define, limit, describe or
amplify the terms or provisions of this Lease or the scope or intent thereof.

                  (j) This Lease may be executed in multiple counterparts, each
of which shall constitute an original, but all of which taken together shall
constitute one and the same agreement.

                  (k) This Lease shall be interpreted under the laws of the
State in which the Demised Premises is located.

                  (l) The parties acknowledge that this Lease is the result of
negotiations between the parties, and in construing any ambiguity hereunder no
presumption shall be made in favor of either party. No inference shall be made
from any item which has been stricken from this Lease other than the deletion of
such item.


                                 Page 60



         IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
under seals, the day and year first above written.


         LANDLORD:

         INDUSTRIAL DEVELOPMENTS INTERNATIONAL, INC.


         By:
               Name:
               Title:

         Attest:
                   Name:
                   Title:

                                          (CORPORATE SEAL)

[signatures continue on following page]


         TENANT:

         PETCO ANIMAL SUPPLIES, INC.


         By:
               Name:
               Title:


         Attest:
                   Name:
                   Title:

                                          (CORPORATE SEAL)



EXHIBIT A

Legal Description

The legal description of the Land will conform to the Site Plan and will be
determined by a ground run survey within sixty (60) calendar days after the
Lease Date. As of the Lease Date the Land is part of a larger unsubdivided
parcel. Landlord will have the right during the Term,


                                 Page 61



at the expense of Landord to file a subdivision plat with the City of Joliet
to cause the Land to be separate, subdivided lot.

EXHIBIT A-1

Site Plan

EXHIBIT B

Permitted Encumbrances

1.       Declaration of Protective Covenants for Rock Run Business Park,
dated June 16, 1995, recorded as Document No. R95-041407, Records of Will
County, Illinois, as modified by First Amendment dated March 14, 1996,
recorded as Document No. R96-023013, said Records.

2.       Development Agreement dated July 17, 1990, recorded as Document No.
R90-56433, said Records.

3.       Utility and drainage easements serving or crossing the Demised
Premises or required by Governmental Requirements for subdivision of the
Land; provided that no such easements may interfere with use of the Demised
Premises by Tenant in accordance with this Lease.

EXHIBIT C

EXPANSION LAND
EXHIBIT C-1

ALTERNATE EXPANSION LAND
EXHIBIT D

PREVAILING MARKET RATE

         For purposes of this Lease, the phrase "Prevailing Market Rate" shall
mean the then prevailing market rate for base minimum rental calculated on a per
square foot per annum basis for leases containing comparable terms, covering
space comparable to the Demised Premises, with improvements of comparable age
and nature within buildings comparable to the Building located in the area
(hereinafter referred to as the "Market Area") designated as "Joliet, Illinois
Market Area".

         The Prevailing Market Rate shall be determined by an appraisal
procedure as follows:

         In the event that Tenant notifies Landlord that Tenant elects to extend
the Term for any one or more of the Renewal Terms in accordance with Section 3.5
of this Lease, Landlord and Tenant shall negotiate


                                 Page 62



in good faith for a period of thirty (30) calendar days after the timely
giving of the written notice from Tenant required by Section 3.5 to reach
mutual agreement regarding the Prevailing Market Rate. Each of Landlord and
Tenant shall submit to the other during such thirty (30) day period at least
one written proposal for the Prevailing Market Rate. If Landlord and Tenant
are unable to reach agreement during the thirty (30) day period, each of
Landlord and Tenant shall, by written notice to the other within ten (10)
business days after expiration of the thirty (30) day period, select a real
estate appraiser. For a period of ten (10) business days after designation of
the second appraiser, the two appraisers so designated shall attempt to reach
mutual agreement regarding the Prevailing Market Rate. If the two appraisers
are unable to reach agreement, each of the two appraisers shall, not later
than the twentieth (20th) business day following the designation of the
second appraiser, render a separate written determination of the Prevailing
Market Rate. The two appraisers shall also select a third appraiser prior to
the end of the period when their separate appraisals must be rendered. Within
twenty (20) business days after the appointment of the third appraiser, the
third appraiser shall render a written determination of the Prevailing Market
Rate. From the three appraisals, the appraisal which is the farthest from the
median appraisal shall be disregarded and the average of the remaining two
appraisals shall conclusively constitute the Prevailing Market Rate. All
appraisers selected in accordance with this paragraph shall have at least ten
years experience in the commercial leasing market in the Market Area and
shall be members of the American Institute of Real Estate Appraisers or
similar professional organization. If either Landlord or Tenant fails or
refuses to select an appraiser, the other appraiser shall alone determine the
Prevailing Market Rate. Landlord and Tenant agree that they shall be bound by
the determination of Prevailing Market Rate pursuant to this paragraph.
Landlord shall bear the fee and expenses of its appraiser; Tenant shall bear
the fee and expense of its appraiser; and Landlord and Tenant shall share
equally the fee and expenses of the third appraiser, if any.

EXHIBIT E

ALLOWANCE WORK

The Allowance Work is described in Exhibit G-2.

EXHIBIT F

ENVIRONMENTAL REPORTS

1.       Beling Consultants Phase I Environmental Property Assessment


                                 Page 63



Report dated January 19, 1990.

2.       Beling Consultants Phase I Environmental Property Assessment Report
dated October 17, 1989.

3.       ERM Underground Storage Tank Removal Report dated April 13, 1995.

EXHIBIT G

BUILDING PLANS AND SPECIFICATIONS

Plans and Specifications by Philip Prince & Associates, dated May 19, 1997,
consisting of Sheets A-1 through A-6.

EXHIBIT G-1

ADDITIONAL PLANS AND SPECIFICATIONS

EXHIBIT G-2

TENANT'S WORK

EXHIBIT H

SUBORDINATION, NON-DISTURBANCE AND
ATTORNMENT AGREEMENT

                  THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
(this "Agreement") is made as of the ____ day of ______________, 199__ between
_____________________, a _________________ (hereinafter called "Mortgagee"),
which has an office at _________________________ (Attn: _____________________)
and ______________________________________, a ____________ corporation
(hereinafter called "Tenant"), which has an office at _________________________.


W I T N E S S E T H:

                  WHEREAS, Tenant has entered into that certain Lease ("Lease")
dated ___________________, 199__ with INDUSTRIAL DEVELOPMENTS INTERNATIONAL,
INC. (hereinafter called "Landlord"), as Landlord, which Lease demises certain
premises (the "Premises") located on the real property described on Exhibit A
attached hereto and made a part hereof (the "Property");

                  WHEREAS, Mortgagee has agreed to make a loan to Landlord in
the face principal amount of $__________, to be secured by a


                                 Page 64



Mortgage and Security Agreement (herein, together with all amendments,
modifications, extensions, renewals, consolidations and replacements thereof
now existing or hereafter entered into, collectively called the "Mortgage")
on the Property; and

                  WHEREAS, Mortgagee and Tenant have reached certain agreements
regarding the Lease and the Mortgage hereinafter set forth in this Agreement.

                  NOW, THEREFORE, in consideration of the sum of Ten Dollars
($10.00) in hand paid by Mortgagee to Tenant and other valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, it is hereby
agreed as follows:

                  1.   In accordance with and subject to all the provisions of
this Agreement, the Lease is and shall be subject and subordinate to the
Mortgage, to the full extent of any and all amounts from time to time secured
thereby and interest thereon.

                  2.   Tenant, for itself and its successors and assigns,
agrees that it will attorn to and recognize any purchaser of the Property at a
foreclosure sale under the Mortgage or any transferee who acquires the Property
by deed in lieu of foreclosure or otherwise, and the successors and assigns of
such purchaser or transferee, as its landlord for the unexpired balance (and any
extensions or renewals, whether previously, at that time or thereafter exercised
by Tenant) of the term of the Lease, subject to and in accordance with the terms
and conditions set forth in the Lease.

                  3.   Mortgagee, for itself and its successors and assigns, and
for any purchaser at a foreclosure sale under the Mortgage, any transferee who
acquires the Property by deed in lieu of foreclosure or otherwise, and the
successors and assigns of such purchaser or transferee (herein, Mortgagee and
each such other party is called a "New Landlord"), hereby covenants and agrees
with Tenant that in the event Mortgagee shall commence any proceedings to
foreclose the Mortgage for any reason whatsoever or in the event any other New
Landlord shall succeed to the interest of Landlord by foreclosure, deed in lieu
thereof or otherwise, that: (a) the Lease shall, in accordance with its terms,
remain in full force and effect as a direct indenture of lease between Mortgagee
or other New Landlord (as the case may be), and Tenant, with the same force and
effect as if originally entered into with Mortgagee, or such other New Landlord
(as the case may be); and (b) Tenant's possession of the Premises and Tenant's
rights and privileges under the Lease shall not be diminished, interfered with
or disturbed by such Mortgagee or such other New Landlord by such foreclosure
under the Mortgage or by any such attempt to foreclose or to succeed to the
interests of Landlord by foreclosure, deed in lieu thereof or


                                 Page 65



otherwise; provided that the rights of possession of Tenant are subject to
all the terms of the Lease.

                  4.   Without the prior written consent of Mortgagee, Landlord
will have no right or power to (a) enter into any agreement amending or
terminating the Lease or (b) cancel the term of, or surrender, the Lease, or (c)
waive or release Tenant from any obligation of Tenant under the Lease; provided
that regarding only any proposed amendment of the Lease which does not reduce
the amount of rental payable under the Lease by Tenant, relieve Tenant of any
obligation under the Lease, increase the responsibilities of Landlord or
otherwise impair or reduce the economic value of the Lease to Mortgagee,
Mortgagee agrees not unreasonably to withhold or delay its consent.

                  5.   The Tenant hereby agrees to provide Mortgagee with a copy
of any written notice given by Tenant to Landlord of any default under the Lease
by the Landlord (such copy to Mortgagee to be given simultaneously with the
giving of the notice to Landlord) and to allow Mortgagee the same right and
opportunity to remedy or cure such default as may be available to Landlord under
the Lease prior to exercising any right or remedy of the Tenant under the Lease.
Notwithstanding the foregoing, Tenant agrees that Mortgagee shall have no
obligation to remedy or cure any such default.

                  6.   In the event that Mortgagee or any other New Landlord
shall succeed to the interest of Landlord under the Lease, Tenant agrees that
Mortgagee or such other New Landlord shall not be: (i) except as provided to
the contrary in Section 23.1 of the Lease, subject to any credits, offsets,
defenses, claims or counterclaims which Tenant might have against any prior
landlord (including Landlord), (ii) bound by any rent or additional rent
which Tenant shall have paid more than one month in advance to any prior
landlord (including Landlord), or (iii) bound by any amendment or
modification to the Lease, or waiver of any provision of the Lease, which has
not been consented to in writing by Mortgagee.

                  7.   Each notice, demand or other communication in connection
with this Agreement shall be in writing and shall be deemed to be given to and
served upon the addressee thereof on the earlier of (i) actual delivery to such
addressee at its address set out above or (ii) the third business day after the
deposit thereof in the United States mails, registered or certified mail, return
receipt requested, first-class postage prepaid, addressed to such addressee at
its address set out above. By notice complying with this section, any party may
from time to time designate a different address in the continental United States
as its address for the purpose of the receipt of notice hereunder.


                                 Page 66



                  8.   This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto, and their respective successors and
assigns.

                  9.   This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of Illinois.

                  IN WITNESS WHEREOF, the parties hereto have executed, sealed
and delivered this Agreement as of the day and year first above written.

         MORTGAGEE:




         By:
            Name:
            Title:



         TENANT:

         _________________________________, a _______________


         By:
            Name:
            Title:


         Attest:
           Name:
              Title:

         (Affix Corporate Seal)


[TO BE EXECUTED IN FORM ACCEPTABLE FOR RECORDING
UNDER THE LAWS OF THE STATE OF ILLINOIS]

EXHIBIT A

Legal Description


                                 Page 67



EXHIBIT I

PROTECTIVE COVENANTS


EXHIBIT J.

LANDLORD'S AGREEMENT



         THIS LANDLORD'S AGREEMENT (this "Agreement"), is executed and delivered
as of this _____ day of _____________________, 199__, by ("Landlord"), in favor
of ("Secured Party").

WITNESSETH:

         WHEREAS, Secured Party and ("Borrower"), have entered, are entering,
and may from time to time hereafter enter into various agreements, instruments
and documents (collectively the "Loan Agreements") providing for certain
financial accommodations for the benefit of Borrower; and

         WHEREAS, to secure payment and performance of all of Borrower's
obligations and liabilities under the Loan Agreements ("Borrower's
Liabilities"), Secured Party has required that Borrower grant to Secured Party a
security interest in certain machinery, equipment, inventory and other personal
property owned by Borrower and all proceeds of the foregoing (the "Collateral");
and

         WHEREAS, all or some of the Collateral is now or from time to time
hereafter may be located at the premises known as (the "Premises")
[and legally described on Exhibit A hereto], which Premises are owned and
leased by Landlord to Borrower pursuant to that certain Lease Agreement dated
________________, 199__ (the "Lease"); and

         WHEREAS, Borrower may require loans or advances pursuant to the Loan
Agreements, and Secured Party, as a condition precedent to making such
additional loans or advances, has required Landlord to execute and deliver this
Agreement.

         NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which


                                 Page 68



are hereby acknowledged, Landlord hereby covenants and agrees with Secured
Party as follows:

         1.    So long as Secured Party has an interest in the Collateral
under the Loan Agreements, and subject to all the provisions of this
Agreement, Landlord waives each and every right which Landlord now has or
hereafter may have, under the laws of the State of Illinois, or by virtue of
the Lease, or any renewals, extensions, amendments, modifications,
substitutions or replacements thereof (a "New Lease") or by virtue of
Borrower's occupation of the Premises, to claim or assert any lien, right,
claim or title to any or all of the Collateral, which now or hereafter may be
placed or located on the Premises.

         2.    Landlord agrees, subject to the provisions of Paragraph 6 of this
Agreement, that the Collateral (a) is and shall remain personal property and (b)
is not and shall not become or be deemed to be fixtures.

         3.    Subject to all the provisions of this Agreement, Landlord
recognizes and acknowledges that Secured Party's security interest in the
Collateral pursuant to the Loan Agreements is superior to any lien, right or
claim of title of any nature which Landlord now has or hereafter may have or
assert in or to the Collateral by statute, the Lease, any New Lease, any
other agreement or otherwise.

         4.    If Landlord gives to Tenant written notice of the occurrence of
an Event of Default (as that term is defined in the Lease) by Tenant under the
Lease, Landlord shall send to Secured Party a copy of such written notice
concurrently with the giving of the notice to Tenant. Landlord agrees that, with
respect to any Event of Default which arises as a result of a failure by Tenant
to pay a sum of money required by the Lease to be paid by Tenant, Landlord will
allow Secured Party to cure such monetary Event of Default by Tenant for the
same period of time that Tenant is entitled to cure such Event of Default.
Nothing contained in this Agreement will (i) extend or create any right to cure
any Event of Default except as expressly provided in the Lease and (ii) limit,
restrict, alter or modify the rights of Landlord under the Lease which are
available to Landlord as a result of the occurrence of an Event of Default by
Tenant.

         5.    In the event of default by Borrower in the payment or
performance of any of Borrower's Liabilities, Landlord, in accordance with
all the provisions of this Agreement (a) will not impede or interfere with
Secured Party in its efforts to assemble all of the Collateral located on the
Premises, (b) will not interfere with lawful efforts by Secured Party to
remove the Collateral from the Premises and (c) will not hinder Secured
Party's lawful actions in enforcing its security interest in the Collateral.


                                 Page 69



         6.    Secured Party may, without affecting the validity of this
Agreement, extend, amend or in any way modify the terms of payment or
performance of any of Borrower's Liabilities, without the consent of Landlord
and without giving notice thereof to Landlord.

         7.    As a material part of the consideration to Landlord for
entering into this Agreement, Secured Party hereby agrees as follows:

         (a)   Landlord shall have no duty or obligation under this Agreement
to grant or facilitate access to the Premises by or for the benefit of Secured
Party, and nothing contained in this Agreement shall be deemed or construed to
grant to Secured Party any right of access to the Premises or the Collateral;

         (b)   Notwithstanding any provisions which may be contained in the
Loan Agreements, Secured Party shall not have any right to undertake or
attempt forcible entry to the Premises or to achieve entry in any manner
which causes any damage to the Premises; access by Secured Party to the
Premises shall be gained only by consent of the Borrower or pursuant to legal
process, but always without damage to the Premises;

         (c)   If any of the Collateral is affixed in any way to the Premises,
then, irrespective of the agreement of Landlord in this Agreement that
Collateral does not constitute fixtures, Secured Party shall have the same
obligations as Tenant under the Lease to restore any damage to the Premises
which may be caused by the removal of such affixed Collateral; and

         (d)   Any entry by Secured Party into the Premises pursuant to this
Agreement or the Loan Agreements shall be at the sole risk and expense of
Secured Party and Secured Party hereby releases Landlord from any loss, claim,
liability, damage, cost or expense of any nature whatsoever which Secured Party
may incur in connection with the exercise of its rights under this Agreement.

         8.    This Agreement shall inure to the benefit of the successors
and assigns of Secured Party and shall be binding upon the heirs, personal
representatives, successors and assigns of Landlord.

         9.    This Agreement shall continue in force until all of Borrower's
Liabilities are paid and satisfied in full and the Loan Agreements have been
terminated.

         IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
as of the day and year specified at the beginning hereof.


                                 Page 70



LANDLORD:




By:
         Its:


ACKNOWLEDGED AND AGREED:

TENANT


By:
         Name:
         Title:

SECURED PARTY:




By:
         Its:




EXHIBIT A

Legal Description of the Premises





                                 Page 71

EX-10.4

                                                                    EXHIBIT 10.4








                                LEASE AGREEMENT

                                     FORM

                            OPUS WEST CORPORATION,
                      A MINNESOTA CORPORATION ("LANDLORD")





                           PETCO ANIMAL SUPPLIES, INC.
                        A DELAWARE CORPORATION ("TENANT")




                            DATED: NOVEMBER 24, 1997












                             TABLE OF CONTENTS



                                                                            Page
                                                                            ----
                                                                         
ARTICLE 1    LEASE OF PREMISES AND LEASE TERM                                 4
      1.1    Premises                                                         4
      1.2    Term of Lease                                                    4
             1.2.1    Acknowledgment of Commencement Date                     4
             1.2.2    Early Occupancy                                         4
      1.3    Delivery of Premises                                             5
             1.3.1    Acknowledgment of Delivery Date                         5

ARTICLE 2    RENTAL AND OTHER PAYMENTS                                        5
      2.1    Basic Rent                                                       5
             2.1.1    Free Rent Periods                                       5
      2.2    Additional Rent                                                  5
      2.3    Rental Deposit                                                   6

ARTICLE 3    PAYMENT OF PROPERTY TAXES AND ASSESSMENTS                        6
      3.1    Payment of Property Taxes                                        6
      3.2    Property Taxes                                                   6
      3.3    Tenant's Right to Contest Property Taxes                         6
      3.4    Landlord's Right to Contest Property Taxes                       7

ARTICLE 4    USE                                                              7
      4.1    Permitted Use                                                    7
      4.2    Acceptance of Premises                                           7
      4.3    Rules and Regulations                                            7
      4.4    Tenant's Obligations                                             7
      4.5    Condition of Premises                                            7

ARTICLE 5    HAZARDOUS MATERIALS                                              8
      5.1    Hazardous Materials                                              8
      5.2    Hazardous Materials Laws                                         8
             5.2.1    Federal                                                 8
             5.2.2    California                                              8
             5.2.3    Other Laws and Regulations                              8
             5.2.4    Phase I Environmental Analysis                          8
      5.3    Compliance with Hazardous Materials Laws                         8
      5.4    Notice of Actions                                                9
      5.5    Disclosure and Warning Obligations                               9
      5.6    Tenant Indemnification                                           9
      5.7    Landlord Indemnification                                        10
      5.8    Environmental Audits                                            10
      5.9    Assignment and Subletting                                       10

ARTICLE 6    SERVICES AND UTILITIES                                          10

ARTICLE 7    MAINTENANCE, REPAIR AND ALTERATION OF PREMISES                  10
      7.1    Construction Warranty and Landlord Obligations                  10
      7.2    Tenant's Maintenance                                            11
      7.3    Tenant's Waiver of Claims Against Landlord                      11

ARTICLE 8    CHANGES AND ALTERATIONS                                         11
      8.1    Tenant's Changes and Alterations                                11
      8.2    Liens                                                           12
      8.3    Compliance with Laws                                            12

ARTICLE 9    RIGHTS RESERVED BY LANDLORD                                     13
      9.1    Landlord's Entry                                                13
      9.2    Landlord's Cure                                                 13

ARTICLE 10   INDEMNITY AND INSURANCE                                         13
      10.1   Tenant's Insurance Obligations                                  13
      10.2   Insurance Coverage                                              13
      10.3   Insurance Provisions                                            14
      10.4   Waiver of Subrogation                                           14
      10.5   Rental Abatement Insurance                                      14
      10.6   Indemnification by Tenant                                       14
      10.7   Indemnification by Landlord                                     15




                                       i


                             TABLE OF CONTENTS
                                 (CONTINUED)


                                                                            Page
                                                                            ----
                                                                         
ARTICLE 11   ASSIGNMENT AND SUBLETTING                                       15
      11.1   Restriction on Other Transfers                                  15
      11.2   Permitted Transfers                                             15
      11.3   Sublease Requirements                                           16
      11.4   No Merger                                                       16
      11.5   Profits on Transfer                                             16
             11.5.1   Tenant's Profit Statement                              16

ARTICLE 12   DAMAGE OR DESTRUCTION                                           16
      12.1   Destruction and Restoration                                     16
      12.2   Application of Insurance Proceeds                               16
      12.3   Continuance of Tenant's Obligations                             16
      12.4   Damage or Destruction at End of Lease Term                      17
      12.5   Waiver of California Statutes                                   17

ARTICLE 13   CONDEMNATION                                                    17
      13.1   Condemnation of Entire Premises                                 17
      13.2   Partial Condemnation/Termination of Lease                       17
      13.3   Partial Condemnation/Continuation of Lease                      17
      13.4   Continuance of Obligations                                      18
      13.5   Tenant's Waiver                                                 18

ARTICLE 14   DEFAULTS; REMEDIES                                              18
      14.1   Events of Default                                               18
             14.1.1   Failure to Pay                                         18
             14.1.2   Failure to Perform                                     18
             14.1.3   Other Defaults                                         18
      14.2   Remedies                                                        19
      14.3   Right of Landlord to Re-Enter                                   19
      14.4   Cumulative Remedies                                             19
      14.5   Mitigation                                                      19
      14.6   Limitation on Remedies                                          19
      14.7   Legal Costs                                                     19
      14.8   No Waiver                                                       19
      14.9   Waiver by Tenant                                                20
             14.9.1   Delinquent Rental Payments                             20

ARTICLE 15   PROTECTION OF CREDITORS                                         20
      15.1   Subordination                                                   20
      15.2   Attornment                                                      21
      15.3   Estoppel Certificates                                           21
      15.4   Mortgagee Protection Clause                                     21
      15.5   Non-Disturbance                                                 21

ARTICLE 16   TERMINATION OF LEASE                                            21
      16.1   Surrender of Premises                                           21
      16.2   Holding Over                                                    22

ARTICLE 17   RENEWAL OPTIONS                                                 22
      17.1   Options to Renew                                                22
             17.1.1   No Event of Default                                    22
             17.1.2   Fair Market Rent                                       22
             17.1.3   Exercise of Renewal Term(s)                            22
             17.1.4   Determination of Fair Market Rent                      22
             17.1.5   Arbitration                                            23

ARTICLE 18   EXPANSION OPTION                                                23
      18.1   Option to Expand                                                23
      18.2   No Event of Default                                             23
      18.3   Exercise of Expansion Option                                    23
      18.4   Expansion Terms                                                 23
      18.5   Expansion Space Basic Rent                                      24
      18.6   Free Rent Period                                                24
      18.7   Failure to Exercise Expansion Option                            24



                                       ii


                             TABLE OF CONTENTS
                                 (CONTINUED)


                                                                            Page
                                                                            ----
                                                                         
ARTICLE 19   MISCELLANEOUS PROVISIONS                                        24
      19.1   Notices                                                         24
      19.2   Landlord's Continuing Obligations                               25
      19.3   Net Lease                                                       25
      19.4   Successors                                                      25
      19.5   Memorandum of Lease                                             25
      19.6   Captions and Interpretation                                     25
      19.7   Relationship of Parties                                         25
      19.8   Entire Agreement                                                25
      19.9   Severability                                                    25
     19.10   Landlord's Limited Liability                                    25
     19.11   Survival                                                        25
     19.12   Attorneys' Fees                                                 25
     19.13   Broker                                                          26
     19.14   Governing Law                                                   26
     19.15   Time is of the Essence                                          26
     19.16   Joint and Several Liability                                     26
     19.17   Delivery of Corporate Documents                                 26
     19.18   Tenant's Financial Condition                                    26
     19.19   Provisions are Covenants and Conditions                         26
     19.20   Business Days                                                   26
     19.21   Force Majeure                                                   26
     19.22   No Continuous Operation                                         26
     19.23   Waiver of Landlord's Lien                                       27
     19.24   Submission of Lease                                             27



                                      iii



                               LEASE AGREEMENT

                      SUMMARY OF BASIC LEASE INFORMATION


1.   Lease Date:             November 24, 1997

2.   Landlord:               Opus West Corporation

3.   Address of Landlord     Opus West Management Corporation
     for Payment of Rent:    2415 East Camelback Road, Suite 840
                             Phoenix, AZ  85016-4201
                             Telephone No.:  (602) 912-8880
                             Facsimile No.:  (602) 912-8881

4.   Address of Landlord     Opus West Corporation
     for Notices:            2030 Main Street, Suite 520
                             Irvine, CA 92614
                             Attn:  Paul A. Marshall
                             Telephone No.:  (714) 475-0977
                             Facsimile No.:  (714) 475-0970

     With a copy to:         Opus U.S. Corporation
                             2415 East Camelback Road, Suite 800
                             Phoenix, AZ  85016-4201
                             Attn: Daniel T. Haug, Esq.
                             Telephone No.:  (602) 468-7000
                             Facsimile No.:  (602) 468-7045

     With another copy to:   Opus West Corporation
                             2415 East Camelback Road, Suite 800
                             Phoenix, AZ  85016-4201
                             Attn: Mr. Thomas W. Roberts, President
                             Telephone No.:  (602) 468-7000
                             Facsimile No.:  (602) 468-7045

5.   Tenant:                 PETCO Animal Supplies, Inc., a Delaware corporation

6.   Address of Tenant       PETCO Animal Supplies, Inc.
     for Notices:            9125 Rehco Road
                             San Diego, CA 92121-2270
                             Attn:  Mark Drasin
                             Telephone No.:  (619) 453-7845
                             Facsimile No.:  (619) 677-3000

     With a copy to:         Leslie Coughlan, Esq.
                             Attorney at Law
                             5010 Shoreham Place, Suite 100
                             San Diego, CA 92122
                             Telephone No.:  (619) 626-8494
                             Facsimile No.:  (619) 626-8450

7.   Premises                The parcel of land situated in the County of
                             Riverside, State of California, described on
                             Exhibit "A," together with all Improvements thereon
                             (as defined in Section 1.1).

8.   Landlord's              The Landlord's Improvements to be constructed by
     Improvements            Landlord as described in the Work Letter (See
                             Exhibit "B").

9.   Lease Term              Initial Lease Term:  86 months from the
                             Commencement Date

                             Renewal Terms:  Two (2) Renewal Terms each for
                             five (5) years.

                                       1


10.  Rent:                   Basic Rent:

                             Lease Months:  1-2:

                                 MONTHLY RENT FOR PREMISES:  Basic
                                     Rent is abated for first two (2)
                                     months. Additional Rent is not abated.


                             Lease Months:  3-62:

                                 MONTHLY RENT FOR PREMISES:
                                     $89,991.00 ($.2727 per square foot)

                                 MONTHLY RENT FOR EXPANSION LAND:
                                     PRIOR TO EXPANSION LAND COMMENCEMENT DATE:
                                     $4,125 ($.0125 per square foot of the
                                     Building)
                                     AFTER EXPANSION LAND COMMENCEMENT DATE:
                                     Calculated pursuant to Article 18

                             Lease Months:  63-86 (and Lease months 87-122 if
                             Extension Election under Article 18 is exercised):

                                 MONTHLY RENT FOR THE PREMISES:
                                     $100,782 ($.3054 per square foot)

                                 MONTHLY RENT FOR EXPANSION LAND:
                                     PRIOR TO EXPANSION LAND COMMENCEMENT DATE:
                                     $4,125 ($.0125 per square foot of the
                                     Building)
                                     AFTER EXPANSION LAND COMMENCEMENT DATE:
                                     Calculated pursuant to Article 18

                             Lease Months:  123-146:   (if Extension
                             Election under Article 18 is exercised):

                                 MONTHLY RENT FOR THE PREMISES:
                                     $112,860 ($.3420 per square foot)

                                 MONTHLY RENT FOR EXPANSION LAND:
                                     Calculated pursuant to Article 18

                             RENEWAL TERMS:

                             Calculated pursuant to Article 17.

                             The Basic Rent is subject to adjustment pursuant
                             to the provisions of Section 2.1 and 2.1.1 of
                             this Lease.

                             The term "Basic Rent" as used in this Lease
                             includes the portion of the rent for the
                             Expansion Land.

                             Maximum Rate of Interest: Prime plus two percent
                             (2%) per annum. For purposes of this Lease, the
                             term "Prime" shall mean the rate announced from
                             time to time by Bank of America, N.A., as its
                             prime or reference rate. If Bank of America shall
                             cease to use its prime or reference rate, then
                             Landlord shall select the rate of another financial
                             institution to be substituted therefor, which shall
                             be a major money center commercial bank.

                             Late Charge:  2% of the overdue amount.

11.      Use:                General Office and Warehouse Uses ("Permitted Use")

12.      Deposit:            None

13.      Rental Deposit:     $196,482.00 applicable to third (3rd) and fourth
                             (4th) month's Basic Rent.

14.      Brokers:            Landlord's and Tenant's Broker:  Lee & Associates


                                       2



15.      Exhibits:           The following exhibits are attached hereto and
                             incorporated into this Lease:

                                             
         Exhibit "A".................................... Legal Description of Land
         Exhibit "A-1".................................. Legal Description of Expansion Land
         Exhibit "A-2".................................. Expansion Space
         Exhibit "B".................................... Work Letter
         Schedule 1 to Work Letter...................... Final Plans and Specifications
         Exhibit "C".................................... Preliminary Report
         Exhibit "D".................................... Commencement Date Acknowledgment
         Exhibit "E".................................... Delivery Date Acknowledgment
         Exhibit "F".................................... Subordination, Non-Disturbance and Attornment Agreement

         

         The foregoing Basic Terms are hereby incorporated into and made a
part of this Lease. Each reference in this Lease to the Basic Terms shall
mean the information set forth above and shall be construed to incorporate
all of the terms provided under the particular Lease paragraph pertaining to
such information. In the event of a conflict between the Basic Terms and the
Lease, the Lease shall prevail.

Dated: November 24, 1997                LANDLORD:

                                        OPUS WEST CORPORATION, a
                                        Minnesota corporation


                                        By:    /s/ Thomas W. Roberts
                                               ---------------------------
                                        Name:  Thomas W. Roberts
                                               ---------------------------
                                        Title: President
                                               ---------------------------

Dated: November 20, 1997                TENANT:

                                        PETCO ANIMAL SUPPLIES, INC., a
                                        Delaware corporation


                                        By:    /s/ James M. Myers
                                               ---------------------------
                                        Name:  James M. Myers
                                               ---------------------------
                                        Title: Sr. VP Finance
                                               ---------------------------

                                        By:
                                               ---------------------------
                                        Name:
                                               ---------------------------
                                        Title:
                                               ---------------------------


                                       3



                                LEASE AGREEMENT


         This Lease Agreement (the "Lease"), which includes the Basic Terms
(as hereinafter defined), dated as of November __, 1997 ("Effective Date"),
is made by and between Landlord and Tenant.

                                   ARTICLE 1

                       LEASE OF PREMISES AND LEASE TERM

         1.1      PREMISES. Landlord, for and in consideration of the rents,
covenants and agreements hereinafter set forth, hereby leases to Tenant and
Tenant hereby leases from Landlord, upon and subject to the terms, covenants
and conditions hereinafter set forth, all that certain parcel of land
situated in the County of Riverside, and State of California delineated on
Exhibit "A" attached hereto and incorporated herein ("Land"), together with
those certain Landlord's Improvements as defined in the Work Letter attached
hereto as Exhibit "B" ("Work Letter") to be constructed by Landlord,
including an approximately three hundred thirty thousand (330,000) square
foot building ("Building") and all other improvements, machinery, equipment,
fixtures and other property (except Tenant's trade fixtures), to be installed
or located thereon and all additions, alterations and replacements thereof
(collectively "Improvements"). Herein the Land and the Improvements are
referred to collectively as the "Premises". Tenant acknowledges that this
Lease is subordinate and subject to (a) all liens, encumbrances, deeds of
trust, reservations, covenants, conditions, restrictions and other matters
affecting the Premises ("Title Matters") (i) in effect on the Effective Date
of this Lease as specified in Exhibit "C" attached hereto and incorporated
herein ("Preliminary Report") or (ii) approved or deemed approved pursuant to
this Section 1.1, ("Permitted Encumbrances") and (b) any law, regulation,
rule, order or ordinance of any governmental entity applicable to the
Premises or the use or occupancy thereof, in effect on the execution of this
Lease or thereafter promulgated. In the event that, after the Effective Date
any new Title Matters appear of record, such matters shall be subject to the
review and approval of Tenant which approval shall not be withheld so long as
the new Title Matter does not materially and adversely impair the use or
occupancy by Tenant of the Premises for its intended purpose. Tenant shall
deliver written notice to Landlord of its approval or disapproval of such
Title Matters within ten (10) days after delivery by Landlord to Tenant of
such new Title Matter. If Tenant fails to respond within such ten (10) day
period and Landlord delivers a written reminder notice to Tenant and Tenant
fails to respond within five (5) days of the delivery of the written reminder
notice, the new Title Matter shall be deemed approved.

         1.2      TERM OF LEASE. The initial term of this Lease ("Initial
Term") shall commence on the Delivery Date (defined in Section 1.3 below) as
such date may be extended until (i) the date of Substantial Completion of the
Landlord's Improvements (as defined in the Work Letter) ("Commencement
Date"); provided Tenant shall be permitted by the City to occupy and use the
Premises at such time. The Initial Term shall end on the date which is
eighty-six (86) months after the Commencement Date unless sooner terminated
pursuant to the terms of this Lease. Any reference to the Term of this Lease
or similar reference shall be a reference to the Initial Term together with
any renewal terms of this Lease specified in Article 17. Any reference to
Lease Year shall refer to each consecutive twelve (12) month period during
the Term commencing on the Commencement Date. For purposes of this Lease, a
"Lease Month" shall be defined as those successive calendar month periods
beginning with the Commencement Date and continuing through the Initial Term
or any Renewal Term of this Lease.

                  1.2.1    ACKNOWLEDGMENT OF COMMENCEMENT DATE. Tenant shall,
within ten (10) business days of request therefor by Landlord, execute an
acknowledgment of the Commencement Date prepared by Landlord in the form of
Exhibit "D" attached hereto and incorporated herein ("Commencement Date
Acknowledgment"), provided, however, that the failure of Tenant to execute
such acknowledgment shall not affect any obligation of Tenant hereunder or
the Landlord's determination of the Commencement Date. If the Tenant fails to
execute and deliver such Commencement Date Acknowledgment or provide written
notice of Tenant's disagreement with the contents thereof, then Landlord may
deliver a written reminder notice. If Tenant fails to respond in writing to
the written reminder notice within five (5) days, Landlord may deliver a
second written reminder notice. If Tenant fails to respond in writing to the
second written reminder notice within five (5) days, then Landlord and any
prospective purchaser or encumbrancer may conclusively presume and rely upon
the fact that the Commencement Date is the date specified in the Commencement
Date Acknowledgment.

                  1.2.2    EARLY OCCUPANCY. Tenant shall be entitled to early
occupancy of the Premises thirty (30) days prior to the Commencement Date in
accordance with this Section 1.2.2 and the Work Letter. Tenant's early
occupancy of the Premises for installation of furniture, fixtures and
equipment shall be subject to all the terms and conditions of this Lease,
other than the obligation to pay Basic Rent. Early occupancy of the Premises
shall not advance the expiration date of this Lease. Landlord shall have the
right to charge Tenant for any utility costs incurred as a result of Tenant's
early occupancy of the Premises. If during Tenant's early occupancy of the
Premises, Tenant desires to have security for the Premises, Tenant shall
provide such security at no cost to Landlord.


                                       4



         1.3      DELIVERY OF PREMISES. Landlord shall use its commercially
reasonable efforts to deliver the Premises to Tenant on or before August 1,
1998 ("Delivery Date" with Landlord's Improvements) (as defined in the Work
Letter) Substantially Completed. If Landlord is unable to deliver the
Premises to Tenant by August 1, 1998, then Tenant shall be entitled to
receive from Landlord the amount of Five Thousand Dollars ($5,000) per day
for the first fifteen (15) days beyond August 1, 1998 that Landlord fails to
deliver the Premises (subject to force majeure as provided in Section 19.21)
and Ten Thousand Dollars ($10,000) per day for the fifteen (15) days beyond
August 15, 1998 that Landlord fails to deliver the Premises (subject to force
majeure as provided in Section 19.21) and the Delivery Date shall be deemed
to have occurred on such later date. If Landlord fails to deliver the
Premises on or before September 1, 1998 subject to extension for force
majeure as provided in Section 19.21 of this Lease, then Tenant shall, as
Tenant's sole and exclusive remedy, have the option to terminate this Lease
by delivering written notice ("Termination Note") to Landlord. If Tenant
accepts delivery of the Premises, then Tenant shall be deemed to have waived
its right to terminate the Lease as provided for under this Section 1.3.
Notwithstanding anything herein to the contrary, in the event Landlord
tenders possession of the Premises to Tenant in a substantially completed
condition during that period of time from October 1, 1998 through and
including November 30, 1998 (the "Non- Acceptance Period"), then, Tenant
shall have the right not to accept possession of the Premises during such
period by notifying Landlord, within five (5) days of the tender of
possession of the Premises to Tenant, in which case the Commencement Date
shall not occur until December 1, 1998.

                  1.3.1    ACKNOWLEDGMENT OF DELIVERY DATE. Tenant shall,
within ten (10) business days of request therefor by Landlord, execute an
acknowledgment of the Delivery Date prepared by Landlord in the form of
Exhibit "E" attached hereto and incorporated herein ("Delivery Date
Acknowledgment"), provided, however, that the failure of Tenant to execute
such acknowledgment shall not affect any obligation of Tenant hereunder or
the Landlord's determination of the Delivery Date. If the Tenant fails to
execute and deliver such Commencement Date Acknowledgment or provide written
notice of Tenant's disagreement with the contents thereof, then Landlord may
deliver a reminder notice. If Tenant fails to respond to the reminder notice
within five (5) days, Landlord may deliver a second reminder notice. If
Tenant fails to respond to the second reminder notice within five (5) days,
then Landlord and any prospective purchaser or encumbrancer may conclusively
presume and rely upon the following facts: (i) the Delivery Date is the date
specified in the Delivery Date Acknowledgment and (ii) that the Premises were
in acceptable condition and were delivered in compliance with all of the
requirements of Work Letter.

                                 ARTICLE 2

                        RENTAL AND OTHER PAYMENTS

         2.1      BASIC RENT. In consideration of the leasing of the Premises
and the construction of the Landlord's Improvements described in the Work
Letter, Tenant covenants to pay Landlord in advance, on the first day of each
and every calendar month during the Term, at the address of Landlord as
specified in Item 3 of the Basic Terms, or at such other place as Landlord
may from time to time designate in writing, a rental for the Initial Term of
this Lease calculated based upon the amounts specified in Item 10 of the
Basic Terms ("Basic Rent"). Upon Substantial Completion (as defined in the
Work Letter) of the Landlord's Improvements, Landlord shall deliver to Tenant
a certificate from Landlord's architect certifying the square footage of the
Premises ("Square Footage Certification") together with a calculation of the
Basic Rent. For purposes of calculating the Basic Rent, the Premises shall be
measured from the face of the exterior walls. Tenant shall have the right to
independently confirm such square footage by an architect certified in the
state of California. In the event Tenant's confirmation of such square
footage differs from the calculation provided by Landlord, Tenant shall
provide notice to Landlord within fifteen (15) days after Landlord's delivery
of its Square Footage Certification. Landlord and Tenant shall have fifteen
(15) days after delivery of Tenant's notice to reach agreement on the final
measurement of the square footage of the Premises. In the event Landlord and
Tenant fail to reach agreement on the square footage of the Premises within
such fifteen-day period, then Landlord's architect and Tenant's architect
shall together select a third architect whose determination shall be binding
on the parties. Such selection shall be made within fifteen (15) days after
Landlord and Tenant determine that they cannot reach agreement on the square
footage of the Premises. In the event Landlord's architect and Tenant's
architect cannot reach agreement on a third architect, then the matter shall
be referred to the local office of the American Institute of Architects who
shall make such selection. The third architect so selected shall then make a
final determination of the square footage within fifteen (15) days of such
architect's selection and Landlord shall revise the Square Footage
Certification to reflect this final determination. The parties shall each
bear the costs of their own architect and shall share the costs equally of
any third architect. If the Square Footage Certification differs from the
approximate square footage of the Building set forth in Section 1.1 above,
then the Basic Rent shall be adjusted to reflect the square footage set forth
in the Square Footage Certification.

                  2.1.1    FREE RENT PERIODS.  During the first two (2)
calendar months of the Initial Term, Basic Rent shall be abated ("Free Rent
Period").

         2.2      ADDITIONAL RENT. Except as otherwise specifically provided
in Section 7.1 of this Lease, the Basic Rent shall be net to Landlord so that
this Lease shall yield, net to Landlord, the Basic Rent payable under this
Lease for each year of the Term of this Lease and that all charges payable by
Tenant under this


                                       5



Lease for Property Taxes, insurance premiums, utility charges, maintenance,
repair and replacement expenses, all expenses relating to compliance with
laws, and all other costs, fees, charges, expenses, reimbursements and
obligations of every kind and nature whatsoever relating to the operation and
use of the Premises, and/or the Expansion Land (defined below) (whether or
not Tenant has exercised the Expansion Land Option) which may arise or become
due during the Term or by reason of events occurring during the Term of this
Lease or which relate to the performance by Tenant of all the terms,
covenants, conditions and agreements to be performed, paid or observed by
Tenant hereunder shall be paid or discharged by Tenant, at Tenant's sole cost
and expense. Notwithstanding anything to the contrary, Tenant shall not be
responsible for any property management fees or earthquake insurance premiums
paid by Landlord during the Term of this Lease. Except as otherwise provided
in Section 7.1 or 14.9 of this Lease, all payments of Basic Rent and
Additional Rent shall be payable without previous demand therefor and without
any right of setoff or deduction whatsoever. All charges payable by Tenant
other than Basic Rent, however denoted, are called "Additional Rent." Unless
this Lease provides otherwise, all Additional Rent shall be paid with the
next installment of Basic Rent falling due. Rent for any partial month shall
be prorated on the basis of the number of days within such calendar month and
paid within ten (10) days of the later of (a) invoice from Landlord or (b)
the Commencement Date. Basic Rent and Additional Rent are sometimes
collectively referred to as "Rent" or "rent."

         2.3      RENTAL DEPOSIT. Upon execution of this Lease, Tenant shall
deposit with Landlord the sum specified in the Basic Lease Provisions as the
Rental Deposit. The Rental Deposit shall be held by Landlord without
obligation or liability for payment of interest thereon as security for the
faithful payment of Basic Rent by Tenant, but shall be applicable to the
third (3rd) and fourth (4th) month's Basic Rent payments without offset or
deduction therefrom.

                                   ARTICLE 3

                   PAYMENT OF PROPERTY TAXES AND ASSESSMENTS


         3.1      PAYMENT OF PROPERTY TAXES. Provided Landlord delivers the
Property Tax bill to Tenant (if delivered to Landlord) promptly upon receipt
thereof, but no later than twenty (20) days prior to the day on which any
fine, penalty, interest or cost may be added thereto for the non- payment
thereof, Tenant covenants and agrees to pay during the Term of this Lease, as
Additional Rent, before any fine, penalty, interest or cost may be added
thereto for the nonpayment thereof, all Property Taxes (as defined in Section
3.2 below), which become due and payable during the Term of this Lease.
Within ten (10) days of written request from Landlord, Tenant shall furnish
Landlord with satisfactory evidence that the Property Taxes have been paid.
If any Property Taxes shall cover any period of time prior to or after the
term of this Lease, Tenant's share of such Property Taxes shall be equitably
prorated to cover only the period of time within the tax fiscal year during
which this Lease shall be in effect.

         3.2      PROPERTY TAXES. "Property Taxes" shall include general real
property and improvement taxes, any form of assessment, special assessment or
reassessment, license, permit or inspection fee or tax, commercial rental tax
(but only to the extent the same is in lieu of some existing Property Taxes),
levy, charge, penalty or similar imposition, whatsoever or at all imposed by
any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, lighting,
drainage or other improvement or special assessment district thereof, or any
agency or public body, and all other charges or burdens of whatsoever kind
and nature incurred in the use, occupancy, ownership, operation, leasing or
possession of the Premises, and/or the Expansion Land (whether or not Tenant
has exercised the Expansion Land Option) without particularizing by any known
name or by whatever name hereafter called, and whether any of the foregoing
be general or special, ordinary or extraordinary, foreseen or unforeseen.
Property Taxes shall include, without limitation, the following: (i) any tax
imposed upon the transaction or based upon a reassessment of the Premises,
and/or the Expansion Land (whether or not Tenant has exercised the Expansion
Land Option) due to a change in ownership or transfer of all or part of
Landlord's interest in the Premises the Land, and/or the Expansion Land
(whether or not Tenant has exercised the Expansion Land Option); (ii) any
assessments, taxes, fees, levies or charges in addition to, or in
substitution, partially or totally, for any items previously included within
the definition of Real Property Taxes; (iii) any tax or charge for fire
protection, street lighting streets, sidewalks, road maintenance, refuse,
sewer, water or other services provided to the Premises, and/or the Expansion
Land (whether or not Tenant has exercised the Expansion Land Option) by any
governmental agency; and (iv) capital levy, sales or use tax, gross receipts
tax or other tax on the rents received therefrom, or a franchise tax, or an
assessment, levy or charge measured by or based in whole or in part upon such
rents or value, now or hereafter imposed. Property Taxes do not, however,
include Landlord's state or federal income, franchise, estate or inheritance
taxes.

         3.3      TENANT'S RIGHT TO CONTEST PROPERTY TAXES. Tenant shall have
the right at its own expense, and upon prior notice to Landlord, to contest
the amount or validity, in whole or in part, of any Property Taxes by
appropriate proceedings diligently conducted in good faith, but only after
payment of such Property Taxes, unless such payment, or a payment thereof
under protest, would operate as a bar to such contest or interfere materially
with the prosecution thereof, in which event, notwithstanding the provisions
of Section 3.1 hereof, Tenant may defer payment of such Property Taxes if
neither the Premises, and/or the Expansion Land


                                       6



(whether or not Tenant has exercised the Expansion Land Option)]nor any
portion thereof would, by reason of such deferment, be in danger of being
forfeited or lost and so long as such deferment will not otherwise materially
and adversely impact the Premises, and/or the Expansion Land (whether or not
Tenant has exercised the Expansion Land Option) or impair the value of the
Premises, and/or the Expansion Land (whether or not Tenant has exercised the
Expansion Land Option). Upon the termination of any such proceedings, Tenant
shall pay the amount of such Property Taxes as finally determined in such
proceedings, with any costs, fees, including attorney's fees, interest,
penalties, fines and other liability in connection therewith. Landlord shall
not be required to join in any proceedings referred to in this Section unless
the provisions of any law, rule or regulation at the time in effect shall
require that such proceedings be brought by or in the name of Landlord, in
which event Landlord shall join in such proceedings. Landlord shall not
ultimately be subject to any liability for the payment of any fees, including
attorney's fees, costs and expenses in connection with such proceedings and
Tenant shall reimburse Landlord for all such fees (including reasonable
attorney's fees), costs and expenses on demand.

         3.4      LANDLORD'S RIGHT TO CONTEST PROPERTY TAXES. In addition to
the right of Tenant under Section 3.3 to contest the amount or validity of
Property Taxes, Landlord shall also have the right, but not the obligation,
to contest the amount or validity, in whole or in part, of any Property Taxes
not contested by Tenant. Any such contests by Landlord shall be at Landlord's
sole expense; provided, however, that if the amounts payable by Tenant for
Property Taxes are reduced (or if a proposed increase in such amounts is
avoided or reduced) by reason of Landlord's contest of Property Taxes, Tenant
shall reimburse Landlord for the costs incurred by Landlord in contesting
Property Taxes, but such reimbursements shall not be in excess of the amount
saved by Tenant by reason of Landlord's actions in contesting such Property
Taxes.

                                  ARTICLE 4

                                     USE

         4.1      PERMITTED USE. Tenant may use the Premises only for the
Permitted Use specified in Item 11 of the Basic Terms. Tenant shall not use
or occupy the same, or knowingly permit them to be used or occupied, contrary
to any statute, governmental, quasi-governmental or administrative rule,
order, ordinance, requirement or regulation applicable thereto ("Regulatory
Requirement"), or in any manner which would violate any certificate of
occupancy affecting the same, or which would make void or voidable any
insurance then in force with respect thereto or which would cause structural
injury to the Improvements or cause the value or usefulness of the Premises,
or any portion thereof, substantially to diminish (reasonable wear and tear
excepted), or which would constitute a public or private nuisance or waste
and Tenant agrees that it will promptly, upon discovery of any such use, take
all necessary steps to compel the discontinuance of such use. Landlord
represents that the Premises are zoned for the Permitted Use.

         4.2      ACCEPTANCE OF PREMISES. Tenant shall accept delivery of the
Premises with Landlord's Improvements, as set forth on Exhibit "B"
substantially completed. Within thirty (30) days of Substantial Completion (as
defined below) of Landlord's Improvements, Landlord and Tenant shall provide a
"punchlist" identifying the corrective work of the type commonly found on an
architectural punchlist with respect to Landlord's Improvements, which list
shall be based on whether such items were required by the approved Final Plans
and Specifications. Within ten (10) Business Days after delivery of the
punchlist, Landlord shall commence the correction of punchlist items and
diligently pursue such work to completion. The punchlist procedure to be
followed by Landlord and Tenant shall in no way limit Tenant's obligation to
occupy the Premises under the Lease nor shall it in any way excuse Tenant's
obligation to pay Rent as provided under the Lease unless such punch list
items preclude Tenant from occupying the Premises as reasonably determined by
Tenant. Nothing in this Section 4.2 shall be deemed to diminish any obligation
of Landlord under Section 7.1. Tenant acknowledges, that except as
specifically provided in this Lease and the Work Letter, neither Landlord nor
any agent of Landlord has made any representation or warranty with respect to
the Premises or the Building or with respect to the suitability or fitness of
either for the conduct of Tenant's business or for any other purpose. Tenant
shall comply with the Permitted Encumbrances.

         4.3      RULES AND REGULATIONS. Tenant shall comply with all rules
and regulations adopted by Landlord from time to time for the Project;
provided that such rules and regulations are applied in a non-discriminatory
manner, and do not adversely affect Tenant's hours of operation or otherwise
adversely affect the operation of Tenant's business. In the event of any
conflict between such rules and regulations and the provisions of this Lease,
this Lease shall prevail.

         4.4      TENANT'S OBLIGATIONS. Tenant shall obtain and pay for all
permits, required for Tenant's occupancy of the Premises and shall promptly
take all substantial and non-substantial actions necessary to comply with all
applicable Regulatory Requirements regulating the particular type of use by
Tenant of the Premises, including, without limitation, the Occupational
Health and Safety Act and the Americans with Disabilities Act.

         4.5      CONDITION OF PREMISES. Landlord shall deliver the Premises
to Tenant clean and free of debris on the Commencement Date, with Landlord's
Improvements Substantially Completed as provided in the Work Letter and,
except as disclosed in the Phase 1 Report, (defined below), the improvements


                                       7



constructed by Landlord as Landlord's Improvements shall, as of the
Commencement Date, not contain Hazardous Materials (defined below) in
violation of any of the Hazardous Materials Laws (defined below).

                                 ARTICLE 5

                           HAZARDOUS MATERIALS

         5.1      HAZARDOUS MATERIALS. The term "Hazardous Material(s)" shall
mean any toxic or hazardous substance, material or waste or any pollutant or
contaminant or infectious or radioactive material, including but not limited
to those substances, materials or wastes regulated now or in the future under
any of the statutes or regulations listed in Section 5.2, and any and all of
those substances included within the definitions of "hazardous substances,"
"hazardous materials," "hazardous waste," "hazardous chemical substance or
mixture," "imminently hazardous chemical substance or mixture," "toxic
substances," "hazardous air pollutant," "toxic pollutant," or "solid waste"
in the statutes or regulations in Section 5.2. Hazardous Materials shall also
mean any and all other similar terms defined in other federal, state and
local laws, statutes, regulations, orders or rules, and materials and wastes
which are, or in the future become, regulated under applicable local, state
or federal law for the protection of health or the environment, or which are
classified as hazardous or toxic substances, materials or wastes, pollutants
or contaminants, as defined, listed or regulated by any federal, state or
local law, regulation or order or by common law decision, including, without
limitation, (i) trichloroethylene, tetrachloroethylene, perchloro- ethylene
and other chlorinated solvents, (ii) oil or any petroleum products or
fractions thereof, (iii) asbestos, (iv) polychlorinated biphenyls, (v)
flammable explosives, (vi) urea formaldehyde and (vii) radioactive materials
and waste, and (viii) infectious waste.

         5.2      HAZARDOUS MATERIALS LAWS. The term "Hazardous Materials
Law(s)" shall mean any federal, state or local laws, ordinances, codes,
statutes, regulations, administrative rules, policies and orders, and other
authority, existing now or in the future, which classify, regulate, list or
define hazardous substances, materials, wastes contaminants, pollutants
and/or the Hazardous Materials, including without limitation the following
statutes and regulations, and any other legal authority, regulations, or
policies relating to or implementing such statutes and regulations:

                  5.2.1    FEDERAL. Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA" or "Superfund"), as amended
by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), 42
U.S.C. Section 9601 et seq.; Resource Conservation and Recovery Act of 1976
("RCRA"), 42 U.S.C. Section 6901 et seq.; Clean Water Act ("CWA"), 33 U.S.C.
Section 1251 et seq.; Clean Air Act ("CAA"), 42 U.S.C. Section 78401 et seq.;
Toxic Substances Control Act ("TSCA"), 15 U.S.C. Section 2601 et seq.; The
Refuse Act of 1899, 33 U.S.C. Section 407; Occupational Safety and Health Act
("OSHA"), 29 U.S.C. Section 651 et seq.; Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, et seq.; United States Department of
Transportation Table (49 CFR 172.101 and amendments thereto) and the
Environmental Protection Agency Table (40 CFR Part 302 and amendments
thereto);

                  5.2.2    CALIFORNIA. Carpenter-Presley-Tanner Hazardous
Substance Account Act ("California Superfund"), Cal. Health & Safety Code
Section 25300 et seq.; California Hazardous Waste Control Act, Cal. Health &
Safety Code Sections 25100 et seq.; Porter-Cologne Water Quality Control Act
("Porter-Cologne Act"), Cal. Water Code Section 13000 et seq.; Hazardous
Waste Disposal Land Use Law, Cal. Health & Safety Code Section 25220 et seq.;
Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65"),
Cal. Health & Safety Code Section 25249.5 et seq.; Hazardous Substances
Underground Storage Tank Law, Cal. Health & Safety Code Section 25280 et
seq.; California Hazardous Substance Act, Cal. Health & Safety Code Section
28740 et seq.; Air Resources Law, Cal. Health & Safety Code Section 39000 et
seq.; Hazard-ous Materials Release Response Plans and Inventory, Cal. Health
& Safety Code Sections 25500-25541; Toxic Pits Cleanup Act of 1984 ("TCPA"),
Cal. Health & Safety Code Sections 25208-25208.17;

                  5.2.3    OTHER LAWS AND REGULATIONS. All other regulations
promulgated pursuant to said foregoing laws or any amendments or replacement
thereof, provided such amendments or replacements shall in no way limit the
original scope and/or definition of Hazardous Materials defined herein as of
the execution date of this Lease.

                  5.2.4    PHASE I ENVIRONMENTAL ANALYSIS. Landlord has
delivered to Tenant two (2) Phase I Environmental Analysis Reports ("Phase 1
Reports") covering the Premises, and the Expansion Land, respectively and
Tenant acknowledges that this shall be deemed satisfaction of any obligation
on the part of Landlord to disclose any and all Hazardous Materials on or
relating to the Premises, and the Expansion Land as required hereunder or by
any Hazardous Materials Laws.

         5.3      COMPLIANCE WITH HAZARDOUS MATERIALS LAWS. Tenant shall not
cause or knowingly and intentionally permit any Hazardous Materials to be
brought upon, kept, or used in connection with the Premises or by Tenant, its
agents, employees or contractors in a manner or for a purpose prohibited by
or which could result in liability under any applicable law, regulation, rule
or ordinance, including, without limitation, the Hazardous Materials Laws.
Tenant shall, at its own expense, at all times and in all respects comply
with all Hazardous Materials Laws relating to the industrial hygiene,
environmental protection or the use, analysis, generation, manufacture,
storage, presence, disposal or transportation of any Hazardous


                                       8



Materials brought thereon by Tenant, its agents, employees, or contractors.
Tenant shall, at its own expense, procure, maintain in effect and comply with
all conditions of any and all permits, licenses and other governmental and
regulatory approvals relating to Hazardous Materials that are brought upon,
knowingly and intentionally permitted to be brought upon, kept, or used in
connection with the Premises and/or the Expansion Land by Tenant or Tenant's
agents, employees, or contractors ("Tenant's Agents") and Tenant shall cause
any and all said Hazardous Materials to be removed from the Premises and/or
the Expansion Land and transported in accordance with and in compliance with
all Hazardous Materials Laws. Tenant shall in all respects, handle, treat,
deal with and manage any and all Hazardous Materials that are brought upon,
knowingly and intentionally permitted to be brought upon, kept, or used in
connection with the Premises by Tenant or Tenant's Agents, in complete
conformity with all applicable Hazardous Materials Laws and prudent industry
practices regarding the management of such Hazardous Materials. Upon
expiration or earlier termination of this Lease, Tenant shall at its own
expense, cause all Hazardous Materials (to the extent such Hazardous
Materials are generated, stored, released or disposed of during the Term of
this Lease by Tenant or Tenant's Agents) to be removed from the Premises
and/or the Expansion Land and transported for use, storage or disposal in
accordance and in compliance with all applicable Hazardous Materials Laws.
Tenant shall not take any remedial action in response to the presence of any
Hazardous Materials in, on, about or under the Premises and/or the Expansion
Land or in any Improvements situated on the Land and/or the Expansion Land,
nor enter into any settlement agreement, consent, decree or other compromise
in respect to any claims relating to any way connected with the Premises or
the Improvements on the Land and/or the Expansion Land without first
notifying Landlord of Tenant's intention to do so and affording Landlord
ample opportunity to appear, intervene or otherwise appropriately assert and
protect Landlord's interest with respect thereto.

         5.4      NOTICE OF ACTIONS. Tenant shall immediately notify Landlord
in writing of (a) any enforcement, clean-up, removal or other governmental or
regulatory action instituted, completed or threatened pursuant to any
Hazardous Materials Laws; (b) any written claim made or threatened by any
person against Landlord, or the Premises, relating to damage, contribution,
cost recovery, compensation, loss or injury resulting from or claimed to
result from any Hazardous Materials; and (c) any written reports made to any
environmental agency arising out of or in connection with any Hazardous
Materials in, on or about the Premises or with respect to any Hazardous
Materials removed from the Premises, including, any complaints, notices,
warnings, reports or asserted violations in connection therewith. Tenant
shall also provide to Landlord, as promptly as possible, and in any event
within five (5) business days after Tenant first receives or sends the same,
with copies of all written claims, reports, complaints, notices, warnings or
asserted violations relating in any way to the Premises or Tenant's use
thereof. Upon written request of Landlord (to enable Landlord to defend
itself from any claim or charge related to any Hazardous Materials Law),
Tenant shall promptly deliver to Landlord notices of hazardous waste
manifests reflecting the legal and proper disposal of all such Hazardous
Materials removed or to be removed from the Premises and/or the Expansion
Land. All such manifests shall list the Tenant or its agent as a responsible
party only if such Hazardous Materials were caused or knowingly and
intentionally permitted to be brought upon the Premises or Expansion Land by
Tenant, its agent, employees, or contractors, and in such case shall not
attribute responsibility for any such Hazardous Materials to Landlord.

         5.5      DISCLOSURE AND WARNING OBLIGATIONS. Tenant shall also
comply with all laws, ordinances and regulations regarding warning
obligations with respect to the presence or danger of Hazardous Materials or
as otherwise may be required by law (to the extent Tenant has knowledge
thereof). Tenant acknowledges and agrees that it will promptly notify
Landlord prior to reporting to any governmental or quasi-governmental
agencies any matters relating to Hazardous Materials and Landlord shall have
the right to review such reports. So long as Tenant will not be in violation
of any laws requiring Tenant to make such reports, Landlord shall have the
right to assume control over the making of such reports to the applicable
governmental or quasi-governmental agencies. Tenant further agrees to
cooperate with Landlord in complying with all Hazardous Materials Laws
regarding the disclosure of, the presence or danger of Hazardous Materials,
including, with limitation, all notices or other requirements under
California Health and Safety Code Section 25919 et seq., and 25249.5 et seq.
and California Code of Regulations Section 12000 et seq. Notwithstanding the
foregoing, Tenant shall prior to delivering any notices required by this
Section 5.5 to any governmental entity or agency, deliver written notice to
Landlord of the same so as to afford Landlord opportunity to take over such
obligation if Landlord so desires.

         5.6      TENANT INDEMNIFICATION. Tenant shall indemnify, defend
(with counsel reasonably acceptable to Landlord), protect and hold Landlord
and each of Landlord's officers, directors, partners, employees, agents,
attorneys, successors and assigns (collectively "Landlord's Indemnitees")
free and harmless from and against any and all claims, liabilities, damages,
costs, penalties, forfeitures, losses or expenses (including reasonable
attorneys' fees) for death or injury to any person or damage to any property
whatsoever (including water tables and atmosphere) ("Claims") to the extent
arising or resulting in whole or in part from the presence or discharge of
Hazardous Materials to the extent such Hazardous Materials are in excess of
legally permissible amounts under the Hazardous Materials Laws by Tenant,
Tenant's agents, employees, or contractors in, on, under, upon or from the
Premises and/or the Expansion Land or the Improvements located thereon or
from the transportation or disposal of Hazardous Materials to or from the
Premises and/or the Expansion Land to the extent caused by Tenant.


                                       9



         5.7      LANDLORD INDEMNIFICATION. Landlord shall indemnify, defend
(with legal counsel reasonable acceptable to Tenant) and hold Tenant and
Tenant's officers, directors, partners, employees, agents, attorneys,
successors and assigns (collectively, "Tenant's Indemnitees") free and
harmless from and against any and all Claims to the extent arising or
resulting in whole or in part from the presence or discharge of Hazardous
Materials to the extent such Hazardous Materials are in excess of legally
permissible amounts under the Hazardous Materials Laws by Landlord, or its
employees, agents or contractors in, on, under, upon or for the Premises
and/or the Expansion Land or the Improvements thereon or from the
transportation or disposal of Hazardous Materials by Landlord or its
employees, agents, or contractors. Landlord's obligations hereunder shall
include, without limitation, and whether foreseeable or unforeseeable, all
costs of any required or necessary repairs, clean-up or detoxification or
decontamination of the Premises and/or the Expansion Land or the
Improvements, and the presence and implementation of any closure, remedial
action or other required plans in connection therewith, and shall survive the
expiration of or early termination of the term of this Lease and any costs
and fees incurred in the enforcement of the indemnity action. In addition,
with respect to any Hazardous Materials that are in excess of the legally
permissible amounts under the Hazardous Materials Laws that were on the Land
and/or the Expansion Land at the time that the Phase 1 Reports were issued
and which were not disclosed by the Phase 1 Reports ("Pre-existing Hazardous
Materials"), Landlord agrees to remediate such Pre-existing Hazardous
Materials if, as and when required by a governmental agency to the extent
required by such governmental agency. Landlord further agrees to indemnify
and hold Tenant harmless from any fines, penalties or other fees imposed
against Tenant by such governmental agency as a result of such Pre-exiting
Hazardous Materials. Notwithstanding the foregoing, nothing in this Section
5.7 shall be deemed to impose any obligation or liability on Landlord for
remediation, indemnification or payment of any fines, penalties or other fees
if the same would not have been imposed but for some act or omission of
Tenant.

         5.8      ENVIRONMENTAL AUDITS. Landlord shall have the right, at any
time during the term of this Lease, to conduct an environmental audit. If
Landlord conducts such an audit, it shall be at Landlord's sole cost and
expense, except that if said audit discloses the presence of Hazardous
Materials on the Premises, or the Expansion Land in violation of Tenant's
obligations under this Article 5, then the cost of such audit shall be borne
by Tenant. If the audit confirms the presence of Hazardous Materials in on or
under the Premises, or the Expansion Land or the groundwater thereunder in
violation of Tenant obligations under this Article 5, Landlord shall have the
right to require Tenant to immediately commence all necessary remediation,
abatement, removal and cleanup actions to return the Premises, and/or the
Expansion Land and any other property of whatever nature to their condition
existing prior to the appearance of Hazardous Materials. Any plan of
remediation, abatement, removal and cleanup shall be subject to the prior
approval of Landlord, in its sole discretion. Except as specified above,
Tenant shall not perform or cause to be performed, any Hazardous Materials
surveys, studies, reports or inspections, relating to the Premises, and/or
the Expansion Land without obtaining Landlord's advance written consent.

         5.9      ASSIGNMENT AND SUBLETTING. If (i) any anticipated use of
the Premises by any proposed assignee or sublessee involves the generation,
storage, use, treatment or disposal of Hazardous Materials in a manner or for
a purpose prohibited by any governmental agency or authority, or (ii) the
proposed assignee or sublessee is subject to an enforcement order issued by
any governmental activity in connection with the use, disposal, or storage of
Hazardous Materials, it shall not be unreasonable for Landlord to withhold
its consent to an assignment or subletting to such proposed assignee or
sublessee.

                                ARTICLE 6

                         SERVICES AND UTILITIES

         During the Term of this Lease, Tenant will pay, when due, all
charges of every nature, kind or description (including, without limitation,
charges imposed by any utility company as a condition precedent to furnishing
or continuing to furnish utilities or services to the Premises) for utilities
furnished to the Premises or chargeable against the Premises, including all
charges for water, sewage, heat, gas, light, garbage, electricity, telephone,
steam, power, or other public or private utility services and any charges or
fees for present or future water or sewer capacity to serve the Premises, any
charges for the underground installation of gas or other utilities or
services, and other charges relating to the extension of or change in the
facilities necessary, and requested by Tenant, to provide the Premises with
adequate utility services. Notwithstanding the foregoing, nothing contained
herein shall be deemed to limit Landlord's obligations to complete Landlord's
Improvements pursuant to the terms of the Work Letter.

                                   ARTICLE 7

                MAINTENANCE, REPAIR AND ALTERATION OF PREMISES


         7.1      CONSTRUCTION WARRANTY AND LANDLORD OBLIGATIONS. Except to
the extent caused by Tenant's specific use of the Premises or the negligent
acts or intentional misconduct of Tenant, its agents, employees, or
contractors, or as otherwise provided under this Lease, Landlord shall repair
and maintain in good order, condition and repair the foundation, exterior
walls and structural portions of the roof of the Building ("Structural
Portions of the Building"). However, Landlord shall not be obligated to
maintain or repair windows,


                                       10



doors, plate glass, surfaces of exterior walls, or the membrane or other
nonstructural elements of the roof and the same shall not be deemed to be
included within the definition of the Structural Portions of the Premises
Building. Landlord warrants, as Landlord's sole and exclusive warranty
concerning the Landlord's Improvements and the Improvements (including the
HVAC System), the Landlord's Improvements and the Improvements (including the
HVAC System) against defective workmanship and/or materials for a period of
one (1) year from the date of Substantial Completion (as defined in the Work
Letter) of Landlord's Improvements and Landlord agrees, at its sole cost and
expense, to repair or replace any defective item occasioned by poor
workmanship and/or materials during said one-year period, and performance of
such one- year warranty shall be Landlord's sole and exclusive obligation
with respect to defective workmanship and/or materials, and Tenant's rights
to enforce such one-year warranty shall be Tenant's sole and exclusive remedy
with respect to such defective workmanship and/or materials in limitation of
any contract, warranty or other rights, whether express or implied, that
Tenant may otherwise have under applicable law. Landlord covenants that it
will obtain, as part of the costs of the Landlord's Improvements, a ten (10)
year roof warranty. Landlord shall assign to Tenant, to the extent permitted
under any such warranties provided to Landlord, on a non-exclusive basis, all
rights Landlord may have under any warranties provided by contractors or
subcontractors. From and after the expiration of the one-year warranty of
Landlord against defective workmanship and materials, Landlord agrees to
cooperate with Tenant in the enforcement by Tenant, at Tenant's sole cost and
expense, of any express warranties or guaranties of workmanship or materials
given by subcontractors or materialmen or any service contracts that
guarantee or warrant against defective workmanship or materials or provide
service or repair for a period of time in excess of the one-year period
described above. Notwithstanding anything to the contrary, Landlord, at
Landlord's sole cost and expense, shall be solely responsible for repairing
latent structural defects in the Structural Portions of the Building during
the Initial Term and any Renewal Terms (provided that if Tenant has
penetrated, attached any item to, or otherwise damaged the same, Landlord
shall not be responsible for, nor shall Landlord remedy, any defects
attributable to such actions or conditions). During the Initial Term, Tenant
shall be responsible for annual roof inspections and clean out of gutters and
down spouts and Landlord shall be responsible for all other related
maintenance of the roof structure (exclusive of the roof membrane) including
all roof leaks during the first five (5) years of Initial Lease Term
(provided that if Tenant has penetrated, attached any item to, or otherwise
damaged the same, Landlord shall not be responsible for, nor shall Landlord
remedy, any defects attributable to such actions or conditions). Thereafter,
Tenant's exposure shall be capped at Five Thousand Dollars ($5,000.00)
annually inclusive of inspections and clean out of gutters and down spouts.

         7.2      TENANT'S MAINTENANCE. Except as otherwise expressly
provided in this Lease, Tenant, at its sole cost and expense, throughout the
Term of this Lease, including the warranty period specified in Section 7.1
above, whether Tenant is occupying or has vacated the Premises), shall take
good care of the Premises (including the Landlord's Improvements any
improvements hereafter erected or installed on the Land), and shall keep the
same in at least the same order, condition and repair (including interior
repainting and refurnishing, as needed), as when received and shall make and
perform all routine maintenance thereof and all necessary repairs thereto,
interior and exterior, structural and nonstructural, ordinary and
extraordinary, foreseen and unforeseen, of every nature, kind and
description. When used in this Article 7, "repairs" shall include all
necessary replacements, renewals, alterations, additions and betterments,
interior and exterior, structural and non-structural, ordinary and
extraordinary, foreseen and unforeseen, of every nature, kind and
description, including, without limitation, any repairs, replacements,
renewals, alterations and additions required by any governmental law,
ordinance or regulations now or hereafter enacted relating to the Premises.
All repairs made by Tenant shall be at least equal in quality, workmanship
and cost to the original work and shall be made by Tenant in accordance with
all laws, ordinances and regulations whether heretofore or hereafter enacted.

         7.3      TENANT'S WAIVER OF CLAIMS AGAINST LANDLORD. Except as
otherwise specifically provided in this Lease or the Work Letter or this
Lease, Landlord shall not be required to furnish any services or facilities
or to make any repairs or alterations in, about or to the Premises or any
improvements hereafter erected thereon.

                                  ARTICLE 8

                          CHANGES AND ALTERATIONS


         8.1      TENANT'S CHANGES AND ALTERATIONS. Tenant shall not make any
alterations, additions or improvements ("Alterations") to the Property,
without Landlord's prior written consent, which shall not be unreasonably
withheld, except for non structural alterations in the interior of the
Building that do not affect the Structural Portions of the Building or
exterior of the Building ("Permitted Alterations"). All Alterations shall be
done promptly and in a good and workmanlike manner and in compliance with all
laws, ordinances, orders, rules, regulations and requirements of all federal,
state and municipal governments and appropriate departments, commissions,
boards and officers thereof, and in accordance with the orders, rules and
regulations of the Board of Fire Underwriters where the Premises are located,
or any other body exercising similar functions. All such Alterations which
affect the Structural Portions of the Building or the exterior of the
Building ("Structural or Exterior Alterations") shall be performed by a
contractor approved by Landlord, in its reasonable discretion. If required by
Landlord, Tenant shall provide demolition and/or lien and completion bonds in
form and amount satisfactory to Landlord in connection with any Structural or
Exterior Alterations.


                                      11



Tenant shall promptly remove any Alterations constructed in violation of this
Section upon Landlord's written request. All permanent Alterations (i.e.
other than Tenant's movable trade fixtures and equipment), including the
Permitted Alterations made or installed by Tenant shall immediately, upon
completion or installation thereof, become the property of Landlord without
payment therefor by Landlord, and shall be surrendered to Landlord on the
expiration of the Term of this Lease. Prior to commencement of the
Alterations, Tenant shall deliver Builder's All Risk Insurance, in an amount
acceptable to Landlord, in conformance with the requirements of Article 10 of
this Lease. Notwithstanding anything to the contrary set forth herein, Tenant
agrees, at Tenant's sole cost and expense, and within ten (10) days request
therefor by Landlord at the end of the Lease Term or earlier termination
thereof, to remove any of the following types of Permitted Alterations and
repair the Premises where such Permitted Alterations were situated to the
same or better condition than existed prior to Tenant installation of said
Permitted Alterations: racking, Permitted Alterations to create manufacturing
and/or office space, drop ceilings, mezzanines, and demising walls. To the
extent Tenant removes any other Alterations, Tenant shall also, within ten
(10) days of removal thereof, restore the Premises to the condition that
existed prior to Tenant's installation of such Alterations.

         8.2      LIENS. Tenant shall keep the Premises free from any
mechanics', materialmen's, designer's or other liens arising out of any work
performed, materials furnished or obligations incurred by or for Tenant or
any person or entity claiming by, through or under Tenant. Landlord shall
have the right at all times to post and keep posted on the Premises any
notices which it deems necessary for protection from such liens. If any such
liens are filed and are not released of record by payment or posting of a
proper bond within thirty (30) days after such filing, Landlord may, without
waiving its rights and remedies based on such breach by Tenant and without
releasing Tenant from any obligations hereunder, cause such liens to be
released by any means it shall deem proper, including payment of the claim
giving rise to such lien or posting security to cause the discharge of such
lien, in which event all amounts paid by Landlord shall immediately be due
and payable by Tenant as Additional Rent. Tenant hereby indemnifies,
protects, defends and holds Landlord and Landlord's Indemnitees and the
Premises harmless from any liability, cost, obligation, expense (including,
without limitation, reasonable attorneys' fees and expenses and attorneys'
fees incurred in enforcing of this indemnity), or claim of any mechanics',
materialmen's, design professional's or other liens in any manner relating to
any work performed, materials furnished or obligations incurred by or for
Tenant or any person or entity claiming by, through or under Tenant. Tenant
shall notify Landlord in writing fifteen (15) days prior to commencing any
Alterations so that Landlord shall have the right to record and post notices
of non-responsibility or any other notices deemed necessary by Landlord on
the Premises. Tenant shall not create, and shall within thirty (30) days
discharge and satisfy of record, any other lien, encumbrance, charge,
security interest, or other right or interest which shall be or become a
lien, encumbrance, charge or security interest upon the Premises, or any
portion thereof.

         8.3      COMPLIANCE WITH LAWS. Landlord warrants, that provided that
the Tenant Work, and any subsequent Alterations, is in compliance with all
present laws, codes, regulations and ordinances, upon completion of
Landlord's Improvements, the utilities, including without limitation the
HVAC, (as hereinafter defined), the structural portions, the interior and the
exterior of the Premises will meet with all laws, codes, regulations and
ordinances in effect at the time the Premises is delivered by Landlord to
Tenant and will be in good working condition and order (except for punch-list
items). If, at any time, the Premises or such utilities do not meet with such
laws, codes, regulations and ordinances as required by regulations of
governing authorities (other than as a result of Tenant's negligent acts or
the failure of Tenant Work or Tenant's Alterations to comply with such laws,
codes, regulations and ordinances), then, except for work that is
specifically required as a result of the business operation being conducted
by Tenant, the Premises will be brought up to the proper standards at
Landlord's expense. Landlord's receipt of all governmental permits required
for initial occupancy shall be deemed satisfaction of the foregoing
representations and obligations. Landlord shall also be responsible for
paying any and all fines or penalties assessed by any governmental authority
if the Premises fails to meet codes and regulations of governmental
authorities during the Term of this Lease, other than as a result of the
failure of the Tenant Work or Alterations and/or improvements made by Tenant
to comply with all laws, codes, regulations and ordinances as required by
regulations of governing authorities. Tenant shall be responsible for paying
any and all fines or penalties for the failure of the Tenant Work and
Alterations and/or improvements made by Tenant to comply with all laws,
codes, regulations and ordinances as required by regulations of governing
authorities during the Term of this Lease and shall cause the Tenant Work and
any Alterations and/or improvements made by Tenant to be brought up to the
proper standards at Tenant's expenses.


                                      12



                                     ARTICLE 9

                          RIGHTS RESERVED BY LANDLORD


         9.1      LANDLORD'S ENTRY. In addition to any other right of entry
provided to Landlord in this Lease, Landlord reserves the right, at all
reasonable times and upon twenty-four (24) hours prior notice to Tenant
except in case of emergency when no notice shall be required (but Landlord
will use reasonable efforts to give prior or contemporaneous notice), to
enter the Premises to: (i) inspect them; (ii) show the Premises to
prospective purchasers, mortgagees or tenants (provided that Landlord shall
only show the Premises to prospective tenants during the last (6) six months
of the Lease Term); (iii) post notices of non-responsibility or other notices
as may be customary in the State of California; (iv) for performance of any
of Landlord's repair and/or maintenance rights or obligations; or (v) to
exercise any other rights, obligations or remedies that Landlord may have
under this Lease. Landlord and its authorized representatives may enter the
Premises at any time in case of emergency and shall have the right to use any
and all means which Landlord may deem proper to open such doors during an
emergency in order to obtain entry to the Premises. Any entry to the Premises
obtained by Landlord in the event of any emergency shall not, under any
circumstances, be construed or deemed to be a forcible or unlawful entry
into, or detainer of, the Premises, or to be an eviction of Tenant from the
Premises or any portion thereof.

         9.2      LANDLORD'S CURE. If Tenant shall default in the performance
of its obligations under this Lease and if such default is not cured within
the applicable periods provided in Article 14, Landlord upon twenty (20) days
prior notice to Tenant (except in emergency in which case no notice shall be
required) may, but shall not be obligated to, make any such payment or
perform any such act on Tenant's part without waiving its right based upon
any default of Tenant and without releasing Tenant from any obligations
hereunder. Except as may be specifically provided to the contrary in this
Lease, Tenant shall pay to Landlord, within twenty (20) days after delivery
by Landlord to Tenant of statements therefor, sums equal to expenditures
reasonably made and obligations reasonably incurred by Landlord in connection
with the remedying by Landlord of Tenant's defaults. If there are any
outstanding monetary obligations of Tenant under this Lease attributable to
the period prior to the expiration or termination of this Lease, such
obligations shall survive the termination or expiration of this Lease and
such amount shall be payable to Landlord within ten (10) days after receipt
of notice therefor from Landlord.

                                  ARTICLE 10

                           INDEMNITY AND INSURANCE


         10.1     TENANT'S INSURANCE OBLIGATIONS. Tenant, at its sole cost
and expense, shall obtain and continuously maintain in full force and effect
during the Term of this Lease, commencing with the earlier to occur of (a)
Commencement Date or (b) the date Tenant first occupies the Premises,
policies of insurance covering the Improvements constructed, installed or
located on the Premises naming the Landlord, as an additional insured,
against (a) loss or damage by fire; (b) loss or damage from such other risks
or hazards now or hereafter embraced by an "Extended Coverage Endorsement,"
including, but not limited to, windstorm, hail, explosion, vandalism, riot
and civil commotion, damage from vehicles, smoke damage, water damage and
debris removal; (c) loss for damage by earthquake if requested by Landlord
(provided that Landlord shall reimburse Tenant for the cost of insurance
allocable to earthquake coverage); (d) loss from so-called explosion,
collapse and underground hazards; and (e) loss or damage from such other
risks or hazards of a similar or dissimilar nature which are now or may
hereafter be customarily insured against with respect to improvements similar
in construction, design, general location, use and occupancy to the
Improvements other than loss for flood. At all times, such insurance coverage
shall be in an amount equal to 100% of the then "full replacement cost" of
the Improvements exclusive of excavations, foundations and footings "Full
Replacement Cost" shall be interpreted to mean the cost of replacing the
improvements without deduction for depreciation or wear and tear, and it
shall include a reasonable sum for architectural, engineering, legal,
administrative and supervisory fees connected with the restoration or
replacement of the Improvements in the event of damage thereto or destruction
thereof. If a sprinkler system shall be located in the Improvements,
sprinkler leakage insurance shall be procured and continuously maintained by
Tenant at Tenant's sole cost and expense. Prior to occupancy of the Premises,
Tenant shall deliver to Landlord a copy of such insurance policy.

         10.2     INSURANCE COVERAGE. During the Term of this Lease, Tenant,
at its sole cost and expense, shall obtain and continuously maintain in full
force and effect comprehensive general liability insurance or commercial
liability insurance against any loss, liability or damage on, about or
relating to the Premises, or any portion thereof, with limits of not less
than Three Million Dollars ($3,000,000.00) combined single limit, per
occurrence and aggregate, coverage on an occurrence basis. Such insurance
shall specifically insure (by contractual liability endorsement) Tenant's
indemnity obligations under this Lease.

         The insurance set forth in this Section 10.2 shall be maintained by
Tenant at not less than the limits set forth herein. To the extent it is
customary in the marketplace for insurance limits to be higher than those
specified in this Section 10.2, such limits may be increased, upon written
notice from Landlord to Tenant, at the end of each five (5) year period
during which this Lease is in effect ("Adjustment Date") based upon


                                      13



increases (if any) in the Index (defined below). The most recent Index in
publication prior to the Commencement Date shall be the "Base Index." On each
Adjustment Date, the insurance limits shall be increased by the percentage
equal to the percentage increase (if any) in the most recent Index in
publication prior to the Adjustment Date ("Comparison Index") over the Base
Index. The term "Index" as used in this Lease shall mean the United States
Department of Labor, Bureau of Labor Statistics Consumer Price Index for
Urban Wage Earners and Clerical Workers, Los Angeles-Long Beach-Anaheim
Average Subgroup "All Items," (1982-84 = 100). If the 1982-84 base of the
Index should hereafter be changed, then the new base shall be converted to
the 1982-84 base and the base as so converted shall be used. If at any time
the Index should not exist in the format recited herein, Landlord shall
substitute any official index published by the Bureau of Labor Statistics, or
successor or similar governmental agency, as may then be in existence and
shall, in Landlord's opinion, be most nearly equivalent thereto.

         10.3     INSURANCE PROVISIONS. All policies of insurance required by
this Article shall provide that the proceeds thereof shall be payable to
Tenant and Landlord as their interests appear, and if Landlord so requests
shall also be payable to any contract purchaser of the Premises and the
holder of any mortgages now or hereafter becoming a lien on the fee of the
Premises, or any portion thereof, provided that any such mortgagee has
provided Tenant with the Non-Disturbance Agreement (defined below). Tenant
shall not, on Tenant's own initiative or pursuant to request or requirement
of any third party, take out separate insurance concurrent in form or
contributing in the event of loss with that required in Section 10.1 hereof,
unless Landlord is named therein too as an additional insured with loss
payable as in said Section 10.1 provided. Tenant shall immediately notify
Landlord whenever any such separate insurance is taken out and shall deliver
to Landlord original certificates evidencing the same. Any such insurance
obtained and maintained by Tenant shall name Landlord, and, if requested by
Landlord, Landlord's mortgagee, as an additional insured therein, provided
that any such mortgagee has provided Tenant with the Non-Disturbance
Agreement (defined below), and such insurance shall be obtained and
maintained from and with a reputable and financially sound insurance company
authorized to issue such insurance in California. Each policy required under
this Article 10 shall have attached thereto (a) an endorsement that such
policy shall not be canceled or materially changed without at least thirty
(30) days prior written notice to Landlord, and (b) an endorsement to the
effect that the insurance as to the interest of Landlord shall not be
invalidated by any act or neglect of Landlord or Tenant and an "agreed value"
endorsement. All policies of insurance, together with any endorsements
reflecting the changes to the policy required to comply with this Lease,
shall be written in companies reasonably satisfactory to Landlord and
licensed in the state in which the Premises are located. Such certificates of
insurance shall be in a form reasonably acceptable to Landlord, shall be
delivered to Landlord upon commencement of the Term and prior to expiration
of such policy, new certificates of insurance, shall be delivered to Landlord
not less than twenty (20) days prior to the expiration of the then current
policy Term. In the event Tenant shall fail to procure such insurance, or to
deliver such policies or certificates and appropriate endorsements, Landlord
may, at its option, procure such policies for the account of Tenant after
five (5) days' written notice, and the cost thereof shall be paid by Tenant
to Landlord as Additional Rent within fifteen (15) days after delivery to
Tenant of bills therefor.

         10.4     WAIVER OF SUBROGATION. Tenant shall cause to be inserted in
the policy or policies of insurance required by this Article 10 hereof a
so-called "Waiver of Subrogation Clause" as to Landlord. Each party hereby
waives, releases and discharges the other party, its agents and employees
from all claims whatsoever arising out of loss, claim, expense or damage to
or destruction covered or coverable by insurance required under this Article
10 notwithstanding that such loss, claim, expense or damage may have been
caused by such other party, its agents or employees, and each party agrees to
look to the insurance coverage only in the event of such loss.

         10.5     RENTAL ABATEMENT INSURANCE. Landlord may maintain insurance
coverage (including loss of use and rental abatement coverage) upon Tenant's
business and upon all personal property of Tenant or the personal property of
others kept, stored or maintained on the Premises against loss or damage by
fire, windstorm or any other casualties or causes for such amount as Landlord
may desire. Tenant shall reimburse Landlord for the actual and commercially
reasonable costs of such rental abatement insurance, covering a period not to
exceed eighteen (18) months, on an annual basis. Tenant shall pay such
amounts to Landlord as Additional Rent, no later than thirty (30) days after
receipt of a statement therefor from Landlord. Landlord shall have the right
to require payments on a semi-annual or annual basis. The failure of Landlord
to deliver a statement for such charges shall not constitute a waiver of
Landlord's rights to collect such amounts if delivered within six (6) months.
Tenant shall have the right, upon at least six (6) months prior notice, to
elect to carry its own business interruption or rental abatement insurance,
in amounts reasonably acceptable to Landlord and which satisfy the
requirements set forth in Section 10.3 and this Section 10.5 of this Lease.
In such case, Landlord shall cancel the rental abatement insurance. Tenant
agrees that such policies shall contain a waiver of subrogation clause as to
Landlord.

         10.6     INDEMNIFICATION BY TENANT. To the fullest extent allowed by
law, Tenant shall at all times indemnify, protect, defend with legal counsel
reasonably acceptable to Landlord) and hold Landlord and Landlord's
shareholders, officers, directors, partners, employees, lender, managing
agent, successors and/or assigns (collectively, "Landlord's Indemnities")
harmless against and from any and all claims, costs, liabilities, actions and
damages (including, without limitation, attorneys' fees and costs and costs
related to the enforcement of this indemnity provision) arising from or out
of any occurrence in, upon or about the Premises


                                      14



or the occupancy or use by Tenant of the Premises, or the condition of the
Premises to the extent caused by any act or omission of Tenant, its agents,
contractors, servants, tenants, invitees (i.e. persons directed or requested
by Tenant to enter the Premises) or licensees (collectively "Tenant's
Agents") or arising from any act or negligence of Tenant or Tenant's Agents,
or a default by Tenant under this Lease or, to the extent covered by
insurance Tenant is required to carry under this Lease, arising from any
accident, injury or damage whatsoever caused to any person, or entity
occurring during the Term of this Lease, in or about the Premises, and from
and against all costs, attorney's fees, expenses and liabilities incurred in
or about any such claim or action or proceeding brought thereon.
Notwithstanding the foregoing, Tenant shall not have any liability hereunder
or otherwise with respect to any claim, cost, liability, action or damage
caused by the negligence or wilful misconduct of Landlord or any of
Landlord's Indemnitees or Landlord's Agents or any material default by
Landlord under this Lease. In case any action or proceeding be brought
against Landlord by reason of any such claim, Tenant, upon notice from
Landlord, covenants to defend such action or proceeding by counsel reasonably
satisfactory to Landlord.

         10.7     INDEMNIFICATION BY LANDLORD. To the fullest extent allowed
by law, Landlord shall at all times indemnify, protect, defend (with legal
counsel reasonably acceptable to Tenant) and hold Tenant and Tenant's
shareholders, officers, directors, partners, employees, affiliates,
successors and/or assigns (collectively, "Tenant's Indemnitees") harmless
against and from any and all claims, costs, liabilities, actions and damages
(including, without limitation, attorneys' fees and costs and costs related
to the enforcement of this indemnity provision) arising from or out of any
negligence or willful misconduct by Landlord or any of the Landlord's
Indemnities or Landlord's Agents, in, on, or about the Premises or any breach
by Landlord of its obligations under this Lease, and from and against all
costs, attorneys' fees, expenses and liabilities incurred in or about any
such claim or action or proceeding brought thereon; provided, however, that
in no event shall Landlord be obligated to indemnify, defend and hold Tenant
or any of Tenant's Indemnitees or Tenant's Agents harmless to the extent of
any claims, costs, liabilities, actions or damages arising from or out of, or
occasioned in whole or in part by, the negligence or wilful misconduct of
Tenant, Tenant's Indemnitees or Tenant's Agents or any material default by
Tenant under this Lease. In case any action or proceeding be brought against
Tenant by reason of any such claim, Landlord, upon notice from Tenant,
covenants to defend such action or proceeding by counsel reasonably
satisfactory to Tenant. Landlord shall cause the obligations under this
Section 10.7 to be covered under Landlords policy of commercial general
liability insurance.

                                ARTICLE 11

                         ASSIGNMENT AND SUBLETTING

         11.1     RESTRICTION ON OTHER TRANSFERS. Except as specifically
permitted in Section 11.2 below, Tenant shall not assign, sublease, mortgage,
pledge, transfer, or otherwise encumber or dispose of this Lease, or any
interest therein, or in any manner assign, mortgage, pledge, transfer or
otherwise encumber or dispose of its interest or estate in the Premises, or
any portion thereof ("Transfer"), without obtaining Landlord's prior written
consent in each and every instance, which consent shall not be unreasonably
withheld, delayed or conditioned. If Landlord fails to respond to any request
by Tenant for Landlord's consent or approval within twenty (20) days of such
request, Tenant shall provide Landlord with a second written request. If
Landlord fails to respond to such second written request within ten (10) days
of Landlord's receipt thereof, Landlord shall be deemed to have consented to
such Transfer; provided that such second written request specifically states
that Landlord's failure to respond within ten (10) days shall be deemed
consent under this Section 11.1 of this Lease. No Transfer shall release
Tenant from its liability under this Lease. Tenant acknowledges and agrees
that this covenant and agreement is a material inducement to the decision of
Landlord to lease the Premises to Tenant and that Landlord may use its sole
and absolute discretion hereunder. Landlord shall have the right to withhold
consent to any sublessee in the event any of the conditions set forth in
Section 5.8 of this Lease apply.

         11.2     PERMITTED TRANSFERS. Notwithstanding the provisions of
Section 11.1, Tenant shall have the right, without Landlord's prior consent,
to Transfer all or any portion of the Premises to a related entity or
affiliate of Tenant. Tenant may also Transfer the lease to any successor
entity, whether by merger, consolidation or otherwise, and to any entity that
purchases all or substantially all of Tenant's assets. Finally Tenant shall
be permitted to assign or sublease to an Affiliate (as hereinafter defined)
of Tenant. The foregoing Transfers described in this Section 11.2 are
referred to as "Permitted Transfers." No such Permitted Transfer shall
require Landlord's prior approval or consent, provided that Tenant shall
provide to Landlord written notice of the Transfer, within a reasonable time
thereafter, including the name of the transferee and the terms of the
Transfer, and an agreement executed by the transferee acceptable to and in
favor of Landlord whereby the transferee agrees to assume Tenant's
obligations under this Lease. No such Permitted Transfer shall release Tenant
from its liability under this Lease. As used herein, the term "Affiliate"
shall mean any person, directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control with the
person in question, which, in the case of a person which is a partnership,
shall include each of the partners thereof and each of their Affiliates. The
term "control," as used in the immediately preceding sentence, means, with
respect to a person that is a corporation, the right to exercise, directly or
indirectly, more than twenty percent (20%) of the voting rights attributable
to the shares of the controlled corporation, and, with respect to a person
that is not a corporation, the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of the
controlled person.


                                      15



         11.3     SUBLEASE REQUIREMENTS. Any sublease permitted under this
Article 11 shall contain provisions to the effect that, except as may
otherwise be specifically agreed to by Landlord in writing, (i) such sublease
is only for actual use and occupancy by the sublessee; (ii) such sublease is
subject and subordinate to all of the terms, covenants and conditions of this
Lease and to all of the rights of Landlord thereunder; and (iii) Tenant shall
continue to be and remain liable under the Lease. In the case of a sublease,
a copy of any sublease fully executed and acknowledged by Tenant and the
sublessee shall be mailed to Landlord ten (10) days prior to the effective
date of such sublease, which sublease shall be in form and content reasonably
acceptable to Landlord.

         11.4     NO MERGER. No merger shall result from Tenant's sublease of
the Premises under this Article 11, Tenant's surrender of this Lease or the
termination of this Lease in any other manner.

         11.5     PROFITS ON TRANSFER. In the event that Tenant shall make a
permitted Transfer hereunder of all or any portion of the Premises (the
"Transfer Space"), then the following shall apply: Tenant shall pay Landlord
monthly, as Additional Rent, at the same time as the monthly installment of
Basic Rent required hereunder, fifty percent (50%) of the "Profit" payable by
the Transferee pursuant to the terms reserved in the Transfer agreement,
assignment or sublease. For purposes of this Section 11.5, "Profit" shall
mean all rent and other amounts paid or payable by the Transferee to Tenant
pursuant to the terms of the Transfer which are in excess of the applicable
Basic Rent and Additional Rent (if the obligation to pay Additional Rent is
not passed through to or assumed by the Transferee under this Lease) after
deducting therefrom Tenant's actual and reasonable costs incurred in
connection with the Transfer, including but not limited to reasonable real
estate commissions, costs of renovations or improvements, reasonable tenant
improvement allowances, reasonable attorneys fees and reasonable rent
concessions.

                  11.5.1   TENANT'S PROFIT STATEMENT. Tenant shall and hereby
agrees that it will furnish to Landlord upon written request from Landlord a
complete statement, setting forth in detail the computation of all profit
derived and to be derived from such assignment or sublease, such computation
to be made in accordance with generally accepted accounting principles.
Tenant agrees that Landlord or its authorized representatives shall be given
access, at all reasonable times (at Tenant's Southern California office) upon
ten (10) business days advance notice, not to exceed more than one (1) time
per year per Transfer, to the books, records and papers of Tenant relating
directly to any such assignment or subletting.

