-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WkKVjmkxyydhYtfWIA5puUsRT2w+/asXfTJ7JDa3DN5gyxpB9SXfm/XgvKNd7dfN s0kFfVzql1lOf+Il/JOEPA== 0000950152-03-005949.txt : 20030605 0000950152-03-005949.hdr.sgml : 20030605 20030605082705 ACCESSION NUMBER: 0000950152-03-005949 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030426 FILED AS OF DATE: 20030605 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OFFICEMAX INC /OH/ CENTRAL INDEX KEY: 0000929428 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 341573735 STATE OF INCORPORATION: OH FISCAL YEAR END: 0125 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13380 FILM NUMBER: 03733300 BUSINESS ADDRESS: STREET 1: 3605 WARRENSVILLE CENTER RD CITY: SHAKER HEIGHTS STATE: OH ZIP: 44122 BUSINESS PHONE: 2169216900 MAIL ADDRESS: STREET 1: 3605 WARRENSVILLE CENTER RD CITY: SHAKE HEIGHTS STATE: OH ZIP: 44122 10-Q 1 l01262ae10vq.txt OFFICEMAX, INC. 10-Q/QUARTER END 4-26-2003 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 26, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________. Commission file number 1-13380 OFFICEMAX, INC. --------------- (Exact name of registrant as specified in its charter) OHIO 34-1573735 ---- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122 (Address of principal executive offices) (zip code) (216) 471-6900 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Shares outstanding as of Title of each class June 4, 2003 ------------------- ------------ Common Shares, without par value 124,475,034 OFFICEMAX, INC. INDEX
Part I - Financial Information Page Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 Item 4. Controls and Procedures 24 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 25 Signatures 25 Certifications 26 Exhibit Index 28
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OFFICEMAX, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
APRIL 26, JANUARY 25, 2003 2003 ----------- ----------- (Unaudited) ASSETS Current Assets: Cash and equivalents $ 75,946 $ 137,143 Accounts receivable, net of allowances of $1,240 and $1,073, respectively 115,660 90,339 Merchandise inventories 946,085 927,679 Other current assets 32,310 27,585 ----------- ----------- Total current assets 1,170,001 1,182,746 Property and Equipment: Buildings and land 36,253 36,133 Leasehold improvements 192,140 183,547 Furniture, fixtures and equipment 649,787 645,466 ----------- ----------- Total property and equipment 878,180 865,146 Less: Accumulated depreciation (589,634) (567,709) ----------- ----------- Property and equipment, net 288,546 297,437 Other assets and deferred charges 14,686 14,763 Goodwill, net of accumulated amortization of $89,757 290,495 290,495 ----------- ----------- $ 1,763,728 $ 1,785,441 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - trade $ 440,796 $ 437,884 Accrued expenses and other liabilities 206,651 227,022 Accrued salaries and related expenses 43,607 60,190 Taxes other than income taxes 79,775 79,781 Redeemable preferred shares - Series B 21,750 21,750 Mortgage loan, current portion 130 128 ----------- ----------- Total current liabilities 792,709 826,755 Mortgage loan 1,354 1,390 Other long-term liabilities 159,210 157,587 ----------- ----------- Total liabilities 953,273 985,732 ----------- ----------- Commitments and contingencies -- -- Minority interest 19,517 19,264 Shareholders' Equity: Common stock, without par value; 200,000,000 shares authorized; 134,831,955 and 134,801,656 shares issued and outstanding, respectively 886,366 887,556 Deferred stock compensation (282) (153) Cumulative translation adjustment (2,829) (2,457) Retained deficit (4,082) (13,865) Less: Treasury stock, at cost (88,235) (90,636) ----------- ----------- Total shareholders' equity 790,938 780,445 ----------- ----------- $ 1,763,728 $ 1,785,441 =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets. 3 OFFICEMAX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited)
13 WEEKS ENDED --------------------------------- APRIL 26, APRIL 27, 2003 2002 ------------- ------------- Sales $ 1,226,460 $ 1,178,152 Cost of merchandise sold, including buying and occupancy costs 918,005 878,824 ------------- ------------- Gross profit 308,455 299,328 Store operating and selling expenses 264,403 257,213 General and administrative expenses 33,203 34,013 ------------- ------------- Total operating expenses 297,606 291,226 Operating income 10,849 8,102 Interest expense, net 469 1,341 ------------- ------------- Income before income taxes 10,380 6,761 Income tax benefit -- (57,500) Minority interest 597 743 ------------- ------------- Net income $ 9,783 $ 63,518 ============= ============= INCOME PER COMMON SHARE: Basic $ 0.08 $ 0.52 ============= ============= Diluted $ 0.08 $ 0.51 ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 124,233,000 123,204,000 ============= ============= Diluted 125,382,000 124,781,000 ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 OFFICEMAX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
13 WEEKS ENDED -------------------------- APRIL 26, APRIL 27, 2003 2002 --------- --------- CASH PROVIDED BY (USED FOR): OPERATIONS Net income $ 9,783 $ 63,518 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 22,045 22,071 Other, net 627 1,221 Changes in current assets and current liabilities: Increase in inventories (19,248) (73,335) Decrease in accounts payable (12,992) (65,978) (Increase) decrease in accounts receivable (20,772) 5,570 Decrease in accrued liabilities (24,570) (7,875) Store closing and asset impairment (5,382) (9,454) Other, net (11,385) (55,793) --------- --------- Net cash used for operations (61,894) (120,055) --------- --------- INVESTING Capital expenditures (16,745) (14,510) Other, net 66 (3,996) --------- --------- Net cash used for investing (16,679) (18,506) --------- --------- FINANCING Increase in revolving credit facilities -- 97,600 Payments of mortgage principal (34) (34) Increase in overdraft balances 15,962 19,583 Proceeds from the issuance of common stock, net 1,209 2,787 Other, net 390 (120) --------- --------- Net cash provided by financing 17,527 119,816 --------- --------- Effect of exchange rate changes on cash and equivalents (151) 422 --------- --------- Net decrease in cash and equivalents (61,197) (18,323) Cash and equivalents, beginning of the period 137,143 76,751 --------- --------- Cash and equivalents, end of the period $ 75,946 $ 58,428 ========= ========= SUPPLEMENTAL INFORMATION Interest paid on debt $ 19 $ 256 ========= ========= Taxes paid on income (excluding tax refunds) $ 73 $ 115 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 OFFICEMAX, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) (Unaudited)
Deferred Cumulative Common Stock Translation Retained Treasury Shares Compensation Adjustment Deficit Stock Total --------- ------------ ----------- --------- --------- --------- BALANCE AT JANUARY 25, 2003 $ 887,556 $ (153) $ (2,457) $ (13,865) $ (90,636) $ 780,445 Comprehensive income: Net income -- -- -- 9,783 -- 9,783 Cumulative translation adjustment -- -- (372) -- -- (372) --------- Total comprehensive income 9,411 Issuance of common shares under director plan (20) -- -- -- 47 27 Exercise of stock options (180) -- -- -- 271 91 Sale of shares under management share purchase plan (847) (191) -- -- 1,802 764 Sale of shares under employee share purchase plan (143) -- -- -- 281 138 Amortization of deferred compensation -- 62 -- -- -- 62 --------- --------- --------- --------- --------- --------- BALANCE AT APRIL 26, 2003 $ 886,366 $ (282) $ (2,829) $ (4,082) $ (88,235) $ 790,938 ========= ========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. 6 OFFICEMAX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE 13 WEEKS ENDED APRIL 26, 2003 AND APRIL 27, 2002 Significant Accounting and Reporting Policies 1. The accompanying unaudited consolidated financial statements have been prepared from the financial records of OfficeMax, Inc. and its subsidiaries (the "Company" or "OfficeMax") and reflect all adjustments which are, in the opinion of management, necessary to fairly present the results of the interim periods covered in this report. The results for any interim period are not necessarily indicative of the results to be expected for the full fiscal year. 2. The Company's consolidated financial statements for the 13 weeks ended April 26, 2003 and April 27, 2002 included in this Quarterly Report on Form 10-Q have been prepared in accordance with the accounting policies described in the Notes to Consolidated Financial Statements for the fiscal year ended January 25, 2003 which were included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (File No. 1-13380) on April 8, 2003. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K referred to above. Certain reclassifications have been made to prior year amounts to conform to the current presentation. 3. The Company's fiscal year ends on the Saturday prior to the last Wednesday in January. Fiscal year 2003 ends on January 24, 2004 and includes 52 weeks. Fiscal year 2002 ended on January 25, 2003 and included 52 weeks. 4. OfficeMax serves its customers through nearly 1,000 superstores, e-Commerce Web sites and direct-mail catalogs. The Company has operations in the United States, Canada, Puerto Rico, the U.S. Virgin Islands and Mexico, including 938 domestic superstores and 30 superstores in Mexico. The Company operates the superstores in Mexico through a majority-owned subsidiary. In addition to offering office products, business machines and related items, OfficeMax superstores also feature CopyMax and FurnitureMax, store-within-a-store modules devoted exclusively to print-for-pay services and office furniture. The Company also reaches customers in the United States with an offering of over 40,000 items through its e-Commerce site, OfficeMax.com, its direct-mail catalogs and its outside sales force, all of which are serviced by its three PowerMax inventory distribution facilities, 17 delivery centers and two national customer call and contact centers. 7 5. The Company accounts for stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and provides pro forma disclosures of compensation expense determined under the fair value provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". The following pro forma disclosures of compensation expense are based on the fair value provisions of FAS 123 using the Black-Scholes option pricing model to estimate the fair value of options at the date of grant. (Dollars in thousands, except per share information)
13 WEEKS ENDED --------------------------- APRIL 26, APRIL 27, 2003 2002 -------- -------- Net income, as reported $ 9,783 $63,518 Stock-based compensation excluded from reported net income 1,714 1,051 ------- ------- Pro forma net income $ 8,069 $62,467 ======= ======= Pro forma basic earnings per common share $ 0.07 $ 0.51 ======= ======= Pro forma diluted earnings per common share $ 0.06 $ 0.50 ======= =======
6. The components of the Company's comprehensive income are as follows: (In thousands)
13 WEEKS ENDED --------------------------- APRIL 26, APRIL 27, 2003 2002 --------- --------- Net income $ 9,783 $ 63,518 Other comprehensive income (loss): Cumulative translation adjustment (372) (1,161) -------- -------- Comprehensive income $ 9,411 $ 62,357 ======== ========
8 7. Basic earnings per common share is based on the weighted average number of common shares outstanding. Diluted earnings per common share is based on the weighted average number of common shares outstanding and all potentially dilutive common stock equivalents. A reconciliation of the basic and diluted per share computations is as follows: (Dollars in thousands, except per share data)
13 WEEKS ENDED ------------------------------- APRIL 26, APRIL 27, 2003 2002 ------------ ------------ Net income available to common shareholders $ 9,783 $ 63,518 ============ ============ Weighted average number of common shares outstanding 124,232,830 123,204,035 Effect of dilutive securities: Stock options 946,027 1,495,829 Restricted stock 203,276 81,607 ------------ ------------ Weighted average number of common shares outstanding and assumed conversions 125,382,133 124,781,471 ============ ============ Basic earnings per common share $ 0.08 $ 0.52 ============ ============ Diluted earnings per common share $ 0.08(1) $ 0.51(2) ============ ============
- ---------- (1) Options to purchase 15,996,081 common shares were excluded from the calculation of diluted earnings per common share for the 13 weeks ended April 26, 2003, because the exercise prices of these options were greater than the average market price. The weighted average exercise price of these options was $7.80. (2) Options to purchase 13,196,492 common shares were excluded from the calculation of diluted earnings per common share for the 13 weeks ended April 27, 2002 because the exercise prices of these options were greater than the average market price. The weighted average exercise price of these options was $8.72. 9 8. The Company has two business segments: Domestic and International. The Company's operations in the United States, Puerto Rico and the U.S. Virgin Islands, comprised of its retail stores, e-Commerce operations, catalog business and outside sales groups, are included in the Domestic segment. The operations of the Company's majority owned subsidiary in Mexico, OfficeMax de Mexico, are included in the International segment. The following table summarizes the results of operations for the Company's business segments for the 13 weeks ended April 26, 2003 and April 27, 2002: (In thousands)