                                 ARTICLE 12

                            DAMAGE OR DESTRUCTION

         12.1     DESTRUCTION AND RESTORATION. Tenant covenants and agrees
that in case of damage to or destruction of the Improvements after the
Commencement Date by fire or otherwise, Tenant at its sole cost and expense,
shall promptly restore, repair, replace and rebuild the same ("Restoration")
as nearly as possible to the condition that the same were in immediately
prior to such damage or destruction with such changes or alterations as may
be reasonably acceptable to Tenant or required by law. Tenant shall forthwith
give Landlord written notice of such damage or destruction upon the
occurrence thereof and specify in such notice, in reasonable detail, the
extent thereof. The Restoration shall be carried on and completed in
accordance with the provisions and conditions of this Lease. All insurance
proceeds shall be held by Landlord and Tenant as co-trustee. If the insurance
moneys in the hands of Landlord and Tenant as co-trustees shall be deemed to
be insufficient by Landlord to pay the entire costs of the Restoration,
Tenant agrees, only to the extent Tenant failed to maintain the insurance
Tenant is required to maintain under this Lease, to pay any deficiency
promptly upon demand that would have been paid by the insurance company had
Tenant maintained the required insurance.

         12.2     APPLICATION OF INSURANCE PROCEEDS. All insurance moneys
recovered by Landlord or Tenant shall be held by Landlord and Tenant as
co-trustees on account of such damage or destruction, less the costs, if any,
to Landlord of such recovery, shall be applied to the payment of the costs of
the Restoration and shall be paid out from time to time as the Restoration
progresses, in accordance with requirements imposed by Landlord or any
mortgagee of record, provided that any such mortgagee has theretofore or
concurrently provided, Tenant with the Non-Disturbance Agreement (defined
below). Tenant shall furnish Landlord at the time of any such payment with
lien releases and evidence reasonably satisfactory to
Landlord that there are no unpaid bills in respect to any work, labor,
services or materials performed, furnished or supplied in connection with such
Restoration.

         12.3     CONTINUANCE OF TENANT'S OBLIGATIONS. No destruction of or
damage to the Premises, or any portion thereof, by fire, casualty or
otherwise shall permit Tenant to surrender this Lease or shall relieve Tenant
from its liability to pay to Landlord the Basic Rent and Additional Rent
payable under this Lease or from any of its other obligations under this
Lease, and Tenant waives any rights now or hereafter conferred upon Tenant by
present or future law or otherwise to quit or surrender this Lease or the
Premises, or any portion thereof, to Landlord or to any suspension,
diminution, abatement or reduction of rent on account of any such damage or
destruction.


                                      16




         12.4     DAMAGE OR DESTRUCTION AT END OF LEASE TERM. In the event
the damage or destruction occurs during the last eighteen (18) months of the
Lease Term, then, notwithstanding the provisions of Section 12.1 and 12.2,
Tenant shall not be obligated to complete such Restoration so long as Tenant
assigns to Landlord all insurance proceeds except those amortized and
allocable to Tenant's Work (as defined in the Work Letter) (including the
amount of any deductibles and any other amounts necessary) so that Landlord
can complete such Restoration.

         12.5     WAIVER OF CALIFORNIA STATUTES. Tenant waives the protection
of any statute, code or judicial decision which grants a Tenant the right to
terminate a lease in the event of damage or destruction of the Premises,
including, but not limited to, the provisions of Sections 1932(2) and 1933(4)
of the Civil Code or any successor statute or law. Tenant agrees that the
provisions of this Article shall govern the rights and obligations of
Landlord and Tenant in the event of any damage or destruction of the
Premises. Notwithstanding the foregoing, Basic Rent and Additional Rent shall
be abated proportionately during any period of repair under this Article for
a period not to exceed eighteen (18) months; provided that Tenant has
complied with the requirements of Section 10.5.

                                   ARTICLE 13

                                  CONDEMNATION

         13.1     CONDEMNATION OF ENTIRE PREMISES. If, during the Term of
this Lease, the entire Premises shall be taken as the result of the exercise
of the power of eminent domain (hereinafter referred to as the
"Proceedings"), this Lease shall terminate on the date of vesting of title
pursuant to such Proceedings. In any taking of the Premises, or any portion
thereof, whether or not this Lease is terminated as in this Article provided,
Tenant shall not be entitled to any portion of the award for the taking of
the Premises or damage to the Improvements, except as otherwise provided for
in Section 13.3 with respect to the restoration of the Improvements, or for
the estate or interest of Tenant therein, all such award, damages,
consequential damages and compensation being hereby assigned to Landlord, and
Tenant hereby waives any right it now has or may have under present or future
law to receive any separate award of damages for its interest in the
Premises, or any portion thereof, or its interest in this Lease, except that
Tenant shall have, nevertheless, the limited right to prove in the
Proceedings and to receive any award which may be made for damages to or
condemnation of Tenant's movable trade fixtures and equipment, and for
Tenant's relocation costs in connection therewith.

         13.2     PARTIAL CONDEMNATION/TERMINATION OF LEASE. If, during the
Term of this Lease, less than the entire Premises, but more than ten percent
(10%) of the floor area of the Building, or more than fifteen percent (15%)
of the land area of the Premises, shall be taken in any such Proceedings,
this Lease shall, upon vesting of title in the Proceedings, terminate as to
the portion of the Premises so taken, and Tenant shall have the right to
terminate this Lease if the business of Tenant conducted in the portion of
the Premises taken cannot reasonably be carried on with substantially the
same utility and efficiency in the remainder of the Premises and Tenant
cannot construct or secure substantially similar space to the space so taken,
on the Premises. Such termination as to the remainder of the Premises shall
be effected by notice in writing given not more than sixty (60) days after
the date of vesting of title in such Proceedings, and shall specify a date
not more than sixty (60) days after the giving of such notice as the date for
such termination.

         13.3     PARTIAL CONDEMNATION/CONTINUATION OF LEASE. If ten percent
(10%), or less, of the floor area of the Building, or fifteen percent (15%),
or less, of the Land, shall be taken in such Proceedings, or if more than ten
percent (10%) of the floor area of the Building or more than fifteen percent
(15%) of the Land is taken (but less than the entire Premises), and this
Lease is not terminated as in Section 13.2 hereof provided, this Lease shall,
upon vesting of title in the Proceedings, terminate as to the parts so taken.
The net amount of the award (after deduction of all costs and expenses,
including attorneys' fees), shall be held by Landlord and Tenant as
co-trustees and applied as hereinafter provided. Tenant, in such case,
covenants and agrees, at Tenant's sole cost and expense (subject to
reimbursement to the extent hereinafter provided), promptly to restore that
portion of the Improvements on the Premises not so taken to a complete
architectural and mechanical unit for the use and occupancy of Tenant as in
this Lease provided. In the event that the net amount of the award (after
deduction of all costs and expenses, including attorney's fees) that may be
received by Landlord and held by Landlord and Tenant as co-trustees in any
such Proceedings is insufficient to pay all costs of such restoration work,
Landlord may elect to either (a) terminate the Lease in accordance with the
provisions of Section 13.1 or (b) continue the Lease and restore that portion
of the Improvements on the Premises not so taken to a complete architectural
and mechanical unit for the use and occupancy of Tenant as in this Lease
provided. If Landlord elects to terminate the Lease under this Section 13.3,
Landlord shall deliver to Tenant written notice of Landlord's election to
terminate along with an estimate of the amount of the deficiency between the
costs of complete restoration and the award ("Deficiency Amount"), Tenant may
continue the Lease in effect by delivery written notice to Landlord, within
fifteen (15) days of receipt of Landlord's termination notice, of its
election to continue the Lease and pay the Deficiency Amount. If Tenant
elects to continue the Lease, Tenant shall deliver to Landlord and Tenant as
co-trustees the Deficiency Amount within fifteen (15) days of written request
by Landlord. If the Premises are restored, the award amounts shall be
disbursed in accordance with the same requirements set forth in Section 12.2
of this Lease. If the Lease is terminated, the award amounts shall be
disbursed in accordance with Section 13.1.


                                      17



         13.4     CONTINUANCE OF OBLIGATIONS. In the event this Lease is not
terminated, then from and after the date of vesting of title in such
Proceedings, Tenant shall continue to pay the Basic Rent and Additional Rent
and other charges payable hereunder, as in this Lease provided, to be paid by
Tenant, subject to an abatement of a just and proportionate part of the Basic
Rent according to the extent and nature of such taking as may be mutually
agreed upon by Tenant and Landlord.

         13.5     TENANT'S WAIVER. Tenant waives the protection of any
statute, code or judicial decision which grants Tenant a right to any
compensation other than that set forth in this Article in the event of a
taking, including, but not limited to, California Code of Civil Procedure
Section 1265.150 or any successor statute or law.

                                  ARTICLE 14

                              DEFAULTS; REMEDIES

         14.1     EVENTS OF DEFAULT. The occurrence of any of the following
shall constitute a default and breach of this Lease by Tenant:

                  14.1.1   FAILURE TO PAY. If Tenant fails to pay such Rent
or such charge as and when due where such failure continues for ten (10) days
after written notice thereof by Landlord to Tenant.

                  14.1.2   FAILURE TO PERFORM. If Tenant fails to perform any
of Tenant's nonmonetary obligations under this Lease for a period of thirty
(30) days after written notice from Landlord; provided that if more time is
required to complete such performance, Tenant shall not be in default if
Tenant commences such performance within the thirty (30)-day period and
thereafter diligently pursues its completion.

                  14.1.3   OTHER DEFAULTS. (i) If Tenant makes a general
assignment or general arrangement for the benefit of creditors; (ii) a
petition for adjudication of bankruptcy or for reorganization or
rearrangement is filed by or against Tenant and is not dismissed within sixty
(60) days; (iii) if a trustee or receiver is appointed to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in the Lease and possession is not restored to Tenant within sixty
(60) days; or (iv) if substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease is subjected to attachment,
execution or other judicial seizure which is not discharged within sixty (60)
days. If a court of competent jurisdiction determines that any of the acts
described in this Subsection is not a default under this Lease, and a trustee
is appointed to take possession (or if Tenant remains a debtor in possession)
and such trustee or Tenant transfers Tenant's interest hereunder, then
Landlord shall receive, as Additional Rent, the difference between the Rent
(or any other consideration) paid in connection with such assignment or
sublease and the Rent payable by Tenant hereunder.

The notices required by this Section are intended to satisfy any and all
notice requirements imposed by law on Landlord and are not in addition to any
such requirement.

         14.2     REMEDIES. On the occurrence of any default by Tenant,
Landlord may, at any time thereafter, with or without any additional notice
or demand and without limiting Landlord in the exercise of any right or
remedy which Landlord may have:

                  (a)      Terminate Tenant's right to possession of the
Property at any time by any lawful means, in which case this Lease shall
terminate and Tenant shall immediately surrender possession of the Property
to Landlord. In such event, Landlord shall be entitled to recover from Tenant
all damages incurred by Landlord by reason of Tenant's default, including (i)
the worth at the time of the award of the unpaid Rent and other charges which
Landlord had earned at the time of the termination; (ii) the worth at the
time of the award of the amount by which the unpaid Basic Rent, Additional
Rent and other charges which Landlord would have earned after termination
until the time of the award exceeds the amount of such rental loss that
Tenant proves Landlord could have reasonably avoided; (iii) the worth at the
time of the award of the amount by which the unpaid Basic Rent, Additional
Rent and other charges which Tenant would have paid for the balance of the
Lease Term after the time of award exceeds the amount of such rental loss
that Tenant proves Landlord could have reasonable avoided; and (iv) any other
amount, including court costs necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under the Lease or which in the ordinary course of things would be likely to
result therefrom, including, but not limited to, any costs or expenses
Landlord incurs in maintaining or preserving the Property after such default,
the cost of recovering possession of the Property, expenses of reletting,
including necessary renovation or alteration of the Property, Landlord's
reasonable attorneys' fees incurred in connection therewith, and any real
estate commission paid or payable. As used in subparts (i) and (ii) above,
the "worth at the time of the award" is computed by allowing interest on
unpaid amounts at the Maximum Rate of Interest set forth in Item 10 of the
Basic Terms. As used in subpart (iii) above, the "worth at the time of the
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one
percent (1%). If Tenant has abandoned the Property, Landlord shall have the
option of (i) retaking possession of the Property and recovering from Tenant
the amount specified in this Paragraph 14.1.5(a), or (ii) proceeding under
Paragraph 14.1.5(b) or (c);


                                      18



                  (b)      Maintain Tenant's right to possession, in which
case this Lease shall continue in effect whether or not Tenant has abandoned
the Property. Landlord shall be entitled to enforce all of Landlord's rights
and remedies under this Lease, including the right to recover the Rent as it
becomes due. This remedy is intended to and is hereby declared to be that
described in California Civil Code Section 1951.4. During the period Tenant
is in default, Landlord may enter the Premises and relet them, or any part of
them, to third parties for Tenant's account. Tenant shall be liable
immediately to Landlord for all costs Landlord incurs in reletting the
Premises, including brokers' commissions, expenses of remodeling the Premises
required by the reletting, and like costs. Reletting can be for a period
shorter or longer than the remaining Term of this Lease. Tenant shall pay to
Landlord the Rent due under this Lease on the dates the Rent is due, less the
Rent Landlord receives from reletting. No act by Landlord allowed by this
Section 14.2(b) will terminate this Lease unless Landlord notifies Tenant in
writing that Landlord elects to terminate this Lease. After Tenant's default
and for so long as Landlord does not terminate Tenant's right to possession
of the Premises, if Tenant obtains Landlord's consent, Tenant will have the
right to assign or sublet its interest in this Lease, but Tenant will not be
released from liability. If Landlord elects to relet the Premises as provided
in this Section 14.2(b), Rent that Landlord receives from reletting will be
applied to the payment of: (i) first, any indebtedness from Tenant to
Landlord other than Rent due from Tenant; (ii) second, all costs, including
for maintenance, incurred by Landlord in reletting; and (iii) third, Rent due
and unpaid under the Lease. After deducting the payments referred to in this
Section 14.2(b), any sum remaining from the Rent Landlord receives from
reletting will be held by Landlord and applied in payment of future Rent as
Rent becomes due under this Lease. If, on the date Rent is due under this
Lease, the Rent received from the reletting is less than the Rent due on that
date, Tenant will pay to Landlord, in addition to the remaining Rent due, all
costs, including for maintenance, Landlord incurred in reletting which remain
after applying the Rent received from the reletting; and/or

                  (c)      Pursue any other remedy now or hereafter available
to Landlord under the laws or judicial decisions of the state in which the
Property is located.

         14.3     RIGHT OF LANDLORD TO RE-ENTER. In the event of any
termination of this Lease, Landlord shall have the immediate right to enter
upon and repossess the Premises, and any personal property of Tenant may be
removed from the Premises and stored in any public warehouse at the risk and
expense of Tenant.

         14.4     CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.

         14.5     MITIGATION. Landlord shall have the obligation to use all
reasonable efforts to mitigate any loss or damages suffered by Landlord on
account of any default by Tenant.

         14.6     LIMITATION ON REMEDIES. Notwithstanding anything to the
contrary in this Article 14, Landlord shall not be permitted to accelerate
the payment of Rent for the remainder of the Lease Term unless there has been
a monetary default by Tenant for over 60 days. Except as otherwise
specifically provided in this Lease, neither Landlord nor Tenant shall not be
entitled to recover consequential and/or punitive damages from the other as a
result of the breach of this Lease.

         14.7     LEGAL COSTS. Each party shall reimburse the other party,
upon demand, for any reasonable costs or expenses incurred by such other
party in connection with any actual breach or default of the non-performing
party under this Lease, whether or not suit is commenced or judgment entered.
Such costs shall include reasonable legal fees and costs incurred for the
negotiation of a settlement, enforcement of rights or otherwise. Tenant shall
also indemnify, protect, defend and hold Landlord harmless from all costs,
expenses, demands and liability (including, without limitation, attorneys'
fees and costs, including attorneys fees as a result of the enforcement of
this indemnity) incurred by Landlord if Landlord becomes or is made a party
to any claim or action (a) instituted by Tenant (other than against
Landlord), or by any third party against Tenant, or by or against any person
holding any interest under or using the Premises by license of or agreement
with Tenant; (b) for foreclosure of any lien for labor or material furnished
to or for Tenant or such other person; (c) otherwise arising out of or
resulting from any act or transaction of Tenant or such other person; or (d)
necessary to protect Landlord's interest under this Lease in a bankruptcy
proceeding, or other proceeding under Title 11 of the United States Code, as
amended. Tenant shall defend Landlord against any such claim or action at
Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's election, Tenant shall reimburse Landlord for any legal fees or
costs incurred by Landlord in any such claim or action.

         14.8     NO WAIVER. No failure by Landlord or by Tenant to insist
upon the performance of any of the terms of this Lease or to exercise any
right or remedy consequent upon a breach thereof, and no acceptance by
Landlord of full or partial rent from Tenant or any third party during the
continuance of any such breach, shall constitute a waiver of any such breach
or of any of the terms of this Lease. None of the terms of this Lease to be
kept, observed or performed by Landlord or by Tenant, and no breach thereof,
shall be waived, altered or modified except by a written instrument executed
by Landlord and/or by Tenant, as the case may be. No waiver of any default of
either party herein shall be implied from any omission by the other party to
take any action on account of such default. One or more waivers by either
party shall not be construed as a waiver of a subsequent breach of the same
covenant, term or condition. No statement on a payment check


                                      19



from Tenant or in a letter accompanying a payment check shall be binding on
Landlord. Landlord may, with or without notice to Tenant, negotiate such
check without being bound to the conditions of such statement.

         14.9     WAIVER BY TENANT. Tenant hereby waives all claims by
Landlord's re-entering and taking possession of the Premises and removing and
storing the property of Tenant as permitted under this Article 14 and will
save Landlord harmless from all losses, costs or damages occasioned Landlord
thereby. No such reentry shall be considered or construed to be a forcible
entry by Landlord. If Landlord fails to perform any of Landlord's obligations
under this Lease, which failure continues for more than fifteen (15) days
after Tenant's delivery of written notice to Landlord specifying such
failure, or if such failure is of a nature that it requires more than fifteen
(15) days to remedy and continues beyond the time reasonably necessary to
cure (and Landlord has not undertaken procedures to cure the failure withing
such fifteen (15) day period and diligently pursued such efforts to complete
such cure), Tenant may deliver a reminder notice ("Reminder Notice"). If
Landlord fails to commence to cure such failure within fifteen (15) days of
receipt of Tenant's Reminder Notice and diligently pursue the same to
completion, then Tenant may incur reasonable expenses necessary to perform
the obligation of Landlord specified in such notice and invoice Landlord
therefor. If Landlord fails to reimburse Tenant within fifteen (15) days
following receipt of such invoice, then Tenant may deliver a reminder notice
("First Reminder Notice"). If Landlord fails to reimburse Tenant within
fifteen (15) days of receipt of Tenant's First Reminder Notice, Tenant may
deliver a second reminder notice ("Second Reminder Notice"). If Landlord
fails to reimburse Tenant within fifteen (15) days of receipt of Tenant's
Second Reminder Notice, then Tenant may apply the cost of such repairs
against the next Basic Rent obligations due hereunder, and invoice Landlord
therefor.

         Notwithstanding anything contained herein to the contrary, Tenant's
rights to deduct from Basic Rent shall be restricted to any amount per month
not in excess of the sum of twenty-five percent (25%) of the Basic Rent;
provided, however, that the sum which was not capable of offset as a result
of such cap shall bear interest at the Maximum Rate of Interest from thirty
(30) days after the date Tenant first invoiced Landlord for such expenses to
be offset until the date Tenant actually recovers such costs through offset.
It is further agreed that, if any default by Landlord cannot be cured by
Tenant by the expenditure of a sum that is recoverable from future offsets as
authorized in this Lease by the end of the then applicable Term, the
aforesaid twenty-five percent (25%) figure shall be increased to such
percentage of the Basic Rent as is necessary in order to assure that such sum
is recoverable from future offsets.

                  14.9.1   DELINQUENT RENTAL PAYMENTS. Any installment of
Basic Rent or Additional Rent or any other charges payable by Tenant under
the provisions hereof which shall not be paid when due or within ten (10)
days thereafter shall be subject to a late payment fee of two percent (2%) of
the unpaid amount per month commencing on the date said payment is due ("Late
Payment Fee"). Tenant acknowledges that Tenant's failure to pay Basic Rent or
Additional Rent when due may cause Landlord to incur unanticipated costs. The
exact amount of such costs are impractical or extremely difficult to
ascertain. The parties agree that such charge specified above represents a
fair and reasonable estimate of the costs Landlord will incur by reason of
such late payment and acceptance of such late charge does not constitute a
waiver of Tenant's default or limit any other remedy of Landlord. The late
charge shall be deemed Rent and the rights to require it shall be in addition
to all of Landlord's rights and remedies hereunder or at law. Notwithstanding
the foregoing, Tenant shall not be subject to the late payment fee specified
herein unless Landlord has given Tenant ten (10) days written notice of any
payment of Additional Rent or Basic Rent that is past due ("Late Payment
Notice"); provided that after Tenant's receipt of two (2) such Late Payment
Notices in any Lease Year, Landlord shall no longer be required to deliver a
Late Payment Notice in order to collect the late payment fee during said
Lease Year. Notwithstanding the foregoing, Landlord waives its right to
collect the Late Payment Fee the first time Landlord would otherwise be
entitled to such a Late Payment Fee in any Lease Year.

                                 ARTICLE 15

                          PROTECTION OF CREDITORS


         15.1     SUBORDINATION. This Lease and all rights of Tenant therein,
and all interest or estate of Tenant in the Premises, or any portion thereof,
shall be subject and subordinate to the lien of any mortgage, deed of trust,
or other document of like nature ("Mortgage"), which at any time may be
placed upon the Premises, or any portion thereof, by Landlord, and to any
replacements, renewals, amendments, modifications, extensions or refinancing
thereof, and to each and every advance made under any Mortgage. Tenant agrees
at any time hereafter, and from time to time on demand of Landlord, to
execute and deliver to Landlord a Subordination, Non-Disturbance and
Attornment Agreement in the form of Exhibit "F" attached hereto and
incorporated herein ("SNDA") and any other instruments, releases or other
documents that may be reasonably required for the purpose of subjecting and
subordinating this Lease to the lien of any such Mortgage and which are
reasonably acceptable to Tenant. It is agreed, nevertheless, that so long as
Tenant is not in default in the payment of Basic Rent and Additional Rent and
the performance and observance of all covenants, conditions, provisions,
terms and agreements to be performed and observed by Tenant under this Lease,
that such SNDA or other instrument, release or document shall not interfere
with, hinder or molest Tenant's right to quiet enjoyment under this Lease,
nor the right of Tenant to continue to occupy the Premises, and all portions
thereof, and to conduct its business thereon in accordance with the
covenants, conditions,


                                      20



provisions, terms and agreements of this Lease. The lien of any such Mortgage
shall not cover Tenant's trade fixtures or other personal property located in
or on the Premises.

         15.2     ATTORNMENT. If Landlord's interest in the Premises is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee,
or purchaser at a foreclosure sale or by any new person or entity as a result
of any transfer by Landlord, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Premises and recognize such
transferee or successor as Landlord under this Lease if all obligations and
liabilities accruing under this Lease after such acquisition are assumed in
writing by such transferee or successor. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Premises upon the
transfer of Landlord's interest.

         15.3     ESTOPPEL CERTIFICATES.

                  15.3.1   Within fifteen (15) business days after Landlord's
or Tenant's written request (the "Requesting Party"), the non-requesting
party (the "Responding Party") shall execute, acknowledge and deliver to the
Requesting Party a written statement certifying: (i) that this Lease (and all
guaranties, if any) is unmodified and in full force and effect (or, if there
have been any modifications, that the same is in full force and effect, as
modified, and stating the modifications); (ii) that this Lease has not been
canceled or terminated; (iii) the last date of payment of the Basic Rent and
other charges and the time period covered by such payment; (iv) whether or
not there are then existing any breaches or defaults by such party or the
other party known by such party under this Lease, and specifying such breach
or default, if any, or any setoffs or defenses against the enforcement of any
such breach of this Lease (or of any guaranties) upon the part of Landlord or
Tenant (or any guarantor), as the case may be, to be performed or complied
with (and, if so, specifying the same and the steps being taken to remedy the
same) and (v) such other statements as reasonably required by The Requesting
Party, or any lender or prospective lender, investor or purchaser. the
Responding Party shall deliver such statement to the Requesting Party within
fifteen (15) business days after the Requesting Party's request. Any such
statement by Tenant may be given by Landlord to any prospective purchaser or
encumbrancer of the Premises. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.

                  15.3.2   If the Responding Party, does not deliver such
statement to the Requesting Party within such fifteen (15) business day
period, then the Requesting Party may deliver a second request and if the
Responding Party does not deliver such statement to Landlord within five (5)
business days after receipt of such second request, then the Requesting
Party, and any prospective purchaser or encumbrancer, may conclusively
presume and rely upon the following facts: (i) that the terms and provisions
of this Lease have not been changed except as otherwise represented by the
Requesting Party; (ii) that this Lease has not been canceled or terminated
except as otherwise represented by the Requesting Party; (iii) that not more
than one month's Base Monthly Rent or other charges have been paid in
advance; and (iv) that the Requesting Party is not in default under this
Lease. In such event, the Responding Party shall be estopped from denying the
truth of such facts.

         15.4     MORTGAGEE PROTECTION CLAUSE. Tenant agrees to give any
mortgagees and/or trust deed holders, by registered mail, a copy of any
notice of default, served upon the Landlord, provided that prior to delivery
of such notice Tenant has been notified in writing (by way of Notice of
Assignment of Rents and Leases, or otherwise) of the addresses of such
mortgagees and/or trust deed holders and the same have executed a
Non-Disturbance Agreement as provided and defined below. Tenant further
agrees that if Landlord shall have failed to cure such default within the
time provided for in this Lease, then the mortgagees and/or trust deed
holders shall have an additional fifteen days (15) within which to cure such
default or if such default cannot be cured within that time, then such
additional time as may be necessary if within such fifteen days (15) any
mortgagee and/or trust deed holder has commenced and is diligently pursuing
the remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings if necessary to effect such cure), in
which event this Lease shall not be terminated while such remedies are being
so diligently pursued.

         15.5     NON-DISTURBANCE. Landlord represents that as of the
Effective Date of this Lease, there is no mortgage encumbering the Land. With
respect to any future Mortgages, Tenant's subordination is expressly
conditioned upon Landlord's delivery to Tenant of a fully executed
Recognition and Non-Disturbance Agreement substantially in the form of the
SNDA or in such other form and substance as may be reasonably acceptable to
Tenant with respect to such Mortgage ("Non-Disturbance Agreement").

                                 ARTICLE 16

                            TERMINATION OF LEASE


         16.1     SURRENDER OF PREMISES. At the expiration of the Term of
this Lease or earlier termination of this Lease, Tenant shall surrender the
Premises together with all alterations placed thereon by Tenant (except
Alterations Tenant elects to remove or Alterations Landlord, in the exercise
of reasonable discretion, informed Tenant, in connection with Landlord's
approval of the installation thereof, that Landlord would require


                                      21



Tenant to remove upon the expiration of the Lease) in the same condition as
the same were in upon delivery of possession thereto at the Commencement Date
of the term of this Lease, reasonable wear and tear excepted, and shall
surrender all keys to the Premises to Landlord at the place then fixed for
the payment of Basic Rent and shall inform Landlord of all combinations on
locks, safes and vaults, if any. Tenant shall at such time remove all of its
property therefrom and all alterations and improvements placed thereon by
Tenant unless Landlord requires Tenant to leave the same. Tenant shall repair
any damage to the Premises caused by such removal, and any and all such
property not so removed shall, at Landlord's option, after five (5) business
days notice to Tenant, become the exclusive property of Landlord or be
disposed of by Landlord, at Tenant's cost and expense, without further notice
to or demand upon Tenant. If the Premises be not surrendered as above set
forth, Tenant shall indemnify, protect, defend and hold Landlord harmless
against loss or liability resulting from the delay by Tenant in so
surrendering the Premises, including, without limitation, any claim made by
any succeeding occupant founded on such delay. All property of Tenant not
removed within thirty (30) days after the last day of the Term of this Lease
shall be deemed abandoned. Tenant hereby appoints Landlord its agent to
remove, at Tenant's cost, all property of Tenant from the Premises left
thirty (30) days or longer after termination of this Lease and to cause its
transportation and storage for Tenant's benefit, all at the sole cost and
risk of Tenant and Landlord shall not be liable for damage, theft,
misappropriation or loss thereof and Landlord shall not be liable in any
manner in respect thereto.

         16.2     HOLDING OVER. In the event Tenant remains in possession of
the Premises after expiration of this Lease, and without the execution of a
new lease, it shall be deemed to be occupying the Premises as a tenant from
month to month, subject to all the provisions, conditions and obligations of
this Lease insofar as the same can be applicable to a month-to-month tenancy,
except that the Basic Rent shall be escalated to one hundred twenty-five
percent (125%) of the then current Basic Rent for the Premises.

                                ARTICLE 17

                             RENEWAL OPTIONS


         17.1     OPTIONS TO RENEW. Tenant shall have the right, to be
exercised as hereinafter provided, to extend the term of this Lease ("Renewal
Option") for up to two (2) periods of five (5) years each (each such five (5)
year period is sometimes hereinafter referred to as a "Renewal Term") upon
the following terms and conditions and subject to the limitations set forth
below.

                  17.1.1   NO EVENT OF DEFAULT. At the respective times
hereinafter set forth for the exercise of each Renewal Option and at the time
of the commencement of each Renewal Term, this Lease shall be in full force
and effect and there shall be no uncured Event of Default under this Lease,
but Landlord shall have the right, at its sole discretion, to waive any such
condition regarding an Event of Default.

                  17.1.2   FAIR MARKET RENT. The Premises shall be leased to
Tenant on an "as is" basis on the same terms, covenants and conditions
contained in this Lease, except that the annual Basic Rent for the Premises,
including all buildings, structures and fixtures erected thereon, together
with all additions, alterations and replacements thereof (except Tenant's
moveable trade fixtures, machinery and equipment) shall be adjusted to
reflect ninety-five percent (95%) of the Fair Market Rent (as hereinafter
defined) for the Premises, as of the date of commencement of such Renewal
Term ("Adjusted Basic Rent"); provided that in no event shall such Adjusted
Basic Rent be less than the Basic Rent for the Lease Year immediately prior
to the Renewal Term.

                  17.1.3   EXERCISE OF RENEWAL TERM(S). Tenant shall exercise
its right to extend the Term of this Lease for any Renewal Term set forth in
this Article 17, if at all, by notifying Landlord, in writing, of its
election to exercise the right to renew and extend the term of this Lease at
least nine (9) months prior to the expiration of the Initial Term or the
applicable Renewal Term, as the case may be.

                  17.1.4   DETERMINATION OF FAIR MARKET RENT. In calculating
the Fair Market Rent, the Premises shall be deemed to include all buildings,
structures and fixtures erected thereon, together with all additions and
replacements thereof (except Tenant's moveable trade fixtures, machinery and
equipment). Not earlier than eighteen (18) months prior to the expiration of
the Initial Term and each Renewal Term, Tenant may notify Landlord of its
desire to consider renewal of this Lease. Thereafter, Landlord and Tenant
shall make a good faith effort to agree upon the "Fair Market Rent" of the
Premises for the ensuing Renewal Term. In the event Landlord and Tenant fail
to agree within sixty (60) days after delivery of Tenant's notice ("Initial
Rent Determination Period"), the "Fair Market Rent" shall be determined by
arbitration in accordance with the process described below. Without limiting
the foregoing, in determining the Fair Market Rent, the following factors
shall be considered: the amount per rentable square foot that a willing,
comparable, non-equity tenant would pay, and a willing landlord of a
comparable property in the marketplace (as set forth above) would accept in
an arm's-length transaction giving appropriate consideration to rental rates
per rentable square foot, escalation clauses (including, but not limited to,
operating expenses and real estate taxes), abatement provisions reflecting
free rent, if any, length of lease term, size and location of premises being
leased, tenant improvement allowances, if any, and any other generally
applicable terms and conditions of tenancy for the subject space.


                                      22



                  17.1.5   ARBITRATION. All arbitrators appointed by or on
behalf of either party or appointed pursuant to the provisions hereof shall
be MAI members of the American Institute of Real Estate Appraisers with not
less than ten (10) years of experience in the appraisal of improved
commercial and industrial real estate in the Riverside, California area and
be devoting a substantial amount of time to professional appraisal work at
the time of appointment and be in all respects impartial and disinterested.
If the parties are unable to agree upon the Fair Market Base Rent during the
Initial Rent Determination Period, then within fifteen (15) days after
termination of the Initial Rent Determination Period, each party shall
deliver to the other party a notice specifying the name, address and
professional qualifications of the person designated to act as arbitrator on
its behalf. The two (2) arbitrators so selected shall select a third
arbitrator no later than thirty (30) days after the Initial Rent
Determination Period. If the party receiving a request for arbitration fails
to appoint its arbitrator within the time above specified, or if the two (2)
arbitrators so selected cannot agree on the selection of the third arbitrator
within the time above specified, then either party, on behalf of both
parties, may request such appointment of such second or third arbitrator, as
the case may be, by application to any Judge of the District Court of the
County of Riverside, State of California, upon ten (10) days prior written
notice to the other party of such intent. The decision of the arbitrators so
chosen shall be given within a period of thirty (30) days after the
appointment of such third arbitrator. The arbitrators so selected shall have
all rights and power conferred on him or her by the California Code of Civil
Procedure Sections 1280 et seq. or any successor statute or law, and except
as otherwise provided for herein, the arbitration proceedings shall be
carried on and governed by such statute. No discovery shall be permitted by
the Landlord and Tenant in the arbitration except that all parties shall make
available to the arbitrators such information as may be requested by such
arbitrators. Acting independently of each other and without consultation with
each other, each of said three arbitrators, within sixty (60) days after
appointment of the third appraiser, and his or her acceptance of such
appointment, shall make their appraisal and submit to Landlord and Tenant a
written report and appraisal setting forth the appraiser's opinion as to the
fair market value of the Premises. The two appraisals of all of the
appraisals reported by the three appraisers that are closest in amount shall
be averaged (or if the appraisal is less than one of the other appraisals and
more than the other appraisal by the same amount, all three appraisals shall
be averaged). Such averaged amount shall be the Fair Market Rent of the
Premises. All arbitrators appointed by or on behalf of either party or
appointed by the Presiding Judge of the Superior Court of Riverside County,
California as hereinafter provided, shall be in all respects impartial and
disinterested. Each party shall pay the fees and expenses of the arbitrator
appointed by or on behalf of such party and the fees and expenses of the
third arbitrator shall be borne equally by both parties. Landlord and Tenant
shall then execute an amendment recognizing the Fair Market Rent for the
Renewal Term and the fact Tenant shall pay ninety-five percent (95%) of such
Fair Market Rent or the Basic Rent for the Previous Lease Year, whichever is
greater.

                                 ARTICLE 18

                             EXPANSION OPTION


         18.1     OPTION TO EXPAND. Tenant shall have the right, to be
exercised as hereinafter provided, to expand the Premises ("Expansion
Option") into space to be constructed on the Land adjacent to the Premises,
which land is more particularly described on Exhibit "A-1" attached hereto
and incorporated herein ("Expansion Land") together with certain improvements
to be constructed thereon, including an approximately ninety-five thousand
(95,000) square foot addition to the Building, depicted as the Expansion
Space on Exhibit "A-2" ("Expansion Space"), upon the following terms and
conditions and subject to the limitations set forth below.

         18.2     NO EVENT OF DEFAULT. At the respective times hereinafter
set forth for the exercise of the Expansion Option and the delivery of the
Expansion Space, this Lease shall be in full force and effect and there shall
be no uncured Event of Default (as defined below) under this Lease.

         18.3     EXERCISE OF EXPANSION OPTION. Tenant may exercise its right
to expand by notifying Landlord, in writing, of its election to exercise the
Expansion Option ("Notice of Exercise") at least nine (9) months prior to the
desired occupancy date for the Premises, which Notice of Exercise shall
specify the exact desired occupancy date ("Desired Occupancy Date"); provided
that, subject to the provisions below, there will still be at least five (5)
years remaining in the Initial Term after the Desired Occupancy Date. In the
event that there will not be at least five (5) years remaining in the Initial
Term at the time Tenant desires to exercise its Expansion Option, Tenant may
still exercise its Expansion Option up until nine (9) months prior to the end
of the Initial Term ("Expansion Option Termination Date") if, in Tenant's
Notice of Exercise, Tenant indicates that it is also electing to extend the
Initial Term by the number of days necessary to cause there to be exactly
five (5) years between the Desired Occupancy Date and the expiration of the
Initial Term ("Extension Election"). In the event, Tenant exercises the
Extension Election, the commencement date for the Expansion Space shall occur
upon Substantial Completion of the Expansion Space Landlord's Improvements
(as described in the Work Letter) ("Expansion Space Commencement Date"). The
term of the Lease for the Expansion Space shall terminate concurrently with
the Term of the Lease for the balance of the Premises.

         18.4     EXPANSION TERMS. The Expansion Space shall be leased to
Tenant on the same terms, covenants and conditions contained in this Lease,
except as provided in this Article and except that the Basic


                                      23



Rent for the Expansion Space due and payable each month shall be computed in
accordance with Section 18.5 below and paid along with the Basic Rent
provided in Item 10 of the Basic Terms. The Basic Rent per rentable square
foot for the Expansion Space shall be increased from time to time in
accordance with any proportionate increases to the Basic Rent provided under
Item 10 of the Basic Terms and under Section 18.3 above (provided that
increases in the Expansion Space Rent shall not occur until the sixty-third
(63rd) month after the Expansion Space Commencement Date). If Tenant
exercises any Expansion Option, Landlord and Tenant shall enter into an
amendment of this Lease setting forth the adjusted Basic Rent and other
relevant provisions based on the increase in the area of the Premises
effective on the Expansion Space Commencement Date. If Tenant exercises its
Expansion Option, then (a) all references to the Premises shall include the
Expansion Space and Expansion Land, and all references to the Land shall
include the Expansion Land, effective as of the Expansion Space Commencement
Date; (b) Landlord shall be subject to the same monetary penalties for
failure to deliver the Expansion Space by the Desired Occupancy Date as are
(provided in Section 1.3 for failure to deliver the Premises by August 1,
1998 provided that Tenant shall not have the termination rights set forth in
Section 1.3); and (c) Tenant shall be entitled to the same early occupancy
rights for the Expansion Space as those set forth in Section 1.2.2 and in the
Work Letter for the Premises.

         18.5     EXPANSION SPACE BASIC RENT. Commencing on the Expansion
Space Commencement Date, Tenant shall pay Basic Rent for the Expansion Space
in the amount provided in this Section 18.5 at which time Tenant shall no
longer be required to pay the portion of the Basic Rent described as "Monthly
Rent for Expansion Land" in Item 10 of the Basic Terms. The Basic Rent, paid
monthly, for the Expansion Space shall be the product of ten and one half
percent (102%), multiplied by the following costs ("Expansion Space Basic
Rent"):

                  (1)      The Expansion Land valued at $525,000;

                  (2)      The cost of building the Expansion Space
                           (inclusive of a tenant improvement allowance not
                           to exceed Five Dollars ($5.00) per square foot) as
                           determined by (a) the lowest competitive bid by
                           general contractors acceptable to both parties or
                           (b) Landlord's in-house general contractor at a
                           fee of five percent (5%) of Hard Costs (defined
                           below);

                  (3)      Commercially reasonable and standard Architectural
                           and engineering fees, permit fees, governmental
                           charges, soil testing costs and surveying costs
                           incurred by Landlord in connection with the
                           Expansion Space building;

                  (4)      A three percent (3%) development fee on all Hard
                           Costs. As used herein, the term "Hard Costs" shall
                           mean the actual costs paid by Landlord to
                           construct the Improvements, including without
                           limitation, all amounts paid to the contractors,
                           suppliers, and all general contractors, all
                           architectural, engineering and other design
                           consultants and on-site overhead costs directly
                           attributable to the Expansion Space, all standard
                           fees paid to the governmental agencies for the
                           construction of the Improvements, and other costs
                           commonly included in what is customarily known as
                           "Hard Costs";

                  (5)      The best available interim financing costs, not to
                           exceed the Maximum Rate of Interest specified in
                           Item 10 of the Basic Terms; and

                  (6)      Any standard real estate commission paid or due
                           and payable by Landlord in connection with the
                           Expansion Space or Expansion Land.

         18.6     FREE RENT PERIOD. The first two (2) calendar months of the
Expansion Space Basic Rent shall be abated.

         18.7     FAILURE TO EXERCISE EXPANSION OPTION. In the event Tenant
fails to exercise the Expansion Option during the Initial Term only, for so
long as there has been no Expansion Space Commencement Date, Tenant shall
continue to pay the portion of the Basic Rent described as "Monthly Rent for
Expansion Land." In the event that Tenant has not exercised the Expansion
Option as of the Expansion Option Termination Date, then notwithstanding
anything to the contrary contained herein, commencing on the first day
following the Expansion Option Termination Date, Tenant shall no longer be
required to pay the Monthly Rent for Expansion Land or any Taxes or other
Additional Rent attributable to the Expansion Land.

                                 ARTICLE 19

                          MISCELLANEOUS PROVISIONS


         19.1     NOTICES. All notices, demands and requests which may be or
are required to be given, demanded or requested by either party to the other
shall be in writing. All notices, demands and requests shall be sent by
United States registered or certified mail, postage prepaid or by Federal
Express or other


                                      24



reputable independent overnight courier service, addressed at the addresses
specified in the Basic Terms or at such other place as either party may
designate to the other party by written notice, and shall be deemed to have
been delivered on the date the same is (i) postmarked, if sent by certified
mail, or (ii) deposited, if sent by Federal Express or such other reputable
overnight courier service, but shall not be deemed received until (a) one (1)
business day following deposit with Federal Express or other reputable
overnight courier service, or (b) three (3) days following deposit in the
United States Mail if sent by certified mail.

         19.2     LANDLORD'S CONTINUING OBLIGATIONS. The term "Landlord," as
used in this Lease so far as covenants or obligations on the part of Landlord
are concerned, shall be limited to mean and include only the owner or owners
at the time in question of the fee of the Premises, and in the event of any
transfer or transfers or conveyance the then grantor shall be automatically
freed and relieved from and after the date of such transfer or conveyance of
all liability as respects the performance of any covenants or obligations on
the part of Landlord contained in this Lease thereafter to be performed,
provided (a) that such liability is assumed in writing by the transferee and
(b) that any funds in the hands of such landlord or the then grantor at the
time of such transfer, in which Tenant has an interest, shall be turned over
to the grantee, and any amount then due and payable to Tenant by Landlord or
the then grantor under any provision of this Lease shall be paid to Tenant.

         19.3     NET LEASE. Landlord and Tenant do each state and represent
that it is the intention of each of them that, except as otherwise provided
herein, this Lease be interpreted and construed as a net lease and, except as
otherwise provided in this Lease, all Basic Rent and Additional Rent shall be
paid by Tenant to Landlord without abatement, deduction, diminution,
deferment, suspension, reduction or setoff.

         19.4     SUCCESSORS. The covenants and agreements herein contained
shall bind and inure to the benefit of Landlord, its successors and assigns,
and Tenant and its permitted successors and assigns.

         19.5     MEMORANDUM OF LEASE. Upon not less than fifteen (15)
business days prior written request by Landlord or Tenant, the other party
agrees to execute and deliver to the requesting party a Memorandum of Lease,
in recordable form, setting forth the following: (a) the date of this Lease;
(b) the parties to this Lease; (c) the term of this Lease; and (d) the legal
description of the Premises.

         19.6     CAPTIONS AND INTERPRETATION. The captions of the Articles
or Sections of this Lease are to assist the parties in reading this Lease and
are not a part of the terms or provisions of this Lease. Whenever required by
the context of this Lease, the singular shall include the plural and the
plural shall include the singular. The masculine, feminine and neuter genders
shall each include the other. In any provision relating to the conduct, acts
or omissions of Tenant, the term "Tenant" shall include Tenant's agents,
employees, contractors, invitees, successors or others using the Premises
with Tenant's expressed or implied permission.

         19.7     RELATIONSHIP OF PARTIES. This Lease does not create the
relationship of principal and agent, or of partnership, joint venture, or of
any association or relationship between Landlord and Tenant, the sole
relationship between Landlord and Tenant being that of landlord and tenant.

         19.8     ENTIRE AGREEMENT. Any exhibits, addenda and schedules
attached hereto shall be incorporated herein as though fully set forth
herein. All preliminary and contemporaneous negotiations are merged into and
incorporated in this Lease. This Lease Agreement together with the Exhibits
contains the entire agreement between the parties. No subsequent alteration,
amendment, change or addition to this Lease shall be binding upon Landlord or
Tenant unless reduced to writing and signed by the party to be charged with
their performance.

         19.9     SEVERABILITY. If any covenant, condition, provision, term
or agreement of this Lease shall, to any extent, be held invalid or
unenforceable, the remaining covenants, conditions, provisions, terms and
agreements of this Lease shall not be affected thereby, but each covenant,
condition, provision, term or agreement of this Lease shall be valid and in
force to the fullest extent permitted by law.

         19.10    LANDLORD'S LIMITED LIABILITY. Tenant agrees to look solely
to Landlord's interest in the Premises and any income derived directly
therefrom for recovery of any judgment from Landlord, it being agreed that
Landlord (and if Landlord is a partnership, its partners, whether general or
limited, and if Landlord is a corporation, its directors, officers or
shareholders) shall never be personally liable for any personal judgment or
deficiency decree or judgment against it.

         19.11    SURVIVAL. All obligations of Landlord and Tenant (together
with interest or money obligations at the Maximum Rate of Interest) accruing
prior to expiration of the Term of this Lease shall survive the expiration or
other termination of this Lease.

         19.12    ATTORNEYS' FEES. In the event of any litigation or judicial
action in connection with this Lease or the enforcement thereof or the
enforcement of any indemnity obligation hereunder, the prevailing party in
any such litigation or judicial action shall be entitled to recover all
reasonable costs and expenses of any such judicial action or litigation
(including, but not limited to, reasonable attorneys' fees, costs and
expenditures fees) from the other party.                           XX       XX
                                                                --------  ------
                                                                Landlord  Tenant
                                      25



         19.13    BROKER. Each party represents and warrants that it has not
had any dealings with any realtors, brokers or agents in connection with the
negotiation of this Lease except for Lee & Associates, whose commission shall
be payable by Landlord, and each party agrees to hold the other party
harmless from and against the failure to pay any realtors, brokers or agents
and from any cost, expense or liability for any compensation, commission or
changes claimed by any other realtors, brokers or agents claiming by, through
or on behalf of such party with respect to this Lease and/or the negotiation
hereof.

         19.14    GOVERNING LAW. This Lease shall be governed by the laws of
the State of California. All covenants, conditions and agreements of Tenant
arising hereunder shall be performable in the county wherein the Premises are
located. Any suit arising from or relating to this Lease shall be brought in
the county wherein the Premises are located, and the parties hereto waive the
right to be sued elsewhere.

         19.15    TIME IS OF THE ESSENCE. Time is of the essence with respect
to the performance of every provision of this Lease in which time of
performance is a factor.

         19.16    JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.

         19.17    DELIVERY OF CORPORATE DOCUMENTS. In the event that Tenant
is a corporation, Tenant shall, without charge to Landlord, at any time and
from time to time within fifteen (15) days after written request by Landlord,
if required by a prospective lender or purchaser, deliver to Landlord, in
connection with any proposed sale or mortgage of the Premises, the following
instruments and documents:

                  (a)      Certificate of Good Standing in the state of
                           incorporation of Tenant and in the state in which
                           the Premises are located issued by the appropriate
                           state authority and bearing a current date;

                  (b)      A copy of Tenant's articles of incorporation and
                           bylaws, and any amendments or modifications thereof
                           certified by the secretary or assistant secretary of
                           Tenant.

         19.18    TENANT'S FINANCIAL CONDITION. Prior to the Effective Date,
and within fifteen (15) business days after written request from Landlord (so
long as Landlord has a reasonable basis for requesting such information based
upon Tenant's financial condition) and not more than one (1) time per twelve
month period, Tenant shall deliver to Landlord financial statements prepared
in accordance with generally accepted accounting principles consistently
applied ("GAAP") as are reasonably required by Landlord to verify the net
worth of Tenant, or any assignee, subtenant or guarantor of Tenant provided
that Tenant shall not be required to provide any information that would
constitute a violation of the rules and regulations of the Securities
Exchange Commission. In addition, Tenant shall deliver to any lender or
proposed purchaser of the Premises, Project, Land and/or Expansion Land or
any portion thereof designated by Landlord any financial statements prepared
in accordance with GAAP required by any lender or purchaser to facilitate the
sale, financing or refinancing of the Premises or Project or any portion
thereof. Tenant represents and warrants to Landlord that (a) each such
financial statement is a true and accurate statement as of the date of such
statement; and (b) at all times after the date of any such statement during
the Lease Term or any extension thereof, Tenant's net worth, as stated
therein, shall not be reduced. All financial statements shall be confidential
and shall be used only for the purposes set forth herein. Each such financial
statement shall be executed by Tenant and shall, if requested by Landlord, be
certified by Tenant to be true and correct. Notwithstanding the foregoing, if
Tenant is a publicly traded company. Tenant may provide Landlord with copies
of Tenant's latest 10-Q and 10-K filings with the Securities Exchange
Commission in lieu of the above referenced financial statements.

         19.19    PROVISIONS ARE COVENANTS AND CONDITIONS. All provisions,
whether covenants or conditions, on the part of the Landlord, or on the part
of Tenant, shall be deemed to be both covenants and conditions.

         19.20    BUSINESS DAYS.  As used herein, the term "business days"
shall mean any day which is not a Saturday, Sunday or a legal holiday in the
State of California.

         19.21    FORCE MAJEURE. If either party shall be delayed or
prevented from the performance of any act required hereunder, other than the
payment of Rent, Additional Rent or any other sums required to be paid
hereunder, by reason of acts of God, strikes, lockouts, labor troubles,
inability to procure materials, respect of governmental laws or regulations,
or by reason of any order or direct of any legislative, administrative or
judicial body, or any government department, or by reason of not being able
to obtain any licenses, permissions or authorities required therefor, or
other causes without fault or beyond the reasonable control of such party,
then notwithstanding anything to the contrary contained herein, performance
of such acts by such party shall be excused for the period of the delay and
the period of the performance of any such acts shall be extended for a period
equivalent to the period of such delay; (herein such delays are sometimes
referred to as "Force Majeure".)

         19.22    NO CONTINUOUS OPERATION. Notwithstanding anything in this
Lease to the contrary, nothing herein shall be construed as an obligation for
Tenant to open or operate its business in the Premises. Tenant


                                      26



shall have the right to remove Tenant's personal property and cease
operations in the Premises at any time and at Tenant's sole discretion.
However, the right to cease to operate its business shall not affect Tenant's
obligation to pay all amounts due hereunder and to perform all covenants and
obligations hereunder. Tenant agrees, at such time it is operating its
business in the Premises, to conduct its business in a first-class manner,
consistent with reputable business standards and practices.

         19.23    WAIVER OF LANDLORD'S LIEN. Landlord hereby waives any
contractual, statutory or other Landlord's lien on Tenant's furniture,
moveable trade fixtures, supplies, equipment and inventory. Tenant shall have
the absolute right from time to time during the Term hereof and without
Landlord's further approval, written or otherwise, to grant and assign a
mortgage or other security interest Tenant's furniture, fixtures, supplies,
equipment and inventory to Tenant's lenders in connection with Tenant's
financing arrangement. Landlord agrees to execute such confirmation
certificates and other documents (except amendments to this Lease unless
Landlord hereafter consents in its sole and absolute discretion) as Tenant's
lenders may reasonably request in connection with any such financing.

         19.24    SUBMISSION OF LEASE. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or an
option for lease, and it is not effective as a lease or otherwise until
execution and delivery by both Landlord and Tenant.

         Landlord and Tenant have signed this Lease at the place and on the
dates specified adjacent to their signatures below and have initialed all
Exhibits and Addenda which are attached to or incorporated by reference in
this Lease.

Dated: November 24, 1997                  LANDLORD:

                                          OPUS WEST CORPORATION, a
                                          Minnesota corporation

                                          By:    /s/ Thomas W. Roberts
                                                 -----------------------------
                                          Name:  Thomas W. Roberts
                                          Title: President

Dated: November 20, 1997                  TENANT:

                                          PETCO ANIMAL SUPPLIES, INC., a
                                          Delaware corporation

                                          By:    /s/ James M. Myers
                                                 -----------------------------
                                          Name:  James M. Myers
                                                 -----------------------------
                                          Title: Sr VP Finance
                                                 -----------------------------

                                          By:
                                                 -----------------------------
                                          Name:
                                                 -----------------------------
                                          Title:
                                                 -----------------------------


                                      27

EX-10.5

IBM Credit Corporation
Installment Payment Master Agreement

         Thank you for doing business with us. We are committed to providing you
         with the highest quality financial offerings. If, at any time, you have
         any questions or problems, please let us know.

         This Installment Payment Master Agreement (called the "Agreement")
         covers the terms and conditions under which we finance various charges.

         This Agreement has four parts:

              Part 1 - Definitions;
              Part 2 - Our Offerings;
              Part 3 - Payment; and
              Part 4 - General.

         The specific amount financed, the interest rate charged, and the period
         over which the amount is financed are together referred to as an
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         This Agreement and its applicable Supplements are the complete
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         By signing below, both parties agree to the terms of this Agreement.
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         reliable means (for example, photocopy or facsimile) is considered an
         original.






         Agreed to:                         Agreed to:
         Petco Animal Supplies Inc             IBM Credit Corporation
                                               Stamford, Connecticut 06904-2399

         By                                 By
              Authorized Signature                  Authorized Signature
         Name (type or print):                 Name (type or print):

         Date:                              Date:

         Customer number: 7083749                   Agreement number: 7116026

                                     IBM Office number: pAH

         Customer Address:                       IBM Office address:
         9125 Rehco Rd.                          4800 FALLS OF THE NEUSE RD
         San Diego,   CA 92121-2270              RALEIGH   NC 27609-5491


                                    Page 1 of 6



IBM Credit Corporation
Installment Payment Master Agreement

         Part I - Definitions

         1.1 Definitions

                  Addition is any Machine or Program associated with a Machine
                  previously financed under this Agreement. Customer-set-up
                  Machine is an IBM Machine that you set up according to IBM
                  instructions. Date of Installation is the following:

                  1. for a Machine -

                     a. the business day after the day IBM installs it or, if
                        you defer installation, makes it available to you for
                        installation; or

                     b. the second business day after the end of the standard
                        transit allowance period for a Customer-set-up
                        Machine or a non-IBM Machine.

                  2. for a Program, the latest of -

                     a. the day after its testing period ends;

                     b. 10 days after ISIC4 ships it; or

                     C. the day you are authorized to make an Additional License
                        Copy or a copy of a Distributed Feature.

                  Machine is a machine, its features, conversions, upgrades,
                  elements, or accessories, or any combination of them. We use
                  the terms "IBM Machine" and "non-IBM Machine" if applicable.

                  Modification is any IBM field installable upgrade, feature or
                  accessory added to any Machine. Planning Date is the date
                  stated in the Supplement that financing for each Transaction
                  is scheduled to begin. For a Machine, it is the estimated date
                  the Machine will be put into service. For a Program, it is the
                  estimated Date of Installation. For all other financed
                  charges, it is the date you choose for the financing to begin.

                  Product is a Machine or a Program.

                  Program is all the following, including features and any whole
                  or partial copies:

                  1. machine-readable instructions;

                  2. a collection of machine-readable data, such as a data base;
                     and

                  3. related materials, including documentation and listings, in
                     any form.

                  Service is assistance or use of a resource (such as a
                  network).

                  Term is the number of payment periods stated in the
                  Supplement. The Term of a Transaction begins on the date
                  interest starts. It ends on the last day of the last payment
                  period. If you prepay a Transaction, its Term ends when you
                  complete the prepayment.

                  You and Your refer to you, the Customer. You must be a
                  commercial business.

                  We, Us and Our refer to:

                  1. IBM Credit Corporation (IBM Credit), a wholly owned
                     subsidiary of International Business Machines Corporation
                     (IBM)-

                  2. a partnership in which IBM Credit is a partner, or

                  3. a business enterprise for which IBM Credit is an agent.

                  IBM Credit will remain as the active manager for all matters
                  under this Agreement.



                                    Page 2 of 6



IBM Credit Corporation
Installment Payment Master Agreement

              Part 2 - Our Offerings

              2-1   Machines

                    We finance charges for Machines you purchase from IBM or us.
                    For a Machine we finance, you agree to:

                    1.   keep the Machine free from encumbrances of any kind,
                         except those established by us under this Agreement, or
                         by you with our prior written consent;

                    2.   promptly pay all taxes, interest, and other charges
                         associated with the Machine, excluding taxes based on
                         our net income; and

                    3.   keep the Machine in good operating condition.

              2.2   Modifications and Additions

                    We finance charges for Modifications and Additions you
                    purchase from IBM or us. For Modifications and Additions we
                    finance, you agree to:

                    1.   ensure that the Machine with which the Modifications
                         and Additions will be associated is free from
                         encumbrances of any kind, except those established by
                         us under this Agreement; and

                    2.   keep modified Machines and Additions to them in
                         accordance with the requirements of Section 2.1.

                    We may offer to refinance a Machine when we finance a
                    Modification to it. Changes to the Annual Interest Rate,
                    Payment Amount, and Term will then be specified in a new
                    Supplement.

              2.3   Other Charges

                    We finance one-time charges for IBM Programs and Services.
                    Your obligation to make payments is not affected by the
                    termination of any Service or license for a Program, unless
                    such termination occurs before the date interest starts.
                    We may agree to finance other one-time charges associated
                    with the installation of-IBM Products.

              2.4   Discounts, Allowances and Adjustments

                    The purchase price or one-time charge we finance is the same
                    amount that you would have paid IBM or us after all
                    discounts and adjustments. If this amount changes after you
                    sign the Supplement and before the date interest starts, we
                    will adjust the Supplement accordingly and notify you.




                                    Page 3 of 6







IBM Credit Corporation
Installment Payment Master Agreement

              Part 3 - Payment

              3.1   Your Obligation to Pay

                    You will pay all amounts specified in the Supplement.
                    Payment will be made through the IBM Branch Office unless we
                    notify you otherwise.

                    Your obligation to pay will continue regardless of any
                    dispute you may have with respect to the financed Products
                    or Services.

              3.2   Interest Commencement

                    Unless otherwise specified in the Supplement, interest
                    starts on:

                    1.  the date that payment of the purchase price or one-time
                        charge is due for Products and Services; or

                    2.  the date we provide you the funding for all other
                        charges.

              3.3   Invoicing

                    Payment Amounts for monthly payment periods are invoiced as
                    of the first day of each calendar month and are due on the
                    first day of the following month. When the interest
                    commencement date is not the first day of the calendar month
                    or when the initial Term will not expire on the last day of
                    the calendar month, the applicable Payment Amount will be
                    prorated on the basis of a 30-day month. In these cases, the
                    number of invoices will exceed the number of payment periods
                    specified in the Supplement.

                    Payment Amounts for all other payment periods (for example,
                    annual) are invoiced 30 calendar days before the end of
                    their payment period and are due on the day following the
                    close of the respective payment period.

              3.4   Rate Protection

                    The Supplement states a Planning Date for each Transaction,
                    and one Quote Validity Date for all Transaction rates on the
                    Supplement. These rates are not subject to change provided
                    that:

                    1.  the Supplement is signed and returned to us by the Quote
                        Validity Date; and

                    2.  the Product is installed within the same calendar month
                        as its Planning Date.

              3.5   Prepayment

                    We will not charge any loan origination fees.  If you decide
                    to prepay a Transaction, you agree to pay us a prepayment
                    fee for our unrecovered administrative expense and changes
                    in funding costs. The Supplement describes how the
                    prepayment fee is determined. You may prepay any Transaction
                    by paying all outstanding amounts due plus the remaining
                    principal balance and any prepayment fee. If you prepay a
                    Transaction for a Machine, you must also prepay any
                    Transaction for related non-IBM charges.

              3.6   Delinquent Payments

                    If you do not make a payment by its due date, you agree to
                    pay us, on demand, an additional 2% per month late charge or
                    the maximum allowed by law, whichever is less. The late
                    charge will accrue on a cumulative basis until the
                    outstanding payments and late charges are paid.



                                    Page 4 of 6



IBM Credit Corporation
Installment Payment Master Agreement

              Part 4 - General

              4.1     Events of Default

                      You will be in default if:

                      1.  you do not pay any amount within seven days after its
                          due date;

                      2.  you fail to maintain insurance as required under this
                          Agreement;

                      3.  you make any misrepresentation in a credit application
                          you give us;

                      4.  you make an assignment for the benefit of creditors,
                          or you consent to the appointment of a trustee or
                          receiver, or either is appointed for you or for a
                          substantial part of your property without your
                          consent;

                      5.  any petition or proceeding is filed by or against you
                          under any bankruptcy, insolvency, or similar law;

                      6.  you breach any other provision of this Agreement and
                          that breach continues for fifteen days after you
                          receive written notice from us; or

                      7.  you make a bulk transfer subject to the provisions of
                          the Uniform Commercial Code or otherwise dispose of
                          substantial assets without receiving equivalent value.

              4.2     Remedies

                      If you are in default, we may do one or more of the
                      following:

                      1.  declare the Transaction and all associated
                          Transactions to be in default;

                      2.  recover from you all amounts that are or will be due;


                      3.  repossess or render unusable any or all Machines,
                          Modifications, or Additions without demand, notice,
                          court order, or other process, and retain all payments
                          made as partial compensation for their use and
                          depreciation;

                      4.  require you, at your expense, to assemble and ship
                          Addition to a location we specify-, and

                      5.  recover from you reasonable attorney's fees and legal
                          expenses incurred in exercising any of our rights
                          under this Agreement.

                      If we repossess a Modification, it is your responsibility
                      to restore the, remaining Machine to good working order.
                      We have no liability for costs or damages caused by the
                      removal of such Modification or by your failure to
                      fulfill your responsibilities.

                      Upon repossession or return of a Machine, Modification
                      or Addition, we will dispose of it in a commercially
                      reasonable manner. After deducting our expenses for the
                      repossession and disposition, we will apply the net
                      proceeds toward the amounts due. You will pay us any
                      deficiency between the net proceeds and the unpaid
                      amounts due. We will pay to you any excess net proceeds.

                      We may pursue any other remedy available at law or in
                      equity.

              4.3     Security Interest

                      We reserve a purchase money security interest in each
                      Machine we finance, its substitutions, replacements,
                      accessions, Modifications, Additions and any associated
                      proceeds until we receive all amounts due. You will
                      cooperate with us to perfect our security interest.

                      You authorize us to act as your agent and
                      attorney-in-fact for the limited purpose of preparing
                      executing in your name, and filing on your behalf,
                      financing statements or other document covering
                      Machines, Modifications, and Additions financed by us.

                      Each Machine must be kept at the location specified in
                      this Agreement, where we may Inspect it at any
                      reasonable time. Each Machine will remain personal
                      property, and will not become a fixture to real
                      property. Until your financial obligation on a
                      Transaction is satisfied, you may not modify or
                      otherwise dispose of the Machine, Modification, or
                      Addition, in whole or in part, without our prior written
                      consent.



                                    Page 5 of 6



         IBM CREDIT CORPORATION
                                       North Castle Drive
                                       Armonk, HY 10504-1785
                                       914/499-1900
                                       www.financing.ibm.com

                        ADDENDUM TO INSTALLMENT PAMENT SUPPLEMENT

                                                    Installment Payment
         Enterprise No. 7116026                     Master Agreement No. 7116026

            Customer No. 7083749                        Supplement No. IDOO14924

         We and PETCO ANIMAL SUPPLIES INC (You) agree that for the purposes of
         the referenced Supplement only, the Installment Payment Master
         Agreement between the parties is hereby modified as follows:

                In the Introductory Section, in line 13 after "item" add "which
                represents the Financing of all of the Machines, identified by
                model and type and the related items as described in such line
                item."

                In Section 2.2 Modifications and Additions, delete the last two
                sentences.

                In Section 3.5 Prepayment, delete the last sentence and replace
                with "If you prepay any Transaction specified on the Supplement
                as Option I, you must also prepay any Transaction specified on
                the Supplement as Option T."

                In Section 4.2 Remedies in line 1, delete "associated".

                In Section 4.3 Security Interest at the beginning of the Section
                add the following new paragraph:

                Lessee grants to Lessor a security interest in all of Lessee's
                right, title and interest in and to, whether now owned or
                hereafter acquired or existing, the following (Collateral): (a)
                all equipment financed hereunder and specified on the invoices
                attached to the Supplement, all parts thereof, accessions
                thereto and documents therefor (including all hardware and all
                other information processing equipment of every type and
                description) (Machines) and, all proceeds of all of the
                foregoing Collateral and, to the extent not otherwise included,
                all payments under insurance or and indemnity, warranty or
                guaranty, payable by reason of loss or damage to or otherwise
                with respect to any of the foregoing Collateral.

                In Section 4.4 Insurance, in line 5 delete "If a Machine,
                Modification or Additions suffers a Loss" and replace with "In
                the event Machine Losses suffered under each Transaction
                represent more than 5% of the total number of Machines that
                comprise such Transaction."

                      NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
          Oct 1, 1998                                 Addendum No. Q01636873-03



                             IBM Credit Corporation



             In Section 4.5 Assignment and Relocation, in line 2 delete
             "relocate". - in line 3 after consent, add the following new
             seztence: "With prompt notification, you may relocate any Machine
             under each Transaction provided the number of Machines relocated
             under each Transaction does not represent more than 5% of the total
             number of Machines that comprise such Transaction. Any relocation
             of Machines which will cause the total number of Machines relocated
             to exceed 5% of the total number of Machines that comprise such
             Transaction, requires our prior written consent."


        Prepared by: D DRIVER

        Accepted by:
        IBM Credit Corporation                      PETCO ANIMAL SUPPLIES INC


        by
                    Authorized Signature                   Authorized Signature


                Name (Type or Print)   Date          Name (Type or Print)   Date










                    NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
       Oct 1, 1998                                    Addendum No. Q01638973-03

                                            2

EX-10.6

                          MANAGEMENT SERVICES AGREEMENT

      This MANAGEMENT SERVICES AGREEMENT (this "Management Agreement"), dated as
of October 2, 2000, is made by and among Petco Animal Supplies, Inc., a Delaware
corporation (the "Company"), Leonard Green & Partners, L.P. ("LGP") and TPG
GenPar III, L.P. ("TPG," and together with LGP, the "Managers").

      WHEREAS, the Company has obtained and desires to continue to obtain from
the Managers, and the Managers have provided and desire to continue to provide,
certain investment banking, management, consulting and financial planning
services on an ongoing basis and certain financial advisory and investment
banking services in connection with major financial transactions that may be
undertaken by the Company from time to time in the future;

      WHEREAS, the Company has recently consummated the merger of BD
Recapitalization Corp. ("MergerSub") with and into the Company (the "Merger"),
pursuant to the Agreement and Plan of Merger, dated as of May 17, 2000, as
amended (as amended, the "Merger Agreement"), by and between the Company and
MergerSub;

      WHEREAS, this Management Agreement has been approved by the Company's
board of directors, including a majority of the members of the Company's board
of directors who have not been nominated by affiliates of the Managers; and

      WHEREAS, this Management Agreement has been approved by a majority of the
Company's stockholders, other than stockholders who are affiliates of the
Managers;


      NOW, THEREFORE, in consideration of their mutual promises made herein, and
for other good and valuable consideration, receipt of which is hereby
acknowledged by each party, the parties, intending to be legally bound, hereby
agree as follows:




1.    RETENTION OF SERVICES

      1.1  INVESTMENT BANKING SERVICES. Subject to the terms and conditions
hereof, the Company hereby retains the Managers, and the Managers, severally and
not jointly, hereby agree to be retained by the Company, to provide investment
banking services to the Company.

      1.2  GENERAL SERVICES. Subject to the terms and conditions hereof, the
Company hereby retains the Managers, and the Managers, severally and not
jointly, hereby agree to be retained by the Company, to provide management,
consulting and financial planning services to the Company on an ongoing basis in
connection with the operation and growth of the Company and its subsidiaries in
the ordinary course of their businesses during the term of this Management
Agreement (the "General Services").

      1.3  MAJOR TRANSACTION SERVICES. Subject to the terms and conditions
hereof, the Company hereby retains the Managers, and the Managers severally and
not jointly, hereby agree to be retained by the Company, to provide financial
advisory and investment banking services to the Company in connection with major
financial transactions that may be undertaken from time to time in the future
("Major Transaction Services" and, together with the General Services, the
"Services").

2.    COMPENSATION.

      2.1  GENERAL SERVICES FEE. In consideration of the General Services, the
Company shall pay the Managers an annual fee payable in cash equal to $3,120,000
(the "Base Annual Fee"), which annual fee shall be increased (a "Fee Increase")
by 1.6% of any additional capital invested by BD Recapitalization Holdings LLC
or (i) any of its members or their affiliates; (ii) any investment manager,
investment advisor or partner of Green Equity Investors III, L.P. ("GEI") or TPG
Partners III, L.P. ("TPG III") or any principal or beneficial owner of any of
the foregoing; or (iii) any investment fund, investment account or investment
entity whose investment manager, investment advisor or partner, or any principal
or beneficial owner of any of the foregoing, is either GEI or TPG III or any
person identified in clauses (i) or (ii) above (such annual fee, as adjusted if
applicable, shall be referred to as the "Annual Fee"). Any such increase shall
take effect in the year the relevant additional investment is made and apply to
the Annual Fee for such year and each subsequent year, regardless of the time of
the year such investment is made. The Annual Fee shall be payable by the Company
in equal monthly installments (subject to any additional amounts necessary to be
paid to satisfy any obligation with respect to a Fee Increase in the year such
Fee Increase occurs) in advance, on the first business day of each month
commencing on the first such day following the date hereof,


                                       2



without regard to the amount of services actually performed by Manager. The
Base Annual Fee shall be paid equally to the Managers. Any Fee Increase shall
be paid as agreed in writing by the Managers.

      2.2  MAJOR TRANSACTION SERVICES FEE. In consideration of any Major
Transaction Services provided by the Managers from time to time, the Company
shall pay the Managers normal and customary fees for services of like kind as
agreed by the Managers and the Company, taking into consideration all relevant
factors, including but not limited to, the complexity of the subject
transaction, the time devoted to providing such services and the value of the
Managers' investment banking expertise and relationships within the business and
financial community.

      2.3  STRUCTURING FEE. In connection with the services provided to the
Company in connection with the transactions contemplated by, and pursuant to the
terms of, the Merger Agreement, the Company agrees to pay to the Managers a
structuring fee of $8,000,000 and reasonable out-of-pocket expenses incurred by
the Managers in connection with the services provided in connection with the
Merger.

      2.4  EXPENSES. In addition to the fees to be paid to the Managers under
Sections 2.1, 2.2 and 2.3 hereof, the Company shall pay to, or on behalf of, the
Managers, promptly as billed, all reasonable out-of-pocket expenses incurred by
the Managers in connection with the Services rendered hereunder. Such expenses
shall include, among other things, fees and disbursements of counsel, travel
expenses, word processing charges, messenger and duplicating services, telephone
and facsimile expenses and other customary expenditures.

3.    TERM.

      3.1  TERMINATION.  This Management Agreement shall terminate on the
tenth anniversary of this Management Agreement.

      3.2  SURVIVAL OF CERTAIN OBLIGATIONS. Notwithstanding any other provision
hereof, the obligations of the Company to pay amounts due with respect to
periods prior to the termination hereof pursuant to Section 2 hereof and the
provisions of Sections 4 and 5 hereof shall survive any termination of this
Management Agreement.

4.    DECISIONS/AUTHORITY OF ADVISOR.

      4.1  LIMITATION ON THE MANAGERS' LIABILITY. The Company reserves the right
to make all decisions with regard to any matter upon which the Managers have
rendered their advice and consultation, and there shall be no liability of the
Managers


                                       3



for any such advice accepted by the Company pursuant to the provisions of
this Management Agreement.

      4.2  INDEPENDENT CONTRACTOR. Each of the Managers shall, severally and not
jointly, act solely as an independent contractor and shall have complete charge
of its respective personnel engaged in the performance of the Services. As
independent contractors, each of the Managers shall have authority only to act
as an advisor to the Company and shall have no authority to enter into any
agreement or to make any representation, commitment or warranty binding upon the
Company or to obtain or incur any right, obligation or liability on behalf of
the Company. Nothing contained in this Management Agreement shall constitute
either of the Managers or any of their partners or members or any of their
affiliates, investment managers, investment advisors or partners a partner of or
joint venturer with the Company.

5.    INDEMNIFICATION.

      5.1  INDEMNIFICATION/REIMBURSEMENT OF EXPENSES. The Company shall (i)
indemnify the Managers and their respective partners and members and any of
their affiliates, investment managers, investment advisors and their respective
affiliates, and the partners, directors, officers, employees, agents and
controlling persons of each of the Managers and its respective partners and
their respective affiliates (collectively, the "Indemnified Parties"), to the
fullest extent permitted by law, from and against any and all losses, claims,
damages and liabilities, joint or several, to which any Indemnified Party may
become subject, caused by, related to or arising out of the Services or any
other advice or services contemplated by this Management Agreement or the
engagement of the Managers pursuant to, and the performance by the Managers of
the Services contemplated by, this Management Agreement, and (ii) promptly
reimburse each Indemnified Party for all costs and expenses (including
reasonable and documented attorneys' fees and expenses), as incurred, in
connection with the investigation of, preparation for or defense of any pending
or threatened claim or any action or proceeding arising therefrom, whether or
not such Indemnified Party is a party and whether or not such claim, action or
proceeding is initiated or brought by or on behalf of the Company and whether or
not resulting in any liability.

      5.2  LIMITED LIABILITY. The Company shall not be liable under the
indemnification contained in Section 5.1 hereof to the extent that such loss,
claim, damage, liability, cost or expense is found in a final non-appealable
judgment by a court of competent jurisdiction to have resulted from such
Manager's willful misconduct or gross negligence. The Company further agrees
that no Indemnified Party shall have any liability (whether direct or indirect,
in contract, tort or otherwise) to the Company, holders of its securities or its
creditors related to or arising out of the engagement of the Managers pursuant
to, or the performance by the Managers of the Services contemplated by, this
Management Agreement.


                                       4



6.    MISCELLANEOUS.

      6.1  ASSIGNMENT. None of the parties hereto shall assign this Management
Agreement or the rights and obligations hereunder, in whole or in part, without
the prior written consent of the other parties; provided, however, that, without
obtaining such consent, either of the Managers may assign this Management
Agreement or its rights and obligations hereunder to (i) any of its partners or
members or their affiliates or any person who controls such Manager; (ii) any
investment manager, investment advisor or partner of GEI or TPG III or any
principal or beneficial owner of any of the foregoing; or (iii) any investment
fund, investment account or investment entity whose investment manager,
investment advisor or partner, or any principal or beneficial owner of any of
the foregoing, is either GEI or TPG III or any person identified in clauses (i)
or (ii) above. Subject to the foregoing, this Management Agreement will be
binding upon and inure solely to the benefit of the parties hereto and their
respective successors and assigns, and no other person shall acquire or have any
right hereunder or by virtue hereof.

      6.2  GOVERNING LAW. This Management Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware as applied to
contracts made and performed within the State of Delaware without regard to
principles of conflict of laws.

      6.3  SEVERABILITY. If any term, provision, covenant or restriction of this
Management Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any such which
may be hereafter declared invalid, illegal, void or unenforceable.

      6.4  ENTIRE AGREEMENT. This Management Agreement contains the entire
agreement between the parties with respect to the subject matter of this
Management Agreement and supersedes all written or verbal representations,
warranties, commitments and other understandings with respect to the subject
matter of this Management Agreement prior to the date of this Management
Agreement.

      6.5  FURTHER ASSURANCES. Each party hereto agrees to use all reasonable
efforts to obtain all consents and approvals and to do all other things
necessary to


                                       5



consummate the transactions contemplated by this Management Agreement. The
parties agree to take such further action and to deliver or cause to be
delivered any additional agreements or instruments as any of them may
reasonably request for the purpose of carrying out this Management Agreement
and the agreements and transactions contemplated hereby.

      6.6  ATTORNEYS' FEES. In any action or proceeding brought to enforce any
provision of this Management Agreement, or where any provision hereof is validly
asserted as a defense, the prevailing party, as determined by a court of
competent jurisdiction, shall be entitled to recover reasonable and documented
attorneys' fees in addition to any other available remedy.

      6.7  HEADINGS. The headings in this Management Agreement are for
convenience and reference only and shall not limit or otherwise affect the
meaning hereof.

      6.8  AMENDMENT AND WAIVER. This Management Agreement may be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may be given, provided that the same are in writing and signed
by each of the parties hereto.

      6.9  COUNTERPARTS. This Management Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.


                                       6



      IN WITNESS WHEREOF, the parties have executed this Management Services
Agreement on the date first appearing above.

                                   PETCO ANIMAL SUPPLIES, INC.


                                   By:  /s/ JAMES M. MYERS
                                      -------------------------------------
                                      Name: James M. Myers
                                      Title: Senior Vice-President and
                                             Chief Financial Officer


                                  Leonard Green & Partners, L.P.

                                   By: LGP Management, Inc.

                                   By:  /s/ JOHN DANHAKL
                                      -------------------------------------
                                      Name:  John Danhakl
                                      Title: Manager

                                   TPG GenPar III, L.P.

                                   By: TPG Advisors III, Inc.


                                   By:  /s/ JAMES J. O'BRIEN
                                      -------------------------------------
                                      Name:  James J. O'Brien
                                      Title: Vice President

EX-10.7

                              AMENDED AND RESTATED
                              EMPLOYMENT AGREEMENT


      THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("AGREEMENT"), effective as
of October 2, 2000, by and between Petco Animal Supplies, Inc., a Delaware
corporation (the "COMPANY"), and Brian K. Devine, an individual ("EXECUTIVE"),
amends and restates the Employment Agreement, entered into as of March 17, 1996,
by and between the Company and Executive.

      NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

      1.    EMPLOYMENT. The Company shall employ Executive, and Executive
accepts employment with the Company, upon the terms and conditions set forth
in this Agreement for the period beginning on the date of this Agreement and
ending as provided in Section 5 hereof (the "EMPLOYMENT PERIOD").

      2.    POSITION AND DUTIES.

            (a)   During the Employment Period, Executive shall serve as
Chairman of the Board of Directors of the Company, President and Chief
Executive Officer of the Company, and shall have the normal duties,
responsibilities and authority commensurate with such positions. Executive's
services pursuant to this Agreement shall be performed primarily at the
Company's principal place of business in San Diego County, California, or at
such other facilities of the Company as the Company and Executive may agree
upon from time to time.

            (b)   During the Employment Period, Executive shall report to the
Board of Directors of the Company (the "BOARD") and Executive shall devote
Executive's reasonable best efforts and Executive's full business time and
attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity) to the business and affairs of the Company during
the normal business hours of the executive offices of the Company; provided,
however, the foregoing shall not prevent Executive from making and expending
any time on passive personal investments, expending reasonable amounts of time
for educational or charitable activities and/or serving as a director on the
boards of the companies listed on EXHIBIT A attached hereto and any other
non-competing companies which shall not include companies involved in the
business of selling, retailing, producing, distributing, or marketing pet
food, pet supplies or other pet-related products or services. Executive shall
perform Executive's duties and responsibilities to the best of Executive's
abilities in a reasonably diligent, trustworthy, businesslike and efficient
manner.



      3.    BASE SALARY AND BENEFITS.

            (a)   During the Employment Period, Executive's annual base salary
shall be established annually by the Compensation Committee of the Board of
Directors, but shall in no event be less than $550,000 (the "BASE SALARY")
during each calendar year of the employment period, prorated for any partial
year, which salary shall be payable in regular installments in accordance with
the Company's general payroll practices, including those related to
withholding for taxes, insurance and similar items. In addition, during the
Employment Period or after such Employment Period, as appropriate, Executive
shall be entitled to participate in a Supplemental Executive Retirement
Program as summarized on EXHIBIT B hereto as well as to participate in all of
the Company's employee benefits plans and programs in accordance with their
terms and conditions, including, without limitation, any profit sharing, stock
option, incentive compensation, paid vacation, retirement, deferred
compensation, 401(k) match, investment plans, medical, dental, disability and
all other group or other insurance plans or benefits and other perquisite
plans and programs ("BENEFITS"). Without limiting the foregoing, Executive
shall be entitled to at least the level of Benefits provided to him on the
date hereof.

            (b)   During the Employment Period, the Company shall reimburse
Executive for all reasonable expenses incurred by Executive in the course of
performing Executive's duties under this Agreement that are consistent with
the Company's policies in effect from time to time with respect to travel,
entertainment and other business expenses, subject to the Company's
requirements with respect to reporting and documentation of such expenses.
Without limiting the foregoing, Executive shall be reimbursed for the costs of
first-class travel.

            (c)   During the Employment Period, the Company shall pay for or
reimburse Executive for all fees and reasonable expenses of Executive's
participation in professional organizations, trade associations or other
organizations reasonably related to Executive's position and responsibilities
as an officer of the Company.

            (d)   During the Employment Period, the Company shall provide
Executive with a suite of perquisites appropriate for a senior executive
officer, including but not limited to, a car allowance, life insurance
premiums, club membership, etc., provided that the aggregate cost of such
perquisites shall not exceed $100,000 per year, pro rated for partial years
occurring during the Employment Period.

            (e)   During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the Company's standard policy for
the Company's executives, but not to be less than five (5) weeks per year
PROVIDED, that Executive shall accrue no more than ten (10) weeks of unused
paid vacation.

            (f)   Executive's Base Salary shall be subject to review and
increase by the Compensation Committee at least once annually, in a manner and
amount consistent with past practice.

                                       2



            (g)   Upon the termination of the Employment Period, Executive or
Executive's representatives or beneficiaries, shall be entitled to purchase
his personal computer (desktop and/or laptop), printer, personal fax machine,
personal digital assistant, cellular telephone and luxury automobile used in
connection with the business for an aggregate purchase price of $1.00.
Executive shall be responsible for any taxes due with respect to such sale.

      4.    BONUSES. Executive shall be entitled to participate in the
Company's bonus plan(s) as in effect from time to time, the awards, terms,
targets and other conditions of which shall be designed to produce a bonus at
least as favorable to Executive as the bonus plans of the Company in effect on
the date hereof.

      5.    TERM.

            (a)   This Agreement shall become effective on the date
hereof.

            (b)   The Employment Period under this Agreement shall terminate
upon the earliest to occur of the following events (the date specified in each
such event is referred to as the "TERMINATION DATE"):

                  i.    the third anniversary of the date hereof;
                        PROVIDED, HOWEVER, that, subject to the
                        provisions of this Section 5(b), the term
                        of this Agreement shall automatically be
                        extended from day to day so that it always
                        has a remaining term (the "REMAINING TERM")
                        of three years; PROVIDED, that such renewal
                        shall cease following written notice (a
                        "Notice") from the Company to the
                        Executive, in which case the Remaining Term
                        shall be three years following the
                        effective date of such notice, and that
                        this Agreement shall terminate on the third
                        anniversary of the effective  date of such
                        notice, PROVIDED, FURTHER, that the Company
                        shall not deliver a Notice within 6 months
                        following the Effective Time (as defined in
                        the Merger Agreement);

                  ii.   the date upon which the Company terminates the
                        Executive's employment by the Company for Cause or
                        without Cause, PROVIDED, that such termination shall be
                        effective following written notice of such event in
                        which case the Termination Date shall be the effective
                        date contained in such notice;

                  iii.  the date of the Executive's death;

                  iv.   the date upon which the Company terminates
                        Executive's employment with the Company as
                        a result of Executive's Disability,
                        PROVIDED, that such termination shall be
                        effective

                                       3



                        following written notice of such event from the
                        Executive to the Company or from the Company to the
                        Executive, in which case the Termination Date shall be
                        the effective date contained in such notice; or

                  v.    the date upon which Executive effects a Voluntary
                        Termination with or without Good Reason, PROVIDED, that
                        such termination shall be effective following written
                        notice of such event, in which case the Termination Date
                        shall be the effective date contained in such notice.

            (c)   If the Employment Period is terminated without Cause by the
Company or by Executive with Good Reason, Executive shall be entitled to
receive his Base Salary (determined in accordance with Section 3(a)) for a
period of 36 months from Executive's Termination Date (the "SEVERANCE PERIOD")
and an amount equal to the Executive's highest bonus for a single fiscal year
in the five fiscal years immediately preceding the Termination Date, which
amount shall be paid ratably on an annual basis over the Severance Period.

            (d)   Notwithstanding the foregoing:

                  (1) If the Employment Period is terminated by the Company for
Cause or is terminated as a result of Executive's resignation without Good
Reason, Executive shall receive such compensation and Benefits as Executive is
entitled to as of such date.

                  (2) If the Employment Period is terminated by the Company for
failure to meet the minimum performance objectives set forth in EXHIBIT C hereto
and, at the time of such termination, the Company shall not otherwise be
entitled to terminate Executive's employment for Cause, in addition to any
compensation and Benefits to which Executive is entitled to as of such
Termination Date, Executive shall be entitled to receive his Base Salary for a
period of 18 months from Executive's Termination Date, which amount shall be
paid ratably on an annual basis over such 18-month period.

            (e)   If the Employment Period is terminated as a result of
Executive's death or Disability, Executive or Executive's representatives or
beneficiaries shall be entitled to receive (i) compensation and Benefits
Executive is entitled to as of the Termination Date, and (ii) an amount, which
shall be paid ratably on an annual basis over the Severance Period, equal to
the Executive's highest bonus for a single fiscal year in the five fiscal
years immediately preceding the Termination Date. If the Employment Period is
terminated by reason of Executive's death or Disability, the Company shall
keep in force existing health insurance covering Executive and his dependents
for the Severance Period on the basis in effect at the termination date.
Executive and his dependents shall also be entitled to any continuation of
coverage rights under any applicable law.

                                       4



            (f)   The amount of Base Salary payable pursuant to Section 5(c),
shall be payable in accordance with the Company's normal payroll practices and
procedures applied to Executive as if he remained an employee of the Company.
The amount of Base Salary payable pursuant to Section 5(e) shall be paid in a
lump sum within 30 days following the termination of the Employment Period and
all other compensation and Benefits, if any, will be payable in accordance
with the Company's normal practices and procedures or otherwise as required by
applicable law.

            (g)   All of Executive's rights to any other employee benefit
hereunder (except as described above or pursuant to law) accruing after the
termination of the Employment Period shall cease upon such termination. Upon
termination of his employment for any reason whatsoever, Executive or
Executive's representatives or beneficiaries shall have the right to receive
payment for any accrued but unused vacation time and any and all Benefits (to
the extent required by the terms of such Benefits) due Executive pursuant to
Section 3 as of the Termination Date. This Section 5(g) shall have no effect
on Executive's equity ownership (including stock options) in the Company,
which shall be governed by the terms of such equity ownership and of a
Stockholders Agreement between Executive, the Company and certain other
parties.

            (h)   If the Executive's employment described herein is
terminated, the Executive shall have no duty to mitigate his damages or seek
other employment, and the Company shall have no right to offset any amounts
which are paid to or earned by Executive from other employment obtained by
Executive (including self-employment), except for employment obtained by
Executive which is inconsistent with the provisions of Section 8 of this
Agreement, against any amounts which are payable to Executive pursuant to this
Agreement.

            (i)   At Executive's own expense, Executive and Executive's
dependants shall also be entitled to any continuation of health insurance
coverage rights after his termination of employment under any applicable law;
PROVIDED, HOWEVER, that in the event of the termination of Executive's
employment with the Company without Cause or by Executive for Good Reason,
Executive's health and life insurance coverage shall be provided at the
Company's expense for three (3) years after Executive's date of termination on
the same basis as for other senior management employees of the Company,
including the same employee contributions and co-payments which are required
for other senior management employees.

            (j)   Upon the termination of Executive's employment by the
Company without Cause or by the Executive for Good Reason within twelve months
following the occurrence of a Change of Control, (i) Executive shall be
entitled to receive his Base Salary (determined in accordance with Section
3(a)) for the Severance Period and an amount equal to three times the
Executive's average annual bonus for the three fiscal years immediately
preceding the Termination Date, which amounts shall be payable in a lump sum
at the time of termination, (ii) all of Executive's unvested or restricted (a)
shares of common stock of the Company, (b) options to acquire shares of common
stock of the Company and (c) other equity

                                       5



interests of the Company shall immediately vest or the restrictions thereon
shall immediately lapse, as applicable, and such shares, options and other
equity interests shall become immediately exercisable, (iii) the Company's
Call Option (as defined in the Stockholders Agreement) shall lapse as to all
of Executive's shares, options or other equity interests of the Company, and
(iv) this Agreement shall remain in full force and effect, and shall be
binding upon any and all successors and assigns on the Company, unless
otherwise agreed to by Executive, in writing.

            (k)   Upon the termination of Executive's employment by the
Company for Cause or by the Executive without Good Reason within twelve months
following the occurrence of a Change of Control, (i) Executive shall be
entitled to receive his Base Salary (determined in accordance with Section
3(a)) for the Severance Period and an amount equal to the highest bonus paid
to Executive for a single fiscal year for the five fiscal years immediately
preceding the Termination Date, which amounts shall be payable in a lump sum
at the time of termination, (ii) all of Executive's unvested or restricted (a)
shares of common stock of the Company, (b) options to acquire shares of Common
Stock of the Company and (c) other equity interests of the Company shall
immediately vest or the restrictions thereon shall immediately lapse, as
applicable, and such shares, options and other equity interests shall become
immediately exercisable, (iii) the Company's Call Option (as defined in the
Stockholders Agreement) shall lapse as to all of Executive's shares, options
or other equity interests of the Company, and (iv) this Agreement shall remain
in full force and effect, and shall be binding upon any and all successors and
assigns on the Company, unless otherwise agreed to by Executive, in writing.

            (l)   Executive acknowledges that pursuant to the terms of the
Waiver of Certain Change in Control Benefits, which is attached hereto as
ANNEX A, benefits payable under this Agreement are contingent upon the
approval of the Company's Stockholders and that, if such stockholder approval
is not received, Executive will not be entitled to receive such benefits. In
the event such stockholder approval is received and it is nonetheless
determined that any payment or distribution (including benefits and
acceleration of vesting of options) which is made by the Company to or for the
benefit of Executive (whether paid or payable or distributed or distributable
pursuant to the terms of the Agreement or otherwise (a "PAYMENT") would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended (the "Code"), or any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"EXCISE TAX"), the Company shall make a payment (a "Gross-Up Payment") to or
for the benefit of Executive in an amount such that, after payment by
Executive of all income or other taxes (and any interest and penalties imposed
with respect thereto) imposed on the Gross-Up Payment, Executive retains an
amount of the Gross-Up Payment sufficient to pay the Excise Tax imposed on the
Payments.

            (m)   For purposes of the Agreement, "CAUSE" shall mean (i) the
conviction of any act (other than a traffic offense) constituting a felony
under the laws of any state or of the United States, involving moral turpitude
and having a direct, substantial and adverse effect on

                                       6



the Company, or (ii) willful misconduct by Executive, but only if Executive
shall not have discontinued such misconduct within 10 days after receiving
written notice from the Company describing the misconduct and stating that the
Company will consider the continuation of such misconduct as cause for
termination of this Agreement, or (iii) substantial failure to perform the
duties required by Section 2(a) hereof (other than as a result of physical or
mental illness) which is not cured within 10 days after receiving written
notice from the Company describing the failure to perform and stating that the
Company will consider the continuation of such failure to perform as cause for
termination of this Agreement PROVIDED, HOWEVER, that the failure of the
Company to achieve projected or budgeted results at any time or from time (as
provided in Section 5(d)(2)) to time shall not be a basis for termination for
Cause. Notwithstanding the foregoing, termination by the Company for Cause
shall not be effective until and unless the Board has voted (at a meeting of
the Board duly called and held as to which termination of the Executive is an
agenda item) by a majority vote to terminate the Executive for Cause after
Executive has been given notice of particular acts or circumstances which are
the basis for the termination for Cause and the Executive has been afforded at
least seven (7) days notice of the meeting and an opportunity to be heard at
the meeting and to present his position and the Board has given notice of
termination to the Executive within seven (7) days after such meeting.

            (n)   For purposes of the Agreement, "DISABILITY" means an
inability by the Executive to perform a substantial portion of the Executive's
duties by reason of physical or mental incapacity or disability for a total of
ninety (90) days or more in any consecutive period of three hundred and
sixty-five (365) days, as determined by the reasonable judgment of a physician
selected by the Executive and reasonably acceptable to the Company.

            (o)   For purposes of the Agreement, "GOOD REASON" shall mean the
occurrence, without the express written consent of Executive, of any of the
following events: (i) a reduction or adverse change in, or a change which is
inconsistent with, the Executive's responsibilities, duties, authority,
reporting power, functions, title, working conditions or status as provided
herein, including without limitation, the appointment of any employee to an
executive position at the Company or its successor, the responsibilities and
duties of which are substantially similar to those of the Executive or any
transfer of material responsibilities of Executive to a subsidiary which has
substantially the same effect as such an appointment, or after the date
hereof, the failure to offer to appoint or continue the Executive as chief
executive officer or co-chief executive officer of any company which acquires
the Company, and as the Chief Executive Officer or co-Chief Executive Officer
of the ultimate parent company which is in the same line of business as the
Company and which is within the meaning of Section 414(b) of the Code, a
member of a controlled group of corporations of which the Company is a member,
and which directly or indirectly controls the Company, provided that Executive
agrees to relocate his place of employment to the principal executive office
of such ultimate parent company of the Company; (ii) a material breach by the
Company of the compensation provisions of Section 3 hereof which is not cured
within 5 business days of the written notice of such breach; (iii) the
relocation of the Executive's own office to a location more than 50 miles from
its present location or outside the County of San Diego, California without


                                       7


Executive's prior written consent; or (iv) the failure of the Company to
obtain the assumption in writing of its obligation to perform this Agreement
by any successor to all or substantially all of the assets of the Company
within 60 days after a merger, consolidation, sale or similar transaction,
unless such assumption occurs by operation of law.

            (p)   For purposes of this Agreement, "VOLUNTARY TERMINATION"
shall mean the voluntary termination by Executive of Executive's employment
with the Company by voluntary resignation or any other means, including
without Good Reason or for Good Reason (other than (i) death, Disability, or
(ii) any other termination that would become effective simultaneously with or
following the earlier of (c) the effective date of a termination for Cause or
(y) the occurrence of an event, which if known to the Company at the time of
such voluntary termination by Executive, would give the Company the right to
terminate the Executive for Cause).

            (q)   For purposes of this Agreement, "CHANGE IN CONTROL" shall be
deemed to have occurred if any person or any persons acting together that
would constitute a group (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) (other than B.D. Recapitalization Holdings
LLC, its members and its co-investors ("BUYER") or their affiliates or a group
in which Buyer or its affiliates are the controlling participants) shall
beneficially own at least 50% of the aggregate voting power of all classes of
capital stock (including shares convertible into voting securities) entitled
to vote generally on the election of directors to the Board. Notwithstanding
the foregoing, a Change in Control shall not include any event, circumstance
or transaction which results from the action of any entity or group which
includes, is affiliated with or is wholly or partly controlled by Executive (a
"MANAGEMENT GROUP"). Without limiting the foregoing, any sale of substantially
all of the Company's assets to another entity (other than an entity associated
with the Management Group) without an express assumption by such entity of the
Company's obligations under this Agreement shall be deemed to constitute
termination without Cause pursuant to Section 5(c) above and the Company shall
be obligated to make the specified payments pursuant to Section 5(c) upon
consummation of the transaction pursuant to which the Company is selling
substantially all of its assets.