TOTAL 13 WEEKS ENDED APRIL 26, 2003 COMPANY DOMESTIC INTERNATIONAL - ----------------------------- ----------- ----------- ------------- Sales $ 1,226,460 $ 1,192,124 $ 34,336 Cost of merchandise sold, including buying and occupancy costs 918,005 892,134 25,871 ----------- ----------- ----------- Gross profit 308,455 299,990 8,465 Operating income 10,849 9,975 874 Interest expense (income), net 469 814 (345) Minority interest 597 -- 597 ----------- ----------- ----------- Net income $ 9,783 $ 9,161 $ 622 =========== =========== =========== 13 WEEKS ENDED APRIL 27, 2002 - ----------------------------- Sales $ 1,178,152 $ 1,139,888 $ 38,264 Cost of merchandise sold, including buying and occupancy costs 878,824 849,682 29,142 ----------- ----------- ----------- Gross profit 299,328 290,206 9,122 Operating income 8,102 6,758 1,344 Interest expense (income), net 1,341 1,514 (173) Income tax benefit (57,500) (57,500) -- Minority interest 743 -- 743 ----------- ----------- ----------- Net income $ 63,518 $ 62,744 $ 774 =========== =========== ===========
The total assets of the International segment were approximately $74,682,000 and $69,728,000 as of April 26, 2003 and January 25, 2003, respectively. The total assets of the International segment included long-lived assets, primarily property and equipment, of approximately $22,725,000 and $23,676,000 as of April 26, 2003 and January 25, 2003, respectively. Depreciation expense for the International segment was approximately $792,000 for the 13 weeks ended April 26, 2003 and $838,000 for the 13 weeks ended April 27, 2002. Included in the total assets of the International segment was goodwill, net of accumulated amortization, of $3,699,000 as of April 26, 2003 and January 25, 2003. 10 9. During the fourth quarter of fiscal year 2002, the Company conducted a review of its domestic real estate portfolio and committed to close eight underperforming superstores and one delivery center. In conjunction with these closings, the Company recorded a pre-tax charge for store closing and asset impairment of $11,915,000 during the fourth quarter of fiscal year 2002. Also during the fourth quarter of fiscal year 2002, the Company reversed certain portions of the store closing reserves established in fiscal year 2001 and fiscal year 2000 when those portions of the reserves were deemed no longer necessary. The reversals reduced the fiscal year 2002 charge by approximately $11,203,000. During the first quarter of fiscal year 2003, the Company closed the delivery center and two of the superstores included in the charge for store closing and asset impairment recorded during the fourth quarter of fiscal year 2002. The remaining superstores are expected to close during fiscal year 2003. A reconciliation of the major components of the Company's store closing reserve is as follows:
(In thousands) BALANCE BALANCE JANUARY 25, PAYMENT / APRIL 26, 2003 USAGE 2003 -------- -------- -------- Lease disposition costs, net of sublease $101,304 $ 4,671 $ 96,633 income Other closing costs 2,926 711 2,215 -------- -------- -------- Total $104,230 $ 5,382 $ 98,848 ======== ======== ========
As of April 26, 2003 and January 25, 2003, $76,432,000 and $81,330,000 of the store closing reserve, respectively, was included in other long-term liabilities. Lease disposition cost included in the reserve for store closing costs includes the aggregate rent expense for the closed stores net of expected future sublease income of $108,788,000 and $109,139,000 as of April 26, 2003 and January 25, 2003, respectively. Of the total expected future sublease income included in the reserve for store closing costs, the Company had obtained sublease or assignment agreements for certain of its closed stores totaling $46,682,000 as of April 26, 2003. 10. In the fourth quarter of fiscal year 2001, the Company recorded a $170,616,000 charge to establish a valuation allowance for its net deferred tax assets, including amounts related to its net operating loss carryforwards. The valuation allowance was calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), which places primary importance on the Company's operating results in the most recent three-year period when assessing the need for a valuation allowance. Although management believes the Company's results for those periods were heavily affected by deliberate and planned infrastructure improvements, including its PowerMax distribution network and state-of-the-art SAP computer system, as well as an aggressive store closing program, the Company's cumulative loss in the most recent three-year period represented negative evidence sufficient to require a full valuation allowance under the provisions of FAS 109. As of April 26, 2003, the valuation allowance was approximately $105,021,000, which represents a full valuation allowance of the Company's net deferred tax assets, including amounts related to its net operating loss carryforwards. The Company intends to maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support reversal of some portion or the remainder of the allowance. Until such time, except for minor state, local and foreign tax provisions, the Company will have no reported tax provision, net of valuation allowance adjustments. 11 On March 9, 2002, President Bush signed into law the "Job Creation and Worker Assistance Act" (H.R. 3090). This new tax law temporarily extended the carryback period, to five years from two years, for net operating losses incurred during the Company's taxable years ended in 2001 and 2000. During the first quarter of fiscal year 2002, the Company reversed a portion of the valuation allowance recorded during the fourth quarter of fiscal year 2001 and recognized an income tax benefit of $57,500,000 due to the extension of the carryback period. As of April 27, 2002, a receivable for the $57,500,000 income tax refund was included in other current assets. The Company received refunds for the additional net operating loss carryback resulting from the extension of the carryback period during fiscal year 2002. 11. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies consolidation requirements for variable interest entities ("VIEs") which establishes additional factors beyond ownership of a majority voting interest to indicate that a company has a controlling financial interest in an entity (or a relationship sufficiently similar to a controlling financial interest that it requires consolidation). Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE's expected losses or residual returns if they occur. This interpretation applies immediately to variable interest entities created or obtained after January 31, 2003 and must be retroactively applied to holdings in variable interest entities acquired before February 1, 2003 in interim and annual financial statements issued for periods beginning after June 15, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. The Company leases two of its PowerMax distribution facilities from VIEs (previously referred to as special purpose entities or SPEs) that have been established by nationally prominent, creditworthy commercial lessors to facilitate the financing of the inventory distribution facilities. The VIEs finance the cost of the property through the issuance of commercial paper. The Company has provided standby letters of credit of approximately $81,000,000 in support of the commercial paper. In the event that the Company defaults on its obligations under the leases, the VIEs could draw on the letters of credit in order to redeem the commercial paper. These letters of credit utilize a portion of the Company's available borrowing capacity under its revolving credit facility. Upon expiration of the synthetic operating leases, the Company can elect to purchase the related assets of both facilities at a total cost specified in the lease agreements of approximately $80,000,000. If the Company does not elect to purchase the related assets, the Company is required to honor certain fair value guarantees. These guarantees require the Company to reimburse the lessor for any shortfall from a fair value specified in the lease agreements. Currently, the Company expects to purchase the related assets upon expiration of the synthetic operating leases, or otherwise enter into an arrangement to maintain the continued use of these facilities. The Company is assessing the impact of adoption of FIN 46. However, based on management's preliminary assessment, it is reasonably possible that the Company will be required to consolidate the VIEs involved in the leasing of its PowerMax inventory distribution facilities beginning in the third quarter of fiscal year 2003. If the Company is required to consolidate the VIEs, the assets and related depreciation, liabilities and non-controlling interests of these VIEs will be reflected in the Company's consolidated financial statements. The Company has not yet determined under which of the transition alternatives it will report the impact, if any, of adopting FIN 46. 12 12. In November 2002, the FASB Emerging Issues Task Force ("Task Force") issued EITF Issue 02-16, "Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor," ("EITF 02-16"). EITF 02-16 addressed the following two issues: (i) the classification in a reseller's financial statements of cash consideration received from a vendor ("Issue 1"); and (ii) the timing of recognition by a reseller of a rebate or refund from a vendor that is contingent upon achieving a specific cumulative level of purchases or remaining a customer for a specified time period ("Issue 2"). Issue 1 stipulates that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendors' products and should, therefore, be recognized as a reduction of cost of merchandise sold when recognized in the reseller's financial statements. However, that presumption is overcome when the consideration is either (a) a payment for assets or services delivered to the vendor, in which case the cash consideration should be recognized as revenue (or other income, as appropriate) when recognized in the reseller's income statement, or (b) a reimbursement of a specific, incremental, identifiable cost incurred by the reseller in selling the vendor's products, in which case the cash consideration should be characterized as a reduction of that cost when recognized in the reseller's income statement. Issue 2 states that vendor rebates should be recognized on a systematic and rational allocation of the cash consideration offered to each of the underlying transactions that results in progress by the reseller toward earning the rebate, provided the amounts are probable and reasonably estimable. Issue 1 was effective for all new arrangements, including modifications of existing arrangements, entered into after December 31, 2002. Issue 2 was effective for all new arrangements initiated after November 21, 2002. The Company and its vendors participate in cooperative advertising programs and other vendor marketing programs in which vendors reimburse the Company for a portion of its advertising expenses and other costs. In accordance with the transition provisions of EITF 02-16, the Company is required to adopt the new guidance prospectively as it negotiates agreements with new vendors or modifies existing agreements. The Company's vendor agreements typically do not have expiration dates and remain in effect until replaced, and therefore, it is expected to take up to 18 months to cycle through all vendor program negotiations in the normal course of business. As a result of the more restrictive standards defined in Issue 1 of EITF 02-16, the Company is required to record certain consideration received from its vendors as a reduction of cost of merchandise sold, which previously would have been recognized as a reduction of a related advertising expense. This change in accounting may impact the timing of recognition of cash consideration received from the Company's vendors and increase its gross profit and net advertising expenses. These changes do not affect the total amount of vendor income the Company receives from its vendors. The application of the new guidance reduced earnings by approximately $0.01 per diluted share during the first quarter of fiscal year 2003. The estimated effect of the prospective adoption of EITF 02-16 for the remainder of fiscal year 2003 is a reduction of earnings of $0.01 to $0.02 per diluted share per quarter. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated sales for the 13 weeks ended April 26, 2003 increased 4% to $1,226,460,000 from $1,178,152,000 for the like prior year period. The increase in current year sales was primarily the result of a 5% comparable-store sales increase experienced by the Company's Domestic segment. The first quarter of fiscal year 2003 marked the fifth consecutive quarter of year-over-year improvement in consolidated comparable-store sales. The Domestic segment's comparable-store sales gains were driven by both increased customer counts and higher average revenue per customer transaction primarily as a result of the Company's new merchandising and marketing initiatives, improved inventory in-stock position and better in-store execution. Cost of merchandise sold, including buying and occupancy costs, was $918,005,000 for the 13 weeks ended April 26, 2003 and $878,824,000 for the 13 weeks ended April 27, 2002. Cost of merchandise sold, including buying and occupancy costs, increased as a percentage of sales to 74.8% for the 13 weeks ended April 26, 2003 from 74.6% for the comparable period last year. Correspondingly, gross margin rate decreased approximately 0.2% of sales from the comparable prior year period to 25.2% of sales for the 13 weeks ended April 26, 2003. The slight decline in the gross margin rate was primarily due to a sales mix shift towards electronic merchandise experienced by the Company's Domestic segment, near the end of the