      6.    CONFIDENTIAL INFORMATION. As used herein, the term "CONFIDENTIAL
INFORMATION" shall mean all information disclosed to Executive or known by
Executive as a consequence of or through Executive's employment by the Company
(including, without limitation, information belonging to third parties or
companies affiliated with or related to the Company in the Company's
possession) not generally known in the trade or industry in which such
information is used, about the Company's products, processes, services,
customers, marketing strategy and business plans. Executive agrees that,
except as required in the performance of his duties or by law or to the extent
required to enforce his rights hereunder, Executive shall not disclose to any
unauthorized person or use for Executive's own account any Confidential
Information without the prior written consent of the Board, unless and to the
extent that the aforementioned matters become generally known to and available
for use by the public other than as a result of Executive's acts or omissions
to act. Executive shall deliver to

                                       8



the Company at the termination of the Employment Period, or at any other time
as the Company may request, all memoranda, notes, plans, records, computer
tapes and software and other documents and data (and copies thereof) relating
to the Confidential Information or the business of the Company which Executive
may then possess or have under Executive's control. In the performance of his
duties, Executive has previously had, and may be expected in the future to
have, access to confidential or proprietary information with respect to third
parties which is subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes (the "THIRD-PARTY INFORMATION"). Except in the performance of his
duties to the Company, Executive shall not, during the Employment Period and
at all times thereafter, directly or indirectly for any reason whatsoever,
disclose or use any such Third-Party Information. For purposes of this Section
6, "COMPANY" includes the Company and any of its subsidiaries.

      7.    NON-SOLICITATION. During the term of this Agreement and for a
period of one (1) year thereafter, Executive shall not directly or indirectly
through another entity (A) induce or attempt to induce any employee (excluding
(i) employees junior to regional managers, and (ii) Wilma Owens) of the
Company or any subsidiary to leave the employ of the Company or such
subsidiary or (B) hire any person who was an employee (excluding (i) employees
junior to regional managers, and (ii) Wilma Owens) of the Company or any
subsidiary of the Company at any time during the Employment Period if such
person was employed by the Company or a direct or indirect subsidiary of the
Company at any time during the one-year period prior to such hiring; PROVIDED,
HOWEVER, the Executive may solicit or hire any person if such person is no
longer employed by, and has not been employed within the last three (3) months
by the Company. In addition, during the period ending on the first anniversary
of the termination of Executive's employment (the "NON-INTERFERENCE PERIOD"),
Executive shall not, directly or indirectly through another entity, induce or
attempt to induce any customer, supplier, licensee or other business relation
of the Company or any subsidiary to withdraw, modify, curtail or cease doing
business with the Company or such subsidiary.

      8.    NONCOMPETITION. During the Employment Period, Executive will not,
directly or indirectly, engage in the business of selling, retailing, producing,
distributing, or marketing pet food, pet supplies or other pet-related products
(the "COMPANY BUSINESS") anywhere in the states of the United States. Executive
will be deemed to be engaged in the Company Business if he engages in the
Company Business directly as an employee or consultant, or owns, manages,
operates, joins or controls or participates in the ownership, management or
control of any other entity which is engaged in the Company Business, provided,
however, that Executive will not be deemed to engage in any of the businesses of
any publicly-traded corporation solely by reason of his passive ownership of
less than 5% of the outstanding stock of such entity.

      9.    ENFORCEMENT. If, at the time of enforcement of Sections 7 or 8 of
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area.
Because Executive's services are unique and because Executive has

                                       9



access to Confidential Information, the parties hereto agree that money
damages would be an inadequate remedy for any breach of this Agreement.
Therefore, in the event of a breach or threatened breach of this Agreement,
the Company or its successors or assigns may, in addition to other rights and
remedies existing in their favor, apply to any court of competent jurisdiction
for specific performance and/or injunctive or other relief in order to
enforce, or prevent any violations of the provisions hereof (without posting a
bond or other security).

      10.   REPRESENTATIONS.

            (a)   Executive hereby represents and warrants to the Company that
as of the date hereof (i) the execution, delivery and performance of this
Agreement by Executive does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound; (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and
(iii) upon the execution and delivery of this Agreement by the Company, this
Agreement shall be the valid and binding obligation of Executive, enforceable
in accordance with its terms, subject to applicable law.

            (b)   Company hereby represents and warrants to Executive that as of
the date hereof (i) the execution, delivery and performance of this Agreement by
the Company does not and will not conflict with, breach, violate or cause a
default under any contract, agreement, instrument, order, judgment or decree to
which the Company is a party or by which the Company is bound, and (ii) upon the
execution and delivery of this Agreement by Executive, this Agreement shall be
the valid and binding obligation of the Company, enforceable in accordance with
its terms.

      11.   PETOPIA REPURCHASE. Upon written request by Executive to the
Company, to the extent permitted by applicable law, the Company or its
nominees shall purchase all or any portion of the shares, options or other
equity interests owned by Executive in Petopia.com, Inc. (the "PETOPIA
SHARES") at a purchase price equal to Executive"s purchase price for such
Petopia Shares; PROVIDED, HOWEVER, that the purchase price for any Petopia
Shares purchased pursuant to this Section 11 shall be offset by any
indebtedness owed by the Executive to the Company at the time of such
purchase. If the Employment Period is terminated by the Company for Cause or
by Executive without Good Reason, such written request shall be delivered to
the Company on or prior to 90 days following the Termination Date.

      12.   INDEMNIFICATION. The Company agrees to indemnify and defend
Executive to the fullest extent permitted by law, the Company's Certificate of
Incorporation and the Company's Bylaws as in effect on the date hereof and as
amended thereafter, but in no event less favorable to Executive than those in
effect on the date hereof against expenses (including attorneys' fees and
expenses), judgments, claims, fines and amounts paid in settlement actually
and reasonably incurred by Executive in connection with such actions, suits or
proceedings to which Executive is, or is threatened to be made, a party by
reason of the fact that Executive is

                                      10



or was a director or officer of the Company, Holding or any of their
affiliates, including without limitation, the class action lawsuits filed in
the United States District Court for the Southern District of California
between August and November, 1999, as explained in the Company"s Annual Report
on Form 10-K, filed with the United States Securities and Exchange Commission
on April 13, 2000. The indemnification pursuant to the foregoing sentence
shall be the equivalent of indemnification provided to all directors and
officers as a group and shall not be deemed to be any greater than that
provided to all of the Company's directors and officers as a group. The
Company will use its commercially reasonable efforts to obtain any directors'
and officers' liability insurance covering all directors and officers as a
group and to the extent Executive continues to serve as an officer of the
Company, the Company shall cause Executive to be named as an insured party
under such policy. This section shall survive for 6 years following
termination of the Employment Period.

      13.   CONSULTING AGREEMENT. Upon the termination of this Agreement in
accordance with its terms (other than a termination by the Company for Cause
or for failure to meet the minimum performance objectives set forth in EXHIBIT
C hereto or by Executive without Good Reason), the Company and the Executive
shall enter in the Consulting Agreement, attached hereto as EXHIBIT D.

      14.   SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and its
respective heirs, successors and assigns, except that Executive may not assign
Executive's rights or delegate Executive's obligations hereunder without the
prior written consent of the Company. Without limiting the foregoing, the
Company may not, without Executive's prior written consent, assign rights or
delegate its obligations under this Agreement.

      15.   SURVIVAL. Sections 6, 7, 9, 10, 11, 12, 16, 17, 20, 21, 22 and 23
shall survive and continue in full force in accordance with their terms,
notwithstanding any termination of the Employment Period.

      16.   NOTICES Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered by a nationally recognized
overnight courier service, or mailed by certified mail, return receipt
requested, to the recipient at the address indicated below.

                  NOTICES TO EXECUTIVE:

                  Brian K. Devine
                  c/o Petco Animal Supplies, Inc.
                  9125 Rehco Road
                  San Diego, California 92121-2270

with a copy (which shall not constitute notice) to:

                  Munger Tolles & Olson LLP


                                      11



                  355 South Grand Avenue, Suite 3500
                  Los Angeles, California 90071-1560
                  Attention: Simon M. Lorne, Esq.
                  Telephone: (213) 683-9139
                  Facsimile: (213) 683-5139

                  NOTICES TO THE COMPANY:

                        Petco Animal Supplies, Inc.
                        c/o Leonard Green & Partners, L.P.
                        11111 Santa Monica Boulevard, Suite 2000
                        Los Angeles, California 90025
                        Attention: John G. Danhakl

with a copy (which shall not constitute notice) to:

                        Skadden, Arps, Slate, Meagher & Flom LLP
                        300 South Grand Avenue, Suite 3400
                        Los Angeles, California 90071-3144
                        Attention: Nicholas P. Saggese, Esq.
                        Telephone: (213) 687-5000
                        Facsimile: (213) 687-5600

                  and

                        Cleary, Gottlieb, Steen & Hamilton
                        One Liberty Plaza
                        New York, New York 10006
                        Attention: David Leinwand, Esq.
                        Telephone: (212) 225-2050
                        Facsimile: (212) 225-3999

or such other address or to the attention of such person as the recipient party
shall have specified by prior written notice to the sending party. Any notice
under this Agreement will be deemed to have been given when so delivered or
mailed. Any notice of termination of Executive's employment by the Company shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.

      17.   SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in
any jurisdiction, such invalidity, illegality or unenforceability will

                                      12



be re-formed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.

      18.   COMPLETE AGREEMENT. This Agreement embodies the complete agreement
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.

      19.   COUNTERPARTS.  This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.

      20.   CHOICE OF LAW.  This Agreement will be governed by and construed
in accordance with the internal laws of the State of California, regardless of
the choice of laws provisions of such state or any other jurisdiction.

      21.   AGREEMENT TO ARBITRATE; EXPENSES. Except for the enforcement of
any covenant herein that would be the subject of specific performance
contemplated by Section 9, any controversy or claim arising out of or relating
to this Agreement or the formation, breach or interpretation hereof, will be
settled by arbitration before one arbitrator in accordance with the Rules for
the Resolution of Employment Disputes of the American Arbitration Association
in San Diego County, California. Judgment upon the award rendered by the
arbitration may be entered and enforced in the court with jurisdiction over
the appropriate party. All controversies not subject to arbitration or
contesting any arbitration will be litigated in the State of California, San
Diego County Superior Court or a federal court in the Southern District of
California (and each of the parties hereto hereby consent to the exclusive
jurisdiction of such courts and waive any objections thereto). The expenses
(including reasonable attorneys' fees) incurred by the prevailing party in any
arbitration or litigation related to this Agreement shall be borne by the
non-prevailing party in such arbitration or litigation.

      22.   AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.

      23.   WITHHOLDING TAXES. The Company shall withhold any and all United
States Federal, state, local and other taxes required to be withheld in
connection with Executive's employment with the Company and this Agreement and
the Executive shall indemnify the Company for all such amounts.


                                      13



      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
date first written above.



                                       PETCO ANIMAL SUPPLIES, INC.



                                       By: /s/ JAMES M. MYERS
                                          ----------------------------
                                       Name JAMES M. MYERS
                                           ---------------------------
                                       Title Senior Vice President and
                                             Chief Financial Officer
                                            --------------------------



                                       Brian K. Devine


                                        /s/ BRIAN K. DEVINE
                                       -------------------------------





















                                      14





                                                                         ANNEX A

                    WAIVER OF CERTAIN CHANGE IN CONTROL BENEFITS

         WHEREAS, the Company and Executive have agreed that upon the Closing
of the Agreement and Plan of Merger by and between Petco Animal Supplies,
Inc. (the "Company") and BD Recapitalization Corp., (the "Merger Agreement"),
the Company and I will enter into the Employment Agreement of which this
Exhibit is a part, which agreement provides for:

         (i)   the severance payments under certain circumstances,

         (ii)  the accelerated vesting of certain stock options and other
equity based awards, and

         (iii) other benefits that may be treated as "parachute payments"
within the meaning of Section 280G of the Code subject to the excise tax
under Section 4999 of the Code, with the payments provided for thereunder
being referred to herein as the "Payments";

         WHEREAS, I understand that upon or following a Change in Control of
the Company, some portion of the value of the Payments may be treated as
parachute payments;

         WHEREAS, I understand that, in general, if the aggregate amount of
such parachute payments exceeds 2.99 times my "base amount," as defined in
Code Section 280G (the "Safe Harbor Amount"), I will be subject to an excise
tax imposed under Section 4999 of the Code, in an amount equal to 20% of the
excess of such aggregate parachute payments over one times my "base amount,"
and under Code Section 280G, the Company will not be able to deduct any portion
of the value of such parachute payments in excess of one times my "base amount";

         WHEREAS, the Treasury Regulations under Code Section 280G provide,
subject to certain conditions, that payments made pursuant to a change in
effective control or ownership of a privately held corporation will not be
treated as parachute payments if (i) such payments are approved by a vote of
at least 75% of the corporation's stockholders immediately before the change
and (ii) such vote determines the right of the recipient to receive or retain
such payments; and

         WHEREAS, the Company, promptly following the Effective Time (as
defined in the Merger Agreement), intends to seek to obtain the approval of
its stockholders of the Payments to the extent such payments would exceed my
Safe Harbor Amount.

         NOW, THEREFORE, (i) effective as of the date hereof, (ii) subject to
the closing of the Merger (as defined in the Merger Agreement) and the Terms
and Conditions of Waiver set forth on Appendix A attached hereto, and (iii)
applicable only with respect to the


                                      15



Merger (as defined in the Merger Agreement), I hereby voluntarily and
irrevocably waive, for no separate monetary consideration and with full
knowledge of the effects thereof, such portion of the Payments as shall be
necessary to provide that my aggregate parachute payments in respect of the
Employment Agreement, as reasonably determined by the Company, in
consultation with its independent auditors and tax counsel, in accordance
with Code Section 280G and the applicable rules and regulations thereunder,
shall equal my Safe Harbor Amount; provided, that if at any time on or after
the date hereof the Payments are approved by a vote of at least 75 percent of
the Company's stockholders, then this waiver shall be of no further force or
effect and the Payments shall be paid in full when due in accordance with the
terms of the Employment Agreement.

         I hereby acknowledge that I have had the opportunity to review this
Waiver with counsel of my choosing.

         IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of
the day of _____, 2000.


                                         /s/ BRIAN K. DEVINE
                                       ---------------------------------
                                       Brian K. Devine

Acknowledged and accepted as of the ______ day of ____, 2000, by


                                       PETCO ANIMAL SUPPLIES, INC.


                                       By:   JAMES M. MYERS
                                            ----------------------------
                                       Its: Senior Vice President and
                                            Chief Financial Officer
                                            ----------------------------



                                       16



                                   SPOUSAL CONSENT

         The undersigned, Silvija Devine, represents that she has reviewed
the attached "Waiver of Change in Control Acceleration of Benefits" and
"Terms and Conditions of Waiver" of his spouse, and hereby acknowledges the
effects of and voluntarily consents to such waiver as of the day of
September, 2000. The undersigned acknowledges that she has had the
opportunity to review the Spousal Consent with counsel of her choosing.

                                        /s/ SILVIJA DEVINE
                                       -------------------------------
                                        Silvija Devine

















                                       17



                     APPENDIX A:  TERMS AND CONDITIONS OF WAIVER

          In connection with and as a condition of the attached Waiver of
Change in Control Acceleration of Benefits, the undersigned hereby represents,
warrants, covenants, agrees, understands and acknowledges the following:

      1.  Although the Company has provided me (i) certain sample materials
relating to the potential effects under Code Sections 280G and 4999 of the
Payments in connection with the Merger Agreement and (ii) the opportunity to ask
questions of the Company and its independent auditors and tax counsel regarding
such acceleration and effects, nonetheless, in making my decision as to whether
or not to waive any portion of the Payments, I have not relied in whole or in
part on any statements or advice provided by the Company or any of its officers,
directors, employees, agents or consultants. My decision to make the waiver set
forth herein is solely the result of my own analysis of these issues, in
consultation with my personal financial, tax, accounting and/or legal advisors.

      2.  I understand that (i) the actual parachute payment calculations will
be performed by the Company in consultation with its independent auditors and
tax counsel and (ii) the determination as to the extent to which Payments
will need to be waived will be made by the Company based upon the advice of
such auditors and tax counsel.

          I agree to be irreparably bound by the determinations of the Company
and such auditors and tax counsel in this regard.

      3.  I further acknowledge that there is a significant degree of
uncertainty under existing law and regulatory authority as to the
calculations to be performed under Code Section 280G in connection with the
determination of the amount of my "parachute payments" and the extent to
which the Payments may need to be waived in order to provide that the
aggregate value of the Payments will not exceed my Safe Harbor Amount, and
that accordingly there can be no assurance that the Internal Revenue Service
will agree with the calculations and waiver determinations made by the
Company and its independent auditors and tax counsel, or that any waiver
provided for hereunder will have the result of avoiding the excise tax under
Section 4999 of the Code.

          In consideration of the foregoing, the undersigned hereby forever
releases and discharges the Company, KPMG Peat Marwick, Skadden, Arps, Slate,
Meagher & Flom LLP and each of their respective Affiliates (as such term is
defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as
amended), and each of their respective past and present partners, principals,
officers, directors, stockholders, managers, employees, agents, representatives,
successors and assigns (collectively, "Released Parties") from any and all
claims, charges, complaints, liens, demands, causes of action, obligations,
damages and liabilities, known or unknown, suspected or unsuspected, that the
undersigned had, now has, or may hereafter claim to have against any of the
Released Parties, arising out of or relating in any way connected with the
matters that are the subject of this Waiver of Change in Control


                                       18



Acceleration of Benefits (the "Released Claims"), including without
limitation matters relating to the calculations to be performed in
determining the potential amount of my "parachute payments" and the
assumptions made in performing such calculations.

          The undersigned expressly waives under Section 1542 of the Civil
Code of the State of California ("Section 1542") all rights with respect to the
Released Claims with respect to each of the Released Parties. Section 1542
states as follows:

          A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
          NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
          THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
          SETTLEMENT WITH THE DEBTOR.

          The undersigned hereby acknowledges that he has had the opportunity
to review this Waiver with counsel of his choosing.

          IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of
the _____ day of _______, 2000.



                                        /s/ BRIAN K. DEVINE
                                       ------------------------------
                                       Brian K. Devine






                                       19



                                                                      EXHIBIT A


                           DESIGNATED PERMITTED BOARDS


                                Petopia.com, Inc.

                             Wild Oats Markets, Inc.











                                       20



                                                                      EXHIBIT B


                                      SERP

Term: 20 years

Benefit: 50% of Salary (not Bonus)

      Is reduced by any payments received under any other qualified plans other
than qualified plans that are 401(k) plans.

      Is reduced by any payments provided for in the Consulting Agreement
(regardless of whether such amounts are actually paid).

      Available to Executive regardless of whether Executive's employment is
terminated by the Company with or without Cause or for failure to meet the
minimum performance objectives set forth on Exhibit C, or by Executive with or
without Good Reason.











                                       21



                                                                      EXHIBIT C


                             PERFORMANCE CRITERIA

1.    EBITDA (as defined in the Credit Agreement among Petco Animal Supplies,
      Inc., the Lenders parties thereto, and Union Bank of California, N.A.,
      as Agent, dated as of July 15, 1999, as such agreement may be amended,
      restated, supplemented, renewed, replaced or otherwise modified from time
      to time whether or not with the same agent or lenders, and irrespective
      of any changes in the terms and conditions thereof in any one fiscal year
      of at least $80 million.
















                                       22



                                                                      EXHIBIT D


                              CONSULTING AGREEMENT

Term:       10 years

Benefit:    25% of Salary (not bonus)

            Is not reduced by any benefits under SERP or qualified plans.




















                                       23

EX-10.8

                              EMPLOYMENT AGREEMENT


      THIS EMPLOYMENT AGREEMENT ("AGREEMENT"), is made and effective as of
October 2, 2000, by and between Petco Animal Supplies, Inc., a Delaware
corporation (the "COMPANY"), and Bruce C. Hall, an individual ("EXECUTIVE").

      NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

      1.    EMPLOYMENT. The Company shall employ Executive, and Executive
accepts employment with the Company, upon the terms and conditions set forth
in this Agreement for the period beginning on the date of this Agreement and
ending as provided in Section 5 hereof (the "EMPLOYMENT PERIOD").

      2.    POSITION AND DUTIES.

            (a)   During the Employment Period, Executive shall serve as
Executive Vice-President, Operations of the Company, and shall have the normal
duties, responsibilities and authority commensurate with such positions.
Executive's services pursuant to this Agreement shall be performed primarily
at the Company's principal place of business in San Diego County, California,
or at such other facilities of the Company as the Company and Executive may
agree upon from time to time.

            (b)   During the Employment Period, Executive shall report to the
Board of Directors of the Company (the "BOARD") and Executive shall devote
Executive's reasonable best efforts and Executive's full business time and
attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity) to the business and affairs of the Company during
the normal business hours of the executive offices of the Company; provided,
however, the foregoing shall not prevent Executive from making and expending
any time on passive personal investments, expending reasonable amounts of time
for educational or charitable activities and/or serving as a director on the
boards of the companies listed on EXHIBIT A attached hereto and any other
non-competing companies which shall not include companies involved in the
business of selling, retailing, producing, distributing, or marketing pet
food, pet supplies or other pet-related products or services. Executive shall
perform Executive's duties and responsibilities to the best of Executive's
abilities in a reasonably diligent, trustworthy, businesslike and efficient
manner.




      3.    BASE SALARY AND BENEFITS.

            (a)   During the Employment Period, Executive's annual base salary
shall be established annually by the Compensation Committee of the Board of
Directors, but shall in no event be less than $300,000 (the "BASE SALARY")
during each calendar year of the employment period, prorated for any partial
year, which salary shall be payable in regular installments in accordance with
the Company's general payroll practices, including those related to
withholding for taxes, insurance and similar items. In addition, during the
Employment Period or after such Employment Period, as appropriate, Executive
shall be entitled to participate in all of the Company's employee benefits
plans and programs in accordance with their terms and conditions, including,
without limitation, any profit sharing, stock option, incentive compensation,
paid vacation, retirement, deferred compensation, 401(k) match, investment
plans, medical, dental, disability and all other group or other insurance
plans or benefits and other perquisite plans and programs ("BENEFITS").
Without limiting the foregoing, Executive shall be entitled to at least the
level of Benefits provided to him on the date hereof.

            (b)   During the Employment Period, the Company shall reimburse
Executive for all reasonable expenses incurred by Executive in the course of
performing Executive's duties under this Agreement that are consistent with
the Company's policies in effect from time to time with respect to travel,
entertainment and other business expenses, subject to the Company's
requirements with respect to reporting and documentation of such expenses.
Without limiting the foregoing, Executive shall be reimbursed for the costs of
first-class travel.

            (c)   During the Employment Period, the Company shall pay for or
reimburse Executive for all fees and reasonable expenses of Executive's
participation in professional organizations, trade associations or other
organizations reasonably related to Executive's position and responsibilities
as an officer of the Company.

            (d)   During the Employment Period, the Company shall provide
Executive with a suite of perquisites appropriate for a senior executive
officer, including but not limited to, a car allowance, life insurance
premiums, club membership, etc., provided that the aggregate cost of such
perquisites shall not exceed $25,000 per year, pro rated for partial years
occurring during the Employment Period.

            (e)   During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the Company's standard policy for
the Company's executives, but not to be less than five (5) weeks per year
PROVIDED, that Executive shall accrue no more than ten (10) weeks of unused
paid vacation.

            (f)   Executive's Base Salary shall be subject to review and
increase by the Compensation Committee at least once annually, in a manner and
amount consistent with past practice.

                                       2



            (g)   Upon the termination of the Employment Period, Executive or
Executive's representatives or beneficiaries, shall be entitled to purchase
his personal computer (desktop and/or laptop), printer, personal fax machine,
personal digital assistant, cellular telephone and luxury automobile used in
connection with the business for an aggregate purchase price of $1.00.
Executive shall be responsible for any taxes due with respect to such sale.

      4.    BONUSES. Executive shall be entitled to participate in the
Company's bonus plan(s) as in effect from time to time, the awards, terms,
targets and other conditions of which shall be designed to produce a bonus at
least as favorable to Executive as the bonus plans of the Company in effect on
the date hereof.

      5.    TERM.

            (a)   This Agreement shall become effective on the date hereof.

            (b)   The Employment Period under this Agreement shall terminate
upon the earliest to occur of the following events (the date specified in each
such event is referred to as the "TERMINATION DATE"):

                  i.    the third anniversary of the date hereof;
                        PROVIDED, HOWEVER, that, subject to the
                        provisions of this Section 5(b), the term of
                        this Agreement shall automatically be extended
                        from day to day so that it always has a
                        remaining term (the "REMAINING TERM") of three
                        years; PROVIDED, that such renewal shall cease
                        following written notice (a "Notice") from the
                        Company to the Executive, in which case the
                        Remaining Term shall be three years following
                        the effective date of such notice, and that
                        this Agreement shall terminate on the third
                        anniversary of the effective  date of such
                        notice, PROVIDED, FURTHER, that the Company
                        shall not deliver a Notice within 6 months
                        following the Effective Time (as defined in the
                        Merger Agreement);

                  ii.   the date upon which the Company terminates the
                        Executive's employment by the Company for Cause or
                        without Cause, PROVIDED, that such termination shall be
                        effective following written notice of such event in
                        which case the Termination Date shall be the effective
                        date contained in such notice;

                  iii.  the date of the Executive's death;

                  iv.   the date upon which the Company terminates
                        Executive's employment with the Company as a
                        result of Executive's

                                       3



                        Disability, PROVIDED, that such termination shall be
                        effective following written notice of such event from
                        the Executive to the Company or from the Company to
                        the Executive, in which case the Termination
                        Date shall be the effective date contained in
                        such notice; or

                  v.    the date upon which Executive effects a Voluntary
                        Termination with or without Good Reason, PROVIDED, that
                        such termination shall be effective following written
                        notice of such event, in which case the Termination Date
                        shall be the effective date contained in such notice.

            (c)   If the Employment Period is terminated without Cause by the
Company or by Executive with Good Reason, Executive shall be entitled to
receive his Base Salary (determined in accordance with Section 3(a)) for a
period of 18 months from Executive's Termination Date (the "SEVERANCE PERIOD")
and an amount equal to the Executive's highest bonus for a single fiscal year
in the five fiscal years immediately preceding the Termination Date, which
amount shall be paid ratably on an annual basis over such 18 month severance
period.

            (d)   Notwithstanding the foregoing:

                  (1) If the Employment Period is terminated by the Company for
Cause or is terminated as a result of Executive's resignation without Good
Reason, Executive shall receive such compensation and Benefits as Executive is
entitled to as of such date.

                  (s) If the Employment Period is terminated by the Company for
failure to meet the minimum performance objectives set forth in EXHIBIT B hereto
and, at the time of such termination, the Company shall not otherwise be
entitled to terminate Executive's employment for Cause, in addition to any
compensation and Benefits to which Executive is entitled to as of such
Termination Date, Executive shall be entitled to receive his Base Salary (as
determined in accordance with Section 3(a)) for a period of 9 months from
Executive's Termination Date, which amount shall be paid ratably on an annual
basis over such 9-month period.

            (e)   If the Employment Period is terminated as a result of
Executive's death or Disability, Executive or Executive's representatives or
beneficiaries shall be entitled to receive (i) compensation and Benefits
Executive is entitled to as of the Termination Date, and (ii) an amount, which
shall be paid ratably on an annual basis over the Severance Period, equal to
the Executive's highest bonus for a single fiscal year in the five fiscal
years immediately preceding the Termination Date. If the Employment Period is
terminated by reason of Executive's death or Disability, the Company shall
keep in force existing health insurance covering Executive and his dependents
for the Severance Period on the basis in

                                       4



effect at the termination date. Executive and his dependents shall also be
entitled to any continuation of coverage rights under any applicable law.

            (f)   The amount of Base Salary payable pursuant to Section 5(c),
shall be payable in accordance with the Company's normal payroll practices and
procedures applied to Executive as if he remained an employee of the Company.
The amount of Base Salary payable pursuant to Section 5(e) shall be paid in a
lump sum within 30 days following the termination of the Employment Period and
all other compensation and Benefits, if any, will be payable in accordance
with the Company's normal practices and procedures or otherwise as required by
applicable law.

            (g)   All of Executive's rights to any other employee benefit
hereunder (except as described above or pursuant to law) accruing after the
termination of the Employment Period shall cease upon such termination. Upon
termination of his employment for any reason whatsoever, Executive or
Executive's representatives or beneficiaries shall have the right to receive
payment for any accrued but unused vacation time and any and all Benefits (to
the extent required by the terms of such Benefits) due Executive pursuant to
Section 3 as of the Termination Date. This Section 5(g) shall have no effect
on Executive's equity ownership (including stock options) in the Company,
which shall be governed by the terms of such equity ownership and of a
Stockholders Agreement between Executive, the Company and certain other
parties.

            (h)   If the Executive's employment described herein is
terminated, the Executive shall have no duty to mitigate his damages or seek
other employment, and the Company shall have no right to offset any amounts
which are paid to or earned by Executive from other employment obtained by
Executive (including self-employment), except for employment obtained by
Executive which is inconsistent with the provisions of Section 8 of this
Agreement, against any amounts which are payable to Executive pursuant to this
Agreement.

            (i)   At Executive's own expense, Executive and Executive's
dependants shall also be entitled to any continuation of health insurance
coverage rights after his termination of employment under any applicable law;
PROVIDED, HOWEVER, that in the event of the termination of Executive's
employment with the Company without Cause or by Executive for Good Reason,
Executive's health and life insurance coverage shall be provided at the
Company's expense for three (3) years after Executive's date of termination on
the same basis as for other senior management employees of the Company,
including the same employee contributions and co-payments which are required
for other senior management employees.

            (j)   Upon the termination of Executive's employment by the
Company without Cause or by the Executive for Good Reason within twelve months
following the occurrence of a Change of Control, (i) Executive shall be
entitled to receive his Base Salary (determined in accordance with Section
3(a)) for a period of 18 months from Executive's Termination Date, and an
amount equal to 1.5 times the Executive's annual bonus for the

                                       5



three fiscal years immediately preceding the Termination Date, which amounts
shall be payable in a lump sum at the time of termination, (ii) all of
Executive's unvested or restricted (a) shares of common stock of the Company,
(b) options to acquire shares of common stock of the Company and (c) other
equity interests of the Company shall immediately vest or the restrictions
thereon shall immediately lapse, as applicable, and such shares, options and
other equity interests shall become immediately exercisable, (iii) the
Company's Call Option (as defined in the Stockholders Agreement) shall lapse
as to all of Executive's shares, options or other equity interests of the
Company, and (iv) this Agreement shall remain in full force and effect, and
shall be binding upon any and all successors and assigns on the Company,
unless otherwise agreed to by Executive, in writing.

            (k)   Upon the termination of Executive's employment by the
Company for Cause or by the Executive without Good Reason within twelve months
following the occurrence of a Change of Control, (i) Executive shall be
entitled to receive his Base Salary (determined in accordance with Section
3(a)) for a period of 18 months from Executive's Termination Date and an
amount equal to the highest bonus paid to Executive for a single fiscal year
for the five fiscal years immediately preceding the Termination Date, which
amounts shall be payable in a lump sum at the time of termination, (ii) all of
Executive's unvested or restricted (a) shares of common stock of the Company,
(b) options to acquire shares of Common Stock of the Company and (c) other
equity interests of the Company shall immediately vest or the restrictions
thereon shall immediately lapse, as applicable, and such shares, options and
other equity interests shall become immediately exercisable, (iii) the
Company's Call Option (as defined in the Stockholders Agreement) shall lapse
as to all of Executive's shares, options or other equity interests of the
Company, and (iv) this Agreement shall remain in full force and effect, and
shall be binding upon any and all successors and assigns on the Company,
unless otherwise agreed to by Executive, in writing.

            (l)   Executive acknowledges that pursuant to the terms of the
Waiver of Certain Change in Control Benefits, which is attached hereto as
ANNEX A, benefits payable under this Agreement are contingent upon the
approval of the Company's Stockholders and that, if such stockholder approval
is not received, Executive will not be entitled to receive such benefits. In
the event such stockholder approval is received and it is nonetheless
determined that any payment or distribution (including benefits and
acceleration of vesting of options) which is made by the Company to or for the
benefit of Executive (whether paid or payable or distributed or distributable
pursuant to the terms of the Agreement or otherwise (a "PAYMENT") would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended (the "Code"), or any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"EXCISE TAX"), the Company shall make a payment (a "Gross-Up Payment") to or
for the benefit of Executive in an amount such that, after payment by
Executive of all income or other taxes (and any interest and penalties imposed
with respect thereto) imposed on the Gross-Up Payment, Executive retains an
amount of the Gross-Up Payment sufficient to pay the Excise Tax imposed on the
Payments.

                                       6



            (m)   For purposes of the Agreement, "CAUSE" shall mean (i) the
conviction of any act (other than a traffic offense) constituting a felony
under the laws of any state or of the United States, involving moral turpitude
and having a direct, substantial and adverse effect on the Company, or (ii)
willful misconduct by Executive, but only if Executive shall not have
discontinued such misconduct within 10 days after receiving written notice
from the Company describing the misconduct and stating that the Company will
consider the continuation of such misconduct as cause for termination of this
Agreement, or (iii) substantial failure to perform the duties required by
Section 2(a) hereof (other than as a result of physical or mental illness)
which is not cured within 10 days after receiving written notice from the
Company describing the failure to perform and stating that the Company will
consider the continuation of such failure to perform as cause for termination
of this Agreement PROVIDED, HOWEVER, that the failure of the Company to
achieve projected or budgeted results at any time or from time (as provided in
Section 5(d)(2)) to time shall not be a basis for termination for Cause.
Notwithstanding the foregoing, termination by the Company for Cause shall not
be effective until and unless the Board has voted (at a meeting of the Board
duly called and held as to which termination of the Executive is an agenda
item) by a majority vote to terminate the Executive for Cause after Executive
has been given notice of particular acts or circumstances which are the basis
for the termination for Cause and the Executive has been afforded at least
seven (7) days notice of the meeting and an opportunity to be heard at the
meeting and to present his position and the Board has given notice of
termination to the Executive within seven (7) days after such meeting.

            (n)   For purposes of the Agreement, "DISABILITY" means an
inability by the Executive to perform a substantial portion of the Executive's
duties by reason of physical or mental incapacity or disability for a total of
ninety (90) days or more in any consecutive period of three hundred and
sixty-five (365) days, as determined by the reasonable judgment of a physician
selected by the Executive and reasonably acceptable to the Company.

            (o)   For purposes of the Agreement, "GOOD REASON" shall mean the
occurrence, without the express written consent of Executive, of any of the
following events: (i) a reduction or adverse change in, or a change which is
inconsistent with, the Executive's responsibilities, duties, authority,
reporting power, functions, title, working conditions or status as provided
herein, including without limitation, the appointment of any employee to an
executive position at the Company or its successor, the responsibilities and
duties of which are substantially similar to those of the Executive or any
transfer of material responsibilities of Executive to a subsidiary which has
substantially the same effect as such an appointment, or after the date
hereof, the failure to offer to appoint or continue the Executive as an
executive vice president of any company which acquires the Company, and as an
executive vice president of the ultimate parent company which is in the same
line of business as the Company and which is within the meaning of Section
414(b) of the Code, a member of a controlled group of corporations of which
the Company is a member, and which directly or indirectly controls the
Company, provided that Executive agrees to relocate his place of employment to
the principal executive office of such ultimate parent company of the Company;
(ii) a material breach by the Company of the compensation provisions of
Section 3

                                       7



hereof which is not cured within 5 business days of the written notice of such
breach; (iii) the relocation of the Executive's own office to a location more
than 50 miles from its present location or outside the County of San Diego,
California without Executive's prior written consent; or (iv) the failure of
the Company to obtain the assumption in writing of its obligation to perform
this Agreement by any successor to all or substantially all of the assets of
the Company within 60 days after a merger, consolidation, sale or similar
transaction, unless such assumption occurs by operation of law.

            (p)   For purposes of this Agreement, "VOLUNTARY TERMINATION"
shall mean the voluntary termination by Executive of Executive's employment
with the Company by voluntary resignation or any other means, including
without Good Reason or for Good Reason (other than (i) death, Disability, or
(ii) any other termination that would become effective simultaneously with or
following the earlier of (c) the effective date of a termination for Cause or
(y) the occurrence of an event, which if known to the Company at the time of
such voluntary termination by Executive, would give the Company the right to
terminate the Executive for Cause).

            (q)   For purposes of this Agreement, "CHANGE IN CONTROL" shall be
deemed to have occurred if any person or any persons acting together that
would constitute a group (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) (other than B.D. Recapitalization Holdings
LLC, its members and its co-investors ("Buyer") or their affiliates or a group
in which Buyer or its affiliates are the controlling participants) shall
beneficially own at least 50% of the aggregate voting power of all classes of
capital stock (including shares convertible into voting securities) entitled
to vote generally on the election of directors to the Board. Notwithstanding
the foregoing, a Change in Control shall not include any event, circumstance
or transaction which results from the action of any entity or group which
includes, is affiliated with or is wholly or partly controlled by Executive (a
"MANAGEMENT GROUP"). Without limiting the foregoing, any sale of substantially
all of the Company's assets to another entity (other than an entity associated
with the Management Group) without an express assumption by such entity of the
Company's obligations under this Agreement shall be deemed to constitute
termination without Cause pursuant to Section 5(c) above and the Company shall
be obligated to make the specified payments pursuant to Section 5(c) upon
consummation of the transaction pursuant to which the Company is selling
substantially all of its assets.

      6.    CONFIDENTIAL INFORMATION. As used herein, the term "CONFIDENTIAL
INFORMATION" shall mean all information disclosed to Executive or known by
Executive as a consequence of or through Executive's employment by the Company
(including, without limitation, information belonging to third parties or
companies affiliated with or related to the Company in the Company's
possession) not generally known in the trade or industry in which such
information is used, about the Company's products, processes, services,
customers, marketing strategy and business plans. Executive agrees that,
except as required in the performance of his duties or by law or to the extent
required to enforce his rights hereunder, Executive shall not disclose to any
unauthorized person or use for Executive's own account

                                       8



any Confidential Information without the prior written consent of the Board,
unless and to the extent that the aforementioned matters become generally
known to and available for use by the public other than as a result of
Executive's acts or omissions to act. Executive shall deliver to the Company
at the termination of the Employment Period, or at any other time as the
Company may request, all memoranda, notes, plans, records, computer tapes and
software and other documents and data (and copies thereof) relating to the
Confidential Information or the business of the Company which Executive may
then possess or have under Executive's control. In the performance of his
duties, Executive has previously had, and may be expected in the future to
have, access to confidential or proprietary information with respect to third
parties which is subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes (the "THIRD-PARTY INFORMATION"). Except in the performance of his
duties to the Company, Executive shall not, during the Employment Period and
at all times thereafter, directly or indirectly for any reason whatsoever,
disclose or use any such Third-Party Information. For purposes of this Section
6, "COMPANY" includes the Company and any of its subsidiaries.

      7.    NON-SOLICITATION. During the term of this Agreement and for a
period of one (1) year thereafter, Executive shall not directly or indirectly
through another entity (A) induce or attempt to induce any employee (excluding
employees junior to regional managers) of the Company or any subsidiary to
leave the employ of the Company or such subsidiary or (B) hire any person who
was an employee (excluding employees junior to regional managers) of the
Company or any subsidiary of the Company at any time during the Employment
Period if such person was employed by the Company or a direct or indirect
subsidiary of the Company at any time during the one-year period prior to such
hiring; PROVIDED, HOWEVER, the Executive may solicit or hire any person if
such person is no longer employed by, and has not been employed within the
last three (3) months by the Company. In addition, during the period ending on
the first anniversary of the termination of Executive's employment (the
"NON-INTERFERENCE PERIOD"), Executive shall not, directly or indirectly
through another entity, induce or attempt to induce any customer, supplier,
licensee or other business relation of the Company or any subsidiary to
withdraw, modify, curtail or cease doing business with the Company or such
subsidiary.

      8.    NONCOMPETITION. During the Employment Period, Executive will not,
directly or indirectly, engage in the business of selling, retailing,
producing, distributing, or marketing pet food, pet supplies or other
pet-related products (the "COMPANY BUSINESS") anywhere in the states of the
United States. Executive will be deemed to be engaged in the Company Business
if he engages in the Company Business directly as an employee or consultant,
or owns, manages, operates, joins or controls or participates in the
ownership, management or control of any other entity which is engaged in the
Company Business, provided, however, that Executive will not be deemed to
engage in any of the businesses of any publicly-traded corporation solely by
reason of his passive ownership of less than 5% of the outstanding stock of
such entity.

                                       9



      9.    ENFORCEMENT. If, at the time of enforcement of Sections 7 or 8 of
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area.
Because Executive's services are unique and because Executive has access to
Confidential Information, the parties hereto agree that money damages would be
an inadequate remedy for any breach of this Agreement. Therefore, in the event
of a breach or threatened breach of this Agreement, the Company or its
successors or assigns may, in addition to other rights and remedies existing
in their favor, apply to any court of competent jurisdiction for specific
performance and/or injunctive or other relief in order to enforce, or prevent
any violations of the provisions hereof (without posting a bond or other
security).

      10.   REPRESENTATIONS.

            (a)   Executive hereby represents and warrants to the Company that
as of the date hereof (i) the execution, delivery and performance of this
Agreement by Executive does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound; (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and
(iii) upon the execution and delivery of this Agreement by the Company, this
Agreement shall be the valid and binding obligation of Executive, enforceable
in accordance with its terms, subject to applicable law.

            (b)   Company hereby represents and warrants to Executive that as
of the date hereof (i) the execution, delivery and performance of this
Agreement by the Company does not and will not conflict with, breach, violate
or cause a default under any contract, agreement, instrument, order, judgment
or decree to which the Company is a party or by which the Company is bound,
and (ii) upon the execution and delivery of this Agreement by Executive, this
Agreement shall be the valid and binding obligation of the Company,
enforceable in accordance with its terms.

      11.   PETOPIA REPURCHASE. Upon written request by Executive to the
Company, to the extent permitted by applicable law, the Company or its
nominees shall purchase all or any portion of the shares, options or other
equity interests owned by Executive in Petopia.com, Inc. (the "PETOPIA
SHARES") at a purchase price equal to Executive's purchase price for such
Petopia Shares; PROVIDED, HOWEVER, that the purchase price for any Petopia
Shares purchased pursuant to this Section 11 shall be offset by any
indebtedness owed by the Executive to the Company at the time of such
purchase. If the Employment Period is terminated by the Company for Cause or
by Executive without Good Reason, such written request shall be delivered to
the Company on or prior to 90 days following the Termination Date.

                                      10



      12.   INDEMNIFICATION. The Company agrees to indemnify and defend
Executive to the fullest extent permitted by law, the Company's Certificate of
Incorporation and the Company's Bylaws as in effect on the date hereof and as
amended thereafter, but in no event less favorable to Executive than those in
effect on the date hereof against expenses (including attorneys' fees and
expenses), judgments, claims, fines and amounts paid in settlement actually
and reasonably incurred by Executive in connection with such actions, suits or
proceedings to which Executive is, or is threatened to be made, a party by
reason of the fact that Executive is or was a director or officer of the
Company, Holding or any of their affiliates, including without limitation, the
class action lawsuits filed in the United States District Court for the
Southern District of California between August and November, 1999, as
explained in the Company's Annual Report on Form 10-K, filed with the United
States Securities and Exchange Commission on April 13, 2000. The
indemnification pursuant to the foregoing sentence shall be the equivalent of
indemnification provided to all directors and officers as a group and shall
not be deemed to be any greater than that provided to all of the Company's
directors and officers as a group. The Company will use its commercially
reasonable efforts to obtain any directors' and officers' liability insurance
covering all directors and officers as a group and to the extent Executive
continues to serve as an officer of the Company, the Company shall cause
Executive to be named as an insured party under such policy. This section
shall survive for 6 years following termination of the Employment Period.

      13.   SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and its
respective heirs, successors and assigns, except that Executive may not assign
Executive's rights or delegate Executive's obligations hereunder without the
prior written consent of the Company. Without limiting the foregoing, the
Company may not, without Executive's prior written consent, assign rights or
delegate its obligations under this Agreement.

      14.   SURVIVAL. Sections 6, 7, 9, 10, 11, 12, 15, 16, 19, 20, 21 and 22
shall survive and continue in full force in accordance with their terms,
notwithstanding any termination of the Employment Period.

      15.   NOTICES Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered by a nationally recognized
overnight courier service, or mailed by certified mail, return receipt
requested, to the recipient at the address indicated below.

                  NOTICES TO EXECUTIVE:

                  Bruce C. Hall
                  c/o Petco Animal Supplies, Inc.
                  9125 Rehco Road
                  San Diego, California 92121-2270



                                      11



with a copy (which shall not constitute notice) to:

                  Munger Tolles & Olson LLP
                  355 South Grand Avenue, Suite 3500
                  Los Angeles, California 90071-1560
                  Attention: Simon M. Lorne, Esq.
                  Telephone: (213) 683-9139
                  Facsimile: (213) 683-5139

                  NOTICES TO THE COMPANY:

                        Petco Animal Supplies, Inc.
                        c/o Leonard Green & Partners, L.P.
                        11111 Santa Monica Boulevard, Suite 2000
                        Los Angeles, California 90025
                        Attention: John G. Danhakl

with a copy (which shall not constitute notice) to:

                        Skadden, Arps, Slate, Meagher & Flom LLP
                        300 South Grand Avenue, Suite 3400
                        Los Angeles, California 90071-3144
                        Attention:  Nicholas P. Saggese, Esq.
                        Telephone: (213) 687-5000
                        Facsimile: (213) 687-5600


                  and


                        Cleary, Gottlieb, Steen & Hamilton
                        One Liberty Plaza
                        New York, New York 10006
                        Attention: David Leinwand, Esq.
                        Telephone: (212) 225-2050
                        Facsimile: (212) 225-3999


or such other address or to the attention of such person as the recipient party
shall have specified by prior written notice to the sending party. Any notice
under this Agreement will be deemed to have been given when so delivered or
mailed. Any notice of termination of Executive's employment by the Company shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.



                                      12



      16.   SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in
any jurisdiction, such invalidity, illegality or unenforceability will be
re-formed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.

      17.   COMPLETE AGREEMENT. This Agreement embodies the complete agreement
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.

      18.   COUNTERPARTS.  This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.

      19.   CHOICE OF LAW.  This Agreement will be governed by and construed
in accordance with the internal laws of the State of California, regardless of
the choice of laws provisions of such state or any other jurisdiction.

      20.   AGREEMENT TO ARBITRATE; EXPENSES. Except for the enforcement of
any covenant herein that would be the subject of specific performance
contemplated by Section 9, any controversy or claim arising out of or relating
to this Agreement or the formation, breach or interpretation hereof, will be
settled by arbitration before one arbitrator in accordance with the Rules for
the Resolution of Employment Disputes of the American Arbitration Association
in San Diego County, California. Judgment upon the award rendered by the
arbitration may be entered and enforced in the court with jurisdiction over
the appropriate party. All controversies not subject to arbitration or
contesting any arbitration will be litigated in the State of California, San
Diego County Superior Court or a federal court in the Southern District of
California (and each of the parties hereto hereby consent to the exclusive
jurisdiction of such courts and waive any objections thereto). The expenses
(including reasonable attorneys' fees) incurred by the prevailing party in any
arbitration or litigation related to this Agreement shall be borne by the
non-prevailing party in such arbitration or litigation.

      21.   AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.

      22.   WITHHOLDING TAXES. The Company shall withhold any and all United
States Federal, state, local and other taxes required to be withheld in
connection with Executive's employment with the Company and this Agreement and
the Executive shall indemnify the Company for all such amounts.

                                      13



      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
date first written above.


                                       PETCO ANIMAL SUPPLIES, INC.



                                       By: /s/ JAMES M. MYERS
                                          --------------------------------
                                       Name: James M. Myers
                                       Title: Senior Vice President and
                                              Chief Financial Officer



                                       Bruce C. Hall


                                        /s/ BRUCE C. HALL
                                       -----------------------------------




                                                                         ANNEX A

                 WAIVER OF CERTAIN CHANGE IN CONTROL BENEFITS

            WHEREAS, the Company and Executive have agreed that upon the Closing
of the Agreement and Plan of Merger by and between Petco Animal Supplies, Inc.]
(the "Company") and BD Recapitalization Corp., (the "Merger Agreement"), the
Company and I will enter into the Employment Agreement of which this Exhibit is
a part, which agreement provides for:

            (i)   the severance payments under certain circumstances,

            (ii)  the accelerated vesting of certain stock options and other
equity based awards, and

            (iii) other benefits that may be treated as "parachute payments"
within the meaning of Section 280G of the Code subject to the excise tax under
Section 4999 of the Code, with the payments provided for thereunder being
referred to herein as the "Payments";

            WHEREAS, I understand that upon or following a Change in Control of
the Company, some portion of the value of the Payments may be treated as
parachute payments;

            WHEREAS, I understand that, in general, if the aggregate amount of
such parachute payments exceeds 2.99 times my "base amount," as defined in Code
Section 280G (the "Safe Harbor Amount"), I will be subject to an excise tax
imposed under Section 4999 of the Code, in an amount equal to 20% of the excess
of such aggregate parachute payments over one times my "base amount," and under
Code Section 280G, the Company will not be able to deduct any portion of the
value of such parachute payments in excess of one times my "base amount";

            WHEREAS, the Treasury Regulations under Code Section 280G provide,
subject to certain conditions, that payments made pursuant to a change in
effective control or ownership of a privately held corporation will not be
treated as parachute payments if (i) such payments are approved by a vote of at
least 75% of the corporation's stockholders immediately before the change and
(ii) such vote determines the right of the recipient to receive or retain such
payments; and

            WHEREAS, the Company, promptly following the Effective Time (as
defined in the Merger Agreement), intends to seek to obtain the approval of its
stockholders of the Payments to the extent such payments would exceed my Safe
Harbor Amount.

            NOW, THEREFORE, (i) effective as of the date hereof, (ii) subject to
the closing of the Merger (as defined in the Merger Agreement) and the Terms and
Conditions of Waiver set forth on Appendix A attached hereto, and (iii)
applicable only with respect to the Merger (as defined in the Merger Agreement),
I hereby voluntarily and irrevocably waive, for



no separate monetary consideration and with full knowledge of the effects
thereof, such portion of the Payments as shall be necessary to provide that my
aggregate parachute payments in respect of the Employment Agreement, as
reasonably determined by the Company, in consultation with its independent
auditors and tax counsel, in accordance with Code Section 280G and the
applicable rules and regulations thereunder, shall equal my Safe Harbor
Amount; provided, that if at any time on or after the date hereof the Payments
are approved by a vote of at least 75 percent of the Company's stockholders,
then this waiver shall be of no further force or effect and the Payments shall
be paid in full when due in accordance with the terms of the Employment
Agreement.

            I hereby acknowledge that I have had the opportunity to review this
Waiver with counsel of my choosing.

            IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of
the day of _____, 2000.


                                             /s/ BRUCE C. HALL
                                            -------------------------
                                            Bruce C. Hall

Acknowledged and accepted as of the ___ day of ____, 2000, by



                                            PETCO ANIMAL SUPPLIES, INC.


                                            By: James M. Myers
                                            Its: Senior Vice President and
                                                 Chief Financial Officer



                                SPOUSAL CONSENT

            The undersigned, Susan M-Hall, represents that she has reviewed
the attached "Waiver of Change in Control Acceleration of Benefits" and
"Terms and Conditions of Waiver" of his spouse, and hereby acknowledges the
effects of and voluntarily consents to such waiver as of the ___ day of
September, 2000. The undersigned acknowledges that she has had the
opportunity to review the Spousal Consent with counsel of her choosing.

                                                  /s/ SUZAN M. HALL
                                                 ---------------------



                  APPENDIX A: TERMS AND CONDITIONS OF WAIVER

            In connection with and as a condition of the attached Waiver of
Change in Control Acceleration of Benefits, the undersigned hereby represents,
warrants, covenants, agrees, understands and acknowledges the following:

      1.    Although the Company has provided me (i) certain sample materials
relating to the potential effects under Code Sections 280G and 4999 of the
Payments in connection with the Merger Agreement and (ii) the opportunity to
ask questions of the Company and its independent auditors and tax counsel
regarding such acceleration and effects, nonetheless, in making my decision as
to whether or not to waive any portion of the Payments, I have not relied in
whole or in part on any statements or advice provided by the Company or any of
its officers, directors, employees, agents or consultants. My decision to make
the waiver set forth herein is solely the result of my own analysis of these
issues, in consultation with my personal financial, tax, accounting and/or
legal advisors.

      2.    I understand that (i) the actual parachute payment calculations
will be performed by the Company in consultation with its independent auditors
and tax counsel and (ii) the determination as to the extent to which Payments
will need to be waived will be made by the Company based upon the advice of
such auditors and tax counsel.

            I agree to be irreparably bound by the determinations of the Company
and such auditors and tax counsel in this regard.

      3.    I further acknowledge that there is a significant degree of
uncertainty under existing law and regulatory authority as to the calculations
to be performed under Code Section 280G in connection with the determination
of the amount of my "parachute payments" and the extent to which the Payments
may need to be waived in order to provide that the aggregate value of the
Payments will not exceed my Safe Harbor Amount, and that accordingly there can
be no assurance that the Internal Revenue Service will agree with the
calculations and waiver determinations made by the Company and its independent
auditors and tax counsel, or that any waiver provided for hereunder will have
the result of avoiding the excise tax under Section 4999 of the Code.

            In consideration of the foregoing, the undersigned hereby forever
releases and discharges the Company, KPMG Peat Marwick, Skadden, Arps, Slate,
Meagher & Flom LLP and each of their respective Affiliates (as such term is
defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as
amended), and each of their respective past and present partners, principals,
officers, directors, stockholders, managers, employees, agents, representatives,
successors and assigns (collectively, "Released Parties") from any and all
claims, charges, complaints, liens, demands, causes of action, obligations,
damages and liabilities, known or unknown, suspected or unsuspected, that the
undersigned had, now has, or may hereafter claim to have against any of the
Released Parties, arising out of or relating in any way connected with the
matters that are the subject of this Waiver of Change in Control Acceleration of
Benefits (the "Released Claims"), including without limitation matters relating



to the calculations to be performed in determining the potential amount of my
"parachute payments" and the assumptions made in performing such calculations.

            The undersigned expressly waives under Section 1542 of the Civil
Code of the State of California ("Section 1542") all rights with respect to the
Released Claims with respect to each of the Released Parties. Section 1542
states as follows:

            A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
            NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
            THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
            SETTLEMENT WITH THE DEBTOR.

            The undersigned hereby acknowledges that he has had the opportunity
to review this Waiver with counsel of his choosing.

            IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of
the ___ day of _______, 2000.


                                     /s/ BRUCE C. HALL
                                    -----------------------
                                    Bruce C. Hall



                                                                       EXHIBIT A




                           DESIGNATED PERMITTED BOARDS


                                      None.



                                                                       EXHIBIT B



                                PERFORMANCE CRITERIA

   1.    EBITDA (as defined in the Credit Agreement among Petco Animal
         Supplies, Inc., the Lenders parties thereto, and Union Bank of
         California, N.A., as Agent, dated as of July 15, 1999, as such
         agreement may be amended, restated, supplemented, renewed,
         replaced or otherwise modified from time to time whether or not
         with the same agent or lenders, and irrespective of any changes in
         the terms and conditions thereof in any one fiscal year of at
         least $80 million.

EX-10.9

                              EMPLOYMENT AGREEMENT


      THIS EMPLOYMENT AGREEMENT ("AGREEMENT"), is made and effective as of
October 2, 2000, by and between Petco Animal Supplies, Inc., a Delaware
corporation (the "COMPANY"), and James M. Myers, an individual ("EXECUTIVE").

      NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

      1.    EMPLOYMENT. The Company shall employ Executive, and Executive
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date of this Agreement and
ending as provided in Section 5 hereof (the "EMPLOYMENT PERIOD").

      2.    POSITION AND DUTIES.

            (a)   During the Employment Period, Executive shall serve as Senior
Vice President and Chief Financial Officer of the Company, and shall have the
normal duties, responsibilities and authority commensurate with such position.
Executive's services pursuant to this Agreement shall be performed primarily at
the Company's principal place of business in San Diego County, California, or at
such other facilities of the Company as the Company and Executive may agree upon
from time to time.

            (b)   During the Employment Period, Executive shall report to the
Board of Directors of the Company (the "BOARD") and Executive shall devote
Executive's reasonable best efforts and Executive's full business time and
attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity) to the business and affairs of the Company during
the normal business hours of the executive offices of the Company; provided,
however, the foregoing shall not prevent Executive from making and expending any
time on passive personal investments, expending reasonable amounts of time for
educational or charitable activities and/or serving as a director on the boards
of the companies listed on EXHIBIT A attached hereto and any other non-competing
companies which shall not include companies involved in the business of selling,
retailing, producing, distributing, or marketing pet food, pet supplies or other
pet-related products or services. Executive shall perform Executive's duties and
responsibilities to the best of Executive's abilities in a reasonably diligent,
trustworthy, businesslike and efficient manner.

      3.    BASE SALARY AND BENEFITS.

            (a)   During the Employment Period, Executive's annual base salary
shall be established annually by the Compensation Committee of the Board of
Directors, but shall in no event be less than $250,000 (the "BASE SALARY")
during each calendar year of the




employment period, prorated for any partial year, which salary shall be payable
in regular installments in accordance with the Company's general payroll
practices, including those related to withholding for taxes, insurance and
similar items. In addition, during the Employment Period or after such
Employment Period, as appropriate, Executive shall be entitled to participate
in all of the Company's employee benefits plans and programs in accordance with
their terms and conditions, including, without limitation, any profit sharing,
stock option, incentive compensation, paid vacation, retirement, deferred
compensation, 401(k) match, investment plans, medical, dental, disability and
all other group or other insurance plans or benefits and other perquisite plans
and programs ("BENEFITS"). Without limiting the foregoing, Executive shall be
entitled to at least the level of Benefits provided to him on the date hereof.

            (b)   During the Employment Period, the Company shall reimburse
Executive for all reasonable expenses incurred by Executive in the course of
performing Executive's duties under this Agreement that are consistent with the
Company's policies in effect from time to time with respect to travel,
entertainment and other business expenses, subject to the Company's
requirements with respect to reporting and documentation of such expenses.
Without limiting the foregoing, Executive shall be reimbursed for the costs of
first-class travel.

            (c)   During the Employment Period, the Company shall pay for or
reimburse Executive for all fees and reasonable expenses of Executive's
participation in professional organizations, trade associations or other
organizations reasonably related to Executive's position and responsibilities
as an officer of the Company.

            (d)   During the Employment Period, the Company shall provide
Executive with a suite of perquisites appropriate for a senior executive
officer, including but not limited to, a car allowance, life insurance
premiums, club membership, etc., provided that the aggregate cost of such
perquisites shall not exceed $25,000 per year, pro rated for partial years
occurring during the Employment Period.

            (e)   During the Employment Period, the Executive shall be entitled
to paid vacation in accordance with the Company's standard policy for the
Company's executives, but not to be less than five (5) weeks per year PROVIDED,
that Executive shall accrue no more than ten (10) weeks of unused paid vacation.

            (f)   Executive's Base Salary shall be subject to review and
increase by the Compensation Committee at least once annually, in a manner and
amount consistent with past practice.

            (g)   Upon the termination of the Employment Period, Executive or
Executive's representatives or beneficiaries, shall be entitled to purchase his
personal computer (desktop and/or laptop), printer, personal fax machine,
personal digital assistant, cellular telephone and luxury automobile used in
connection with the business for an


                                       2



aggregate purchase price of $1.00. Executive shall be responsible for any taxes
due with respect to such sale.

      4.    BONUSES. Executive shall be entitled to participate in the Company's
bonus plan(s) as in effect from time to time, the awards, terms, targets and
other conditions of which shall be designed to produce a bonus at least as
favorable to Executive as the bonus plans of the Company in effect on the date
hereof.

      5.    TERM.

            (a)   This Agreement shall become effective on the date
hereof.

            (b)   The Employment Period under this Agreement shall terminate
upon the earliest to occur of the following events (the date specified in each
such event is referred to as the "TERMINATION DATE"):

                  i.    the third anniversary of the date hereof;
                        PROVIDED, HOWEVER, that, subject to the
                        provisions of this Section 5(b), the term of
                        this Agreement shall automatically be extended
                        from day to day so that it always has a
                        remaining term (the "REMAINING TERM") of three
                        years; PROVIDED, that such renewal shall cease
                        following written notice (a "Notice") from the
                        Company to the Executive, in which case the
                        Remaining Term shall be three years following
                        the effective date of such notice, and that this
                        Agreement shall terminate on the third
                        anniversary of the effective  date of such
                        notice, PROVIDED, FURTHER, that the Company
                        shall not deliver a Notice within 6 months
                        following the Effective Time (as defined in the
                        Merger Agreement);

                  ii.   the date upon which the Company terminates the
                        Executive's employment by the Company for Cause or
                        without Cause, PROVIDED, that such termination shall be
                        effective following written notice of such event in
                        which case the Termination Date shall be the effective
                        date contained in such notice;

                  iii.  the date of the Executive's death;

                  iv.   the date upon which the Company terminates
                        Executive's employment with the Company as a
                        result of Executive's Disability, PROVIDED, that
                        such termination shall be effective following
                        written notice of such event from the Executive
                        to the Company or from the Company to the
                        Executive, in which case the Termination Date
                        shall be the effective date contained in such
                        notice; or


                                       3



                  v.    the date upon which Executive effects a Voluntary
                        Termination with or without Good Reason, PROVIDED, that
                        such termination shall be effective following written
                        notice of such event, in which case the Termination Date
                        shall be the effective date contained in such notice.

            (c)   If the Employment Period is terminated without Cause by the
Company or by Executive with Good Reason, Executive shall be entitled to receive
his Base Salary (determined in accordance with Section 3(a)) for a period of 18
months from Executive's Termination Date (the "SEVERANCE PERIOD") and an amount
equal to the Executive's highest bonus for a single fiscal year in the five
fiscal years immediately preceding the Termination Date, which amount shall be
paid ratably on an annual basis over such 18 month severance period.


            (d)   Notwithstanding the foregoing:

                  (1)   If the Employment Period is terminated by the Company
for Cause or is terminated as a result of Executive's resignation without Good
Reason, Executive shall receive such compensation and Benefits as Executive is
entitled to as of such date.

                  (2)   If the Employment Period is terminated by the Company
for failure to meet the minimum performance objectives set forth in EXHIBIT B
hereto and, at the time of such termination, the Company shall not otherwise be
entitled to terminate Executive's employment for Cause, in addition to any
compensation and Benefits to which Executive is entitled to as of such
Termination Date, Executive shall be entitled to receive his Base Salary (as
determined in accordance with Section 3(a)) for a period of 9 months from
Executive's Termination Date, which amount shall be paid ratably on an annual
basis over such 9-month period.

            (e)   If the Employment Period is terminated as a result of
Executive's death or Disability, Executive or Executive's representatives or
beneficiaries shall be entitled to receive (i) compensation and Benefits
Executive is entitled to as of the Termination Date, and (ii) an amount, which
shall be paid ratably on an annual basis over the Severance Period, equal to the
Executive's highest bonus for a single fiscal year in the five fiscal years
immediately preceding the Termination Date. If the Employment Period is
terminated by reason of Executive's death or Disability, the Company shall keep
in force existing health insurance covering Executive and his dependents for the
Severance Period on the basis in effect at the termination date. Executive and
his dependents shall also be entitled to any continuation of coverage rights
under any applicable law.


                                       4



            (f)   The amount of Base Salary payable pursuant to Section 5(c),
shall be payable in accordance with the Company's normal payroll practices and
procedures applied to Executive as if he remained an employee of the Company.
The amount of Base Salary payable pursuant to Section 5(e) shall be paid in a
lump sum within 30 days following the termination of the Employment Period and
all other compensation and Benefits, if any, will be payable in accordance with
the Company's normal practices and procedures or otherwise as required by
applicable law.

            (g)   All of Executive's rights to any other employee benefit
hereunder (except as described above or pursuant to law) accruing after the
termination of the Employment Period shall cease upon such termination. Upon
termination of his employment for any reason whatsoever, Executive or
Executive's representatives or beneficiaries shall have the right to receive
payment for any accrued but unused vacation time and any and all Benefits (to
the extent required by the terms of such Benefits) due Executive pursuant to
Section 3 as of the Termination Date. This Section 5(g) shall have no effect on
Executive's equity ownership (including stock options) in the Company, which
shall be governed by the terms of such equity ownership and of a Stockholders
Agreement between Executive, the Company and certain other parties.

            (h)   If the Executive's employment described herein is terminated,
the Executive shall have no duty to mitigate his damages or seek other
employment, and the Company shall have no right to offset any amounts which are
paid to or earned by Executive from other employment obtained by Executive
(including self-employment), except for employment obtained by Executive which
is inconsistent with the provisions of Section 8 of this Agreement, against any
amounts which are payable to Executive pursuant to this Agreement.

            (i)   At Executive's own expense, Executive and Executive's
dependants shall also be entitled to any continuation of health insurance
coverage rights after his termination of employment under any applicable law;
PROVIDED, HOWEVER, that in the event of the termination of Executive's
employment with the Company without Cause or by Executive for Good Reason,
Executive's health and life insurance coverage shall be provided at the
Company's expense for three (3) years after Executive's date of termination on
the same basis as for other senior management employees of the Company,
including the same employee contributions and co-payments which are required
for other senior management employees.

            (j)   Upon the termination of Executive's employment by the Company
without Cause or by the Executive for Good Reason within twelve months following
the occurrence of a Change of Control, (i) Executive shall be entitled to
receive his Base Salary (determined in accordance with Section 3(a)) for a
period of 18 months from Executive's Termination Date, and an amount equal to
1.5 times the Executive's annual bonus for the three fiscal years immediately
preceding the Termination Date, which amounts shall be payable in a lump sum at
the time of termination, (ii) all of Executive's unvested or restricted (a)
shares of common stock of the Company, (b) options to acquire shares of common
stock


                                       5



of the Company and (c) other equity interests of the Company shall immediately
vest or the restrictions thereon shall immediately lapse, as applicable, and
such shares, options and other equity interests shall become immediately
exercisable, (iii) the Company's Call Option (as defined in the Stockholders
Agreement) shall lapse as to all of Executive's shares, options or other equity
interests of the Company, and (iv) this Agreement shall remain in full force
and effect, and shall be binding upon any and all successors and assigns on the
Company, unless otherwise agreed to by Executive, in writing.

            (k)   Upon the termination of Executive's employment by the Company
for Cause or by the Executive without Good Reason within twelve months following
the occurrence of a Change of Control, (i) Executive shall be entitled to
receive his Base Salary (determined in accordance with Section 3(a)) for a
period of 18 months from Executive's Termination Date and an amount equal to the
highest bonus paid to Executive for a single fiscal year for the five fiscal
years immediately preceding the Termination Date, which amounts shall be payable
in a lump sum at the time of termination, (ii) all of Executive's unvested or
restricted (a) shares of common stock of the Company, (b) options to acquire
shares of Common Stock of the Company and (c) other equity interests of the
Company shall immediately vest or the restrictions thereon shall immediately
lapse, as applicable, and such shares, options and other equity interests shall
become immediately exercisable, (iii) the Company's Call Option (as defined in
the Stockholders Agreement) shall lapse as to all of Executive's shares, options
or other equity interests of the Company, and (iv) this Agreement shall remain
in full force and effect, and shall be binding upon any and all successors and
assigns on the Company, unless otherwise agreed to by Executive, in writing.

            (l)   Executive acknowledges that pursuant to the terms of the
Waiver of Certain Change in Control Benefits, which is attached hereto as ANNEX
A, benefits payable under this Agreement are contingent upon the approval of
the Company's Stockholders and that, if such stockholder approval is not
received, Executive will not be entitled to receive such benefits. In the event
such stockholder approval is received and it is nonetheless determined that any
payment or distribution (including benefits and acceleration of vesting of
options) which is made by the Company to or for the benefit of Executive
(whether paid or payable or distributed or distributable pursuant to the terms
of the Agreement or otherwise (a "PAYMENT") would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any interest or penalties are incurred by Executive with respect to
such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "EXCISE TAX"), the
Company shall make a payment (a "Gross-Up Payment") to or for the benefit of
Executive in an amount such that, after payment by Executive of all income or
other taxes (and any interest and penalties imposed with respect thereto)
imposed on the Gross-Up Payment, Executive retains an amount of the Gross-Up
Payment sufficient to pay the Excise Tax imposed on the Payments.

            (m)   For purposes of the Agreement, "CAUSE" shall mean (i) the
conviction of any act (other than a traffic offense) constituting a felony
under the laws of any state or of the United States, involving moral turpitude
and having a direct, substantial and adverse


                                       6



effect on the Company, or (ii) willful misconduct by Executive, but only if
Executive shall not have discontinued such misconduct within 10 days after
receiving written notice from the Company describing the misconduct and stating
that the Company will consider the continuation of such misconduct as cause for
termination of this Agreement, or (iii) substantial failure to perform the
duties required by Section 2(a) hereof (other than as a result of physical or
mental illness) which is not cured within 10 days after receiving written
notice from the Company describing the failure to perform and stating that the
Company will consider the continuation of such failure to perform as cause for
termination of this Agreement PROVIDED, HOWEVER, that the failure of the
Company to achieve projected or budgeted results at any time or from time (as
provided in Section 5(d)(2)) to time shall not be a basis for termination for
Cause. Notwithstanding the foregoing, termination by the Company for Cause
shall not be effective until and unless the Board has voted (at a meeting of
the Board duly called and held as to which termination of the Executive is an
agenda item) by a majority vote to terminate the Executive for Cause after
Executive has been given notice of particular acts or circumstances which are
the basis for the termination for Cause and the Executive has been afforded at
least seven (7) days notice of the meeting and an opportunity to be heard at
the meeting and to present his position and the Board has given notice of
termination to the Executive within seven (7) days after such meeting.

            (n)   For purposes of the Agreement, "DISABILITY" means an
inability by the Executive to perform a substantial portion of the Executive's
duties by reason of physical or mental incapacity or disability for a total of
ninety (90) days or more in any consecutive period of three hundred and
sixty-five (365) days, as determined by the reasonable judgment of a physician
selected by the Executive and reasonably acceptable to the Company.

            (o)   For purposes of the Agreement, "GOOD REASON" shall mean the
occurrence, without the express written consent of Executive, of any of the
following events: (i) a reduction or adverse change in, or a change which is
inconsistent with, the Executive's responsibilities, duties, authority,
reporting power, functions, title, working conditions or status as provided
herein, including without limitation, the appointment of any employee to an
executive position at the Company or its successor, the responsibilities and
duties of which are substantially similar to those of the Executive or any
transfer of material responsibilities of Executive to a subsidiary which has
substantially the same effect as such an appointment, or after the date hereof,
the failure to offer to appoint or continue the Executive as a senior vice
president and chief financial officer of any company which acquires the Company,
and as a senior vice president and chief financial officer of the ultimate
parent company which is in the same line of business as the Company and which is
within the meaning of Section 414(b) of the Code, a member of a controlled group
of corporations of which the Company is a member, and which directly or
indirectly controls the Company, provided that Executive agrees to relocate his
place of employment to the principal executive office of such ultimate parent
company of the Company; (ii) a material breach by the Company of the
compensation provisions of Section 3 hereof which is not cured within 5 business
days of the written notice of such breach; (iii) the relocation of the
Executive's own office to a location more than 50 miles from its present
location or outside the County of San


                                       7



Diego, California without Executive's prior written consent; or (iv) the
failure of the Company to obtain the assumption in writing of its obligation to
perform this Agreement by any successor to all or substantially all of the
assets of the Company within 60 days after a merger, consolidation, sale or
similar transaction, unless such assumption occurs by operation of law.

            (p)   For purposes of this Agreement, "VOLUNTARY Termination" shall
mean the voluntary termination by Executive of Executive's employment with the
Company by voluntary resignation or any other means, including without Good
Reason or for Good Reason (other than (i) death, Disability, or (ii) any other
termination that would become effective simultaneously with or following the
earlier of (c) the effective date of a termination for Cause or (y) the
occurrence of an event, which if known to the Company at the time of such
voluntary termination by Executive, would give the Company the right to
terminate the Executive for Cause).

            (q)   For purposes of this Agreement, "CHANGE IN CONTROL" shall be
deemed to have occurred if any person or any persons acting together that would
constitute a group (as defined in Rule l3d-3 under the Securities Exchange Act
of 1934, as amended) (other than B.D. Recapitalization Holdings LLC, its members
and its co-investors ("Buyer") or their affiliates or a group in which Buyer or
its affiliates are the controlling participants) shall beneficially own at least
50% of the aggregate voting power of all classes of capital stock (including
shares convertible into voting securities) entitled to vote generally on the
election of directors to the Board. Notwithstanding the foregoing, a Change in
Control shall not include any event, circumstance or transaction which results
from the action of any entity or group which includes, is affiliated with or is
wholly or partly controlled by Executive (a "MANAGEMENT GROUP"). Without
limiting the foregoing, any sale of substantially all of the Company's assets to
another entity (other than an entity associated with the Management Group)
without an express assumption by such entity of the Company's obligations under
this Agreement shall be deemed to constitute termination without Cause pursuant
to Section 5(c) above and the Company shall be obligated to make the specified
payments pursuant to Section 5(c) upon consummation of the transaction pursuant
to which the Company is selling substantially all of its assets.

      6.    CONFIDENTIAL INFORMATION. As used herein, the term "CONFIDENTIAL
INFORMATION" shall mean all information disclosed to Executive or known by
Executive as a consequence of or through Executive's employment by the Company
(including, without limitation, information belonging to third parties or
companies affiliated with or related to the Company in the Company's possession)
not generally known in the trade or industry in which such information is used,
about the Company's products, processes, services, customers, marketing strategy
and business plans. Executive agrees that, except as required in the performance
of his duties or by law or to the extent required to enforce his rights
hereunder, Executive shall not disclose to any unauthorized person or use for
Executive's own account any Confidential Information without the prior written
consent of the Board, unless and to the extent that the aforementioned matters
become generally known to and available for use by


                                       8



the public other than as a result of Executive's acts or omissions to act.
Executive shall deliver to the Company at the termination of the Employment
Period, or at any other time as the Company may request, all memoranda, notes,
plans, records, computer tapes and software and other documents and data (and
copies thereof) relating to the Confidential Information or the business of the
Company which Executive may then possess or have under Executive's control. In
the performance of his duties, Executive has previously had, and may be
expected in the future to have, access to confidential or proprietary
information with respect to third parties which is subject to a duty on the
Company's part to maintain the confidentiality of such information and to use
it only for certain limited purposes (the "THIRD-PARTY INFORMATION"). Except in
the performance of his duties to the Company, Executive shall not, during the
Employment Period and at all times thereafter, directly or indirectly for any
reason whatsoever, disclose or use any such Third-Party Information. For
purposes of this Section 6, "COMPANY" includes the Company and any of its
subsidiaries.

      7.    NON-SOLICITATION. During the term of this Agreement and for a
period of one (1) year thereafter, Executive shall not directly or indirectly
through another entity (A) induce or attempt to induce any employee (excluding
employees junior to regional managers) of the Company or any subsidiary to
leave the employ of the Company or such subsidiary or (B) hire any person who
was an employee (excluding employees junior to regional managers) of the
Company or any subsidiary of the Company at any time during the Employment
Period if such person was employed by the Company or a direct or indirect
subsidiary of the Company at any time during the one-year period prior to such
hiring; PROVIDED, HOWEVER, the Executive may solicit or hire any person if such
person is no longer employed by, and has not been employed within the last
three (3) months by the Company. In addition, during the period ending on the
first anniversary of the termination of Executive's employment (the
"NON-INTERFERENCE PERIOD"), Executive shall not, directly or indirectly through
another entity, induce or attempt to induce any customer, supplier, licensee or
other business relation of the Company or any subsidiary to withdraw, modify,
curtail or cease doing business with the Company or such subsidiary.

      8.    NONCOMPETITION. During the Employment Period, Executive will not,
directly or indirectly, engage in the business of selling, retailing,
producing, distributing, or marketing pet food, pet supplies or other
pet-related products (the "COMPANY BUSINESS") anywhere in the states of the
United States. Executive will be deemed to be engaged in the Company Business
if he engages in the Company Business directly as an employee or consultant, or
owns, manages, operates, joins or controls or participates in the ownership,
management or control of any other entity which is engaged in the Company
Business, provided, however, that Executive will not be deemed to engage in any
of the businesses of any publicly-traded corporation solely by reason of his
passive ownership of less than 5% of the outstanding stock of such entity.



                                       9



      9.    ENFORCEMENT. If, at the time of enforcement of Sections 7 or 8 of
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area.
Because Executive's services are unique and because Executive has access to
Confidential Information, the parties hereto agree that money damages would be
an inadequate remedy for any breach of this Agreement. Therefore, in the event
of a breach or threatened breach of this Agreement, the Company or its
successors or assigns may, in addition to other rights and remedies existing in
their favor, apply to any court of competent jurisdiction for specific
performance and/or injunctive or other relief in order to enforce, or prevent
any violations of the provisions hereof (without posting a bond or other
security).

      10.   REPRESENTATIONS.

            (a)   Executive hereby represents and warrants to the Company that
as of the date hereof (i) the execution, delivery and performance of this
Agreement by Executive does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound; (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and
(iii) upon the execution and delivery of this Agreement by the Company, this
Agreement shall be the valid and binding obligation of Executive, enforceable
in accordance with its terms, subject to applicable law.

            (b)   Company hereby represents and warrants to Executive that as
of the date hereof (i) the execution, delivery and performance of this
Agreement by the Company does not and will not conflict with, breach, violate
or cause a default under any contract, agreement, instrument, order, judgment
or decree to which the Company is a party or by which the Company is bound, and
(ii) upon the execution and delivery of this Agreement by Executive, this
Agreement shall be the valid and binding obligation of the Company, enforceable
in accordance with its terms.

      11.   PETOPIA REPURCHASE. Upon written request by Executive to the
Company, to the extent permitted by applicable law, the Company or its nominees
shall purchase all or any portion of the shares, options or other equity
interests owned by Executive in Petopia.com, Inc. (the "PETOPIA SHARES") at a
purchase price equal to Executive's purchase price for such Petopia Shares;
PROVIDED, HOWEVER, that the purchase price for any Petopia Shares purchased
pursuant to this Section 11 shall be offset by any indebtedness owed by the
Executive to the Company at the time of such purchase. If the Employment Period
is terminated by the Company for Cause or by Executive without Good Reason,
such written request shall be delivered to the Company on or prior to 90 days
following the Termination Date.


                                      10



      12.   INDEMNIFICATION. The Company agrees to indemnify and defend
Executive to the fullest extent permitted by law, the Company's Certificate of
Incorporation and the Company's Bylaws as in effect on the date hereof and as
amended thereafter, but in no event less favorable to Executive than those in
effect on the date hereof against expenses (including attorneys' fees and
expenses), judgments, claims, fines and amounts paid in settlement actually and
reasonably incurred by Executive in connection with such actions, suits or
proceedings to which Executive is, or is threatened to be made, a party by
reason of the fact that Executive is or was a director or officer of the
Company, Holding or any of their affiliates, including without limitation, the
class action lawsuits filed in the United States District Court for the
Southern District of California between August and November, 1999, as explained
in the Company's Annual Report on Form 10-K, filed with the United States
Securities and Exchange Commission on April 13, 2000. The indemnification
pursuant to the foregoing sentence shall be the equivalent of indemnification
provided to all directors and officers as a group and shall not be deemed to be
any greater than that provided to all of the Company's directors and officers
as a group. The Company will use its commercially reasonable efforts to obtain
any directors' and officers' liability insurance covering all directors and
officers as a group and to the extent Executive continues to serve as an
officer of the Company, the Company shall cause Executive to be named as an
insured party under such policy. This section shall survive for 6 years
following termination of the Employment Period.

      13.   SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and its
respective heirs, successors and assigns, except that Executive may not assign
Executive's rights or delegate Executive's obligations hereunder without the
prior written consent of the Company. Without limiting the foregoing, the
Company may not, without Executive's prior written consent, assign rights or
delegate its obligations under this Agreement.

      14.   SURVIVAL. Sections 6, 7, 9, 10, 11, 12, 15, 16, 19, 20, 21 and 22
shall survive and continue in full force in accordance with their terms,
notwithstanding any termination of the Employment Period.

      15.   NOTICES. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered by a nationally recognized
overnight courier service, or mailed by certified mail, return receipt
requested, to the recipient at the address indicated below.


                  NOTICES TO EXECUTIVE:

                  James M. Myers
                  c/o Petco Animal Supplies, Inc.
                  9125 Rehco Road
                  San Diego, California 92121-2270



                                      11



with a copy (which shall not constitute notice) to:

                  Munger Tolles & Olson LLP
                  355 South Grand Avenue, Suite 3500
                  Los Angeles, California 90071-1560
                  Attention: Simon M. Lorne, Esq.
                  Telephone: (213) 683-9139
                  Facsimile: (213) 683-5139

                  NOTICES TO THE COMPANY:

                        Petco Animal Supplies, Inc.
                        c/o Leonard Green & Partners, L.P.
                        11111 Santa Monica Boulevard, Suite 2000
                        Los Angeles, California 90025
                        Attention: John G. Danhakl

with a copy (which shall not constitute notice) to:

                        Skadden, Arps, Slate, Meagher & Flom LLP
                        300 South Grand Avenue, Suite 3400
                        Los Angeles, California 90071-3144
                        Attention: Nicholas P. Saggese, Esq.
                        Telephone: (213) 687-5000
                        Facsimile: (213) 687-5600

                  and

                        Cleary, Gottlieb, Steen & Hamilton
                        One Liberty Plaza
                        New York, New York 10006
                        Attention: David Leinwand, Esq.
                        Telephone: (212) 225-2050
                        Facsimile: (212) 225-3999

or such other address or to the attention of such person as the recipient party
shall have specified by prior written notice to the sending party. Any notice
under this Agreement will be deemed to have been given when so delivered or
mailed. Any notice of termination of Executive's employment by the Company shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.


                                      12



      16.   SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will be
re-formed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.

      17.   COMPLETE AGREEMENT. This Agreement embodies the complete agreement
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.

      18.   COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.

      19.   CHOICE OF LAW. This Agreement will be governed by and construed in
accordance with the internal laws of the State of California, regardless of the
choice of laws provisions of such state or any other jurisdiction.

      20.   AGREEMENT TO ARBITRATE; EXPENSES. Except for the enforcement of any
covenant herein that would be the subject of specific performance contemplated
by Section 9, any controversy or claim arising out of or relating to this
Agreement or the formation, breach or interpretation hereof, will be settled by
arbitration before one arbitrator in accordance with the Rules for the
Resolution of Employment Disputes of the American Arbitration Association in
San Diego County, California. Judgment upon the award rendered by the
arbitration may be entered and enforced in the court with jurisdiction over the
appropriate party. All controversies not subject to arbitration or contesting
any arbitration will be litigated in the State of California, San Diego County
Superior Court or a federal court in the Southern District of California (and
each of the parties hereto hereby consent to the exclusive jurisdiction of such
courts and waive any objections thereto). The expenses (including reasonable
attorneys' fees) incurred by the prevailing party in any arbitration or
litigation related to this Agreement shall be borne by the non-prevailing party
in such arbitration or litigation.

      21.   AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.

      22.   WITHHOLDING TAXES. The Company shall withhold any and all United
States Federal, state, local and other taxes required to be withheld in
connection with Executive's employment with the Company and this Agreement and
the Executive shall indemnify the Company for all such amounts.


                                      13



      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
date first written above.



                                       PETCO ANIMAL SUPPLIES, INC.



                                       By:  /s/ BRUCE C. HALL
                                          ----------------------------
                                       Name: Bruce C. Hall
                                       Title: Executive Vice President,
                                              Operations



                                       James M. Myers

                                         /s/  JAMES M. MYERS
                                       -------------------------------









                                                                         ANNEX A

                 WAIVER OF CERTAIN CHANGE IN CONTROL BENEFITS

            WHEREAS, the Company and Executive have agreed that upon the Closing
of the Agreement and Plan of Merger by and between Petco Animal Supplies, Inc.]
(the "Company") and BD Recapitalization Corp., (the "Merger Agreement"), the
Company and I will enter into the Employment Agreement of which this Exhibit is
a part, which agreement provides for:

            (i)   the severance payments under certain circumstances,

            (ii)  the accelerated vesting of certain stock options and
other equity based awards, and

            (iii) other benefits that may be treated as "parachute payments"
within the meaning of Section 280G of the Code subject to the excise tax under
Section 4999 of the Code, with the payments provided for thereunder being
referred to herein as the "Payments";

            WHEREAS, I understand that upon or following a Change in Control of
the Company, some portion of the value of the Payments may be treated as
parachute payments;

            WHEREAS, I understand that, in general, if the aggregate amount of
such parachute payments exceeds 2.99 times my "base amount," as defined in Code
Section 280G (the "Safe Harbor Amount"), I will be subject to an excise tax
imposed under Section 4999 of the Code, in an amount equal to 20% of the excess
of such aggregate parachute payments over one times my "base amount," and under
Code Section 280G, the Company will not be able to deduct any portion of the
value of such parachute payments in excess of one times my "base amount";

            WHEREAS, the Treasury Regulations under Code Section 280G provide,
subject to certain conditions, that payments made pursuant to a change in
effective control or ownership of a privately held corporation will not be
treated as parachute payments if (i) such payments are approved by a vote of at
least 75% of the corporation's stockholders immediately before the change and
(ii) such vote determines the right of the recipient to receive or retain such
payments; and

            WHEREAS, the Company, promptly following the Effective Time (as
defined in the Merger Agreement), intends to seek to obtain the approval of its
stockholders of the Payments to the extent such payments would exceed my Safe
Harbor Amount.

            NOW, THEREFORE, (i) effective as of the date hereof, (ii) subject to
the closing of the Merger (as defined in the Merger Agreement) and the Terms and
Conditions of Waiver set forth on Appendix A attached hereto, and (iii)
applicable only with respect to the Merger (as defined in the Merger Agreement),
I hereby voluntarily and irrevocably waive, for




no separate monetary consideration and with full knowledge of the effects
thereof, such portion of the Payments as shall be necessary to provide that my
aggregate parachute payments in respect of the Employment Agreement, as
reasonably determined by the Company, in consultation with its independent
auditors and tax counsel, in accordance with Code Section 280G and the
applicable rules and regulations thereunder, shall equal my Safe Harbor Amount;
provided, that if at any time on or after the date hereof the Payments are
approved by a vote of at least 75 percent of the Company's stockholders, then
this waiver shall be of no further force or effect and the Payments shall be
paid in full when due in accordance with the terms of the Employment Agreement.

            I hereby acknowledge that I have had the opportunity to review this
Waiver with counsel of my choosing.

            IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of
the day of _______, 2000.


                                  /s/ JAMES M. MYERS
                                 --------------------------
                                 James M. Myers

Acknowledged and accepted as of the ___ day of ______, 2000, by


                              PETCO ANIMAL SUPPLIES, INC.

                               /s/ BRUCE C. HALL
                              ----------------------------
                              By:  Bruce C. Hall
                              Its: Executive Vice President, Operations




                                SPOUSAL CONSENT

            The undersigned, Josephine Myers, represents that she has
reviewed the attached "Waiver of Change in Control Acceleration of Benefits"
and "Terms and Conditions of Waiver" of his spouse, and hereby acknowledges
the effects of and voluntarily consents to such waiver as of the 27 day of
September, 2000. The undersigned acknowledges that she has had the
opportunity to review the Spousal Consent with counsel of her choosing.

                                                      /s/ JOSEPHINE MYERS
                                                    --------------------------



                  APPENDIX A:  TERMS AND CONDITIONS OF WAIVER

            In connection with and as a condition of the attached Waiver of
Change in Control Acceleration of Benefits, the undersigned hereby represents,
warrants, covenants, agrees, understands and acknowledges the following:

      1.    Although the Company has provided me (i) certain sample materials
relating to the potential effects under Code Sections 280G and 4999 of the
Payments in connection with the Merger Agreement and (ii) the opportunity to ask
questions of the Company and its independent auditors and tax counsel regarding
such acceleration and effects, nonetheless, in making my decision as to whether
or not to waive any portion of the Payments, I have not relied in whole or in
part on any statements or advice provided by the Company or any of its officers,
directors, employees, agents or consultants. My decision to make the waiver set
forth herein is solely the result of my own analysis of these issues, in
consultation with my personal financial, tax, accounting and/or legal advisors.

      2.    I understand that (i) the actual parachute payment calculations will
be performed by the Company in consultation with its independent auditors and
tax counsel and (ii) the determination as to the extent to which Payments will
need to be waived will be made by the Company based upon the advice of such
auditors and tax counsel.

            I agree to be irreparably bound by the determinations of the Company
and such auditors and tax counsel in this regard.

      3.    I further acknowledge that there is a significant degree of
uncertainty under existing law and regulatory authority as to the calculations
to be performed under Code Section 280G in connection with the determination of
the amount of my "parachute payments" and the extent to which the Payments may
need to be waived in order to provide that the aggregate value of the Payments
will not exceed my Safe Harbor Amount, and that accordingly there can be no
assurance that the Internal Revenue Service will agree with the calculations and
waiver determinations made by the Company and its independent auditors and tax
counsel, or that any waiver provided for hereunder will have the result of
avoiding the excise tax under Section 4999 of the Code.

            In consideration of the foregoing, the undersigned hereby forever
releases and discharges the Company, KPMG Peat Marwick, Skadden, Arps, Slate,
Meagher & Flom LLP and each of their respective Affiliates (as such term is
defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as
amended), and each of their respective past and present partners, principals,
officers, directors, stockholders, managers, employees, agents, representatives,
successors and assigns (collectively, "Released Parties") from any and all
claims, charges, complaints, liens, demands, causes of action, obligations,
damages and liabilities, known or unknown, suspected or unsuspected, that the
undersigned had, now has, or may hereafter claim to have against any of the
Released Parties, arising out of or relating in any way connected with the
matters that are the subject of this Waiver of Change in Control Acceleration of
Benefits (the "Released Claims"), including without limitation matters relating




to the calculations to be performed in determining the potential amount of my
"parachute payments" and the assumptions made in performing such calculations.

            The undersigned expressly waives under Section 1542 of the Civil
Code of the State of California ("Section 1542") all rights with respect to the
Released Claims with respect to each of the Released Parties. Section 1542
states as follows:

            A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
            NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
            THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
            SETTLEMENT WITH THE DEBTOR.

            The undersigned hereby acknowledges that he has had the opportunity
to review this Waiver with counsel of his choosing.

            IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of
the ___ day of _________, 2000.




                                    --------------------------
                                    James M. Myers




                                                                 EXHIBIT A


                           DESIGNATED PERMITTED BOARDS

                                      None.




                                                                     EXHIBIT B


                                PERFORMANCE CRITERIA

   1.    EBITDA (as defined in the Credit Agreement among Petco Animal Supplies,
         Inc., the Lenders parties thereto, and Union Bank of California, N.A.,
         as Agent, dated as of July 15, 1999, as such agreement may be amended,
         restated, supplemented, renewed, replaced or otherwise modified from
         time to time whether or not with the same agent or lenders, and
         irrespective of any changes in the terms and conditions thereof in any
         one fiscal year of at least $80 million.

EX-10.11

                               RETENTION AGREEMENT


THIS RETENTION AGREEMENT ("Agreement") is effective as of ___________, by and
between PETCO Animal Supplies, Inc. ("PETCO") and ______________ ("Employee").

         A.       EMPLOYEE is currently employed by PETCO. If the employment is
                  pursuant to an Offer Letter of Employment ("Offer Letter"), a
                  copy of the Offer Letter is attached hereto as Exhibit 1.

         B.       Although PETCO presently anticipates no Change in Control, the
                  Board of Directors wishes to plan for such a possibility and
                  to ensure EMPLOYEE's continued dedication and efforts in such
                  event without undue concern for personal, financial and
                  employment security.

         C.       The parties hereto desire to fulfill the above purpose
                  according to the terms set forth in this Agreement.


                                    AGREEMENT

In consideration of the mutual covenants set forth in this Agreement and other
good and valuable consideration, the sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

1.       DEFINITIONS. The following words and phrases as used in this Agreement
         shall have the following respective meanings.

         a.       CAUSE. A termination of employment for "Cause" is a
                  termination precipitated by EMPLOYEE's:

                    (i)    failure to substantially perform EMPLOYEE's duties
                           with PETCO (other than due to incapacity resulting
                           from physical or mental illness), which failure has
                           continued for at least 30 days following receipt by
                           EMPLOYEE of written notice specifying the failure to
                           substantially perform,

                   (ii)    engagement in conduct that is demonstrably and
                           materially injurious to PETCO, monetarily or
                           otherwise, which injurious conduct has continued for
                           at least 30 days following EMPLOYEE's receipt of
                           written notice specifying the injurious conduct and
                           offering EMPLOYEE the opportunity to explain the
                           conduct to the President/Chief Executive Officer; or

                  (iii)    a material breach by Employee of any provision of
                           this Agreement or the Offer Letter.



         b.       CHANGE IN CONTROL. A "Change in Control" shall be deemed to
                  occur:

                  (i)      if any person or entity other than persons or
                           entities currently owning more than five percent of
                           PETCO's securities is or becomes the "beneficial
                           owner" (as defined in rule 13d-3 of the Securities
                           Exchange Act of 1934), directly or indirectly, of
                           securities of PETCO representing 50% or more of the
                           combined voting power of PETCO's then outstanding
                           securities;

                  (ii)     upon the approval by PETCO's stockholders and the
                           consummation of a Transaction; or

                  (iii)    if, during any period, members of the Incumbent Board
                           cease for any reason to constitute at least a
                           majority of the Board.

                  Notwithstanding the foregoing, a Change in Control pursuant to
                  subparagraphs (ii) and (iii) above shall not be deemed to
                  occur if immediately following the consummation of a
                  Transaction or other event approved by the Incumbent Board,
                  holders of PETCO's voting securities immediately prior to a
                  Transaction either continue to own at least 50% of the
                  combined voting power of PETCO's then outstanding voting
                  securities if PETCO survives the Transaction or then own
                  voting securities representing at least 50% of the combined
                  voting power of each surviving entity after a Transaction.

         c.       GOOD REASON. Termination of employment by EMPLOYEE for "Good
                  Reason" is a termination of employment due to the occurrence
                  of any one of the following events or conditions:

                  (i)      a material change in EMPLOYEE's status, title,
                           position or responsibilities which in the EMPLOYEE's
                           reasonable judgment represents a substantial
                           reduction of the status, title, position or
                           responsibilities in effect immediately prior to the
                           change;

                  (ii)     the assignment of EMPLOYEE to a position which
                           requires EMPLOYEE to relocate permanently to a site
                           outside of San Diego County;

                  (iii)    assigning EMPLOYEE any duties or responsibilities
                           (other than due to a promotion) which in the
                           EMPLOYEE's reasonable judgment are inconsistent with
                           his/her status, title, position or responsibilities;

                  (iv)     any removal of EMPLOYEE from or failure to reappoint
                           or reelect EMPLOYEE to his/her previously held
                           position, except in connection with a promotion, the
                           termination of employment for Cause, as a result of
                           permanent disability (as determined by EMPLOYEE's
                           eligibility to receive disability benefits under any
                           long-term disability plan PETCO may then

                                       2



                           have in effect), as a result of EMPLOYEE's death, or
                           by EMPLOYEE other than for Good Reason; or

                  (v)      any material breach by PETCO of any provision of this
                           Agreement or the Offer Letter.

         d.       INCUMBENT BOARD. The "Incumbent Board" consists of the members
                  of the Board of Directors of PETCO as of the date of this
                  Agreement, to the extent they continue to serve as Board
                  members and any individual who becomes a Board member after
                  the date of this Agreement if (i) his or her election or
                  nomination as a director was approved by a vote of at least
                  two-thirds of the then Incumbent Board and such person does
                  not own more than 20% of PETCO's securities, or (ii) such
                  individual is a representative of an institutional investor
                  that either owns less than 20% of PETCO's securities or was
                  represented on the Board as of the date of this Agreement.

         e.       SEVERANCE PERIOD. The "Severance Period" is the twelve-month
                  period beginning on the date of termination of EMPLOYEE's
                  employment or such longer period as offered by the acquiring
                  company consistent with acquiring company's policies and
                  practices or industry practices at that time.

         f.       TRANSACTION. A "Transaction" means a merger or consolidation,
                  reorganization, distribution of assets to stockholders by
                  spin-off, split-up or otherwise, a sale or disposition of all
                  or substantially all of PETCO's assets or a liquidation or
                  dissolution of PETCO.