first quarter, driven in part by an increase in spending for capital goods following the winding down of the war in Iraq, which the Company believes was an initial reaction to businesses and consumers regaining some degree of confidence. Store operating and selling expenses, which consist primarily of store payroll and operating and advertising expenses, were $264,403,000 for the 13 weeks ended April 26, 2003 and $257,213,000 for the 13 weeks ended April 27, 2002. As a percentage of sales, store operating and selling expenses improved 0.2% of sales to 21.6% for the 13 weeks ended April 26, 2003 from 21.8% for the comparable period last year. The decrease in store operating and selling expenses as a percentage of sales was primarily a result of improved leverage of store-level payroll, which included incremental costs associated with remerchandising efforts and remodels, and certain fixed costs included in store operating and selling expenses such as equipment lease expense. General and administrative expenses decreased to $33,203,000, or 2.7% of sales, for the 13 weeks ended April 26, 2003 from $34,013,000, or 2.9% of sales, for the 13 weeks ended April 27, 2002. The decrease in general and administrative expenses was primarily a benefit of the Company's continued expense control programs and efficiency gains from the Company's information technology initiatives. As a result of the foregoing factors, operating income for the 13 weeks ended April 26, 2003 was $10,849,000, or 0.9% of sales. Operating income was $8,102,000, or 0.7% of sales, for the comparable period last year. Interest expense, net, was $469,000 for the 13 weeks ended April 26, 2003, as compared to $1,341,000 for the comparable period last year. The decrease in interest expense was primarily a result of lower average outstanding borrowings during the current fiscal year as compared to the same period last year and lower interest rates on the Company's outstanding borrowings. The Company had pre-tax income, net of minority interest, of $9,783,000, or 0.8% of sales, for the 13 weeks ended April 26, 2003 compared to pre-tax income, net of minority interest, of $6,018,000, or 0.5% of sales, for the comparable period last year. 14 In accordance with the provisions of Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" ("FAS 109"), the Company recorded a charge to establish a valuation allowance for its net deferred tax assets including amounts related to its net operating loss carryforwards in the fourth quarter of fiscal year 2001. The Company intends to maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support reversal of some portion or the remainder of the allowance. Until such time, except for minor state, local and foreign tax provisions, the Company will have no reported tax provision, net of valuation adjustments. On March 9, 2002, President Bush signed into law the "Job Creation and Worker Assistance Act" (H.R. 3090). This new tax law temporarily extended the carryback period for net operating losses incurred during the Company's taxable years ended in 2001 and 2000 to five years from two years. In the first quarter of fiscal year 2002, the Company reversed a portion of the valuation allowance for its net deferred tax assets and net operating loss carryforwards recorded during the fourth quarter of fiscal year 2001 and recognized an income tax benefit of $57,500,000 due to the extension of the carryback period. Other than the benefit for additional net operating loss carryback recognized during the first quarter of fiscal year 2002, the Company had no reported tax provision, net of valuation allowance adjustments during the 13 week periods ended April 26, 2003 and April 27, 2002. See "Note 10 of Notes to Consolidated Financial Statements" above. As a result of the foregoing factors, the Company realized net income of $9,783,000 for the 13 weeks ended April 26, 2003 compared to net income of $63,518,000 for the comparable period last year. BUSINESS SEGMENTS Domestic Segment Sales for the Domestic segment increased to $1,192,124,000 for the 13 weeks ended April 26, 2003 from $1,139,888,000 for the like period last year. The increase in sales for the Domestic segment during the 13 weeks ended April 26, 2003 was primarily a result of a 5% increase in comparable-store sales. The increase in comparable-store sales was driven by increased customer counts and higher average revenue per customer transaction primarily as a result of the Company's new merchandising and marketing initiatives, improved inventory in-stock position and better in-store execution. Gross profit for the Domestic segment was $299,990,000, or 25.2% of sales, for the 13 weeks ended April 26, 2003, compared to $290,206,000, or 25.5% of sales, for the 13 weeks ended April 27, 2002. The slight decline in the gross margin rate was due to an upward sales lift in electronic merchandise towards the end of the first quarter as it became apparent that the country's major combat effort in Iraq was winding down and capital expenditures resumed. The margin effect of this sales mix shift was partially mitigated by margin improvements from the continued expansion of the Company's strategic sourcing initiative and private label, Max-branding program as well as improved leverage of certain fixed costs included in cost of merchandise sold which benefited gross margin rate by approximately 0.3% of sales. The Domestic segment realized operating income of $9,975,000, or 0.8% of sales, for the 13 weeks ended April 26, 2003 compared to operating income of $6,758,000, or 0.6% of sales, for the comparable period last year. The year-over-year improvement in the Domestic segment's operating results was primarily due to better leverage of store operating and selling expenses and general and administrative expenses which improved more than 0.5% of sales year-over-year. As a result of the foregoing factors, the Domestic segment realized pre-tax income of $9,161,000, or 0.8% of sales, for the 13 weeks ended April 26, 2003 compared to pre-tax income of $5,244,000, or 0.5% of sales, for the comparable period last year. 15 As described above, during the first quarter of fiscal year 2002, the Company reversed a portion of the valuation allowance for its net deferred tax assets and net operating loss carryforwards recorded during the fourth quarter of fiscal year 2001 and recognized an income tax benefit of $57,500,000 due to the extension of the carryback period. Other than the benefit for additional net operating loss carryback recognized during the first quarter of fiscal year 2002, the Domestic segment had no reported tax provision, net of valuation allowance adjustments during the 13-week periods ended April 26, 2003 and April 27, 2002. As a result of the foregoing factors, the Domestic segment had net income of $9,161,000 for the 13 weeks ended April 26, 2003 compared