2.       AT-WILL EMPLOYMENT. Notwithstanding any of the provisions in the
         Agreement, EMPLOYEE and PETCO understand and expressly agree that
         EMPLOYEE's employment is not for a specified term and that, other than
         during the first year following a Change in Control, EMPLOYEE's
         employment may be terminated by PETCO or by EMPLOYEE at any time, with
         or without notice, and with or without cause. EMPLOYEE and PETCO
         expressly agree that this provision is intended by EMPLOYEE and PETCO
         to be the complete and final expression of their understanding
         regarding the terms and conditions under which EMPLOYEE's employment
         may be terminated. EMPLOYEE and PETCO further understand and agree that
         no representation contrary to this provision is valid, and that this
         provision may not be augmented, contradicted or modified in any way,
         except by a writing signed by EMPLOYEE and PETCO's president.

3.       SEVERANCE

         a.       EMPLOYEE shall be entitled to receive from PETCO severance
                  benefits in the amount provided in subsection b, below, if in
                  connection with a Change in Control or within one year after a
                  Change in Control, EMPLOYEE's employment with PETCO is
                  terminated; provided, however, that EMPLOYEE will not be
                  entitled to any severance benefits if EMPLOYEE's termination
                  of employment is


                                       3



                  (i) for Cause, (ii) by reason of permanent disability (as
                  determined by EMPLOYEE's eligibility to receive
                  disability benefits under any long-term disability plan
                  PETCO may then have in effect), (iii) initiated by
                  EMPLOYEE for other than Good Reason or (iv) by reason of
                  EMPLOYEE's death. Notwithstanding any other provision of
                  this Agreement, the consummation of a Transaction in
                  itself shall not be deemed a termination of employment
                  entitling EMPLOYEE to severance benefits hereunder even
                  if such event results in EMPLOYEE being employed by a
                  different entity which assumes PETCO's obligations under
                  this Agreement.

         b.       If EMPLOYEE's services are terminated, entitling EMPLOYEE to
                  severance benefits pursuant to subsection a, above, EMPLOYEE
                  shall be entitled to the following benefits:

                  (i)      During the Severance Period, PETCO shall continue to
                           pay to EMPLOYEE base salary, less applicable
                           withholding, at the rate and according to the payment
                           schedule in place immediately prior to the
                           termination of employment.

                  (ii)     During the Severance Period, PETCO shall continue on
                           behalf of EMPLOYEE (and EMPLOYEE's dependents and
                           beneficiaries) life insurance, disability insurance,
                           and medical, dental, and automobile benefits, if any,
                           which were being provided to EMPLOYEE at the time of
                           termination of employment and the expense shall be
                           allocated between PETCO and EMPLOYEE on the same
                           basis as prior to the date of termination of
                           employment. The period of time during which such
                           payments and continuation of coverage shall occur
                           under this paragraph will run concurrently with any
                           separate period of time during which the law requires
                           continuation coverage. The benefits provided pursuant
                           to this subsection shall be no less favorable to
                           EMPLOYEE than the coverage provided to EMPLOYEE under
                           the plans providing such benefits at the time notice
                           of termination was given to EMPLOYEE. The obligation
                           of PETCO under this subsection shall be limited to
                           the extent that EMPLOYEE obtains any such benefits
                           pursuant to a subsequent employer's benefit plans, in
                           which case PETCO may reduce the coverage of any
                           benefits it is required to provide EMPLOYEE under
                           this subsection, as long as the aggregate coverage of
                           the combined benefit plans is no less favorable to
                           EMPLOYEE, in terms of amounts and deductibles and
                           costs to EMPLOYEE, than the coverage required to be
                           provided under this subsection. This subsection shall
                           not be interpreted so as to limit any benefits to
                           which EMPLOYEE (or EMPLOYEE's dependents or
                           beneficiaries) are entitled under any of PETCO's
                           employee benefit plans, programs or practices
                           following EMPLOYEE's date of termination of
                           employment. The provision of continued benefits to
                           EMPLOYEE under this subsection shall not deprive
                           EMPLOYEE of any

                                       4




                           independent statutory right to continue benefits
                           coverage pursuant to sections 601 through 606 of
                           the Employee Retirement Income Security Act of
                           1974, as amended; and

                  (iii)    On the date of termination of employment, PETCO shall
                           pay EMPLOYEE an amount equal to the bonus, if any,
                           EMPLOYEE would have received had EMPLOYEE remained in
                           PETCO's employment during the Severance Period. For
                           purposes of this paragraph, the bonus is calculated
                           as the greater of the prorata bonus norm or actual
                           bonus earned.

                  (iv)     The above provisions set forth the minimum severance
                           benefits and do not prohibit better severance
                           benefits being offered that are consistent with the
                           acquiring company's policies and practices or
                           industry practices at that time.

                  (v)      Nothing in this Retention Agreement is meant to
                           prohibit an employee from continuing to contribute to
                           his or her 401(k) plan during the Severance Period.

4.       ACCELERATION OF OPTIONS. Pursuant to the authority granted to the Board
         Committee under Section 4.7 of PETCO's amended and restated 1994 Stock
         Option Plan (the "Plan"), in the event of the occurrence of a Change in
         Control, all of EMPLOYEE's rights to exercise option(s) granted under
         the Plan and held by EMPLOYEE at the time of the Change in Control
         shall immediately vest resulting in these option(s) becoming
         immediately exercisable for the period specified in the section of the
         respective option(s) relating to vesting of options, if the period
         specified is less than three months, then three months after which time
         the option(s) shall expire.

5.       TERM OF AGREEMENT. This Agreement shall continue in full force and
         effect until terminated as provided in this section. This Agreement
         shall terminate on the earlier of:

         a.       July 31st of a year after 1996, if the Board of Directors by
                  the affirmative vote of a majority of its members prior to May
                  1 of such year and prior to the occurrence or consideration of
                  a specific Change in Control, has voted to terminate this
                  Agreement; or

         b.       if EMPLOYEE's services are terminated prior to the occurrence
                  of a Change in Control or after the first anniversary of a
                  Change in Control, the date of such termination of services;

         c.       if EMPLOYEE's services are terminated upon or within the first
                  year following a Change in Control under circumstances where
                  EMPLOYEE would not be entitled to severance benefits pursuant
                  to this Agreement, the date of such termination of services;
                  or

                                       5



         d.       after a Change in Control, the date on which any successor to
                  PETCO has performed all of its obligations under Section 3 of
                  this Agreement and EMPLOYEE has performed all of EMPLOYEE's
                  obligations under Section 3 of this Agreement.

6.       AGREEMENT NOT TO USE TRADE SECRETS.

         a.       TRADE SECRETS IN GENERAL. During the course of EMPLOYEE's
                  employment, EMPLOYEE will have access to various trade secrets
                  of PETCO. A "Trade Secret" is information, which is not
                  generally known to the public and, as a result, is of economic
                  benefit to PETCO in the conduct of its business. EMPLOYEE and
                  PETCO agree that Trade Secrets shall include, but not be
                  limited to, all information developed or obtained by PETCO,
                  comprising the following items, whether or not such items have
                  been reduced to tangible form (e.g., physical writing): all
                  methods, technics, processes, ideas, trade names, service
                  marks, slogans, forms, customer lists, pricing structures,
                  menus, business forms, recipes, formulas, marketing programs
                  and plans, layout and design, financial structure, operational
                  methods and tactics, cost information, the identity of
                  suppliers or customers of PETCO, customer lists, accounting
                  procedures, databases, and any document, record or other
                  information of PETCO relating to the above. Trade Secrets
                  include not only information belonging to PETCO which existed
                  before the date of this Agreement, but also information
                  developed by EMPLOYEE or PETCO or PETCO's employees during the
                  term of this Agreement and thereafter.

         b.       RESTRICTION ON USE OF TRADE SECRETS. EMPLOYEE agrees that
                  EMPLOYEE's use of trade secrets is subject to the following
                  restrictions during the term of this Agreement and for an
                  indefinite period thereafter, so long as the Trade Secrets
                  have not become generally known to the public.

                  (i)      NON-DISCLOSURE. EMPLOYEE will not publish or
                           disclose, or allow to be published or disclosed,
                           Trade Secrets to any person who is not an employee of
                           PETCO unless such disclosure is necessary for the
                           performance of EMPLOYEE's obligations under this
                           Agreement. Disclosure to someone who is not an
                           employee of PETCO must first be authorized in writing
                           by PETCO's president.

                  (ii)     NON-REMOVAL. EMPLOYEE will not remove any Trade
                           Secrets from the office of PETCO or the premises of
                           any facility in which PETCO is performing services,
                           or allow such removal, unless permitted in writing by
                           PETCO's president.

                  (iii)    PROHIBITION AGAINST UNFAIR COMPETITION. At any time
                           after the termination of EMPLOYEE's employment with
                           PETCO for any reason, EMPLOYEE will not engage in
                           competition with PETCO while making use of the Trade
                           Secrets of PETCO.

                                       6



         c.       SOLICITATION OF EMPLOYEES. EMPLOYEE will be called upon to
                  work closely with employees of PETCO in performing services
                  under this Agreement. EMPLOYEE expressly agrees that EMPLOYEE
                  will not, during EMPLOYEE's employment with PETCO and for one
                  year thereafter, solicit or take away any employee of PETCO.
                  In addition, all information about such employees which
                  becomes known to EMPLOYEE during the course of EMPLOYEE's
                  employment with PETCO, and which is not otherwise known to the
                  public, is a Trade Secret of PETCO and shall not be used by
                  EMPLOYEE in soliciting or taking away employees of PETCO at
                  any time during or after termination of EMPLOYEE's employment
                  with PETCO.

         d.       COMPETITION DURING EMPLOYMENT. During EMPLOYEE's employment
                  with PETCO, EMPLOYEE will not render services or give advice
                  to, affiliate with (as employee, partner, consultant or
                  otherwise) or invest or acquire any interest in, in whole or
                  in significant part, any other person or organization which is
                  engaged in or about to become engaged in franchising,
                  developing, owning or operating a retail store specializing in
                  pet food supplies and/or services (a "Conflicting
                  Organization"). EMPLOYEE shall not, however, be prohibited
                  from investing in securities of any Conflicting Organization
                  that is listed on a national securities exchange or traded on
                  the NASDAQ stock market, providing that EMPLOYEE does not own,
                  or have the right to acquire, more than three percent of the
                  outstanding voting securities of such company.

         e.       RETURN OF PROPERTY. Upon the termination of EMPLOYEE's
                  employment for any reason, EMPLOYEE shall immediately deliver
                  to PETCO all originals and copies of documents, records,
                  computer disks, hard copy printouts of computer disks,
                  software programs, keys, security access cards, credit cards,
                  financial information, procedures, proposals, reports,
                  computers, and other items and information within EMPLOYEE's
                  possession or control, belonging to PETCO or in any way
                  related to the business of PETCO or the services EMPLOYEE
                  performed for PETCO, including, but not limited to, any and
                  all of PETCO's Trade Secrets.

         f.       VIOLATIONS OF TRADE SECRETS, SOLICITATION, COMPETITION CLAUSES
                  AND/OR RETURN OF PROPERTY. EMPLOYEE agrees and acknowledges
                  that the violation of any of the provisions contained in
                  Section 6 would cause irreparable injury to PETCO, that the
                  remedy at law for any violation or threatened violation
                  thereof would be inadequate and PETCO shall be entitled to
                  temporary and permanent injunctive or other equitable relief
                  without the necessity of proving actual damages. EMPLOYEE
                  agrees that such relief shall be available in a court of law
                  regardless of the arbitration provision contained in Section
                  14 of this Agreement. In any proceeding by PETCO to enforce
                  any of the provisions contained in Section 6, the prevailing
                  party shall be entitled to reimbursement of all costs and
                  reasonable attorneys' fees incurred in such litigation.

                                       7



7.       SUCCESSORS. This Agreement shall bind, and then be enforced by, any
         successor (whether direct or indirect, by purchase, merger,
         consolidation or otherwise) to all or substantially all of the business
         or assets of PETCO, in the same manner and to the same extent that
         PETCO would be obligated under or entitled to enforce this Agreement if
         no succession had taken place. In the case of any Transaction in which
         a successor would not by the foregoing provision or by operation of law
         be bound by this Agreement, PETCO shall use its best efforts to require
         such successor expressly and unconditionally to assume and agree to
         perform PETCO's obligations under this Agreement, in the same manner
         and to the same extent that PETCO would be required to perform if no
         such succession had taken place unless PETCO previously arranged to
         establish an escrow to satisfy its obligations thereunder.

8.       ENTIRE AGREEMENT. Except as otherwise provided for in this Agreement,
         this Agreement, together with the Offer Letter, if any, represents the
         only agreement among the parties concerning the subject matter hereof
         and supersedes all prior agreements whether written or oral, relating
         thereto; provided, however, that the terms of the option(s) granted to
         EMPLOYEE under the Plan are not superseded except to the extent that
         this Agreement provides severance compensation and benefits which are
         greater than under the Offer Letters and that this Agreement restricts
         competition with PETCO for a longer period than under the option(s) or
         the Offer Letters in either of which case the provision of this
         Agreement shall govern.

9.       ASSIGNMENT. This Agreement shall not be assignable by EMPLOYEE. Any and
         all assignments of this Agreement or any interest therein by EMPLOYEE
         shall be void.

10.      NO WAIVER. Any waiver of any term or condition of this Agreement by
         either party shall not operate as a waiver of any continued breach of
         such term or condition, or any other term or condition, nor shall any
         failure to enforce a provision of this Agreement operate as a waiver of
         such provision or of any other provision of this Agreement.

11.      CAPTIONS. The captions and headings of this Agreement are for
         convenience only and shall in no way limit or otherwise affect any of
         the terms or provisions contained herein.

12.      SEVERABILITY. Should any provision of this Agreement, or its
         application, to any extent be held invalid or unenforceable, the
         remainder of this Agreement and its application, excluding such invalid
         or unenforceable provisions shall not be affected by such exclusion and
         shall continue to be valid and enforceable to the fullest extent
         permitted by law or equity.

13.      GOVERNING LAW. This Agreement shall for all purposes be governed and
         interpreted in accordance with the laws of the State of California.

14.      ARBITRATION. Any dispute arising out of or relating to this Agreement
         or the alleged breach of it, or the making of this Agreement, including
         claims of fraud in the inducement, shall be discussed between the
         disputing parties in a good faith effort to arrive at a mutual

                                       8



         settlement of any such controversy. If, the dispute cannot be resolved,
         it shall be settled by binding arbitration. Judgment upon the award
         rendered by the arbitrator may be entered in any court having
         jurisdiction thereof. Arbitration will be conducted pursuant to the
         provisions of this Agreement, and the Commercial Arbitration Rules of
         the American Arbitration Association, unless such rules are
         inconsistent with the provisions of this Agreement. Limited civil
         discovery shall be permitted for the production of documents and taking
         of depositions. Unresolved discovery disputes may be brought to the
         attention of the arbitrator who may dispose of such dispute. The
         arbitrator shall have the authority to award any remedy or relief that
         a court of this state could order or grant. The arbitrator may award to
         the prevailing party, if any, as determined by the arbitrator, all of
         its costs and fees, including the arbitrator's fees, administrative
         fees, travel expenses, out-of-pocket expenses and reasonable attorneys'
         fees. Unless otherwise agreed by the parties, the place of any
         arbitration proceedings shall be San Diego County, California.

15.      AMENDMENTS. No amendment or modification of these terms or conditions
         of this Agreement shall be valid unless in writing and signed by the
         parties hereto.

16.      COUNTERPARTS. This Agreement may be executed in counterparts, and if so
         executed, each such counterpart shall have the force and effect of an
         original.

17.      NOTICES. Any notice required or permitted to be given under this
         Agreement shall be sufficient, if in writing, sent by mail to his/her
         residence in the case of the EMPLOYEE, or hand delivered to the
         EMPLOYEE, or to PETCO's principal office (corporate office) in the case
         of PETCO.

18.      CONSTRUCTION. This Agreement shall not be construed against any party
         on the grounds that such party drafted the Agreement or caused it to be
         drafted.

19.      AUTHORITY TO SIGN. Each individual signing this Agreement directly and
         expressly warrants that he/she has been given and has received and
         accepted authority to sign and execute the Agreement on behalf of the
         party for whom it is indicated he/she has signed, and further has been
         expressly given and received and accepted authority to enter into a
         binding agreement on behalf of such party with respect to the matters
         contained herein and as stated herein.

20.      ACKNOWLEDGMENT. EMPLOYEE acknowledges that EMPLOYEE has been advised by
         PETCO to consult with independent counsel of EMPLOYEE's own choice, at
         EMPLOYEE's expense, concerning this Agreement, that EMPLOYEE has had
         the opportunity to do so, and that EMPLOYEE has taken advantage of that
         opportunity to the extent that EMPLOYEE desires. EMPLOYEE further
         acknowledges that EMPLOYEE has read and understands this Agreement, is
         fully aware of its legal effect, and has entered into it freely based
         on EMPLOYEE's own judgement.

                                       9



IN WITNESS HEREOF, the parties have executed this Agreement as of the date set
forth above.


                                 PETCO ANIMAL SUPPLIES, INC.


                                 By:  /s/ BRIAN K. DEVINE
                                 --------------------------------------------
                                      Brian K. Devine

                                 Its: Chairman, President and CEO
                                 --------------------------------------------




                                 EMPLOYEE



                                 --------------------------------------------


                                       10

EX-10.12

                               RETENTION AGREEMENT


THIS RETENTION AGREEMENT ("Agreement") is effective as of ______________, by and
between PETCO Animal Supplies, Inc. ("PETCO") and ____________ ("Employee").

         A.       EMPLOYEE is currently employed by PETCO. If the employment is
                  pursuant to an Offer Letter of Employment ("Offer Letter"), a
                  copy of the Offer Letter is attached hereto as Exhibit 1.

         B.       Although PETCO presently anticipates no Change in Control, the
                  Board of Directors wishes to plan for such a possibility and
                  to ensure EMPLOYEE's continued dedication and efforts in such
                  event without undue concern for personal, financial and
                  employment security.

         C.       The parties hereto desire to fulfill the above purpose
                  according to the terms set forth in this Agreement.


                                    AGREEMENT

In consideration of the mutual covenants set forth in this Agreement and other
good and valuable consideration, the sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

1.       DEFINITIONS. The following words and phrases as used in this Agreement
         shall have the following respective meanings.

         a.       CAUSE. A termination of employment for "Cause" is a
                  termination precipitated by EMPLOYEE's:

                  (i)      failure to substantially perform EMPLOYEE's duties
                           with PETCO (other than due to incapacity resulting
                           from physical or mental illness), which failure has
                           continued for at least 30 days following receipt by
                           EMPLOYEE of written notice specifying the failure to
                           substantially perform,

                   (ii)    engagement in conduct that is demonstrably and
                           materially injurious to PETCO, monetarily or
                           otherwise, which injurious conduct has continued for
                           at least 30 days following EMPLOYEE's receipt of
                           written notice specifying the injurious conduct and
                           offering EMPLOYEE the opportunity to explain the
                           conduct to the President/Chief Executive Officer; or

                  (iii)    a material breach by Employee of any provision of
                           this Agreement or the Offer Letter.



         b.       CHANGE IN CONTROL. A "Change in Control" shall be deemed to
                  occur:

                  (i)      if any person or entity other than persons or
                           entities currently owning more than five percent of
                           PETCO's securities is or becomes the "beneficial
                           owner" (as defined in rule 13d-3 of the Securities
                           Exchange Act of 1934), directly or indirectly, of
                           securities of PETCO representing 50% or more of the
                           combined voting power of PETCO's then outstanding
                           securities;

                  (ii)     upon the approval by PETCO's stockholders and the
                           consummation of a Transaction; or

                  (iii)    if, during any period, members of the Incumbent Board
                           cease for any reason to constitute at least a
                           majority of the Board.

                  Notwithstanding the foregoing, a Change in Control pursuant to
                  subparagraphs (ii) and (iii) above shall not be deemed to
                  occur if immediately following the consummation of a
                  Transaction or other event approved by the Incumbent Board,
                  holders of PETCO's voting securities immediately prior to a
                  Transaction either continue to own at least 50% of the
                  combined voting power of PETCO's then outstanding voting
                  securities if PETCO survives the Transaction or then own
                  voting securities representing at least 50% of the combined
                  voting power of each surviving entity after a Transaction.

         c.       GOOD REASON. Termination of employment by EMPLOYEE for "Good
                  Reason" is a termination of employment due to the occurrence
                  of any one of the following events or conditions:

                  (i)      a material change in EMPLOYEE's status, title,
                           position or responsibilities which in the EMPLOYEE's
                           reasonable judgment represents a substantial
                           reduction of the status, title, position or
                           responsibilities in effect immediately prior to the
                           change;

                  (ii)     the assignment of EMPLOYEE to a position which
                           requires EMPLOYEE to relocate permanently to a site
                           outside of San Diego County;

                  (iii)    assigning EMPLOYEE any duties or responsibilities
                           (other than due to a promotion) which in the
                           EMPLOYEE's reasonable judgment are inconsistent with
                           his/her status, title, position or responsibilities;

                  (iv)     any removal of EMPLOYEE from or failure to reappoint
                           or reelect EMPLOYEE to his/her previously held
                           position, except in connection with a promotion, the
                           termination of employment for Cause, as a result of
                           permanent disability (as determined by EMPLOYEE's
                           eligibility to receive disability benefits under any
                           long-term disability plan PETCO may then

                                     2


                           have in effect), as a result of EMPLOYEE's death,
                           or by EMPLOYEE other than for Good Reason; or

                  (v)      any material breach by PETCO of any provision of this
                           Agreement or the Offer Letter.

         d.       INCUMBENT BOARD. The "Incumbent Board" consists of the members
                  of the Board of Directors of PETCO as of the date of this
                  Agreement, to the extent they continue to serve as Board
                  members and any individual who becomes a Board member after
                  the date of this Agreement if (i) his or her election or
                  nomination as a director was approved by a vote of at least
                  two-thirds of the then Incumbent Board and such person does
                  not own more than 20% of PETCO's securities, or (ii) such
                  individual is a representative of an institutional investor
                  that either owns less than 20% of PETCO's securities or was
                  represented on the Board as of the date of this Agreement.

         e.       SEVERANCE PERIOD. The "Severance Period" is the six-month
                  period beginning on the date of termination of EMPLOYEE's
                  employment or such longer period as offered by the acquiring
                  company consistent with acquiring company's policies and
                  practices or industry practices at that time.

         f.       TRANSACTION. A "Transaction" means a merger or consolidation,
                  reorganization, distribution of assets to stockholders by
                  spin-off, split-up or otherwise, a sale or disposition of all
                  or substantially all of PETCO's assets or a liquidation or
                  dissolution of PETCO.

2.       AT-WILL EMPLOYMENT. Notwithstanding any of the provisions in the
         Agreement, EMPLOYEE and PETCO understand and expressly agree that
         EMPLOYEE's employment is not for a specified term and that, other than
         during the first year following a Change in Control, EMPLOYEE's
         employment may be terminated by PETCO or by EMPLOYEE at any time, with
         or without notice, and with or without cause. EMPLOYEE and PETCO
         expressly agree that this provision is intended by EMPLOYEE and PETCO
         to be the complete and final expression of their understanding
         regarding the terms and conditions under which EMPLOYEE's employment
         may be terminated. EMPLOYEE and PETCO further understand and agree that
         no representation contrary to this provision is valid, and that this
         provision may not be augmented, contradicted or modified in any way,
         except by a writing signed by EMPLOYEE and PETCO's president.

3.       SEVERANCE

         a.       EMPLOYEE shall be entitled to receive from PETCO severance
                  benefits in the amount provided in subsection b, below, if in
                  connection with a Change in Control or within one year after a
                  Change in Control, EMPLOYEE's employment with PETCO is
                  terminated; provided, however, that EMPLOYEE will not be
                  entitled to any severance benefits if EMPLOYEE's termination
                  of employment is

                                     3


                  (i) for Cause, (ii) by reason of permanent disability (as
                  determined by EMPLOYEE's eligibility to receive disability
                  benefits under any long-term disability plan PETCO may then
                  have in effect), (iii) initiated by EMPLOYEE for other than
                  Good Reason or (iv) by reason of EMPLOYEE's death.
                  Notwithstanding any other provision of this Agreement, the
                  consummation of a Transaction in itself shall not be deemed
                  a termination of employment entitling EMPLOYEE to severance
                  benefits hereunder even if such event results in EMPLOYEE
                  being employed by a different entity which assumes PETCO's
                  obligations under this Agreement.

         b.       If EMPLOYEE's services are terminated, entitling EMPLOYEE to
                  severance benefits pursuant to subsection a, above, EMPLOYEE
                  shall be entitled to the following benefits:

                  (i)      During the Severance Period, PETCO shall continue to
                           pay to EMPLOYEE base salary, less applicable
                           withholding, at the rate and according to the payment
                           schedule in place immediately prior to the
                           termination of employment.

                  (ii)     During the Severance Period, PETCO shall continue on
                           behalf of EMPLOYEE (and EMPLOYEE's dependents and
                           beneficiaries) life insurance, disability insurance,
                           and medical, dental, and automobile benefits, if any,
                           which were being provided to EMPLOYEE at the time of
                           termination of employment and the expense shall be
                           allocated between PETCO and EMPLOYEE on the same
                           basis as prior to the date of termination of
                           employment. The period of time during which such
                           payments and continuation of coverage shall occur
                           under this paragraph will run concurrently with any
                           separate period of time during which the law requires
                           continuation coverage. The benefits provided pursuant
                           to this subsection shall be no less favorable to
                           EMPLOYEE than the coverage provided to EMPLOYEE under
                           the plans providing such benefits at the time notice
                           of termination was given to EMPLOYEE. The obligation
                           of PETCO under this subsection shall be limited to
                           the extent that EMPLOYEE obtains any such benefits
                           pursuant to a subsequent employer's benefit plans, in
                           which case PETCO may reduce the coverage of any
                           benefits it is required to provide EMPLOYEE under
                           this subsection, as long as the aggregate coverage of
                           the combined benefit plans is no less favorable to
                           EMPLOYEE, in terms of amounts and deductibles and
                           costs to EMPLOYEE, than the coverage required to be
                           provided under this subsection. This subsection shall
                           not be interpreted so as to limit any benefits to
                           which EMPLOYEE (or EMPLOYEE's dependents or
                           beneficiaries) are entitled under any of PETCO's
                           employee benefit plans, programs or practices
                           following EMPLOYEE's date of termination of
                           employment. The provision of continued benefits to
                           EMPLOYEE under this subsection shall not deprive
                           EMPLOYEE of any

                                     4


                           independent statutory right to continue benefits
                           coverage pursuant to sections 601 through 606 of
                           the Employee Retirement Income Security Act of
                           1974, as amended; and

                  (iii)    On the date of termination of employment, PETCO shall
                           pay EMPLOYEE an amount equal to the bonus, if any,
                           EMPLOYEE would have received had EMPLOYEE remained in
                           PETCO's employment during the Severance Period. For
                           purposes of this paragraph, the bonus is calculated
                           as the greater of the prorata bonus norm or actual
                           bonus earned.

                  (iv)     The above provisions set forth the minimum severance
                           benefits and do not prohibit better severance
                           benefits being offered that are consistent with the
                           acquiring company's policies and practices or
                           industry practices at that time.

                  (v)      Nothing in this Retention Agreement is meant to
                           prohibit an employee from continuing to contribute to
                           his or her 401(k) plan during the Severance Period.

4.       ACCELERATION OF OPTIONS. Pursuant to the authority granted to the Board
         Committee under Section 4.7 of PETCO's amended and restated 1994 Stock
         Option Plan (the "Plan"), in the event of the occurrence of a Change in
         Control, all of EMPLOYEE's rights to exercise option(s) granted under
         the Plan and held by EMPLOYEE at the time of the Change in Control
         shall immediately vest resulting in these option(s) becoming
         immediately exercisable for the period specified in the section of the
         respective option(s) relating to vesting of options, if the period
         specified is less than three months, then three months after which time
         the option(s) shall expire.

5.       TERM OF AGREEMENT. This Agreement shall continue in full force and
         effect until terminated as provided in this section. This Agreement
         shall terminate on the earlier of:

         a.       July 31st of a year after 1996, if the Board of Directors by
                  the affirmative vote of a majority of its members prior to May
                  1 of such year and prior to the occurrence or consideration of
                  a specific Change in Control, has voted to terminate this
                  Agreement; or

         b.       if EMPLOYEE's services are terminated prior to the occurrence
                  of a Change in Control or after the first anniversary of a
                  Change in Control, the date of such termination of services;

         c.       if EMPLOYEE's services are terminated upon or within the first
                  year following a Change in Control under circumstances where
                  EMPLOYEE would not be entitled to severance benefits pursuant
                  to this Agreement, the date of such termination of services;
                  or

                                     5


         d.       after a Change in Control, the date on which any successor to
                  PETCO has performed all of its obligations under Section 3 of
                  this Agreement and EMPLOYEE has performed all of EMPLOYEE's
                  obligations under Section 3 of this Agreement.

6.       AGREEMENT NOT TO USE TRADE SECRETS.

         a.       TRADE SECRETS IN GENERAL. During the course of EMPLOYEE's
                  employment, EMPLOYEE will have access to various trade secrets
                  of PETCO. A "Trade Secret" is information, which is not
                  generally known to the public and, as a result, is of economic
                  benefit to PETCO in the conduct of its business. EMPLOYEE and
                  PETCO agree that Trade Secrets shall include, but not be
                  limited to, all information developed or obtained by PETCO,
                  comprising the following items, whether or not such items have
                  been reduced to tangible form (e.g., physical writing): all
                  methods, technics, processes, ideas, trade names, service
                  marks, slogans, forms, customer lists, pricing structures,
                  menus, business forms, recipes, formulas, marketing programs
                  and plans, layout and design, financial structure, operational
                  methods and tactics, cost information, the identity of
                  suppliers or customers of PETCO, customer lists, accounting
                  procedures, databases, and any document, record or other
                  information of PETCO relating to the above. Trade Secrets
                  include not only information belonging to PETCO which existed
                  before the date of this Agreement, but also information
                  developed by EMPLOYEE or PETCO or PETCO's employees during the
                  term of this Agreement and thereafter.

         b.       RESTRICTION ON USE OF TRADE SECRETS. EMPLOYEE agrees that
                  EMPLOYEE's use of trade secrets is subject to the following
                  restrictions during the term of this Agreement and for an
                  indefinite period thereafter, so long as the Trade Secrets
                  have not become generally known to the public.

                  (i)      NON-DISCLOSURE. EMPLOYEE will not publish or
                           disclose, or allow to be published or disclosed,
                           Trade Secrets to any person who is not an employee of
                           PETCO unless such disclosure is necessary for the
                           performance of EMPLOYEE's obligations under this
                           Agreement. Disclosure to someone who is not an
                           employee of PETCO must first be authorized in writing
                           by PETCO's president.

                  (ii)     NON-REMOVAL. EMPLOYEE will not remove any Trade
                           Secrets from the office of PETCO or the premises of
                           any facility in which PETCO is performing services,
                           or allow such removal, unless permitted in writing by
                           PETCO's president.

                  (iii)    PROHIBITION AGAINST UNFAIR COMPETITION. At any time
                           after the termination of EMPLOYEE's employment with
                           PETCO for any reason, EMPLOYEE will not engage in
                           competition with PETCO while making use of the Trade
                           Secrets of PETCO.

                                     6


         c.       SOLICITATION OF EMPLOYEES. EMPLOYEE will be called upon to
                  work closely with employees of PETCO in performing services
                  under this Agreement. EMPLOYEE expressly agrees that EMPLOYEE
                  will not, during EMPLOYEE's employment with PETCO and for one
                  year thereafter, solicit or take away any employee of PETCO.
                  In addition, all information about such employees which
                  becomes known to EMPLOYEE during the course of EMPLOYEE's
                  employment with PETCO, and which is not otherwise known to the
                  public, is a Trade Secret of PETCO and shall not be used by
                  EMPLOYEE in soliciting or taking away employees of PETCO at
                  any time during or after termination of EMPLOYEE's employment
                  with PETCO.

         d.       COMPETITION DURING EMPLOYMENT. During EMPLOYEE's employment
                  with PETCO, EMPLOYEE will not render services or give advice
                  to, affiliate with (as employee, partner, consultant or
                  otherwise) or invest or acquire any interest in, in whole or
                  in significant part, any other person or organization which is
                  engaged in or about to become engaged in franchising,
                  developing, owning or operating a retail store specializing in
                  pet food supplies and/or services (a "Conflicting
                  Organization"). EMPLOYEE shall not, however, be prohibited
                  from investing in securities of any Conflicting Organization
                  that is listed on a national securities exchange or traded on
                  the NASDAQ stock market, providing that EMPLOYEE does not own,
                  or have the right to acquire, more than three percent of the
                  outstanding voting securities of such company.

         e.       RETURN OF PROPERTY. Upon the termination of EMPLOYEE's
                  employment for any reason, EMPLOYEE shall immediately deliver
                  to PETCO all originals and copies of documents, records,
                  computer disks, hard copy printouts of computer disks,
                  software programs, keys, security access cards, credit cards,
                  financial information, procedures, proposals, reports,
                  computers, and other items and information within EMPLOYEE's
                  possession or control, belonging to PETCO or in any way
                  related to the business of PETCO or the services EMPLOYEE
                  performed for PETCO, including, but not limited to, any and
                  all of PETCO's Trade Secrets.

         f.       VIOLATIONS OF TRADE SECRETS, SOLICITATION, COMPETITION CLAUSES
                  AND/OR RETURN OF PROPERTY. EMPLOYEE agrees and acknowledges
                  that the violation of any of the provisions contained in
                  Section 6 would cause irreparable injury to PETCO, that the
                  remedy at law for any violation or threatened violation
                  thereof would be inadequate and PETCO shall be entitled to
                  temporary and permanent injunctive or other equitable relief
                  without the necessity of proving actual damages. EMPLOYEE
                  agrees that such relief shall be available in a court of law
                  regardless of the arbitration provision contained in Section
                  14 of this Agreement. In any proceeding by PETCO to enforce
                  any of the provisions contained in Section 6, the prevailing
                  party shall be entitled to reimbursement of all costs and
                  reasonable attorneys' fees incurred in such litigation.

                                     7


7.       SUCCESSORS. This Agreement shall bind, and then be enforced by, any
         successor (whether direct or indirect, by purchase, merger,
         consolidation or otherwise) to all or substantially all of the business
         or assets of PETCO, in the same manner and to the same extent that
         PETCO would be obligated under or entitled to enforce this Agreement if
         no succession had taken place. In the case of any Transaction in which
         a successor would not by the foregoing provision or by operation of law
         be bound by this Agreement, PETCO shall use its best efforts to require
         such successor expressly and unconditionally to assume and agree to
         perform PETCO's obligations under this Agreement, in the same manner
         and to the same extent that PETCO would be required to perform if no
         such succession had taken place unless PETCO previously arranged to
         establish an escrow to satisfy its obligations thereunder.

8.       ENTIRE AGREEMENT. Except as otherwise provided for in this Agreement,
         this Agreement, together with the Offer Letter, if any, represents the
         only agreement among the parties concerning the subject matter hereof
         and supersedes all prior agreements whether written or oral, relating
         thereto; provided, however, that the terms of the option(s) granted to
         EMPLOYEE under the Plan are not superseded except to the extent that
         this Agreement provides severance compensation and benefits which are
         greater than under the Offer Letters and that this Agreement restricts
         competition with PETCO for a longer period than under the option(s) or
         the Offer Letters in either of which case the provision of this
         Agreement shall govern.

9.       ASSIGNMENT. This Agreement shall not be assignable by EMPLOYEE. Any and
         all assignments of this Agreement or any interest therein by EMPLOYEE
         shall be void.

10.      NO WAIVER. Any waiver of any term or condition of this Agreement by
         either party shall not operate as a waiver of any continued breach of
         such term or condition, or any other term or condition, nor shall any
         failure to enforce a provision of this Agreement operate as a waiver of
         such provision or of any other provision of this Agreement.

11.      CAPTIONS. The captions and headings of this Agreement are for
         convenience only and shall in no way limit or otherwise affect any of
         the terms or provisions contained herein.

12.      SEVERABILITY. Should any provision of this Agreement, or its
         application, to any extent be held invalid or unenforceable, the
         remainder of this Agreement and its application, excluding such invalid
         or unenforceable provisions shall not be affected by such exclusion and
         shall continue to be valid and enforceable to the fullest extent
         permitted by law or equity.

13.      GOVERNING LAW. This Agreement shall for all purposes be governed and
         interpreted in accordance with the laws of the State of California.

14.      ARBITRATION. Any dispute arising out of or relating to this Agreement
         or the alleged breach of it, or the making of this Agreement, including
         claims of fraud in the inducement, shall be discussed between the
         disputing parties in a good faith effort to arrive at a mutual

                                     8


         settlement of any such controversy. If, the dispute cannot be resolved,
         it shall be settled by binding arbitration. Judgment upon the award
         rendered by the arbitrator may be entered in any court having
         jurisdiction thereof. Arbitration will be conducted pursuant to the
         provisions of this Agreement, and the Commercial Arbitration Rules of
         the American Arbitration Association, unless such rules are
         inconsistent with the provisions of this Agreement. Limited civil
         discovery shall be permitted for the production of documents and taking
         of depositions. Unresolved discovery disputes may be brought to the
         attention of the arbitrator who may dispose of such dispute. The
         arbitrator shall have the authority to award any remedy or relief that
         a court of this state could order or grant. The arbitrator may award to
         the prevailing party, if any, as determined by the arbitrator, all of
         its costs and fees, including the arbitrator's fees, administrative
         fees, travel expenses, out-of-pocket expenses and reasonable attorneys'
         fees. Unless otherwise agreed by the parties, the place of any
         arbitration proceedings shall be San Diego County, California.

15.      AMENDMENTS. No amendment or modification of these terms or conditions
         of this Agreement shall be valid unless in writing and signed by the
         parties hereto.

16.      COUNTERPARTS. This Agreement may be executed in counterparts, and if so
         executed, each such counterpart shall have the force and effect of an
         original.

17.      NOTICES. Any notice required or permitted to be given under this
         Agreement shall be sufficient, if in writing, sent by mail to his/her
         residence in the case of the EMPLOYEE, or hand delivered to the
         EMPLOYEE, or to PETCO's principal office (corporate office) in the case
         of PETCO.

18.      CONSTRUCTION. This Agreement shall not be construed against any party
         on the grounds that such party drafted the Agreement or caused it to be
         drafted.

19.      AUTHORITY TO SIGN. Each individual signing this Agreement directly and
         expressly warrants that he/she has been given and has received and
         accepted authority to sign and execute the Agreement on behalf of the
         party for whom it is indicated he/she has signed, and further has been
         expressly given and received and accepted authority to enter into a
         binding agreement on behalf of such party with respect to the matters
         contained herein and as stated herein.

20.      ACKNOWLEDGMENT. EMPLOYEE acknowledges that EMPLOYEE has been advised by
         PETCO to consult with independent counsel of EMPLOYEE's own choice, at
         EMPLOYEE's expense, concerning this Agreement, that EMPLOYEE has had
         the opportunity to do so, and that EMPLOYEE has taken advantage of that
         opportunity to the extent that EMPLOYEE desires. EMPLOYEE further
         acknowledges that EMPLOYEE has read and understands this Agreement, is
         fully aware of its legal effect, and has entered into it freely based
         on EMPLOYEE's own judgement.

                                     9


IN WITNESS HEREOF, the parties have executed this Agreement as of the date set
forth above.



                                    PETCO ANIMAL SUPPLIES, INC.


                                    By: /s/ BRIAN K. DEVINE
                                    --------------------------------------------
                                         Brian K. Devine

                                    Its: Chairman, President and CEO
                                    --------------------------------------------




                                    EMPLOYEE



                                    --------------------------------------------

                                     10

EX-10.13

- --------------------------------------------------------------------------------





                       PETCO ANIMAL SUPPLIES 401(K) PLAN





- --------------------------------------------------------------------------------



                            ADOPTION AGREEMENT # 009
               NONSTANDARDIZED CODE SECTION 401(k) PROFIT SHARING PLAN

The undersigned, PETCO ANIMAL SUPPLIES ("Employer"), by executing this
Adoption Agreement, elects to become a participating Employer in the THE
CHICAGO TRUST COMPANY Defined Contribution Master Plan (basic plan document #01)
by adopting the accompanying Plan and Trust in full as if the Employer were a
signatory to that Agreement. The Employer makes the following elections
granted under the provisions of the Master Plan.

                                   ARTICLE I
                                  DEFINITIONS

         1.02  TRUSTEE. The Trustee executing this Adoption Agreement is:
         (CHOOSE (a) OR (b))

[N/A]    (a)   A discretionary Trustee. See Section 10.03[A] of the Plan.

[X]      (b)   A nondiscretionary Trustee. See Section 10.03[B] of the Plan.
         [NOTE: THE EMPLOYER MAY NOT ELECT OPTION (b) IF A CUSTODIAN EXECUTES
         THE ADOPTION AGREEMENT.]

         1.03  PLAN. The name of the Plan as adopted by the Employer is PETCO
ANIMAL SUPPLIES 401(k) PLAN.

         1.07  EMPLOYEE. The following Employees are not eligible to participate
in the Plan: (CHOOSE (a) OR AT LEAST ONE OF (b) THROUGH (g))

[N/A]    (a)   No exclusions.

[X]      (b)   Collective bargaining employees (as defined in Section 1.07 of
         the Plan). [NOTE: IF THE EMPLOYER EXCLUDES UNION EMPLOYEES FROM THE
         PLAN, THE EMPLOYER MUST BE ABLE TO PROVIDE EVIDENCE THAT RETIREMENT
         BENEFITS WERE THE SUBJECT OF GOOD FAITH BARGAINING.]

[X]      (c)   Nonresident aliens who do not receive any earned income (as
         defined in Code Section 911(d)(2)) from the Employer which constitutes
         United States source income (as defined in Code Section 861(a)(3)).

[N/A]    (d)   Commission Salesmen.

[N/A]    (e)   Any Employee compensated on a salaried basis.

[N/A]    (f)   Any Employee compensated on an hourly basis.

[N/A]    (g) (SPECIFY) __.

LEASED EMPLOYEES. Any Leased Employee treated as an Employee under Section 1.31
of the Plan, is: (CHOOSE (h) OR (i))

[X]      (h)   Not eligible to participate in the Plan.

[N/A]    (i)   Eligible to participate in the Plan, unless excluded by reason
         of an exclusion classification elected under this Adoption Agreement
         Section 1.07.

                                       1


RELATED EMPLOYERS. If any member of the Employer's related group (as defined
in Section 1.30 of the Plan) executes a Participation Agreement to this
Adoption Agreement, such member's Employees are eligible to participate in
this Plan, unless excluded by reason of an exclusion classification elected
under this Adoption Agreement Section 1.07. In addition: (CHOOSE (j) OR (k))

[X]      (j)   No other related group member's Employees are eligible to
         participate in the Plan.

[N/A]    (k)   The following nonparticipating related group member's Employees
         are eligible to participate in the Plan unless excluded by reason of
         an exclusion classification elected under this Adoption Agreement
         Section 1.07: __.

         1.12  COMPENSATION.

TREATMENT OF ELECTIVE CONTRIBUTIONS. (CHOOSE (a) OR (b))

[X]      (a)   "Compensation" includes elective contributions made by the
         Employer on the Employee's behalf.

[N/A]    (b)   "Compensation" does not include elective contributions.

MODIFICATIONS TO COMPENSATION DEFINITION. (CHOOSE (c) OR AT LEAST ONE OF (d)
TROUGH (j))

[N/A]    (c)   No modifications other than as elected under Options (a) or (b)

[N/A]    (d)   The Plan excludes Compensation in excess of $__.

[N/A]    (e)   In lieu of the definition in Section 1.12 of the Plan,
         Compensation means any earnings reportable as W-2 wages for Federal
         income tax withholding purposes, subject to any other election under
         this Adoption Agreement Section 1.12.

[N/A]    (f)   The Plan excludes bonuses.

[N/A]    (g)   The Plan excludes overtime.

[N/A]    (h)   The Plan excludes Commissions.

[N/A]    (i)   Compensation will not include Compensation from a related
         employer (as defined in Section 1.30 of the Plan) that has not executed
         a Participation Agreement in this Plan unless, pursuant to Adoption
         Agreement Section 1.07, the Employees of that related employer are
         eligible to participate in this Plan.

[X]      (j) (SPECIFY) SECTION 3401(a) WAGES: COMPENSATION IS DEFINED AS WAGES
         WITHIN THE MEANING OF CODE SECTION 3401(a) FOR THE PURPOSES OF INCOME
         TAX WITHHOLDING AT THE SOURCE, BUT DETERMINED WITHOUT REGARD TO ANY
         RULES THAT LIMIT THE REMUNERATION INCLUDED IN WAGES BASED ON THE NATURE
         OR LOCATION OF THE EMPLOYMENT OR THE SERVICES PEFORMED (SUCH AS THE
         EXCEPTION FOR AGRICULTURAL LABOR IN CODE SECTION 3401(a)(2)) WAGES PAID
         WHILE A PARTICIPANT BUT EXCLUDING BONUSES, FRINGE BENEFITS, RELOCATION
         AND SEVERANCE PAY.

If, for any Plan Year, the Plan uses permitted disparity in the contribution or
allocation formula elected under Article III, any election of Options (f), (g),
(h) or (j) is ineffective for such Plan Year with respect to any Nonhighly
Compensated Employee.

SPECIAL DEFINITION FOR MATCHING CONTRIBUTIONS. "Compensation" for purposes of
any matching contribution formula under Article III means: (CHOOSE (k) OR (l)
ONLY IF APPLICABLE)

[X]      (k)   Compensation as defined in this Adoption Agreement Section 1.12.

[N/A]    (l)   (SPECIFY) __.


                                       2


SPECIAL DEFINITION FOR SALARY REDUCTION CONTRIBUTIONS. An Employee's salary
reduction agreement applies to his Compensation determined prior to the
reduction authorized by that salary reduction agreement, with the following
exceptions: (CHOOSE (m) OR AT LEAST ONE OF (n) OR (o), IF APPLICABLE)

[N/A]    (m)   No exceptions.

[N/A]    (n)   If the Employee makes elective contributions to another plan
         maintained by the Employer, the Advisory Committee will determine the
         amount of the Employee's salary reduction contribution for the
         withholding period: (CHOOSE (1) OR (2))

         [N/A] (1)    After the reduction for such period of elective
               contributions to the other plan(s).

         [N/A] (2)    Prior to the reduction for such period of elective
               contributions to the other plan(s).

[X]      (o)   (SPECIFY) COMPENSATION INCLUDES EACH AMOUNT AS PAID ON
         PAYROLL-BY-PAYROLL BASIS, SUBJECT TO THE SPECIFIC EXCLUSIONS ABOVE.

         1.17  PLAN YEAR/LIMITATION YEAR.

PLAN YEAR. Plan Year means: (CHOOSE (a) OR (b))

[X]      (a)   The 12 consecutive month period ending every DECEMBER 31.

[N/A]    (b)   (SPECIFY) __.

LIMITATION YEAR. The Limitation Year is: (CHOOSE (c) OR (d))

[X]        (c)  The Plan Year.

[n/a]      (d)  The 12 consecutive month period ending every __.

           1.18 EFFECTIVE DATE.

NEW PLAN. The "Effective Date" of the Plan is __.

RESTATED PLAN. The restated Effective Date is JANUARY 1, 1997.
This Plan is a substitution and amendment of an existing retirement plan(s)
originally established JANUARY 1, 1992. [NOTE: SEE THE EFFECTIVE DATE ADDENDUM.]


                                       3



         1.27  HOUR OF SERVICE. The crediting method for Hours of Service is:
(CHOOSE (a) OR (b))

[X]      (a)   The actual method.

[N/A]    (b)   The __ equivalency method, except:

         [N/A] (1)    No exceptions.

         [N/A] (2)    The actual method applies for purposes of: (CHOOSE AT
               LEAST ONE)

               [N/A] (a)   Participation under Article II.

               [N/A] (b)   Vesting under Article V.

               [N/A] (c)   Accrual of benefits under Section 3.06.

[NOTE: ON THE BLANK LINE INSERT "DAILY," "WEEKLY", "SEMI-MONTHLY PAYROLL
PERIODS" OR "MONTHLY."]

         1.29  SERVICE FOR PREDECESSOR EMPLOYER. In addition to the predecessor
service the Plan must credit by reason of Section 1.29 of the Plan, the Plan
credits Service with the following predecessor employer(s): N/A. Service with
the designated predecessor employer(s) applies: (CHOOSE AT LEAST ONE OF (a) OR
(b); (c) IS AVAILABLE ONLY IN ADDITION TO (a) OR (b))

[N/A]    (a)   For purposes of participation under Article II.

[N/A]    (b)   For purposes of vesting under Article V.

[N/A]    (c)   Except the following Service: __.

[NOTE: IF THE PLAN DOES NOT CREDIT ANY PREDECESSOR SERVICE UNDER THIS
PROVISION, INSERT "N/A" IN THE FLRST BLANK LINE. THE EMPLOYER MAY ATTACH A
SCHEDULE TO THIS ADOPTION AGREEMENT, IN THE SAME FORMAT AS THIS SECTION 1.29,
DESIGNATING ADDITIONAL PREDECESSOR EMPLOYERS AND THE APPLICABLE SERVICE
CREDITING ELECTIONS.]

         1.31  LEASED EMPLOYEES. If a Leased Employee is a Participant in the
Plan and also participates in a plan maintained by the leasing organization:
(CHOOSE (a) OR (b))

[N/A]    (a)   The Advisory Committee will determine the Leased Employee's
         allocation of Employer contributions under Article III without taking
         into account the Leased Employee's allocation, if any, under the
         leasing organization's plan.

[X]      (b)   The Advisory Committee will reduce the Leased Employee's
         allocation of Employer nonelective contributions (other than
         designated qualified nonelective contributions) under this Plan by the
         Leased Employee's allocation under the leasing organization's plan, but
         only to the extent that allocation is attributable to the Leased
         Employee's service provided to the Employer. The leasing
         organization's plan:

         [X]   (1)  Must be a money purchase plan which would satisfy the
               definition under Section 1.31 of a safe harbor plan, irrespective
               of whether the safe harbor exception applies.

         [N/A] (2) Must satisfy the features and, if a defined benefit plan, the
               method of reduction described in an addendum to this Adoption
               Agreement, numbered 1.31.


                                       4


                                ARTICLE II
                           EMPLOYEE PARTICIPANTS

           2.01  ELIGIBILITY.

ELIGIBILITY CONDITIONS. To become a Participant in the Plan, an Employee must
satisfy the following eligibility conditions: (CHOOSE (a) OR (b) OR BOTH;
(c) IS OPTIONAL AS AN ADDITIONAL ELECTION)

[X]        (a)   Attainment of age 21  (SPECIFY AGE, NOT EXCEEDING 21).

[X]        (b)   Service requirement. (CHOOSE ONE OF (1) THROUGH (3))

           [X]   (1) One Year of Service.

           [N/A] (2)  __ months (not exceeding 12) following the Employee's
                 Employment Commencement Date.

           [N/A] (3)  One Hour of Service.

[N/A]      (c)   Special requirements for non-401(k) portion of plan. (MAKE
                 ELECTIONS UNDER (1) AND UNDER (2))

                 (1)   The requirements of this Option (c) apply to
                       participation in: (CHOOSE AT LEAST ONE OF (a) THROUGH
                       (c))

                 [N/A] (a) The allocation of Employer nonelective contributions
                       and Participant forfeitures.

                 [N/A] (b) The allocation of Employer matching contributions
                       (including forfeitures allocated as matching
                       contributions).

                 [N/A] (c) The allocation of Employer qualified nonelective
                       contributions.

                 (2)   For participation in the allocations described in (1),
                 the eligibility conditions are: (CHOOSE AT LEAST ONE OF (a)
                 THROUGH (d))

                 [N/A] (a) __ (one or two) Year(s) of Service, without an
                       intervening Break in Service (as described in Section
                       2.03(A) of the Plan) if the requirement is two Years of
                       Service.

                 [N/A] (b) __ months (not exceeding 24) following the Employee's
                       Employment Commencement Date.

                 [N/A] (c) One Hour of Service.

                 [N/A] (d) Attainment of age __ (SPECIFY AGE, NOT EXCEEDING 21).

PLAN ENTRY DATE. "Plan Entry Date" means the Effective Date and: (CHOOSE (d),
(e) OR (f))

[N/A]      (d)   Semi-annual Entry Dates. The first day of the Plan Year and the
           first day of the seventh month of the Plan Year.

[N/A]      (e)   The first day of the Plan Year.

[X]        (f)   (SPECIFY ENTRY DATES) MONTHLY; THE FIRST PAY PERIOD OF THE
           MONTH FOLLOWING THE MONTH THE PARTICIPANT SATISFIES THE ELIGIBILITY
           REQUIREMENTS AND EACH SUBSEQUENT PAYROLL PERIOD.

TIME OF PARTICIPATION. An Employee will become a Participant (and, if
applicable, will participate in the allocations described in Option (c)(1)),
unless excluded under Adoption Agreement Section 1.07, on the Plan Entry Date
(if employed on that date): (CHOOSE (g), (h) OR (i))

                                       5



[X]        (g)   immediately following or coinciding with


[N/A]      (h)   immediately preceding

[N/A]      (i)   nearest

the date the Employee completes the eligibility conditions described in Options
(a) and (b) (or in Option (c)(2) if applicable) of this Adoption Agreement
Section 2.01. [NOTE: THE EMPLOYER MUST COORDINATE THE SELECTION OF (g), (h) OR
(i) WITH THE "PLAN ENTRY DATE" SELECTION IN (d), (e) OR (f). UNLESS OTHERWISE
EXCLUDED UNDER SECTION 1.07, THE EMPLOYEE MUST BECOME A PARTICIPANT BY THE
EARLIER OF: (1) THE FIRST DAY OF THE PLAN YEAR BEGINNING AFTER THE DATE THE
EMPLOYEE COMPLETES THE AGE AND SERVICE REQUIREMENTS OF CODE SECTION 410(a); OR
(2) 6 MONTHS AFTER THE DATE THE EMPLOYEE COMPLETES THOSE REQUIREMENTS.]

DUAL ELIGIBILITY. The eligibility conditions of this Section 2.01 apply
to: (CHOOSE (j) OR (k))

[X]        (j)   All Employees of the Employer, except: (CHOOSE (1) OR (2))

           [X]   (1) No exceptions.

           [n/a] (2) Employees who are Participants in the Plan as of the
                 Effective Date.

[N/A]      (k)   Solely to an Employee employed by the Employer after __.
           If the Employee was employed by the Employer on or before the
           specified date, the Employee will become a Participant: (CHOOSE (1),
           (2) OR (3))

           [N/A] (1) On the latest of the Effective Date, his Employment
                 Commencement Date or the date he attains age __ (not to exceed
                 21).

           [N/A] (2) Under the eligibility conditions in effect under the Plan
                 prior to the restated Effective Date. If the restated Plan
                 required more than one Year of Service to participate, the
                 eligibility condition under this Option (2) for participation
                 in the Code Section 401(k) arrangement under this Plan is one
                 Year of Service for Plan Years beginning after December 31,
                 1988. [FOR RESTATED PLANS ONLY]

           [N/A] (3) (Specify) __.

           2.02  YEAR OF SERVICE - PARTICIPATION.

HOURS OF SERVICE. An Employee must complete: (CHOOSE (a) OR (b))

[X]        (a)  1,000 Hours of Service

[N/A]      (b)  __ Hours of Service

during an eligibility computation period to receive credit for a Year of
Service. [NOTE: THE HOURS OF SERVICE REQUIREMENT MAY NOT EXCEED 1,000.]

ELIGIBILITY COMPUTATION PERIOD. After the initial eligibility computation
period described in Section 2.02 of the Plan, the Plan measures the
eligibility computation period as: (CHOOSE (c) OR (d))

[N/A]      (c)  The 12 consecutive month period beginning with each
           anniversary of an Employee's Employment Commencement Date.

[X]        (d)  The Plan Year, beginning with the Plan Year which includes
           the first anniversary of the Employee's Employment Commencement
           Date.

                                       6


           2.03  BREAK IN SERVICE - PARTICIPATION. The Break in Service rule
described in Section 2.03(B) of the Plan: (CHOOSE (a) OR (b))

[X]        (a)  Does not apply to the Employer's Plan.

[N/A]      (b)  Applies to the Employer's Plan.

           2.06  ELECTION NOT TO PARTICIPATE. The Plan: (CHOOSE (a) OR (b))

[X]        (a)  Does not permit an eligible Employee or a Participant to elect
           not to participate.

[N/A]      (b)  Does permit an eligible Employee or a Participant to elect
           not to participate in accordance with Section 2.06 and with the
           following rules: (COMPLETE (1), (2), (3) AND (4))

                (1)   An election is effective for a Plan Year if filed no
                later than __.

                (2)   An election not to participate must be effective for at
                least __ Plan Year(s).

                (3)   Following a re-election to participate, the Employee or
                Participant:

                [N/A] (a) May not again elect not to participate for any
                      subsequent Plan Year.

                [N/A] (b) May again elect not to participate, but not earlier
                      than the __ Plan Year following the Plan Year in which the
                      re-election first was effective.

                (4)   (SPECIFY) __ [INSERT "N/A" IF NO OTHER RULES APPLY].

                                    ARTICLE III
                     EMPLOYER CONTRIBUTIONS AND FORFEITURES

           3.01  AMOUNT

PART I. [OPTIONS (a) THROUGH (g)] AMOUNT OF EMPLOYER'S CONTRIBUTION. The
Employer's annual contribution to the Trust will equal the total amount of
deferral contributions, matching contributions, qualified nonelective
contributions and nonelective contributions, as determined under this Section
3.01. (CHOOSE ANY COMBINATION OF (a), (b), (c) AND (d), OR CHOOSE (e))

[X]        (a)  DEFERRAL CONTRIBUTIONS (CODE SECTION 401(k) ARRANGEMENT).
           (CHOOSE (1) OR (2) OR BOTH)

           [X]   (1) Salary reduction arrangement. The Employer must contribute
                 the amount by which the Participants have reduced their
                 Compensation for the Plan Year, pursuant to their salary
                 reduction agreements on file with the Advisory Committee. A
                 reference in the Plan to salary reduction contributions is a
                 reference to these amounts.

           [N/A] (2) Cash or deferred arrangement. The Employer will contribute
                 on behalf of each Participant the portion of the Participant's
                 proportionate share of the cash or deferred contribution which
                 he has not elected to receive in cash. See Section 14.02 of the
                 Plan. The Employer's cash or deferred contribution is the
                 amount the Employer may from time to time deem advisable which
                 the Employer designates as a cash or deferred contribution
                 prior to making that contribution to the Trust.

[X]        (b)  MATCHING CONTRIBUTIONS. The Employer will make matching
           contributions in accordance with the formula(s) elected in Part II
           of this Adoption Agreement Section 3.01.

[X]        (c)  DESIGNATED QUALIFIED NONELECTIVE CONTRIBUTIONS. The Employer, in
           its sole discretion, may contribute an amount which it designates as
           a qualified nonelective contribution.

                                       7



[X]        (d)  NONELECTIVE CONTRIBUTIONS. (CHOOSE ANY COMBINATION OF (1)
           THROUGH (4))

           [X]   (1)  Discretionary contribution. The amount (or additional
                 amount) the Employer may from time to time deem advisable.

           [N/A] (2)  The amount (or additional amount) the Employer may
                 from time to time deem advisable, separately determined for
                 each of the following classifications of Participants:
                 (CHOOSE (a) OR (b))

                  [N/A] (a)  Nonhighly Compensated Employees and Highly
                         Compensated Employees.

                  [N/A] (b)  (SPECIFY CLASSIFICATIONS) __.

                         Under this Option (2), the Advisory Committee will
                         allocate the amount contributed for each Participant
                         classification in accordance with Part II of Adoption
                         Agreement Section 3.04, as if the Participants in
                         that classification were the only Participants in
                         the Plan.

           [N/A] (3) __% of the Compensation of all Participants under the Plan,
                 determined for the Employer's taxable year for which it makes
                 the contribution. [NOTE: THE PERCENTAGE SELECTED MAY NOT EXCEED
                 15%.]

           [N/A] (4) __% of Net Profits but not more than $__.

[N/A]      (e)  FROZEN PLAN. This Plan is a frozen Plan effective __. The
           Employer will not contribute to the Plan with respect to any period
           following the stated date.

NET PROFITS. The Employer: (CHOOSE (f) OR (g))

[X]        (f)  Need not have Net Profits to make its annual contribution under
            this Plan.

[N/A]      (g)  Must have current or accumulated Net Profits exceeding $__ to
           make the following contributions: (CHOOSE AT LEAST ONE)

           [N/A] (1) Cash or deferred contributions described in Option (a)(2)).

           [N/A] (2) Matching contributions described in Option (b), except: __.

           [N/A] (3) Qualified nonelective contributions described in
                 Option (c).

           [N/A] (4) Nonelective contributions described in Option (d).

The term "Net Profits" means the Employer's net income or profits for any
taxable year determined by the Employer upon the basis of its books of
account in accordance with generally accepted accounting practices
consistently applied without any deductions for Federal and state taxes upon
income or for contributions made by the Employer under this Plan or under any
other employee benefit plan the Employer maintains. The term "Net Profits"
specifically excludes N/A. [NOTE: ENTER "N/A" IF NO EXCLUSIONS APPLY.]

If the Employer requires Net Profits for matching contributions and the
Employer does not have sufficient Net Profits under Option (g), it will
reduce the matching contribution under a fixed formula on a prorata basis for
all Participants. A Participant's share of the reduced contribution will bear
the same ratio as the matching contribution the Participant would have
received if Net Profits were sufficient bears to the total matching
contribution all Participants would have received if Net Profits were
sufficient. If more than one member of a related group (as defined in Section
1.30) execute this Adoption Agreement, each participating member will
determine Net Profits separately but will not apply this reduction unless,
after combining the separately determined Net Profits, the aggregate Net
Profits are insufficient to satisfy the matching contribution liability.
"Net Profits" includes both current and accumulated Net Profits.

                                       8



PART II. (OPTIONS (h) THROUGH (j)] MATCHING CONTRIBUTION FORMULA. (NOTE: IF
THE EMPLOYER ELECTED OPTION (b), COMPLETE OPTIONS (h), (i) AND (j).]

[X]  (h)    AMOUNT OF MATCHING CONTRIBUTIONS. For each Plan Year, the Employer's
     matching contribution is: (CHOOSE ANY COMBINATION OF (1), (2), (3), (4) AND
     (5))

     [N/A]  (1)    An amount equal to __% of each Participant's eligible
            contributions for the Plan Year.

     [N/A]  (2)    An amount equal to __% of each Participant's first tier of
            eligible contributions for the Plan Year, plus the following
            matching percentage(s) for the following subsequent tiers of
            eligible contributions for the Plan Year: __.

     [X]    (3)    Discretionary formula.

            [X]    (i)  An amount (or additional amount) equal to a matching
                   percentage the Employer from time to time may deem advisable
                   of the Participant's eligible contributions for the Plan
                   Year.

            [N/A]  (ii)  An amount (or additional amount) equal to a matching
                   percentage the Employer from time to time may deem advisable
                   of each tier of the Participant's eligible contributions for
                   the Plan Year.

     [N/A]  (4)    An amount equal to the following percentage of each
            Participant's eligible contributions for the Plan Year, based on the
            Participant's Years of Service:



                Number of Years of Service              Matching Percentage
                --------------------------              -------------------
                                                         
                         ----                               ----
                         ----                               ----
                         ----                               ----
                         ----                               ----


            The Advisory Committee will apply this formula by determining Years
            of Service as follows: __.

     [N/A]  (5)    A Participant's matching contributions may not: (CHOOSE (a)
            OR (b))

            [N/A]  (a)  Exceed __.

            [N/A]  (b)  Be less than __.

     RELATED EMPLOYERS. If two or more related employers (as defined in Section
     1.30) contribute to this Plan, the related employers may elect different
     matching contribution formulas by attaching to the Adoption Agreement a
     separately completed copy of this Part II. NOTE: SEPARATE MATCHING
     CONTRIBUTION FORMULAS CREATE SEPARATE CURRENT BENEFIT STRUCTURES THAT MUST
     SATISFY THE MINIMUM PARTICIPATION TEST OF CODE SECTION 401(a)(26).]

[X]  (i)    DEFINITION OF ELIGIBLE CONTRIBUTIONS. Subject to the requirements of
     Option (j), the term "eligible contributions" means: (CHOOSE ANY
     COMBINATION OF (1) THROUGH (3))

     [X]    (1)    Salary reduction contributions.

     [N/A]  (2)    Cash or deferred contributions (including any part of the
            Participant's proportionate share of the cash or deferred
            contribution which the Employer defers without the Participant's
            election).


                                       9




     [N/A]  (3)    Participant mandatory contributions, as designated in
            Adoption Agreement Section 4.01. See Section 14.04 of the Plan.

[X]  (j)    AMOUNT OF ELIGIBLE CONTRIBUTIONS TAKEN INTO ACCOUNT. When
     determining a Participant's eligible contributions taken into account under
     the matching contributions formula(s), the following rules apply: (CHOOSE
     ANY COMBINATION OF (1) THROUGH (4))

     [N/A]  (1)    The Advisory Committee will take into account all eligible
            contributions credited for the Plan Year.

     [N/A]  (2)    The Advisory Committee will disregard eligible contributions
            exceeding __.

     [N/A]  (3)    The Advisory Committee will treat as the first tier of
            eligible contributions, an amount not exceeding: __.
            The subsequent tiers of eligible contributions are: __.

     [X]    (4)    (SPECIFY) AN AMOUNT DETERMINED IN ITS DISCRETION.

PART III. [OPTIONS (k) AND (l)]. SPECIAL RULES FOR CODE SECTION 401(k)
ARRANGEMENT. (CHOOSE (k) OR (l), OR BOTH, AS APPLICABLE)

[X]  (k)    SALARY REDUCTION AGREEMENTS. The following rules and restrictions
     apply to an Employee's salary reduction agreement: (MAKE A SELECTION UNDER
     (1), (2), (3) AND (4))

     (1)    Limitation on amount. The Employee's salary reduction
     contributions: (CHOOSE (a) OR AT LEAST ONE OF (b) OR (c))

     [N/A]  (a)    No maximum limitation other than as provided in the Plan.

     [X]    (b)    May not exceed 20% of Compensation for the Plan Year, subject
            to the annual additions limitation described in Part 2 of Article
            III and the 402(g) limitation described in Section 14.07 of the
            Plan.

     [N/A]  (c)    Based on percentages of Compensation must equal at least __.

     (2)    An Employee may revoke, on a prospective basis, a salary reduction
     agreement: (CHOOSE (a), (b), (c) OR (d))

     [N/A]  (a)    Once during any Plan Year but not later than __ of the Plan
            Year.

     [X]    (b)    As of any Plan Entry Date.

     [N/A]  (c)    As of the first day of any month.

     [N/A]  (d)    (SPECIFY, BUT MUST BE AT LEAST ONCE PER PLAN YEAR) __.

     (3)    An Employee who revokes his salary reduction agreement may file a
     new salary reduction agreement with an effective date: (CHOOSE (a), (b),
     (c) OR (d))

     [N/A]  (a)    No earlier than the first day of the next Plan Year.

     [N/A]  (b)    As of any subsequent Plan Entry Date.

     [N/A]  (c)    As of the first day of any month subsequent to the month in
            which he revoked an Agreement.

     [X]    (d)    (SPECIFY, BUT MUST BE AT LEAST ONCE PER PLAN YEAR FOLLOWING
            THE PLAN YEAR OF REVOCATION) ON THE NEXT OPEN ENROLLMENT PERIOD AS
            DEFINED BY EMPLOYER POLICY.


                                      10


       (4)    A Participant may increase or may decrease, on a prospective
       basis, his salary reduction percentage or dollar amount: (CHOOSE (a),
       (b), (c) OR (d))

       [X]    (a)    As of the beginning of each payroll period.

       [N/A]  (b)    As of the first day of each month

       [N/A]  (c)    As of any Plan Entry Date.

       [X]    (d)    (SPECIFY, BUT MUST PERMIT AN INCREASE OR A DECREASE AT
              LEAST ONCE PER PLAN YEAR) HOWEVER, AN INCREASE FROM A "ZERO"
              PERCENTAGE CAN BE MADE ONLY AT THE NEXT PAYROLL ENROLLMENT PERIOD.

[N/A]  (1)    CASH OR DEFERRED CONTRIBUTIONS. For each Plan Year for which the
       Employer makes a designated cash or deferred contribution, a  Participant
       may elect to receive directly in cash not more than the following portion
       (or, if less, the 402(g) limitation described in Section 14.07 of the
       Plan) of his proportionate share of that cash or deferred contribution:
       (CHOOSE (1) OR (2))

       [N/A]  (1)    All or any portion.

       [N/A]  (2)    __%.

       3.04 CONTRIBUTION ALLOCATION. The Advisory Committee will allocate
deferral contributions, matching contributions, qualified nonelective
contributions and nonelective contributions in accordance with Section 14.06
and the elections under this Adoption Agreement Section 3.04.

PART 1. [OPTIONS (a) THROUGH (d)]. SPECIAL ACCOUNTING ELECTIONS. (CHOOSE
WHICHEVER ELECTIONS ARE APPLICABLE TO THE EMPLOYER'S PLAN)

[X]    (a)    MATCHING CONTRIBUTIONS ACCOUNT. The Advisory Committee will
       allocate matching contributions to a Participant's: (CHOOSE (1) OR (2);
       (3) IS AVAILABLE ONLY IN ADDITION TO (1))

       [X]    (1)    Regular Matching Contributions Account.

       [X]    (2)    Qualified Matching Contributions Account.

       [X]    (3)    Except, matching contributions under Option(s) (1) OR (2)
              MAY BE DESIGNATED OR REDESIGNATED AS SUCH BY THE EMPLOYER TO THE
              EXTENT PERMITTED BY LAW, REGARDLESS OF WHETHER THE PLAN PROVIDES
              THAT SUCH MATCHING CONTRIBUTIONS UNDER THE RULE of Adoption
              Agreement Section 3.01 are allocable to the Qualified Matching
              Contributions Account.

[N/A]  (b)    SPECIAL ALLOCATION DATES FOR SALARY REDUCTION CONTRIBUTIONS. The
       Advisory Committee will allocate salary reduction contributions as of the
       Accounting Date and as of the following additional allocation dates: __.

[N/A]  (c)    SPECIAL ALLOCATION DATES FOR MATCHING CONTRIBUTIONS. The Advisory
       Committee will allocate matching contributions as of the Accounting Date
       and as of the following additional allocation dates: __.

[X]    (d)    DESIGNATED QUALIFIED NONELECTIVE CONTRIBUTIONS - DEFINITION OF
       PARTICIPANT. For purposes of allocating the designated qualified
       nonelective contribution, "Participant" means. (CHOOSE (1) OR (2))

       [N/A]  (1)    All Participants.

       [X]    (2)    Participants who are Nonhighly Compensated Employees for
              the Plan Year.

       [N/A]  (3)    (Specify) __.


                                      11



PART II. METHOD OF ALLOCATION - NONELECTIVE CONTRIBUTION. Subject to any
restoration allocation required under Section 5.04, the Advisory Committee will
allocate and credit each annual nonelective contribution (and Participant
forfeitures treated as nonelective contributions) to the Employer Contributions
Account of each Participant who satisfies the conditions of Section 3.06, in
accordance with the allocation method selected under this Section 3.04. If the
Employer elects Option (e)(2), Option (g)(2) or Option (h), for the first 3% of
Compensation allocated to all Participants, "Compensation" does not include any
exclusions elected under Adoption Agreement Section 1.12 (other than the
exclusion of elective contributions), and the Advisory Committee must take into
account the Participant's Compensation for the entire Plan Year. (CHOOSE AN
ALLOCATION METHOD UNDER (e), (f), (g) OR (h), (i) IS MANDATORY IF THE EMPLOYER
ELECTS (f), (g) OR (h); (j) IS OPTIONAL IN ADDITION TO ANY OTHER ELECTION.)

[X]    (e)    NONINTEGRATED ALLOCATION FORMULA. (CHOOSE (1) OR (2))

       [N/A]  (1)    The Advisory Committee will allocate the annual nonelective
       contributions in the same ratio that each Participant's Compensation for
       the Plan Year bears to the total Compensation of all Participants for the
       Plan Year.

       [X]    (2)    The Advisory Committee will allocate the annual nonelective
       contributions in the same ratio that each Participant's Compensation for
       the Plan Year bears to the total Compensation of all Participants for
       the Plan Year. For purposes of this Option (2), "Participant" means, in
       addition to a Participant who satisfies the requirements of Section 3.06
       for the Plan Year, any other Participant entitled to a top heavy minimum
       allocation under Section 3.04(B), but such Participant's allocation will
       not exceed 3% of his Compensation for the Plan Year.

[n/a]  (f)    TWO-TIERED INTEGRATED ALLOCATION FORMULA - MAXIMUM DISPARITY.
       First, the Advisory Committee will allocate the annual Employer
       nonelective contributions in the same ratio that each Participant's
       Compensation plus Excess Compensation for the Plan Year bears to the
       total Compensation plus Excess Compensation of all Participants for the
       Plan Year. The allocation under this paragraph, as a percentage of each
       Participant's Compensation plus Excess Compensation, must not exceed the
       applicable percentage (5.7%, 5.4% or 4.3%) listed under the Maximum
       Disparity Table following Option (i).

       The Advisory Committee then will allocate any remaining nonelective
       contributions in the same ratio that each Participant's Compensation for
       the Plan Year bears to the total Compensation of all Participants for
       the Plan Year.

[N/A]  (g)    THREE-TIERED INTEGRATED ALLOCATION FORMULA. First, the Advisory
       Committee will allocate the annual Employer nonelective contributions in
       the same ratio that each Participant's Compensation for the Plan Year
       bears to the total Compensation of all Participants for the Plan Year.
       The allocation tinder this paragraph, as a percentage of each
       Participant's Compensation may not exceed the applicable percentage
       (5.7%, 5.4% or 4.3%) listed under the Maximum Disparity Table following
       Option (i). Solely for purposes of the allocation in this first
       paragraph, "Participant" means, in addition to a Participant who
       satisfies the requirements of Section 3.06 for the Plan Year. (CHOOSE (1)
       OR (2))

       [N/A]  (1)    No other Participant.

       [N/A]  (2)    Any other Participant entitled to a top heavy minimum
              allocation under Section 3.04(B), but such Participant's
              allocation under this Option (g) will not exceed 3% of his
              Compensation for the Plan Year.

       As a second tier allocation, the Advisory Committee will allocate the
       nonelective contributions in the same ratio that each Participant's
       Excess Compensation for the Plan Year bears to the total Excess
       Compensation of all Participants for the Plan Year. The allocation under
       this paragraph, as a percentage of each Participant's Excess
       Compensation, may not exceed the allocation percentage in the first
       paragraph.


                                      12



       Finally, the Advisory Committee will allocate any remaining nonelective
       contributions in the same ratio that each Participant's Compensation for
       the Plan Year bears to the total Compensation of all Participants for the
       Plan Year.

[N/A]  (h)    FOUR-TIERED INTEGRATED ALLOCATION FORMULA. First, the Advisory
       Committee will allocate the annual Employer nonelective contributions in
       the same ratio that each Participant's Compensation for the Plan Year
       bears to the total Compensation of all Participants for the Plan Year,
       but not exceeding 3% of each Participant's Compensation. Solely for
       purposes of this first tier allocation, a "Participant" means, in
       addition to any Participant who satisfies the requirements of Section
       3.06 for the Plan Year, any other Participant entitled to a top heavy
       minimum allocation under Section 3.04(B) of the Plan.

       As a second tier allocation, the Advisory Committee will allocate the
       nonelective contributions in the same ratio that each Participant's
       Excess Compensation for the Plan Year bears to the total Excess
       Compensation of all Participants for the Plan Year, but not exceeding 3%
       of each Participant's Excess Compensation.

       As a third tier allocation, the Advisory Committee will allocate the
       annual Employer contributions in the same ratio that each Participant's
       Compensation plus Excess Compensation for the Plan Year bears to the
       total Compensation plus Excess Compensation of all Participants for the
       Plan Year. The allocation under this paragraph, as a percentage of each
       Participant's Compensation plus Excess Compensation, must not exceed the
       applicable percentage (2.7%, 2.4% or 1.3%) listed under the Maximum
       Disparity Table following Option (i).

       The Advisory Committee then will allocate any remaining nonelective
       contributions in the same ratio that each Participant's Compensation for
       the Plan Year bears to the total Compensation of all Participants for the
       Plan Year.

[N/A]  (i)    EXCESS COMPENSATION. For purposes of Option (f), (g) or (h),
       "Excess Compensation" means Compensation in excess of the following
       Integration Level: (CHOOSE (1) OR (2))

       [N/A]  (1)    __% (not exceeding 100%) of the taxable wage base, as
              determined under Section 230 of the Social Security Act, in effect
              on the first day of the Plan Year: (CHOOSE ANY COMBINATION OF (a)
              AND (b) OR CHOOSE (c))

              [N/A]  (a)  Rounded to __ (but not exceeding the taxable wage
                     base).

              [N/A]  (b)  But not greater than $__.

              [N/A]  (c)  Without any further adjustment or limitation.

       [N/A]  (2)    $__ [NOTE: NOT EXCEEDING THE TAXABLE WAGE BASE FOR THE PLAN
              YEAR IN WHICH THIS ADOPTION AGREEMENT FIRST IS EFFECTIVE.]


                                      13


MAXIMUM DISPARITY TABLE. For purposes of Options (f), (g) and (h), the
applicable percentage is:



         Integration Level (as               Applicable Percentages for        Applicable Percentages
   percentage of taxable wage base)           Option (f) or Option (g)              for Option (h)
   --------------------------------          -------------------------         ----------------------
                                                                         
100%                                                     5.7%                            2.7%
More than 80% but less than 100%                         5.4%                            2.4%
More than 20% (but not less than $10,001)
and not more than 80%                                    4.3%                            1.3%
20% (or $10,000, if greater) or less                     5.7%                            2.7%


[N/A]    (j) ALLOCATION OFFSET. The Advisory Committee will reduce a
         Participant's allocation otherwise made under Part II of this Section
         3.04 by the Participant's allocation under the following qualified
         plan(s) maintained by the Employer:________________.

         The Advisory Committee will determine this allocation reduction:
         (CHOOSE (1) OR (2))

         [N/A](1) By treating the term "nonelective contribution" as including
                  all amounts paid or accrued by the Employer during the Plan
                  Year to the qualified plan(s) referenced under this
                  Option (j). If a Participant under this Plan also participates
                  in that other plan, the Advisory Committee will treat the
                  amount the Employer contributes for or during a Plan Year on
                  behalf of a particular Participant under such other plan as an
                  amount allocated under this Plan to that Participant's Account
                  for that Plan Year. The Advisory Committee will make the
                  computation of allocation required under the immediately
                  preceding sentence before making any allocation of nonelective
                  contributions under this Section 3.04.

         [N/A](2) In accordance with the formula provided in an addendum to this
                  Adoption Agreement, numbered 3.04(j).

TOP HEAVY MINIMUM ALLOCATION - METHOD OF COMPLIANCE. If a Participant's
allocation under this Section 3.04 is less than the top heavy minimum allocation
to which he is entitled under Section 3.04(B): (CHOOSE (k) OR (l))

[X]      (k) The Employer will make any necessary additional contribution to the
         Participant's Account, as described in Section 3.04(B)(7)(a) of the
         Plan.

[N/A]    (l) The Employer will satisfy the top heavy minimum allocation under
         the following plan(s) it maintains:_____________. However, the Employer
         will make any necessary additional contribution to satisfy the top
         heavy minimum allocation for an Employee covered only under this Plan
         and not under the other plan(s) designated in this Option (l). See
         Section 3.04(B)(7)(b) of the Plan.

If the Employer maintains another plan, the Employer may provide in an addendum
to this Adoption Agreement, numbered Section 3.04, any modifications to the Plan
necessary to satisfy the top heavy requirements under Code Section 416.

RELATED EMPLOYERS. If two or more related employers (as defined in Section 1.30)
contribute to this Plan, the Advisory Committee must allocate all Employer
nonelective contributions (and forfeitures treated as nonelective contributions)
to each Participant in the Plan, in accordance with the elections in this
Adoption Agreement Section 3.04: (CHOOSE (m) OR (n))

[N/A]    (m) Without regard to which contributing related group member employs
         the Participant.

[N/A]    (n) Only to the Participants directly employed by the contributing
         Employer. If a Participant receives Compensation from more than one
         contributing Employer, the Advisory Committee will determine the
         allocations


                                       14


         under this Adoption Agreement Section 3.04 by prorating among the
         participating Employers the Participant's Compensation and, if
         applicable, the Participant's Integration Level under Option (i).

     3.05 FORFEITURE ALLOCATION. Subject to any restoration allocation required
under Sections 5.04 or 9.14, the Advisory Committee will allocate a Participant
forfeiture in accordance with Section 3.04: (CHOOSE (a) OR (b); (c) AND (d)
ARE OPTIONAL IN ADDITION TO (a) OR (b))

[X]      (a) As an Employer nonelective contribution for the Plan Year in which
         the forfeiture occurs, as if the Participant forfeiture were an
         additional nonelective contribution for that Plan Year.

[N/A]    (b) To reduce the Employer matching contributions and nonelective
         contributions for the Plan Year: (CHOOSE (1) OR (2))

         [N/A]    (1) in which the forfeiture occurs.

         [N/A]    (2) immediately following the Plan Year in which the
                  forfeiture occurs.

[X]      (c) To the extent attributable to matching contributions: (CHOOSE (1),
         (2) OR (3))

         [X]      (1) In the manner elected under Options (a) or (b).

         [N/A]    (2) First to reduce Employer matching contributions for the
                  Plan Year: (CHOOSE (a) OR (b))

                  [N/A]    (a) in which the forfeiture occurs,

                  [N/A]    (b) immediately following the Plan Year in which the
                           forfeiture occurs, then as elected in Options (a) or
                           (b).

         [N/A]    (3) As a discretionary matching contribution for the Plan Year
                  in which the forfeiture occurs, in lieu of the manner elected
                  under Options (a) or (b).

[X]      (d) First to reduce the Plan's ordinary and necessary administrative
         expenses for the Plan Year and then will allocate any remaining
         forfeitures in the manner described in Options (a), (b) or (c),
         whichever applies. If the Employer elects Option (c), the forfeitures
         used to reduce Plan expenses: (CHOOSE (1) OR (2))

         [X]      (1) relate proportionately to forfeitures described in Option
                  (c) and to forfeitures described in Options (a) or (b).

         [N/A]    (2) relate first to forfeitures described in Option_________.

ALLOCATION OF FORFEITED EXCESS AGGREGATE CONTRIBUTIONS. The Advisory Committee
will allocate any forfeited excess aggregate contributions (as described in
Section 14.09): (CHOOSE (e), (f) OR (g))

[X]      (e) To reduce Employer matching contributions for the Plan Year:
         (CHOOSE (1) OR (2))

         [X]      (1) in which the forfeiture occurs.

         [N/A]    (2) immediately following the Plan Year in which the
                  forfeiture occurs.

[N/A]    (f) As Employer discretionary matching contributions for the Plan Year
         in which forfeited, except the Advisory Committee will not allocate
         these forfeitures to the Highly Compensated Employees who incurred the
         forfeitures.


                                       15


[N/A]    (g) In accordance with Options (a) through (d), whichever applies,
         except the Advisory Committee will not allocate these forfeitures under
         Option (a) or under Option (c)(3) to the Highly Compensated Employees
         who incurred the forfeitures.

     3.06 ACCRUAL OF BENEFIT.

COMPENSATION TAKEN INTO ACCOUNT. For the Plan Year in which the Employee first
becomes a Participant, the Advisory Committee will determine the allocation of
any cash or deferred contribution, designated qualified nonelective contribution
by taking into account: (CHOOSE (a) OR (b))

[X]      (a) The Employee's Compensation for the entire Plan Year.

[N/A]    (b) The Employee's Compensation for the portion of the Plan Year in
         which the Employee actually is a Participant in the Plan.

ACCRUAL REQUIREMENTS. Subject to the suspension of accrual requirements of
Section 3.06(E) of the Plan, to receive an allocation of cash or deferred
contributions, matching contributions, designated qualified nonelective
contributions, nonelective contributions and Participant forfeitures, if any,
for the Plan Year, a Participant must satisfy the conditions described in the
following elections: (CHOOSE (c), OR AT LEAST ONE OF (d) THROUGH (f))

[N/A]    (c) SAFE HARBOR RULE. If the Participant is employed by the Employer on
         the last day of the Plan Year, the Participant must complete at least
         one Hour of Service for that Plan Year. If the Participant is not
         employed by the Employer on the last day of the Plan Year, the
         Participant must complete at least 501 Hours of Service during the Plan
         Year.

[X]      (d) HOURS OF SERVICE CONDITION. The Participant must complete the
         following minimum number of Hours of Service during the Plan Year:
         (CHOOSE AT LEAST ONE OF (1) THROUGH (5))

         [X]      (1) 1,000 Hours of Service.

         [N/A]    (2) (SPECIFY, BUT THE NUMBER OF HOURS OF SERVICE MAY NOT
                  EXCEED 1,000)____________.

         [N/A]    (3) No Hour of Service requirement if the Participant
                  terminates employment during the Plan Year on account of:
                  (CHOOSE (a), (b) OR (c))

                  [N/A]    (a) Death.

                  [N/A]    (b) Disability.

                  [N/A]    (c) Attainment of Normal Retirement Age in the
                           current Plan Year or in a prior Plan Year.

         [N/A]    (4) ____ Hours of Service (not exceeding 1,000) if the
                  Participant terminates employment with the Employer during
                  the Plan Year, subject to any election in Option (3).

         [X]      (5) No Hour of Service requirement for an allocation of the
                  following contributions: MATCHING CONTRIBUTIONS.

[X]      (e) EMPLOYMENT CONDITION. The Participant must be employed by the
         Employer on the last day of the Plan Year, irrespective of whether he
         satisfies any Hours of Service condition under Option (d), with the
         following exceptions: (CHOOSE (1) OR AT LEAST ONE OF (2) THROUGH (5))

         [X]      (1) No exceptions.

         [N/A]    (2) Termination of employment because of death.


                                       16


         [N/A]    (3) Termination of employment because of disability.

         [N/A]    (4) Termination of employment following attainment of Normal
                  Retirement Age.

         [X]      (5) No employment condition for the following contributions:
                  MATCHING CONTRIBUTIONS.

[N/A]    (f) (SPECIFY OTHER CONDITIONS, IF APPLICABLE): ____.

SUSPENSION ACCRUAL REQUIREMENTS. The suspension of accrual requirements of
Section 3.06(E) of the Plan. (CHOOSE (g), (h) OR (i))

[N/A]    (g) Applies to the Employer's Plan.

[X]      (h) Does not apply to the Employer's Plan.

[N/A]    (i) Applies in modified form to the Employer's Plan, as described in an
         addendum to this Adoption Agreement, numbered Section 3.06(E).

SPECIAL ACCRUAL REQUIREMENTS FOR MATCHING CONTRIBUTIONS. If the Plan allocates
matching contributions on two or more allocation dates for a Plan Year, the
Advisory Committee, unless otherwise specified in Option (l), will apply any
Hours of Service condition by dividing the required Hours of Service on a
prorata basis to the allocation periods included in that Plan Year. Furthermore,
a Participant who satisfies the conditions described in this Adoption Agreement
Section 3.06 will receive an allocation of matching contributions (and
forfeitures treated as matching contributions) only if the Participant
satisfies the following additional condition(s): (CHOOSE (j) OR AT LEAST ONE OF
(k) OR (l))

[N/A]    (j)  No additional conditions.

[N/A]    (k) The Participant is not a Highly Compensated Employee for the
         Plan Year. This Option (k) applies to: (CHOOSE (1) OR (2))

         [N/A]    (1) All matching contributions.

         [N/A]    (2) Matching contributions described in Option(s) ______ of
                  Adoption Agreement Section 3.01.

[N/A]    (l) (SPECIFY) __.

     3.15 MORE THAN ONE PLAN LIMITATION. If the provisions of Section 3.15
apply, the Excess Amount attributed to this Plan equals: (CHOOSE (a), (b) OR
(c))

[N/A]    (a) The product of:

                  (1) the total Excess Amount allocated as of such date
                  (including any amount which the Advisory Committee would have
                  allocated but for the limitations of Code Section 415), times

                  (2) the ratio of (1) the amount allocated to the Participant
                  as of such date under this Plan divided by (2) the total
                  amount allocated as of such date under all qualified defined
                  contribution plans (determined without regard to the
                  limitations of Code Section 415).

[X]      (b) The total Excess Amount.

[N/A]    (c) None of the Excess Amount.


                                       17





     3.18 DEFINED BENEFIT PLAN LIMITATION.

APPLICATION OF LIMITATION. The limitation under Section 3.18 of the Plan (CHOOSE
(a) OR (b))

[X]      (a) Does not apply to the Employer's Plan because the Employer does not
         maintain and never has maintained a defined benefit plan covering any
         Participant in this Plan.

[N/A]    (b) Applies to the Employer's Plan. To the extent necessary to satisfy
         the limitation under Section 3.18, the Employer will reduce: (CHOOSE
         (1) OR (2))

         [N/A]    (1) The Participant's projected annual benefit under the
                  defined benefit plan under which the Participant participates.

         [N/A]    (2) Its contribution or allocation on behalf of the
                  Participant to the defined contribution plan under which the
                  Participant participates and then, if necessary, the
                  Participant's projected annual benefit under the defined
                  benefit plan under which the Participant participates.

(NOTE: IF THE EMPLOYER SELECTS (a), THE REMAINING OPTIONS IN THIS SECTION 3.18
DO NOT APPLY TO THE EMPLOYER'S PLAN.

COORDINATION WITH TOP HEAVY MINIMUM ALLOCATION. The Advisory Committee will
apply the top heavy minimum allocation provisions of Section 3.04(B) of the Plan
with the following modifications: (CHOOSE (c) OR AT LEAST ONE OF (d) OR (e))

[N/A]    (c) No modifications.

[N/A]    (d) For Non-Key Employees participating only in this Plan, the top
         heavy minimum allocation is the minimum allocation described in
         Section 3.04(B) determined by substituting _% (not less than 4%) for
         "3%," except: (CHOOSE (1) OR (2))

         [N/A]    (1) No exceptions.

         [N/A]    (2) Plan Years in which the top heavy ratio exceeds 90%.

[N/A]    (e) For Non-Key Employees also participating in the defined benefit
         plan, the top heavy minimum is: (CHOOSE (1) OR (2))

         [N/A]    (1) 5% of Compensation (as determined under Section 3.04(B) of
                  the Plan) irrespective of the contribution rate of any Key
                  Employee, except: (CHOOSE (i) or (ii))

                  [N/A]    (a) No exceptions.

                  [N/A]    (b) Substituting "7 1/2%" for "5%" if the top heavy
                           ratio does not exceed 90%.

         [N/A]    (2) 0%. [NOTE: THE EMPLOYER MAY NOT SELECT THIS OPTION (2)
                  UNLESS THE DEFINED BENEFIT PLAN SATISFIES THE TOP HEAVY
                  MINIMUM BENEFIT REQUIREMENTS OF CODE SECTION 416 FOR THESE
                  NON-KEY EMPLOYEES.]

ACTUARIAL ASSUMPTIONS FOR TOP HEAVY CALCULATION. To determine the top heavy
ratio, the Advisory Committee will use the following interest rate and
mortality assumptions to value accrued benefits under a defined benefit
plan: __.

If the elections under this Section 3.18 are not appropriate to satisfy the
limitations of Section 3.18, or the top heavy requirements under Code Section
416, the Employer must provide the appropriate provisions in an addendum to
this Adoption Agreement.

                                       18



                                   ARTICLE IV
                           PARTICIPANT CONTRIBUTIONS

     4.01 PARTICIPANT NONDEDUCTIBLE CONTRIBUTIONS. The Plan: (CHOOSE (a) OR (b),
(c) IS AVAILABLE ONLY WITH (b))

[X]      (a) Does not permit Participant nondeductible contributions.

[N/A]    (b) Permits Participant nondeductible contributions, pursuant to
         Section 14.04 of the Plan.

[N/A]    (c) The following portion of the Participant's nondeductible
         contributions for the Plan Year are mandatory contributions under
         Option (i)(3) of Adoption Agreement Section 3.01: (Choose (1) OR (2))

         [N/A]    (1) The amount which is not less than: _.

         [N/A]    (2) The amount which is not greater than: _.

ALLOCATION DATES. The Advisory Committee will allocate nondeductible
contributions for each Plan Year as of the Accounting Date and the following
additional allocation dates: (CHOOSE (d) OR (e))

[N/A]    (d) No other allocation dates.

[N/A]    (e) (SPECIFY) _.

As of an allocation date, the Advisory Committee will credit all nondeductible
contributions made for the relevant allocation period. Unless otherwise
specified in (e), a nondeductible contribution relates to an allocation period
only if actually made to the Trust no later than 30 days after that allocation
period ends.

     4.05 PARTICIPANT CONTRIBUTION - WITHDRAWAL/DISTRIBUTION. Subject to the
restrictions of Article VI, the following distribution options apply to a
Participant's Mandatory Contributions Account, if any, prior to his Separation
from Service: (CHOOSE (a) OR AT LEAST ONE OF (b) THROUGH (d))

[N/A]    (A) No distribution options prior to Separation from Service.

[N/A]    (b) The same distribution options applicable to the Deferral
         Contributions Account prior to the Participant's Separation from
         Service, as elected in Adoption Agreement Section 6.03.

[N/A]    (c) Until he retires, the Participant has a continuing election to
         receive all or any portion of his Mandatory Contributions Account if:
         (CHOOSE (1) OR AT LEAST ONE OF (2) THROUGH (4))

         [N/A]    (1) No conditions.

         [N/A]    (2) The mandatory contributions have accumulated for at least
                  ___ Plan Years since the Plan Year for which contributed.

         [N/A]    (3) The Participant suspends making nondeductible
                  contributions for a period of _ months.

         [N/A]    (4) (SPECIFY) _.

[N/A]    (d) (SPECIFY) _.


                                       19



                                    ARTICLE V
                  TERMINATION OF SERVICE - PARTICIPANT VESTING

         5.01     NORMAL RETIREMENT. Normal Retirement Age under the Plan is:
                  (CHOOSE (a) OR (b))

[X]      (a) 65 [STATE AGE, BUT MAY NOT EXCEED AGE 65]

[N/A]    (b) The later of the date the Participant attains _ years of age or
         the _ anniversary of the first day of the Plan Year in which the
         Participant commenced participation in the Plan. (THE AGE SELECTED MAY
         NOT EXCEED AGE 65 AND THE ANNIVERSARY SELECTED MAY NOT EXCEED THE 5TH.]

     5.02 PARTICIPANT DEATH OR DISABILITY. The 100% vesting rule under Section
5.02 of the Plan: (CHOOSE (a) OR CHOOSE ONE OR BOTH OF (b) AND (c))

[N/A]    (a) Does not apply.

[X]      (b) Applies to death.

[X]      (c) Applies to disability.

         5.03     VESTING SCHEDULE.

DEFERRAL CONTRIBUTIONS ACCOUNT/QUALIFIED MATCHING CONTRIBUTIONS
ACCOUNT/QUALIFIED NONELECTIVE CONTRIBUTIONS ACCOUNT/MANDATORY CONTRIBUTIONS
ACCOUNT. A Participant has a 100% Nonforfeitable interest at all times in his
Deferral Contributions Account, his Qualified Matching Contributions Account,
his Qualified Nonelective Contributions Account and in his Mandatory
Contributions Account.

REGULAR MATCHING CONTRIBUTIONS ACCOUNT/EMPLOYER CONTRIBUTIONS ACCOUNT. With
respect to a Participant's Regular Matching Contributions Account and Employer
Contributions Account, the Employer elects the following vesting schedule:
(CHOOSE (a) OR (b); (c) AND (d) ARE AVAILABLE ONLY AS ADDITIONAL OPTIONS)

[N/A]    (a) Immediate vesting. 100% Nonforfeitable at all times. [Note: THE
         EMPLOYER MUST ELECT OPTION (a) IF THE ELIGIBILITY CONDITIONS UNDER
         ADOPTION AGREEMENT SECTION 2.01 (c) REQUIRE 2 YEARS OF SERVICE OR MORE
         THAN 12 MONTHS OF EMPLOYMENT.]