to net income of $62,744,000 for the comparable period last year. International Segment Sales for the International segment, which were significantly impacted by an unfavorable currency translation from the weakening of the Mexican Peso against the U.S. Dollar, decreased to $34,336,000 for the 13 weeks ended April 26, 2003 from $38,264,000 for the comparable period last year. In local currency, comparable-store sales were flat during the first quarter of fiscal year 2003, attributable to increased customer counts which were offset by a decrease in average revenue per customer transaction, primarily due to a sales mix shift towards higher margin supply merchandise from lower margin computer merchandise. The unfavorable currency translation resulted in a comparable-store sales decline of approximately 16% for the 13 weeks ended April 26, 2003. Gross profit for the International segment was $8,465,000, or 24.7% of sales, for the 13 weeks ended April 26, 2003, compared to $9,122,000, or 23.8% of sales, for the comparable prior year period. The increase in gross profit as a percentage of sales was primarily due to the above mentioned sales mix shift. The International segment realized operating income of $874,000, or 2.5% of sales, for the 13 weeks ended April 26, 2003, compared to operating income of $1,344,000, or 3.5% of sales, for the comparable period last year. The decrease in operating profit as a percentage of sales during the first quarter of fiscal year 2003 was due to the de-leveraging of the International segment's store operating and selling expenses and general and administrative expenses consistent with the sales mix shift towards supply merchandise from lower margin computer merchandise. Minority interest in the net income of the International segment was $597,000 for the 13 weeks ended April 26, 2003, compared to $743,000 for the 13 weeks ended April 27, 2002. As a result of the foregoing factors, the International segment realized net income of $622,000, or 1.8% of sales, for the 13 weeks ended April 26, 2003, compared to net income of $774,000, or 2.0% of sales, for the comparable prior year period. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities used $61,894,000 of cash during the 13 weeks ended April 26, 2003. Cash usage as a result of net working capital changes of $94,349,000, primarily due to decreases in accrued expenses and accounts payable, and increases in accounts receivable and inventory, offset income of $9,783,000 and non-cash depreciation expense of $22,045,000. Since the end of fiscal year 2002, accrued expenses decreased $24,570,000 primarily because of bonus payments under the Company's Annual Incentive Bonus Plan and seasonal fluctuations in advertising expenses. During the first quarter of fiscal year 2003, inventory increased $19,248,000 and accounts payable decreased $12,992,000. Year-over-year, inventory decreased $12,077,000 and annualized inventory turns improved to 3.8 times from 3.6 for the comparable prior year period. Accounts payable-to-inventory leverage decreased 0.3% of inventory to 46.6% as of April 26, 2003 from 46.9% as of April 27, 2002. The decrease in accounts payable-to-inventory leverage is consistent with the Company's decision to take advantage of special discounts and forgo extended terms offered by its vendors. Accounts receivable increased $20,772,000 since the end of the prior fiscal year, primarily due to the timing of billings for certain vendor income related receivables and an increase in non-income tax related receivables recorded by the Company's subsidiary in Mexico. The Company's operating activities used $120,055,000 of cash during the 13 weeks ended April 27, 2002, primarily for the purchase of inventory which increased $73,335,000, and the payment of accounts payable, which decreased $65,978,000, since the end of the prior fiscal year. 16 Net cash used for investing activities was $16,679,000 for the 13 weeks ended April 26, 2003 versus $18,506,000 for the comparable prior year period. Capital expenditures, primarily for new and remodeled superstores, were $16,745,000 for the 13 weeks ended April 26, 2003 and $14,510,000 for the 13 weeks ended April 27, 2002. Net cash provided by financing activities was $17,527,000 for the 13 weeks ended April 26, 2003. Current year financing activities primarily represent an increase in overdraft balances (checks issued pending clearance that result in overdraft balances for accounting purposes) of $15,962,000. The overdraft balances are included as a component of accounts payable in the Company's Consolidated Balance Sheets. The change in overdraft balances since the end of fiscal year 2002 is reflected in the Consolidated Statements of Cash Flows as a financing activity. Net cash provided by financing activities was $119,816,000 in the comparable prior year period primarily because of an increase in borrowings under the Company's revolving credit facility and an increase in overdraft balances. On March 9, 2002, President Bush signed into law the "Job Creation and Worker Assistance Act" (H.R. 3090). This new tax law temporarily extended the carryback period, to five years from two years, for net operating losses incurred during the Company's taxable years ended in 2001 and 2000. During the first quarter of fiscal year 2002, the Company reversed a portion of the valuation allowance for its net deferred tax assets and net operating loss carryforwards recorded during the fourth quarter of fiscal year 2001 and recognized an income tax benefit of $57,500,000 due to the extension of the carryback period. During fiscal year 2002, the Company received refunds for the additional net operating loss carryback resulting from the extension of the carryback period. As of April 27, 2002, a receivable for the $57,500,000 income tax refund was included in other current assets. Also during fiscal year 2002, the Company received refunds of amounts on deposit with the Internal Revenue Service of approximately $30,000,000 related to prior year tax returns. See "Note 10 of Notes to Consolidated Financial Statements" above. In accordance with an amended and restated joint venture agreement, the minority owner in the Company's subsidiary in Mexico can elect to put its remaining 49% interest in OfficeMax de Mexico to the Company, if certain earnings targets are achieved. These earnings targets are calculated quarterly on a rolling four quarter basis. If the earnings targets are achieved and the minority owner elects to put its ownership interest to the Company, the purchase price would be equal to fair value calculated based on the subsidiary's earnings for the last four quarters before interest, taxes, depreciation and amortization and current market multiples of similar companies. The fair value purchase price is currently estimated to be $25,000,000 to $30,000,000. During the fourth