[X]      (b) Graduated Vesting Schedules.



              TOP HEAVY SCHEDULE                NON TOP HEAVY SCHEDULE
                  (MANDATORY)                            (OPTIONAL)

Years of            Nonforfeitable       Years of        Nonforfeitable
Service               Percentage         Service            Percentage
                                                    
Less than 1               0%             Less than 1            0%
     1                   20%              1                    20%
     2                   40%              2                    40%
     3                   60%              3                    60%
     4                   80%              4                    80%
     5                  100%              5                   100%
 6 or more              100%              6                   100%
                                      7 or more               100%



                                       20


[N/A]    (c) Special vesting election for Regular Matching Contributions
         Account. In lieu of the election under Options (a) or (b), the Employer
         elects the following vesting schedule for a Participant's Regular
         Matching Contributions Account: (CHOOSE (1) OR (2))

         [N/A]    (1) 100% Nonforfeitable at all times.

         [N/A]    (2) In accordance with the vesting schedule described in the
                  addendum to this Adoption Agreement, numbered 5.03(c). [NOTE:
                  IF THE EMPLOYER ELECTS THIS OPTION (c)(2), THE ADDENDUM MUST
                  DESIGNATE THE APPLICABLE VESTING SCHEDULE(S) USING THE SAME
                  FORMAT AS USED IN OPTION (b).]

[NOTE: UNDER OPTIONS (b) AND (c)(2), THE EMPLOYER MUST COMPLETE A TOP HEAVY
SCHEDULE WHICH SATISFIES CODE Section 416. THE EMPLOYER, AT ITS OPTION, MAY
COMPLETE A NON TOP HEAVY SCHEDULE. THE NON TOP HEAVY SCHEDULE MUST SATISFY
CODE SECTION 411(a)(2). ALSO SEE SECTION 7.05 OF THE PLAN.]

(d)      The Top Heavy Schedule under Option (b) (and, if applicable, under
         Option (c)(2)) APPLIES: (CHOOSE (1) OR (2))

         (X]      (1) Only in a Plan Year for which the Plan is top heavy.

         [N/A]    (2) In the Plan Year for which the Plan first is top heavy and
                  then in all subsequent Plan Years. [NOTE: THE EMPLOYER MAY NOT
                  ELECT OPTION (d) UNLESS IT HAS COMPLETED A NON TOP HEAVY
                  SCHEDULE.]

MINIMUM VESTING. (CHOOSE (e) OR (f))

[X]      (e) The Plan does not apply a minimum vesting rule.

[N/A]    (f) A Participant's Nonforfeitable Accrued Benefit will never be less
         than the lesser of $__ or his entire Accrued Benefit, even if the
         application of a graduated vesting schedule under Options (b) or (c)
         would result in a smaller Nonforfeitable Accrued Benefit.

LIFE INSURANCE INVESTMENTS. The Participant's Accrued Benefit attributable to
insurance contracts purchased on his behalf under Article XI is: (CHOOSE (g) OR
(h))

[N/A]    (g) Subject to the vesting election under Options (a), (b) or (c).

[X]      (h) 100% Nonforfeitable at all times, irrespective of the vesting
         election under Options (b) or (c)(2).

     5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION OF
FORFEITED ACCRUED BENEFIT. The deemed cash-out rule described in Section 5.04(C)
of the Plan: (CHOOSE (a) OR (b))

[N/A]    (a) Does not apply.

[X]      (b) Will apply to determine the timing of forfeitures for 0% vested
         Participants. A Participant is not a 0% vested Participant if he has a
         Deferral Contributions Account.


                                       21




     5.06 YEAR OF SERVICE - VESTING.

VESTING COMPUTATION PERIOD. The Plan measures a Year of Service on the basis
of the following 12 consecutive month periods: (CHOOSE (a) OR (b))

[X]      (a) Plan Years.

[N/A]    (b) Employment Years. An Employment Year is the 12 consecutive month
         period measured from the Employee's Employment Commencement Date and
         each successive 12 consecutive month period measured from each
         anniversary of that Employment Commencement Date.

HOURS OF SERVICE. The minimum number of Hours of Service an Employee must
complete during a vesting computation period to receive credit for a Year of
Service is: (CHOOSE (c) OR (d))

[X]      (c) 1,000 Hours of Service.

[N/A]    (d) ___ Hours of Service. [NOTE: THE HOURS OF SERVICE REQUIREMENT MAY
         NOT EXCEED 1,000.]

     5.08 INCLUDED YEARS OF SERVICE - VESTING. The Employer specifically
excludes the following Years of Service: (CHOOSE (a) OR AT LEAST ONE OF (b)
THROUGH (e))

[X]      (a) None other than as specified in Section 5.08(a) of the Plan.

[N/A]    (b) Any Year of Service before the Participant attained the age of _.
         [NOTE: THE AGE SELECTED MAY NOT EXCEED AGE 18.]

[N/A]    (c) Any Year of Service during the period the Employer did not maintain
         this Plan or a predecessor plan.

[N/A]    (d) Any Year of Service before a Break in Service if the number of
         consecutive Breaks in Service equals or exceeds the greater of 5 or the
         aggregate number of the Years of Service prior to the Break. This
         exception applies only if the Participant is 0% vested in his Accrued
         Benefit derived from Employer contributions at the time he has a Break
         in Service. Furthermore, the aggregate number of Years of Service
         before a Break in Service do not include any Years of Service not
         required to be taken into account under this exception by reason of any
         prior Break in Service.

[N/A]    (e) Any Year of Service earned prior to the effective date of ERISA if
         the Plan would have disregarded that Year of Service on account of an
         Employee's Separation from Service under a Plan provision in effect and
         adopted before January 1, 1974.

                                   ARTICLE VI
                     TIME AND METHOD OF PAYMENTS OF BENEFITS

CODE SECTION 411(d)(6) PROTECTED BENEFITS. The elections under this Article
VI may not eliminate Code Section 411(d)(6) protected benefits. To the extent
the elections would eliminate a Code Section 411(d)(6) protected benefit, see
Section 13.02 of the Plan. Furthermore, if the elections liberalize the
optional forms of benefit under the Plan, the more liberal options apply on
the later of the adoption date or the Effective Date of this Adoption
Agreement.

                                       22



     6.01 TIME OF PAYMENT OF ACCRUED BENEFIT.

DISTRIBUTION DATE. A distribution date under the Plan means any day the
Trustee and all major stock exchanges are open for business ("a valuation
date"). [NOTE: THE EMPLOYER MUST SPECIFY THE APPROPRIATE DATE(S). THE SPECIFIED
DISTRIBUTION DATES PRIMARILY ESTABLISH ANNUITY STARTING DATES AND THE NOTICE AND
CONSENT PERIODS PRESCRIBED BY THE PLAN. THE PLAN ALLOWS THE TRUSTEE AN
ADMINISTRATIVELY PRACTICABLE PERIOD OF TIME TO MAKE THE ACTUAL DISTRIBUTION
RELATING TO A PARTICULAR DISTRIBUTION DATE.]

NONFORFEITABLE ACCRUED BENEFIT NOT EXCEEDING $3,500. Subject to the limitations
of Section 6.01(A)(1), the distribution date for distribution of a
Nonforfeitable Accrued Benefit not exceeding $3,500 is: (CHOOSE (a), (b), (c)
(d) OR (e))

[N/A]    (a) ___ of the ___ Plan Year beginning after the Participant's
         Separation from Service.

[X]      (b) any valuation date following the Participant's Separation from
         Service.

[N/A]    (c) ___ of the Plan Year after the Participant incurs ___ Break(s)
         in Service (as defined in Article V).

[N/A]    (d) ___ following the Participant's attainment of Normal Retirement
         Age, but not earlier than _ days following his Separation from Service.

[N/A]    (e) (SPECIFY) ___.

NONFORFEITABLE ACCRUED BENEFIT EXCEEDS $3,500. See the elections under Section
6.03.

DISABILITY. The distribution date, subject to Section 6.01(A)(3), is:
(CHOOSE (f), (g) OR (h))

[N/A]    (f) ___ after the Participant terminates employment because of
         disability.

[X]      (g) The same as if the Participant had terminated employment without
         disability.

[N/A]    (h) (SPECIFY) ___.

HARDSHIP. (CHOOSE (i) OR (j))

[X]      (i) The Plan does not permit a hardship distribution to a Participant
         who has separated from service.

[N/A]    (j) The Plan permits a hardship distribution to a Participant who has
         separated from Service in accordance with the hardship distribution
         policy stated in: (CHOOSE (1), (2) OR (3))

         [N/A]    (1) Section 6.01(A)(4) of the Plan.

         [N/A]    (2) Section 14.11 of the Plan.

         [N/A]    (3) The addendum to this Adoption Agreement, numbered Section
                  6.01.


                                       23



DEFAULT ON A LOAN. If a Participant or Beneficiary defaults on a loan made
pursuant to a loan policy adopted by the Advisory Committee pursuant to Section
9.04, the Plan: (CHOOSE (k), (l) OR (m))

[N/A]    (k) Treats the default as a distributable event. The Trustee, at the
         time of the default, will reduce the Participant's Nonforfeitable
         Accrued Benefit by the lesser of the amount in default (plus accrued
         interest) or the Plan's security interest in that Nonforfeitable
         Accrued Benefit. To the extent the loan is attributable to the
         Participant's Deferral Contributions Account, Qualified Matching
         Contributions Account or Qualified Nonelective Contributions Account,
         the Trustee will not reduce the Participant's Nonforfeitable Accrued
         Benefit unless the Participant has separated from Service or unless the
         Participant has attained age 59 1/2.

[N/A]    (l) Does not treat the default as a distributable event. When an
         otherwise distributable event first occurs, pursuant to Section 6.01 or
         Section 6.03 of the Plan, the Trustee will reduce the Participant's
         Nonforfeitable Accrued Benefit by the lesser of the amount in default
         (plus accrued interest) or the Plan's security interest in that
         Nonforfeitable Accrued Benefit.

[X]      (m) (SPECIFY) A default is treated under Option (1) or (2) to the
         extent permitted by law

     6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. The Advisory Committee will
apply Section 6.02 of the Plan with the following modifications: (CHOOSE (a) OR
AT LEAST ONE OF (b), (c), (d) AND (e))

[N/A]    (a) No modifications.

[N/A]    (b) Except as required under Section 6.01 of the Plan, a lump sum
         distribution is not available: ___.

[X]      (c) An installment distribution: (CHOOSE (1) OF AT LEAST ONE OF (2) OR
         (3))

         [X]      (1) Is not available under the Plan.

         [N/A]    (2) May not exceed the lesser of ___ years or the maximum
                  period permitted under Section 6.02.

         [N/A]    (3) (SPECIFY) ___.

[N/A]      (d) The Plan permits the following annuity options:

     Any Participant who elects a life annuity option is subject to the
requirements of Sections 6.04(A), (B), (C) and (D) of the Plan. See Section
6.04(E). [NOTE: THE EMPLOYER MAY SPECIFY ADDITIONAL ANNUITY OPTIONS IN AN
ADDENDUM TO THIS ADOPTION AGREEMENT, NUMBERED 6.02(d).]

[N/A]    (e) If the Plan invests in qualifying Employer securities, as described
         in Section 10.03(F), a Participant eligible to elect distribution under
         Section 6.03 may elect to receive that distribution in Employer
         securities only in accordance with the provisions of the addendum to
         this Adoption Agreement, numbered 6.02(e).

     6.03 BENEFIT PAYMENT ELECTIONS.

PARTICIPANT ELECTIONS AFTER SEPARATION FROM SERVICE. A Participant who is
eligible to make distribution elections under Section 6.03 of the Plan may elect
to commence distribution of his Nonforfeitable Accrued Benefit: (CHOOSE AT LEAST
ONE OF (a) THROUGH (c))

[N/A]    (a) As of any distribution date, but not earlier than ___ of the ___
         Plan Year beginning after the Participant's Separation from Service.

[X]      (b) As of the following date(s): (CHOOSE AT LEAST ONE OF OPTIONS (1)
         THROUGH (6))


                                       24



         [N/A]    (1) Any distribution date after the close of the Plan Year
                  in which the Participant attains Normal Retirement Age.

         [X]      (2) Any distribution date following his Separation from
                  Service with the Employer.

         [N/A]    (3) Any distribution date in the ___ Plan Year(s) beginning
                  after his Separation from Service.

         [N/A]    (4) Any distribution date in the Plan Year after the
                  Participant incurs ___ Break(s) in Service (as defined in
                  Article V).

         [N/A]    (5) Any distribution date following attainment of age ___ and
                  completion of at least ___ Years of Service (as defined in
                  Article V).

         [N/A]    (6) (SPECIFY) ___.

[N/A]    (c) (SPECIFY) ___.

     The distribution events described in the election(s) made under Options
(a), (b) or (c) apply equally to all Accounts maintained for the Participant
unless otherwise specified in Option (c).

PARTICIPANT ELECTIONS PRIOR TO SEPARATION FROM SERVICE - REGULAR MATCHING
CONTRIBUTIONS ACCOUNT AND EMPLOYER CONTRIBUTIONS ACCOUNT. Subject to the
restrictions of Article VI, the following distribution options apply to a
Participant's Regular Matching Contributions Account and Employer Contributions
Account prior to his Separation from Service. (CHOOSE (d) OR AT LEAST ONE OF (e)
THROUGH (h))

[N/A]    (d) No distribution options prior to Separation from Service.

[X]      (e) Attainment of Specified Age. Until he retires, the Participant has
         a continuing election to receive all or any portion of his
         Nonforfeitable interest in these Accounts after he attains: (CHOOSE (1)
         OR (2))

         [N/A]    (1) Normal Retirement Age.

         [X]      (2) 59 1/2 years of age and is at least 0% vested in these
                  Accounts. [NOTE: IF THE PERCENTAGE IS LESS THAN 100%, SEE THE
                  SPECIAL VESTING FORMULA IN SECTION 5.03.

[N/A]    (f) After a Participant has participated in the Plan for a period of
         not less than ___ years and he is 100% vested in these Accounts, until
         he retires, the Participant has a continuing election to receive all or
         any portion of the Accounts. [NOTE: THE NUMBER IN THE BLANK SPACE MAY
         NOT BE LESS THAN 5.]

[N/A]    (g) HARDSHIP. A Participant may elect a hardship distribution prior to
         his Separation from Service in accordance with the hardship
         distribution policy: (CHOOSE (1), (2) OR (3); (4) IS AVAILABLE ONLY AS
         AN ADDITIONAL OPTION)

         [N/A]    (1) Under Section 6.01(A)(4) of the Plan.

         [N/A]    (2) Under Section 14.11 of the Plan.

         [N/A]    (3) Provided in the addendum to this Adoption Agreement,
                  numbered Section 6.03.

         [N/A]    (4) In no event may a Participant receive a hardship
                  distribution before he is at least ___% vested in these
                  Accounts. [NOTE: IF THE PERCENTAGE IN THE BLANK IS LESS THAN
                  100%, SEE THE SPECIAL VESTING FORMULA IN SECTION 5.03.]

[N/A]    (h) (SPECIFY) ___.


                                       25



[NOTE: THE EMPLOYER MAY USE AN ADDENDUM, NUMBERED 6.03, TO PROVIDE ADDITIONAL
LANGUAGE AUTHORIZED BY OPTIONS (b)(6), (c), (g)(3) OR (h) OF THIS ADOPTION
AGREEMENT SECTION 6.03.]

PARTICIPANT ELECTIONS PRIOR TO SEPARATION FROM SERVICE - DEFERRAL CONTRIBUTIONS
ACCOUNT, QUALIFIED MATCHING CONTRIBUTIONS ACCOUNT AND QUALIFIED NONELECTIVE
CONTRIBUTIONS ACCOUNT. Subject to the restrictions of Article VI, the following
distribution options apply to a Participant's Deferral Contributions Account,
Qualified Matching Contributions Account and Qualified Nonelective Contributions
Account prior to his Separation from Service. (CHOOSE (i) OR AT LEAST ONE OF (j)
THROUGH (l))

[N/A]    (i) No distribution options prior to Separation from Service.

[X]      (j) Until he retires, the Participant has a continuing election to
         receive all or any portion of these Accounts after he attains: (CHOOSE
         (1) OR (2))

         [N/A]    (1) The later of Normal Retirement Age or age 59 1/2.

         [X]      (2) Age 59 1/2 (at least 59 1/2).

[X]      (k) Hardship. A Participant, prior to this Separation from Service, may
         elect a hardship distribution from his Deferral Contributions Account
         in accordance with the hardship distribution policy under Section 14.11
         of the Plan.

[N/A]    (l) (SPECIFY)__. [NOTE: OPTION (l) MAY NOT PERMIT IN SERVICE
         DISTRIBUTIONS PRIOR TO AGE 59 1/2 (OTHER THAN HARDSHIP) AND MAY NOT
         MODIFY THE HARDSHIP POLICY DESCRIBED IN SECTION 14.11.]

SALE OF TRADE OR BUSINESS/SUBSIDIARY. If the Employer sells substantially all
of the assets (within the meaning of Code Section 409(d)(2)) used in a trade
or business or sells a subsidiary (within the meaning of Code Section
409(d)(3)), a Participant who continues employment with the acquiring
corporation is eligible for distribution from his Deferral Contributions
Account, Qualified Matching Contributions Account and Qualified Nonelective
Contributions Account: (CHOOSE (m) OR (n))

[X]      (m) Only as described in this Adoption Agreement Section 6.03 for
         distributions prior to Separation from Service.

[N/A]    (n) As if he has a Separation from Service. After March 31, 1988, a
         distribution authorized solely by reason of this Option (n) must
         constitute a lump sum distribution, determined in a manner consistent
         with Code Section 401(k)(10) and the applicable Treasury regulations.

     6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. The
annuity distribution requirements of Section 6.04: (CHOOSE (a) OR (b))

[X]      (A) Apply only to a Participant described in Section 6.04(E) of the
         Plan (relating to the profit sharing exception to the joint and
         survivor requirements).

[N/A]    (b) Apply to all Participants.

                                   ARTICLE IX
       ADVISORY COMMITTEE - DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS

     9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. If a distribution (other than
a distribution from a segregated Account and other than a corrective
distribution described in Sections 14.07, 14.08, 14.09 or 14.10 of the Plan)
occurs more than 90 days after the most recent valuation date, the distribution
will include interest at: (CHOOSE (a), (b) OR (c))


                                       26


[X]      (a) 0 % per annum. [NOTE: THE PERCENTAGE MAY EQUAL 0%.]

[N/A]    (b) The 90 day Treasury bill rate in effect at the beginning of the
         current valuation period.

[N/A]    (c)(SPECIFY)__.

     9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAINS OR LOSS. Pursuant
to Section 14.12, to determine the allocation of net income, gain or loss:
(COMPLETE ONLY THOSE ITEMS, IF ANY, WHICH ARE APPLICABLE TO THE EMPLOYER'S
PLAN)

[X]      (a) For salary reduction contributions, the Advisory Committee will:
         (CHOOSE (1), (2), (3), (4) OR (5))

         [N/A]    (1) Apply Section 9.11 without modification.

         [X]      (2) Use the segregated account approach described in Section
                  14.12.

         [N/A]    (3) Use the weighted average method described in Section
                  14.12, based on a _ weighting period.

         [N/A]    (4) Treat as part of the relevant Account at the beginning of
                  the valuation period _% of the salary reduction contributions:
                  (CHOOSE (a) OR (b))

                  [N/A]    (a) made during that valuation period.

                  [N/A]    (b) made by the following specified time: __.

         [N/A]    (5) Apply the allocation method described in the addendum to
                  this Adoption Agreement numbered 9.11(a).

[X]      (b) For matching contributions, the Advisory Committee will: (CHOOSE
         (1), (2) (3) OR (4))

         [N/A]    (1) Apply Section 9.11 without modification.

         [N/A]    (2) Use the weighted average method described in Section
                  14.12, based on a __ weighting period.

         [N/A]    (3) Treat as part of the relevant Account at the beginning of
                  the valuation period __% of the matching contributions
                  allocated during the valuation period.

         [X]      (4) Apply the allocation method described in the addendum to
                  this Adoption Agreement numbered 9.11(b).

[X]      (c) For Participant nondeductible contributions, the Advisory
         Committee will: (CHOOSE (1), (2), (3) OR (4))

         [N/A]    (1) Apply Section 9.11 without modification.

         [X]      (2) Use the segregated account approach described in Section
                  14.12.

         [N/A]    (3) Use the weighted average method described in Section
                  14.12, based on a __ weighting period.

         [N/A]    (4) Treat as part of the relevant Account at the beginning of
                  the valuation period __% of the Participant nondeductible
                  contributions: (CHOOSE (a) OR (b))

                  [N/A]    (a) made during that valuation period.

                  [N/A]    (b) made by the following specified time: __.


                                       27


         [N/A]    (5) Apply the allocation method described in the addendum to
                  this Adoption Agreement numbered 9.11(c).

                                    ARTICLE X
                    TRUSTEE AND CUSTODIAN, POWERS AND DUTIES

     10.03 INVESTMENT POWERS. Pursuant to Section 10.03[F] of the Plan, the
aggregate investments in qualifying Employer securities and in qualifying
Employer real property: (CHOOSE (a) OR (b))

[N/A]    (a) May not exceed 10% of Plan assets.

[X]      (b) May not exceed 0 % of Plan assets. [NOTE: THE PERCENTAGE MAY NOT
         EXCEED 100%.]

     10.14 VALUATION OF TRUST. In addition to each Accounting Date, the Trustee
must value the Trust Fund on the following valuation date(s): (CHOOSE (a) OR
(b))

[N/A]    (a) No other mandatory valuation dates.

[X]      (B) (SPECIFY) Any day that the Trustee and all major stock markets are
         open for business.


                                       28


                             EFFECTIVE DATE ADDENDUM
                              (RESTATED PLANS ONLY)

     The Employer must complete this addendum only if the restated Effective
Date specified in Adoption Agreement Section 1.18 is different than the restated
effective date for at least one of the provisions listed in this addendum. In
lieu of the restated Effective Date in Adoption Agreement Section 1.18, the
following special effective dates apply: (CHOOSE WHICHEVER ELECTIONS APPLY)

[N/A]    (a) COMPENSATION DEFINITION. The Compensation definition of Section
         1.12 (other than the $200,000 limitation) is effective for Plan Years
         beginning after __. [NOTE: MAY NOT BE EFFECTIVE LATER THAN THE FIRST
         DAY OF THE FIRST PLAN YEAR BEGINNING AFTER THE EMPLOYER EXECUTES THIS
         ADOPTION AGREEMENT TO RESTATE THE PLAN FOR THE TAX REFORM ACT OF 1986,
         IF APPLICABLE.]

[N/A]    (b) ELIGIBILITY CONDITIONS. The eligibility conditions specified in
         Adoption Agreement Section 2.01 are effective for Plan Years beginning
         after __.

[N/A]    (c) SUSPENSION OF YEARS OF SERVICE. The suspension of Years of Service
         rule elected under Adoption Agreement Section 2.03 is effective for
         Plan Years beginning after __.

[N/A]    (d) CONTRIBUTION/ALLOCATION FORMULA. The contribution formula elected
         under Adoption Agreement Section 3.01 and the method of allocation
         elected under Adoption Agreement Section 3.04 is effective for Plan
         Years beginning after __.

[N/A]    (e) ACCRUAL REQUIREMENTS. The accrual requirements of Section 3.06 are
         effective for Plan Years beginning after __.

[N/A]    (f) EMPLOYMENT CONDITION. The employment condition of Section 3.06 is
         effective for Plan Years beginning after __.

[N/A]    (g) ELIMINATION OF NET PROFITS. The requirement for the Employer not to
         have net profits to contribute to this Plan is effective for Plan Years
         beginning after _. [NOTE: THE DATE SPECIFIED MAY NOT BE EARLIER THAN
         DECEMBER 31, 1985.]

[N/A]    (h) VESTING SCHEDULE. The vesting schedule elected under Adoption
         Agreement Section 5.03 is effective for Plan Years beginning after __.

[X]      (i) ALLOCATION OF EARNINGS. The special allocation provisions elected
         under Adoption Agreement Section 9.11 are effective for Plan Years
         beginning after effective as of the first day implemented by the
         Trustee.

[X]      (j) (SPECIFY) Annuity forms of benefit are first available as of
         September 1, 1998, and are eliminated effective July 1, 2001. The
         addendum regarding Early Retirement Age is effective as of the dates
         therein stated. The maximum rate of deferral is 20% effective 1/1/2001.

     For Plan Years prior to the special Effective Date, the terms of the Plan
prior to its restatement under this Adoption Agreement will control for purposes
of the designated provisions. A special Effective Date may not result in the
delay of a Plan provision beyond the permissible Effective Date under any
applicable law requirements.


                                       29




                    ADDENDUM TO ADOPTION AGREEMENT 9.11(b)

     Use the segregated account approach described in Section 14.12.




                                 EXECUTION PAGE

     The Trustee (and Custodian, if applicable), by executing this Adoption
Agreement, accepts its position and agrees to all of the obligations,
responsibilities and duties imposed upon the Trustee (or Custodian) under the
Master Plan and Trust. The Employer hereby agrees to the provisions of this Plan
and Trust, and in witness of its agreement, the Employer by its duly authorized
officers, has executed this Adoption Agreement, and the Trustee (and Custodian,
if applicable) signified its acceptance, on this _______ day of
________________,_______.

                            Name and EIN of Employer:
                            Petco Animal Supplies
                            95-2650552

                            Signed: /s/ [ILLEGIBLE]
                                    ____________________________

                            Name(s) of Trustee:
                            The Chicago Trust Company

                            Signed: ____________________________

PLAN NUMBER. The 3-digit plan number the Employer assigns to this Plan for ERISA
reporting purposes (Form 5500 Series) is: 001.

USE OF ADOPTION AGREEMENT. Failure to complete properly the elections in this
Adoption Agreement (may result in disqualification of the Employer's Plan. The
3-digit number assigned to this Adoption Agreement (see page 1) is solely for
the Master Plan Sponsor's recordkeeping purposes and does not necessarily
correspond to the plan number the Employer designated in the prior paragraph.

MASTER PLAN SPONSOR. The Master Plan Sponsor identified on the first page of the
basic plan document will notify all adopting employers of any amendment of this
Master Plan or of any abandonment or discontinuance by the Master Plan Sponsor
of its maintenance of this Master Plan. For inquiries regarding the adoption of
the Master Plan, the Master Plan Sponsor's intended meaning of any plan
provisions or the effect of the opinion letter issued to the Master Plan
Sponsor, please contact the Master Plan Sponsor at the following address and
telephone number: The Chicago Trust Company 312-223-5200.

RELIANCE ON OPINION LETTER. The Employer may not rely on the Master Plan
Sponsor's opinion letter covering this Adoption Agreement. For reliance on the
Plan's qualification, the Employer must obtain a determination letter from the
applicable IRS Key District office.


                                       30


[PETCO LOGO]

- --------------------------------------------------------------------------------
                       "SUMMARY OF MATERIAL MODIFICATION"
                                     TO THE
                        PETCO ANIMAL SUPPLIES 401(K) PLAN
                                 (July 31, 2001)
- --------------------------------------------------------------------------------

     The Petco Animal Supplies 401(k) Plan ("Plan") has been amended to require
that all distributions from the Plan be paid out as a cash lump sum. The Plan
will no longer offer annuity payouts. This amendment will go into effect on
November 1, 2001. If you have any questions please call Laura Horn, Benefits
Administrator at (888) 583-6044, ext. 3171.

EX-10.15

                          AMENDMENT AND RESTATEMENT TO
                   1994 STOCK OPTION AND RESTRICTED STOCK PLAN
                         FOR EXECUTIVE AND KEY EMPLOYEES
                                       OF
                           PETCO ANIMAL SUPPLIES, INC.
                  (amended and restated as of October 2, 2000)


                 PETCO Animal Supplies, Inc., a corporation organized under
the laws of the State of Delaware (the "Company"), hereby amends and restates
this 1994 Stock Option and Restricted Stock Plan for Executive and Key
Employees of PETCO Animal Supplies, Inc., as amended and restated (this
"Plan"), effective as of October 2, 2000.

                 This Plan was adopted by the Board (as defined) on January
11, 1994 and approved by the Company's stockholders on February 24, 1994.

                 PETCO Animal Supplies, Inc. has entered into the Agreement
and Plan of Merger, dated as of May 17, 2000, by and between PETCO Animal
Supplies, Inc. and BD Recapitalization Corp. ("MergerSub"), as amended (the
"Merger Agreement"), pursuant to which MergerSub shall merge with and into
the Company, with the Company being the surviving corporation (the "Merger"),
effective at the Effective Time (as defined in the Merger Agreement). The
Effective Time occurred on October 2, 2000.

                 Pursuant to the terms of the Merger Agreement, certain
options (the "Roll-Over Options") to purchase shares of the Company's common
stock, par value $.0001 per share, that were granted under the Plan shall
remain outstanding and shall be converted into options to purchase shares of
the Company's common stock, par value $.001 per share ("Common Stock"),
effective at the Effective Time. The Roll-Over Options, as converted, shall
be subject to the terms and conditions of this Plan, as amended and restated
herein.

                 Also, commencing at the Effective Time, this Plan, as
amended and restated, shall provide that, in addition to the 27,615.64 shares
of Common Stock to be issued upon exercise of the Roll-Over Options,
31,952.36 shares of Common Stock shall be available for issuance under this
Plan.

                 The purposes of this Plan, as amended and restated, are as
follows:

                 (1) To further the growth, development and financial success
of the Company by providing additional incentives to certain of its executive
and other key Employees who have been or will be given responsibility for the
management or administration of the Company's business affairs, by assisting
them to become owners of the Company's Common Stock and thus to benefit
directly from its growth, development and financial success.

                 (2) To enable the Company to obtain and retain the services
of the type of professional, technical and managerial employees considered
essential to the long-range success of the Company by providing and offering
them an opportunity to become owners of



the Company's Common Stock under restricted stock and options, including
options that are intended to qualify as "incentive stock options" under
Section 422 of the Code.

                                   ARTICLE I

                                   DEFINITIONS

                 Whenever the following terms are used in this Plan, they
shall have the meaning specified below unless the context clearly indicates
to the contrary. The masculine pronoun shall include the feminine and neuter
and the singular shall include the plural, where the context so indicates.

SECTION 1.1      -  ADDITIONAL OPTION

                 "Additional Option" shall mean an Option granted to an
Optionee to purchase a number of shares of Common Stock equal to the number
of shares of Common Stock tendered or relinquished by the Optionee in payment
of the exercise price upon exercise of an Option and/or the number of shares
of Common Stock tendered or relinquished in payment of the amount to be
withheld under applicable federal, state and local income tax laws in
connection with the exercise of an Option as described in Article XI.

SECTION 1.2      - ADDITIONAL OPTION FEATURE

                 "Additional Option Feature" shall mean a feature of an
Option that provides for the automatic grant of an Additional Option in
accordance with the provisions described in Article XI.

SECTION 1.3      -  BOARD

                 "Board" shall mean the Board of Directors of the Company.

SECTION 1.4      - CODE

                 "Code" shall mean the Internal Revenue Code of 1986, as
amended.

SECTION 1.5      - COMMITTEE

                 "Committee" shall mean the Committee of the Board
administering this Plan, appointed as provided in Section 9.1.

SECTION 1.6      - COMPANY

                 "Company" shall mean PETCO Animal Supplies, Inc., a Delaware
corporation. In addition, "Company" shall mean any corporation assuming, or
issuing new employee stock options in substitution for, Incentive Stock
Options, outstanding under the Plan, in a transaction to which Section 424(a)
of the Code applies.

                                       2




SECTION 1.7      - Consultant

                 "Consultant" shall mean any consultant or adviser (other
than an Employee) if:

                 (a) the consultant or advisor renders bona fide services to
the Company;

                 (b) the services rendered by the consultant or adviser are
not in connection with the offer or sale of securities in a capital-raising
transaction and do not directly or indirectly promote or maintain a market
for the Company's securities; and

                 (c) the consultant or advisor is a natural person who has
contracted directly with the Company to render such services.

SECTION 1.8      - DIRECTOR

                 "Director" shall mean a member of the Board.

SECTION 1.9      - EMPLOYEE

                 "Employee" shall mean any employee (as defined in accordance
with the regulations and revenue rulings then applicable under Section
3401(c) of the Code) of the Company, or of any corporation which is then a
Parent Corporation or a Subsidiary, whether such employee is so employed at
the time this Plan is adopted or becomes so employed subsequent to the
adoption of this Plan.

SECTION 1.10     - EXCHANGE ACT

                 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.

SECTION 1.11     - FAIR MARKET VALUE

                 "Fair Market Value" of a share of Common Stock as of a given
date shall be as defined in Section 4.2.

SECTION 1.12     - INCENTIVE STOCK OPTION

                 "Incentive Stock Option" shall mean an Option which
qualifies under Section 422 of the Code and which is designated as an
Incentive Stock Option by the Committee.

SECTION 1.13     - NON-QUALIFIED OPTION

                 "Non-Qualified Option" shall mean an Option which is not an
Incentive Stock Option.

SECTION 1.14     - OFFICER

                 "Officer" shall mean an officer of the Company, as defined
in Rule 16a-1(f) under the Exchange Act, as such Rule may be amended in the
future.

                                      3



SECTION 1.15     - OPTION

                 "Option" shall mean an option to purchase Common Stock of
the Company, granted under the Plan. "Options" includes both Incentive Stock
Options and Non-Qualified Options.

SECTION 1.16     - OPTIONEE

                 "Optionee" shall mean an Employee or Consultant to whom an
option is or was granted under the Plan.

SECTION 1.17     - PARENT CORPORATION

                 "Parent Corporation" shall mean any corporation in an
unbroken chain of corporations ending with the Company if each of the
corporations other than the Company then owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.

SECTION 1.18     - PLAN

                 "Plan" shall mean this 1994 Stock Option and Restricted
Stock Plan for Executive and Key Employees of PETCO Animal Supplies, Inc., as
amended from time to time.

SECTION 1.19     - RESTRICTED STOCK

                 "Restricted Stock" shall mean shares of the Company's Common
Stock issued pursuant to Article VII of the Plan.

SECTION 1.20     - RESTRICTED STOCKHOLDER

                 "Restricted Stockholder" shall mean an Employee to whom
Restricted Stock has been issued under the Plan.

SECTION 1.21     - RULE 16b-3

                 "Rule 16b-3" shall mean that certain Rule 16b-3 under the
Exchange Act, as such Rule may be amended in the future.

SECTION 1.22     - SECRETARY

                 "Secretary" shall mean the Secretary of the Company.

SECTION 1.23     - SECURITIES ACT

                 "Securities Act" shall mean the Securities Act of 1933, as
amended.

                                      4



SECTION 1.24     - STOCK APPRECIATION RIGHTS

                 "Stock Appreciation Rights" shall mean a stock appreciation
right granted under the Plan.

SECTION 1.25     - SUBSIDIARY

                 "Subsidiary" shall mean any corporation in an unbroken chain
of corporations beginning with the Company if each of the corporations other
than the last corporation in the unbroken chain then owns stock possessing
50% or more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.

SECTION 1.26     - TERMINATION OF CONSULTANCY

                 "Termination of Consultancy" shall mean, as to a Consultant,
the time when the consultancy relationship between the Consultant and the
Company, a Parent Corporation or a Subsidiary is terminated for any reason,
with or without cause, including, but not by way of limitation, a termination
by expiration or non-renewal of contractual agreement, resignation,
discharge, death or retirement. The Committee, in its absolute discretion,
shall determine the effect of all other matters and questions relating to
Termination of Consultancy.

SECTION 1.27     - TERMINATION OF EMPLOYMENT

                 "Termination of Employment" shall mean, as to an Optionee,
the holder of a Stock Appreciation Right or a Restricted Stockholder, the
time when the employee-employer relationship between the Employee and the
Company, a Parent Corporation or a Subsidiary is terminated for any reason,
with or without cause, including, but not by way of limitation, a termination
by resignation, discharge, death or retirement, but excluding terminations
where there is a simultaneous reemployment by the Company, a Parent
Corporation or a Subsidiary. The Committee, in its absolute discretion, shall
determine the effect of all other matters and questions relating to
Termination of Employment, including, but not by way of limitation, the
question of whether a Termination of Employment resulted from a discharge for
good cause, and all questions of whether particular leaves of absence
constitute Terminations of Employment; provided, however, that, with respect
to Incentive Stock Options, a leave of absence shall constitute a Termination
of Employment if, and to the extent that, such leave of absence interrupts
employment for the purposes of Section 422(a)(2) of the Code and the then
applicable regulations and revenue rulings under said Section.

                                  ARTICLE II

                             SHARES SUBJECT TO PLAN

SECTION 2.1      - SHARES SUBJECT TO PLAN

                 The shares of stock subject to Options, Stock Appreciation
Rights and Restricted Stock awards under this Plan shall be the Company's
Common Stock, par value $.001 per share ("Common Stock"), subject to Section
2.2. The aggregate number of shares of Common Stock which may be issued upon
exercise of or under Options, Stock Appreciation Rights and

                                     5



Restricted Stock awards shall not exceed the sum of: (a) 31,952.36 additional
shares, and (b) the 27,615.64 shares issuable upon the exercise of the
Roll-Over Options.

                 If any Option, Stock Appreciation Right or Restricted Stock
award expires or is canceled without having been fully exercised or vested,
the number of shares of Common Stock subject to such Option, Stock
Appreciation Right or Restricted Stock award, but as to which such Option,
Stock Appreciation Right or Restricted Stock award was not exercised or
vested prior to its expiration or cancellation may again be issued hereunder
as additional shares, subject to the limitations of this Section 2.1. With
the consent of the Committee, in its sole discretion, Shares of Common Stock
which are delivered by the holder or withheld by the Company upon the
exercise of any Option, Stock Appreciation Right or Restricted Stock award
under the Plan, in payment of the exercise price thereof or tax withholding
thereon, may again be optioned, granted or awarded hereunder, subject to the
limitations of this Section 2.1. Notwithstanding the provisions of this
Section 2.2, no shares of Common Stock may again be issued if such action
would cause an Incentive Stock Option to fail to qualify as an "incentive
stock option" under Section 422 of the Code.

                 Notwithstanding the foregoing, if the offer or sale of
shares of Common Stock under the Plan is subject to Section 260.140.45 of
Title 10 of the California Code of Regulations (or other applicable law
limiting the offers or sales of shares of Common Stock under the Plan), the
aggregate number of shares of Common Stock issuable upon the exercise of all
outstanding Options, Stock Appreciation Rights and Restricted Stock awards
(together with options and similar awards outstanding under any other stock
option plan of the Company) and the total number of shares provided for under
any stock bonus or similar plan of the Company shall not exceed thirty
percent (30%) (or such other higher percentage limitation as may be approved
by the stockholders of the Company pursuant to Section 260.140.45) of the
then outstanding shares of Common Stock, as calculated in accordance with the
conditions and exclusions of Section 260.140.45 (or such other limitation
under applicable law).

SECTION 2.2      - CHANGES IN COMPANY'S SHARES

                 In the event that the outstanding shares of Common Stock of
the Company are hereafter changed into or exchanged for a different number or
kind of shares or other securities of the Company, or of another corporation,
by reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend or combination of shares,
appropriate adjustments shall be made by the Committee in the number and kind
of shares for the purchase of which Options may be granted and in the number
and kind of shares of Restricted Stock that may be issued, including
adjustments of the limitations in Section 2.1 on the maximum number and kind
of shares which may be issued on exercise of Options or as Restricted Stock.

                                       6



                                  ARTICLE III

                               GRANTING OF OPTIONS

SECTION 3.1      - ELIGIBILITY

                 Any executive or other key Employee or Consultant of the
Company or of any corporation which is then a Parent Corporation or a
Subsidiary shall be eligible to be granted Options, except as provided in
Section 3.2. However, no option shall be granted to any Employee who owns
(within the meaning of Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the
Company, any Parent Corporation or any Subsidiary.

SECTION 3.2      - QUALIFICATION OF INCENTIVE STOCK OPTIONS

                 No Incentive Stock Option shall be granted unless such
Option, when granted, qualifies as an "incentive stock option" under Section
422 of the Code.

SECTION 3.3      - GRANTING OF OPTIONS

                   (a) The Committee shall from time to time, in its absolute
discretion:

                       (i) Determine which Employees are executive or other
         key Employees and Consultants and select from among the executive or
         other key Employees and Consultants (including those to whom Options
         and/or Stock Appreciation Rights have been previously granted and/or
         Restricted Stock has previously been issued under the Plan) such of
         them as in its opinion should be granted Options; and

                       (ii) Determine the number of shares to be subject to such
         Options granted to such selected executive or other key Employees, and
         determine whether such Options are to be Incentive Stock Options or
         Non-Qualified Options; and

                       (iii) Determine the terms and conditions of such Options,
         consistent with the Plan.

                   (b) Upon the selection of an executive or other key
Employee to be granted an Option, the Committee shall instruct the Secretary
to issue such Option and may impose such conditions on the grant of such
Option as it deems appropriate. Without limiting the generality of the
preceding sentence, the Committee may, in its absolute discretion and on such
terms as it deems appropriate, require as a condition on the grant of an
Option to an Employee that the Employee surrender for cancellation some or
all of the unexercised Options which have been previously granted to him. An
Option the grant of which is conditioned upon such surrender may have an
option price lower (or higher) than the option price of the surrendered
Option, may cover the same (or a lesser or greater) number of shares as the
surrendered Option, may contain such other terms as the Committee deems
appropriate and shall be exercisable in accordance with its terms, without
regard to the number of shares, price, option period or any other term or
condition of the surrendered Option. Without limiting the generality of the

                                      7



preceding sentence, the Committee may, in its absolute discretion and on such
terms as it deems appropriate, require as a condition on the issuance of
Restricted Stock to an Employee that the Employee surrender for cancellation
some or all of the Restricted Stock that has been previously granted to him.

                                    ARTICLE IV

                           ARTICLE IV TERMS OF OPTIONS

SECTION 4.1      - OPTION AGREEMENT

                 Each Option shall be evidenced by a written Stock Option
Agreement, which shall be executed by the Optionee and an authorized Officer
of the Company and which shall contain such terms and conditions as the
Committee shall determine, consistent with the Plan. Stock Option Agreements
evidencing Incentive Stock Options shall contain such terms and conditions as
may be necessary to qualify such Options as "incentive stock options" under
Section 422 of the Code.

SECTION 4.2      - OPTION PRICE

                   (a) The price of the shares subject to each Option shall
be set by the Committee; provided, however, that the price per share shall be
not less than 100% of the Fair Market Value of such shares on the date such
Option is granted.

                   (b) For purposes of the Plan, the Fair Market Value of a
share of the Company's Common Stock ("Fair Market Value") as of a given date
shall be determined as follows: (i) if the Common Stock is then quoted on the
Nasdaq National Market, its last reported sale price on the Nasdaq National
Market or, if no such reported sale takes place on such date, the average of
the closing bid and asked prices; (ii) if the Common Stock is publicly traded
and is then listed on a national securities exchange but is not quoted on the
Nasdaq National Market, the last reported sale price or, if no such reported
sale takes place on such date, the average of the closing bid and asked
prices on the principal national securities exchange on which the Common
Stock is listed or admitted to trading; (iii) if such Common Stock is
publicly traded but is not quoted on the Nasdaq National Market nor listed or
admitted to trading on a national securities exchange, the average of the
closing bid and asked prices on such date, as reported in the Western Edition
of THE WALL STREET JOURNAL, for the over-the-counter market; or (iv) if none
of the foregoing is applicable, by the Board in good faith.

SECTION 4.3      - COMMENCEMENT OF EXERCISABILITY

                   (a) Except as the Committee may otherwise provide, no
Option may be exercised in whole or in part during the first six months after
such Option is granted.

                   (b) Subject to the provisions of Sections 4.3(a), 4.3(c),
and 10.3, Options shall become exercisable at such times and in such
installments (which may be cumulative) as the Committee shall provide in the
terms of each individual Option; provided, however, that by a resolution
adopted after an Option is granted the Committee may, on such terms and
conditions as it may determine to be appropriate and subject to Sections
4.3(a), 4.3(c), and

                                      8



10.3, accelerate the time at which such Option or any portion thereof may be
exercised; PROVIDED, HOWEVER, that, to the extent required by Section
25102(o) of the California Corporations Code and the regulations thereunder,
except with regard to Options granted to officers of the Company or any
Parent Corporation or Subsidiary or Consultants, in no event shall an Option
granted hereunder become vested and exercisable at a rate of less than twenty
percent (20%) per year over five (5) years from the date the Option is
granted, subject to the continued employment of the holder with the Company
or the Parent Corporation or the Subsidiaries or other reasonable conditions
established by the Committee.

                   (c) No portion of an Option which is unexercisable at the
later to occur of (i) Termination of Employment, or (ii) Termination of
Consultancy, shall thereafter become exercisable.

                   (d) To the extent that the aggregate fair market value of
stock with respect to which "incentive stock options" (within the meaning of
Section 422 of the Code, but without regard to Section 422(d) of the Code)
are exercisable for the first time by an Optionee during any calendar year
(under the Plan and all other incentive stock option plans of the Company,
any Subsidiary and any Parent Corporation) exceeds $100,000, such options
shall be taxed as Non-Qualified Options. The rule set forth in the preceding
sentence shall be applied by taking options into account in the order in
which they were granted. For purposes of this Section 4.3(d), the Fair Market
Value of stock shall be determined as of the time that the option with
respect to such stock is granted.

SECTION 4.4      - EXPIRATION OF OPTIONS

                   (a) No Option may be exercised to any extent by anyone
after the first to occur of the following events:

                       (i) The expiration of ten years from the date the
         Option was granted; or

                       (ii) Except in the case of any Optionee who is disabled
         (within the meaning of Section 22(e)(3) of the Code), the expiration of
         three months from the date of the later to occur of (A) the Optionee's
         Termination of Employment for any reason, or (B) the Optionee's
         Termination of Consultancy for any reason, other than such Optionee's
         death unless the Optionee dies within said three-month period; or

                       (iii) In the case of an Optionee who is disabled (within
         the meaning of Section 22(e)(3) of the Code), the expiration of one
         year from the later to occur of (A) the date of the Optionee's
         Termination of Employment for any reason, or (B) the date of Optionee's
         Termination of Consultancy for any reason, other than such Optionee's
         death unless the Optionee dies within said one-year period; or

                       (iv) The expiration of one year from the date of the
         Optionee's death.

                   (b) Subject to the provisions of Section 4.4(a), the
Committee shall provide, in the terms of each individual Option, when such
Option expires and becomes unexercisable;

                                      9



and (without limiting the generality of the foregoing) the Committee may
provide in the terms of individual Options that said Options expire
immediately upon a Termination of Employment or a Termination of Consultancy
for any reason; PROVIDED, HOWEVER, that, to the extent required by Section
25102(o) of the California Corporations Code and Section 260.140.41 of Title
10 of the California Code of Regulations (or other applicable law), an Option
may be exercised in the event of Termination of Consultancy or Termination of
Employment (other than for cause as defined by applicable law, the Option
Agreement or a contract of employment with the holder), to the extent that
such Option is exercisable on the date of such Termination: (i) for a period
of at least six months (or such longer period as is required by applicable
law) from the date of such Termination if such Termination was caused by
death or disability, and (ii) for a period of at least 30 days (or such
longer period as is required by applicable law) from the date of such
Termination if such Termination was caused by reason other than the death or
disability of the holder.

SECTION 4.5      - NO RIGHT TO EMPLOYMENT

                 Nothing in this Plan or in any Stock Option Agreement
hereunder shall confer upon any Optionee any right to continue in the employ
or service of the Company, any Parent Corporation or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company, its Parent
Corporations and its Subsidiaries, which are hereby expressly reserved, to
discharge any Optionee at any time for any reason whatsoever, with or without
cause.

SECTION 4.6      - ADJUSTMENTS IN OUTSTANDING OPTIONS

                 In the event that the outstanding shares of the stock
subject to Options are changed into or exchanged for a different number or
kind of shares of the Company or other securities of the Company by reason of
merger, consolidation, recapitalization, reclassification, stock split-up,
reverse stock split, stock dividend or combination of shares, the Committee
shall make an appropriate and equitable adjustment in the number and kind of
shares as to which all outstanding Options, or portions thereof then
unexercised, shall be exercisable, to the end that after such event the
Optionee's proportionate interest shall be maintained as before the
occurrence of such event. Such adjustment in an outstanding Option shall be
made without change in the total price applicable to the Option or the
unexercised portion of the Option (except for any change in the aggregate
price resulting from rounding-off of share quantities or prices) and with any
necessary corresponding adjustment in Option price per share; provided,
however, that, in the case of Incentive Stock Options, each such adjustment
shall be made in such manner as not to constitute a "modification" within the
meaning of Section 424(h)(3) of the Code. Any such adjustment made by the
Committee shall be final and binding upon all Optionees, the Company and all
other interested persons.

SECTION 4.7      - MERGER, CONSOLIDATION, ACQUISITION, LIQUIDATION OR
                   DISSOLUTION

                 Notwithstanding the provisions of Section 4.6, in its
absolute discretion, and on such terms and conditions as it deems
appropriate, the Committee may provide by the terms of any Option that such
Option cannot be exercised after the merger or consolidation of the Company
with or into another corporation, the acquisition by another corporation or
person of all or substantially all of the Company's assets or 80% or more of
the Company's then

                                      10



outstanding voting stock or the liquidation or dissolution of the Company;
and if the Committee so provides, it may, in its absolute discretion and on
such terms and conditions as it deems appropriate, also provide, either by
the terms of such Option or by a resolution adopted prior to the occurrence
of such merger, consolidation, acquisition, liquidation or dissolution, that,
for some period of time prior to such event, such Option shall be exercisable
as to all shares covered thereby, notwithstanding anything to the contrary in
Section 4.3(a), Section 4.3(b) and/or any installment provisions of such
Option.

                                    ARTICLE V

                               EXERCISE OF OPTIONS

SECTION 5.1      - PERSON ELIGIBLE TO EXERCISE

                 During the lifetime of the Optionee, only the Optionee may
exercise an Option (or any portion thereof). After the death of the Optionee,
any exercisable portion of an Option may, prior to the time when such portion
becomes unexercisable under the Plan or the applicable Stock Option
Agreement, be exercised by his personal representative or by any person
empowered to do so under the deceased Optionee's will or under the then
applicable laws of descent and distribution.

SECTION 5.2      - PARTIAL EXERCISE

                 At any time and from time to time prior to the time when any
exercisable Option or exercisable portion thereof becomes unexercisable under
the Plan or the applicable Stock Option Agreement, such Option or portion
thereof may be exercised in whole or in part; provided, however, that the
Company shall not be required to issue fractional shares and the Committee
may, by the terms of the Option, require any partial exercise to be with
respect to a specified minimum number of shares.

SECTION 5.3      - MANNER OF EXERCISE

                 An exercisable Option, or any exercisable portion thereof,
may be exercised solely by delivery to the Secretary or his office of all of
the following prior to the time when such Option or such portion becomes
unexercisable under the Plan or the applicable Stock Option Agreement:

                   (a) Notice in writing signed by the Optionee or other
person then entitled to exercise such Option or portion, stating that such
Option or portion is exercised, such notice complying with all applicable
rules established by the Committee; and

                   (b) (i) Full payment (in cash or by check) for the shares
with respect to which such Option or portion is thereby exercised; or

                       (ii) With the consent of the Committee, in its
         absolute discretion, (A) shares of the Company's Common Stock owned by
         the Optionee duly endorsed for transfer to the Company, or (B) shares
         of the Company's Common Stock issuable to the Optionee upon exercise of
         the Option, with a Fair Market Value (as determined under

                                      11



         Section 4.2(b)) on the date of Option exercise equal to the aggregate
         Option price of the shares with respect to which such Option or portion
         is thereby exercised; or

                       (iii) With the consent of the Committee, in its
         absolute discretion, a full recourse promissory note bearing interest
         (at no less than such rate as shall then preclude the imputation of
         interest under the Code or any successor provision) and payable upon
         such terms as may be prescribed by the Committee. The Committee may
         also prescribe the form of such note and the security to be given for
         such note. No Option may, however, be exercised by delivery of a
         promissory note or by a loan from the Company when or where such loan
         or other extension of credit is prohibited by law; or

                       (iv) With the consent of the Committee, in its absolute
         discretion, any combination of the consideration provided in the
         foregoing subsections (i), (ii) and (iii); and

                   (c) The payment to the Company (or other employer
corporation) of all amounts which it is required to withhold under federal,
state or local law in connection with the exercise of the Option; with the
consent of the Committee, in its absolute discretion,

                       (i) shares of the Company's Common Stock owned by the
         Optionee duly endorsed for transfer, or

                       (ii) shares of the Company's Common Stock issuable to the
         Optionee upon exercise of the Option, valued at Fair Market Value (as
         determined under Section 4.2(b)) as of the date of Option exercise, may
         be used to make all or part of such payment;

                   (d) Such representations and documents as the Committee,
in its absolute discretion, deems necessary or advisable to effect compliance
with all applicable provisions of the Securities Act and any other federal or
state securities laws or regulations. The Committee may, in its absolute
discretion, also take whatever additional actions it deems appropriate to
effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer orders to transfer agents and
registrars; and

                   (e) In the event that the Option or portion thereof shall
be exercised pursuant to Section 5.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to
exercise the Option or portion thereof.

                                      12



SECTION 5.4      - CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES

                 The shares of stock issuable and deliverable upon the
exercise of an Option, or any portion thereof, may be either previously
authorized but unissued shares or issued shares which have then been
reacquired by the Company. The Company shall not be required to issue or
deliver any certificate or certificates for shares of stock purchased upon
the exercise of any Option or portion thereof prior to fulfillment of the
conditions of Section 5.3 and all of the following conditions:

                 (a) The completion of any registration or other
qualification of such shares under any state or federal law or under the
rulings or regulations of the Securities and Exchange Commission or any other
governmental regulatory body, which the Committee shall, in its absolute
discretion, deem necessary or advisable; and

                 (b) The obtaining of any approval or other clearance from
any state or federal governmental agency which the Committee shall, in its
absolute discretion, determine to be necessary or advisable; and

                 (c) The payment to the Company (or other employer
corporation) of all amounts which it is required to withhold under federal,
state or local law in connection with the exercise of the Option; and

                 (d) The lapse of such reasonable period of time following
the exercise of the Option as the Committee may establish from time to time
for reasons of administrative convenience.

SECTION 5.5      - RIGHTS AS STOCKHOLDERS

                 The holders of Options shall not be, nor have any of the
rights or privileges of, stockholders of the Company in respect of any shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to such
holders.

SECTION 5.6      - TRANSFER RESTRICTIONS

                 Unless otherwise approved in writing by the Committee, no
shares acquired upon exercise of any Option by any Officer may be sold,
assigned, pledged, encumbered or otherwise transferred until at least six
months have elapsed from (but excluding) the date that such Option was
granted. The Committee, in its absolute discretion, may impose such other
restrictions on the transferability of the shares purchasable upon the
exercise of an Option as it deems appropriate. Any such other restriction
shall be set forth in the respective Stock Option Agreement and may be
referred to on the certificates evidencing such shares. The Committee may
require the Employee to give the Company prompt notice of any disposition of
shares of stock, acquired by exercise of an Incentive Stock Option, within
two years from the date of granting such Option or one year after the
transfer of such shares to such Employee. The Committee may direct that the
certificates evidencing shares acquired by exercise of an Incentive Stock
Option refer to such requirement to give prompt notice of disposition.

                                      13



SECTION 5.7      - ADDITIONAL LIMITATIONS ON EXERCISE OF OPTIONS

                 Holders may be required to comply with any timing or other
restrictions with respect to the settlement or exercise of an Option,
including a window-period limitation, as may be imposed in the discretion of
the Committee.

                                  ARTICLE VI

                            STOCK APPRECIATION RIGHTS

SECTION 6.1      - GRANT OF STOCK APPRECIATION RIGHTS

                 A Stock Appreciation Right may be granted by the Committee
to any Employee who receives a grant of an Option under the Plan. A Stock
Appreciation Right may be granted in connection and simultaneously with the
grant of an Option or with respect to a previously granted Option. A Stock
Appreciation Right shall be subject to such terms and conditions not
inconsistent with the Plan as the Committee shall impose, including the
following:

                 (a) A Stock Appreciation Right shall be related to a
particular Option and shall be exercisable only to the extent the related
Option is exercisable.

                 (b) A Stock Appreciation Right shall be granted to the
Optionee to the maximum extent of 100% of the number of shares subject to the
simultaneously or previously granted Option.

                 (c) A Stock Appreciation Right shall entitle the Optionee
(or other person entitled to exercise the Option pursuant to Section 5.1) to
surrender unexercised a portion of the Option to which the Stock Appreciation
Right relates to the Company and to receive from the Company in exchange
therefor an amount, payable in shares of the Company's Common Stock (valued
pursuant to Section 4.2(b)), or, in the discretion of the Committee, in cash,
determined by multiplying the lesser of (i) the difference obtained by
subtracting the Option exercise price per share of the Company's Common Stock
subject to the related Option from the Fair Market Value (as determined under
Section 4.2(b)) of a share of the Company's Common Stock on the date of
exercise of the Stock Appreciation Right or (ii) two times the Option
exercise price per share of the Company's Common Stock subject to the related
Option, by the number of shares of the Company's Common Stock subject to the
related Option with respect to which the Stock Appreciation Right shall have
been exercised.

SECTION 6.2      - EXERCISE OF STOCK APPRECIATION RIGHTS

                 Except in the case of death or disability (within the
meaning of Section 22(e)(3) of the Code) of the Optionee, no Stock
Appreciation Right shall be exercisable during the first six months after a
Stock Appreciation Right is granted with respect to an outstanding Option.

                                      14



                                 ARTICLE VII

                          ISSUANCE OF RESTRICTED STOCK

SECTION 7.1      - ELIGIBILITY

                 Any executive or other key Employee of the Company or of any
corporation which is then a Parent Corporation or a Subsidiary, shall be
eligible to be issued Restricted Stock.

SECTION 7.2      - ISSUANCE OF RESTRICTED STOCK

                   (a) The Committee shall from time to time, in its absolute
discretion:

                       (i) Determine which Employees are executive or key
         Employees and select from among the executive or key Employees
         (including those to whom Options and/or Stock Appreciation Rights
         have been previously granted and/or Restricted Stock has been
         previously issued) such of them as in its opinion should be issued
         Restricted Stock; and

                       (ii) Determine the number of shares of Restricted Stock
         to be issued to such selected executive or key Employees; and

                       (iii) Determine the terms and conditions applicable to
         such Restricted Stock, consistent with the Plan.

                   (b) Shares issued as Restricted Stock may be either
previously authorized but unissued shares or issued shares that have been
reacquired by the Company. Legal consideration, but no other cash payment,
shall be required for each issuance of Restricted Stock.

                   (c) Upon the selection of an executive or key Employee to
be issued Restricted Stock, the Committee shall instruct the Secretary to
issue such Restricted Stock and may impose such conditions on the issuance of
such Restricted Stock as it deems appropriate.

                                  ARTICLE VIII

                            TERMS OF RESTRICTED STOCK

SECTION 8.1      - RESTRICTED STOCK AGREEMENT

                 Restricted Stock shall be issued only pursuant to a written
Restricted Stock Agreement, which shall be executed by the Restricted
Stockholder and an authorized Officer of the Company and which shall contain
such terms and conditions as the Committee shall determine, consistent with
the Plan.

SECTION 8.2      - NO RIGHT TO EMPLOYMENT

                 Nothing in this Plan or in any Restricted Stock Agreement
hereunder shall confer upon any Restricted Stockholder any right to continue
in the employ or service of the

                                      15



Company, any Parent Corporation or any Subsidiary or shall interfere with or
restrict in any way the rights of the Company, its Parent Corporations and
its Subsidiaries, which are hereby expressly reserved, to terminate or
discharge any Restricted Stockholder at any time for any reason whatsoever,
with or without cause.

                 To the extent required by Section 25102(o) of the California
Corporations Code and the Regulations thereunder, the price of the shares
subject to each Restricted Stock award shall be not less than 85% of the Fair
Market Value of such shares on the date such Restricted Stock award is
granted.

SECTION 8.3      - RIGHTS AS RESTRICTED STOCKHOLDERS

                 Upon delivery of the shares of Restricted Stock to the
escrow holder pursuant to Section 8.7, the Restricted Stockholder shall have
all the rights of a stockholder with respect to said shares, subject to the
restrictions in his Restricted Stock Agreement, including the right to vote
the shares and to receive all dividends or other distributions paid or made
with respect to the shares.

SECTION 8.4      - RESTRICTIONS

                 All shares of Restricted Stock issued under this Plan
(including any shares received by Restricted Stockholders as a result of
stock dividends, stock splits or any other forms of recapitalization) shall
be subject to such restrictions as the Committee shall provide in the terms
of each individual Restricted Stock Agreement; provided, however, that by a
resolution adopted after the Restricted Stock is issued, the Committee may,
on such terms and conditions as it may determine to be appropriate and
subject to Section 10.3, remove any or all of the restrictions imposed by the
terms of the Restricted Stock Agreement. All restrictions imposed pursuant to
this Section 8.4 shall expire within ten years of the date of issuance.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire.

SECTION 8.5      - FORFEITURE OF RESTRICTED STOCK

                 The Committee shall provide in the terms of each individual
Restricted Stock Agreement that the Restricted Stock then subject to
restrictions under the Restricted Stock Agreement be forfeited by the
Restricted Stockholder back to the Company immediately upon the later to
occur of: (a) a Termination of Employment for any reason, or (b) a
Termination of Consultancy for any reason; provided, however, that provision
may be made that no such forfeiture shall occur in the event of a Termination
of Employment or Termination of Consultancy because of the Employee's normal
retirement, death, total disability or early retirement with the consent of
the Board.

SECTION 8.6      - MERGER, CONSOLIDATION, ACQUISITION, LIQUIDATION OR
                   DISSOLUTION

                 Upon the merger or consolidation of the Company with or into
another corporation, the acquisition by another corporation or person of all
or substantially all of the Company's assets or 80% or more of the Company's
then outstanding voting stock or the liquidation of the Company, the
Committee may determine, at its sole discretion, that the

                                      16



restrictions imposed under the Restricted Stock Agreement upon some or all
shares of Restricted Stock shall immediately expire and/or that some or all
of such shares shall cease to be subject to forfeiture under Section 8.5.

SECTION 8.7      - ESCROW

                 The Secretary or such other escrow holder as the Committee
may appoint shall retain physical custody of the certificates representing
Restricted Stock until all of the restrictions imposed under the Restricted
Stock Agreement expire or shall have been removed; provided, however, that in
no event shall any Restricted Stockholder retain physical custody of any
certificates representing Restricted Stock issued to him.

SECTION 8.8      - LEGEND

                 In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Committee shall cause a legend or legends to
be placed on certificates representing all shares of Restricted Stock that
are still subject to restrictions under Restricted Stock Agreements, which
legend or legends shall make appropriate reference to the conditions imposed
thereby.

                                   ARTICLE IX

                                 ADMINISTRATION

SECTION 9.1      - COMMITTEE

                 The Committee shall consist of the Board, or such committee
or subcommittee of the Board as is designated by the Board. In the event that
the Board designates such a committee or subcommittee as the Committee,
appointment of Committee members shall be effective upon acceptance of
appointment, Committee members may resign at any time by delivering written
notice to the Board and vacancies in the Committee shall be filled by the
Board.

SECTION 9.2      - DUTIES AND POWERS OF COMMITTEE

                 It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the terms of the Plan, the Options, the
Stock Appreciation Rights and the Restricted Stock and to adopt such rules
for the administration, interpretation and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules. Any
such interpretations and rules in regard to Incentive Stock Options shall be
consistent with the basic purpose of the Plan to grant "incentive stock
options" within the meaning of Section 422 of the Code.

                                      17



SECTION 9.3      - MAJORITY RULE

                 The Committee shall act by a majority of its members in
office. The Committee may act either by vote at a meeting or by a memorandum
or other written instrument signed by a majority of the Committee.

SECTION 9.4      - COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS

                 Members of the Committee shall receive such compensation for
their services as members as may be determined by the Board. All expenses and
liabilities incurred by members of the Committee in connection with the
administration of the Plan shall be borne by the Company. The Committee may
employ attorneys, consultants, accountants, appraisers, brokers or other
persons. The Committee, the Company and its Officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon all Optionees, all
Restricted Stockholders, the Company and all other interested persons. No
member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan,
the Options, the Stock Appreciation Rights or the Restricted Stock and all
members of the Committee shall be fully protected by the Company in respect
to any such action, determination or interpretation.

                                   ARTICLE X

                                OTHER PROVISIONS

SECTION 10.1     - OPTIONS, STOCK APPRECIATION RIGHTS AND RESTRICTED STOCK NOT
                   TRANSFERABLE

                 No Option, Stock Appreciation Right, Restricted Stock or
interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee, the holder of the Stock
Appreciation Right, the Restricted Stockholder or his successors in interest
or shall be subject to disposition by transfer, alienation, anticipation,
pledge, encumbrance, assignment or any other means whether such disposition
be voluntary or involuntary or by operation of law by judgment, levy,
attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null
and void and of no effect; provided, however, that nothing in this Section
10.1 shall, to the extent required by Section 25102(o) of the California
Corporation Code and Section 260.140.41 of Title 10 of the California Code of
Regulations (or other applicable law), prevent transfers by will or by the
applicable laws of descent and distribution, by instrument to an inter vivos
or testamentary trust in which the options are to be passed to beneficiaries
upon the death of the trustor (settlor), or by gift to "immediate family" as
that term is defined in 17 C.F.R. 240.16a-1(e).

SECTION 10.2     - AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN

                 The Plan, including without limitation any agreement,
instrument or document executed pursuant to the Plan, may be wholly or
partially amended or otherwise modified, suspended or terminated at any time
or from time to time by the Committee. However, without approval of the
Company's stockholders given within 12 months before or after the action by

                                     18



the Committee, no action of the Committee may increase any limit imposed in
Section 2.1 on the maximum number of shares which may be issued on exercise
of Options or Stock Appreciation Rights or as Restricted Stock, materially
modify the eligibility requirements of Section 3.1, reduce the minimum Option
price requirements of Section 4.2(a) or extend the limit imposed in this
Section 10.2 on the period during which Options or Stock Appreciation Rights
may be granted or Restricted Shares may be issued. Neither the amendment,
suspension nor termination of the Plan shall, without the consent of the
holder of the Option or Stock Appreciation Rights or the Restricted
Stockholder, impair any rights or obligations under any Option or Stock
Appreciation Rights theretofore granted or under any Restricted Stock
theretofore issued, as the case may be. No Option or Stock Appreciation
Rights may be granted and no Restricted Stock may be issued, during any
period of suspension nor after termination of the Plan, and in no event may
any Option or Stock Appreciation Rights be granted or may any Restricted
Stock be issued, under this Plan after January 11, 2004.

SECTION 10.3     - APPROVAL OF PLAN BY STOCKHOLDERS

                 This Plan was approved by the Company's stockholders on
February 24, 1994.

SECTION 10.4     - EFFECT OF PLAN UPON OTHER OPTION AND COMPENSATION PLANS

                 The adoption of this Plan shall not affect any other
compensation or incentive plans in effect for the Company, any Parent
Corporation or any Subsidiary. Nothing in this Plan shall be construed to
limit the right of the Company, any Parent Corporation or any Subsidiary (a)
to establish any other forms of incentives or compensation for employees of
the Company, any Parent Corporation or any Subsidiary or (b) to grant or
assume options or stock appreciation rights or to issue restricted stock
otherwise than under this Plan in connection with any proper corporate
purpose, including, but not by way of limitation, the grant or assumption of
options or stock appreciation rights or the issuance of restricted stock in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, firm or
association.

SECTION 10.5     - TITLES

                 Titles are provided herein for convenience only and are not
to serve as a basis for interpretation or construction of the Plan.

SECTION 10.6     - CONFORMITY TO SECURITIES LAWS

                 The Plan is intended to conform to the extent necessary with
all applicable provisions of any applicable state securities laws, the
Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including
without limitation Rule 16b-3. Notwithstanding anything herein to the
contrary, the Plan shall be administered, and Options and Stock Appreciation
Rights shall be granted and may be exercised and Restricted Stock may be
issued, only in such a manner as to conform to such laws, rules and
regulations. To the extent permitted by applicable law, the Plan, Options and
Stock Appreciation Rights granted and Restricted Stock issued hereunder

                                     19



shall be deemed amended to the extent necessary to conform to such laws,
rules and regulations.

SECTION 10.7     - INFORMATION TO HOLDERS AND PURCHASERS.

                 To the extent required by Section 25102(o) of the California
Corporation Code and Section 260.140.46 of Title 10 of the California Code of
Regulations (or other applicable law), the Company shall provide to each
holder of an Option and to each person who acquires shares of Common Stock
pursuant to the Plan, not less frequently than annually during the period
such person holds an Option, and, in the case of a holder or other person who
acquires shares of Common Stock pursuant to the Plan, during the period such
holder or person owns such shares, copies of the Company's annual financial
statements. Notwithstanding the preceding sentence, the Company shall not be
required to provide such statements to Employees and Consultants whose duties
in connection with the Company assure their access to equivalent information.

SECTION 10.8     - REPURCHASE PROVISIONS.

                 The Committee in its discretion may provide that the Company
may repurchase shares of Common Stock acquired upon exercise of an Option or
purchase of Common Stock under a Restricted Stock award upon a holder's
Termination of Consultancy or Termination of Employment; PROVIDED, HOWEVER,
that any such repurchase right shall be set forth in the applicable Option
Agreement or in another agreement entered into pursuant to such Option
Agreement or Restricted Stock award agreement; and, PROVIDED, FURTHER, that,
to the extent required by Section 25102(o) of the California Corporation Code
and Section 260.140.41 or 260.140.42 of Title 10 of the California Code of
Regulations (or other applicable law), any such repurchase of shares of
Common Stock from a person who is not an officer of the Company or any
Subsidiary or a Consultant shall be upon the following terms: (a) if the
repurchase option gives the Company the right to repurchase the shares upon
Termination of Employment at not less than the Fair Market Value of the
shares to be purchased on the date of Termination of Employment, then (i) the
right to repurchase shall be exercised for cash or cancellation of purchase
money indebtedness for the shares within ninety (90) days of Termination of
Employment (or in the case of shares issued upon exercise of Options after
such date of termination, within ninety (90) days after the date of the
exercise) or such longer period as may be agreed to by the Administrator and
the person and (ii) the right shall terminate when the shares of Common Stock
become publicly traded; and (b) if the repurchase right gives the Company the
right to repurchase the shares upon Termination of Employment at the original
purchase price for such shares, then (i) the right to repurchase at the
original purchase price shall lapse at the rate of at least twenty percent
(20%) of the shares per year over five (5) years from the date the Option or
Restricted Stock award is granted (without respect to the date the Option or
Restricted Stock award was exercised or became exercisable) and (ii) the
right to repurchase shall be exercised for cash or cancellation of purchase
money indebtedness for the shares within ninety (90) days of Termination of
Employment (or, in the case of shares issued upon exercise of Options after
such date of Termination of Employment, within ninety (90) days after the
date of the exercise) or such longer period as may be agreed to by the
Committee and the person.

                                      20



SECTION 10.9     - INVESTMENT INTENT.

                 The Company may require a holder or other person purchasing
shares of Common Stock, as a condition of exercising or acquiring Common
Stock under any Option, to give written assurances satisfactory to the
Company as to the Holder's or other person's knowledge and experience in
financial and business matters and/or to employ a representative reasonably
satisfactory to the Company who is knowledgeable and experienced in financial
and business matters and that such holder or person is capable of evaluating,
alone or together with the representative, the merits and risks of exercising
the Option; and to give written assurances satisfactory to the Company
stating that the person is acquiring the stock subject to the Option for such
holder or person's own account and not with any present intention of selling
or otherwise distributing the Common Stock. The foregoing requirements, and
any assurances given pursuant to such requirements, shall be inoperative if
the issuance of the shares upon the exercise or acquisition of Common Stock
under the applicable Option has been registered under a then currently
effective registration statement under the Securities Act, or as to any
particular requirement, a determination is made by counsel for the Company
that such requirement need not be met in the circumstances under the then
applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the
transfer of the stock.

                                  ARTICLE XI
                               ADDITIONAL OPTIONS

SECTION 11.1     - Additional Options

                   (a) Subject to the limitations of Section 2.1, the
Committee may, in its absolute discretion, at or after the date of grant of
an Option, grant Additional Options. Additional Options may be granted with
respect to any outstanding Option.

                   (b) If, with the consent of the Committee pursuant to
Section 5.3(b)(ii), an Optionee exercises an Option that has an Additional
Option Feature by tendering or relinquishing shares of Common Stock and/or
when shares of Common Stock are tendered or relinquished in payment for the
amount to be withheld under applicable federal, state and local income tax
laws (at withholding rates not to exceed the Optionee's applicable marginal
tax rates) in connection with the exercise of an Option, the Optionee shall
automatically be granted an Additional Option. The Additional Option shall be
subject to the following provisions:

                       (i) The Additional Option shall cover the number of
         shares of Common Stock equal to the sum of (A) the number of shares of
         Common Stock tendered or relinquished as consideration upon the
         exercise of the Option to which such Additional Option Feature relates,
         and (B) the number of shares of Common Stock tendered or relinquished
         in payment of the amount to be withheld under applicable federal, state
         and local income tax laws in connection with the exercise of the Option
         to which such Additional Option Feature relates;

                                     21



                       (ii) The Additional Option may, in the Committee's
         absolute discretion, have an Additional Option Feature;

                       (iii) The Additional Option exercise price shall be 100%
         of the Fair Market Value per share (as determined under Section 4.2(b))
         on the date the Employee tenders or relinquishes shares of Common Stock
         to exercise the Option that has the Additional Option Feature and/or
         tenders or relinquishes shares of Common Stock in payment of income tax
         withholding on the exercise of an Option that has the Additional Option
         Feature; and

                       (iv) The Additional Option shall have the same
         termination date and other termination provisions as the underlying
         Option that had the Additional Option Feature.

                                      * * *

                 I hereby certify that the foregoing amendment to the Plan
was duly adopted by the Board of Directors of PETCO Animal Supplies, Inc. on
October 23, 2000.

                 Executed this 15th day of February, 2001.

                                        /s/ JAMES M. MYERS
                                      ----------------------------------------
                                      James M. Myers
                                      Secretary

                                      * * *

                 I hereby certify that the foregoing Plan was duly approved
by the stockholders of PETCO Animal Supplies, Inc. on February 15, 2001.

                 Executed this 15th day of February, 2001.

                                        /s/ JAMES M. MYERS
                                      ----------------------------------------
                                      James M. Myers
                                      Secretary

                                      22

EX-10.19

================================================================================








                          AGREEMENT AND PLAN OF MERGER


                                 by and between


                           PETCO ANIMAL SUPPLIES, INC.


                                       and


                            BD RECAPITALIZATION CORP.


                                   Dated as of


                                  May 17, 2000









================================================================================



                                TABLE OF CONTENTS



                                                                                              PAGE
                                                                                              ----
                                                                                           
AGREEMENT AND PLAN OF MERGER...................................................................  1

ARTICLE I     DEFINITIONS......................................................................  2
      Section 1.1    CERTAIN DEFINITIONS.......................................................  2
      Section 1.2    TERMS GENERALLY...........................................................  8

ARTICLE II    THE MERGER.......................................................................  9
      Section 2.1    THE MERGER................................................................  9
      Section 2.2    CONVERSION (OR RETENTION) OF SHARES.......................................  9
      Section 2.3    PAYMENT OF CASH FOR OTHER SHARES.......................................... 11
      Section 2.4    EXCHANGE OF STOCK CERTIFICATES............................................ 13
      Section 2.5    DISSENTING SHARES......................................................... 14
      Section 2.6    STOCK OPTIONS............................................................. 15

ARTICLE III   THE SURVIVING CORPORATION........................................................ 15
      Section 3.1    CERTIFICATE OF INCORPORATION.............................................. 15
      Section 3.2    BYLAWS.................................................................... 16
      Section 3.3    DIRECTORS AND OFFICERS.................................................... 16

ARTICLE IV    REPRESENTATIONS AND WARRANTIES OFTHE COMPANY..................................... 16
      Section 4.1    CORPORATE EXISTENCE AND POWER............................................. 16
      Section 4.2    CORPORATE AUTHORIZATION................................................... 16
      Section 4.3    CORPORATE RECORDS......................................................... 17
      Section 4.4    CONSENTS AND APPROVALS; NO VIOLATION...................................... 17
      Section 4.5    CAPITALIZATION............................................................ 18
      Section 4.6    COMPANY SEC REPORTS....................................................... 20
      Section 4.7    PROVIDED INFORMATION...................................................... 21
      Section 4.8    ABSENCE OF CERTAIN CHANGES OR EVENTS...................................... 21
      Section 4.9    ACCOUNTS PAYABLE AND INVENTORY............................................ 25
      Section 4.10   NO UNDISCLOSED MATERIAL LIABILITIES....................................... 25
      Section 4.11   LITIGATION................................................................ 25
      Section 4.12   TAXES..................................................................... 26
      Section 4.13   EMPLOYEE BENEFIT PLANS; ERISA............................................. 28
      Section 4.14   LABOR MATTERS............................................................. 31
      Section 4.15   COMPLIANCE WITH LAWS AND COURT ORDERS..................................... 33


                                                     i



      Section 4.16   FINDERS' FEES............................................................. 33
      Section 4.17   ENVIRONMENTAL MATTERS..................................................... 33
      Section 4.18   SUBSIDIARIES.............................................................. 34
      Section 4.19   YEAR 2000 MATTERS......................................................... 35
      Section 4.20   INSURANCE................................................................. 35
      Section 4.21   SUPPLIERS................................................................. 36
      Section 4.22   PERSONNEL, ETC............................................................ 36
      Section 4.23   STOCKHOLDERS RIGHTS PLAN.................................................. 36
      Section 4.24   CONTRACTS................................................................. 36
      Section 4.25   PERMITS; COMPLIANCE WITH APPLICABLE LAWS AND MATERIAL
                     AGREEMENTS................................................................ 38
      Section 4.26   INTELLECTUAL PROPERTY..................................................... 38
      Section 4.27   RELATED PARTY TRANSACTIONS................................................ 41
      Section 4.28   REAL ESTATE............................................................... 41
      Section 4.29   ASSETS.................................................................... 44
      Section 4.30   OPINION OF FINANCIAL ADVISOR.............................................. 44
      Section 4.31   STATE ANTI-TAKEOVER STATUTES; DELAWARE SECTION 203........................ 44
      Section 4.32   INTERNATIONAL TRADE LAWS AND REGULATIONS.................................. 46
      Section 4.33   INVESTMENTS IN AFFILIATED ENTITIES........................................ 45
      Section 4.34   NASDAQ LISTING; HOLDERS OF EQUITY SECURITIES AS OF RECORD
                       DATE FOR MOST RECENT MEETING OF STOCKHOLDERS............................ 46

ARTICLE V     REPRESENTATIONS AND WARRANTIES OF MERGERSUB...................................... 46
      Section 5.1    CORPORATE EXISTENCE AND POWER............................................. 46
      Section 5.2    CORPORATE AUTHORIZATION................................................... 47
      Section 5.3    GOVERNMENTAL AUTHORIZATION................................................ 47
      Section 5.4    NON-CONTRAVENTION......................................................... 47
      Section 5.5    DISCLOSURE DOCUMENTS...................................................... 47
      Section 5.6    FINDERS' FEES............................................................. 48
      Section 5.7    FINANCING................................................................. 48

ARTICLE VI    COVENANTS OF THE COMPANY......................................................... 48
      Section 6.1    CONDUCT OF THE COMPANY.................................................... 48
      Section 6.2    COMPANY STOCKHOLDERS MEETING.............................................. 51
      Section 6.3    ACCESS TO INFORMATION; RIGHT OF INSPECTION................................ 52
      Section 6.4    OTHER POTENTIAL ACQUIRERS................................................. 52
      Section 6.5    RESIGNATION OF DIRECTORS.................................................. 56
      Section 6.6    WARN ACT.................................................................. 56
      Section 6.7    LEASE CONSENTS............................................................ 56


                                                   ii



ARTICLE VII   COVENANTS OF MERGERSUB........................................................... 56
      Section 7.1    DIRECTOR AND OFFICER LIABILITY............................................ 56

ARTICLE VIII  COVENANTS OF MERGERSUB AND THE COMPANY........................................... 56
      Section 8.1    REASONABLE BEST EFFORTS................................................... 57
      Section 8.2    CONSENTS AND APPROVALS.................................................... 57
      Section 8.3    CERTAIN FILINGS........................................................... 58
      Section 8.4    HSR ACT................................................................... 59
      Section 8.5    ADVICE OF CHANGES......................................................... 59
      Section 8.6    FINANCING................................................................. 59
      Section 8.7    RECAPITALIZATION.......................................................... 60
      Section 8.8    PUBLIC ANNOUNCEMENTS...................................................... 60
      Section 8.9    FURTHER ASSURANCES........................................................ 60
      Section 8.10   NOTICES OF CERTAIN EVENTS................................................. 60

ARTICLE IX    CONDITIONS TO THE MERGER......................................................... 61
      Section 9.1    CONDITIONS TO THE OBLIGATIONS OF EACH PARTY............................... 61
      Section 9.2    CONDITIONS TO THE OBLIGATIONS OF MERGERSUB................................ 61
      Section 9.3    CONDITIONS TO THE OBLIGATIONS OF THE COMPANY.............................. 63

ARTICLE X     TERMINATION...................................................................... 63
      Section 10.1   TERMINATION............................................................... 63
      Section 10.2   TERMINATION FEE........................................................... 65
      Section 10.3   EFFECT OF TERMINATION..................................................... 66

ARTICLE XI    MISCELLANEOUS.................................................................... 66
      Section 11.1   NOTICES................................................................... 66
      Section 11.2   SURVIVAL OF REPRESENTATIONS AND WARRANTIES................................ 68
      Section 11.3   AMENDMENTS AND WAIVERS.................................................... 68
      Section 11.4   EXPENSES.................................................................. 68
      Section 11.5   SUCCESSORS AND ASSIGNS; ASSIGNMENT........................................ 69
      Section 11.6   GOVERNING LAW............................................................. 69
      Section 11.7   COUNTERPARTS; EFFECTIVENESS............................................... 69
      Section 11.8   SEVERABILITY.............................................................. 69
      Section 11.9   SPECIFIC PERFORMANCE...................................................... 69
      Section 11.10  ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES............................ 69
      Section 11.11  "KNOWLEDGE"............................................................... 70



                                                     iii




                          AGREEMENT AND PLAN OF MERGER



      This AGREEMENT AND PLAN OF MERGER, dated as of May 17, 2000 (this
"Agreement"), by and between Petco Animal Supplies, Inc., a Delaware corporation
(the "Company"), and BD Recapitalization Corp., a Delaware corporation
("MergerSub").

      WHEREAS, it is the intention of the parties that MergerSub shall merge
with and into the Company (the "Merger"), with the Company being the surviving
corporation;

      WHEREAS, a Special Committee (the "Special Committee") of the Board of
Directors of the Company (composed entirely of directors who have no direct or
indirect interest in the transactions contemplated hereby) has unanimously
determined, and the Board of Directors of the Company has unanimously
determined, that the Merger and the other transactions contemplated by this
Agreement, are fair to, advisable and in the best interests of the Company and
its stockholders, and each of the Special Committee and the Board of Directors
of the Company has approved this Agreement and recommended its adoption by the
stockholders of the Company;

      WHEREAS, the Special Committee, the Board of Directors of the Company and
the sole stockholder of MergerSub have each approved and adopted this Agreement
and have approved the transactions contemplated hereby;

      WHEREAS, as of the date hereof, certain holders of outstanding capital
stock of the Company have entered into a voting agreement (the "Voting
Agreement") with respect to approximately 0.6% of the outstanding capital stock
of the Company and certain employees of the Company have entered into employment
agreements which are conditioned upon the consummation of the Merger and,
following the date hereof, but on or prior to the consummation of the Merger,
the stockholders who are parties to the Voting Agreement and certain additional
stockholders will enter into a stockholders agreement in the form attached as an
exhibit to the Voting Agreement;

      WHEREAS, MergerSub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger (as defined
below) and also to prescribe certain conditions to the Merger; and

      WHEREAS, it is intended that the Merger be accounted for as a
"Recapitalization" for financial reporting purposes.

                                       1



      NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements set forth herein, the parties hereto,
intending to be legally bound, agree as follows:


                                    ARTICLE I
                                   DEFINITIONS

      Section 1.1 CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms shall have the respective meanings set forth below:

      "Affiliate" of a Person shall mean any Person that directly or indirectly
through one or more intermediaries controls, is controlled by, or is under
common control with such Person.

      "Affiliated Entity" shall mean any corporation or other entity in which
the Company or any Subsidiary owns capital stock, a limited partnership interest
or other security which constitutes at least 10% of all of such outstanding
securities or class of securities.

      "Aggregate Spread Amount" shall have the meaning given to it in Section
2.2(d).

      "Balance Sheet" shall mean the consolidated balance sheet of the Company
as of January 29, 2000 (and the notes thereto) set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended January 29, 2000.

      "Balance Sheet Date" shall mean January 29, 2000.

      "Business Day" shall mean any day that is not a Saturday, Sunday or legal
holiday in the State of New York.

      "Code" shall mean the Internal Revenue Code of 1986, as amended.

      "Common Share Exchange Ratio" shall have the meaning set forth in Section
2.2(d).

      "Common Shares" shall mean the shares of Common Stock.

      "Common Stock" shall mean the capital stock of the Company designated as
common stock, $0.0001 par value per share.

      "Company" shall mean Petco Animal Supplies, Inc., a Delaware
corporation.

      "Company Proxy Statement" shall have the meaning set forth in Section 4.4.

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      "Company SEC Reports" shall have the meaning set forth in Section 4.6.

      "Company Securities" shall have the meaning set forth in Section 4.5(b).

      "Company Stockholders Meeting" shall have the meaning set forth in Section
6.2.

      "Contracts" shall have the meaning set forth in Section 4.24.

      "Current Policies" shall have the meaning set forth in Section 7.1.

      "Delaware Corporate Law" shall mean the Delaware General Corporation Law,
as amended.

      "Director Options" shall mean the outstanding options to acquire Shares
granted to directors of the Company.

      "Disbursing Agent" shall have the meaning set forth in Section 2.3.

      "Disclosure Letter" shall have the meaning set forth in the preamble to
Article IV.

      "Dissenting Shares" shall have the meaning set forth in Section 2.5.

      "Effective Time" shall have the meaning set forth in Section 2.1(b).

      "Employee Options" shall mean the outstanding options to acquire Shares
granted to employees or consultants of the Company.

      "Environmental Claims" shall have the meaning set forth in Section 4.17.

      "Environmental Laws" shall have the meaning set forth in Section 4.17.

      "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.

      "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.

      "Expenses" shall have the meaning set forth in Section 10.2.

                                       3



      "Financing" shall have the meaning set forth in Section 5.7.

      "Financing Letters" shall have the meaning set forth in Section 5.7.

      "GAAP" shall mean generally accepted accounting principles, as in effect
in the United States, from time to time.

      "Governmental Authority" shall mean any agency, public or regulatory
authority, instrumentality, department, commission, court, ministry, tribunal or
board of any government, whether foreign or domestic and whether national,
federal, tribal, provincial, state, regional, local or municipal.

      "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.

      "Insurance Policies" shall have the meaning set forth in Section 4.20.

      "Intellectual Property" shall mean all trademarks, service marks, trade
names, Internet domain names, designs, logos, slogans, and general intangibles
of like nature, whether registered or unregistered, together with all goodwill,
registrations and applications related to the foregoing (collectively,
"Trademarks"); patents and industrial designs (including any continuations,
divisionals, continuations-in-part, renewals, reissues, and applications for any
of the foregoing); copyrights (including any registrations and applications for
any of the foregoing); Software; technology, trade secrets and other
confidential information, know-how, proprietary processes, formulae, algorithms,
models, and methodologies (collectively, "Trade Secrets"); rights of publicity
and privacy relating to the use of the names, likenesses, voices, signatures and
biographical information of real persons; in each case used in or necessary for
the conduct of Company's business as currently conducted or contemplated to be
conducted.

      "Irrevocable Proxies" shall have the meaning set forth in the preamble to
this Agreement.

      "IRS" shall mean the United States Internal Revenue Service.

      "Law" shall mean statutes, common laws, rules, ordinances, regulations,
codes, licensing requirements, orders, judgments, injunctions, decrees,
licenses, agreements, settlements, governmental guidelines or interpretations,
permits, rules and bylaws of a Governmental Authority.

      "Leased Real Property" shall have the meaning set forth in Section
4.28(b).

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      "Leases" shall have the meaning set forth in Section 4.28(b).

      "Lien" shall mean, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.

      "Material Adverse Effect" shall mean, with respect to any Person, any
event, circumstance, change, condition, development or occurrence either
individually or in the aggregate with all other events, circumstances, changes,
conditions, developments or occurrences, resulting in or reasonably likely to
result in a material adverse effect on (i) the business (as now conducted or as
now proposed by such Person to be conducted), results of operations, condition
(financial or otherwise), assets or liabilities (contingent or otherwise), or
prospects of such Person and its Subsidiaries, taken as a whole, (ii) the
legality or enforceability of this Agreement, or (iii) the ability of such
Person to perform its obligations and to consummate the transactions under this
Agreement.

      "Materials of Environmental Concern" shall have the meaning set forth in
Section 4.17.

      "Merger" shall have the meaning set forth in Section 2.1(a).

      "Merger Consideration" shall have the meaning set forth in Section 2.2(a).

      "MergerSub" shall mean BD Recapitalization Corp., a Delaware
corporation.

      "MergerSub Common Shares" shall mean the common stock, $0.01 par value, of
MergerSub.

      "MergerSub Securities" shall have the meaning set forth in Section 5.8.

      "MergerSub Series A Preferred Shares" shall mean the shares of 14% Series
A Senior Redeemable Exchangeable Cumulative Preferred Stock of MergerSub.

      "MergerSub Series B Preferred Shares" shall mean the shares of 12% Series
B Junior Redeemable Exchangeable Cumulative Preferred Stock of MergerSub.

      "Minimum Lease Consents" shall mean (i) any and all consents of landlords
under the Leases for all Leased Real Property at which the distribution centers
of the Company and its Subsidiaries are located, (ii) any and all consents of
landlords under the Leases required by MergerSub's lender(s) in connection with
the Financing, except with respect to leaseholds which the Agents (as defined in
the Financing Letters) determine are immaterial to the collateral package (as
contemplated by the Financing Letters) as a whole, and (iii) any and

                                       5



all consents of landlords under the Leases sufficient to ensure that, as of
the Effective Time, the stores (on an annualized basis) occupied under the
Leases for which the consents of the landlords thereunder were required under
such Leases but have not been obtained do not account, in the aggregate, for
more than five percent (5%) of the Company's total annual gross revenue for
its fiscal year ended January 29, 2000 as indicated in the Company's
accounting books and records.

      "New Series A Preferred Stock" shall have the meaning set forth in Section
2.2(f).

      "New Series A Preferred Stock Exchange Ratio" shall have the meaning set
forth in Section 2.2(e).

      "New Series B Preferred Stock" shall have the meaning set forth in Section
2.2(g).

      "New Series B Preferred Stock Exchange Ratio" shall have the meaning set
forth in Section 2.2(g).

      "Notice of Superior Proposal" shall have the meaning set forth in Section
6.4(b).

      "Other Shares" shall have the meaning set forth in Section 2.2(a).

      "Options" shall mean Employee Options and Director Options.

      "Owned Real Property" shall have the meaning set forth in Section 4.28(a).

      "Permits" shall mean any licenses, franchises, permits, certificates,
consents, approvals or other similar authorizations affecting, or relating in
any way to, the assets or business of the Company.

      "Person" shall mean any individual, corporation, limited liability
company, partnership, association, trust or any other entity or organization,
including any government or political subdivision or any agency or
instrumentality thereof.

      "Plans" shall have the meaning set forth in Section 4.13(a).

      "Proceeding" shall have the meaning set forth in Section 4.11.

      "Real Property" shall have the meaning set forth in Section 4.28(c).

      "Related Parties" shall have the meaning set forth in Section 4.27.

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      "Replacement Policies" shall have the meaning set forth in Section 7.1.

      "Retained Shares" shall have the meaning set forth in Section 2.2(c).

      "Retaining Stockholders" shall have the meaning set forth in Section
2.2(c).

      "Rights" shall mean the preferred share purchase rights issued with
respect to each share of Common Stock pursuant to the Rights Agreement.

      "Rights Agreement" shall mean the Rights Agreement, dated September 14,
1998, between the Company and American Stock Transfer and Trust Company as
Rights Agent.

      "Roll-over Schedule" shall have the meaning set forth in Section 2.2(d).

      "Roll-over Share Number" shall have the meaning set forth in Section
2.2(d).

      "SEC" shall mean the Securities and Exchange Commission.

      "Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.

      "Shares" shall mean the Common Stock of the Company, including the Rights.

      "Software" means any and all (a) computer programs, including any and all
software implementation of algorithms, models and methodologies, whether in
source code or object code form, (b) databases and compilations, including any
and all data and collections of data, and (c) all documentation, including user
manuals and training materials, relating to any of the foregoing.

      "Spread Amount" shall have the meaning set forth in section 2.6(b).

      "Subsidiary" shall mean any corporation or other entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned by such Person.

      "Superior Proposal" shall have the meaning set forth in Section 6.4(c).

      "Surviving Corporation" shall have the meaning set forth in Section
2.1(a).

                                       7



      "System" shall have the meaning set forth in Section 4.19.

      "Tax or Taxes" shall mean (A) all taxes, charges, fees, duties, levies,
penalties or other assessments, including, without limitation, income, gross
receipts, excise, real and personal property, sales, use, transfer, license,
payroll, withholding, social security, franchise, unemployment insurance,
workers' compensation, employer health tax or other taxes, fees, assessments or
charges of any kind whatsoever, imposed by any Governmental Authority and shall
include any interest, penalties or additions to any of the foregoing, (B) any
liability for payment of amounts described in clause (A) whether as a result of
transferee liability, of being a member of an affiliated, consolidated, combined
or unitary group for any period, or otherwise through operation of law, and (C)
any liability for the payment of amounts described in clauses (A) or (B) as a
result of any tax sharing agreement, tax allocation agreement, tax indemnity
agreement, or other agreement that includes indemnification for any tax
liability.

      "Tax Return" shall mean all returns, declarations, reports, forms,
estimates, information returns, statements or other documents (including any
related or supporting information) filed or required to be filed with or
supplied to any Governmental Authority or any Person, in each case, in
connection with any Taxes.

      "Terminal Date" shall have the meaning set forth in Section 10.1(b).

      "Third Party" shall have the meaning set forth in Section 6.4(c).

      "Third Party Acquisition" shall have the meaning set forth in Section
6.4(c).

      "Voting Agreement" shall have the meaning set forth in the Recitals
hereto.

      "WARN Act" shall have the meaning set forth in section 6.6.

      "Year 2000 Compliant" shall have the meaning set forth in Section 4.19.

      Section 1.2 TERMS GENERALLY. The definitions in Sections 1.1 shall apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include," "includes" and "including" shall
be deemed to be followed by the phrase "without limitation" even if not followed
actually by such phrase unless the context expressly provides otherwise. All
references herein to Sections, paragraphs and Exhibits shall be deemed
references to Sections or paragraphs of or Exhibits to this Agreement unless the
context shall otherwise require. Unless otherwise expressly defined, terms
defined in this Agreement shall have the same meanings when used in any Exhibit
and terms defined in any Exhibit shall have


                                       8



the same meanings when used in this Agreement or in any other Exhibit. The
words "herein," "hereof," "hereto" and "hereunder" and similar words refer to
this Agreement as a whole and not to any particular provision of this Agreement.

                                   ARTICLE II
                                   THE MERGER

      Section 2.1 THE MERGER.

            (a)   At the Effective Time, MergerSub shall be merged with and
into the Company in accordance with Delaware Corporate Law and the terms and
conditions hereof (the "Merger"). Upon consummation of the Merger, the separate
existence of MergerSub shall cease and the Company shall be the surviving
corporation (the "Surviving Corporation").