quarter of fiscal year 2000, the Company entered into a $700,000,000 senior secured revolving credit facility. In May 2003, the Company extended the revolving credit facility until February 28, 2007 and reduced the available borrowing capacity under the revolving credit facility to $550,000,000. The decision to reduce the available borrowing capacity of this credit facility was another benefit of the Company's enhanced supply-chain management programs and processes and the Company's forecasts through fiscal year 2006 which reflect a significant reduction in the need for larger credit availability based on improving positive cash flow. This reduction also served to minimize fees paid on the unused portion of the facility. The revolving credit facility is secured by a first priority perfected security interest in the Company's inventory and certain accounts receivable and provides for borrowings at the bank's base rate or Eurodollar Rate plus 1.75% to 2.50% depending on the level of borrowing. The Company had $118,883,000 of standby letters of credit outstanding as of April 26, 2003, which utilize a portion of the Company's available borrowing capacity under this facility. These letters of credit are issued in connection with the Company's insurance programs and two synthetic operating leases related to its PowerMax inventory distribution facilities. The Company pays quarterly usage fees of between 1.62% and 1.87% per annum on the outstanding standby letters of credit. The Company pays quarterly fees of 0.25% per annum on the unused portion of the revolving credit facility. Available borrowing capacity under the revolving credit facility is calculated as a percentage of the Company's inventory and certain accounts receivable. As of April 26, 2003, the Company had unused and available borrowings under the revolving credit facility of more than $414,000,000. As of April 26, 2003, and January 25, 2003, the Company had no outstanding borrowings under this facility. The Company expects its funds generated from operations, as well as its current cash reserves, and, when necessary, seasonal short-term borrowings, will be sufficient to finance its operations and capital requirements in the foreseeable future. 17 The Company's business is seasonal, with sales and operating income higher in the third and fourth fiscal quarters, which include the back-to-school period and the holiday selling season, respectively, followed by the traditional new year office supply restocking month of January. Sales in the second fiscal quarter's summer months are the slowest of the year primarily because of lower office supplies consumption during the summer vacation period. The Company occupies two of its PowerMax inventory distribution facilities under synthetic operating leases with initial lease terms expiring in fiscal year 2004. One of the synthetic operating leases has been extended at the Company's option until fiscal year 2005. The Company leases the PowerMax facilities from VIEs (previously referred to as special purpose entities or SPEs) that have been established by nationally prominent, creditworthy commercial lessors that are not affiliated with OfficeMax to facilitate the financing of those assets for the Company. No officers, directors or employees of the Company hold any direct or indirect equity interest in such VIEs. The VIEs finance the cost of the property through the issuance of commercial paper. The Company has provided standby letters of credit of approximately $81,000,000 in support of the commercial paper. In the event that the Company defaults on its obligations under the leases, the VIEs could draw on the letters of credit in order to redeem the commercial paper. These letters of credit utilize a portion of the Company's available borrowing capacity under its revolving credit facility. Upon expiration of the synthetic operating leases, the Company can elect to purchase the related assets of both facilities at a total cost specified in the lease agreements of approximately $80,000,000. If the Company does not elect to purchase the related assets, the Company is required to honor certain fair value guarantees. These guarantees require the Company to reimburse the lessor any shortfall to a fair value specified in the lease agreements. Currently, the Company expects to purchase the related assets upon expiration of the synthetic operating leases, or otherwise enter into an arrangement to maintain the continued use of these facilities, and is unable to estimate its obligation, if any, under the fair value provisions of these leases. See "Note 11 of Notes to Consolidated Financial Statements" above and "Recently Issued Accounting Pronouncements" below for additional information regarding the Company's synthetic operating leases. LEGAL PROCEEDINGS There are various claims, lawsuits and pending actions against the Company incidental to the Company's operations. Although litigation is inherently subject to many uncertainties, it is the opinion of management that the ultimate resolution of these matters will not have a material effect on the Company's liquidity and financial position. However, in the event of an unanticipated adverse final determination, the Company's consolidated net income for the period in which such determination occurs could be materially affected. SETTLEMENT OF DISPUTE WITH GATEWAY In fiscal year 2000, Gateway Companies, Inc. ("Gateway") committed to operate licensed store-within-a-store computer departments within all OfficeMax superstores in the United States pursuant to a strategic alliance. In connection with the investment requirements of the strategic alliance, during the second quarter of fiscal year 2000, Gateway invested $20,000,000 in Series B Serial Preferred Shares (the "Series B Shares"). The Series B Shares, which had a purchase price of $10 per share and a coupon rate of 7% per annum, had no voting rights. In fiscal 2001, a dispute arose between Gateway and OfficeMax as to their respective rights and entitlements under the agreements related to the implementation of the strategic alliance. Litigation and arbitration proceedings were commenced with each party asserting claims of non-performance against the other. During the second quarter of fiscal year 2003, the Company and Gateway mutually and satisfactorily resolved all outstanding issues in dispute. In accordance with the settlement, OfficeMax redeemed the outstanding Series B Shares owned by Gateway, Gateway reimbursed the Company for certain expenses it had incurred in conjunction with the strategic alliance, and all litigation and arbitration proceedings have been dismissed. The settlement had no impact on the Company's results of operations. 