            (b)   As soon as practicable after satisfaction (or, to the extent
permitted hereunder, waiver) of all conditions to the Merger, the Company and
MergerSub will file a certificate of merger with the Secretary of State of the
State of Delaware in accordance with Delaware Corporate Law and make all other
filings or recordings required by Law in connection with the Merger. The Merger
shall become effective at such time as the certificate of merger is certified
by the Secretary of State of the State of Delaware or at such later time as is
specified in the certificate of merger (such date and time being referred to
herein as the "Effective Time").

            (c)   The Merger shall have the effects set forth in the Delaware
Corporate Law.

      Section 2.2 CONVERSION (OR RETENTION) OF SHARES. At the Effective Time,
pursuant to this Agreement and by virtue of the Merger and without any action on
the part of MergerSub, the Company or the holders of any of the following
securities:

            (a)   Each share of Common Stock issued and outstanding immediately
prior to the Effective Time other than: (i) any shares of Common Stock to be
canceled pursuant to Section 2.2(b), (ii) each share of Common Stock to remain
outstanding pursuant to Section 2.2(c) or 2.2(d), and (iii) each Dissenting
Share complying with Section 2.5, shall be canceled, retired and shall cease to
exist and shall be converted automatically into the right to receive an amount
equal to $22 in cash, without interest (the "Merger Consideration"), payable to
the holder thereof upon surrender of the certificate formerly representing such
share of Common Stock in the manner provided in Section 2.3; and no other
consideration shall be delivered or deliverable on or in exchange therefor (the
shares of Common Stock being


                                       9



converted into the right to receive the Merger Consideration are hereinafter
referred to as the "Other Shares.")

            (b)   Each Share held in the treasury of the Company and each Share
owned by any of the Company's Subsidiaries or by MergerSub, if any, immediately
prior to the Effective Time shall be canceled without any conversion thereof and
no payment or distribution shall be made with respect thereto.

            (c)   The shares of Common Stock registered in the names of the
persons (the "Retaining Stockholders") listed and as set forth in Section 2.2(c)
of the Disclosure Letter (collectively, the "Retained Shares") shall not be
converted, exchanged or canceled as provided above but shall remain outstanding.

            (d)   That number of shares of Common Stock registered in the names
of the persons (which shall not include the Retained Shares) and as identified
in a schedule prepared by the Company (the "Roll-over Schedule"), shall not be
converted, exchanged or canceled as provided in Sections 2.2(a) or (b) above,
but shall remain outstanding. The Roll-over Schedule shall be delivered by the
Company to MergerSub prior to the consummation of the Merger, and shall
identify a number of shares of Common Stock to remain outstanding (the
"Rollover Share Number") and a number of Options to remain outstanding such
that (x) the sum of (A) the product of $22 and the Rollover Share Number, and
(B) the Aggregate Spread Amount (as defined in Section 2.6(b) hereof and
subject to the adjustment provided in Section 2.6(c)) for all Options
identified in the Roll-over Schedule (the "Aggregate Spread Amount") shall be
less than or equal to (y) $1,735,927.

            (e)   Each MergerSub Common Share that is issued and outstanding
immediately prior to the Effective Time shall be converted into one newly
issued, fully paid and nonassessable shares of Common Stock (the "Common Share
Exchange Ratio").

            (f)   Each MergerSub Series A Preferred Share that is issued and
outstanding immediately prior to the Effective Time shall be converted into one
newly issued, fully paid and nonassessable share of Series A Preferred Stock
(the "New Series A Preferred Stock") of the Surviving Corporation (the "New
Series A Preferred Stock Exchange Ratio"). The terms of the New Series A
Preferred Stock shall be as provided in the Surviving Corporation's certificate
of incorporation.

            (g)   Each MergerSub Series B Preferred Share that is issued and
outstanding immediately prior to the Effective Time shall be converted into one
newly issued, fully paid and nonassessable share of Series B Preferred Stock
(the "New Series B Preferred Stock") of the Surviving Corporation (the "New
Series B Preferred Stock Exchange Ratio").


                                       10



The terms of the New Series B Preferred Stock shall be as provided in the
Surviving Corporation's certificate of incorporation.

            (h)   If between the date of this Agreement and the Effective Time
the number of outstanding Shares shall have been changed into a different
number of shares or a different class, by reason of any stock dividend,
subdivision, reclassification, recapitalization, split-up, combination,
exchange of shares or the like other than pursuant to the Merger, the amount of
the Merger Consideration, the Common Share Exchange Ratio, the New Series A
Preferred Stock Exchange Ratio and the New Series B Preferred Stock Exchange
Ratio and the Roll-over Share Number shall be correspondingly adjusted and, if
and as appropriate, all other appropriate corresponding adjustments shall be
made, including, without limitation, as necessary to properly adjust the
numbers in Sections 2.2(c) and (d).

      Section 2.3 PAYMENT OF CASH FOR OTHER SHARES.

            (a)   At the Effective Time, the Surviving Corporation shall
irrevocably deposit or cause to be deposited with a bank or trust company to be
designated by the Surviving Corporation which is organized and doing business
under the laws of the United States or any state thereof and has a combined
capital and surplus of at least $100,000,000 (the "Disbursing Agent"), as agent
for the holders of Other Shares, cash in the aggregate amount required to pay
the Merger Consideration in respect of the Other Shares outstanding immediately
prior to the Effective Time. Pending distribution pursuant to Section 2.3(b)
hereof of the cash deposited with the Disbursing Agent, such cash shall be held
in trust for the benefit of the holders of Other Shares and such cash shall not
be used for any other purposes; PROVIDED, HOWEVER, that the Surviving
Corporation may direct the Disbursing Agent to invest such cash, provided that
such investments (i) shall be obligations of or guaranteed by the United States
of America, in commercial paper obligations receiving the highest rating from
either Moody's Investors Services, Inc. or Standard & Poor's Corporation, or in
certificates of deposit, bank repurchase agreements or bankers acceptances of
domestic commercial banks with capital exceeding $250,000,000 (collectively
"Permitted Investments") or in money market funds which are invested solely in
Permitted Investments and (ii) shall have maturities that will not prevent or
delay payments to be made pursuant to Section 2.3(b) hereof. Each holder of a
certificate or certificates representing Other Shares canceled and extinguished
at the Effective Time pursuant to Section 2.2(a) hereof may thereafter in
accordance with the provisions of Section 2.3(b) hereof, surrender such
certificate or certificates to the Disbursing Agent, as agent for such holder of
Other Shares, to effect the exchange of such certificate or certificates on such
holder's behalf for a period ending six months after the Effective Time.


                                       11



            (b)   As soon as reasonably practicable after the Effective Time,
the Surviving Corporation shall cause the Disbursing Agent to mail to each
holder of record of Other Shares, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
certificates representing Other Shares shall pass, only upon delivery of such
certificates to the Disbursing Agent and shall be in such form and have such
other provisions not inconsistent with this Agreement as the Surviving
Corporation may specify) and (ii) instructions for use in effecting the
surrender of certificates representing Other Shares in exchange for payment of
the Merger Consideration. Upon surrender of a certificate or certificates
representing Other Shares for cancellation to the Disbursing Agent or to such
other agent or agents as may be appointed by the Surviving Corporation,
together with such letter of transmittal, duly executed and completed, the
holder of such certificate or certificates shall be entitled to receive in
exchange therefor the Merger Consideration for each Other Share formerly
represented by such certificate or certificates, and the certificate or
certificates so surrendered shall forthwith be cancelled, less any amounts
required to be withheld by applicable law. Until so surrendered and exchanged,
each such certificate shall, after the Effective Time, be deemed to represent
only the right to receive the Merger Consideration, and until such surrender
and exchange, no cash or other consideration or payment of any kind shall be
paid to the holder of such outstanding certificate in respect thereof.

            (c)   If payment is to be made to a Person other than the registered
holder of the Other Shares represented by the certificate or certificates
surrendered in exchange therefor, it shall be a condition to such payment that
the certificate or certificates so surrendered shall be properly endorsed or
otherwise be in proper form for transfer and that the Person requesting such
payment shall pay to the Disbursing Agent any transfer or other Taxes required
as a result of such payment to a Person other than the registered holder of such
Other Shares or establish to the satisfaction of the Disbursing Agent that such
Tax has been paid or is not payable.

            (d)   After the Effective Time, there shall be no further transfers
on the stock transfer books of the Surviving Corporation of the Other Shares
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates representing Other Shares are presented to the
Surviving Corporation, they shall be canceled and exchanged for the
consideration provided for, and in accordance with the procedures set forth, in
this Article II.

            (e)   If any cash deposited with the Disbursing Agent for purposes
of payment in exchange for Other Shares remains unclaimed six months after the
Effective Time, such cash; together with all interest and earnings thereon
shall be returned to the Surviving Corporation, upon demand, and any such
holder who has not converted his Other Shares into the Merger Consideration
prior to that time shall thereafter look only to the Surviving


                                       12



Corporation for payment of the Merger Consideration. Notwithstanding the
foregoing, the Surviving Corporation shall not be liable to any holder of Other
Shares for any amount paid to a public official pursuant to applicable
unclaimed property laws. Any amounts remaining unclaimed by holders of Other
Shares six (6) years after the Effective Time (or such earlier date immediately
prior to such time as such amounts would otherwise escheat to or become
property of any Governmental Authority) shall, to the extent permitted by
applicable Law, become the property of the Surviving Corporation free and clear
of any claims or interest of any Person previously entitled thereto.

            (f)   Any portion of the Merger Consideration; together with all
interest and earnings thereon made available to the Disbursing Agent pursuant to
Section 2.5(a) to pay for Other Shares for which dissenter's rights have been
perfected shall be returned to the Surviving Corporation, upon demand.

            (g)   No dividends or other distributions with respect to capital
stock of the Surviving Corporation with a record date after the Effective Time
shall be paid to the holder of any unsurrendered certificate for Other Shares.

            (h)   From and after the Effective Time, the holders of Other Shares
outstanding immediately prior to the Effective Time shall cease to have any
rights with respect to such Other Shares, other than the right to receive the
Merger Consideration as provided in this Agreement.

            (i)   In the event that any certificate representing Other Shares
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such certificate representing Other Shares to
be lost, stolen or destroyed and, if required by the Company, the posting by
such holder of a bond in such reasonable amount as the Company may direct as
indemnity against any claim that may be made against it with respect to such
certificate representing Other Shares, the Disbursing Agent will issue in
exchange for such lost, stolen or destroyed certificate representing Other
Shares the Merger Consideration, and unpaid dividends and distributions on Other
Shares deliverable in respect thereof pursuant to this Agreement and the Merger.

      Section 2.4 EXCHANGE OF STOCK CERTIFICATES. Immediately after the
Effective Time, the Surviving Corporation shall (i) deliver to the record holder
of the certificates which immediately prior to the Effective Time represented
all the outstanding shares of MergerSub Common Shares that were converted into
the right to receive shares of Common Stock in accordance with Section 2.2(e),
in exchange for such certificates, duly endorsed in blank, share certificates,
registered in the name of such record holder, representing the number of shares
of Common Stock to which such record holder is so entitled by virtue of Section


                                       13



2.2(e), (ii) deliver to the record holder of the certificates which immediately
prior to the Effective Time represented all the outstanding MergerSub Series A
Preferred Shares that were converted into the right to receive shares of New
Series A Preferred Stock in accordance with Section 2.2(f), in exchange for such
certificates, duly endorsed in blank, share certificates, registered in the name
of such record holder, representing the number of shares of New Series A
Preferred Stock to which such record holder is so entitled by virtue of Section
2.2(f), and (iii) deliver to the record holder of the certificates which
immediately prior to the Effective Time represented all the outstanding
MergerSub Series B Preferred Shares that were converted into the right to
receive shares of New Series B Preferred Stock in accordance with Section
2.2(g), in exchange for such certificates, duly endorsed in blank, share
certificates, registered in the name of such record holder, representing the
number of shares of New Series B Preferred Stock to which such record holder is
so entitled by virtue of Section 2.2(g). Such certificate will bear a legend
restricting the transferability of such shares to the extent contemplated by the
form of stockholders agreement attached as an exhibit to the Voting Agreement,
which restrictions include restrictions designed to assure the Surviving
Corporation that these shares will not be offered or sold in contravention of
any federal or state securities laws.

      Section 2.5 DISSENTING SHARES. Notwithstanding Section 2.2, Shares which
are issued and outstanding immediately prior to the Effective Time and which are
held by a holder who has not voted such Shares in favor of the Merger and who
has delivered a written demand for relief as a dissenting stockholder in the
manner provided by Delaware Corporate Law and who, as of the Effective Time,
shall not have effectively withdrawn or lost such right to relief as a
dissenting stockholder ("Dissenting Shares") shall not be converted into a right
to receive the Merger Consideration. The holders of such Dissenting Shares shall
be entitled only to such rights as are granted by Section 262 of Delaware
Corporate Law. Each holder of Dissenting Shares who becomes entitled to payment
for such Shares pursuant to Section 262 of Delaware Corporate Law shall receive
payment therefor from the Surviving Corporation in accordance with Delaware
Corporate Law; provided, however, that if any such holder of Dissenting Shares
(i) shall have failed to establish his entitlement to relief as a dissenting
stockholder as provided in Section 262 of Delaware Corporate Law, (ii) shall
have effectively withdrawn his demand for relief as a dissenting stockholder
with respect to such Shares or lost his right to relief as a dissenting
stockholder and payment for his Shares under Section 262 of Delaware Corporate
Law, or (iii) shall have failed to file a complaint with the appropriate court
seeking relief as to determination of the value of all Dissenting Shares within
the time provided in Section 262 of Delaware Corporate Law, such holder shall
forfeit the right to relief as a dissenting stockholder with respect to such
Shares and each such Share shall be converted into the right to receive the
appropriate Merger Consideration without interest thereon, from the Surviving
Corporation as provided in Section 2.2. The Company shall give MergerSub prompt
written notice of any demands received by the Company for


                                       14



relief as a dissenting stockholder and MergerSub shall have the right to
participate in all negotiations and proceedings with respect to such demands.
The Company shall not, except with the prior written consent of MergerSub, make
any payment with respect to, or settle or offer to settle, any such demands.

      Section 2.6 STOCK OPTIONS.

            (a)   Each Option, whether vested or unvested, that has an exercise
price equal to or greater than $22 shall be canceled immediately prior to the
Effective Time for no consideration.

            (b)   Immediately prior to the Effective Time, all other outstanding
and vested Options (other than Options being retained pursuant to Section 2.6(c)
hereof) shall be canceled and, in lieu thereof, as soon as reasonably
practicable as of or after the Effective Time, the holders of such Options shall
receive a cash payment from the Company equal to the product of (i) the total
number of Shares previously subject to such Option and (ii) the excess (x) of
the Merger Consideration that would be paid with respect to the Share subject to
such Option if the Option were exercised over (y) the exercise price per Share
subject to such Option (such excess, the "Spread Amount"), as reduced by any
required withholding of taxes. Immediately prior to the Effective Time, all
unvested Options other than Options being retained pursuant to Section 2.6(c)
hereof shall be vested.

            (c)   Subject to the provisions of Section 2.2(d) hereof, at the
Effective Time, those Options identified in the Roll-over Schedule shall not be
converted, exchanged or canceled as provided above but shall remain outstanding,
provided, however, that the exercise price of such Options shall be adjusted to
$4.40 per Share and the number of Shares subject to such Options shall be
adjusted such that the Aggregate Spread Amount for all such Options, after such
adjustments, shall be equal to 80% of the Aggregate Spread Amount for all such
Options immediately prior to such adjustments.


                                   ARTICLE III
                            THE SURVIVING CORPORATION

      Section 3.1 CERTIFICATE OF INCORPORATION. The certificate of incorporation
of the Surviving Corporation shall be amended in the Merger to be the
Certificate of Incorporation of MergerSub immediately prior to the Effective
Time until amended in accordance therewith and with applicable law, except that
Article First thereof shall continue to read, "The name of the Corporation
(hereafter the "Corporation") is PETCO ANIMAL SUPPLIES, INC.".


                                       15


      Section 3.2 BYLAWS. The bylaws of MergerSub in effect at the Effective
Time shall be the bylaws of the Surviving Corporation (with the name of the
Surviving Corporation changed, as appropriate) until amended in accordance
therewith and in accordance with the certificate of incorporation of the
Surviving Corporation and applicable law.

      Section 3.3 DIRECTORS AND OFFICERS. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable Law, (i) the directors of MergerSub at the Effective Time shall be
the initial directors of the Surviving Corporation and (ii) the officers of the
Company at the Effective Time shall be the initial officers of the Surviving
Corporation, in each case to hold office in accordance with the certificate of
incorporation and bylaws of the Surviving Corporation.


                                   ARTICLE IV
               REPRESENTATIONS AND WARRANTIES OF THE COMPANY

      The Company represents and warrants to MergerSub that, except as set forth
in the corresponding sections or subsections of the Disclosure Letter delivered
to MergerSub by the Company concurrently with entering into this Agreement (the
"Disclosure Letter"):

      Section 4.1 CORPORATE EXISTENCE AND POWER. Each of the Company and its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation, and has all
corporate powers required to carry on its business as now conducted. Each of the
Company and its Subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where the failure to be
so qualified would not, individually or in the aggregate, be reasonably likely
to have a Material Adverse Effect on the Company. Without limiting the
generality of the foregoing, the Company and it Subsidiaries are qualified to do
business in the states shown on Section 4.1 of the Disclosure Letter. The
Company has heretofore made available to MergerSub true and complete copies of
the currently effective amended and restated certificate of incorporation and
bylaws or similar organizational documents of the Company and each of its
Subsidiaries (as the same may be amended and restated as of the date hereof).

      Section 4.2 CORPORATE AUTHORIZATION. (a) The Company has the full
corporate power and authority to execute and deliver this Agreement and, subject
to approval of this Agreement by the affirmative vote of a majority of the votes
represented by the shares of Common Stock outstanding on the record date to be
established for the Company Stockholders Meeting, to consummate the transactions
contemplated by this Agreement. The

                                      16



execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby on the part of the Company have been (i) duly
and validly authorized and adopted by the unanimous vote of the Special
Committee and by the unanimous vote of the Company's Board of Directors, and
(ii) determined to be fair to, advisable and in the best interests of the
stockholders of the Company (other than the Retaining Stockholders) by the
Special Committee and the Company's Board of Directors. The Special Committee
and the Board of Directors have each recommended that the Stockholders of the
Company adopt this Agreement and approve the Merger. No corporate proceedings
on the part of the Company are necessary, as a matter of law or otherwise, for
the consummation of the transactions contemplated hereby, other than the
approval of this Agreement by the Company's stockholders at the Company
Stockholders Meeting. This Agreement has been duly and validly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery of this Agreement by MergerSub, is a valid and binding agreement of
the Company enforceable against it in accordance with its terms, except to the
extent that the enforcement thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws now or hereafter in effect relating to creditor's rights generally, (ii)
general principles of equity (regardless of whether such enforcement is
considered in a proceeding at law or in equity) and (iii) the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the discretion of the court before which any enforcement proceeding
therefor may be brought.

      Section 4.3 CORPORATE RECORDS. The Company has made available to
MergerSub a complete and correct copy of the certificate of incorporation and
bylaws, each as amended to date, of each of the Company and the Company's
Subsidiaries. Each of the certificates of incorporation and bylaws so delivered
is in full force and effect. The corporate records and minute books of the
Company and the Company's Subsidiaries provided to MergerSub reflect all
material action taken and authorizations made at meetings of such companies'
Boards of Directors or any committees thereof and at any stockholders' meetings
thereof.

      Section 4.4 CONSENTS AND APPROVALS; NO VIOLATION. The execution and
delivery of this Agreement by the Company, the consummation of the transactions
contemplated hereby (including completion of the Financing on the terms set
forth in the Financing Letters) and the performance by the Company of its
obligations hereunder will not:

            (a) conflict with or result in any breach of any provision of the
Company's Certificate of Incorporation or the Bylaws or other organizational
documents;

            (b) require any consent, approval, order, authorization or permit
of, or registration, filing with or notification to, any Governmental Authority
or any private third party except for (i) the filing of a pre-merger
notification and report form by the Company under the

                                      17



HSR Act, (ii) the filing with the SEC of (A) a proxy statement relating to the
Company Stockholders Meeting (together with any amendments thereof or
supplements thereto and any other required proxy materials, the "Company Proxy
Statement"), (B) a Rule 13e-3 transaction statement on Schedule 13E-3 (the
"Schedule 13E-3"), and (C) such reports under Section 13(a) of the Exchange
Act as may be required in connection with this Agreement and the transactions
contemplated hereby, (iii) any registration, filing or notification required
pursuant to state securities or Blue Sky laws, and (iv) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware in
connection with the Merger;

            (c) result in the creation or imposition of any material Lien on
any asset of the Company or any of its Subsidiaries or Affiliated Entities;

            (d) result in any violation of or the breach of or constitute a
default (with notice or lapse of time or both) under (or give rise to any
right of termination, cancellation or acceleration or guaranteed payments
under or to, a loss of a material benefit or result in the creation or
imposition of a lien under) any of the terms, conditions or provisions of any
note, lease, mortgage, indenture, license, agreement or other instrument or
obligation to which the Company or any of its Subsidiaries is a party or by
which the Company, any of its Subsidiaries or any of their respective
Affiliates may be bound, except for such violations, breaches, defaults, or
rights of termination, cancellation or acceleration, losses or the imposition
of liens as to which requisite waivers or consents have been obtained or will
be obtained prior to the Effective Time or which, individually or in the
aggregate, would not reasonably be expected to result in a Material Adverse
Effect; or

            (e) violate the provisions of any order, writ, injunction,
judgment, decree, statute, rule or regulation applicable to the Company or any
of its Subsidiaries, in such a manner as could, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Effect.

      Section 4.5 CAPITALIZATION. (a) The authorized capital stock of the
Company consists of 100,000,000 shares of Common Stock, par value $0.0001 per
share including the associated Rights and 2,000,000 shares of preferred stock,
par value $0.0001 per share. As of the date hereof, (i) 21,107,329 shares of
Common Stock were issued and outstanding, all of which were validly issued,
fully paid and nonassessable and were issued free of preemptive (or similar)
rights, and (ii) an aggregate of 250,000 shares of preferred stock were
designated as the company's Series A Junior Participating Preferred Stock,
none of which are issued and outstanding. Section 4.5 of the Disclosure Letter
contains a true, complete and correct list of all outstanding Options and all
other options, warrants, rights or other securities convertible into or
exercisable for shares of capital stock of the Company, the holders of such
options, warrants, rights and other securities and the exercise price with
respect to such securities.

                                      18



            (b) Except as set forth in this Section 4.5 and except as may result
from the exercise, prior to the consummation of the Merger, of Options
outstanding on the date hereof, there are no outstanding (i) shares of capital
stock or other voting securities of the Company, (ii) securities of the Company
convertible into or exchangeable for shares of capital stock or voting
securities of the Company or its Subsidiaries, (iii) options or other rights,
other than the Rights, to acquire from the Company or its Subsidiaries, or
obligations of the Company or its Subsidiaries to issue, any shares of capital
stock, voting securities or securities of the Company, and (iv) no equity
equivalent interests in the ownership or earnings of the Company or its
Subsidiaries or other similar rights (the items in clauses (b)(i), (ii), (iii)
and (iv) being referred to collectively as the "Company Securities"). There are
no outstanding obligations of the Company or any Subsidiary to repurchase,
redeem or otherwise acquire any Company Securities.

            (c) Other than the Voting Agreement, there are no voting trusts or
other agreements or understandings to which the Company or any of its
Subsidiaries is a party with respect to the voting of the shares of any capital
stock of the Company or any of its Subsidiaries. Neither the Company nor any of
its Subsidiaries will be required to redeem, repurchase or otherwise acquire any
shares of capital stock of the Company (other than pursuant to the Merger in
accordance with the terms of this Agreement) or any of its Subsidiaries, as a
result of the transactions contemplated by this Agreement.

            (d) No agreement or other document grants or imposes on any shares
of Common Stock any right, preference, privilege or restriction with respect to
the transactions contemplated hereby (including, without limitation, any rights
of first refusal). All of the outstanding shares of Common Stock are, and all
shares of Common Stock that may be issued upon the exercise of outstanding
Options will be, when issued in accordance with the terms thereof, duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. There are no outstanding contractual obligations of the Company or any
of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company or any of its Subsidiary or to provide funds to
make any investment (in the form of a loan, capital contribution or otherwise)
in the Company, any of its Subsidiaries or any other Person.

            (e) All of the issued and outstanding shares of capital stock of the
Company's Subsidiaries are owned beneficially and of record by the Company, free
and clear of all liens, charges, pledges, encumbrances, equities, voting
restrictions, claims and options of any nature, and all such shares have been
duly authorized, validly issued and are fully paid, nonassessable and free of
preemptive rights. The Company has not made, directly or

                                      19



indirectly, any material investment in, advance to or purchase or guaranty of
any obligations of, any Person other than obligations of its Subsidiaries.

      Section 4.6 COMPANY SEC REPORTS.

            (a) The Company has filed with the SEC all forms, reports,
schedules, statements and other documents required to be filed by it since
January 1, 1996 under the Securities Act or the Exchange Act (such documents, as
supplemented or amended since the time of filing, collectively, the "Company SEC
Reports"). As of their respective dates, the Company SEC Reports, including,
without limitation, any financial statements or schedules included or
incorporated by reference therein, at the time filed (and, in the case of
registration statements and proxy statements, on the dates of effectiveness and
the dates of mailing, respectively) (a) complied, in all material respects, with
all applicable requirements of the Securities Act and the Exchange Act, as the
case may be and (b) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The audited consolidated financial statements
and unaudited consolidated interim financial statements (the "Financial
Statements") included or incorporated by reference in the Company SEC Reports
(including any related notes and schedules) fairly present, in all material
respects, the financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and the results of their operations and
their cash flows for the periods set forth therein, in each case in accordance
with past practices and GAAP consistently applied during the periods involved
(except as otherwise disclosed in the notes thereto and subject, where
appropriate, to normal year-end adjustments that would not be material in amount
or effect).

            (b) The Company has heretofore made available or promptly will make
available to MergerSub a complete and correct copy of any amendments or
modifications to any Company SEC Reports filed prior to the date hereof which
are required to be filed with the SEC but have not yet been filed with the SEC.

            (c) The Company will file with the SEC and promptly will make
available to MergerSub true and complete copies of each form, registration
statement, report, schedule, proxy or information statement and other documents
(including exhibits thereto) required to be filed with the SEC under the
Securities Act or the Exchange Act.

      Section 4.7 PROVIDED INFORMATION. The information supplied or to be
supplied by the Company, for inclusion in (a) offering documents (the "Offering
Documents") in connection with the Financing; (b) the Schedule 13E-3; and (c)
the Company Proxy Statement will not, in the case of the Offering Documents and
the Schedule 13E-3, as of the date thereof, of each

                                      20



amendment or supplement thereto and as of the Effective Time, and in the case
of the Company Proxy Statement, either at the date mailed to the Company's
Stockholders or at the time of the Company Stockholders Meeting, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Each of the Company Proxy Statement and the Schedule 13E-3, as to information
supplied by the Company, will comply in all material respects with all
applicable provisions of the Exchange Act.

      Section 4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.

            (a) Except as expressly contemplated by this Agreement, since the
Balance Sheet Date, the business of the Company and its Subsidiaries has been
conducted in all material respects in the ordinary course of business and
consistent with past practices, neither the Company nor any of its Subsidiaries
has engaged in any transaction or series of related transactions material to the
Company or its Subsidiaries other than in the ordinary course of business and
consistent with past practices, and there has not been any event, occurrence or
development, alone or taken together with all other existing facts, that,
individually or in the aggregate, constitutes a Material Adverse Effect on the
Company.

            (b) Without limiting the generality of the foregoing Section 4.8(a),
since the Balance Sheet Date there has not been:

                (i)    any damage, destruction or loss to any of the assets or
      properties of the Company or any of its Subsidiaries that, individually or
      in the aggregate, constitutes a Material Adverse Effect on the Company;

                (ii)   any declaration, setting aside or payment of any dividend
      or distribution (whether in cash, stock or property) or capital return in
      respect of any shares of the Company's capital stock or any redemption,
      purchase or other acquisition by the Company or any of its Subsidiaries of
      any shares of the Company's capital stock or any repurchase, redemption or
      other purchase by the Company or any of its Subsidiaries of any
      outstanding shares of capital stock or other securities of, or other
      ownership interests in, the Company or any of its Subsidiaries, or any
      amendment of any material term of any outstanding security of the Company
      or any of its Subsidiaries;

                (iii)  any sale, assignment, transfer, lease or other
      disposition or agreement to sell, assign, transfer, lease or otherwise
      dispose of any of the assets of

                                      21



      the Company or any of its Subsidiaries or other than in the ordinary
      course of business consistent with past practices;

                (iv)   any acquisition (by merger, consolidation, or acquisition
      of stock or assets) by the Company or any of its Subsidiaries of any
      corporation, partnership or other business organization or division
      thereof or any equity interest therein for consideration, or any loans or
      advances to any Person;

                (v)    any (a) incurrence of, (b) guarantee with respect to, or
      (c) provision of credit support for, any indebtedness by the Company or
      any of its Subsidiaries other than pursuant to the Company's existing
      credit facilities in the ordinary course of business or any creation or
      assumption by the Company or any of its Subsidiaries of any material Lien
      on any material asset;

                (vi)   any material change in any method of accounting or
      accounting practice (whether for financial accounting or Tax purposes)
      used by the Company or any of its Subsidiaries;

                (vii)  (A) any employment, deferred compensation, severance or
      similar agreement entered into or amended by the Company or any of its
      Subsidiaries and any employee, in each case other than sales commission
      agreements and product promotional agreements entered into in the ordinary
      course of business consistent with past practices, (B) any increase in the
      compensation payable or to become payable by it to any of its directors or
      officers or generally applicable to all or any category of the Company's
      or any of its Subsidiaries' employees, (C) any increase in the coverage or
      benefits available under any vacation pay, company awards, salary
      continuation or disability, sick leave, deferred compensation, bonus or
      other incentive compensation, insurance, pension or other employee benefit
      plan, payment or arrangement made to, for or with any of the directors or
      officers of the Company or any of its Subsidiaries or generally applicable
      to all or any category of the Company's or any of its Subsidiaries'
      employees or (D) severance pay arrangements made to, for or with such
      directors, officers or employees other than, in the case of (B) and (C)
      above and only with respect to employees who are not officers or directors
      of the Company or any of its Subsidiaries, increases in the ordinary
      course of business consistent with past practices and that in the
      aggregate have not resulted in a material increase in the benefits or
      compensation expense of the Company or any of its Subsidiaries;

                (viii) any revaluing in any material respect any of the assets
      of the Company or any of its Subsidiaries, including without limitation
      writing down the value

                                      22



      of any assets or inventory or writing off notes or accounts receivable
      other than in the ordinary course of business and consistent with past
      practices;

                (ix)   any loan, advance or capital contribution made by the
      Company or any of its Subsidiaries to, or investment in, any person other
      than loans, advances or capital contributions, or investments of the
      Company made in the ordinary course of business consistent with past
      practices;

                (x)    any adoption or amendment of any Plan (as defined in
      Section 4.13);

                (xi)   any waiver, direct or indirect, by the Company or any of
      its Subsidiaries of (A) any right or rights of material value or (B) any
      payment of any material debt, liability or other obligation, except for
      non-material waivers and payments made in the ordinary course of business
      consistent with past practice;

                (xii)  any change in or amendment to the Company's or any of its
      Subsidiaries' Certificate of Incorporation, Bylaws or other organizational
      documents;

                (xiii) any payment, loan or advance of any amount to or in
      respect of, or the sale, transfer or lease of any properties or assets
      (whether real, personal or mixed, tangible or intangible) to, or entering
      into of any agreement arrangement or transaction with or on behalf of, any
      officer, director, or employee of the Company, any of its Subsidiaries or
      any Affiliate of any of them, or any business or entity in which the
      Company, any Subsidiary or any Affiliate of any of them, or relative of
      any such Person, has any material, direct or indirect, interest, except
      for (i) directors' fees, (ii) compensation to the officers and employees
      of the Company in the ordinary course of business and consistent with past
      practices and (iii) advancement or reimbursement of expenses in the
      ordinary course of business and consistent with past practices;

                (xiv)  any material modification or change that would result in
      a diminishment of coverage under any insurance policies; or

                (xv)   any material reduction in any cash or short-term
      investments or their equivalent, other than to meet cash needs arising in
      the ordinary course of business, generally consistent with past practices;
      sale, assignment, disposition, transfer, pledge, mortgage or lease of any
      Owned Real Estate or Leased Real Estate;

                                      23




                   (xvi)   any issuance, sale or disposition of any capital
      stock or other equity interest in the Company, except upon the valid
      exercise of Options in accordance with the terms thereof, or issuance
      or grant of any options, warrants or other rights to purchase any such
      capital stock or equity interest or any securities convertible into or
      exchangeable for such capital stock or equity interest or any other
      change in the issued and outstanding capitalization of the Company;

                   (xvii)  any amendment, alteration or modification in the
      terms of any currently outstanding options, warrants or other rights to
      purchase any capital stock or equity interest in the Company or any
      securities convertible into or exchangeable for such capital stock or
      equity interest, including without limitation any reduction in the
      exercise or conversion price of any such rights or securities, any
      change to the vesting or acceleration terms of any such rights or
      securities, or any change to terms relating to the grant of any such
      rights or securities;

                   (xviii) any material changes in the business policies
      (including advertising, investment, marketing, pricing, purchasing,
      production, personnel, sales or budgeting) or organization of the
      Company, the Company's relationships with employees or the Company's
      relationships with suppliers, agents, servicers or customers that are
      material to the Company;

                   (xix)   any closure, shut down or other elimination of any
      of the Company's stores, offices, store franchises or any material
      change in the basic character of its business, properties or assets,
      other than those store closures effected or proposed to be effected as
      set forth in Section 4.8(b)(xix) of the Disclosure Letter and
      additional closures of stores which did not account in the aggregate
      for more than 1% of the Company's total annual gross revenue for the
      fiscal year ended January 29, 2000 as indicated in the Company's
      accounting books and records;

                   (xx)    any action which, if it had been taken after the
      date hereof, would have required the consent of MergerSub under Section
      6.1 hereof.

                   (xxi)   any agreement to take any actions specified in this
      Section 4.8(b), except for this Agreement;

      Section 4.9  ACCOUNTS PAYABLE AND INVENTORY. Since the Balance Sheet Date
to the date hereof, the Company has (i) discharged its material accounts payable
and other material current liabilities and obligations in accordance with past
practice, and (ii) purchased and maintained inventory in an amount which it
reasonably believes to be appropriate for normal


                                      24



seasonal requirements of the Company's business and current business
conditions and consistent with its past practices.

      Section 4.10 NO UNDISCLOSED MATERIAL LIABILITIES. There are no liabilities
of the Company or any of its Subsidiaries of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, which
would be required by generally accepted accounting principles to be reflected on
a consolidated balance sheet of the Company (including the notes thereto), other
than:

               (i)   liabilities disclosed in the Company SEC Reports filed
      prior to the date hereof;

               (ii)  actual trade payables incurred in the ordinary course of
      business consistent with past practices;

               (iii) liabilities incurred to perform this Agreement and
      permitted pursuant to Section 6.1 hereof; and,

               (iv)  liabilities incurred in the ordinary course of business
      consistent with past practices;

PROVIDED, HOWEVER, that, no liability listed in clauses (ii) and (iv) above,
individually or in the aggregate, constitutes a Material Adverse Effect on the
Company or any of its Subsidiaries, taken as a whole.

      Section 4.11 LITIGATION. (a) There is no action, suit, investigation or
proceeding pending against, or to the knowledge of the Company threatened
against or affecting, the Company or any of its Subsidiaries or their respective
properties before any court or arbitrator or any Governmental Authority which,
if determined adversely, would constitute a Material Adverse Effect on the
Company (a "Proceeding") and (b) to the knowledge of the Company, there is no
basis for any such Proceeding. All Proceedings disclosed in Section 4.11 of the
Disclosure Letter have been timely reported to all applicable insurance carriers
and no reservation of rights or denial of coverage has been issued by any such
carrier. Neither the Company, any of its Subsidiaries nor any officer, director
or employee of the Company or any of its Subsidiaries has been permanently or
temporarily enjoined by any order, judgment or decree of any court or any other
Governmental Authority from engaging in or continuing any conduct or practice in
connection with the business or assets of the Company or any of its Subsidiaries
nor, to the Company's and its Subsidiaries' knowledge, is the Company, any of
its Subsidiaries or any officer, director or employee of the Company or any of
its Subsidiaries under investigation by any Governmental Authority related to
the conduct of the Company's


                                      25



or any of its Subsidiaries' business. There is not in existence any order,
judgment or decree of any court or other tribunal or other agency that is
specifically applicable to the Company or any of its Subsidiaries enjoining
or requiring the Company or any of its Subsidiaries' to take any action of
any kind with respect to its business or assets.

      Section 4.12  TAXES.

            (a)  The Company and each of its Subsidiaries and each
of its Affiliated Entities:

                 (i)   have timely paid or caused to be paid all material Taxes
      required to be paid by it. The accruals for Taxes payable in Company's
      most recent consolidated financial statements are adequate to cover all
      material Taxes attributable to periods (or portions thereof) ending on the
      date of such financial statements, and no material Taxes attributable to
      periods following the date of such financial statements have been incurred
      other than in the ordinary course of business;

                 (ii)  have filed or caused to be filed in a timely and proper
      manner all material Tax Returns required to be filed by such entities with
      the appropriate Governmental Authority in all jurisdictions in which Tax
      Returns are required to be filed, and all such Tax Returns are true,
      correct and complete in all material respects; and

                 (iii) have not requested or caused to be requested any
      extension of time within which to file any material Tax Return, which
      Tax Return has not since been filed.

            (b)  The Company has made available to MergerSub true, correct and
complete copies of all United States federal Tax Returns filed by or on behalf
of the Company or any of its Subsidiaries for all taxable periods ending on or
after December 31, 1995.

            (c)  Neither the Company nor any of its Subsidiaries has been
notified in writing by the Internal Revenue Service or any other Governmental
Authority of any issues relating to Taxes in connection with any Tax Return
filed by or on behalf of the Company or any of its Subsidiaries.

            (d)  There are no pending Tax audits relating to the Company or any
of its Subsidiaries and no waivers of statutes of limitations have been given or
requested by the Company or any of its Subsidiaries that are currently
outstanding.


                                      26



            (e)  No Liens for Taxes have been filed against the Company or any
of its Subsidiaries, except for Liens for Taxes not yet due or payable for which
adequate reserves have been provided for in the latest balance sheet of the
Company.

            (f)  No unresolved deficiencies or additions to Taxes have been
proposed, asserted, or assessed against the Company or any of its Subsidiaries.

            (g)  Neither the Company nor any of its Subsidiaries has received
notice within the last three years from any Governmental Authority in a
jurisdiction in which the Company or any of its Subsidiaries does not file Tax
Returns that the Company or any of its Subsidiaries is or may be subject to
taxation by that jurisdiction.

            (h)  Neither the Company nor any of its Subsidiaries is (i) a party
to any Tax sharing, Tax allocation or similar agreement, or (ii) bound by any
closing agreement, offer in compromise or other agreement with any Governmental
Authority.

            (i)  Neither the Company nor any of its Subsidiaries is required
to include in its income any adjustment pursuant to Section 481 of the Code
following the Effective Time.

            (j)  The Company is not currently a "United States real property
holding corporation" ("USRPHC") within the meaning of Section 897(c)(2) of the
Code, and the Company will not have been a USRPHC at any time within the period
beginning five (5) years prior to the Effective Time and ending as of the
Effective Time.

            (k)  As of the date of this Agreement, the Company has not undergone
an "ownership change" within the meaning of Section 382(g) of the Code at any
time during the period set forth in Section 382(i) of the Code. The Company will
not undergo an "ownership change" (other than as a result of the Merger) at any
time within the period beginning three (3) years prior to the Effective Time and
ending as of the Effective Time.

      Section 4.13   EMPLOYEE BENEFIT PLANS; ERISA.

               (a)   Section 4.13 of the Disclosure Letter contains a true and
complete list of each employment, bonus, deferred compensation, incentive
compensation, stock purchase, stock option, stock appreciation right or other
stock-based incentive, severance, change-in-control, or termination pay,
hospitalization or other medical, disability, life or other insurance,
supplemental unemployment benefits, profit-sharing, pension, or retirement plan,
program, agreement or arrangement and each other employee benefit plan,


                                      27



program, agreement or arrangement, sponsored, maintained or contributed to or
required to be contributed to by the Company or any of its Subsidiaries, or
by any trade or business, whether or not incorporated (an "ERISA AFFILIATE"),
that together with the Company or any of its Subsidiaries would be deemed a
"single employer" within the meaning of Section 4001(b)(1) of ERISA, for the
benefit of any current or former employee or director of the Company, or any
of its Subsidiaries or any ERISA Affiliate (the "PLANS"). Section 4.13(a) of
the Disclosure Letter identifies each of the Plans that is an "employee
welfare benefit plan," or "employee pension benefit plan" as such terms are
defined in Sections 3(1) and 3(2) of ERISA (such plans being hereinafter
referred to collectively as the "ERISA PLANS"). None of the Company, any of
its Subsidiaries nor any ERISA Affiliate has any formal plan or commitment,
whether legally binding or not, to create any additional Plan or modify or
change any existing Plan that would affect any current or former employee or
director of the Company, any of its Subsidiaries or any ERISA Affiliate.

            (b)  With respect to each of the Plans, the Company has heretofore
delivered or made available to MergerSub true and complete copies of each of the
following documents, as applicable:

               (i)   a copy of the Plan documents (including all amendments
      thereto) for each written Plan or a written description of any Plan that
      is not otherwise in writing;

               (ii)  a copy of the annual report or Internal Revenue Service
      Form 5500 Series, if required under ERISA, with respect to each ERISA
      Plan for the last three Plan years ending prior to the date of this
      Agreement for which such a report was filed;

               (iii) a copy of the actuarial report, if required under ERISA,
      with respect to each ERISA Plan for the last three Plan years ending
      prior to the date of this Agreement;

               (iv)  a copy of the most recent Summary Plan Description ("SPD"),
      together with all Summaries of Material Modification issued with respect
      to such SPD, if required under ERISA, with respect to each ERISA Plan, and
      all other material employee communications relating to each ERISA Plan;

               (v)   if the Plan is funded through a trust or any other funding
      vehicle, a copy of the trust or other funding agreement (including all
      amendments thereto) and the latest financial statements thereof, if any;


                                      28



               (vi)  all contracts relating to the Plans with respect to which
      the Company, any of its Subsidiaries or any ERISA Affiliate may have any
      liability, including insurance contracts, investment management
      agreements, subscription and participation agreements and record keeping
      agreements; and

               (vii) the most recent determination letter received from the IRS
      with respect to each Plan that is intended to be qualified under Section
      401(a) of the Code.

            (c) No liability under Title IV of ERISA has been incurred by the
Company, any of its Subsidiaries or any ERISA Affiliate since the Effective Date
of ERISA that has not been satisfied in full, and no condition exists that
presents a material risk to the Company, or any of its Subsidiaries or any ERISA
Affiliate of incurring any liability under such Title, other than liability for
premiums due the Pension Benefit Guaranty Corporation ("PBGC"), which payments
have been or will be made when due. To the extent this representation applies to
Sections 4064, 4069 or 4204 of Title IV of ERISA, it is made not only with
respect to the ERISA Plans but also with respect to any employee benefit plan,
program, agreement or arrangement subject to Title IV of ERISA to which the
Company, any of its Subsidiaries or any ERISA Affiliate made, or was required to
make, contributions during the past six years.

            (d) The PBGC has not instituted proceedings pursuant to Section 4042
of ERISA to terminate any of the ERISA Plans subject to Title IV of ERISA, and
no condition exists that presents a material risk that such proceedings will be
instituted by the PBGC.

            (e) With respect to each of the ERISA Plans that is subject to Title
IV of ERISA, the present value of accumulated benefit obligations under such
Plan, as determined by the Plan's actuary based upon the actuarial assumptions
used for funding purposes in the most recent actuarial report prepared by such
Plan's actuary with respect to such Plan, did not, as of its latest valuation
date, exceed the then current value of the assets of such Plan allocable to such
accumulated benefit obligations.

            (f) None of the Company, any of its Subsidiaries, any ERISA
Affiliate, any of the ERISA Plans, any trust created thereunder, nor, to the
Company's knowledge, any trustee or administrator thereof has engaged in a
transaction or has taken or failed to take any action in connection with which
the Company, any of its Subsidiaries or any ERISA Affiliate could be subject to
any material liability for either a civil penalty assessed pursuant to Section
409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975(a) or (b), 4976
or 4980B of the Code.


                                      29



            (g) All contributions and premiums which the Company, any of its
Subsidiaries or any ERISA Affiliate is required to pay under the terms of each
of the ERISA Plans and Section 412 of the Code, have, to the extent due, been
paid in full or properly recorded on the financial statements or records of the
Company or its Subsidiaries, and none of the ERISA Plans or any trust
established thereunder has incurred any "accumulated funding deficiency" (as
defined in Section 302 of ERISA and Section 412 of the Code), whether or not
waived, as of the last day of the most recent fiscal year of each of the ERISA
Plans ended prior to the date of this Agreement. No lien has been imposed under
Section 412(n) of the Code or Section 302(f) of ERISA on the assets of the
Company, any of its Subsidiaries or any ERISA Affiliate, and no event or
circumstance has occurred that is reasonably likely to result in the imposition
of any such lien on any such assets on account of any ERISA Plan.

            (h) With respect to any ERISA Plan that is a "multiemployer plan,"
as such term is defined in Section 3(37) of ERISA, (i) neither the Company, any
of its Subsidiaries nor any ERISA Affiliate has, since September 26, 1980, made
or suffered a "complete withdrawal" or a "partial withdrawal," as such terms are
respectively defined in Sections 4203 and 4205 of ERISA, (ii) no event has
occurred that presents a material risk of a complete or partial withdrawal,
(iii) neither the Company, each of its Subsidiaries nor any ERISA Affiliate has
any contingent liability under Section 4204 of ERISA, (iv) no circumstances
exist that present a material risk that any such multi-employer plan will go
into reorganization, and (v) the aggregate withdrawal liability of the Company,
each of its Subsidiaries and the ERISA Affiliates, computed as if a complete
withdrawal by the Company, each of its Subsidiaries and all of its ERISA
Affiliates had occurred under each such multiemployer plan on the date hereof,
would be zero.

            (i) Each of the Plans has been operated and administered in all
material respects in accordance with applicable laws, including but not limited
to ERISA and the Code.

            (j) Each of the ERISA Plans that is intended to be "qualified"
within the meaning of Section 401(a) of the Code is so qualified. The Company
has applied for and received a currently effective determination letter from the
IRS stating that it is so qualified, and no event has occurred which would
affect such qualified status.

            (k) Any fund established under an ERISA Plan that is intended to
satisfy the requirements of Section 501(c)(9) of the Code has so satisfied such
requirements.

            (l) No amounts payable under any of the Plans or any other
contract, agreement or arrangement with respect to which the Company or any of
its Subsidiaries may


                                      30



have any liability could fail to be deductible for federal income tax
purposes by virtue of Section 162(m) or Section 280G of the Code.

            (m) No Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees of the Company, its Subsidiaries or any ERISA Affiliate after
retirement or other termination of service (other than (i) coverage mandated by
applicable laws, (ii) death benefits or retirement benefits under any "employee
pension plan," as that term is defined in Section 3(2) of ERISA, (iii) deferred
compensation benefits accrued as liabilities on the books of the Company, any of
its Subsidiaries or an ERISA Affiliate, or (iv) benefits, the full direct cost
of which is borne by the current or former employee (or beneficiary thereof)).

            (n) The consummation of the transactions contemplated by this
Agreement will not, either alone or in combination with any other event, (i)
entitle any current or former employee, officer or director of the Company, any
of its Subsidiaries or any ERISA Affiliate to severance pay, unemployment
compensation or any other similar termination payment, or (ii) accelerate the
time of payment or vesting, or increase the amount of or otherwise enhance any
benefit due any such employee, officer or director.

            (o) There are no pending or, to the Company's knowledge, threatened
or anticipated claims by or on behalf of any Plan, by any employee or
beneficiary under any such Plan or otherwise involving any such Plan (other than
routine claims for benefits).

      Section 4.14   LABOR MATTERS.

            (a)  (i) there is no labor strike, dispute, slowdown, stoppage or
lockout actually pending, or to the knowledge of the Company and the
Subsidiaries, threatened against or affecting the Company or any Subsidiary and
during the past five years there has not been any such action; (ii) to the
knowledge of the Company and the Subsidiaries, no union claims to represent the
employees of the Company or any Subsidiary; (iii) neither the Company nor any
Subsidiary is a party to or bound by any collective bargaining or similar
agreement with any labor organization, or work rules or practices agreed to with
any labor organization or employee association applicable to employees of the
Company or any Subsidiary; (iv) none of the employees of the Company or any
Subsidiary are represented by any labor organization and none of the Company or
any Subsidiary have any knowledge of any current union organizing activities
among the employees of the Company or any Subsidiary, nor does any question
concerning representation exist concerning such employees; (v) Section 4.14 of
the Disclosure Letter contains a true and complete list of each written
personnel policy, rule or procedure applicable to employees of the Company or
any of its Subsidiaries, true correct and complete copies of which have
heretofore been made available to MergerSub; (vi) the


                                      31



Company and the Subsidiaries are, and have at all times been, in material
compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment, wages, hours of work and
occupational safety and health, and are not engaged in any unfair labor
practices as defined in the National Labor Relations Act or other applicable
law, ordinance or regulation; (vii) there is no unfair labor practice charge
or complaint against the Company or any Subsidiary pending or, to the
knowledge of the Company and the Subsidiaries, threatened before the National
Labor Relations Board or any similar state or foreign agency; (viii) there is
no grievance or arbitration proceeding arising out of any collective
bargaining agreement or other grievance procedure relating to the Company or
any Subsidiary; (ix) to the knowledge of the Company and the Subsidiaries, no
charges with respect to or relating to the Company or the Subsidiaries are
pending before the Equal Employment Opportunity Commission or any other
corresponding state agency, and the Company and the Subsidiaries have at all
times been in material compliance with all federal and state laws and
regulations prohibiting discrimination in the workplace including, without
limitation, laws and regulations that prohibit discrimination and/or
harassment on account of race, national origin, religion, gender, disability,
age, workers compensation status or otherwise; (x) to the knowledge of the
Company and the Subsidiaries, no federal, state, local or foreign agency
responsible for the enforcement of labor or employment laws intends to
conduct an investigation with respect to or relating to the Company and the
Subsidiaries and no such investigation is in progress; and (xi) there are no
material lawsuits, complaints, controversies or other proceedings pending or,
to the knowledge of the Company and the Subsidiaries, any applicant for
employment or classes of the foregoing alleging breach of any express or
implied contract or employment, any law or regulation governing employment or
the termination thereof or other discriminatory, wrongful or tortious conduct
in connection with the employment relationship. There are no employment
contracts or severance agreements with any employees of the Company and the
Subsidiaries. The execution of this Agreement and the consummation of the
transactions contemplated hereby shall not result in a breach or other
violation of any collective bargaining agreement to which the Company or any
Subsidiary is a party.

            (b) Since the enactment of Worker Adjustment and Retraining
Notification Act of 1988 (the "WARN Act"), the Company and the Subsidiaries have
not effectuated (i) a "plant closing" (as defined in the WARN Act) affecting any
site of employment or one or more facilities or operating units within any site
of employment or facility of the Company or any Subsidiary, or (ii) a "mass
layoff" (as defined in the WARN Act) affecting any site of employment or
facility of the Company or any Subsidiary; nor has the Company or any Subsidiary
been affected by any transaction or engaged in layoffs or employment
terminations sufficient in number to trigger application of any similar state or
local law. None of the employees of the Company and the Subsidiaries has
suffered an"employment loss" (as defined in the WARN Act).



                                      32



      Section 4.15   COMPLIANCE WITH LAWS AND COURT ORDERS.

            (a) Neither the Company nor its Subsidiaries is in violation of, nor
has it since January 1, 1996 violated, and to the knowledge of the Company
nothing is under investigation with respect to or has been threatened to be
charged with or given notice of any violation of, any applicable Law, except for
possible violations that have not had and would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on the
Company. This Section does not relate to matters with respect to Taxes or
Environmental Laws which are exclusively the subject of Sections 4.12 and 4.17,
respectively.

            (b) None of the Company, any of its Subsidiaries or any directors,
officers, agents or employees of the Company or any of its Subsidiaries has (i)
used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to political activity, (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful
payment. Neither the Company nor any of its Subsidiaries has participated in any
boycotts.

      Section 4.16  FINDERS' FEES. There is no fee payable to any investment
banker, broker, finder or other intermediary which has been retained by or is
authorized to act on behalf, of the Company or any of its Subsidiaries by the
Company or any of its Affiliates upon consummation of the transactions
contemplated by this Agreement.

      Section 4.17  ENVIRONMENTAL MATTERS. (a) The Company, its Subsidiaries and
its Affiliated Entities are in compliance in all material respects with federal,
state, local and foreign laws and regulations relating to pollution, protection
or preservation of human health or the environment, including, without
limitation, laws and regulations relating to emissions, discharges, releases or
threatened releases of toxic or hazardous substances, materials or wastes,
petroleum and petroleum products, asbestos or asbestos-containing materials,
polychlorinated biphenyls, radon, or lead or lead-based paints or materials
("Materials of Environmental Concern"), or otherwise relating to the generation,
storage, containment (whether above ground or underground), disposal, transport
or handling of Materials of Environmental Concern, or the preservation of the
environment or mitigation of adverse effects thereon (collectively,
"Environmental Laws"), and including, but not limited to, compliance in all
material respects with any Permits or the terms and conditions thereof; (b)
neither the Company nor any of its Subsidiaries or its Affiliated Entities has
received any communication or notice, whether from a Governmental Authority or
otherwise, alleging any violation of or noncompliance with any Environmental
Laws by any of the Company or its Subsidiaries or its Affiliated Entities or for
which any of them is responsible, and there is no


                                      33



pending or, to the knowledge of the Company, threatened claim, action,
investigation or notice by any person or entity alleging potential liability
for investigatory, cleanup or governmental response costs, or natural
resources or property damages, or personal injuries, attorney's fees or
penalties relating to (i) the presence, or release into the environment, of
any Materials of Environmental Concern at any location owned or operated by
the Company or its Subsidiaries or its Affiliated Entities, now or in the
past, or (ii) any violation, or alleged violation, of any Environmental Law
(collectively, "Environmental Claims"); and (c) to the knowledge of the
Company, there are no past or present facts or circumstances that could
reasonably be expected to form the basis of any material Environmental Claim
against the Company or its Subsidiaries or its Affiliated Entities or against
any person or entity whose liability for any Environmental Claim the Company
or its Subsidiaries or its Affiliated Entities have retained or assumed
either contractually or by operation of law. All Permits currently held or
required to be held by the Company, its Subsidiaries and Affiliated Entities
pursuant to any Environmental Laws are identified in Section 4.17 of the
Disclosure Letter. The Company has provided or made available to MergerSub
all assessments, reports, data, results of investigations or audits, and
other information that is in the possession of or reasonably available to the
Company and its Subsidiaries and Affiliated Entities regarding environmental
matters pertaining to, or the environmental condition of the business of the
Company and its Subsidiaries and Affiliated Entities, or the compliance (or
noncompliance) by the Company, its Subsidiaries or Affiliated Entities with
any Environmental Laws.

      Section 4.18   SUBSIDIARIES. Section 4.18 of the Disclosure Letter lists
each Subsidiary of the Company together with the jurisdiction of incorporation
of each Subsidiary and the percentage of each Subsidiary's outstanding capital
stock or other equity interests owned by the Company or another Subsidiary of
the Company. All the outstanding shares of capital stock of each Subsidiary have
been validly issued, are fully paid and nonassessable and are owned by the
Company, by another Subsidiary or by the Company and another such Subsidiary,
free and clear of all Liens or any other limitation or restriction. Except for
the capital stock of the Subsidiaries and ownership interests in the Affiliates
described in Section 4.33, the Company does not own directly or indirectly, any
capital stock or other ownership interest in any other Person.

      Section 4.19   YEAR 2000 MATTERS.

            (a)    Except as disclosed in the Company SEC Reports, to the
knowledge of the Company, the Company's central operating and accounting
systems described in the Company's most recently filed Form 10-K (the "System")
are Year 2000 Compliant.


                                      34



            (b)    "Year 2000 Compliant" means the System:

               (i)  will accurately input, process and output all date and time
      data, whether from years in the same century or in different centuries,
      including by yielding correct results in arithmetic operations,
      comparisons, sequencing and sorting of date and time data and in leap year
      calculations; and

               (ii) will not operate abnormally or cease to operate, return an
      error message or otherwise fail due to date- or time-related processing
      relating to the then current date being on or after January 1, 2000 or any
      other date.

            (c) The Company has not received any notification from any supplier
of critical information technology systems or material service provider of any
Year 2000-related problem that affects the Company.

      Section 4.20 INSURANCE. Each of the Company and its Subsidiaries maintains
insurance policies (the "Insurance Policies") against all risks of a character
and in such amounts as are usually insured against by similarly situated
companies in the same or similar businesses. Section 4.20 of the Disclosure
Letter contains a complete and accurate list of all Insurance Policies of the
Company and its Subsidiaries. Each Insurance Policy is in full force and effect
and is valid, outstanding and enforceable, and all premiums due thereon have
been paid in full. None of the Insurance Policies will terminate or lapse (or be
affected in any other materially adverse manner) by reason of the transactions
contemplated by this Agreement. Each of the Company and its Subsidiaries has
complied in all material respects with the provisions of each Insurance Policy
under which it is the insured party. No insurer under any Insurance Policy has
canceled or generally disclaimed liability under any such policy or, to the
Company's knowledge, indicated any intent to do so or not to renew any such
policy. All material claims under the Insurance Policies have been filed in a
timely fashion. Since the Company's formation, there have been no historical
gaps in insurance coverage of the Company and/or its Subsidiaries.

      Section 4.21 SUPPLIERS. Set forth in Section 4.21 of the Disclosure Letter
is a list of the ten largest suppliers of the Company based on the dollar value
of materials or products purchased by the Company for the fiscal year ended
January 29, 2000. Since such date, there has not been, nor as a result of the
Merger is there anticipated to be, any change in relations with any of the major
suppliers of the Company and its Subsidiaries that, individually or in the
aggregate, would result in a Material Adverse Effect. The existing suppliers of
the Company and its Subsidiaries are adequate for the operation of the Company's
business as operated on the date hereof.


                                      35



      Section 4.22   PERSONNEL, ETC.  (a) Set forth in Section 4.22 of the
Disclosure Letter is a list setting forth:

               (i)   the name of each officer of each of the Company and the
      Company's Subsidiaries, specifying the title of each such Person; and

               (ii)  the name of each director of each of the Company and the
      Company's Subsidiaries.

            (b) The Company has heretofore provided MergerSub with a complete
and accurate schedule of compensation which each of the officers referred to in
clause (a) above is currently entitled to receive, and all payroll records
relating to non-officer employees heretofore provided to MergerSub are accurate
and complete.

      Section 4.23 STOCKHOLDERS RIGHTS PLAN. The Board of Directors of the
Company has approved and adopted an amendment to the Rights Agreement, a copy of
which has been previously delivered to MergerSub and which provides that neither
the execution nor delivery of this Agreement nor the consummation of any of the
transactions contemplated by this Agreement, including, without limitation, the
Merger, shall be deemed to (i) cause MergerSub or any of its respective
Affiliates to be deemed to be "Acquiring Persons" within the meaning of the
Rights Agreement, (ii) constitute a "Triggering Event" within the meaning of the
Rights Agreement, (iii) cause any Rights to become exercisable or to separate
from the shares of Common Stock to which they are attached, or (iii) trigger any
other provisions of the Rights Agreement, including giving rise to a
Distribution Date (as defined in the Rights Agreement), and such amendment shall
remain in full force and effect at all times from and after the date hereof.

      Section 4.24 CONTRACTS. (a) Section 4.24 of the Disclosure Letter contains
a complete and accurate list of all contracts (written or oral), undertakings,
commitments or agreements (other than contracts, undertakings, commitments or
agreements for employee benefit matters set forth in Section 4.13 of the
Disclosure Letter and real property leases set forth in Section 4.28(b) of the
Disclosure Letter) of the following categories to which the Company or any of
its Subsidiaries is a party or by which any of them is bound (collectively, and
together with the contracts, undertakings, commitments or agreements for
employee benefit matters set forth in Section 4.13 of the Disclosure Letter and
the real property leases set forth in Section 4.28(b) of the Disclosure Letter,
the "Contracts"):

               (i)   contracts requiring annual expenditures by or liabilities
      of the Company and its Subsidiaries in excess of One Million Dollars
      ($1,000,000) which have a remaining term in excess of one hundred eighty
      (180) days or are not


                                      36



      cancellable (without material penalty, cost or other liability) within
      one hundred eighty (180) days;

               (ii)  promissory notes, loans, agreements, indentures, evidences
      of indebtedness or other instruments relating to the lending of money,
      whether as borrower, lender or guarantor, in excess of One Million Dollars
      ($1,000,000).

               (iii) contracts containing covenants limiting the freedom of the
      Company or any of its Subsidiaries to engage in any line of business
      (other than prohibitions against engaging in business relating to specific
      product lines) or compete with any person, in any product line or line of
      business, or operate at any location;

               (iv)  joint venture or partnership agreements or joint
      development or similar agreements pursuant to which any third party has
      been entitled or is reasonably expected to be entitled to share in profits
      or losses of the Company or its Subsidiaries;

               (v)   contracts with any federal, state or local government which
      have a remaining term in excess of one year or are not cancellable
      (without material penalty, cost or other liability) within one year;

               (vi)  other contract or commitment in which the Company or any of
      its Subsidiaries has granted manufacturing rights or exclusive marketing
      rights relating to any product or service, any group of products or
      services or any territory; and

               (vii) as of the date hereof any other contract the performance of
      which could be reasonably expected to require annual expenditures by the
      Company or any of its Subsidiaries in excess of One Million Dollars
      ($1,000,000), except for purchase orders received in the ordinary course
      of business consistent with past practices.

            (b) True and complete copies of the written Contracts and
descriptions of verbal Contracts, if any, have been delivered or made available
to MergerSub. Each of the Contracts is a valid and binding obligation of the
Company and, to the Company's knowledge, the other parties thereto, enforceable
against the other parties thereto in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium,
reorganization, arrangement or similar laws affecting creditors' rights
generally and by general principles of equity. Except for the execution of this
Agreement and the consummation of the transactions contemplated hereby and
thereby, no event has occurred which would, on notice or lapse of time or both,
entitle the holder of any indebtedness issued pursuant to a Contract identified
in Section 4.24 of the Disclosure Letter in response to paragraph (ii) above to
accelerate, or which does accelerate, the maturity of any such indebtedness.


                                      37



            (c) None of the Company or its Subsidiaries is in breach, default or
violation (and no event has occurred or not occurred through the Company's
action or inaction or, to the knowledge of the Company, through the action or
inaction of any third parties, which with notice or the lapse of time or both
would constitute a breach, default or violation) of any term, condition or
provision of any Contract to which the Company or any of its Subsidiaries is now
a party or by which any of them or any of their respective properties or assets
may be bound, except for violations, breaches or defaults that, individually or
in the aggregate, would not have a Material Adverse Effect on the Company.

      Section 4.25  PERMITS; COMPLIANCE WITH APPLICABLE LAWS AND MATERIAL
AGREEMENTS. The Company and its Subsidiaries hold all material licenses, permits
and authorizations necessary for the lawful conduct of its business, as now
conducted, and such business is not being, and the Company and its Subsidiaries
has not received any notice from any authority or person that such business has
been or is being, conducted in material violation of any law, ordinance or
regulation except to the extent that any such failure of conduct does not,
individually or in the aggregate, constitute a Material Adverse Effect on the
Company and its Subsidiaries, taken as a whole. The Company and its Subsidiaries
are not in conflict with, or in default or violation of any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or any of its Subsidiaries
is a party or by which the Company and its Subsidiaries or any of their
respective properties is bound or affected, except to the extent that any such
conflict, default or violation does not, constitute a Material Adverse Effect on
the Company and its Subsidiaries, taken as a whole.

      Section 4.26  INTELLECTUAL PROPERTY.

            (a) Section 4.26(a) of the Disclosure Letter sets forth, for the
Intellectual Property owned by the Company, a complete and accurate list of all
U.S. and foreign (i) patents and patent applications; (ii) trademark
registrations (including Internet domain registrations), trademark applications,
and material unregistered trademarks; (iii) copyright registrations, and
material unregistered copyrights. Section 4.26(a) of the Disclosure Letter lists
all Software (other than readily available commercial software programs having
an acquisition price of less than $50,000) which are owned, licensed, leased, by
Company, and identifies which Software is owned, licensed, or leased, as the
case may be.

            (b) Section 4.26(b) of the Disclosure Letter sets forth a complete
and accurate list of all agreements (whether oral or written) to which Company
is a party or otherwise bound, (i) granting or obtaining any right to use or
practice any rights under any Intellectual Property other than (A) licenses
entered into in connection with acquisitions by the


                                      38



Company pursuant to which the Company or any of its Subsidiaries was granted
the right to use any trademark or service mark previously used in the conduct
of the business of the acquired company prior to such acquisition which are
not, individually or in the aggregate, material to the Company and its
Subsidiaries, taken as a whole, and (B) non-exclusive licenses to use
Intellectual Property in connection with co-promotion or other marketing
efforts which are not, individually or in the aggregate, material to the
Company and its Subsidiaries, taken as a whole, or (ii) restricting the
Company's rights to use any Intellectual Property, including license
agreements, development agreements, distribution agreements, settlement
agreements, consent to use agreements, and covenants not to sue
(collectively, and including those licenses not set forth in Section 4.26(b)
of the Disclosure Letter pursuant to Section 4.26(b)(i)(A) and (B) above, the
"License Agreements"). The License Agreements are valid and binding
obligations of all parties thereto, enforceable in accordance with their
terms, and there exists no event or condition which will result in a
violation or breach of, or constitute (with or without due notice of lapse of
time or both) a default by any party under any such License Agreement.
Company has not licensed or sublicensed its rights in any Intellectual
Property other than pursuant to the License Agreements. No royalties,
honoraria or other fees are payable by Company to any third parties for the
use of or right to use any Intellectual Property except pursuant to the
License Agreements.

            (c) The Company owns, or has a valid right to use, free and clear of
all Liens, all of the Intellectual Property. The Company is listed in the
records of the appropriate United States, state, or foreign registry as the sole
current owner of record for each application and registration listed on Section
4.26(b) of the Disclosure Letter.

            (d) The Intellectual Property owned by Company, to the best of
Company's knowledge, and any Intellectual Property used by Company, is
subsisting, in full force and effect, and has not been cancelled, expired, or
abandoned, and, to the best of the Company's knowledge, is valid and
enforceable.

            (e) There is no pending or threatened claim, suit, arbitration or
other adversarial proceeding before any court, agency, arbitral tribunal, or
registration authority in any jurisdiction (i) involving the Intellectual
Property owned by Company or licensed to Company, or (ii) alleging that the
activities or the conduct of the Company infringes upon, violates or constitutes
the unauthorized use of the intellectual property rights of any third party or
challenging the Company's ownership, use, validity, enforceability or
registrability of any Intellectual Property. There are no settlements,
forebearances to sue, consents, judgments, or orders or similar obligations
other than the License Agreements which (i) restrict the Company's rights to use
any Intellectual Property, (ii) restrict Company's business in order to
accommodate a third party's intellectual property rights, or (iii) permit third
parties to use any Intellectual Property owned or controlled by the Company.


                                      39




            (f)   The conduct of Company's business as currently conducted or
planned to be conducted does not infringe upon (either directly or indirectly
such as through contributory infringement or inducement to infringe) any
intellectual property rights owned or controlled by any third party. No third
party is misappropriating, infringing, diluting or violating any Intellectual
Property owned or used by Company, and no such claims, suits, arbitrations or
other adversarial proceedings have been brought against any third party by the
Company.

            (g)   Company takes reasonable measures to protect the
confidentiality of Trade Secrets, including requiring its employees and other
parties having access thereto to execute written non-disclosure agreements. To
the best of Company's knowledge, no Trade Secret has been disclosed or
authorized to be disclosed to any third party other than pursuant to a
non-disclosure agreement. To the best of Company's knowledge, no party to any
non-disclosure agreement relating to its Trade Secrets is in breach or default
thereof.

            (h)   No current or former partner, director, officer, or employee
of Company (or any of their respective predecessors in interest) will, after
giving effect to the transactions contemplated herein, own or retain any rights
to use any of the Intellectual Property owned or used by the Company where such
ownership or retention of rights would, individually or in the aggregate,
constitute a Material Adverse Effect on the Company and its Subsidiaries, taken
as a whole.

            (i)   The consummation of the transaction contemplated hereby will
not result in the loss or impairment of Company's right to own or use any of
the Intellectual Property, nor will it require the consent of any Governmental
Authority or third party in respect of any such Intellectual Property.

      Section 4.27 RELATED PARTY TRANSACTIONS. No (a) beneficial owner of 5% or
more of the Company's outstanding capital stock, nor (b) officer or director of
the Company or (c) any Person (other than the Company) in which any such
beneficial owner, officer or director owns any beneficial interest (other than a
publicly held corporation whose stock is traded on a national securities
exchange or in the over-the-counter market and less than 1% of the stock of
which is beneficially owned by all such Persons) (collectively, "Related
Parties") has any interest in: (i) any contract, arrangement or understanding
with, or relating to, the business or operations of, the Company or any of its
Subsidiaries; (ii) any loan, arrangement, understanding, agreement or contract
for or relating to indebtedness of the Company or any of its Subsidiaries; or
(iii) any property (real, personal or mixed), tangible or intangible, used in
the business or operations of the Company or any of its Subsidiaries, excluding
any such contract, arrangement, understanding or agreement constituting a Plan.
Following the Effective Time, except for obligations set forth in this
Agreement, neither the Company nor any of its


                                       40



Subsidiaries will have any obligations to any Related Party except for (i)
accrued salary for the pay period commencing immediately prior to the Effective
Time and (ii) the obligations set forth in the Company SEC Reports.

      Section 4.28 REAL ESTATE.

            (a)   OWNED PROPERTIES. Section 4.28 of the Disclosure Letter sets
forth a true, correct and complete list of all real property (including
improvements thereon) owned by the Company (collectively, the "Owned Real
Property"). With respect to each such parcel of Owned Real Property: (i) such
parcel is free and clear of all encumbrances other than such encumbrances which
do not materially interfere with the present use thereof; (ii) there are no
leases, subleases, licenses, concessions, or other agreements, written or oral,
granting to any person the right of use or occupancy of any portion of such
parcel; and (iii) there are no outstanding actions, rights of first refusal or
options to purchase such parcel.

            (b)   LEASED PROPERTIES. Section 4.28(b) of the Disclosure Letter
sets forth a true, correct and complete list of all of the leases and subleases
("Leases") and each leased and subleased parcel of real property in which the
Company or any of its Subsidiaries is a tenant, subtenant, landlord or
sublandlord (collectively, the "Leased Real Property") and for each Lease
indicates whether or not the consent of the landlord thereunder will be
required in connection with (i) the Merger, (ii) the assignment of the Leases
as collateral in respect of the Financing (assuming it occurs on the terms set
forth in the Financing Letters) or (iii) the other transactions contemplated by
this Agreement. The Company (either directly or through a Subsidiary) holds a
valid and existing leasehold or subleasehold interest or landlord or
sublandlord interest as applicable, under each of the Leases described in
Section 4.28(b) of the Disclosure Letter. The Company has delivered or made
available to MergerSub true, correct, and complete copies of each of the
Leases. With respect to each Lease: (i) the Lease is legal, valid, binding,
enforceable and in full force and effect; (ii) the Lease will continue to be
legal, valid, binding, enforceable and in full force and effect on the same
terms and conditions following the Effective Time; (iii) neither the Company
(or its applicable Subsidiary), nor to the knowledge of the Company, any other
party to the Lease, is in breach or default under the Lease, and no event has
occurred which, with notice or lapse of time, would constitute a breach or
default by the Company (or such Subsidiary) or permit termination, modification
or acceleration under the Lease by any other party thereto; (iv) the Company
(or its applicable Subsidiary) has performed and will continue to perform all
of its obligations under the Lease, (v) the Company has not, and to the
knowledge of the Company, no third party has repudiated any provision of the
Lease; (vi) there are no disputes, oral agreements, or forbearance programs in
effect as to the Lease other than (x) those arising in the ordinary course of
business and (y) those which, individually or in the aggregate, do not
constitute a Material Adverse Effect on the Company and its Subsidiaries, taken
as a whole;


                                       41



(vii) the Lease has not been modified in any respect, except to the extent that
such modifications are disclosed by the documents previously delivered or made
available to MergerSub; and (viii) the Company has not assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the Lease.

            (c)   REAL PROPERTY DISCLOSURE. Except as disclosed on Section 4.28
of the Disclosure Letter, there is no Real Property leased or owned by the
Company or any of its Subsidiaries that is used in their business. The Owned
Real Property and Leased Real Property are referred to collectively herein as
the "Real Property." To the knowledge of the Company, each parcel of Real
Property is in material compliance with all existing Laws, including, without
limitation, (a) the Americans with Disabilities Act, 42 U.S.C. Section 12102
et seq., together with all rules, regulations and official interpretations
promulgated pursuant thereto, and (b) all Laws with respect to zoning,
building, fire, life safety, health codes and sanitation. The Company and its
Subsidiaries have received no notice of, and have no knowledge of, any
condition currently or previously existing on the Real Property or any portion
thereof which may give rise to any violation of any existing Law applicable to
the Real Property if it were disclosed to the authorities having jurisdiction
over such Real Property other than those (x) arising in the ordinary course of
business or (y) which do not constitute, individually or in the aggregate, a
Material Adverse Effect on the Company and its Subsidiaries, taken as a whole.

            (d)   NO PROCEEDINGS. There are no proceedings in eminent domain,
condemnation or other similar proceedings pending or, to the knowledge of the
Company, threatened, affecting any portion of the Real Property. There exists
no writ, injunction, decree, order or judgment outstanding, nor any litigation,
pending or, to the knowledge of the Company, threatened, relating to the
ownership, lease, use, occupancy or operation by any person of the Real
Property.

            (e)   CURRENT USE. The current use of the Real Property does not
violate in any material respect any instrument of record or agreement affecting
such Real Property. There are no violations of any covenants, conditions,
restrictions, easements, agreements or orders of any Governmental Authority
having jurisdiction over any of the Real Property that affect such Real Property
or the use or occupancy thereof other than those (x) arising in the ordinary
course of business or (y) which do not, individually or in the aggregate,
constitutes a Material Adverse Effect on the Company and its Subsidiaries, taken
as a whole. No damage or destruction has occurred with respect to any of the
Real Property that, individually or in the aggregate, has had or resulted in, or
is reasonably likely to have or result in, a Material Adverse Effect on the
Company or any of its Subsidiaries.


                                       42



            (f)   INSURANCE. There are currently in effect such insurance
policies for the Real Property as are customarily maintained with respect to
similar properties. True, correct and complete copies of all insurance policies
maintained by the Company and its Subsidiaries with respect to the Real
Property have been delivered or made available to MergerSub. All premiums due
on such insurance policies have been paid by the Company and the Company will
maintain such insurance policies from the date hereof through the Effective
Time or earlier termination of this Agreement. The Company has not received and
has no knowledge of any notice or request from any insurance company requesting
the performance of any work or alteration with respect to the Real Property or
any portion thereof. The Company has received no notice from any insurance
company concerning, nor is the Company aware of, any defects or inadequacies in
the Real Property, which, if not corrected, would result in the termination of
insurance coverage or increase its cost.

            (g)   CONDITION AND OPERATION OF IMPROVEMENTS. All buildings and
other improvements included within the Real Property (the "Improvements") are,
in all material respects, in good condition and repair and adequate to operate
such facilities as currently used, and, to the Company's knowledge, there are
no facts or conditions affecting any of the Improvements which would,
individually or in the aggregate, interfere in any significant respect with the
current use, occupancy or operation thereof which interference would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company. No Improvement or portion thereof is dependent
for its access, operation or utility on any land, building or other improvement
not included in the Real Property.

            (h)   PERMITS. All required or appropriate certificates of
occupancy, permits, licenses, franchises, approvals and authorizations
(collectively, the "Real Property Permits") of all Governmental Authorities
having jurisdiction over the Real Property, the absence of which constitute a
Material Adverse Effect on the Company, have been issued to the Company to
enable the Real Property to be lawfully occupied and used for all of the
purposes for which it is currently occupied and used have been lawfully issued
and are, as of the date hereof, in full force and effect. The Company has
delivered or made available to MergerSub true, correct and complete copies of
the Real Property Permits to MergerSub. The Company has not received or been
informed by a third party of the receipt by it of any notice which constitutes
a Material Adverse Effect on the Company from any Governmental Authority having
jurisdiction over the Real Property threatening a suspension, revocation,
modification or cancellation of any Real Property Permit and, to the knowledge
of the Company, there is no basis for the issuance of any such notice or the
taking of any such action.




                                       43



      Section 4.29 ASSETS. The assets and properties of the Company and its
Subsidiaries, considered as a whole, constitute all of the material assets and
properties which are reasonably required for the business and operations of the
Company and its Subsidiaries as presently conducted. The Company and its
Subsidiaries have good and marketable title to or a valid leasehold estate in,
free and clear of any Liens, (i) all personal properties and assets reflected on
the Company's Balance Sheet at the Balance Sheet Date (except for properties or
assets subsequently sold in the ordinary course of business consistent with past
practices), except as such, individually or in the aggregate, do not constitute
a Material Adverse Effect on the Company.

      Section 4.30 OPINION OF FINANCIAL ADVISOR. The Special Committee and the
Company have received the opinion of Donaldson, Lufkin & Jenrette Securities
Corporation, the Special Committee's and the Company's financial advisor, to the
effect that, as of the date hereof, the Merger Consideration to be received by
the Company's stockholders (other than the Retaining Stockholders and the
persons named in the Roll-over Schedule) is fair to such stockholders from a
financial point of view. The written confirmation of such opinion has been
provided to MergerSub.

      Section 4.31 STATE ANTI-TAKEOVER STATUTES; DELAWARE SECTION 203. The
Company, the Special Committee and the Board of Directors of the Company have
each taken all action required to be taken by it in order to exempt this
Agreement (as it may be amended from time to time), the Voting Agreement and the
transactions contemplated hereby and thereby from, and such agreements and the
transactions contemplated hereby and thereby are exempt from, the requirements
of the provisions of Section 203 of the Delaware Corporate Law and other
antitakeover laws and regulations of any state, including without limitation the
State of Delaware. The Company has heretofore delivered to MergerSub complete
and correct copies of (i) a resolution of the Special Committee and of the Board
of Directors of the Company that Section 203 of Delaware Corporate Law and other
antitakeover laws and regulations of any state, including without limitation the
State of Delaware, are and shall be inapplicable to the Merger and the
transactions contemplated by this Agreement and the Voting Agreement, as they
may be amended from time to time, and (ii) the Company's certificate of
incorporation, which provides that the Company elects not to be governed by
Section 203 of Delaware Corporate Law.

      Section 4.32 INTERNATIONAL TRADE LAWS AND REGULATIONS.

            (a)   The Company and each of its Subsidiaries has complied and is
in compliance with all Laws respecting international trade ("International
Trade Laws") applicable in connection with the conduct of their respective
businesses (including as the same relates to record keeping requirements),
except for possible violations which do not,


                                       44



individually or in the aggregate, constitute a Material Adverse Effect on the
Company and its Subsidiaries, taken as a whole.

            (b)   Neither the Company nor any of its Subsidiaries is or has been
the subject of any civil or criminal investigation, litigation, audit, penalty,
proceeding or assessment, liquidated damages proceeding or claim, forfeiture or
forfeiture action, claim for additional customs duties or fees, denial orders,
suspension of export privileges, governmental sanctions, or any other action,
proceeding or claim by any foreign, federal, state, local or other Governmental
Authority involving or otherwise relating to any alleged or actual violation of
International Trade Laws or relating to any alleged or actual underpayment of
customs duties, fees, taxes or other amounts owed pursuant to any International
Trade Laws and, to the knowledge of the Company and its Subsidiaries, there is
no basis for any of the foregoing, except for possible proceedings, claims or
actions which do not, individually or in the aggregate, constitute a Material
Adverse Effect on the Company and its Subsidiaries, taken as a whole.

            (c)   Neither the Company nor any of its Subsidiaries has engaged in
or otherwise participated in, assisted or facilitated any transaction that is
prohibited by any applicable embargo or related trade restriction imposed by the
United States Office of Foreign Assets Control or any other agency of the United
States government.

            (d)   Set forth on Section 4.32 of the Disclosure Letter is a list
of each foreign jurisdiction to which the Company or any of its Subsidiaries
exports any products, equipment, services or technology, each foreign
jurisdiction from which the Company or any of its Subsidiaries imports any
products, equipment, services or technology and each foreign jurisdiction to
which the Company's or any of its Subsidiaries' products, equipment, services
or technology (or products of such technology) are reexported. The Company and
each of its Subsidiaries has complied and is in compliance with all
International Trade Laws applicable in connection with the conduct of their
respective businesses (including as the same relates to recordkeeping
requirements), except for possible violations which do not, individually or in
the aggregate, constitute a Material Adverse Effect on the Company.

      Section 4.33 INVESTMENTS IN AFFILIATED ENTITIES. Section 4.33 of the
Disclosure Letter contains a true, complete and correct schedule of all
securities of Persons other than Subsidiaries ("Affiliated Entities") that are
owned by the Company (or its Subsidiaries) (the "Affiliated Entity Securities").
The Affiliated Entity Securities have been validly issued, are fully paid and
nonassessable and are owned by the Company (or its Subsidiaries, as the case may
be) free and clear of all Liens or any other limitation or restriction
(including limitations of transfer, rights of first refusal or similar rights).


                                       45



      Section 4.34 NASDAQ LISTING; HOLDERS OF EQUITY SECURITIES AS OF RECORD
DATE FOR MOST RECENT MEETING OF STOCKHOLDERS. As of the date hereof, all
outstanding shares of the Common Stock are designated as qualified for trading
as a national market security on the National Association of Securities Dealers
Automatic Quotation System. As of May 7, 1999, the record date (the "Annual
Meeting Record Date") for the most recent meeting of the Company's stockholders,
the Company had more than 800 holders of its equity securities, within the
meaning of California Corporations Code Section 2115 ("Section 2115"). The
Company is not subject to the requirements of subdivision (b) of Section 2115 of
the California Corporations Code.


                                    ARTICLE V
              REPRESENTATIONS AND WARRANTIES OF MERGERSUB

      MergerSub represents and warrants to the Company that:

      Section 5.1 CORPORATE EXISTENCE AND POWER. MergerSub is a corporation
duly incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all corporate powers to execute and
deliver this Agreement and to consummate the Merger and the transactions
contemplated hereby (including, without limitation, the Voting Agreements).
Since the date of its incorporation, MergerSub has not engaged in any activities
other than in connection with or as contemplated by this Agreement and the
Merger or in connection with arranging any financing required to consummate the
transactions contemplated hereby.

      Section 5.2 CORPORATE AUTHORIZATION. No corporate proceedings on the part
of MergerSub are necessary, as a matter of law or otherwise, for the
consummation of the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by MergerSub and, assuming the due
authorization, execution and delivery of this Agreement by the Company, is a
valid and binding agreement of MergerSub enforceable against it in accordance
with its terms, except to the extent that the enforcement thereof may be limited
by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance
or other similar laws now or hereafter in effect relating to creditor's rights
generally, (ii) general principles of equity (regardless of whether such
enforcement is considered in a proceeding at law or in equity) and (iii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to the discretion of the court before which any
enforcement proceeding therefor may be brought.



                                       46


      Section 5.3 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by MergerSub of this Agreement and the consummation by MergerSub of
the transactions contemplated by this Agreement require no action by or in
respect of, or filing with, any Governmental Authority other than (a) the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware, (b) compliance with any applicable requirements of the HSR Act; (c)
compliance with the applicable requirements of the Exchange Act; (d) compliance
with the applicable requirements of the Securities Act; (e) compliance with any
applicable Federal, foreign or state securities or Blue Sky laws; and (f) such
other items the failure of which to be obtained will not constitute a Material
Adverse Effect on MergerSub.

      Section 5.4 NON-CONTRAVENTION. The execution, delivery and performance by
MergerSub of this Agreement and the consummation by MergerSub of the
transactions contemplated hereby do not and will not (a) contravene or conflict
with the certificate of incorporation or bylaws of MergerSub, (b) contravene,
conflict with or constitute a violation of any provision of law, regulation,
judgment, order or decree binding upon MergerSub, or (c) constitute a default
under or give rise to any right of termination, cancellation or acceleration of
any right or obligation of MergerSub or to a loss of any benefit to which
MergerSub is entitled under any agreement, contract or other instrument binding
upon MergerSub which constitutes a Material Adverse Effect on MergerSub.

      Section 5.5 DISCLOSURE DOCUMENTS. None of the information supplied or to
be supplied by MergerSub regarding MergerSub for inclusion in the Company Proxy
Statement will, at the date it is first mailed to stockholders of the Company or
at the time of the Company Stockholder Meeting, 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 the light of the
circumstances under which they are made, not misleading.

      Section 5.6 FINDERS' FEES. Except for Credit Suisse First Boston and the
parties providing the Financing, there is no investment banker, broker, finder
or other intermediary which has been retained by or is authorized to act on
behalf of MergerSub who would be entitled to any fee or commission from
MergerSub or any of its Affiliates upon consummation of the transactions
contemplated by this Agreement.

      Section 5.7 FINANCING. MergerSub has delivered to the Company; (i) signed
counterpart(s) of the commitment letter(s) of Goldman Sachs Credit Partners
L.P., Wells Fargo Bank N.A. and Trust Company of the West, dated as of the date
hereof, pursuant to which such persons have agreed, subject to the terms and
conditions set forth therein, to provide up to an aggregate of $525,000,000 of
debt financing to the Company in connection with the transactions contemplated
hereby and for working capital of the Company; (ii) the signed commitment letter
of Green Equity Investors III, LP, pursuant to which Green Equity

                                      47



Investors III, LP has agreed, subject to the terms and conditions set forth in
such letter, to make or cause to be made an equity investment in MergerSub of
$92,500,000 and (iii) the signed commitment letter of TPG Partners III, L.P.,
pursuant to which TPG Partners III, L.P. has agreed, subject to the terms and
conditions set forth in such letter, to make or cause to be made an equity
investment in MergerSub of $92,500,000. The foregoing commitment letters are
referred to herein as the "Financing Letters". The Financing Letters are in
full force and effect as of the date hereof. The funds contemplated to be
provided by the Financing Letters would be sufficient to enable MergerSub and
the Company to pay the full Merger Consideration as provided herein, to make
all other necessary payments by it in connection with the Merger (including
the repayment of certain outstanding indebtedness of the Surviving
Corporation) and to pay all of the related fees and expenses (such amount of
funds, the "Financing"). The Company shall use all reasonable efforts to
cooperate with and assist MergerSub in obtaining the Financing.


                                   ARTICLE VI
                            COVENANTS OF THE COMPANY

      Section 6.1 CONDUCT OF THE COMPANY. Except as otherwise specifically
provided in this Agreement, without the prior written consent of MergerSub, from
the date hereof to the Effective Time, the Company and each of its Subsidiaries
shall carry on its business in the ordinary and usual course of business and
consistent with past practices and shall use its best efforts to (i) preserve
intact its present business organization, (ii) maintain in effect all material
federal, state and local Permits that are required for the Company or any of its
Subsidiaries to carry on its business, (iii) keep available the services of its
present employees and consultants and (iv) preserve its present relationships
with its employees, consultants, customers, lenders, suppliers, licensors,
licensees, landlords and others having significant business relationships with
it. Without limiting the generality of the foregoing, and except as otherwise
specifically provided in this Agreement, without the prior written consent of
MergerSub, prior to the Effective Time, the Company and each of its Subsidiaries
shall not and shall not permit its Subsidiaries to:

            (a)   propose or adopt any change in its certificate of
incorporation or bylaws or comparable organizational documents;

            (b)   (i) merge with or acquire (by merger, consolidation,
acquisition of stock or assets, joint venture or otherwise of a direct or
indirect ownership interest or investment) any corporation, partnership or
other business organization or division thereof, or sell, lease or otherwise
dispose of a material amount of assets (excluding sales of inventory or other
assets in the ordinary course of business) or securities; (ii) waive, release,
grant, or

                                      48



transfer any rights of value which are, individually or in the aggregate,
material; (iii) modify or change in any respect any material Permit; (iv)
incur, assume or prepay any indebtedness for borrowed money except in the
ordinary course of business, consistent with past practices; (v) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for any indebtedness of any other Person,
except in the ordinary course of business consistent with past practices; (vi)
mortgage, pledge or subject to any lien, charge or other encumbrance any of
the Company's or its Subsidiaries' material assets, properties or business,
whether tangible or intangible; (vii) make any loans, advances or capital
contributions to, or investments in, any other Person, except in the ordinary
course of business, consistent with past practices; (viii) authorize any
capital expenditure or expenditures not in the ordinary course of business;
(ix) pledge or otherwise encumber shares of capital stock of the Company or
any of its Subsidiaries; (x) enter into any contract or agreement other than
in the ordinary course of business consistent with past practices that would
be material to the Company and its Subsidiaries, taken as a whole; or (xi)
amend, modify or waive in any material respects any right under any material
contract of the Company or any of its Subsidiaries, except as permitted by
Section 6.1(d);

            (c)   enter into any new lease, sublease or other agreement in
respect of the Real Property without MergerSub's prior written consent (which
consent may be withheld in MergerSub's sole and absolute discretion), other
than leases related to the opening of new stores entered into in the ordinary
course of business consistent with past practices that are on terms consistent
with the Company's past practices;

            (d)   extend, renew, replace, amend, modify or alter any existing
Lease (other than in the ordinary course of business and consistent with past
practices in connection with new store openings and distribution center
expansions) in respect of the Real Property without MergerSub's prior written
consent (which consent may be withheld in MergerSub's sole and absolute
discretion);

            (e)   sell, contribute, assign or create any right, title or
interest whatsoever in or to the Owned Real Property, or create or permit to
exist thereon any lien, charge or encumbrance, or enter into any agreement to
do any of the foregoing, without the prior written consent of MergerSub (which
consent may be granted or withheld in MergerSub's sole and absolute
discretion);

            (f)   take any action that would result in any representation or
warranty of the Company contained in this Agreement which are qualified as to
materiality becoming untrue as of the Effective Time or any representation or
warranty not so qualified becoming untrue in any material respect as of the
Effective Time;

                                      49



            (g)   split, combine or reclassify any shares of, or declare, or
set aside or pay any dividend (including, without limitation, an extraordinary
dividend) or other distribution (whether in cash, stock or property or any
combination thereof) in respect of, Company Securities or any other securities
of the Company or any of its Subsidiaries or redeem, repurchase or otherwise
acquire or offer to redeem, repurchase, or otherwise acquire any Company
Securities or any other securities of the Company or any of its Subsidiaries;

            (h)   adopt or amend any bonus, profit sharing, compensation,
severance, termination, stock option, pension, retirement, deferred
compensation, employment or employee benefit plan, agreement, trust, plan,
fund or other arrangement for the benefit and welfare of any director,
officer, employee, agent, consultant or person providing management services
or increase in any manner the compensation or fringe benefits of any director,
officer or any class of employees or pay any benefit not required by any
existing plan or arrangement (including, without limitation, the granting of
stock options or stock appreciation rights or the removal of existing
restrictions in any benefit plans or agreements); make any loans to any of its
officers, directors, employees, Affiliates, agents or consultants or make any
change in its existing borrowing or lending arrangements for or on behalf of
any of such persons, whether pursuant to a Plan or otherwise; or grant, issue,
accelerate, pay, accrue or agree to pay or make any accrual or arrangement for
payment of salary or other payments or benefits pursuant to, or adopt or
amend, any new or existing Plan; PROVIDED, HOWEVER, that notwithstanding the
foregoing, the Company shall be entitled to increase the compensation of
employees and make minor modifications in personnel policies and procedures
for non-officer employees, in each case in the ordinary course of business and
consistent with past practices;

            (i)   except as required by applicable Law or GAAP, revalue in any
material respect any of its assets, including writing down the value of
inventory in any material manner, or write-off notes or accounts receivable in
any material manner;

            (j)   pay, discharge or satisfy any material claims, liabilities
or obligations (whether absolute, accrued, asserted or unasserted, contingent
or otherwise) other than the payment, discharge or satisfaction in the
ordinary course of business, consistent with past practices;

            (k)   make any material Tax election or settle or compromise any
material Tax liability;

            (l)   make any change in accounting methods, principles or
practices materially affecting the reported consolidated assets, liabilities
or results of operations of the Company;

                                      50



            (m)   authorize for issuance, issue, sell, deliver or agree or
commit to issue sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any Company Securities or any other securities of the Company or
any of its Subsidiaries or equity equivalents;

            (n)   adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its Subsidiaries;

            (o)   alter through merger, liquidation, reorganization,
restructuring or any other fashion the corporate structure or ownership of any
Subsidiary;

            (p)   permit to lapse any material Permits;

            (q)   permit to lapse any registrations or applications for
material Intellectual Property owned, licensed, or used by the Company; or

            (r)   agree or commit to do any of the foregoing.

      Section 6.2 COMPANY STOCKHOLDERS MEETING. The Company shall cause a
meeting of its stockholders (the "Company Stockholder Meeting") to be duly
called, noticed and held as promptly as practicable for the purpose of voting on
the adoption of this Agreement and the Merger. In connection with the Company
Stockholders Meeting, the Company will use its best efforts to obtain the
necessary vote for adoption by its stockholders of this Agreement and the Merger
and shall take all other action necessary or, in the reasonable opinion of
MergerSub, advisable to secure any vote of stockholders required by Delaware
Corporate Law to effect the Merger and will otherwise comply with all legal
requirements applicable to such meeting. The Special Committee and the Board of
Directors of the Company shall, unless the Special Committee or the Board of
Directors of the Company, as the case may be, determines in its good faith
judgment, after receiving the advice of its outside legal counsel and otherwise
in accordance with the terms of this Agreement, that in order for the Special
Committee or the Board of Directors of the Company, as the case may be, to
comply with its fiduciary duties under applicable Law it must recommend a
Superior Proposal, recommend that the stockholders of the Company approve this
Agreement and the Merger.

      Section 6.3 ACCESS TO INFORMATION; RIGHT OF INSPECTION. From the date
hereof until the Effective Time, the Company and each of its Subsidiaries will,
during normal business hours, (i) give MergerSub, its Affiliates and their
respective officers, employees, counsel, accountants, financial advisors,
financing sources and other agents and representatives full access to the
offices, properties, warehouses and other facilities and to all contracts,
internal

                                      51



reports, data processing files, books and records, Federal, state, local and
foreign tax returns and records, commitments, books, records and affairs of
the Company, whether located on the premises of the Company, its Subsidiaries
or at another location; (ii) furnish promptly to MergerSub or its Affiliates a
copy of each report, schedule, registration statement and other document filed
or received by it during such period pursuant to the requirements of Federal
securities laws or regulations; (iii) permit MergerSub or its Affiliates to
make such inspections as they may reasonably require; (iv) cause its officers
to furnish MergerSub and its Affiliates such existing financial, operating and
product data and other information with respect to the business and properties
of the Company and its Subsidiaries as MergerSub or its Affiliates from time
to time may reasonably request, including without limitation financial
statements and schedules; (v) allow MergerSub and its Affiliates the
opportunity to interview such employees and other personnel of the Company and
its Subsidiaries; and (iv) otherwise instruct and cause the Company's and its
Subsidiaries' employees, accountants, counsel and financial advisors to fully
cooperate with MergerSub in its investigation of the business of the Company
and its Subsidiaries; PROVIDED, HOWEVER, that no investigation pursuant to
this Section 6.3 or notice pursuant to Section 8.5 shall affect or be deemed
to modify any representation or warranty made by the Company herein.

      Section 6.4 OTHER POTENTIAL ACQUIRERS.

            (a)   Neither the Company, its Subsidiaries nor any of their
respective Affiliates shall, nor shall the Company or its Subsidiaries or
Affiliates authorize or permit any of their respective officers, directors,
employees, representatives, legal counsel, financial advisors or other agents
to, directly or indirectly, encourage, solicit, initiate, or engage in
discussions or negotiations with or provide any non-public information to any
person or group (other than MergerSub or its Affiliates or any designees of
MergerSub or its Affiliates), or take any action designed to facilitate any
inquiries or the making of any proposal with respect to, any Third Party
Acquisition; and neither the Company nor any Subsidiary or Affiliated Entity
shall enter into any agreement with respect to a Third Party Acquisition;
PROVIDED, HOWEVER, that nothing contained in this Section 6.4(a) shall prevent
the Special Committee or the Board of Directors of the Company from (i) taking
and disclosing to the Company's stockholders a position as required by Rules
14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender or
exchange offer, PROVIDED, THAT such disclosure states that no action will be
taken by the Special Committee or the Board of Directors of the Company or any
other committee thereof, as applicable, in violation of this Section 6.4; and
(ii) if it receives a written unsolicited expression of interest from a Person
relating to the submission by such Person of a Superior Proposal, supplying to
and receiving non-public information from such Person (subject to a customary
confidentiality agreement which expressly permits the Company to fulfill its
obligations set forth in the last sentence of this Section 6.4(a)), in response
to such unsolicited Third Party Acquisition proposal as, and to

                                      52



the extent that, the Special Committee or the Board of Directors of the
Company, as applicable, determines in its good faith judgment, after
consultation with outside legal counsel, (A) such action is required in order
to comply with its fiduciary duties under applicable Law, and (B) there is a
reasonable prospect that such expression of interest will result in a Superior
Proposal from such Person, PROVIDED, THAT, after consultation with outside
legal counsel, the Company may conduct such discussions and negotiations as it
believes are necessary in light of the fiduciary duties of the Special
Committee and the Board of Directors of the Company concerning such
unsolicited Third Party Acquisition proposal. The Company shall immediately
terminate any pending discussion regarding any Third Party Acquisition (other
than with MergerSub or its Affiliates or any designees of MergerSub or its
Affiliates) and shall promptly notify MergerSub of (i) any inquiries or
proposals received by, any non-public information requested from, or any
negotiations or discussions sought to be initiated or continued with, the
Company or any of its Subsidiaries or Affiliated Entities, (ii) any inquiries
or proposals known by the Company to have been received by, any non-public
information known by the Company to have been requested from, or any
negotiation or discussions known by the Company to have been sought to be
initiated or continued with, the Company or any of its Affiliates or any of
the respective directors, officers, employees, agents or representatives of
the foregoing, in each case from a person (other than MergerSub and its
representatives and Affiliates) with respect to a Third Party Acquisition, and
(iii) the terms thereof, including the identity of such third party and the
general terms of any financing arrangement or commitment in connection with
such Third Party Acquisition, and the Company agrees to promptly update
MergerSub on an ongoing basis of the status thereof, including furnishing
copies of any such written inquiries or offers.

            (b)   Except as set forth in this Section 6.4(b), neither the
Special Committee nor the Board of Directors of the Company shall withdraw or
modify its approval or recommendation of this Agreement, the Merger or the
transactions contemplated hereby or approve or recommend, or cause or allow
the Company or any Subsidiary to enter into any agreement with respect to, any
Third Party Acquisition. If the Special Committee or the Board of Directors of
the Company, by a majority disinterested vote determines in its good faith
judgment after consultation with its outside legal counsel, that it is
required to do so in order to comply with its fiduciary duties under
applicable Law, the Special Committee or the Board of Directors of the
Company, as applicable, may, in the event that it receives a Superior Proposal
and in response thereto, (x) withdraw its recommendation of the transactions
contemplated hereby or (y) approve or recommend such Superior Proposal but in
each case only (i) after providing written notice to MergerSub (a "Notice of
Superior Proposal") advising MergerSub that the Special Committee or the Board
of Directors of the Company, as applicable, has received a Superior Proposal,
specifying the material terms and conditions of such Superior Proposal and
identifying the person making such Superior Proposal, and (ii) the Special
Committee or the Board of Directors of the Company, as

                                      53



applicable, by a majority disinterested vote determines in its good faith
judgment (after receipt of written advice of a financial adviser of nationally
recognized reputation consistent with such determination and consultation with
outside legal counsel) that any transaction proposed by MergerSub is not at
least as favorable to the Company's stockholders (other than the Retaining
Stockholders) as the Superior Proposal; PROVIDED, HOWEVER, that (I) no action
specified in clause (x) or (y) above shall be taken until the sixth Business
Day after receipt of a Notice of Superior Proposal by MergerSub and (II) the
Company shall not be entitled to enter into any agreement with respect to a
Superior Proposal unless and until this Agreement is terminated by its terms
pursuant to Section 10.1 and the Company has paid all amounts due to MergerSub
pursuant to Section 10.2. Nothing contained in this Section 6.4(b) shall
prevent the Special Committee or the Board of Directors of the Company from
(i) taking and disclosing to the Company's stockholders a position as required
by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any
tender or exchange offer, PROVIDED, THAT such disclosure states that no action
will be taken by the Special Committee or the Board of Directors of the
Company in violation of this Section 6.4, or (ii) disclosing the fact that the
Special Committee or the Board of Directors, as applicable, has received a
proposal for a Third Party Acquisition and the terms of such proposal, if the
Special Committee or the Board of Directors of the Company, as applicable,
determines, after consultation with outside legal counsel, that it is
compelled to make such disclosure in order to comply with its fiduciary duties
under applicable law or with federal securities laws.

            (c)   For the purposes of this Agreement, "Third Party
Acquisition" means the occurrence of any of the following events: (i) the
acquisition of the Company by merger or otherwise by any person (which
includes a "PERSON" as such term is defined in Section 13(d)(3) of the
Exchange Act) other than MergerSub (a "Third Party"); (ii) the acquisition by
a Third Party of any material portion of the assets of the Company and its
Subsidiaries taken as a whole; (iii) the acquisition by a Third Party of
fifteen percent (15%) or more of the outstanding Common Stock or the issuance
by the Company of capital stock containing terms which are inconsistent with
the consummation of the transactions contemplated by this Agreement; (iv) the
adoption by the Company of a plan of liquidation or the declaration or payment
of an extraordinary dividend; (v) the repurchase by the Company or any of its
Subsidiaries of more than fifteen percent (15%) of the outstanding Shares; or
(vi) the acquisition by the Company or any of its Subsidiaries by merger,
joint venture or otherwise of any person, or any purchase of stock or assets
or acquisition of any direct or indirect ownership interest or investment in
any business such that, after such acquisition, the Company and its
Subsidiaries' interest or investment in such business's annual revenues, net
income or assets is greater than or equal to fifteen percent (15%) of the
annual revenues, net income or assets of the Company. For purposes of this
Agreement, a "Superior Proposal" means any bona fide written unsolicited
proposal to acquire, by merger or otherwise, directly or indirectly for
consideration consisting of cash and/or securities more than fifty percent
(50%) of the

                                      54



Shares then outstanding or all or substantially all the assets of the Company
and its Subsidiaries, taken as a whole (in either case, with funding that is
at least as committed as the funding commitments in the Financing Letters),
and otherwise for a consideration with a value higher than the Merger
Consideration and on terms and conditions that the Special Committee or the
Board of Directors of the Company, as applicable, by a majority disinterested
vote determines in its good faith judgment (after receipt of written advice of
a financial advisor of nationally recognized reputation consistent with such
determination and consultation with outside legal counsel) (i) is capable of
being so funded, and (ii) would, if consummated provide a higher value to the
Company's stockholders (excluding the Retaining Stockholders) from a financial
point of view than the transactions contemplated hereby and by any alternative
transaction proposal made by MergerSub pursuant to Section 6.4(b) hereof;
PROVIDED, HOWEVER, that such proposal or offer shall not be deemed to be a
"Superior Proposal" unless the Special Committee or the Board of Directors of
the Company, as applicable, reasonably determines that such proposal is
reasonably likely to be consummated in accordance with its terms and that the
financing required to consummate the transaction contemplated by such proposal
or offer is capable of being, and is reasonably likely to be, obtained.

      Section 6.5 RESIGNATION OF DIRECTORS. Prior to the Effective Time, the
Company shall deliver to MergerSub evidence satisfactory to MergerSub of the
resignation of all directors of the Company effective as of the Effective Time.

      Section 6.6 WARN ACT. The Company shall not, at any time prior to the
Effective Time, without the written consent of MergerSub and without complying
fully with the notice and other requirements of the Worker Adjustment and
Retraining Notification Act of 1988 ("WARN Act"), effectuate (1) a "plant
closing" as defined in the WARN Act affecting any site of employment or one or
more facilities or operating units within any site of employment of the Company;
or (2) a "mass layoff" as defined in the WARN Act affecting any site of
employment of the Company; or any similar action under applicable state or
foreign law requiring notice to employees in the event of a plant closing or
layoff.

      Section 6.7 LEASE CONSENTS. Notwithstanding the provisions of Section 8.2
below, the Company hereby covenants and agrees to use its reasonable best
efforts to obtain the Minimum Lease Consents.


                                   ARTICLE VII
                             COVENANTS OF MERGERSUB



                                      55



      Section 7.1 DIRECTOR AND OFFICER LIABILITY. The Surviving Corporation
shall honor all of the Company's obligations to indemnify and hold harmless
(including any obligations to advance funds for expenses) the present and former
officers and directors of the Company in respect of acts or omissions occurring
prior to the Effective Time to the extent provided under the Delaware General
Corporate Law and the Company's certificate of incorporation and bylaws in
effect on the date hereof, and such obligations shall survive the Merger and
shall continue in full force and effect from the Effective Time until six (6)
years after the Effective Time; PROVIDED, HOWEVER, that such indemnification
shall be subject to any limitation imposed from time to time under applicable
Law. For a period of six (6) years after the Effective Time, the Surviving
Corporation shall cause to be maintained the current policies of officers' and
directors' liability insurance maintained by the Company (the "Current
Policies") (provided that the Surviving Corporation may substitute therefor
policies with reputable and financially sound carriers of at least the same
coverage and amount containing terms and conditions that are no less favorable
(the "Replacement Policies")) in respect of acts or omissions occurring prior to
the Effective Time covering each such Person currently covered by such Current
Policies; PROVIDED, HOWEVER, that in no event will the Surviving Corporation be
required to expend, per annum, in excess of 250% of the annual premium currently
paid by the Company for such coverage (or such coverage as is available for 250%
of such annual premium); PROVIDED, FURTHER, that if the annual premium required
to provide the foregoing insurance exceeds 250% of the annual premium currently
paid by the Company, the Company shall provide as much of such insurance as can
be purchased for such premium, and, any present or former officer or director of
the Company who desires to be covered by the Current Policies may so elect and
shall be covered by the Current Policies so long as such former officer or
director pays the portion of the premium for such Current Policies in excess of
the amount which the Surviving Corporation is obligated to pay pursuant to this
Section 7.1.


                                  ARTICLE VIII
                COVENANTS OF MERGERSUB AND THE COMPANY

      The parties hereto agree that:

      Section 8.1 REASONABLE BEST EFFORTS. Subject to the terms and conditions
of this Agreement, each party will use its reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement. Each party shall
also refrain from taking, directly or indirectly, any action which would impair
such party's ability to consummate the Merger and the other transactions
contemplated hereby. Without limiting the foregoing, the Company shall use its
reasonable best efforts to (i) take all action necessary or desirable so that no
state takeover statute or


                                       56



similar statute or regulation is or becomes applicable to the Merger or any of
the other transactions contemplated by this Agreement and (ii) if any state
takeover statute or similar statute or regulation becomes applicable to any of
the foregoing, take all action necessary so that the Merger and the other
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger and the other
transactions contemplated by this Agreement. Each of the Company and MergerSub
will use their reasonable best efforts to exempt the Company, the Surviving
Corporation, this Agreement and the transactions contemplated hereby from the
applicability and provisions of Section 2115 of the California Corporations
Code. The Company shall deliver to MergerSub, within ten Business Days of the
date hereof, a complete list of the Company's Leases as of the date hereof, and
any amendments to such Leases.

      Section 8.2 CONSENTS AND APPROVALS. The Company and MergerSub shall
cooperate with one another in determining whether any action by or in respect
of, or filing with, any Governmental Authority is required, or any actions,
consents, approvals or waivers are required to be obtained from parties to any
material contracts, in connection with the consummation of the transactions
contemplated by this Agreement. Each of the Company and MergerSub will, and will
cause its respective Subsidiaries, if any, to, take all reasonable actions
necessary to obtain (and will cooperate with each other in obtaining) any
consent, approval, waiver, authorization, order or approval of, or any exemption
by, any Governmental Authority or other public or private third party required
to be obtained or made by the Company, MergerSub, or any of their respective
Subsidiaries, if any, in connection with the Merger or the taking of any action
contemplated thereby or by this Agreement.

      Section 8.3 CERTAIN FILINGS.

             (a) SECURITIES LAWS. The Company and MergerSub shall use their
respective reasonable best efforts to take or cause to be taken such actions as
may be required to be taken under the Exchange Act, the Securities Act and any
other federal securities laws, and under any applicable state securities or Blue
Sky Laws in connection with the Merger and the other transactions contemplated
hereby, including, without limitation, the Company Proxy Statement, the Schedule
13E-3 and any other filings that may be required in connection with the
Financing and the Offering Documents.

            (b) COMPANY PROXY STATEMENT; SCHEDULE 13E-3. In connection with the
Merger and the Company Stockholders Meeting, the Company shall prepare and file
with the SEC the Company Proxy Statement and a Rule 13e-3 Transaction Statement
on Schedule 13E-3 (the "Schedule 13E-3") relating to the Merger and the other
transactions contemplated by this Agreement and shall use its best efforts to
respond to the comments of the SEC and


                                       57



to cause the Company Proxy Statement to be mailed to the Company's
stockholders, all as promptly as practicable; PROVIDED, HOWEVER, that prior to
the filing of the Company Proxy Statement and the Schedule 13E-3, the Company
shall consult with MergerSub with respect to such filings and shall afford
MergerSub reasonable opportunity to comment thereon. MergerSub shall provide
the Company with any information for inclusion in the Company Proxy Statement
and the Schedule 13E-3 which may be required under applicable law and which is
reasonably requested by the Company. The Company shall promptly notify
MergerSub of the receipt of comments of the SEC and of any request from the SEC
for amendments or supplements to the Company Proxy Statement or the Schedule
13E-3 or for additional information, and will promptly supply MergerSub with
copies of all correspondence between the Company or its representatives, on the
one hand, and the SEC or members of its staff, on the other hand, with respect
to the Company Proxy Statement, the Schedule 13E-3 or the Merger. If at any
time prior to the Company Stockholder Meeting any event should occur which is
required by applicable law to be set forth in an amendment of, or a supplement
to, the Company Proxy Statement or the Schedule 13E-3, the Company will
promptly inform MergerSub. In such case, the Company, with the cooperation of
MergerSub, will, upon learning of such event, promptly prepare and mail such
amendment or supplement; PROVIDED, HOWEVER, that prior to such mailing, the
Company shall consult with MergerSub with respect to such amendment or
supplement and shall afford MergerSub reasonable opportunity to comment
thereon. The Company will notify MergerSub at least 48 hours prior to the
mailing of the Company Proxy Statement, or 24 hours prior to the mailing of any
amendment or supplement thereto, to the stockholders of the Company.

            (c) PROVIDED INFORMATION. The information supplied by each of the
Company and MergerSub for inclusion in any filing with the SEC, including, but
not limited to, the Company Proxy Statement and the Schedule 13E-3, shall not,
in the case of the Schedule 13E-3 as of the date thereof, the date of any
amendment thereto, and as of the Effective Time, and in the case of the Company
Proxy Statement, as of the time the Company Proxy Statement (or any amendment
thereof or supplement thereto) is first mailed to the stockholders of the
Company, as of the time of the Company Stockholders Meeting, or as of the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein, in circumstances when made, or
necessary in order to make the statements therein not misleading.

      Section 8.4 HSR ACT. The Company and MergerSub shall take all reasonable
actions necessary to file as soon as practicable notifications under the HSR Act
and to respond as promptly as practicable to any inquiries received from the
Federal Trade Commission and the Antitrust Division of the Department of Justice
for additional information or documentation and to respond as promptly as
practicable to all inquiries and requests


                                       58



received from any state attorney general or other Governmental Authority in
connection with antitrust matters.

      Section 8.5 ADVICE OF CHANGES. The Company and MergerSub shall promptly
give notice to the other party upon becoming aware of any representation or
warranty of the Company or MergerSub contained in this Agreement which is
qualified as to materiality becoming untrue or inaccurate or, which is not
qualified as to materiality, becoming untrue or inaccurate in any material
respect or the failure by the Company or MergerSub to timely comply with or
satisfy any material covenant or agreement to be complied with or satisfied by
it under this Agreement and shall use its reasonable best efforts to prevent or
promptly remedy same. No notice given hereunder shall affect or be deemed to
modify any representation or warranty made by the Company or MergerSub herein.

      Section 8.6 FINANCING. MergerSub shall use commercially reasonable
efforts to obtain the Financing, on terms reasonably acceptable to MergerSub,
prior to the Terminal Date, PROVIDED, HOWEVER, that the terms of the Financing
Letters as of the date hereof shall be deemed to be acceptable to MergerSub. The
Company agrees to provide, and will use commercially reasonable efforts to cause
its Subsidiaries, its officers, employees, representatives and advisors,
including legal and accounting, to provide, all necessary cooperation reasonably
requested by MergerSub in connection with the Financing, including, without
limitation, using commercially reasonable efforts to cause (a) appropriate
officers and employees to be available on a customary basis for "road show"
appearances and the preparation of disclosure documents in connection therewith
and (b) its independent accountants and counsel to provide assistance to
MergerSub for fees consistent with the Company's existing arrangements with such
accountants and counsel.

      Section 8.7 RECAPITALIZATION. Each of the Company and MergerSub shall use
reasonable best efforts to cause the transactions contemplated by this
Agreement, including but not limited to the Merger, to be accounted for as a
recapitalization and such accounting treatment to be accepted by their
respective accountants and the SEC, and each of the Company and MergerSub agrees
that it shall take no action that would reasonably be likely to cause such
accounting treatment not to be obtained.

      Section 8.8 PUBLIC ANNOUNCEMENTS. MergerSub and the Company will consult
with each other before issuing any press release or making any public statement
with respect to this Agreement and the transactions contemplated hereby, and
will not issue any such press release or make any such public statement prior to
such consultation.


                                       59



      Section 8.9 FURTHER ASSURANCES. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or MergerSub, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of the Company or MergerSub, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets of the Company acquired or to be acquired by the Surviving Corporation as
a result of, or in connection with, the Merger.

      Section 8.10 NOTICES OF CERTAIN EVENTS.  Each of the parties
hereto shall promptly notify the other party of:

               (i)   the receipt by such party of any notice or other
      communication from any Person alleging that the consent of such Person is
      or may be required in connection with the transactions contemplated by
      this Agreement;

               (ii)  the receipt by such party of any notice or other
      communication from any Governmental Authority in connection with the
      transactions contemplated by this Agreement; and

               (iii) any actions, suits, claims, investigations or proceedings
      commenced or, to the best of such party's knowledge threatened against, or
      affecting such party which, if pending on the date of this Agreement,
      would have been required to have been disclosed pursuant to this Agreement
      or which relate to the consummation of the transactions contemplated by
      this Agreement.


                                   ARTICLE IX
                            CONDITIONS TO THE MERGER

      Section 9.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations
of the Company and MergerSub to consummate the Merger are subject to the
satisfaction or waiver of the following conditions:

            (a)   This Agreement shall have been approved and adopted in
accordance with the Delaware Corporation Law by the affirmative vote of the
holders of a majority of the outstanding Common Shares;


                                       60



            (b)   Any applicable waiting period under the HSR Act relating to
the Merger shall have expired or been terminated; and

            (c)   No provision of any applicable Law and no judgment, order,
decree or injunction shall prohibit or restrain the consummation of the Merger;
provided, however, that the Company and MergerSub shall each use their
reasonable best efforts to have any such judgment, order, decree or injunction
vacated.

      Section 9.2 CONDITIONS TO THE OBLIGATIONS OF MERGERSUB. The obligations
of MergerSub to consummate the Merger are subject to the satisfaction or waiver
of the following further conditions:

            (a)   The Company shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior to the
Effective Time, the representations and warranties of the Company contained in
this Agreement which are qualified as to materiality shall be true and all
representations and warranties not so qualified shall be true in all material
respects on the date hereof and as of the Effective Time (provided that
representations made as of a specific date shall be required to be true as of
such date only) as if made at and as of such time and MergerSub shall have
received a certificate signed by the Chief Executive Officer and the Chief
Financial Officer of the Company to the foregoing effect;

            (b)   There shall not be pending (i) any action or proceeding by any
Governmental Authority or (ii) any action or proceeding by any other Person, in
any case referred to in clauses (i) and (ii), before any court or Governmental
Authority that has reasonable likelihood of success seeking (w) to make illegal,
to delay materially or otherwise directly or indirectly to restrain or prohibit
the consummation of the Merger or seeking to obtain material damages, (x) to
restrain or prohibit MergerSub's (including its Affiliates) ownership or
operation of all or any material portion of the business or assets of the
Surviving Corporation or the Company or any of their Subsidiaries or Affiliated
Entities, or to compel MergerSub or any of its Affiliates to dispose of or hold
separate all or any material portion of the business or assets of the Surviving
Corporation or the Company or any of their Subsidiaries, (y) to impose or
confirm material limitations on the ability of MergerSub or any of its
Affiliates to effectively control the business or operations of the Surviving
Corporation or the Company or any of their Subsidiaries or effectively to
exercise full rights of ownership of the Shares, including, without limitation,
the right to vote any Shares acquired or owned by MergerSub or any of its
Affiliates on all matters properly presented to the Company's stockholders, or
(z) to require divestiture by MergerSub or any of its Affiliates of any material
amount of Shares, and no court, arbitrator or Governmental Authority shall have
issued any judgment, order, decree or injunction, and there shall not be any
statute, rule or regulation,


                                       61



that, in the sole judgment of MergerSub is likely, directly or indirectly, to
result in any of the consequences referred to in the preceding clauses (w)
through (z); PROVIDED, HOWEVER, that MergerSub shall use its reasonable efforts
to have any such judgment, order, decree or injunction vacated;

            (c)   The Company shall have obtained the Minimum Lease Consents
and all consents, approvals, authorizations and permits required to be obtained
prior to the consummation of the Merger from any third party in connection with
this Agreement, the Merger and the other transactions contemplated hereby
including, without limitation, the Financing (assuming it occurs on the terms
set forth in the Financing Letters).

            (d)   The Financing and the retirement of all of the Company's and
its Subsidiaries' indebtedness and the release of any related Liens shall have
been consummated on terms acceptable to MergerSub, PROVIDED, HOWEVER, that the
terms of the Financing Letters as of the date hereof shall be deemed to be
acceptable to MergerSub.

            (e)   The aggregate number of Shares of the Company at the
Effective Time, the holders of which have demanded purchase of their shares
from the Company in accordance with the provisions of Section 262 of the
Delaware Corporate Law, shall not equal 10% or more of the Shares of the
Company outstanding as of the record date for the Company Stockholder Meeting;

            (f)   No change in accounting practices or policies after the date
hereof shall cause MergerSub (after consultation with its accountants) to
conclude that the Merger will not be recorded as a recapitalization for
financial reporting purposes;

            (g)   The SEC shall not object (or, if the SEC so objects, shall
not have withdrawn such objection) to the treatment of the transactions
contemplated hereby as a recapitalization for accounting purposes.

            (h)   Since the date of this Agreement, there shall not have
occurred any change, event, occurrence, development or circumstance which,
individually or in the aggregate, constitutes a Material Adverse Effect on the
Company.

      Section 9.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligation
of the Company to consummate the Merger is subject to the satisfaction or waiver
of the following further condition:


                                       62


            (a)    MergerSub shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior to the
Effective Time, the representations and warranties of MergerSub contained in
this Agreement which are qualified as to materiality shall be true and all
representations and warranties not so qualified shall be true in all material
respects on the date hereof and as of the Effective Time (provided that
representations made as of a specific date shall be required to be true as of
such date only) as if made at and as of such time and the Company shall have
received a certificate signed by the President or any Vice President of
MergerSub to the foregoing effect.

            (b)    The Company shall have received the opinion of a firm of
nationally recognized reputation in such area to the effect that as of the
Closing Date, after giving effect to the transactions contemplated hereby,
including the Financing, the Company will not be insolvent or unable to pay its
debts as they mature, and will not have unreasonably small capital. Such opinion
shall be in form and substance similar to the opinion to such effect provided by
a firm of nationally recognized reputation in such area to the lenders referred
to in the Financing Letters, and otherwise as reasonably acceptable to the
Company.


                                    ARTICLE X
                                   TERMINATION


      Section 10.1 TERMINATION. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time (notwithstanding any
approval of this Agreement by the stockholders of the Company):

            (a)    By mutual written consent of the Company on the one hand
and MergerSub on the other hand;

            (b)    By either the Company or MergerSub, if the Merger has not
been consummated on or prior to (the "Terminal Date") the earlier of (x)
November 1, 2000, and (y) the later of (i) September 30, 2000, provided that
such date shall be extended by one Business Day for each Business Day beyond
10 calendar weeks that pass between the date of the initial filing with the
SEC of the Company Proxy Statement and the date the SEC advises the Company
that it has completed its review of the Company Proxy Statement such that the
Company may deliver definitive copies of the Company Proxy Statement to its
stockholders; and (ii) the date 45 days after the SEC notifies the Company
that it has completed its review of the Company Proxy Statement such that the
Company may deliver definitive copies of the Company Proxy Statement to its
stockholders; PROVIDED, HOWEVER, that neither party shall have the right to
terminate this Agreement if such party seeking to terminate this Agreement
pursuant to this Section 10.1(b) is then in breach of any of its

                                      63



representations, warranties or obligations which are qualified as to
materiality, or is then in breach in any material respect of any of its
representations, warranties or obligations which are not so qualified;

            (c)    By either the Company or MergerSub, if MergerSub (in the
case of termination by the Company) or the Company (in the case of termination
by MergerSub) shall have breached any of its covenants or obligations under
this Agreement which are qualified as to materiality, or breached in any
material respect any of its covenants or obligations under this Agreement
which are not so qualified, or any representation or warranty of MergerSub (in
the case of termination by the Company) or of the Company (in the case of
termination by MergerSub) shall have been incorrect as to those which are
qualified as to materiality or incorrect in any material respect as to those
which are not so qualified, when made or at the Effective Time, PROVIDED,
HOWEVER, that the party terminating pursuant to this Section 10.1(c) shall
not be, at the time of such termination, in material breach of any of its
covenants or obligations hereunder;

            (d)    By either the Company or MergerSub, if any court of
competent jurisdiction in the United States or other United States federal or
state Governmental Authority shall have issued a final order, decree or
ruling, or taken any other final action restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action is or
shall have become nonappealable; PROVIDED, THAT, the right to terminate this
Agreement pursuant to this Section 10.1(d) shall not be available to any party
whose breach of any provision of this Agreement results in the imposition of
such order, decree, ruling or other action.

            (e)    By MergerSub (i) if prior to the consummation of the
Merger, the Special Committee or the Board of Directors of the Company shall
have withdrawn, or modified or changed in a manner adverse to MergerSub its
approval or recommendation of this Agreement or the Merger or shall have
recommended or approved a Third Party Acquisition or, when required by
applicable law, failed to take a position with respect thereto; or (ii) if
there shall have occurred a Third Party Acquisition or the Company shall have
entered into an agreement to effect a Third Party Acquisition; or (iii) if the
Company, or any of the Company's Affiliates, or any of their respective
officers, directors, employees, representatives, legal counsel, financial
advisors or other agents, shall have breached any of the provisions of Section
6.4 hereof; or (iv) if prior to the consummation of the Merger, the Company
shall have breached any of its obligations under Sections 6.2, 8.6 or 8.7
hereof or breached any of its obligations under Section 6.3 hereof in any
material respect;

                                      64



            (f)    By the Company if the Company simultaneously enters into a
definitive agreement for a Superior Proposal in accordance with, and has
otherwise complied with the terms of, Section 6.4 hereof, provided the Company
has complied with all provisions thereof, including the notice provisions
therein, and that it makes payment of the Termination Fee; or

            (g)    By either the Company or MergerSub if, at a duly held
stockholders meeting of the Company or any adjournment thereof at which this
Agreement is voted upon, the requisite stockholder vote in favor of the
adoption of this Agreement shall not have been obtained.

The party desiring to terminate this Agreement pursuant to Sections 10.1(b)
through (g) shall give written notice of such termination to the other party in
accordance with Section 11.1 hereof.

      Section 10.2 TERMINATION FEE.

            (a)    Notwithstanding any other provision of this Agreement, if
this Agreement is terminated pursuant to either of Sections 10.1(e)(i), (ii)
or 10.1(f), then the Company shall immediately pay to MergerSub a break-up fee
of $11,000,000 (the "Termination Fee"). In addition, (i) if this Agreement is
terminated pursuant to Section 10.1(e)(iv) or 10.1(g) then in the event that,
after the date hereof and prior to such termination, either (A) a Third Party
Acquisition occurs, or (B) any Third Party shall have made, proposed,
communicated or disclosed an intention to make a proposal with respect to a
Third Party Acquisition then the Company shall immediately pay to MergerSub
the Termination Fee; or (ii) if this Agreement is terminated pursuant to
Section 10.1(e)(iii) and within eighteen (18) months following the termination
of this Agreement (A) a Third Party Acquisition occurs or (B) the Company or
any of its Subsidiaries shall have entered into a definitive agreement with
respect to a Third Party Acquisition, then the Company shall immediately pay
to MergerSub the Termination Fee upon the first to occur of any of the events
specified in clause (A) or (B) of this clause (ii).

            (b)    The Company shall pay, or reimburse MergerSub, within two
Business Days of submission of one or more statements therefor, accompanied by
reasonable supporting documentation, for the amount of all out of pocket
costs, fees and expenses reasonably incurred by any of them or on their behalf
arising out of, in connection with, or related to this Agreement, the Merger
and the consummation of all transactions contemplated by this Agreement
(including, without limitation, HSR Act and other filing fees, fees and
expenses of printers, accountants, financial advisors, attorneys, consultants
and appraisers, or any Person providing or proposing to provide any portion of
the Financing, as well as commitment and other fees, charges and expenses of
any such Person) (the "Expenses"); if

                                      65



this Agreement is terminated by MergerSub pursuant to Section 10.1(c),
PROVIDED, THAT, the Company's aggregate payments and reimbursements pursuant
to this Section 10.2(b) shall in no event exceed $3,000,000.

      Section 10.3 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 10.1, this Agreement shall become void and of no effect with
no liability on the part of any party hereto except to the extent that such
termination results from the willful and material breach by a party of any
representation, warranty or covenant contained in this Agreement and except that
the agreements contained in Sections 10.2, 10.3, 11.1, 11.4 and 11.7 shall
survive the termination hereof.


                                   ARTICLE XI
                                  MISCELLANEOUS

      Section 11.1 NOTICES. All notices, requests and other communications to
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given, if to MergerSub, to:

      BD Recapitalization Corp.

      c/o Leonard Green & Partners, L.P.
      11111 Santa Monica Blvd., Suite 2000
      Los Angeles, CA 90025
      Attention: Mr. John  G. Danhakl
      Telephone: (310) 954-0444
      Facsimile: (310) 954-0404

      and

      c/o Texas Pacific Group
      345 California Street, Suite 3300
      San Francisco, CA 94104
      Attention: Jonathan Coslet
      Telephone: (415) 743-1500
      Facsimile: (415) 743-1501


      with a copy to:



                                      66



      Skadden, Arps, Slate, Meagher & Flom LLP
      300 South Grand Avenue, Suite 3400
      Los Angeles, California 90071-3144
      Attention: Nicholas P. Saggese, Esq.
      Telephone: (213) 687-5000
      Facsimile: (213) 687-5600

      and

      Cleary, Gottlieb, Steen & Hamilton
      One Liberty Plaza
      New York, New York 10006
      Attention: David Leinwand, Esq.
      Telephone: (212) 225-2000
      Facsimile: (212) 225-3999

      if to the Company, to:

      Petco Animal Supplies, Inc.
      9125 Rehco Road
      San Diego, CA 92121-2270
      Attention: Mr. Brian  Devine
      Telephone: (858) 453-7845
      Facsimile: (858) 638-2197



      with a copy to:

      Gibson, Dunn & Crutcher LLP
      333 South Grand Avenue
      Los Angeles, California 90071
      Attention: Andrew E. Bogen, Esq.
      Telephone: (213) 229-7000
      Facsimile: (213) 229-7520


or such other address or telecopy number as such party may hereafter specify for
the purpose by notice to the other parties hereto. Each such notice, request or
other communication shall be effective (i) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section and the
appropriate telecopy confirmation is received or (ii) if given by any other
means when delivered at the address specified in this Section 11.1.


                                      67



      Section 11.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained herein and in any certificate or other
writing delivered pursuant hereto shall survive until (but not beyond) the
Effective Time. This Section 11.2 shall not limit any covenant or agreement of
the parties which by its terms contemplates performance after the Effective
Time.

      Section 11.3 AMENDMENTS AND WAIVERS.

            (a)    Any provision of this Agreement may be amended or waived
prior to the Effective Time if, and only if, such amendment or waiver is in
writing and signed by each party, in the case of an amendment by the Company
and MergerSub, or in the case of a waiver, by the party against whom the
waiver is to be effective; PROVIDED, HOWEVER, that after the adoption of this
Agreement by the stockholders of the Company, there shall be no amendment that
by applicable Law requires further approval by the stockholders of the Company
without the further approval of such stockholders.

            (b)    No failure or delay by either party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies herein provided shall be cumulative and not exclusive of
any rights or remedies provided by Law.

      Section 11.4 EXPENSES. Except as provided in Sections 6.4 and 10.2 all
costs and expenses incurred in connection with this Agreement shall be paid by
the party incurring such cost or expense.

      Section 11.5 SUCCESSORS AND ASSIGNS; ASSIGNMENT. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto except that MergerSub
may assign, in its sole discretion, any or all of its rights, interests and
obligations hereunder to Green Equity Investors III, LP, or TPG Partners III,
L.P., or to any, direct or indirect, wholly owned subsidiary of either of them.

      Section 11.6 GOVERNING LAW. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware.

      Section 11.7 COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become

                                      68



effective when each party hereto shall have received counterparts hereof
signed by all of the other parties hereto.

      Section 11.8 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any 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 or legal
substance of the transactions contemplated hereby is 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 hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.

      Section 11.9 SPECIFIC PERFORMANCE. The parties hereby acknowledge and
agree that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the Merger, will cause irreparable injury to the
other parties, for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of such
party's obligations and to the granting by any court of the remedy of specific
performance of its obligations hereunder.

      Section 11.10 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This
Agreement, (i) constitutes the entire agreement, and supersedes all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter of this Agreement and (ii) except for the
provisions of Section 7.1, is not intended to confer upon any Person other than
the parties any rights or remedies.

      Section 11.11 "KNOWLEDGE". As used in Article IV hereof, all references
to the knowledge of the Company shall refer to the actual knowledge of the
officers and directors, regional managers and other employees with relevant
compliance responsibility, of the Company.



                                      69



                                   SIGNATURES

      IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.



                                            PETCO ANIMAL SUPPLIES, INC.



                                            By:  /s/ BRIAN K. DEVINE
                                                --------------------------------
                                                Name:
                                                Title:



                                            BD Recapitalization Corp.



                                            By:  /s/ JOHN G. DANHAKL
                                                --------------------------------
                                                Name:  John G. Danhakl
                                                Title: President

EX-10.20

                 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER


      This FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of
September 14, 2000 (this "First Amendment"), is entered into by and between
PETCO Animal Supplies, Inc., a Delaware corporation (the "Company"), and BD
Recapitalization Corp., a Delaware corporation ("MergerSub").

                            R E C I T A L S

      WHEREAS, the Company and MergerSub entered into that certain Agreement and
Plan of Merger, dated as of May 17, 2000 (the "Merger Agreement");

      WHEREAS, the Company and MergerSub wish to amend the Merger Agreement to
reduce the Termination Fee (as defined in Section 10.2 of the Merger Agreement);
and

      WHEREAS, the Special Committee (as defined in the Merger Agreement), the
Board of Directors of the Company and the sole stockholder of MergerSub have
each approved and adopted this First Amendment and have approved the
transactions contemplated hereby;

      NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

      1.   SECTION 10.2(a). Section 10.2(a) of the Merger Agreement is amended
           to reduce the Termination Fee (as defined in the Merger Agreement)
           from $11 million to $5 million.

      2.   RELATIONSHIP TO MERGER AGREEMENT. Consistent and in accordance with
Section 11.3 of the Merger Agreement, the parties hereto acknowledge that, other
than as expressly provided in this First Amendment, this First Amendment shall
have no effect on the rights, obligations, duties (fiduciary or otherwise) or
remedies available or




due under the Merger Agreement or applicable law, whether legal, equitable or
otherwise.

      3.   GOVERNING LAW.  This First Amendment shall be governed by
and construed in accordance with the laws of the State of Delaware.

      4.   COUNTERPARTS.  This First Amendment may be executed in one or more
counterparts which, when taken together, shall constitute one and the same
instrument.






                                       2



      IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed by their respective authorized officers as of the day and year
first above written.



                                   PETCO ANIMAL SUPPLIES, INC.


                                   By:  /s/ JAMES M. MYERS
                                       -------------------------------
                                       Name:  James M. Myers
                                       Title: Senior Vice President
                                              and Chief Financial
                                              Officer

                                   BD RECAPITALIZATION CORP.


                                   By:  /s/ JOHN G. DANHAKL
                                       -------------------------------
                                       Name:  John G. Danhakl
                                       Title: President





                                       3

EX-10.21

                 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
           STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
              (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1.    BASIC PROVISIONS ("BASIC PROVISIONS").

      1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
February 28, 2001, is made by and between Carol Canyon Properties, LLC, a
California limited liability company ("LESSOR") and Petco Animal Supplies, Inc.,
a Delaware corporation ("LESSEE"), (collectively the "PARTIES," or individually
a "PARTY").

      1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 8945 Rehco Road, located in the County of San Diego, State of
California, and generally described as (describe briefly the nature of the
property and, if applicable, the "PROJECT", if the property is located within a
Project) a two (2) story office building consisting of 43,000 rentable square
feet, located within a 9.06 acre office project (the "Project"), more
particularly described on Exhibit A (the Project legal description) and Exhibit
A-1 (the Project Site Plan) ("PREMISES"). (See also Paragraph 2)

      1.3 TERM: eleven (11) years, zero (0) months and fifteen (15) days
("ORIGINAL TERM") commencing upon Substantial Completion (defined below) of the
Lessee Improvements, but not earlier than April 1, 2001. Lessor will provide
Lessee at least ten (10) days' prior written notice of the date upon which
Substantial Completion will occur (see Addendum No. 2) ("COMMENCEMENT DATE") and
ending eleven (11) years after the ("EXPIRATION DATE"). (See also Paragraph 3)
See Addendum No. 1. Commencement Date.

      1.4   BASE RENT:  $62,350.00 per month ("BASE RENT"), payable on the
first (1st)  day of each month commencing on the Commencement Date.  (See
also Paragraph 4)
/X/ If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.

      1.5      BASE RENT PAID UPON EXECUTION:  $62,350.00 as Base Rent for
the first month of the Original Term (prorated for any partial month and the
balance applied to the next month).

      1.6      SECURITY DEPOSIT: $62,350.00 ("SECURITY DEPOSIT").  (See also
Paragraph 5)

      1.7 AGREED USE: Office use for corporate headquarters, including related
facilities and services for employees as Lessee desires, such as a cafeteria
and/or general office use, together with necessarily incidental uses.
Notwithstanding the foregoing to the contrary, Tenant has the right to have pets
in the Premises, so long as any that remain overnight (such as fish, rodents and
reptiles) are caged or otherwise contained in appropriate enclosures. Lessee
shall be responsible for any clean up necessitated by the presence of such pets
at the Project. (See also Paragraph 6)

      1.8      INSURING PARTY.  Lessor is the "INSURING PARTY" unless
otherwise stated herein.  (See also Paragraph 8)

      1.9      REAL ESTATE BROKERS:  (See also Paragraph 15)

            (a) REPRESENTATION: The following real estate brokers (collectively,
the "BROKERS") and brokerage relationships exist in this transaction (check
applicable boxes):

/X/  Acree, Weinman, Inc. represents Lessee exclusively ("LESSEE'S BROKER").

            (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement (or if there is no such agreement, the sum of ______% of the
total Base Rent for the brokerage services rendered by said Broker).

      1.10 ADDENDA AND EXHIBITS. Attached hereto are Addenda and Exhibits
Addendum No. 1, Addendum No. 2, Exhibit A, Exhibit A-1, Exhibit B, Exhibit C,
Exhibit D, Exhibit E, Exhibit F and Exhibit G, all of which constitute a part of
this Lease.

2.    PREMISES.

      2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of size set forth in this Lease, or that may have been
used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.

      2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean and
free of debris on the Commencement Date, and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Date, warrants that the existing electrical,
plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning
systems ("HVAC"), loading doors, if any, and all other such elements in the
Premises, other than those constructed by Lessee, shall be in good operating
condition on said date and that the structural elements of the roof, bearing
walls and foundation of any buildings on the Premises (the "BUILDING") shall be
free of material defects. If a non-compliance with said warranty exists as of
the Date, Lessor shall promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
rectify same at Lessor's expense. See Addendum No. 2.

                                    PAGE 1                 Initials _________
                                                              FORM STN-6-2/97



      2.3 COMPLIANCE. Lessor warrants that the Premises comply with all
applicable laws, covenants or restrictions of record, building codes,
regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the Start
Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use.
If the Premises do not comply with said warranty, Lessor shall, except as
otherwise provided, promptly after receipt of written notice from Lessee setting
forth with specificity the nature and extent of such non-compliance, rectify the
same at Lessor's expense. If the Applicable Requirements are hereafter changed
(as opposed to being in existence at the Start Date, which is addressed in
Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the remediation
of any Hazardous Substance, or the reinforcement or other physical modification
of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the
cost of such work as follows:

            (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures
are required as a result of the specific and unique use of the Premises by
Lessee as compared with uses by tenants in general, Lessee shall be fully
responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall cease the use of
the Premises which requires such Capital Expenditure on the termination date set
forth in Lessee's written termination notice to Lessor. Such termination date
shall, however, in no event be earlier than the last day that Lessee could
legally utilize the Premises without commencing such Capital Expenditure.

            (b) If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as, governmentally mandated
seismic modifications), then Lessor shall be fully responsible for the cost
thereof; provided, however, that if such Capital Expenditure is required during
the last six (6) months of this Lease, Lessor shall have the option to terminate
this Lease upon ninety (90) days prior written notice to Lessee unless Lessee
notifies Lessor, in writing, within ten (10) days after receipt of Lessor's
termination notice that Lessee will pay for such Capital Expenditure. If Lessor
does not elect to terminate, and fails to tender its share of any such Capital
Expenditure, Lessee may advance such funds and deduct same, with Interest, from
Rent until Lessor's share of such costs have been fully paid. If Lessee is
unable to finance Lessor's share, or if the balance of the Rent due and payable
for the remainder of this Lease is not sufficient to fully reimburse Lessee on
an offset basis, Lessee shall have the right to terminate this Lease upon thirty
(30) days written notice to Lessor.

            (c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.

      2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.

3.    TERM.

      3.1      TERM.  The Commencement Date, Expiration Date and Original
Term of this Lease are as specified in Paragraph 1.3 and Addendum No. 1.

      3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.

      3.3 DELAY IN POSSESSION. Lessor agrees to use its best efforts to deliver
possession of the Premises to Lessee by June 1, 2001. If, despite said efforts,
Lessor is unable to deliver possession as agreed, Lessor shall not be subject to
any liability therefor, nor shall such failure affect the validity of this
Lease. Lessee shall not, however, be obligated to pay Rent or perform its other
obligations until it receives possession of the Premises. If possession is not
delivered July 1, 2001, Lessee may, at its option, by notice in writing within
ten (10) days after such date, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder. If such written notice is
not received by Lessor within said ten (10) day period, Lessee's right to cancel
shall terminate. If possession of the Premises is not delivered on or before
November 1, 2001, this Lease shall terminate unless other agreements are reached
between Lessor and Lessee, in writing.

                                    PAGE 2                 Initials _________
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      3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.

4.    RENT.

      4.1      RENT DEFINED.  All monetary obligations of Lessee to Lessor
under the terms of this Lease (except for the Security Deposit) are deemed to
be rent ("RENT").

      4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
Rent for any period during the term hereof which is for less than one (1) full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.

5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. Lessor shall not be required
to keep the Security Deposit separate from its general accounts. Within fourteen
(14) days after the expiration or termination of this Lease, if Lessor elects to
apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30)
days after the Premises have been vacated pursuant to Paragraph 7.4(c) below,
Lessor shall return that portion of the Security Deposit not used or applied by
Lessor. No part of the Security Deposit shall be considered to be held in trust,
to bear interest or to be prepayment for any monies to be paid by Lessee under
this Lease.

6.    USE.

      6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to neighboring properties. Lessor shall not
unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.

      6.2      HAZARDOUS SUBSTANCES.

            (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) injurious to the public health, safety or welfare, the environment
or the Premises, (ii) regulated or monitored by any governmental authority, or
(iii) a basis for potential liability of Lessor to any governmental agency or
third party under any applicable statute or common law theory. Hazardous
Substances shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, and/or crude oil or any products, by-products or fractions thereof.
Lessee shall not engage in any activity in or on the Premises which constitutes
a Reportable Use of Hazardous Substances without the express prior written
consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit. Lessor represents that the Premises and the Project are free of
Hazardous Substances and in compliance with environmental laws.

            (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor,

                                    PAGE 3                 Initials _________
                                                              FORM STN-6-2/97



and provide Lessor with a copy of any report, notice, claim or other
documentation which it has concerning the presence of such Hazardous
Substance.

            (c) REMEDIATION. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under, or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly, at
Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or monitoring of the
Premises or neighboring properties, that was caused or materially contributed to
by Lessee, or pertaining to or involving any Hazardous Substance brought onto
the Premises during the term of this Lease, by or for Lessee, or any third
party. Lessor shall not cause or permit any Hazardous Substance to be spilled or
released in, under or about the Project (including through the plumbing or
sanitary sewer system) and shall promptly, at Lessor's expense, take all
investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required for the clean up of any contamination of, and for
the maintenance of, security and/or monitoring of the Project or neighboring
properties, that was caused or materially contributed to by Lessor, or
pertaining to or involving any Hazardous Substance brought on to the Project
during the Term of this Lease by Lessor or for Lessor.

            (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and reasonable attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations when required by the Applicable Requirements shall include, but not
be limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Lessee, and the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE
AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS
OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS
SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT.

            (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees, agents and
lenders, harmless from and against any and all damages, liabilities, judgments,
claims, expenses, penalties and reasonable attorneys' and consultants' fees,
including the cost of remediation, which existed as a result of Hazardous
Substances on the Project prior to the Commencement Date or which are caused by
the act, omission or negligence of Lessor, its agents or employees. Lessor's
obligations, as and when required by the Applicable Requirements, shall include,
but not be limited to, the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination of
this Lease.

            (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Commencement Date. Lessee
shall cooperate fully in any such activities at the request of Lessor, including
allowing Lessor and Lessor's agents to have reasonable access to the Premises at
reasonable times in order to carry out Lessor's investigative and remedial
responsibilities.

            (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor shall investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, and
this Lease shall continue in full force and effect.

      6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise
provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the reasonable requirements of any applicable fire insurance
underwriter or rating bureau, and the reasonable recommendations of Lessor's
engineers and/or consultants which relate in any manner to the Premises, without
regard to whether said requirements are now in effect or become effective after
the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's
written request, provide Lessor with copies of all permits and other documents,
and other information evidencing Lessee's compliance with any Applicable
Requirements specified by Lessor, and shall immediately upon receipt, notify
Lessor in writing (with copies of any documents involved) of any threatened or
actual claim, notice, citation, warning, complaint or report pertaining to or
involving the failure of Lessee or the Premises to comply with any Applicable
Requirements.

      6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into Premises
at any time, in the case of an emergency, and otherwise at reasonable times and
upon reasonable advance written notice, for the purpose of inspecting the
condition of the Premises and for verifying compliance by Lessee with this
Lease. The cost of any such inspections shall be paid by Lessor, unless a
violation of Applicable Requirements, or a contamination is found to exist or be
imminent. In such case, Lessee shall upon request reimburse Lessor for the cost
of such inspections, so long as such inspection discloses the violation or
contamination.

7.    MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.

                                    PAGE 4                 Initials _________
                                                              FORM STN-6-2/97



      7.1      LESSEE'S OBLIGATIONS.

            (a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations that serve the Premises exclusively, and Alterations in
good order, condition and repair (whether or not the portion of the Premises
requiring repairs, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of such portion
of the Premises), including, but not limited to, all equipment or facilities,
such as plumbing, heating, ventilating, air-conditioning, electrical, lighting
facilities, boilers, pressure vessels, fire protection system, fixtures, walls
(interior and exterior), foundations, ceilings, roofs, floors, windows, doors,
plate glass, and skylights located in, or on the Premises. Lessee, in keeping
the Premises in good order, condition and repair, shall exercise and perform
good maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall, during the term of this
Lease, keep the exterior appearance of the Building in a first-class condition
consistent with the other buildings in the Project.

            (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements ("Basic Elements"), if
any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and
pressure vessels, and (iii) fire extinguishing systems, including fire alarm
and/or smoke detection.

            (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the HVAC equipment or the roof covering the Premises (the "Basic
Elements") cannot be repaired other than at a cost which is in excess of 50% of
the cost of replacing such Basic Elements, then such Basic Elements shall be
replaced by Lessor, and the cost thereof shall be prorated between the Parties
and Lessee shall only be obligated to pay, each month during the remainder of
the term of this Lease, on the date on which Base Rent is due, an amount equal
to the product of multiplying the cost of such replacement by a fraction, the
numerator of which is one, and the denominator of which is the number of months
of the useful life of such replacement as such useful life is specified pursuant
to Federal income tax regulations or guidelines for depreciation thereof
(including interest on the unamortized balance as is then commercially
reasonable in the judgment of Lessor's accountants), with Lessee reserving the
right to prepay its obligation at any time.

      7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee. It is
the intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises, and
they expressly waive the benefit of any statute now or hereafter in effect to
the extent it is inconsistent with the terms of this Lease.

      7.3      UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.

            (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems, communication systems,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "TRADE FIXTURES" shall mean Lessee's furnishings, fixtures, machinery
and equipment that can be removed without doing material damage to the Premises.
The term "ALTERATIONS" shall mean any modification of the improvements, other
than Utility Installations or Trade Fixtures, whether by addition or deletion.
"LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Except as provided in Addendum No. 2,
Lessee shall not make any Alterations or Utility Installations to the Premises
without Lessor's prior written consent which consent shall not be unreasonably
withheld. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof) without such consent but upon
notice to Lessor, as long as they are not visible from the outside, do not
involve puncturing, relocating or removing the roof or any existing walls, and
the cumulative cost thereof during this Lease as extended does not exceed
$50,000 in any one lease year. See Addendum No. 2.

            (b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.

            (c) INDEMNIFICATION. Except as provided in Addendum No. 2, Lessee
shall pay, when due, all claims for labor or materials furnished or alleged to
have been furnished to or for Lessee at or for use on the Premises, which claims
are or may be secured by any mechanic's or materialman's lien

                                    PAGE 5                 Initials _________
                                                              FORM STN-6-2/97



against the Premises or any interest therein. Lessee shall give Lessor not
less than ten (10) days' notice prior to the commencement of any work in, on
or about the Premises, and Lessor shall have the right to post notices of
non-responsibility. If Lessee shall contest the validity of any such lien,
claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy
any such adverse judgment that may be rendered thereon before the enforcement
thereof.

      7.4      OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.

            (a) OWNERSHIP. During the Original Term and any applicable Extension
Term, all Alterations and Utility Installations made by Lessee shall be the
property of Lessee, but considered a part of the Premises. Lessor may, at any
time, elect in writing to be the owner of all or any specified part of the
Lessee Owned Alterations and Utility Installations. All Lessee Owned Alterations
and Utility Installations shall, at the expiration or termination of this Lease,
become the property of Lessor and be surrendered by Lessee with the Premises.

            (b) REMOVAL. Lessor may require the removal at any time of all or
any part of any Lessee Owned Alterations or Utility Installations made without
the required consent.

            (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Lessee shall repair
any damage occasioned by the installation, maintenance or removal of Trade
Fixtures, furnishings, and equipment as well as the removal of any storage tank
installed by or for Lessee, and the removal, replacement, or remediation of any
soil, material or groundwater contaminated by Lessee. Trade Fixtures shall
remain the property of Lessee and shall be removed by Lessee. The failure by
Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without
the express written consent of Lessor shall constitute a holdover under the
provisions of Paragraph 26 below.

8.    INSURANCE; INDEMNITY.

      8.1 PAYMENT FOR INSURANCE. Subject to Addendum No. 1, Lessee shall pay for
Lessee's Pro Rata Share of all insurance required under Paragraph 8 except to
the extent of the cost attributable to liability insurance carried by Lessor
under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for
policy periods commencing prior to or extending beyond the Lease term shall be
prorated to correspond to the Lease term.

      8.2      LIABILITY INSURANCE.

            (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.

            (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as
described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an additional
insured therein.

      8.3      PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.

            (a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force
a policy or policies in the name of Lessor, with loss payable to Lessor, any
groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The
amount of such insurance shall be equal to the full replacement cost of the
Premises, as the same shall exist from time to time, or the amount required by
any Lenders, but in no event more than the commercially reasonable and available
insurable value thereof. Lessee Owned Alterations and Utility Installations
shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the
coverage is available and commercially appropriate, such policy or policies
shall insure against all risks of direct physical loss or damage (except the
perils of flood and/or earthquake), including coverage for debris removal and
the enforcement of any Applicable Requirements requiring the upgrading,
demolition, reconstruction or replacement of any portion of the Premises as the
result of a covered loss. Said policy or policies shall also contain an agreed
valuation provision in lieu of any coinsurance clause, waiver of subrogation,
and inflation guard protection causing an increase in the annual property
insurance coverage amount by a factor of not less than the adjusted U.S.
Department of Labor Consumer Price Index for All Urban Consumers for the city
nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per occurrence.

                                    PAGE 6                 Initials _________
                                                              FORM STN-6-2/97



            (b) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises. Lessor covenants to include a
like provision in all other leases of premises in the Project.

      8.4      LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.

            (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.

            (b) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.

      8.5 INSURANCE POLICIES. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.

      8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages against the other, for loss of or damage to its
property arising out of or incident to the perils required to be insured against
herein. The effect of such releases and waivers is not limited by the amount of
insurance carried or required, or by any deductibles applicable hereto. The
Parties agree to have their respective property damage insurance carriers waive
any right to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated thereby.

      8.7 INDEMNITY. Except for Lessor's negligence or willful misconduct,
Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, reasonable attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters, Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified. Lessor
shall indemnify, protect, defend and hold harmless Lessee and its agents and
employees from and against any claims and/or damages, liens, judgments, expenses
and/or liabilities arising out of or involving or in connection with Lessor's
negligence or willful misconduct. If any action or proceeding is brought against
Lessee by reason of any of the foregoing matters, Lessor shall upon notice
defend the same at Lessor's expense by counsel reasonable satisfactory to Lessee
and Lessee shall cooperate with Lessor in such defense. Lessee need not have
first paid any such claim in order to be defended or indemnified.

      8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places unless due to Lessor's negligence or
willful misconduct. Lessor shall not be liable for any damages arising from any
act or neglect of any other tenant of Lessor. Notwithstanding Lessor's
negligence or breach of this Lease, Lessor shall under no circumstances be
liable for injury to Lessee's business or for any loss of income or profit
therefrom.

9.    DAMAGE OR DESTRUCTION.

      9.1      DEFINITIONS.

            (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction. Lessor shall

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notify Lessee in writing within thirty (30) days from the date of the damage
or destruction as to whether or not the damage is Partial or Total.

            (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which cannot reasonably be repaired in six (6) months or less
from the date of the damage or destruction. Lessor shall notify Lessee in
writing within thirty (30) days from the date of the damage or destruction as to
whether or not the damage is Partial or Total.

            (c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations
and Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.

            (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.

            (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.

      9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. Lessee shall not be entitled to reimbursement of any
funds contributed by Lessee to repair any such damage or destruction. Premises
Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.

      9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.

      9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.

      9.5 DAMAGE NEAR END OF TERM. If at any time during the last twelve (12)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, either party may
terminate this Lease effective sixty (60) days following the date of occurrence
of such damage by giving a written termination notice to the other party within
thirty (30) days after the date of occurrence of such damage. Notwithstanding
the foregoing, if Lessee at that time has an exercisable option to extend this
Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a)
exercising such option on or before the earlier of (i) the date which is ten
days after Lessee's receipt of Lessor's written notice purporting to terminate
this Lease, or (ii) the day prior to the date upon which such option expires. If
Lessee duly exercises such option during such period, Lessor shall, at Lessor's
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
during such period, then this Lease shall terminate on the date specified in the
termination notice and Lessee's option shall be extinguished.

      9.6      ABATEMENT OF RENT; LESSEE'S REMEDIES.

            (a) ABATEMENT. In the event of a Hazardous Substance condition for
which Lessee is not responsible under this Lease, Premises Partial Damage or
Premises Total Destruction, the Rent payable by Lessee for the period required
for the repair, remediation or restoration of such damage shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired. All
other obligations of Lessee hereunder shall be performed by Lessee, and Lessor
shall have no liability for any such damage, destruction, remediation, repair or
restoration except as provided herein.

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            (b) REMEDIES. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within ninety (90) days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or restoration,
give written notice to Lessor and to any Lenders of which Lessee has actual
notice, of Lessee's election to terminate this Lease on a date not less than
sixty (60) days following the giving of such notice. If Lessee gives such notice
and such repair or restoration is not commenced within thirty (30) days
thereafter, this Lease shall terminate as of the date specified in said notice.
If the repair or restoration is commenced within said thirty (30) days, this
Lease shall continue in full force and effect. "COMMENCE" shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.

      9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.

      9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.

10.   REAL PROPERTY TAXES.  SEE ADDENDUM NO. 1.

      10.1 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.

11.   UTILITIES.  Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered. See Addendum No. 1.

12.   ASSIGNMENT AND SUBLETTING.

      12.1     LESSOR'S CONSENT REQUIRED.

            (a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent, which consent will not be unreasonably withheld.

            (b) A change in the control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of forty-nine (49%) or
more of the voting control of Lessee shall constitute a change in control for
this purpose. Any other change in voting control will not constitute an
assignment of this Lease or require Lessor's consent.

      12.2     TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

            (a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.

            (b) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.

            (c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.

            (d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.

            (e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any. Lessee agrees to provide Lessor
with such other or additional information and/or documentation as may be
reasonably requested.

            (f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.

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      12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:

            (a) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.

            (b) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.

            (c) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.

13.   DEFAULT; BREACH; REMEDIES.

      13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "BREACH" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:

            (a) The abandonment of the Premises; or the vacating of the Premises
without providing a commercially reasonable level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof, or without providing reasonable assurances to minimize
potential vandalism.

            (b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder to Lessor, where such
failure continues for a period of ten (10) days following written notice to
Lessee.

            (c) The failure by Lessee to comply with any other provision of this
Lease, where such Default continues for a period of thirty (30) days after
written notice; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach if Lessee commences such cure within said
thirty (30) day period and thereafter diligently prosecutes such cure to
completion.

            (d) The occurrence of any of the following events: (i) the making of
any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within ninety (90) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within ninety (90) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within ninety (90) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.

            (e) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.

      13.2 REMEDIES. In the event of a Breach pursuant to Section 13.1(c),
Lessor may, at its option, perform such duty or obligation on Lessee's behalf,
including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee within thirty (30) days of receipt of invoice therefor. If any check
given to Lessor by Lessee shall not be honored by the bank upon which it is
drawn, Lessor, at its option, may require all future payments to be made by
Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or
without further notice or demand, and without limiting Lessor in the exercise of
any right or remedy which Lessor may have by reason of such Breach:

            (a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, reasonable attorneys' fees,
and that portion of any leasing commission paid by Lessor in connection with
this Lease applicable to the unexpired term of this Lease. The worth at the time
of award of the amount referred to in provision (iii) of the immediately
preceding sentence shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of the District within which the Premises are
located at the time of award plus one percent (1%). Efforts by Lessor to
mitigate damages caused by Lessee's Breach of this Lease shall not waive
Lessor's right to recover damages under Paragraph 12. If termination of this
Lease is obtained through the provisional remedy of unlawful detainer,

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Lessor shall have the right to recover in such proceeding any unpaid Rent and
damages as are recoverable therein, or Lessor may reserve the right to
recover all or any part thereof in a separate suit.

            (b) Continue the Lease and Lessee's right to possession and recover
the Rent as it becomes due, in which event Lessee may sublet or assign, subject
only to reasonable limitations. Acts of maintenance, efforts to relet, and/or
the appointment of a receiver to protect the Lessor's interests, shall not
constitute a termination of the Lessee's right to possession.

            (c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.

      13.3 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The Parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.

      13.4 INTEREST. Any monetary payment due hereunder, other than late
charges, not received within thirty (30) days following written notice that same
is past due (which notice must state that if not paid within thirty (30) days
that upon an additional written notice interest will begin to accrue), and
following an additional written notice given not less than three (3) business
days prior to the date upon which interest begins to accrue (which notice must
state that if not paid within such three (3) business day period interest will
begin to accrue), shall bear interest from the date that is three (3) business
days following such second (2nd) written notice. The interest ("INTEREST")
charged shall be equal to twelve percent (12%), but shall not exceed the maximum
rate allowed by law. Interest is payable in addition to the potential late
charge provided for in Paragraph 13.3.

      13.5     BREACH BY LESSOR.

            (a) NOTICE OF BREACH. Lessor shall be deemed in breach of this Lease
if Lessor fails within a reasonable time to perform an obligation required to be
performed by Lessor. For purposes of this Paragraph, a reasonable time shall in
no event be less than thirty (30) days after receipt by Lessor, and any Lender
whose name and address shall have been furnished Lessee in writing for such
purpose, of written notice specifying wherein such obligation of Lessor has not
been performed; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days are reasonably required for its
performance, then Lessor shall not be in breach if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.

            (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.

14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of the Premises is taken by
Condemnation, Lessee may, at Lessee's option, to be exercised in writing within
thirty (30) days after Lessor shall have given Lessee written notice of such
taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of the
date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall remain
in full force and effect as to the portion of the Premises remaining, except
that the Base Rent shall be reduced in proportion to the reduction of the
Premises caused by such Condemnation. Condemnation awards and/or payments shall
be the property of Lessor, whether such award shall be made as compensation for
diminution in value of the leasehold, the value of the part taken, or for
severance damages; provided, however, that Lessee shall be entitled to any
compensation for Lessee's relocation expenses, loss of business goodwill and/or
Trade Fixtures, without regard to whether or not this Lease is terminated
pursuant to the provisions of this Paragraph. All Alterations and Utility
Installations made to the Premises by Lessee, for purposes of Condemnation only,
shall be considered the property of the Lessee and Lessee shall be entitled to
any and all compensation which is payable therefor. In the event that this Lease
is not terminated by reason of the Condemnation, Lessor shall repair any damage
to the Premises caused by such Condemnation.

15.   BROKERS' FEE.

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      15.1 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Except as
provided in Addendum No. 1, Lessee and Lessor each represent and warrant to the
other that it has had no dealings with any person, firm, broker or finder (other
than the Brokers, if any) in connection with this Lease, and that no one other
than said named Brokers is entitled to any commission or finder's fee in
connection herewith. Lessee and Lessor do each hereby agree to indemnify,
protect, defend and hold the other harmless from and against liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
Party, including any costs, expenses and/or attorneys' fees reasonably incurred
with respect thereto.

16.   ESTOPPEL CERTIFICATES.  SEE ADDENDUM NO. 1.

            (a) Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party without charge, a statement to
the Requiring Party and to any other entity ("Person") specified in such
request: (a) as to whether this Lease has been supplemented or amended, and, if
so, the substance and manner of such supplement or amendment; (b) as to the
validity, force and effect of this Lease, to the certifying party's best
knowledge; (c) as to the existence of any default hereunder, to the certifying
party's best knowledge; (d) as to the existence of any offsets, counterclaims,
or defenses hereto on the part of such other party, to the certifying party's
best knowledge; (e) as to the commencement and expiration dates of the Term; and
(f) as to any other matters which may reasonably be so requested. Any such
certificate may be relied upon by the party requesting it and any Person to whom
the same may be exhibited or delivered, and the contents of such certificate
shall be binding on the party executing same. Each party agrees to provide such
information in the form requested by the Requiring Party or other Person so long
as such form is a commercially reasonable form.

            (b) If Lessor desires to finance, refinance, or sell the Premises,
or any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.

17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragaph 20
below, the original Lessor under this Lease, and all subsequent holders of the
Lessor's interest in this Lease shall remain liable and responsible with regard
to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above, and elsewhere in this Lease.

18.   SEVERABILITY.  The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.

19.   DAYS.  Unless otherwise specifically indicated to the contrary, the
word "days" as used in this Lease shall mean and refer to calendar days.

20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Project and the rents, proceeds and profits therefrom, and to no other
assets of Lessor, for the satisfaction of any liability of Lessor with respect
to this Lease, and shall not seek recourse against the individual partners of
Lessor, or its or their individual partners, directors, officers or
shareholders, or any of their personal assets for such satisfaction.

21.   TIME OF ESSENCE.  Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties
under this Lease.

22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.

23.   NOTICES.

      23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or

                                   PAGE 12                 Initials _________
                                                              FORM STN-6-2/97



registered mail or U.S. Postal Service Express Mail, with postage prepaid, or
by facsimile transmission, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notices. Either Party may by written notice to the other specify a
different address for notice, except that upon Lessee's taking possession of
the Premises, the Premises shall constitute Lessee's address for notice. A
copy of all notices to Lessor shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate in writing.

      23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.

24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of monies or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.

25.   RECORDING.  Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.

26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred twenty-five (125%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.

27.   CUMULATIVE REMEDIES.  No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.

28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the parties, but rather
according to its fair meaning as a whole, as if both parties had prepared it.

29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.

30.   SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.

      30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now placed
upon the Premises, to any and all advances made on the security thereof, and to
all renewals, modifications, and extensions thereof. Lessee agrees that the
holders of any such Security Devices (in this Lease together referred to as
"Lessor's Lender") shall have no liability or obligation to perform any of the
obligations of Lessor under this Lease. Any Lender may elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device by
giving written notice thereof to Lessee, whereupon this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.

      30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership; (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.

      30.3 NON-DISTURBANCE. Lessee's subordination of this Lease shall be
subject to receiving a non-disturbance agreement in the form of Exhibit B
attached hereto or some other commercially reasonable form approved by Lessee,
such approval not to be unreasonably withheld (a "NON-DISTURBANCE AGREEMENT")
from the Lender which Non-Disturbance Agreement provides that Lessee's
possession of the Premises, and this Lease, including any options to extend the
term hereof,

                                   PAGE 13                 Initials _________
                                                              FORM STN-6-2/97



will not be disturbed so long as Lessee is not in Breach hereof and attorns
to the record owner of the Premises. Further, if within sixty (60) days after
the execution of this Lease, Lessor fails to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is
secured by the Premises, then Lessee may, at Lessee's option, either directly
contact Lessor's lender and attempt to negotiate for the execution and
delivery of a Non-Disturbance Agreement, or terminate this Lease upon written
notice to Lessor.

      30.4 EXECUTING. Upon written request from Lessor or a lender in connection
with a sale, financing or refinancing of the Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to separately
document any subordination, attornment and/or Non-Disturbance Agreement provided
for herein.

31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.

32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times and upon reasonable advance notice for the
purpose of showing the same to prospective purchasers, lenders, or during the
last six (6) months of the Term, lessees. All such activities shall be without
abatement of rent or liability to Lessee. Lessor may at any time place on the
common areas of the Project any ordinary "FOR SALE" signs and Lessor may during
the last six (6) months of the term hereof place on the common areas of the
Project any ordinary "FOR LEASE" signs. Lessee may at any time place on or about
the Premises any ordinary "FOR SUBLEASE" sign.

33.   AUCTIONS.  Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent, which
consent will not be unreasonably withheld.

34. SIGNS. Except for ordinary "For Sublease" signs and as otherwise provided in
Addendum No. 1, Lessee shall not place any sign upon the Premises without
Lessor's prior written consent, which consent will not be unreasonably withheld.
All signs must comply with all Applicable Requirements.

35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.

36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's consent to any act,
assignment or subletting shall not constitute an acknowledgment that no Default
or Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request in writing.

37. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.

38.   OPTIONS.  See Addendum No. 1.

39. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.

40. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.

                                   PAGE 14                 Initials _________
                                                              FORM STN-6-2/97



41. AUTHORITY. If either Party hereto is a corporation, trust, limited liability
company, partnership, or similar entity, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly authorized
to execute and deliver this Lease on its behalf. Each party shall, within thirty
(30) days after request, deliver to the other party satisfactory evidence of
such authority.

42.   CONFLICT.  Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.

43.   OFFER.  Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease
to the other Party. This Lease is not intended to be binding until executed
and delivered by all Parties hereto.

44. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.

45.   MULTIPLE PARTIES.  If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.

46.   MEDIATION AND ARBITRATION OF DISPUTES.  An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease / / is / / is not attached to this Lease.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

- -------------------------------------------------------------------------------
ATTENTION:  NO REPRESENTATIVE OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
TO WHICH IT RELATES.  THE PARTIES ARE URGED TO:

1.    SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2.    RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.

WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES ARE LOCATED.


- -------------------------------------------------------------------------------


The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.

                                                   
Executed at:                                          Executed at:
             --------------------------------------                -----------------------------------------
on:                                                   on:
    -----------------------------------------------       --------------------------------------------------
By LESSOR:                                            By LESSEE:
CAROL CANYON PROPERTIES, LLC,                         PETCO ANIMAL SUPPLIES, INC.,
a California limited liability company                a Delaware corporation

By: /s/ MICHAEL J. ELLIS                              By:  /s/ GARY L. GRAHAM
    -----------------------------------------------       --------------------------------------------------
Name Printed: Michael J. Ellis, as Trustee of the     Name Printed: Gary L. Graham
Title: Michael J. and Monica I. Ellis Family Trust,   Title: Vice President - Real Estate
       Manager

By: /s/ BRIAN HUSTER                                  By:  /s/ JAMES M. MYERS
    -----------------------------------------------       ---------------------------------------------------
Name Printed: Brian Huster                            Name Printed: James M. Myers
Title: Manager                                        Title: Executive Vice President and
Address:                                                     Chief Financial Officer
         ------------------------------------------   Address: c/o Property Manager
                                                               9125 Rehco Road
- ---------------------------------------------------            San Diego, California 92121-2270
Telephone: (    )                                     Telephone: (858) 453-7845
                 ----------------------------------   Facsimile: (858) 677-3002
Facsimile: (    )                                     Federal ID No.
                 ----------------------------------                  ------------------------------------------
Federal ID No.                                        With a copy to:
               ------------------------------------   Petco Animal Supplies, Inc.
                                                      c/o Vice President/Real Estate
                                                      9125 Rehco Road
                                                      San Diego, California 92121-2270



                                   PAGE 15                 Initials _________
                                                              FORM STN-6-2/97



                                 ADDENDUM NO. 1
                                TO STANDARD LEASE

This Addendum No. 1 modifies and supplements that certain Standard Lease
dated February ____, 2001 ("Lease"), between Carol Canyon Properties, LLC
("Lessor") and Petco Animal Supplies, Inc. ("Lessee"). All capitalized terms
used herein, which are not otherwise defined, shall have the meanings
ascribed to them in the Lease. In the event of a conflict between this
Addendum No. 1 and the Lease, the provisions of this Addendum No. 1 shall
control.

GENERAL PROVISION. The term "Project" shall mean that certain real property,
consisting of approximately 9.06 acres of land, known as 8925 and 8945 Rehco
Road, San Diego, California (APN # 343-240-3400), more particularly described on
EXHIBIT A attached hereto and incorporated herein. The Project includes the
Premises (designated as Building Two on EXHIBIT A-1) and a second office
building located at 8925 Rehco Road, consisting of approximately 43,000 rentable
square feet ("Building One"). The Project is contemplated to have a third office
building ("Building Three"), which Lessor may decide to construct. Provided
Lessor binds the remainder of the Project and such separate parcel or lot with
easements for cross-access and cross-parking and preserving Lessee's rights
under the Lease, Lessor may, in its reasonable discretion, elect to subdivide
the Project or process a parcel map to provide for a separate legal lot for that
portion of the Project upon which Building Three will be built. In such event,
the Premises and Building One will be located on one legal lot and Building
Three will be located on a separate legal lot.

50.   BASE RENT. Base Rent for each Lease Year (defined below) during the
term of the Lease shall be as follows:



      LEASE YEAR           BASE RENT            ANNUAL RENT
      ----------           ---------            -----------

                                          
      Year 1*              $ 62,350.00          $  748,200.00
      Year 2               $ 64,532.25          $  774,387.00
      Year 3               $ 66,790.62          $  801,487.44
      Year 4               $ 69,128.29          $  829,539.48
      Year 5               $ 71,547.78          $  858,573.36
      Year 6               $ 74,051.95          $  888,623.40
      Year 7               $ 76,643.77          $  919,725.24
      Year 8               $ 79,326.30          $  951,915.60
      Year 9               $ 82,102.72          $  985,232.64
      Year 10              $ 84,976.32          $1,019,715.80
      Year 11              $ 87,950.49          $1,055,405.80
      Year 12**            $ 91,028.76          $1,092,345.10
      Year 13              $ 94,214.76          $1,130,577.10
      Year 14              $ 97,512.28          $1,170,147.30
      Year 15              $100,925.20          $1,211,110.40
      Year 16              $104,457.58          $1,253,490.90
      Year 17              $108,113.59          $1,297,363.00
      Year 18              $111,897.56          $1,342,770.70
      Year 19              $115,813.97          $1,389,767.60
      Year 20              $119,867.45          $1,438,409.40
      Year 21              $124,062.81          $1,488,753.70
      Year 22              $128,405.00          $1,540,860.00
      Year 23              $132,899.17          $1,594,790.00
      Year 24              $137,550.64          $1,650,607.60
      Year 25              $142,364.91          $1,708,378.00
      Year 26              $147,347.68          $1,768,172.10


                                   PAGE 16
- ----                                                                      ----
- ----                                                                      ----



*Lease Year 1 will actually be one (1) year and fifteen (15) days long. Lessor
agrees to abate Lessee's Base Rent payment for the first fifteen (15) days of
Lease Year 1. Subject to the foregoing abatement, Base Rent will commence on the
Rent Commencement Date (defined below).

**Years 12 through 26 are Lease Years that are the subject of the Extension
Option provisions set forth in PARAGRAPH 54.

The foregoing amounts are based upon a Base Rent of $1.45 per square foot of
rentable area per month for Lease Year (defined below) 1, with a 3.5 percent
annual increase throughout the Main Term and the Extension Options.

Except for Lease Year 1, the term "Lease Year" shall mean each successive period
of twelve (12) consecutive calendar months, beginning on the first day of the
month following the Commencement Date.

51.   OPERATING EXPENSES.

51.1 DEFINITION OF OPERATING EXPENSES. The term "Operating Expenses" shall mean
and refer to all costs and expenses, of any kind or nature, which are paid or
incurred by Lessor relative to the operation, repair, restoration, replacement,
maintenance, and management of the Project, including, without limitation, all
costs and expenses relating to: (i) all personnel involved in the operation,
repair, replacement, maintenance, and management of the Project including wages,
fringe benefits, and other labor payments; (ii) water, sewage disposal,
drainage, refuse collection and disposal, gas, electricity, and other utility
services (excluding those utility costs associated solely with the Premises, for
which Lessee will be responsible, or solely with Building One or Building Three)
and the maintenance of all components, systems, and apparatus by which such
utilities and services are provided; (iii) general maintenance and repair of the
Project, exclusive of the buildings, including, without limitation, driveways,
asphalt, and concrete surfaces, and security services (if any, to be provided at
Lessor's reasonable discretion); (iv) maintenance of landscaping (including
irrigation and sprinkler systems) and replanting; (v) keeping the Parking Area
(defined below) in good condition and free from litter, dirt, debris, and other
obstructions, and keeping all lighting and signage serving the Project in good
condition and fully operating; (vi) any expenses payable by Lessor pursuant to
the provisions of any recorded Covenants, Conditions, and Restrictions or
similar recorded instruments affecting the Project; (vii) all real property or
real estate taxes, assessments, and other impositions, whether general, special,
ordinary, or extraordinary, and of every kind and nature, which may be levied,
assessed, imposed upon or with respect to the Project, or any portion thereof,
by any local, state, or federal entity except to the extent of taxes payable by
Lessee pursuant to the Lease (although if Building Three is constructed on a
separate lot or parcel, it will be separately assessed) ; (viii) any personal
property taxes, assessments, or other impositions levied, assessed, or imposed
upon any personal property of Lessor located at and used in connection with the
Project; (ix) the cost of all casualty, liability, and other insurance required
to be carried by Lessor under the Lease; (x) legal, accounting, inspection, and
consultation fees; and (xi) Permitted Capital Pass-Through Costs (defined
below).

Lessor shall neither duplicate the cost of items included in Operating Expenses,
including, but not limited to, management fees, nor duplicate Operating Expenses
with charges to Lessee elsewhere in this Lease. Notwithstanding any contrary
provision in this Lease, "Operating Expenses" shall not include any of the
following:

      (1)   costs for which Lessor is entitled to reimbursement by insurance
            or condemnation awards;

      (2)   expenses incurred in connection within leasing or procuring new
            tenants or renewing or modifying existing leases with tenants,
            including advertising expenses or leasing commissions paid to agents
            of Lessor or other brokers;

      (3)   income, capital stock, estate, inheritance, franchise or other
            taxes payable by Lessor;

                                   PAGE 17                 Initials _________
                                                              FORM STN-6-2/97



      (4)   depreciation of the Premises, Building One or Building Three;

      (5)   interest on debt or amortization payments on any mortgage or deed
            of trust;

      (6)   rental under any prime lease or similar rental under any other
            superior lease or sublease, and any late fees, default interest or
            similar payments accruing under such lease or sublease;

      (7)   dividends paid by Lessor;

      (8)   the portion of the wages, salary or other compensation for any
            employee not employed by Lessor full time on behalf of the Project,
            to the extent not reasonably allocated by Lessor to the Project and
            the wages, salaries or other compensation of any employee above the
            grade of Senior Project Manager;

      (9)   costs which are to be capitalized under GAAP, except for
            Permitted Capital Pass-Through Costs (defined below);

      (10)  accounting fees, expert fees legal fees, court costs, or
            disbursements incurred in connection with proceedings of any nature
            to assert Lessor's rights under any lease with a tenant in the
            Project or to resolve disputes between Lessor and tenants of the
            Project as to the interpretation or administration of any lease,
            including this Lease, except where incurred predominately for the
            benefit of the tenants of the Project, including Lessee;

      (11)  management or administrative fees other than a management fee, if
            any, actually paid by Lessor to a third-party management company
            which is not affiliated with Lessor or any of its members and which
            is a recognized property management company in San Diego,
            California, not to exceed three and one-half percent (3 1/2%) of
            Operating Costs (the Parties anticipating that the actual fee paid
            will be substantially less than three and one-half percent (3 1/2%)
            if Building One is a single tenant building and Lessor agreeing to
            use commercially reasonable efforts to obtain the lowest rate
            obtainable from such property management company);

      (12)  the costs for repairs or maintenance that are reimbursed by others,
            including, without limitation, reimbursement made on warranty
            claims;

      (13)  any points or fees, including without limitation, late fees, default
            interest and other similar payments on loans relating to the
            Project;

      (14)  increases in insurance premiums due to hazardous activities
            conducted elsewhere within the Project;

      (15)  Lessor's cost of any services sold to tenants for which Lessor is
            entitled to be reimbursed by such tenants as additional charge above
            rent charges;

      (16)  Lessor's costs of any above building standard janitorial services or
            above building standard security services provided to other tenants
            of the Project, as well as Lessor's cost of any other above building
            standard services (including, without, limitation, above building
            standard electrical service) which Lessor provides to other tenants
            of the Project.

      (17)  commissions and other costs and expenses incurred in connection with
            negotiations with or sales to purchasers or potential purchasers of
            the Project;

      (18)  costs for art work placed on the Project;

                                   PAGE 18                 Initials _________
                                                              FORM STN-6-2/97



      (19)  rentals and other related expenses incurred leasing equipment or
            machinery for a period of more than five (5) years and which
            equipment or machinery would constitute a capital expenditure if
            purchased by Lessor, except for Permitted Capital Pass-Through
            Costs;

      (20)  penalties and fines incurred by Lessor due to violation of any
            building code or other law;

      (21)  tort damages awarded against Lessor;

      (22)  costs paid to a related entity to the extent that the payment
            exceeds that which would have been paid in the absence of such a
            relationship;

      (23)  compensation paid to clerks, attendants or other persons to operate
            a commercial concession on the Project and costs incurred in
            connection with the operation of any club or other entertainment,
            exercise or recreational facility on the Project;

      (24)  costs of renovating or constructing space for Lessee or other
            tenants or renovating space vacated by Lessee or other tenants;

      (25)  the cost of any Building appraisal, other than an appraisal obtained
            in connection with contesting real estate taxes or determining
            whether the amount of real estate taxes is fair and reasonable;

      (26)  costs to remove any Hazardous Substance from the Project or
            otherwise abate any Hazardous Substance within, under or on the
            Project;

      (27)  costs incurred as a result of the existence of any Hazardous
            Substance in the Project;

      (28)  expenses in connection with services or other benefits which are not
            provided to Lessee, but which are provided solely to other tenants
            or occupants of the Project;

      (29)  any costs related to the design and construction of Building Three,
            any costs of repairs to or replacements of the Parking Area (defined
            below), or other portions of the Project made necessary by or
            increased by the construction of Building Three and any increases in
            Lessee's Pro Rata Share of Operating Expenses due to the
            construction or presence of Building Three;

      (30)  any costs of maintenance, repair or replacement of any buildings
            in the Project;

      (31)  during the Original Term, any costs of replacement of the Parking
            Area even if same are Permitted Capital Past-Through Costs; and

      (32)  any costs of janitorial services for any building in the Project.

"Permitted Capital Pass-Through Costs" means: (a) any improvement made to the
Property by Lessor that is required under any governmental law or regulations
which was not promulgated, or which was promulgated but was not applicable to
the Project, on the Commencement Date, amortized using such period and method as
is permitted under generally accepted accounting principles ("GAAP"), or (b) any
labor-saving, cost-saving or energy-saving device or other equipment installed
in the Project (provided that the amount included in Operating Costs in any one
year shall in no event exceed the savings realized in Operating Costs during
such year as a result of the installation and use of the applicable device),
amortized using such period and method as is permitted under GAAP.

51.2 PAYMENT OF OPERATING EXPENSES. Lessor shall maintain the common areas of
the Project in good order and repair and in a manner comparable to that of
similar projects in San Diego, California, and in consideration for same,
starting on the Commencement Date, Lessee shall pay to Lessor, on the first day


                                   PAGE 19                 Initials _________
                                                              FORM STN-6-2/97



of each calendar month during the Original Term, as Additional Rent, an amount
("Lessee's Monthly Payment") equal to one-twelfth of Lessee's Pro -Rata Share of
the Operating Expenses for such calendar year, as estimated by Lessor in the
most recently delivered Estimated Statement (defined below). Starting on the
Commencement Date and prior to the commencement of each calendar year during the
Term, Lessor will deliver to Lessee a written statement ("Estimated Statement")
setting forth Lessor's estimate of the Operating Expenses allocable to the
ensuing calendar year and Lessee's Pro Rata Share of such Operating Expenses.
Lessor may, at its option, during any calendar year but not more often than once
per calendar quarter, deliver to Lessee a revised Estimated Statement, in
accordance with Lessor's most current estimate. Within approximately ninety (90)
days after the end of each calendar year during the term of the Lease, Lessor
will deliver to Lessee a written statement ("Actual Statement") setting forth
the actual Operating Expenses allocable to the preceding calendar year. Lessee's
failure to object to Lessor regarding the contents of an Actual Statement, in
writing, within one hundred twenty (120) days after delivery to Lessee of such
Actual Statement, shall constitute Lessee's acceptance and approval of the
Actual Statement. Upon not less than ten (10) days' prior written notice to
Lessor, Lessee shall have the right to audit Lessor's books and records
regarding Operating Expenses (any over or under payments revealed by such audit
being paid or credited as provided below). If the sum of Lessee's Monthly
Payments actually paid by Lessee during any calendar year exceeds Lessee's Pro
Rata Share of the actual Operating Expenses allocable to such calendar year,
then such excess will be credited against the amounts next becoming due under
the Lease, unless such calendar year was the calendar year during which the
Expiration Date occurs (the "Last Calendar Year"), in which event either: (i)
such excess shall be credited against any monetary default of Lessee under this
Lease; or (ii) if Lessee is not in default under this Lease, then Lessor shall
pay to Lessee such excess. If the sum of Lessee's Monthly Payments actually paid
by Lessee during any calendar year is less than Lessee's Pro Rata Share of the
actual Operating Expenses allocable to such calendar year, then Lessee shall,
within thirty (30) days of delivery of the Actual Statement, pay to Lessor the
amount of such deficiency. Lessor's delay in delivering any Estimated Statement
or Actual Statement will not release Lessee of its obligation to pay any
Lessee's Monthly Payment or, provided any such delay is less than 365 days, any
such excess upon receipt of the Estimated Statement or the Actual Statement, as
the case may be. For purposes of this Lease, the term "Lessee's Pro Rata Share"
will mean and refer to the portion of the Operating Expenses payable by Lessee.
Except with regard to real estate taxes and assessments (which shall be
proportioned as provided below), Lessee's Pro Rata Share of Operating Expenses
shall be as follows: (A) unless and until Building Three is constructed,
one-half (1/2) of the Operating Expenses, and (B) after Building Three is
constructed, one-third (1/3) of Operating Expenses.

Notwithstanding anything contained herein to the contrary, unless escrow of same
is required by Lessor's lender, Lessee will not be required to pay monthly any
portion of Operating Expenses for real estate taxes and assessments ("Real
Estate Taxes"). Instead, Lessee's Pro Rata Share of Real Estate Taxes will be
payable not earlier than the later of (i) thirty (30) days following receipt
from Lessor of an invoice together with a copy of the real estate tax bill and a
calculation of Lessee's Pro Rata Share, or (ii) twenty (20) days prior to the
date such real estate taxes become delinquent. Lessee's Pro Rata Share of Real
Estate Taxes will be as follows: (Y) unless and until Building Three is
constructed, one-half (1/2) of the Real Estate Taxes applicable to the
improvements located in the Project and one-third (1/3) of the Real Estate Taxes
applicable to the land upon which the Project is situated, and (Z) after
Building Three is constructed, one-third (1/3) of the Real Estate Taxes on the
improvements located in the Project and one-third (1/3) of the Real Estate Taxes
applicable to the land upon which the Project is situated (unless Building Three
is on a separate tax parcel, in which case, Lessee's Pro Rata Share of Real
Estate Taxes will be one-half (1/2) of the Real Estate Taxes for the tax parcel
upon which the Premises are located and one-half (1/2) of the Real Estate Taxes
for the improvements located on such tax parcel).

53. PARKING. During the Original Term of the Lease and the Extension Terms,
Lessor grants to Lessee free of charge (for the benefit of Lessee and Lessee's
invitees) the right to the non-exclusive use, together with Lessor, other
lessees of the Project and their employees and invitees, of any parking area
(including but not limited to any parking garage that may hereafter be
constructed on any portion of the Project) within the boundaries of (such
boundaries of the Project to be those of the entire Project shown on Exhibit
A-1, regardless of whether Building Three or any other portion of the Project is
later divided

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                                                              FORM STN-6-2/97



into a separate tax parcel) and serving the Project ("Parking Area").
Lessee's use of the Parking Area shall be subject to the Rules and
Regulations attached to the Lease as EXHIBIT C and, upon not less than ten
(10) days' prior written notice from Lessor, such other reasonable and
non-discriminatory rules and regulations as Lessor may, in its reasonable
discretion, adopt from time to time with respect to the Parking Area,
including without limitation: rules limiting lessees of the Project
(including, without limitation, Lessee) to the use of, or excluding the use
of, certain parking spaces or certain portions of the Parking Area, in order
to maintain the availability of accessible parking spaces for clients,
guests, and invitees of lessees of the Project. Lessee shall be entitled to
at least as favorable treatment regarding any such parking rules as the most
favorably treated other tenant of the Project. In the event of a conflict
between the Lease and any rules and regulations adopted by Lessor, the Lease
controls. There is presently an electric powered gate at the vehicular
driveway entrance to the Project. Lessee shall have the non-exclusive right,
together with Lessor and other lessees of the Project to control such gate.
Such gate shall remain open Monday through Friday from 7:30 a.m. to 6:30 p.m.
At other times access will be card or code controlled.

54.   EXTENSION OPTIONS.

54.1 OPTIONS. Lessee shall have the option to extend the Original Term of the
Lease (individually, "Option" and collectively, "Options") for three (3)
consecutive periods of five (5) years each (individually, "Extension Term" and
collectively, "Extension Terms"), provided Lessee gives Lessor written notice of
its election to exercise the Options at least twelve (12) months prior to the
expiration of the Original Term of the Lease (or the then applicable Extension
Term, to the extent the Original Term has been previously extended pursuant to
the terms of this paragraph). The terms and conditions governing each such
Extension Term will be the same as those for the Original Term, except as set
forth herein. Time is of the essence with respect to each and every term of this
PARAGRAPH 54. Notwithstanding anything contained in the Lease or this Addendum
to the contrary, if Lessee has exercised any right of first refusal for
expansion into any portion of Building One or Building Three prior to the
applicable Extension Term, Lessee may exercise the corresponding Option for
either the Premises alone or for the Premises together with the Expansion Space
(defined below) in Building One, the Expansion Space in Building Three, or both.

54.2 EXERCISE OF OPTIONS. The Options herein granted to Lessee may be assigned
with any permitted assignment of the Lease. Lessee shall not have the right to
exercise the Options, notwithstanding anything set forth above to the contrary,
during any period of time commencing from the date Lessor gives to Lessee a
written notice that Lessee is in material default under any provision of the
Lease, and continuing until the default alleged in said notice is cured. The
period of time within which the Options may be exercised shall not be extended
or enlarged by reason of Lessee's inability to exercise the Options because of
the foregoing provisions of this PARAGRAPH 54, even if the effect thereof is to
eliminate Lessee's right to exercise the Options. All rights with respect to the
Options shall terminate and be of no further force or effect, even after
Lessee's due and timely exercise of the Options, if, after such exercise, but
prior to the commencement of the applicable Extension Term, Lessee is in
material default under any provision of the Lease beyond applicable cure
periods. The Base Rent for each Extension Term shall be as set forth in
PARAGRAPH 50 above.

55. FINDER'S FEE. Notwithstanding any provision of the Lease to the contrary,
Acree, Weinman, Inc. (the Broker identified in the Lease) shall be entitled to
receive a brokerage commission, which commission shall be paid pursuant to a
separate written agreement, and Brian Huster shall be entitled to receive a
finder's fee from Lessor for his work on behalf of Lessor in connection with the
Lease and pursuant to PARAGRAPHS 58 AND 59 below, which fee shall be paid
pursuant to a separate agreement.

56.   PROJECT AND SURROUNDING PROJECT EXPANSION/MODIFICATION.

56.1 FURTHER CONSTRUCTION. Lessee acknowledges that Lessor may construct or
permit a third party to construct a parking garage to serve the entire Project
and Building Three. Lessee acknowledges that any such construction work will
necessarily involve, among other things, the generation of noise, dust, and


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                                                              FORM STN-6-2/97



vibrations, barricading portions of the Project and the placement of scaffolding
within the Project, demolition, structural alterations, storage of materials and
equipment within the Project, and the presence of workmen within the Project,
all of which may require the rearrangement of parking areas, roadways, lighting
facilities, and the redirection of vehicular and pedestrian traffic. Lessor
covenants to maintain at all times reasonable access to the Premises and the
Parking Area, to use its best efforts to minimize interference with Lessee's
business in the Premises, not to cause or permit interruption of utilities to
the Premises and to include the foregoing covenants as obligations of any third
party (including, without limitation, any contractor) authorized to construct
Building Three. Lessor's Contractor shall coordinate the construction activities
for Building Three with any construction schedule for any Alterations being
performed by or on behalf of Lessee. Lessor further agrees to indemnify, defend
and hold harmless Lessee from all losses, liabilities, actions, damages, costs
and expenses claimed, asserted, or arising in connection with the construction
of Building Three. Lessor will not construct or permit to be constructed on the
Project any buildings or other structures, except for a parking garage to serve
the entire Project and Building Three, which parking garage will be constructed
on the common areas of the Project in an area reasonably approved by Lessee, and
which Building Three will be constructed only in the area shown on EXHIBIT
"A-1". If Lessor constructs Building Three and such parking garage, the parking
garage will be constructed first.

56.2 RIGHT OF ABATEMENT. Notwithstanding anything to the contrary contained in
PARAGRAPH 56.1, in the event any Construction Work undertaken by Lessor or any
third party (including, without limitation, any contractor) authorized to
construct such parking garage and/or Building Three, materially interferes with
the operation of Lessee's business within the Premises, Lessee's Base Rent will
be abated two (2) days for each day of such material interference.

57.   CONDITION OF THE PREMISES.  Lessee is accepting the Premises in the
condition described in Addendum No. 2, PARAGRAPH 64. Should Lessee desire to
make additional improvements to the Premises in the future, such Lessee Work
shall be constructed in accordance with the procedures outlined in Addendum
No. 2.

58. RIGHT OF FIRST OFFER TO LEASE. During the Original Term, and any
Extension Term, Lessor grants to Lessee a continuing right of first offer to
lease (the "Expansion Right") any portion of Building One. When Lessor
desires to offer to lease all or any portion of Building One (the "Expansion
Space") to third parties, Lessor shall deliver written notice (the "Offer
Notice") to Lessee setting forth the terms upon which Lessor will offer to
lease the Expansion Space to third parties and offering to lease, the
Expansion Space to Lessee upon such terms. Once Lessor has sent the Offer
Notice, if Lessee elects to exercise said Expansion Right in accordance with
the terms of the Offer Notice, Lessee shall do so by giving Lessor written
notice of such election within ten (10) days after receiving the Offer
Notice. In the event Lessee rejects the Expansion Space Offer or fails to
respond to the Offer Notice within said ten (10) day period, Lessor may,
within six (6) months following the date of the Offer Notice, lease the
Expansion Space to third parties on "Substantially the Same Terms and
Conditions" (defined below) as are set forth in the Offer Notice. As used in
this PARAGRAPH 58, "Substantially the Same Terms and Conditions" means that
(a) the rent under the third party lease is not less than ninety-five percent
(95%) of that set forth in the Offer Notice, (b) the lease terms are no more
favorable than set forth in the Offer Notice, (c) the duration and
construction allowance are the same as in the Offer Notice, (c) the third
party lease does not provide the third party Lessee financing of any costs
except to the extent set forth in the Offer Notice, and (e) the commencement
of the third party lease is within six (6) months of the Offer Notice. If the
third party lease is not on Substantially the Same Terms and Conditions as
the Offer, Lessor must again provide Lessee a Refusal Right Notice in
accordance with this PARAGRAPH 58. Notwithstanding anything contained therein
to the contrary, the duration (including any renewal options) of any lease
entered into with such third party will not exceed fifteen (15) years. If
Lessee leases the Expansion Space, the lease of the Expansion Space shall be
upon the same terms and conditions as the Lease, as modified by the
provisions of the Offer Notice. Further, in addition to and separate and
distinct from the foregoing right of first offer regarding Building One,
Lessor hereby grants to Lessee a continuing right of first offer to lease any
portion Building Three (if constructed) on the same terms and conditions as
the foregoing right of first offer regarding Building One. The Broker
identified in the Lease shall be entitled to receive a brokerage

                                   PAGE 22                 Initials _________
                                                              FORM STN-6-2/97



commission and Brian Huster shall be entitled to receive a finder's fee in
connection with the proper exercise by Lessee of its Expansion Right (and/or
similar rights regarding Building Three) under this PARAGRAPH 58, which
payments shall be the subject of separate written agreements. If, during the
Original Term or any Extension Term, Lessee is in material monetary Breach of
the Lease (beyond applicable cure periods), the Expansion Right will
terminate. Notwithstanding the foregoing to the contrary, if prior to such
material monetary Breach (beyond applicable cure periods) Lessee has
purchased any building in the Project, such Expansion Right will not
terminate, but will remain in effect despite such Breach.

59. RIGHT OF FIRS OFFER TO PURCHASE. During the Original Term, and any Extension
Term, Lessor grants Lessee a continuing right of first offer to purchase (the
"Purchase Right"): (i) the Premises and Building One (together with an allocable
portion of the Common Areas of the Project) and/or (ii) Building Three (but only
after such time as Building Three has been constructed) (together with an
allocable portion of the Common Areas of the Project); and/or (iii) the Project.
When Lessor desires to offer to sell any of the Premises and Building One,
Building Three or the Project to third parties, Lessor shall deliver written
notice (the "Purchase Right Notice") to Lessee setting forth the terms upon
which Lessor will offer to sell the applicable building, buildings or Project
and offering to sell the same to Lessee upon such terms. Once Lessor has sent
the Purchase Right Notice, if Lessee elects to exercise said Purchase Right in
accordance with the terms of the Purchase Offer, Lessee shall do so by giving
Lessor written notice of such election within ten (10) days after receiving the
Purchase Notice. In the event Lessee rejects the Purchase Offer or fails to
respond to the Purchase Notice within said ten (10) business day period, Lessor
may sell the applicable building or buildings or Project to third parties on
Substantially the Same Terms and Conditions (defined below) as are set forth in
the Purchase Right Notice. As used in this PARAGRAPH 59, "Substantially the Same
Terms and Conditions" means that (a) the sales price is not less than
ninety-five percent (95%) of that set forth in the Offer Notice, (b) the
contract terms are no more favorable than set forth in the Offer Notice, (c) the
inspection period, title review period and closing date are the same as in the
Offer Notice, (d) the third party contract does not provide the third party
purchase financing of any costs except to the extent set forth in the Offer
Notice, and (e) the closing date is within six (6) months of the Offer Notice.
If the third party sale is not on Substantially the Same Terms and Conditions as
the Purchase Right Notice, Lessor must again provide Lessee a Purchase Right
Notice in accordance with this PARAGRAPH 59. Notwithstanding anything contained
herein to the contrary, any sale to such third party will be subject to the
Lease. The Broker identified in the Lease shall be entitled to receive
a-brokerage commission and Brian Huster shall be entitled to receive a finder's
fee in connection with the proper exercise by Lessee of its Purchase Right under
this PARAGRAPH 59, which payments shall be the subject of separate written
agreements. If, during the Original Term or any Extension Term, Lessee is in
material monetary Breach of the Lease (beyond applicable cure periods), the
Purchase Right will terminate. Notwithstanding the foregoing to the contrary, if
prior to such material monetary Breach (beyond applicable cure periods) Lessee
has purchased any building in the Project, such Purchase Right will not
terminate, but will remain in effect despite such Breach. Lessor covenants that
it will not divide the Premises and Building One into separate parcels and that
it will not sell either the Premises or Building One without the other.

60. LESSEE'S FINANCIAL INFORMATION. Not more often than one (1) time per Lease
Year and not more than ten (10) times during the Original Term and all Extension
Terms combined, Lessee shall provide Lessor with reasonable evidence (such
evidence to be in the form generally provided by Lessee to its landlords and
lenders) of Lessee's financial condition within ten (10) days following Lessor's
written request therefor.

61.   ADDITIONAL DOCUMENTS.  Simultaneously with the execution of the Lease,
Lessor and Lessee (as applicable) will execute the following:

      (a)   Easement Agreement regarding the Project (the "Easement Agreement")
            in the form attached hereto as EXHIBIT D, which Easement Agreement
            Lessor will promptly record against the Project at Lessor's sole
            cost.

                                   PAGE 23                 Initials _________
                                                              FORM STN-6-2/97



      (b)   Memorandum of Lease (the "Memorandum of Lease") in the form attached
            hereto as EXHIBIT F, which Memorandum of Lease Lessor will promptly
            record against the Project at Lessor's sole cost.

      (c)   Memorandum of First Offer (the "Memorandum of First Offer") in the
            form of EXHIBIT F, which Memorandum of First Offer Lessor will
            promptly record against the Project at Lessor's sole cost.

      (d)   Agreement Regarding Memorandum of First Offer (the "Agreement
            Regarding Memorandum of First Offer") in the form attached hereto as
            EXHIBIT G, which Agreement Regarding Memorandum of First Offer will
            be held in escrow by Stewart Title Company of San Diego.

62. HOT WATER. Lessee's Pro Rata Share of the cost of the hot water to Lessee
and other lessees of the Project shall be one-half (1/2). If Building Three is
constructed, hot water for Building Three will not be supplied by the same
centrally located plant that supplies the Premises and Building One. Building
Three, if constructed, will have a separate hot water supply source.

63. LEASES OF BUILDING ONE AND BUILDING THREE. Lessor will not enter into any
lease for a term (including all extension options) in excess of fifteen (15)
years with a third party for all or any portion of Building One or Building
Three without first obtaining Lessee's prior written consent, which consent will
not be unreasonably withheld.

                                                   
LESSOR:                                               LESSEE:

CAROL CANYON PROPERTIES, LLC,                         PETCO ANIMAL SUPPLIES, INC.,
a California limited liability company                a Delaware corporation
                                                      By:  /s/ JAMES M. MYERS
By:  /s/ MICHAEL J. ELLIS                                 --------------------------------
    -----------------------------------------------         James M. Myers
       Michael J. Ellis, as Trustee of the                  Executive Vice President and
       Michael J. and Monica I. Ellis Family Trust,         Chief Financial Officer
       Manager
                                                      By:  /s/ GARY L. GRAHAM
By:  /s/ BRIAN HUSTER                                     --------------------------------
    -----------------------------------------------         Gary L. Graham
       Brian Huster                                         Vice President - Real Estate
       Manager



                                   PAGE 24                 Initials _________
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                        ADDENDUM NO. 2 TO STANDARD LEASE


This Addendum No. 2 modifies and supplements that certain Standard Lease
dated February ____, 2001 ("Lease"), between Carol Canyon Properties, LLC
("Lessor") and Petco Animal Supplies, Inc. ("Lessee"). All capitalized terms
used herein, which are not otherwise defined, shall have the meanings
ascribed to them in the Lease. In the event of a conflict between this
Addendum No. 2 and the Lease, the provisions of this Addendum No. 2 shall
control.

GENERAL PROVISION. LESSOR SHALL PROVIDE A MUTUALLY AGREED UPON STANDARD FINISH
FOR THE PREMISES AND SHALL PROVIDE A LESSEE IMPROVEMENT ALLOWANCE (DEFINED
BELOW) FOR THE COST OF THE LESSEE IMPROVEMENTS TO BE CONSTRUCTED BY LESSOR,
SUBJECT TO THE TERMS AND CONDITIONS AS MORE COMPLETELY DESCRIBED HEREIN.

64. LESSOR'S WORK. Following execution of the Lease by Lessor and Lessee, Lessor
shall reinstall the building core of the Premises to a mutually agreed upon
condition in compliance with the mutually agreed upon plans, specifications and
working drawings and the attached SCHEDULE 1 to this Addendum No. 2 (the "Core
Contract"). The portion of Lessor's Work included in the Core Contract will be
at Lessor's sole cost. The Core Contract will include completion of the
bathrooms in the Premises to mutually agreed upon building standard condition in
compliance with the mutually agreed upon plans, specifications and working
drawings and any modifications to the Premises necessary to cause the Premises
to comply with applicable laws, including, without limitation, fire rated doors
on all exit corridors and the requirements of the Americans With Disabilities
Act and any similar state laws. Any work of a curative nature necessary to cause
the Premises to comply with applicable laws will be performed as a part of
Lessor's Work under the Core Contract, at Lessor's sole cost. The Core Contract
will also include: (a) securing the easterly boundary of the Project from
adjacent property in an appropriate locked manner, and (b) sealing and
restriping the Project's Parking Area. The second of such contracts (the "Lessee
Improvements Contract") shall be for the construction of improvements to the
Premises as specified in the plans and specifications originally prepared by
Lessor for completion of the finishes and other interior improvements to the
Premises (the "Original Plans"), as modified by Lessee and approved by Lessor in
accordance with this PARAGRAPH 64 (the "Lessee Improvements"). All of the work
described in this PARAGRAPH 64 is collectively, "Lessor's Work". Lessor's Work
shall be promptly completed by Lessor in a good and workmanlike manner, and in
accordance with working drawings, plans, and specifications for the Premises
mutually agreed upon by Lessor and Lessee. Lessee will review and submit
required changes to the Original Plans to Lessor as soon as reasonably possible.
Lessor will then have ten (10) days to approve (such approval not to be
unreasonably withheld) or to provide Lessee with written objections to such
changes (such process to repeat until the plans, specifications and working
drawings are mutually agreed upon by Lessor and Lessee). Thereafter, such
mutually approved plans, specifications and working drawings will be attached
hereto and made a part of the Lease. As part of Lessor's Work, Lessor will
provide electricity to the Premises. Lessee will have the right to use the
existing electrical panels and electrical wiring for the Premises without Lessor
charging any costs therefor against the Lessee Improvement Allowance. Lessor
represents and warrants to Lessee that such existing electrical panels and
wiring comply with applicable codes. In addition, as part of the Lessee
Improvements, Lessee will have the right to install card or code access readers
at any exterior entrances to the Premises it so desires. Lessee will be entitled
to the maximum signage on the exterior facade of the Premises as is allowed by
applicable law (including any variance obtained by Lessee), and Lessee shall be
entitled to the top one-half (1/2) of the monument sign located at the Project,
Lessee's sign panel installation to be included in Lessor's Work, and both the
cost of the panel and the installation thereof to be charged against the Lessee
Improvement Allowance. Lessee shall not be liable for any loss, cost, damage, or
expense incurred or claimed by Lessor or any other person or party on account of
the construction or installation of Lessor's Work. Lessor agrees to obtain, at
Lessor's cost, any necessary consents of third parties for all of the
above-described signage, including, without limitation, approvals required
pursuant to that certain Declaration of Covenants, Conditions and Restrictions
dated December 24, 1986, and recorded February 4, 1987, as File No. 87-063214 of
the Official Records of San Diego County, California (the "CC&Rs"). Lessor
represents and warrants to Lessee based on Lessor's due diligence and proper
investigation that the "approving agent" (defined in the CC&Rs) does not exist
and that no approvals of the existing Premises or of Lessor's Work are required.
Lessor hereby agrees to indemnify, hold harmless and defend Lessee from and
against all

                                   PAGE 25
- ----                                                                      ----
- ----                                                                      ----



claims (including consequential damages) arising out of the failure of the
existing Premises or Lessor's Work to comply with the CC&Rs. Lessee will have
the right to offset against Base Rent and other charges due under this Lease
any costs it incurs due to any such failure and/or the breach of such
representation. Lessor hereby acknowledges and agrees that the compliance of
Lessor's Work and the plans, specifications and working drawings therefor,
with all applicable governmental laws, codes and regulations shall be solely
Lessor's responsibility. Lessee assumes no liability or responsibility
resulting from the failure of Lessor to comply with all applicable
governmental laws, codes and regulations or for any defect in any of Lessor's
Work. Lessor further agrees to indemnify, defend and hold harmless Lessee
from all losses, liabilities, actions, damages, costs and expenses claimed,
asserted or arising in connection with any of the foregoing. Lessor shall
submit to at least three (3) mutually approved general contractors for bid
the working drawings, plans and specifications for the Lessee Improvements.
In addition to the general contractor, Lessee will also have approval rights
over the mechanical, electrical and plumbing contractors selected. Both
Lessor and Lessee shall be provided a copy of each bid. Selection of the
general contractor to be used to perform the Lessee Improvements will be made
by Lessor with the approval of Lessee, which approval will not be
unreasonably withheld. Thereafter, Lessor will enter into the Lessee
Improvements Contract for construction of the Lessee Improvements, and Lessor
shall provide Lessee with a copy of said contract for review and approval,
such approval not to be unreasonably withheld. Lessor agrees to use all
commercially reasonable efforts to obtain the best possible prices for labor
and materials to be used in the construction of the Lessee Improvements. The
Lessee Improvements Contract shall require the general contractor to comply
with Lessor's construction rules and regulations set forth in PARAGRAPHS
70.1-70.9 below (adjusted as applicable to apply to such general contractor).
Lessor agrees to obtain any necessary consents under the CC&Rs. Lessor and
such general contractor are responsible for compliance with all applicable
codes and regulations of duly constituted authorities having jurisdiction as
far as the performance of Lessor's Work is concerned, for compliance with the
CC&Rs and for compliance with all applicable safety regulations, OSHA or
other regulatory agencies, and Lessor further agrees to indemnify and hold
Lessee harmless for Lessor's actions arising from Lessor's Work. Lessor
agrees that upon Lessee's written request, Lessor will enforce all warranty
claims under the Core Contract and the Lessee Improvements Contract. If
Lessor fails to enforce same within thirty (30) days of Lessee's written
request, Lessee may enforce same at Lessor's cost, which if not paid to
Lessee within ten (10) days of invoice Lessee may offset against Base Rent
and other charges next becoming due under this Lease until fully reimbursed.

65. LESSEE IMPROVEMENT ALLOWANCE. Lessor shall be responsible for bearing all
costs and expenses of completing the Lessee Improvements up to a maximum of
$15.00 per rentable square foot of the Premises ($645,000.00) ("Lessee
Improvement Allowance"). All costs and expenses of the Lessee Improvements in
excess of the Lessee Improvement Allowance (the "Excess") shall be payable by
Lessee to Lessor upon ten (10) days' written notice from Lessor, accompanied by
reasonable documentation evidencing the Excess. Upon completion of Lessor's
Work, Lessee shall have the right to audit Lessor's books and records with
regard thereto, and if such audit reveals an overpayment of the actual Excess
(based upon actual invoices and paid receipts), any such overage will be
credited against amounts next becoming due under the Lease. The Lessee
Improvements Contract shall contain cost savings provisions whereby any savings
in the cost of Lessee's Improvements below $15.00 per rentable square foot are
shared forty percent (40%) by the contractor and sixty percent (60%) by Lessor
("Lessor's Portion"). Lessor and Lessee agree to share Lessor's Portion of such
savings as follows: for Lessor's Portion of savings up to One and 50/100 Dollars
($1.50) per rentable square foot of the Premises, Lessor will pay to Lessee on
the Commencement Date seventy-five percent (75%) of such Lessor's Portion, and
for Lessor's Portion of savings in excess of One and 50/100 Dollars ($1.50) per
rentable square foot, Lessor will pay to Lessee on or before the Commencement
Date fifty percent (50%) of such savings. Notwithstanding the foregoing to the
contrary, solely for the purpose of calculating the cost savings described
above, change orders during construction will be excluded on both the cost side
and the savings side.

66. CONDITION OF PREMISES FOLLOWING COMPLETION OF LESSOR'S WORK. The Premises
shall be delivered to Lessee with Lessor's Work substantially completed. Lessor
shall provide Lessee at least ten (10) days' prior written notice (the "Notice
of Substantial Completion") of the date upon which "Substantial

                                   PAGE 26                 Initials _________
                                                              FORM STN-6-2/97



Completion" (defined below) will occur. Thereafter, Lessor will promptly
complete all portions of Lessor's Work. Subject to the abatement described in
PARAGRAPH 50, Base Rent will commence on the later of the date Lessor's Work
is Substantially Complete or the date that is ten (10) days following
Lessee's receipt of the Notice of Substantial, Completion (the "Rent
Commencement Date"). "Substantial Completion" or "Substantially Complete"
means (i) that the Lessor's Work has been performed in the Premises in
substantial accordance with the plans, specifications and working drawings,
(ii) all construction debris has been removed from the Premises and the
Premises are clean, and (iii) the Premises may reasonably be used and
occupied by Lessee in accordance with PARAGRAPH 1.8 of the Lease.

67. ESTIMATED COMPLETION DATE. Lessor shall use its best efforts to cause the
Lessor's Work to be substantially completed by June 1, 2001 following mutual
execution of the Lease, subject to delays from causes beyond the reasonable
control of Lessor, including, without limitation, acts of God, strikes, work
stoppages, unavailability of or delay in receiving permits, labor or materials,
defaults by contractors or subcontractors, weather conditions, fire or other
casualty, or action of governmental authorities ("Force Majeure Events").

68.   EFFECT OF DELAY ON TEASE TERM.  In the event the Lessor's Work is not
substantially completed by July 1, 2001, the provisions of PARAGRAPH 3.3 of
the Lease shall apply.

69. ALTERATIONS. If Lessee desires to alter or perform additional construction
work in the Premises (the "Alterations"), the cost of which exceeds $50,000.00
in any Lease Year, Lessee shall cause detailed plans and specifications (the
"Lessee Plans") to be prepared and delivered to Lessor, which Lessee Plans shall
reflect the proposed Alterations (unless the Alterations are limited to floor
and wall coverings in which case detailed plans and specifications are not
required). Further, any modifications to the exterior of the Premises shall be
subject to Lessor's prior approval, which approval will not be unreasonably
withheld. No romex wiring shall be allowed, nor shall water lines be placed in
slabs, unless approved by Lessor prior to installation. Any equipment placed
upon the roof as a result of the Alterations, and any roof penetrations, shall
be approved by Lessor (such approval not to be unreasonably withheld) prior to
the commencement of the Alterations. Lessor shall, within ten (10) days
following its receipt of the Lessee Plans, either approve (such approval not to
be unreasonably withheld) such Lessee Plans or provide Lessee with written
objections to the Lessee Plans (such process to repeat until the Lessee Plans
are approved). No Alterations shall be undertaken by Lessee until the Lessee
Plans have been approved by Lessor (such approval not to be unreasonably
withheld). Performance by Lessee of the Alterations shall conform to the
approved Lessee Plans, and any material deviation will require Lessor's prior
approval (such approval not to be unreasonably withheld). Lessee shall cause the
Alterations to be completed in accordance with sound construction practices and
in a manner consistent with this Addendum No. 2.

70. CONSTRUCTION OF THE ALTERATIONS BY LESSEE'S CONTRACTOR. In the event of
Alterations that require Lessor's approval, after the Lessee Plans for the
Alterations have been approved by Lessor, Lessee shall submit to Lessor the
name, address, license number and evidence of insurance of Lessee's proposed
contractor ("Lessee's Contractor") for Lessor's review and approval (such
approval not to be unreasonably withheld). If Lessor deems, in its reasonable
discretion, that Lessee's proposed Contractor is unacceptable, Lessee shall
resubmit information on a replacement contractor until a mutually approved
Contractor is selected. Upon said selection, Lessee shall enter into a
construction contract with the Contractor which shall include a provision for
compliance with the construction rules and regulations set forth in Paragraphs
70.1-70.9 below, and Lessee shall provide Lessor with a copy of said contract.
In no event shall Lessee be permitted to commence the Alterations without first
providing Lessor with the above-listed information relating to the Alterations.
Lessor shall have the right to post a notice of non-responsibility at a
prominent location within the Premises prior to the commencement of any
Alterations. All costs and expenses arising from the Alterations or any part
thereof shall be the sole and exclusive responsibility of Lessee to pay in a
prompt and timely fashion as such costs become due.

      70.1 Lessee's Contractor shall perform the Alterations in a manner and at
times which do not impede or delay of any work by Lessor in the Project.

                                   PAGE 27                 Initials _________
                                                              FORM STN-6-2/97



      70.2 Lessee's Contractor shall be responsible for the repair, replacement,
or clean-up of any damage caused in the Premises or the Project. Firelanes and
sidewalks may not be blocked or obstructed at any time.

      70.3 Lessee's Contractor shall contain its storage of materials and its
operations within the Premises and such other space as he may be assigned by
Lessor. Should Lessee's Contractor be assigned space outside of the Premises,
Lessee's Contractor shall move to such other space as Lessor shall direct from
time to time to avoid interference or delays with other work. Lessee's
Contractor shall. park construction vehicles in areas designated by Lessor.

      70.4 All trash and surplus construction materials shall be stored within
the Premises and shall be promptly removed from the Premises. Lessee's
Contractor shall not use common area trash enclosures or waste bins for disposal
of trash or surplus construction material.

      70.5 Noise emanating outside the Premises shall be kept to a minimum at
all times, and Lessee's Contractor shall not be permitted to interfere with the
conduct of other lessees' business or the performance of any work by another
lessee, or the general operation of the Project. Lessee's Contractor shall
coordinate the Alterations with any construction schedule for any work being
performed by or on behalf of Lessor or any other lessee, and that the
performance of the Alterations shall not interfere with Lessor's or any other
lessee's construction activities. If there be such interference or conflict,
notice thereof shall be given by Lessor to Lessee, and immediately after receipt
of such notice Lessee agrees to cease or cause to be terminated such
interference or conflict. Lessee further covenants and agrees that Lessee and
Lessee's Contractor shall comply with all reasonable directives of Lessor
governing permissible hours for construction. Lessee's Contractor shall notify
Lessor or Lessor's project manager of any planned work to be done on weekends or
other than normal job hours.

      70.6 Lessee and Lessee's Contractor are responsible for compliance with
all applicable codes and regulations of duly constituted authorities having
jurisdiction as far as the performance of the Alterations is concerned and for
all applicable safety regulations established by Lessor, OSHA, or other
regulatory agencies, and Lessee further agrees to indemnify and hold Lessor
harmless for Lessee's actions arising from the Alterations. Prior to
commencement of construction, Lessee shall submit to Lessor evidence of
insurance as required by the Lease and evidence of insurance for Lessee's
Contractor.

      70.7 Lessee's Contractor shall not post signs on any part of the Project
or on the Premises without Lessor's prior written approval.

      70.8 Lessee shall be responsible for and shall obtain and record a Notice
of Completion promptly following completion of the Lessee's Work.

      70.9 All required permits and approvals, including, without limitation,
Planning, Building, Fire, and Health department permits, must be obtained and
all necessary calculations, including, without limitation, those required under
Title 24, must be submitted to the local governing agencies for all Alterations.

71. NO LESSOR LIABILITY. Lessor shall not be liable for any loss, cost, damage,
or expense incurred or claimed by Lessee or any other person or party on account
of the construction or installation of the Alterations. Lessee hereby
acknowledges and agrees that the compliance of the Alterations and Lessee's
Plans, with all applicable governmental laws, codes, and regulations shall be
solely Lessee's responsibility. Lessor assumes no liability or responsibility
resulting from the failure of the Lessee to comply with all applicable
governmental laws, codes and regulations or for any defect in any of the
Alterations. Lessee further agrees to indemnify, defend, and hold harmless
Lessor from all losses, liabilities, actions, damages, costs and expenses
claimed, asserted, or arising in connection with any of the foregoing.

                                   PAGE 28                 Initials _________
                                                              FORM STN-6-2/97



                                                 
LESSOR:                                             LESSEE:

CAROL CANYON PROPERTIES, LLC,                       PETCO ANIMAL SUPPLIES, INC.,
a California limited liability company              a Delaware corporation
                                                    By:  /s/ JAMES M. MYERS
By:  /s/ MICHAEL J. ELLIS                               -----------------------------
    ---------------------------------------------        James M. Myers
     Michael J. Ellis, as Trustee of the                 Executive Vice President and
     Michael J. and Monica I. Ellis Family Trust,        Chief Financial Officer
     Manager
                                                    By:  /s/ GARY L. GRAHAM
By:  /s/ BRIAN HUSTER                                   -----------------------------
    ---------------------------------------------        Gary L. Graham
     Brian Huster                                        Vice President - Real Estate
     Manager



                                   PAGE 29                 Initials _________
                                                              FORM STN-6-2/97

EX-10.22

                                                                   Exhibit 10.22
PETCO ANIMAL SUPPLIES, INC.
Deferred Compensation Plan
MASTER PLAN DOCUMENT
================================================================================










                            EFFECTIVE JANUARY 1, 2001














                                TABLE OF CONTENTS
                                                                                                            PAGE
                                                                                                         
               PURPOSE........................................................................................1

ARTICLE 1      DEFINITIONS....................................................................................1

ARTICLE 2      SELECTION, ENROLLMENT, ELIGIBILITY.............................................................7

      2.1      SELECTION BY COMMITTEE.........................................................................7
      2.2      ENROLLMENT REQUIREMENTS........................................................................7
      2.3      ELIGIBILITY; COMMENCEMENT OF PARTICIPATION.....................................................7
      2.4      TERMINATION OF PARTICIPATION AND/OR DEFERRALS..................................................7

ARTICLE 3      DEFERRAL COMMITMENTS/COMPANY MATCHING/CREDITING TAXES..........................................7

      3.1      MINIMUM AND MAXIMUM DEFERRALS..................................................................7
      3.2      ELECTION TO DEFER; EFFECT OF ELECTION FORM.....................................................8
      3.3      WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS.........................................................8
      3.4      CEO DISCRETIONARY AWARD AMOUNT.................................................................9
      3.5      ANNUAL COMPANY MATCHING AMOUNT.................................................................9
      3.6      INVESTMENT OF TRUST ASSETS.....................................................................9
      3.7      VESTING........................................................................................9
      3.8      CREDITING/DEBITING OF ACCOUNT BALANCES........................................................10
      3.9      FICA AND OTHER TAXES..........................................................................11

ARTICLE 4      SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL EMERGENCIES; WITHDRAWAL ELECTION; 401(k)
               ROLL-OVER.....................................................................................12

      4.1      SHORT-TERM PAYOUT.............................................................................12
      4.2      OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM................................................12
      4.3      WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES.........................12
      4.4      WITHDRAWAL ELECTION...........................................................................13

ARTICLE 5      RETIREMENT BENEFIT............................................................................13

      5.1      RETIREMENT BENEFIT............................................................................13
      5.2      PAYMENT OF RETIREMENT BENEFIT.................................................................13
      5.3      DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT...............................................13

ARTICLE 6      PRE-RETIREMENT SURVIVOR BENEFIT...............................................................14

      6.1      PRE-RETIREMENT SURVIVOR BENEFIT...............................................................14
      6.2      PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT....................................................14



                                      -i-


                                                                                                          
ARTICLE 7      TERMINATION BENEFIT...........................................................................15

      7.1      TERMINATION BENEFIT...........................................................................15
      7.2      PAYMENT OF TERMINATION BENEFIT................................................................15

ARTICLE 8      DISABILITY WAIVER AND BENEFIT.................................................................15

      8.1      DISABILITY WAIVER.............................................................................15
      8.2      CONTINUED ELIGIBILITY; DISABILITY BENEFIT.....................................................15

ARTICLE 9      BENEFICIARY DESIGNATION.......................................................................16

      9.1      BENEFICIARY...................................................................................16
      9.2      BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT..............................................16
      9.3      ACKNOWLEDGEMENT...............................................................................16
      9.4      NO BENEFICIARY DESIGNATION....................................................................16
      9.5      DOUBT AS TO BENEFICIARY.......................................................................16
      9.6      DISCHARGE OF OBLIGATIONS......................................................................16

ARTICLE 10     LEAVE OF ABSENCE..............................................................................16

      10.1     PAID LEAVE OF ABSENCE.........................................................................16
      10.2     UNPAID LEAVE OF ABSENCE.......................................................................16

ARTICLE 11     TERMINATION, AMENDMENT OR MODIFICATION........................................................17

      11.1     TERMINATION...................................................................................17
      11.2     AMENDMENT.....................................................................................17
      11.3     PLAN AGREEMENT................................................................................17
      11.4     EFFECT OF PAYMENT.............................................................................18

ARTICLE 12     ADMINISTRATION................................................................................18

      12.1     COMMITTEE DUTIES..............................................................................18
      12.2     ADMINISTRATION UPON CHANGE IN CONTROL.........................................................18
      12.3     AGENTS........................................................................................19
      12.4     BINDING EFFECT OF DECISIONS...................................................................19
      12.5     INDEMNITY OF COMMITTEE........................................................................19
      12.6     EMPLOYER INFORMATION..........................................................................19

ARTICLE 13     OTHER BENEFITS AND AGREEMENTS.................................................................20

      13.1     COORDINATION WITH OTHER BENEFITS..............................................................20

ARTICLE 14     CLAIMS PROCEDURES.............................................................................20

      14.1     PRESENTATION OF CLAIM.........................................................................20


                                      -ii-



      14.2     NOTIFICATION OF DECISION......................................................................20
      14.3     REVIEW OF A DENIED CLAIM......................................................................20
      14.4     DECISION ON REVIEW............................................................................20
      14.5     LEGAL ACTION..................................................................................21

ARTICLE 15     TRUST.........................................................................................21

      15.1     ESTABLISHMENT OF THE TRUST....................................................................21
      15.2     INTERRELATIONSHIP OF THE PLAN AND THE TRUST...................................................21
      15.3     DISTRIBUTIONS FROM THE TRUST..................................................................21

ARTICLE 16     MISCELLANEOUS.................................................................................21

      16.1     STATUS OF PLAN................................................................................22
      16.2     UNSECURED GENERAL CREDITOR....................................................................22
      16.3     EMPLOYER'S LIABILITY..........................................................................22
      16.4     NONASSIGNABILITY..............................................................................22
      16.5     NOT A CONTRACT OF EMPLOYMENT..................................................................22
      16.6     FURNISHING INFORMATION........................................................................22
      16.7     TERMS.........................................................................................22
      16.8     CAPTIONS......................................................................................23
      16.9     GOVERNING LAW.................................................................................23
      16.10    NOTICE........................................................................................23
      16.11    SUCCESSORS....................................................................................23
      16.13    VALIDITY......................................................................................23
      16.14    INCOMPETENT...................................................................................23
      16.16    DISTRIBUTION IN THE EVENT OF TAXATION.........................................................23
      16.17    INSURANCE.....................................................................................24
      16.18    LEGAL FEES TO ENFORCE RIGHTS AFTER CHANGE IN CONTROL..........................................24





                                     -iii-



                           PETCO ANIMAL SUPPLIES, INC.
                           DEFERRED COMPENSATION PLAN
                            Effective January 1, 2001
                                     PURPOSE

         The purpose of this Plan is to provide specified benefits to a select
group of management and highly compensated Employees and Directors who
contribute materially to the continued growth, development and future business
success of PETCO Animal Supplies, Inc., a Delaware corporation, and its
subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for
tax purposes and for purposes of Title I of ERISA.

                                    ARTICLE 1
                                   DEFINITIONS

         For purposes of this Plan, unless otherwise clearly apparent from the
context, the following phrases or terms shall have the following indicated
meanings:

1.1      "Account Balance" shall mean, with respect to a Participant, a credit
         on the records of the Employer equal to the sum of (i) the Deferral
         Account balance, (ii) the vested CEO Discretionary Award Account
         Balance, (iii) the vested Company Matching Account balance, and (iv)
         any prior account balances, as of December 31, 2000, held under PETCO
         Animal Supplies, Inc. Nonqualified Deferred Compensation Plans 1001 and
         1002. The Account Balance, and each other specified account balance,
         shall be a bookkeeping entry only and shall be utilized solely as a
         device for the measurement and determination of the amounts to be paid
         to a Participant, or his or her designated Beneficiary, pursuant to
         this Plan.

1.2      "Annual Base Salary" shall mean the annual cash compensation relating
         to services performed during any calendar year, excluding bonuses,
         commissions, overtime, fringe benefits, stock options, relocation
         expenses, incentive payments, non-monetary awards, directors fees and
         other fees, automobile and other allowances paid to a Participant for
         employment services rendered (whether or not such allowances are
         included in the Employee's gross income). Annual Base Salary shall be
         calculated before reduction for compensation voluntarily deferred or
         contributed by the Participant pursuant to all qualified or
         non-qualified plans of the Employer (including this Plan) and shall be
         calculated to exclude amounts not otherwise included in the
         Participant's gross income under Code Sections 125, 402(e)(3), 402(h),
         or 403(b) pursuant to plans established by the Employer; provided
         however, that all such amounts will be included in compensation only to
         the extent that, had there been no such plan, the amount would have
         been payable in cash to the Employee.

1.3      "Annual Company Matching Amount" for any one Plan Year shall be the
         amount determined in accordance with Section 3.5.

1.4      "Annual Deferral Amount" shall mean that portion of a Participant's
         Annual Base Salary, Bonus and Directors Fees that a Participant elects
         to have deferred, and is deferred, in accordance with Article 3, for
         any one Plan Year. In the event of a Participant's Retirement,
         Disability (if deferrals cease in accordance with Section 8.1), death
         or a Termination of Employment prior to the end of a Plan Year, such
         year's Annual Deferral Amount shall be the actual amount withheld prior
         to such event.



                                      -1-


1.5      "Annual Installment Method" shall be an annual installment payment over
         the number of years selected by the Participant in accordance with this
         Plan, calculated as follows: The Account Balance of the Participant
         shall be calculated as of the last business day of each calendar year.
         Payments due to be made in any year shall be paid as soon as
         practicable after the beginning of the year, based upon the
         participant's Account Balance as of the end of the prior year. The
         annual installment shall be calculated by multiplying this balance by a
         fraction, the numerator of which is one, and the denominator of which
         is the remaining number of annual payments due the Participant. By way
         of example, if the Participant elects a 10 year Annual Installment
         Method, the first payment shall be 1/10 of the Account Balance,
         calculated as described in this definition. The following year, the
         payment shall be 1/9 of the Account Balance, calculated as described in
         this definition.

1.6      "Beneficiary" shall mean one or more persons, trusts, estates or other
         entities, designated in accordance with Article 9, that are entitled to
         receive benefits under this Plan upon the death of a Participant.

1.7      "Beneficiary Designation Form" shall mean the form established from
         time-to-time by the Committee that a Participant completes, signs and
         returns to the Committee to designate one or more Beneficiaries.

1.8      "Board" shall mean the board of directors of the Company.

1.9      "Bonus" shall mean any cash compensation, in addition to Annual Base
         Salary relating to services performed during any calendar year, whether
         or not paid in such calendar year or included on the Federal Income Tax
         Form W-2 for such calendar year, payable to a Participant as an
         Employee under the Employer's Bonus plans, excluding stock options.
         Bonus awards which relate to periods of more than one year, or which
         are discretionary, will be treated as related to the year in which all
         events have occurred which make the bonus both calculable and payable.

1.10     "CEO Discretionary Award Account" shall mean (i) the sum of the
         Participant's CEO Discretionary Award Amounts, plus (ii) amounts
         credited in accordance with all the applicable crediting provisions of
         this Plan that relate to the Participant's CEO Discretionary Award
         Account, less (iii) all distributions made to the Participant, or his
         or her Beneficiary, pursuant to this Plan that relate to the
         Participant's CEO Discretionary Award Account.

1.11     "CEO Discretionary Award Amount" shall mean, for any one Plan Year, the
         amount determined in accordance with Section 3.4.

1.12     "Change in Control" means:

         (a)      Any Person (as that term is used in Sections 13 and 14(d)(2)
                  of the Securities Exchange Act of 1934, other than the Company
                  or any of its subsidiaries, a trustee or other fiduciary
                  holding securities under an employee benefit plan of the
                  Company, or a corporation owned directly or indirectly by the
                  shareowners of the Company in substantially the same
                  proportions as their ownership of stock of the Company), or an
                  underwriter temporarily holding securities pursuant to an
                  offering of securities, becomes the Beneficial Owner (as used
                  in Section 13(d) of the Securities Exchange Act of 1934),
                  directly or indirectly, of securities of the Company
                  (excluding from the securities beneficially owned by such
                  Person any securities acquired directly from the Company or
                  its affiliates pursuant to



                                      -2-


                  express authorization by the Board citing this exception)
                  representing fifty percent (50%) or more of the combined
                  voting power of the Company's then outstanding voting
                  securities and representing more than the voting power then
                  held by the shareowner that was the largest shareowner at the
                  time conversion occurred; or;

         (b)      During any period of two (2) consecutive years (not including
                  any period prior to the Effective Date), individuals who at
                  the beginning of such period constitute the Board (and any new
                  director, whose election by the Company's shareowners was
                  approved by a vote of at least two-thirds (2/3) of the
                  directors then still in office who either were directors at
                  the beginning of the period or whose election or nomination
                  for election was so approved), (collectively the "Continuing
                  Directors"), cease for any reason to constitute a majority
                  thereof; provided, however, that individuals who are appointed
                  to the Board pursuant to or in accordance with the terms of an
                  agreement related to a merger, consolidation, or share
                  exchange involving the Company (or any direct or indirect
                  subsidiary of the Company) shall not be Continuing Directors
                  for purposes of this Agreement until after such individuals
                  are first nominated for election by a vote of at least
                  two-thirds (2/3) of the then Continuing Directors and are
                  thereafter elected as directors by the shareowners of the
                  Company at a meeting of shareowners held following
                  consummation of such merger, consolidation, or share exchange;
                  or

         (c)      Any of the following occurs: [a] the Directors (and, if
                  needed, the Company's shareowners) approve a plan of complete
                  liquidation of the Company; or [b] the sale, lease, exchange,
                  transfer or other disposition of all or substantially all the
                  Company's assets; or [c] a merger, consolidation, share
                  exchange, or reorganization of the Company with or involving
                  any other corporation, other than a merger, consolidation,
                  share exchange or reorganization that would result in the
                  voting securities of the Company outstanding immediately prior
                  thereto continuing to represent (either by remaining
                  outstanding or by being converted into voting securities of
                  the surviving entity), more than fifty percent (50%) of the
                  combined voting power of the voting securities of the Company
                  (or such surviving entity) outstanding immediately after such
                  merger, consolidation, share exchange or reorganization.

                  However, in no event shall a "Change in Control" be deemed to
                  have occurred, with respect to a Participant, if the
                  Participant is part of a purchasing group which consummates
                  the Change-in-Control transaction. A Participant shall be
                  deemed "part of a purchasing group" for purposes of the
                  preceding sentence if the Participant is an equity participant
                  in the purchasing company or group (except for: (i) passive
                  ownership of less than three percent (3%) of the stock of the
                  purchasing company; or (ii) ownership of equity participation
                  in the purchasing company or group which is otherwise not
                  significant, as determined prior to the Change in Control by a
                  majority of the nonemployee directors).

                  The determination of whether a Change in Control has occurred
                  shall be made by the Committee upon request of the Company or
                  the Participant (or beneficiary if Participant is deceased).
                  The Committee may require the Company to furnish evidence to
                  determine, or to enable the Committee to determine whether a
                  Change in Control has occurred. In performing any of its
                  obligations or taking any discretionary action under this
                  Agreement



                                      -3-


                  which is dependent upon a Change in Control having occurred,
                  the Committee will be fully protected in relying on its
                  determination, which may be based upon opinion of counsel
                  selected by the Committee that a Change in Control has
                  occurred, unless such a determination arises out of the
                  Committee's gross negligence or willful misconduct. The
                  Committee determination whether a Change in Control has
                  occurred shall be communicated by the Committee to the Company
                  and to the Participant (and beneficiary, if applicable) and
                  shall be binding and conclusive on all persons.

1.13      "Claimant" shall have the meaning set forth in Section 14.1.

1.14     "Code" shall mean the Internal Revenue Code of 1986, as it may be
         amended from time-to-time.

1.15     "Committee" shall mean the committee described in Article 12.

1.16     "Company" shall mean PETCO Animal Supplies, Inc., a Delaware
         corporation, and any successor to all, or substantially all, of the
         Company's assets or business.

1.17     "Company Matching Account" shall mean (i) the sum of all of a
         Participant's Annual Company Matching Amounts, plus (ii) amounts
         credited in accordance with all the applicable crediting provisions of
         this Plan that relate to the Participant's Company Matching Account,
         less (iii) all distributions made to the Participant, or his or her
         Beneficiary, pursuant to the Plan that relate to the Participant's
         Company Matching Account.

1.18     "Deduction Limitation" shall mean the following described limitation on
         a benefit that may otherwise be distributable pursuant to the
         provisions of this Plan. Except as otherwise provided, this limitation
         shall be applied to all distributions that are "subject to the
         Deduction Limitation" under this Plan. If the Employer determines in
         good faith prior to a Change in Control that there is a reasonable
         likelihood that any compensation paid to a Participant for a taxable
         year of the Employer would not be deductible by the Employer solely by
         reason of the limitation under Code Section 162(m), then to the extent
         deemed necessary by the Employer to ensure that the entire amount of
         any distribution to the Participant pursuant to this Plan prior to the
         Change in Control is deductible, the Employer may defer all or any
         portion of a distribution under this Plan. Any amounts deferred
         pursuant to this limitation shall continue to be credited/debited with
         additional amounts in accordance with Section 3.8 below, even if such
         amount is being paid out in installments. The amounts so deferred and
         amounts credited thereon shall be distributed to the Participant or his
         or her Beneficiary (in the event of the Participant's death) at the
         earliest possible date, as determined by the Employer in good faith, on
         which the deductibility of compensation paid or payable to the
         Participant for the taxable year of the Employer during which the
         distribution is made will not be limited by Section 162(m), or if
         earlier, the effective date of a Change in Control. Notwithstanding
         anything to the contrary in this Plan, the Deduction Limitation shall
         not apply to any distributions made after a Change in Control.

1.19     "Deferral Account" shall mean (i) the sum of all of a Participant's
         Annual Deferral Amounts, plus (ii) amounts credited in accordance with
         all the applicable crediting provisions of this Plan that relate to the
         Participant's Deferral Account, less (iii) all distributions made to
         the Participant or his or her Beneficiary pursuant to this Plan that
         relate to his or her Deferral Account.

1.20     "Director" shall mean any member of the board of directors of the
         Company.


                                      -4-


1.21     "Directors Fees" shall mean the annual fees paid by any Employer,
         including retainer fees, meetings fees and committee chair fees, as
         compensation for serving on the board of directors.

1.22     "Disability" shall mean a period of disability during which a
         Participant qualifies for permanent disability benefits under the
         Employer's long-term disability plan, or if a Participant does not
         participate in such a plan, a period of disability during which the
         Participant would have qualified for permanent disability benefits
         under such a plan had the Participant been a participant in such a
         plan, as determined in the sole discretion of the Committee. If the
         Employer does not sponsor such a plan, or discontinues to sponsor such
         a plan, Disability shall be determined by the Committee in its sole
         discretion.

1.23     "Disability Benefit" shall mean the benefit set forth in Article 8.

1.24     "Election Form" shall mean the form established from time to time by
         the Committee that a Participant completes, signs and returns to the
         Committee to make an election under the Plan.

1.25     "Employee" shall mean a person who is an employee of the Employer.

1.26     "Employer" shall mean the Company and/or each of its subsidiaries (now
         in existence or hereafter formed or acquired) that have been selected
         by the Board to participate in the Plan and have adopted the Plan as a
         sponsor.

1.27     "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
         as it may be amended from time-to-time.

1.28     "401(k) Plan" shall be that certain PETCO Animal Supplies 401(k) Plan
         adopted by the Company, as it may be amended from time-to-time.

1.29     "Participant" shall mean any Employee or Director (i) who is selected
         to participate in the Plan, (ii) who elects to participate in the Plan,
         (iii) who signs a Plan Agreement, an Election Form and a Beneficiary
         Designation Form, (iv) whose signed Plan Agreement, Election Form and
         Beneficiary Designation Form are accepted by the Committee, (v) who
         commences participation in the Plan, and (vi) whose Plan Agreement has
         not terminated. A spouse or former spouse of a Participant shall not be
         treated as a Participant in the Plan, or have an account balance under
         the Plan, even if he or she has an interest in the Participant's
         benefits under the Plan as a result of applicable law or property
         settlements resulting from legal separation or divorce.

1.30     "Plan" shall mean the Company's Deferred Compensation Plan, which shall
         be evidenced by this instrument and by each Plan Agreement, as may be
         further amended from time-to-time.

1.31     "Plan Agreement" shall mean a written agreement, as may be amended from
         time-to-time, which is entered into by and between the Employer and a
         Participant. Each Plan Agreement executed by a Participant and the
         Employer shall provide for the entire benefit to which such Participant
         is entitled under the Plan; should there be more than one Plan
         Agreement, the Plan Agreement bearing the latest date of acceptance by
         the Employer shall supersede all previous Plan Agreements in their
         entirety and shall govern such entitlement. The terms of any Plan
         Agreement may be different for any Participant, and any Plan Agreement
         may provide additional benefits not set forth in the Plan or limit the
         benefits otherwise provided under the Plan; provided however, that any
         such additional benefits, or benefit limitations, must be agreed to by
         both the Employer and the Participant.


                                      -5-


1.32     "Plan Year" shall mean a period beginning on January 1 of each calendar
         year and continuing through December 31 of such calendar year.

1.33     "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in
         Article 6.

1.34     "Retirement", "Retire(s)" or "Retired" shall mean, with respect to an
         Employee, severance from employment from the Employer for any reason
         other than a leave of absence, death or Disability at such time as (i)
         the Employee's age equals sixty-five (65), or (ii) the Employee has at
         least six (6) Years of Service and the sum of the Employee's age and
         Years of Service equals fifty-five (55) or more; and shall mean with
         respect to a Director who is not an Employee, severance of his or her
         directorships with the Employer. If a Participant is both an Employee
         and a Director, Retirement shall not occur until he or she Retires as
         both an Employee and a Director; provided however, that such a
         Participant may elect, at least one year prior to Retirement, and in
         accordance with the policies and procedures established by the
         Committee, to Retire for purposes of this Plan at the time he or she
         Retires as an Employee.

1.35     "Retirement Benefit" shall mean the benefit set forth in Article 5.

1.36     "Short-Term Payout" shall mean the payout set forth in Section 4.1.

1.37     "Termination Benefit" shall mean the benefit set forth in Article 7.

1.38     "Termination of Employment" shall mean the severing of employment with
         all Employers, or service as a Director of the Employer, voluntarily or
         involuntarily, for any reason other than Retirement, Disability, death
         or an authorized leave of absence. If a Participant is both an Employee
         and a Director, a Termination of Employment shall occur only upon the
         termination of the last position held; provided however, that such a
         Participant may elect, at least one year before Termination of
         Employment and in accordance with the policies and procedures
         established by the Committee, to be treated for purposes of this Plan
         as having experienced a Termination of Employment at the time he or she
         ceases employment with an Employer as an Employee.

1.39     "Trust" shall mean the grantor trust established pursuant to the Trust
         Agreement, attached hereto as Exhibit 1, as amended from time-to-time.

1.40     "Trustee" shall mean the designated Trustee acting at any time under
         the Trust.

1.41     "Unforeseeable Financial Emergency" shall mean an unanticipated
         emergency that is caused by an event beyond the control of the
         Participant that would result in severe financial hardship to the
         Participant resulting from (i) a sudden and unexpected illness or
         accident of the Participant or a dependent of the Participant, (ii) a
         loss of the Participant's property due to casualty, or (iii) such other
         extraordinary and unforeseeable circumstances arising as a result of
         events beyond the control of the Participant, all as determined in the
         sole discretion of the Committee.

1.42     "Years of Service" shall mean the total number of full years in which a
         Participant has been employed by one or more Employers. For purposes of
         this definition, a year of employment shall be a 365 day period (or 366
         day period in the case of a leap year) that, for the first year of
         employment, commences on the Employee's date of hiring and ends on the
         anniversary of that date and that for the second year commences on
         first day of the Plan Year during which the first year ended and for
         each subsequent year is the Plan Year.



                                      -6-


                                    ARTICLE 2
                       SELECTION, ENROLLMENT, ELIGIBILITY

2.1      SELECTION BY COMMITTEE. Participation in the Plan shall be limited to a
         select group of management and highly compensated Employees and
         Directors of the Employer, as determined by the Committee in its sole
         discretion. From that group, the Committee shall select, in its sole
         discretion, Employees and Directors to participate in the Plan. For
         purposes of the Plan, the phrase "select group of management or highly
         compensated employees" shall include, but not be limited to, those
         individuals employed as an executive officer, senior officer, or
         corporate officer of the Employer, all as determined by the Committee.

2.2      ENROLLMENT REQUIREMENTS. As a condition of participation, each selected
         Employee or Director shall complete, execute and return to the
         Committee a Plan Agreement, an Election Form and a Beneficiary
         Designation Form, all within 30 days after he or she is notified of
         selection to participate in the Plan. In addition, the Committee shall
         establish from time-to-time such other enrollment requirements as it
         determines in its sole discretion to be necessary.

2.3      ELIGIBILITY; COMMENCEMENT OF PARTICIPATION. Provided an Employee or
         Director selected to participate in the Plan has met all enrollment
         requirements set forth in this Plan and required by the Committee,
         including returning all required documents to the Committee within the
         specified time period, such Employee or Director shall commence
         participation in the Plan as soon as administratively practical
         following the date on which the Employee or Director completes all
         enrollment requirements. If an Employee or a Director fails to meet all
         such requirements within the period required, in accordance with
         Section 2.2, that Employee or Director shall not be eligible to
         participate in the Plan until the first day of the Plan Year following
         the delivery to, and acceptance by, the Committee of the required
         documents.

2.4      TERMINATION OF PARTICIPATION AND/OR DEFERRALS. If the Committee
         determines in good faith that a Participant no longer qualifies as a
         member of a select group of management or highly compensated employees,
         as membership in such group is determined in accordance with Sections
         201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the
         right, in its sole discretion, to (i) terminate any deferral election
         the Participant has made for the remainder of the Plan Year in which
         the Participant's membership status changes, (ii) prevent the
         Participant from making future deferral elections and/or (iii)
         immediately distribute the Participant's then Account Balance as a
         Termination Benefit and terminate the Participant's participation in
         the Plan.

                                    ARTICLE 3
              DEFERRAL COMMITMENTS/COMPANY MATCHING/CREDITING/TAXES

3.1      MINIMUM AND MAXIMUM DEFERRALS.

         (a)      ANNUAL BASE SALARY, BONUS AND DIRECTOR'S FEES. For each Plan
                  Year, a Participant may elect to defer, as his or her Annual
                  Deferral Amount, Annual Base Salary, Bonus and/or Director's
                  Fees in the following percentages or dollar amounts for each
                  deferral elected:


                                      -7-






                 ------------------------------- ------------------ -----------
                           DEFERRAL                MINIMUM AMOUNT     MAXIMUM
                                                                
                 ------------------------------- ------------------ -----------
                   Annual Base Salary                  N/A              75%
                 ------------------------------- ------------------ -----------
                   Bonus                               N/A              100%
                 ------------------------------- ------------------ -----------
                   Combined Annual Base Salary      $1,500.00           N/A
                   and Bonus
                 ------------------------------- ------------------ -----------
                   Directors Fees                   $1,500.00           100%
                 ------------------------------- ------------------ -----------


                  If an election is made for less than stated minimum amounts,
                  or if no election is made, the amount deferred shall be zero.

         (b)      SHORT PLAN YEAR. Notwithstanding the foregoing, if a
                  Participant first becomes a Participant after the first day of
                  a Plan Year, or in the case of the first Plan Year of the Plan
                  itself, the minimum Annual Base Salary deferral shall be an
                  amount equal to the minimum set forth above, multiplied by a
                  fraction, the numerator of which is the number of complete
                  months remaining in the Plan Year and the denominator of which
                  is 12. Notwithstanding the foregoing, if a Participant first
                  becomes a Participant after the first day of a Plan Year, or
                  in the case of the first Plan Year of the Plan itself, the
                  maximum Annual Deferral Amount, with respect to Annual Base
                  Salary, Bonus and Directors Fees shall be limited to the
                  amount of compensation not yet earned by the Participant as of
                  the date the Participant submits a Plan Agreement and Election
                  Form to the Committee for acceptance.

3.2      ELECTION TO DEFER; EFFECT OF ELECTION FORM.

         (a)      FIRST PLAN YEAR. In connection with a Participant's
                  commencement of participation in the Plan, the Participant
                  shall make an irrevocable deferral election for the Plan Year
                  in which the Participant commences participation in the Plan,
                  along with such other elections as the Committee deems
                  necessary or desirable under the Plan. For these elections to
                  be valid, the Election Form must be completed and signed by
                  the Participant, timely delivered to the Committee (in
                  accordance with Section 2.2 above) and accepted by the
                  Committee.

         (b)      SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an
                  irrevocable deferral election for that Plan Year, and such
                  other elections as the Committee deems necessary, or desirable
                  under the Plan, shall be made by every participant by timely
                  delivery to the Committee, in accordance with its rules and
                  procedures, before the end of the Plan Year preceding the Plan
                  Year for which the election is made. If no such Election Form
                  is timely delivered for a Plan Year, the Annual Deferral
                  Amount shall be zero for that Plan Year.

3.3      WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS. For each Plan Year, the Annual
         Base Salary portion of the Annual Deferral Amount shall be withheld
         from each regularly scheduled Annual Base Salary payroll period in
         equal amounts, as adjusted from time-to-time for increases and
         decreases in Annual Base Salary. The Bonus and/or Directors Fees
         portion of the Annual Deferral Amount shall be withheld at the time the
         Bonus or Directors Fees are, or otherwise would be paid, to the
         Participant.


                                      -8-


3.4      CEO DISCRETIONARY AWARD AMOUNT. For each Plan Year, and at any time
         during a Plan Year, an Employer, in its sole discretion may, but is not
         required to, credit any amount it desires, subject to approval by the
         Company's Board, to any Participant's CEO Discretionary Award Account
         under this Plan. The amount so credited to a Participant may be smaller
         or larger than the amount credited to any other Participant, and the
         amount credited to any Participant for a Plan Year may be zero, even
         though one or more other Participants may receive a CEO Discretionary
         Award Amount for that Plan year. The Discretionary Award Amount, if
         any, shall be credited as of the date the Employer presents the
         Discretionary Award to the Participant.

3.5      ANNUAL COMPANY MATCHING AMOUNT. A Participant's Annual Company Matching
         Amount for any Plan Year shall be equal to 50% of the Participant's
         Annual Deferral Amount for such Plan Year, but limited to a total of 6%
         of the Participant's Annual Base Salary, reduced by the maximum amount
         of matching contribution that could have been allocated to the
         Participant under the Company 401(k) Plan for the year of the 401(k)
         Plan that corresponds to the Plan Year, determined as if the
         Participant had contributed the maximum amount that would have been
         permitted for contribution by the Participant. If a Participant is not
         employed by the Employer, or is no longer providing services as a
         Director, as of the last day of a Plan Year other than by reason of his
         or her Retirement, death or termination of employment in a Plan Year
         during which there is a Change in Control, the Annual Company Matching
         Amount for such plan shall be zero. In the event of Retirement,
         Disability, death or termination of employment in a Plan Year during
         which there is a Change in Control, a Participant shall be credited
         with the Annual Company Matching Amount for the Plan Year in which he
         or she Retires, becomes disabled, dies or terminates during a Plan Year
         in which there is a Change in Control.

3.6      INVESTMENT OF TRUST ASSETS. The Trustee of the Trust shall be
         authorized, upon written instructions received from the Committee or
         investment manager appointed by the Committee, to invest and reinvest
         the assets of the Trust in accordance with the applicable Trust
         Agreement, including the disposition of stock and reinvestment of the
         proceeds in one or more investment vehicles designated by the
         Committee.

3.7      VESTING.

         (a)      A Participant shall at all times be 100% vested in his or her
                  Deferral Account.

         (b)      A Participant shall be vested in his or her CEO Discretionary
                  Award Account as follows: (i) with respect to all benefits
                  under this Plan other than the Termination Benefit, a
                  Participant's vested CEO Discretionary Award Account shall
                  equal 100% of such Participant's CEO Discretionary Award
                  Account; and (ii) with respect to the Termination Benefit, the
                  Participant shall vest in each of his or her CEO Discretionary
                  Award Amounts, and earnings or losses credited or debited
                  thereon, on the earlier of: (iii) a date selected by the chief
                  executive officer of the Company; or (iv) the third (3rd)
                  anniversary of the date such Discretionary Award Amount was
                  first credited to his or her Discretionary Award Account

         (d)             A Participant shall at all times be 100% vested in his
                  or her Company Matching Account. Notwithstanding anything to
                  the contrary contained in this Section 3.7, in the event of a
                  Change in Control, a Participant's CEO Discretionary Award
                  Account shall


                                      -9-


                  immediately become 100% vested (if it is not already vested in
                  accordance with the above vesting schedules).

                  Notwithstanding Section 3.7 and subsections 3.8(d), the
                  vesting schedule for a Participant's CEO Discretionary Award
                  Account shall not be accelerated to the extent that the
                  Committee determines that such acceleration would cause the
                  deduction limitations of Section 280G of the Code to become
                  effective. In the event that all of a Participant's Company
                  Matching Account is not vested pursuant to such a
                  determination, the Participant may request independent
                  verification of the Committee's calculations with respect to
                  the application of Section 280G. In such case, the Committee
                  must provide to the Participant within 15 business days of
                  such a request an opinion from a nationally recognized
                  accounting firm selected by the Company (the "Accounting
                  Firm"). The opinion shall state the Accounting Firm's opinion
                  that any limitation in the vested percentage hereunder is
                  necessary to avoid the limits of Section 280G and contain
                  supporting calculations. The cost of such opinion shall be
                  paid for by the Company.

                  Notwithstanding anything to the contrary contained in this
                  Plan if a Participant admits to, is convicted of or pleads no
                  contest to embezzlement or theft of company assets or property
                  such Participant shall forfeit all or a portion of his or her
                  Account Balance as determined by the Company in its sole
                  discretion.

3.8      CREDITING/DEBITING OF ACCOUNT BALANCES. In accordance with, and subject
         to, the rules and procedures that are established from time to time by
         the Committee, in its sole discretion, amounts shall be credited or
         debited to a Participant's Account Balance in accordance with the
         following rules:

         (a)      ELECTION OF MEASUREMENT FUNDS. A Participant, in connection
                  with his or her initial deferral election in accordance with
                  Section 3.2(a) above, shall elect, on the Election Form, one
                  or more Measurement Fund(s) (as described in Section 3.8(c)
                  below) to be used to determine the additional amounts to be
                  credited to his or her Account Balance for the first day in
                  which the Participant commences participation in the Plan and
                  continuing thereafter for each subsequent day in which the
                  Participant participates in the Plan, unless changed in
                  accordance with the next sentence. Commencing with the first
                  business day that follows the Participant's commencement of
                  participation in the Plan and continuing thereafter for each
                  subsequent day in which the Participant participates in the
                  Plan, the Participant may (but is not required to) elect, by
                  submitting an Election Form to the Committee that is accepted
                  by the Committee, to change the portion of his or her Account
                  Balance allocated to each previously elected Measurement Fund.
                  If an election is made in accordance with the previous
                  sentence, it shall apply to the next business day and continue
                  thereafter for each subsequent day in which the Participant
                  participates in the Plan, unless changed in accordance with
                  the previous sentence.

         (b)      PROPORTIONATE ALLOCATION. In making any election described in
                  Section 3.8(a) above, the Participant shall specify on the
                  Election Form, in increments of whole percentage points, the
                  percentage of his or her Account Balance to be allocated to a
                  Measurement Fund (as if the Participant was making an
                  investment in that Measurement Fund with that portion of his
                  or her Account Balance).


                                      -10-


         (c)      MEASUREMENT FUNDS. The Participant may elect one or more
                  measurement funds (the "Measurement Funds") for the purpose of
                  crediting and/or debiting amounts to his or her Account
                  Balance. The available Measurement Funds will be selected by
                  the Committee, in its sole discretion, and communicated to
                  Participants in the enrollment materials or in periodic
                  notices.

                  As necessary, the Committee may, in its sole discretion,
                  discontinue, substitute or add a Measurement Fund.

         (d)      CREDITING OR DEBITING METHOD. The performance of each elected
                  Measurement Fund (either positive or negative) will be based
                  on the performance of the Measurement Funds themselves. A
                  Participant's Account Balance shall be credited or debited on
                  a daily basis based on the performance of each Measurement
                  Fund selected by the Participant as though (i) a Participant's
                  Account Balance were invested in the Measurement Fund(s)
                  selected by the Participant, in the percentages applicable to
                  such business day at the closing price on such date; (ii) the
                  portion of the Annual Deferral Amount that was actually
                  deferred during any day was invested in the Measurement
                  Fund(s) selected by the Participant no later than the close of
                  business on the first business day after the day on which such
                  amounts are actually deferred from the Participant's Annual
                  Base Salary through reductions in his or her payroll, at the
                  closing price on such date; and (iii) any distribution made to
                  a Participant that decreases such Participant's Account
                  Balance ceased being invested in the Measurement Fund(s), in
                  the percentages applicable to such day, no earlier than one
                  business day prior to the distribution, at the closing price
                  on such date. The Participant's Annual Company Matching Amount
                  shall be credited to his or her Company Matching Account for
                  purposes of this Section 3.8(d) as of the close of business on
                  the first business day in February of the Plan Year following
                  the Plan Year to which it relates.

         (e)      NO ACTUAL INVESTMENT. Notwithstanding any other provision of
                  this Plan that may be interpreted to the contrary, the
                  Measurement Funds are to be used for measurement purposes
                  only, and a Participant's election of any such Measurement
                  Fund, the allocation to his or her Account Balance thereto,
                  the calculation of additional amounts and the crediting or
                  debiting of such amounts to a Participant's Account Balance
                  SHALL NOT be considered or construed in any manner as an
                  actual investment of his or her Account Balance in any such
                  Measurement Fund. In the event that the Company or the Trustee
                  (as that term is defined in the Trust), in its own discretion,
                  decides to invest funds in any or all of the Measurement
                  Funds, no Participant shall have any rights in or to such
                  investments themselves. Without limiting the foregoing, a
                  Participant's Account Balance shall at all times be a
                  bookkeeping entry only and shall not represent any investment
                  made on his or her behalf by the Company or the Trust; the
                  Participant shall at all times remain an unsecured creditor of
                  the Company.

3.9      FICA AND OTHER TAXES.

         (a)      ANNUAL DEFERRAL AMOUNTS. For each Plan Year in which an Annual
                  Deferral Amount is being withheld from a Participant, the
                  Participant's Employer(s) shall withhold from that portion of
                  the Participant's Annual Base Salary and Bonus that is not
                  being deferred, in a


                                      -11-


                  manner determined by the Employer, the Participant's share of
                  FICA and other employment taxes on such Annual Deferral
                  Amount. If necessary, the Committee may reduce the Annual
                  Deferral Amount in order to comply with this Section 3.9.

         (b)      COMPANY MATCHING AMOUNTS AND CEO DISCRETIONARY AWARD AMOUNTS.
                  When a participant becomes vested in a portion of his or her
                  Company Matching Account and/or CEO Discretionary Award
                  Amount, the Employer shall withhold from the Participant's
                  Annual Base Salary and/or Bonus that is not deferred, in a
                  manner determined by the Employer, the Participant's share of
                  FICA and other employment taxes or such amount. If necessary,
                  the Committee may reduce the vested portion of the
                  Participant's Company Matching Account or CEO Discretionary
                  Award Amount, as the case may be, in order to comply with this
                  Section 3.9.

         (c)      DISTRIBUTIONS. The Employer, or the trustee of the Trust,
                  shall withhold from any payments made to a Participant under
                  this Plan all federal, state and local income, employment and
                  other taxes required to be withheld by the Employer, or the
                  trustee of the Trust, in connection with such payments, in
                  amounts and in a manner to be determined in the sole
                  discretion of the Employer and the trustee of the Trust.

                                    ARTICLE 4
             SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL EMERGENCIES;
                               WITHDRAWAL ELECTION

4.1      SHORT-TERM PAYOUT. In connection with each election to defer an Annual
         Deferral Amount, a Participant may irrevocably elect to receive a
         future "Short-Term Payout" from the Plan with respect to such Annual
         Deferral Amount. Subject to the Deduction Limitation, the Short-Term
         Payout shall be a lump sum payment in an amount that is equal to the
         Annual Deferral Amount plus amounts credited or debited in the manner
         provided in Section 3.8 above on that amount, determined at the time
         that the Short-Term Payout becomes payable (rather than the date of a
         Termination of Employment). Subject to the Deduction Limitation and the
         other terms and conditions of this Plan, each Short-Term Payout elected
         shall be paid out as soon as administratively practicable after the
         last day of any Plan Year designated by the Participant that is at
         least two Plan Years after the Plan Year in which the Annual Deferral
         Amount is actually deferred. By way of example, if a two year
         Short-Term Payout is elected for Annual Deferral Amounts that are
         deferred in the Plan Year commencing January 1, 2001, the two year
         Short-Term Payout would become payable as soon as administratively
         possible after January 1, 2004.

4.2      OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM. Should an event occur
         that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral
         Amount, plus amounts credited or debited thereon, that is subject to a
         Short-Term Payout election under Section 4.1 shall not be paid in
         accordance with Section 4.1, but shall be paid in accordance with the
         other applicable Article.

4.3      WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES.
         If the Participant experiences an Unforeseeable Financial Emergency,
         the Participant may petition the Committee to (i) suspend any deferrals
         required to be made by a Participant and/or (ii) receive a partial or
         full payout from the Plan. The payout shall not exceed the lesser of
         the Participant's



                                      -12-


         Account Balance, calculated as if such Participant were receiving a
         Termination Benefit, or the amount reasonably needed to satisfy the
         Unforeseeable Financial Emergency. If, subject to the sole discretion
         of the Committee, the petition for a suspension and/or payout is
         approved, suspension shall take effect upon the date of approval and
         any payout shall be made as soon as administratively practicable after
         the date of approval. The payment of any amount under this Section 4.3
         shall not be subject to the Deduction Limitation.

4.4      WITHDRAWAL ELECTION. A Participant (or, after a Participant's death,
         his or her Beneficiary) may elect, at any time, to withdraw all of his
         or her Account Balance, calculated as if there had occurred a
         Termination of Employment as of the day of the election, less a
         withdrawal penalty equal to 10% of such amount (the net amount shall be
         referred to as the "Withdrawal Amount"). This election can be made at
         any time, before or after Retirement, Disability, death or Termination
         of Employment, and whether or not the Participant (or Beneficiary) is
         in the process of being paid pursuant to an installment payment
         schedule. If made before Retirement, Disability or death, a
         Participant's Withdrawal Amount shall be his or her Account Balance
         calculated as if there had occurred a Termination of Employment as of
         the day of the election. No partial withdrawals of the Withdrawal
         Amount shall be allowed. The Participant (or his or her Beneficiary)
         shall make this election by giving the Committee advance written notice
         of the election in a form determined from time-to-time by the
         Committee. The Participant (or his or her Beneficiary) shall be paid
         the Withdrawal Amount as soon as administratively possible after his or
         her election. Once the Withdrawal Amount is paid, the Participant's
         participation in the Plan shall terminate and the Participant shall not
         be eligible to participate in the Plan for the remainder of the Plan
         Year in which the Withdrawal Amount is paid and the following Plan
         Year. The payment of this Withdrawal Amount shall not be subject to the
         Deduction Limitation.

                                    ARTICLE 5
                               RETIREMENT BENEFIT

5.1      RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant
         who Retires shall receive, as a Retirement Benefit, his or her Account
         Balance.

5.2      PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his or
         her commencement of participation in the Plan, shall elect on an
         Election Form to receive the Retirement Benefit in a lump sum or
         pursuant to an Annual Installment Method ranging from 2 to 10 years.
         The Participant may annually change his or her election to an allowable
         alternative payout period by submitting a new Election Form to the
         Committee, provided that any such Election Form is submitted at least 1
         year prior to the Participant's Retirement and is accepted by the
         Committee in its sole discretion. The Election Form most recently
         accepted by the Committee shall govern the payout of the Retirement
         Benefit. If a Participant does not make any election with respect to
         the payment of the Retirement Benefit, then such benefit shall be
         payable in a lump sum. The lump sum payment shall be made, or
         installment payments shall commence as soon as administratively
         practicable after the last day of the Plan Year in which the
         Participant Retires. Any payment made shall be subject to the Deduction
         Limitation.

5.3      DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant dies
         after Retirement, but before the Retirement Benefit is paid in full,
         the Participant's unpaid Retirement Benefit



                                      -13-



         payments shall continue and shall be paid to the Participant's
         Beneficiary (a) over the remaining number of years and in the same
         amounts as that benefit would have been paid to the Participant had the
         Participant survived, or (b) in a lump sum, if requested by the
         Beneficiary and allowed in the sole discretion of the Committee, that
         is equal to the Participant's unpaid remaining Account Balance.

                                    ARTICLE 6
                         PRE-RETIREMENT SURVIVOR BENEFIT

6.1      PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation,
         the Participant's Beneficiary shall receive a Pre-Retirement Survivor
         Benefit equal to the Participant's Account Balance if the Participant
         dies before he or she Retires, experiences a Termination of Employment,
         or suffers a Disability.

6.2      PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. The Pre-Retirement Survivor
         Benefit shall be payable in a lump sum. Despite the foregoing, if the
         Participant's Account Balance at the time of his or her death is more
         than $100,000, payment of the Pre-Retirement Survivor Benefit may be
         made in the sole discretion of the Committee, pursuant to an Annual
         Installment Method over 3 years. The lump sum payment shall be made, or
         installment payments shall commence as soon as administratively
         practicable after the last day of the Plan Year in which the Committee
         is provided with proof that is satisfactory to the Committee of the
         Participant's death. Any payment made shall be subject to the Deduction
         Limitation.



                                      -14-


                                    ARTICLE 7
                               TERMINATION BENEFIT

7.1      TERMINATION BENEFIT. Subject to the Deduction Limitation, the
         Participant shall receive a Termination Benefit, which shall be equal
         to the Participant's vested Account Balance if a Participant
         experiences a Termination of Employment prior to his or her Retirement,
         death or Disability.

7.2      PAYMENT OF TERMINATION BENEFIT. The Termination Benefit shall be
         payable in a lump sum if the Participant's Account Balance is less
         than, or equal to $100,000. If the Participant's Account Balance at the
         time of his or her Termination of Employment is greater than that
         amount, payment of the Termination of Employment Benefit shall be made
         pursuant to an Annual Installment Method over 3 years. Despite the
         foregoing, in the sole discretion of the Committee, a lump sum payment
         may be made in lieu of the Annual Installment method. The lump sum
         payment shall be made, or installment payments shall commence, as soon
         as administratively practicable after the Participant's Termination of
         Employment. Any payment made shall be subject to the Deduction
         Limitation.


                                    ARTICLE 8
                          DISABILITY WAIVER AND BENEFIT

8.1      DISABILITY WAIVER.

         (a)      WAIVER OF DEFERRAL. A Participant who is determined by the
                  Committee to be suffering from a Disability and is receiving
                  less than 100% of current Annual Base Salary shall be excused
                  from fulfilling that portion of the Annual Deferral Amount
                  commitment that would otherwise have been withheld from a
                  Participant's Annual Base Salary, Bonus and/or Directors Fees
                  for the Plan Year during which the Participant first suffers a
                  Disability. During the period of Disability, the Participant
                  shall not be allowed to make any additional deferral
                  elections, but will continue to be considered a Participant
                  for all other purposes of this Plan.

         (b)      RETURN TO WORK. If a Participant returns to employment, or
                  service as a Director, with an Employer, after a Disability
                  ceases, the Participant may elect to defer an Annual Deferral
                  Amount for the Plan Year following his or her return to
                  employment or service and for every Plan Year thereafter while
                  a Participant in the Plan; provided such deferral elections
                  are otherwise allowed and an Election Form is delivered to,
                  and accepted by, the Committee for each such election in
                  accordance with Section 3.2 above.

8.2      CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a
         Disability shall, for benefit purposes under this Plan, continue to be
         considered to be employed, or in the service of the Employer as a
         Director, and shall be eligible for the benefits provided for in
         Articles 4, 5, 6 or 7 in accordance with the provisions of those
         Articles.



                                      -15-


                                    ARTICLE 9
                             BENEFICIARY DESIGNATION

9.1      BENEFICIARY. Each Participant shall have the right, at any time, to
         designate his or her Beneficiary(ies) (both primary as well as
         contingent) to receive any benefits payable under the Plan to a
         beneficiary upon the death of a Participant. The Beneficiary designated
         under this Plan may be the same as, or different from, the Beneficiary
         designation under any other plan of the Employer in which the
         Participant participates.

9.2      BENEFICIARY DESIGNATION; CHANGE. A Participant shall designate his or
         her Beneficiary by completing and signing the Beneficiary Designation
         Form, and returning it to the Committee or its designated agent. A
         Participant shall have the right to change a Beneficiary by completing,
         signing and otherwise complying with the terms of the Beneficiary
         Designation Form and the Committee's rules and procedures, as in effect
         from time-to-time. Upon acceptance by the Committee of a new
         Beneficiary Designation Form, all Beneficiary designations previously
         filed shall be canceled. The Committee shall be entitled to rely on the
         last Beneficiary Designation Form filed by the Participant and accepted
         by the Committee prior to his or her death.

9.3      ACKNOWLEDGMENT. No designation or change in designation of a
         Beneficiary shall be effective until received in writing by the
         Committee or its designated agent.

9.4      NO BENEFICIARY DESIGNATION. If a Participant fails to designate a
         Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all
         designated Beneficiaries predecease the Participant or die prior to
         complete distribution of the Participant's benefits, then the
         Participant's designated Beneficiary shall be deemed to be his or her
         surviving spouse. If the Participant has no surviving spouse, the
         benefits remaining under the Plan to be paid to a Beneficiary shall be
         payable to the Participant's estate.

9.5      DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the
         proper Beneficiary to receive payments pursuant to this Plan, the
         Committee shall have the right, exercisable in its discretion, to cause
         the Employer to withhold such payments until this matter is resolved to
         the Committee's satisfaction.

9.6      DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a
         Beneficiary shall fully and completely discharge the Employer and the
         Committee from all further obligations under this Plan with respect to
         the Participant, and that Participant's Plan Agreement shall terminate
         upon such full payment of benefits.

                                   ARTICLE 10
                                LEAVE OF ABSENCE

10.1     PAID LEAVE OF ABSENCE. If a Participant is authorized by the Employer
         for any reason to take a paid leave of absence from the employment of
         the Employer, the Participant shall continue to be considered employed
         by the Employer and the Annual Deferral Amount shall continue to be
         withheld during such paid leave of absence in accordance with Section
         3.3.

10.2     UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the Employer
         for any reason to take an unpaid leave of absence from the employment
         of the Employer, the Participant shall continue



                                      -16-


         to be considered employed by the Employer and the Participant shall be
         excused from making deferrals until the earlier of the date the leave
         of absence expires, or the Participant returns to a paid employment
         status. Upon such expiration or return, deferrals shall resume for the
         remaining portion of the Plan Year in which the expiration or return
         occurs, based on the deferral election, if any, made for that Plan
         Year. If no election was made for that Plan Year, no deferral shall be
         withheld.

                                   ARTICLE 11
                     TERMINATION, AMENDMENT OR MODIFICATION

11.1     TERMINATION. Although the Employer anticipates that it will continue
         the Plan for an indefinite period of time, there is no guarantee that
         the Employer will continue the Plan, or will not terminate the Plan at
         any time in the future. Accordingly, the Employer reserves the right to
         discontinue its sponsorship of the Plan and/or to terminate the Plan at
         any time with respect to any, or all, of its participating Employees
         and Directors. Upon the termination of the Plan with respect to the
         Employer, the Plan Agreements of the affected Participants who are
         employed by the Employer, or in the service of that Employer as
         Directors, shall terminate and their Account Balances, determined as if
         they had experienced a Termination of Employment on the date of Plan
         termination or, if Plan termination occurs after the date upon which a
         Participant was eligible to Retire, then with respect to that
         Participant as if he or she had Retired on the date of Plan
         termination, shall be paid to the Participants as follows: Prior to a
         Change in Control, if the Plan is terminated with respect to all of its
         Participants, the Employer shall have the right, in its sole
         discretion, and notwithstanding any elections made by the Participant,
         to pay such benefits in a lump sum or pursuant to an Annual Installment
         Method of up to 10 years, with amounts credited and debited during the
         installment period as provided herein. If the Plan is terminated with
         respect to less than all of its Participants, the Employer shall be
         required to pay such benefits in a lump sum. After a Change in Control,
         the Employer shall be required to pay such benefits in a lump sum. The
         termination of the Plan shall not adversely affect any Participant or
         Beneficiary who has become entitled to the payment of any benefits
         under the Plan as of the date of termination; provided however, that
         the Employer shall have the right to accelerate installment payments
         without a premium or prepayment penalty by paying the remaining Account
         Balance in a lump sum.

11.2     AMENDMENT. The Employer reserves the right to amend any provisions of
         the Plan at any time without the consent of the Participant or any
         Beneficiary; provided however, that without a Participant's prior
         written consent, no such amendment shall impair, or adversely affect,
         the rights of any Participant or Beneficiary with respect to either any
         amounts deferred or contributions made or authorized before such
         amendment is made by the Employer or any earnings on such amounts
         credited to a Participant's Account Balance before such amendment. In
         no event will an amendment or modification of this Section 11.2, 11.3
         or Section 12.2 of the Plan be effective with respect to amounts
         credited to the Participant's Account Balance prior to the amendment,
         or earnings credited thereafter.

11.3     PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2 above,
         if a Participant's Plan Agreement contains benefits or limitations that
         are not in this Plan document, the Employer may only amend, or
         terminate, such provisions with the written consent of the Participant.


                                      -17-


11.4     EFFECT OF PAYMENT. The full payment of the applicable benefit under
         Articles 4, 5, 6, 7, 8 or 11 of the Plan shall completely discharge all
         obligations to a Participant and his or her designated Beneficiaries
         under this Plan and the Participant's Plan Agreement shall terminate.

                                   ARTICLE 12
                                 ADMINISTRATION

12.1     COMMITTEE DUTIES. Except as otherwise provided in this Article 12, this
         Plan shall be administered by the Compensation Committee
         ("Committee")of the Company. Members of the Committee may be
         Participants under this Plan. The Committee shall be the
         "Administrator" of the Plan. As Administrator, the Committee shall also
         have the discretion and authority to (i) make, interpret, and enforce
         all appropriate rules and regulations for the administration of this
         Plan and (ii) decide or resolve any and all questions including
         interpretations of this Plan, as may arise in connection with the Plan.
         Any individual serving on the Committee who is a Participant shall not
         vote or act on any matter relating solely to himself or herself. When
         making a determination or calculation, the Committee shall be entitled
         to rely on information furnished by a Participant, or the Company.

12.2     ADMINISTRATION UPON CHANGE IN CONTROL. Upon and after the occurrence of
         a Change in Control, all the responsibilities of the Committee, except
         the investment of Trust Assets, shall be transferred to an independent
         third party selected by the Trustee and approved by the individual who,
         immediately prior to such event, was the Company's Chief Executive
         Officer (the "Ex-CEO"). The independent third party shall have the
         discretionary power to determine all questions arising in connection
         with the administration of the Plan and the interpretation of the Plan
         and Trust including, but not limited to benefit entitlement
         determinations; provided however, upon and after the occurrence of a
         Change in Control, the independent third party shall have no power to
         direct the investment of Plan or Trust assets, or select any investment
         manager or custodial firm for the Plan or Trust. These investment
         powers/responsibilities shall remain with the Committee. Upon and after
         the occurrence of a Change in Control, the Company must: (1) pay all
         reasonable administrative expenses and fees of the independent third
         party; (2) indemnify the independent third party against any costs,
         expenses and liabilities including, without limitation, attorney's fees
         and expenses arising in connection with the performance of the
         independent third party hereunder, except with respect to matters
         resulting from the gross negligence, or willful misconduct, of the
         independent third party or its employees or agents; and (3) supply full
         and timely information to the independent third party on all matters
         relating to the Plan, the Trust, the Participants and their
         Beneficiaries, the Account Balances of the Participants, the date of
         circumstances of the Retirement, Disability, death or Termination of
         Employment of the Participants, and such other pertinent information as
         the independent third party may reasonably require. Upon and after a
         Change in Control, the independent third party may be terminated (and a
         replacement appointed) by the Trustee only with the approval of the
         Ex-CEO. If the Ex-CEO is not living or cannot be located or is
         incapacitated, the duties of the Ex-CEO shall default first to the
         Chief Operating Officer, if capable, if not, then the Chief Financial
         Officer if capable, and if not, then the Corporate Secretary, in each
         case meaning the individual last holding such office before the Change
         in Control. The Trustee shall make the determination



                                      -18-


         of capacity. Upon and after a Change in Control, the independent third
         party so selected may not be terminated by the Company.

12.3     AGENTS. In the administration of this Plan, the Committee may, from
         time-to-time, employ agents and delegate to them such administrative
         duties as it sees fit (including acting through a duly appointed
         representative) and may from time-to-time consult with counsel who may
         be counsel to the Employer.

12.4     BINDING EFFECT OF DECISIONS. The Administrator shall be vested with
         sole discretionary authority (i) to construe and interpret the Plan,
         its Trust, and related Plan documents (collectively referred to as
         "Documents"), their terms, and any rules and regulations promulgated
         thereunder, including but not limited to resolving ambiguities,
         inconsistencies and omissions, (ii) to construe and interpret the
         Federal and state laws and regulations that relate to the Documents,
         (iii) to decide all factual questions arising in connection with the
         Documents, and (iv) to decide all other questions arising in connection
         with the Documents, including but not limited to, determinations of
         eligibility, entitlement to benefits, and vesting. All findings of the
         Plan Administrator shall be final and shall be binding and conclusive
         upon all persons having any interest in the Plan and Trust.

12.5     INDEMNITY OF COMMITTEE. The Employer shall indemnify and hold harmless
         the members of the Committee, any Employee to whom the duties of the
         Committee may be delegated, and the Administrator against any and all
         claims, losses, damages, expenses or liabilities arising from any
         action or failure to act with respect to this Plan, except in the case
         of willful misconduct by the Committee, any of its members, any such
         Employee, or the Administrator.

12.6     EMPLOYER INFORMATION. To enable the Committee and/or Administrator to
         perform its functions, the Company and the Employer shall supply full
         and timely information to the Committee and/or Administrator, as the
         case may be, on all matters relating to the compensation of its
         Participants, the date and circumstances of the Retirement, Disability,
         death or circumstances of the Retirement, Disability, death or
         Termination of Employment of its Participants, and such other pertinent
         information as the Committee or Administrator may reasonably require.



                                      -19-


                                   ARTICLE 13
                          OTHER BENEFITS AND AGREEMENTS

13.1     COORDINATION WITH OTHER BENEFITS. The benefits provided for a
         Participant and Participant's Beneficiary under the Plan are in
         addition to any other benefits available to such Participant under any
         other plan or program for employees of the Employer. The Plan shall
         supplement and shall not supersede, modify or amend any other such plan
         or program except as may otherwise be expressly provided.

                                   ARTICLE 14
                                CLAIMS PROCEDURES

14.1     PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased
         Participant (such Participant or Beneficiary being referred to below as
         a "Claimant") may deliver to the Committee a written claim for a
         determination with respect to the amounts distributable to such
         Claimant from the Plan. The claim must state with particularity the
         determination desired by the Claimant.

14.2     NOTIFICATION OF DECISION. The Committee shall consider a Claimant's
         claim within a reasonable time, and shall notify the Claimant in
         writing:

         (a)      that the Claimant's requested determination has been made, and
                  that the claim has been allowed in full; or

         (b)      that the Committee has reached a conclusion contrary, in whole
                  or in part, to the Claimant's requested determination, and
                  such notice must set forth in a manner calculated to be
                  understood by the Claimant:

                  (i)      the specific reason(s) for the denial of the claim,
                           or any part of it;

                  (ii)     specific reference(s) to pertinent provisions of the
                           Plan upon which such denial was based;

                  (iii)    a description of any additional material or
                           information necessary for the Claimant to perfect the
                           claim, and an explanation of why such material or
                           information is necessary; and

                  (iv)     an explanation of the claim review procedure set
                           forth in Section 14.3 below.

14.3     REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from
         the Committee that a claim has been denied, in whole or in part, a
         Claimant (or the Claimant's duly authorized representative) may file
         with the Committee a written request for a review of the denial of the
         claim. Thereafter, but not later than 30 days after the review
         procedure began, the Claimant (or the Claimant's duly authorized
         representative):

         (a)      may review pertinent documents;

         (b)      may submit written comments or other documents; and/or

         (c)      may request a hearing, which the Committee, in its sole
                  discretion, may grant.

14.4     DECISION ON REVIEW. The Committee shall render its decision on review
         promptly, and not later than 60 days after the filing of a written
         request for review of the denial, unless a hearing is held


                                      -20-


         or other special circumstances require additional time, in which case
         the Committee's decision must be rendered within 120 days after such
         date. Such decision must be written in a manner calculated to be
         understood by the Claimant, and it must contain:

         (a)      specific reasons for the decision;

         (b)      specific reference(s) to the pertinent Plan provisions upon
                  which the decision was based; and

         (c)      such other matters as the Committee deems relevant.

14.5     LEGAL ACTION. A Claimant's compliance with the foregoing provisions of
         this Article 14 is a mandatory prerequisite to a Claimant's right to
         commence any legal action with respect to any claim for benefits under
         this Plan.

                                   ARTICLE 15
                                      TRUST

15.1     ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and
         the Employer shall at least annually transfer over to the Trust such
         cash and/or cash equivalent assets that are equal in amount to the
         increase in each Participant's Deferral Account Balance for the
         preceding twelve (12) month period. In addition, the Employer shall at
         least annually transfer over to the Trust such additional assets as the
         Employer determines, in its sole discretion, are necessary to provide,
         on a present value basis, for its respective future liabilities created
         with respect to the Annual Deferral Amounts, CEO Discretionary Award
         Amounts, and Company Matching Amounts for Employer's Participants for
         all periods prior to the transfer, as well as any debits and credits to
         the Participants' Account Balances for all periods prior to the
         transfer, taking into consideration the value of the assets in the
         trust at the time of the transfer. As soon as administratively
         practicable following a Change in Control, the Company shall transfer
         over to the Trust a sufficient amount of cash and/or cash equivalent
         assets so that the liquidation value of the Trust's cash and/or cash
         equivalent assets are at least equal to the sum of all Account Balances
         under the Plan which Account Balances shall include any Company
         Matching Amounts that have accrued during the Plan Year in which the
         Change in Control occurred.

15.2     INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan
         and the Plan Agreement shall govern the rights of a Participant to
         receive distributions pursuant to the Plan. The provisions of the Trust
         shall govern the rights of the Employer, Participants and the creditors
         of the Employer to the assets transferred to the Trust. The Employer
         shall at all times remain liable to carry out its obligations under the
         Plan.

15.3     DISTRIBUTIONS FROM THE TRUST. The Employer's obligations under the Plan
         may be satisfied with Trust assets distributed pursuant to the terms of
         the Trust, and any such distribution shall reduce the Employer's
         obligations under this Plan.

                                   ARTICLE 16
                                  MISCELLANEOUS


                                      -21-



16.1     STATUS OF PLAN. The Plan is intended to be a plan that is not qualified
         within the meaning of Code Section 401(a) and that "is unfunded and is
         maintained by an employer primarily for the purpose of providing
         deferred compensation for a select group of management or highly
         compensated employees" within the meaning of ERISA Sections 201(2),
         301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted
         to the extent possible in a manner consistent with that intent.

16.2     UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries,
         heirs, successors and assigns shall have no legal or equitable rights,
         interests or claims in any property or assets of the Employer. For
         purposes of the payment of benefits under this Plan, any and all of the
         Employer's assets shall be, and remain, the general, unpledged
         unrestricted assets of the Employer. The Employer's obligation under
         the Plan shall be merely that of an unfunded and unsecured promise to
         pay money in the future.

16.3     EMPLOYER'S LIABILITY. The Employer's liability for the payment of
         benefits shall be defined only by the Plan and the Plan Agreement, as
         entered into between the Employer and a Participant. The Employer shall
         have no obligation to a Participant under the Plan except as expressly
         provided in the Plan and his or her Plan Agreement.

16.4     NONASSIGNABILITY. Neither a Participant, nor any other person, shall
         have any right to commute, sell, assign, transfer, pledge, anticipate,
         mortgage or otherwise encumber, transfer, hypothecate, alienate or
         convey in advance of actual receipt, the amounts, if any, payable
         hereunder, or any part thereof, which are, and all rights to which are
         expressly declared to be, unassignable and non-transferable. No part of
         the amounts payable shall, prior to actual payment, be subject to
         seizure, attachment, garnishment or sequestration for the payment of
         any debts, judgments, alimony or separate maintenance owed by a
         Participant or any other person, be transferable by operation of law in
         the event of a Participant's, or any other person's, bankruptcy or
         insolvency or be transferable to a spouse as a result of a property
         settlement or otherwise.

16.5     NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan
         shall not be deemed to constitute a contract of employment between the
         Employer and the Participant. Such employment is hereby acknowledged to
         be an "at will" employment relationship that can be terminated at any
         time, for any reason, or no reason, with or without cause, and with or
         without notice, unless expressly provided in a written employment
         agreement. Nothing in this Plan shall be deemed to give a Participant
         the right to be retained in the service of the Employer, either as an
         Employee or a Director, or to interfere with the right of the Employer
         to discipline or discharge the Participant at any time.

16.6     FURNISHING INFORMATION. A Participant, or his or her Beneficiary, will
         cooperate with the Committee by furnishing any, and all information,
         requested by the Committee and take such other actions as may be
         requested in order to facilitate the administration of the Plan and the
         payments of benefits hereunder, including but not limited to, taking
         such physical examinations as the Committee may deem necessary.

16.7     TERMS. Whenever any words are used herein in the masculine, they shall
         be construed as though they were in the feminine in all cases where
         they would so apply; and whenever any words are used herein in the
         singular or in the plural, they shall be construed as though they were
         used in the plural or the singular, as the case may be, in all cases
         where they would so apply.



                                      -22-


16.8     CAPTIONS. The captions of the articles, sections and paragraphs of this
         Plan are for convenience only and shall not control or affect the
         meaning or construction of any of its provisions.

16.9     GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be
         construed and interpreted according to the internal laws of the State
         of California without regard to its conflicts of laws principles.

16.10    NOTICE. Any notice or filing required, or permitted, to be given to the
         Committee under this Plan shall be sufficient if in writing and
         hand-delivered, or sent by registered or certified mail, to the address
         below:

                         Compensation Committee
                         ---------------------------------------------
                         Attention: Compensation and Benefits Manager
                         ---------------------------------------------
                         PETCO Animal Supplies, Inc.
                         ---------------------------------------------
                         9125 Rehco Road
                         ---------------------------------------------
                         San Diego, CA  92121
                         ---------------------------------------------

         Such notice shall be deemed given as of the date of delivery or, if
         delivery is made by mail, as of the date shown on the postmark on the
         receipt for registration or certification.

         Any notice or filing required or permitted to be given to a Participant
         under this Plan shall be sufficient if in writing and hand-delivered,
         or sent by mail, to the last known address of the Participant.

16.11    SUCCESSORS. The provisions of this Plan shall bind and inure to the
         benefit of the Employer and its successors and assigns and the
         Participant and the Participant's designated Beneficiaries.

16.12    VALIDITY. In case any provision of this Plan shall be illegal or
         invalid for any reason, said illegality or invalidity shall not affect
         the remaining parts hereof, but this Plan shall be construed and
         enforced as if such illegal or invalid provision had never been
         inserted herein.

16.13    INCOMPETENT. If the Committee determines in its discretion that a
         benefit under this Plan is to be paid to a minor, a person declared
         incompetent or to a person incapable of handling the disposition of
         that person's property, the Committee may direct payment of such
         benefit to the guardian, legal representative, or person having the
         care and custody of such minor, incompetent or incapable person. The
         Committee may require proof of minority, incompetence, incapacity or
         guardianship, as it may deem appropriate prior to distribution of the
         benefit. Any payment of a benefit shall be a payment for the account of
         the Participant and the Participant's Beneficiary, as the case may be,
         and shall be a complete discharge of any liability under the Plan for
         such payment amount.

16.14    DISTRIBUTION IN THE EVENT OF TAXATION.

         (a)      IN GENERAL. If, for any reason, all or any portion of a
                  Participant's benefits under this Plan becomes taxable to the
                  Participant prior to receipt, a Participant may petition the
                  Committee before a Change in Control, or the Administrator
                  after a Change in Control, for a distribution of that portion
                  of his or her benefit that has become taxable. Upon the grant
                  of such a petition, which grant shall not be unreasonably
                  withheld (and, after a Change in Control, shall be granted),
                  the Employer shall distribute to the Participant


                                      -23-


                  immediately available funds in an amount equal to the taxable
                  portion of his or her benefit (which amount shall not exceed a
                  Participant's unpaid Account Balance under the Plan). If the
                  petition is granted, the tax liability distribution shall be
                  made within 90 days of the date when the Participant's
                  petition is granted. Such a distribution shall affect and
                  reduce the benefits to be paid under this Plan.

         (b)      TRUST. If the Trust terminates in accordance with its terms,
                  and benefits are distributed from the Trust to a Participant
                  in accordance therewith, the Participant's benefits under this
                  Plan shall be reduced to the extent of such distributions.

16.17    INSURANCE. The Employer, on their own behalf or on behalf of the
         trustee of the Trust, and, in their sole discretion, may apply for and
         procure insurance on the life of the Participant, in such amounts and
         in such forms as the Trust may choose. The Employer or the trustee of
         the Trust, as the case may be, shall be the sole owner and beneficiary
         of any such insurance. The Participant shall have no interest
         whatsoever in any such policy or policies, and at the request of the
         Employer shall submit to medical examinations and supply such
         information and execute such documents as may be required by the
         insurance company, or companies, to whom the Employer has applied for
         insurance.

16.18    LEGAL FEES TO ENFORCE RIGHTS AFTER CHANGE IN CONTROL. The Company and
         the Employer is aware that upon the occurrence of a Change in Control,
         the Board, or the board of directors of the Employer (which might then
         be composed of new members), or a shareholder of the Company or the
         Employer, or of any successor corporation might then cause or attempt
         to cause the Company, the Employer or such successor to refuse to
         comply with its obligations under the Plan and might cause or attempt
         to cause the Company or the Employer to institute, or may institute,
         litigation seeking to deny Participants the benefits intended under the
         Plan. In these circumstances, the purpose of the Plan could be
         frustrated. Accordingly, if, following a Change in Control, it should
         appear to any Participant that the Company, the Employer or any
         successor corporation has failed to comply with any of its obligations
         under the Plan or any agreement thereunder or, if the Company, such
         Employer or any other person takes any action to declare the Plan void
         or unenforceable or institutes any litigation or other legal action
         designed to deny, diminish or to recover from any Participant the
         benefits intended to be provided, then the Company and the Employer
         irrevocably authorize such Participant to retain counsel of his or her
         choice at the expense of the Company and the Employer (who shall be
         jointly and severally liable) to represent such Participant in
         connection with the initiation or defense of any litigation or other
         legal action, whether by or against the Company, the Employer or any
         director, officer, shareholder or other person affiliated with the
         Company, the Employer or any successor thereto in any jurisdiction.



                                      -24-


IN WITNESS WHEREOF, the Company has signed this Plan document as of this ___ day
of ________, 2000.


                            "Company"
                            PETCO Animal Supplies, Inc., a Delaware  corporation



                            By:
                                ----------------------------------
                            Title:
                                  --------------------------------



                                      -25-

EX-23.2

                                                                    Exhibit 23.2



                           INDEPENDENT AUDITOR'S CONSENT


The Board of Directors
Petco Animal Supplies, Inc.


We consent to the use of our report dated March 12, 2001, except for the
second paragraph of Note 1(c), which is as of January 30, 2002, with respect
to the consolidated balance sheets of Petco Animal Supplies, Inc. and
subsidiaries as of January 29, 2000 and February 3, 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended February 3, 2001,
included herein and to the reference to our firm under the heading "Experts"
in the prospectus.


                                            KPMG LLP


San Diego, California
January 30, 2002