18 SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual amounts could differ from these estimates and different amounts could be reported using different assumptions and estimates. The Company's significant accounting policies are described in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 25, 2003. Management believes that of its significant accounting policies, its policies concerning inventories, income taxes, impairment of long-lived assets, goodwill, vendor income recognition and facility closure costs involve high degrees of judgments, estimates and complexity. The estimates and judgments made by management in regards to these policies have the most significant impact on the Company's reported financial position and operating results. Additional information regarding these policies is set forth below. Inventories Inventories are valued at weighted average cost or market. Throughout the year, the Company performs annual physical inventories at all of its locations. For periods subsequent to the date of each location's last physical inventory, an allowance for estimated shrinkage is provided based on various factors including sales volume, the location's historical shrinkage results and current trends. If actual losses as a result of inventory shrinkage are different than management's estimates, adjustments to the Company's allowance for inventory shrinkage may be required and the Company's gross margin could be adversely impacted. The Company records cost markdowns for inventory not expected to be part of its ongoing merchandise offering. These markdowns amounted to $7,000,000 and $6,250,000 as of April 26, 2003 and January 25, 2003, respectively. Management estimates the required allowance for future inventory cost markdowns based on historical information regarding product sell through and gross margin rates for similar products. If actual sell through or gross margin rates for discontinued inventory are different than management's estimates, additional inventory markdowns may be required and the Company's gross margin could be adversely impacted. Income Taxes The Company uses the liability method whereby income taxes are recognized during the fiscal year in which transactions enter into the determination of financial statement income. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement and tax bases of assets and liabilities. The Company assesses the recoverability of its deferred tax assets in accordance with the provisions of FAS 109. In accordance with that standard, the Company recorded a charge to establish a valuation allowance for its net deferred tax assets and net operating loss carryforwards of $170,616,000 in the fourth quarter of fiscal year 2001. As of April 26, 2003, the valuation allowance was approximately $105,021,000, which represents a full valuation allowance of the Company's net deferred tax assets, including amounts related to its net operating loss carryforwards. The Company intends to maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support the reversal of some portion or the remainder of the allowance. Until such time, except for minor state, local and foreign tax provisions, the Company will have no reported tax provision, net of valuation allowance adjustments. Any future decision to reverse a portion or all of the remaining valuation allowance will be based on consideration of several factors including, but not limited to, the Company's expectations regarding future taxable income and the Company's cumulative income or loss in the then most recent three-year period. In the event the Company was to determine, based on the existence of sufficient positive evidence, that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. 19 Impairment of Long-Lived Assets The Company reviews its long-lived assets for possible impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable by the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If impairment exists, the carrying amount of the asset is reduced to fair value or fair value less the cost to sell depending upon whether the asset is held for use or disposal, respectively. The Company evaluates possible impairment of long-lived assets for each of its retail stores individually based on management's estimate of the store's future earnings before interest, taxes, depreciation and amortization. Long-lived assets for which the Company cannot specifically identify cash flows that are largely independent of the cash flows of other long-lived assets, such as its corporate and distribution facilities, are evaluated based on management's estimate of the Company's future consolidated operating cash flows. If actual future operating results or cash flows are different than management's estimates, additional impairment losses may be required to be recorded. Goodwill Goodwill represents the excess of cost over the fair value of the net identifiable assets acquired in a business combination accounted for under the purchase method. As a result of the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangibles" ("FAS 142"), that was effective for the Company as of the beginning of fiscal year 2002, goodwill and intangible assets with an indefinite useful life are no longer amortized, but are tested for impairment at least annually. The Company completed the initial impairment test during the second quarter of fiscal year 2002 and concluded that the fair value of both of the Company's reporting units (Domestic and International) exceeded their carrying values as of January 27, 2002 and, therefore, no impairment existed at that date. In addition to the initial impairment test completed during the second quarter of fiscal year 2002, the Company elected to perform the first of its annual tests during the fourth quarter of fiscal year 2002 and concluded that the fair value of both of the Company's reporting units exceeded their respective carrying values and no impairment charge was required. The Company engaged a financial advisory firm to assist management in completing the impairment tests and to prepare certain analyses regarding the fair value of the Company's reporting units. In developing its analyses, the financial advisory firm reviewed plans prepared by management, interviewed senior managers of the Company and performed independent research. Calculations regarding the fair value of the Company's reporting units, including the analyses prepared by the financial advisory firm, rely primarily on forecasts and projections regarding future operating results and cash flows, which require management to make estimates and assumptions. If actual operating results or cash flows are different than management's estimates and assumptions, the Company could be required to record impairment charges in future periods. The Company will be required to complete the annual impairment test during its fourth fiscal quarter each year, beginning in fiscal year 2003. Vendor Income Recognition The Company participates in various cooperative advertising and other vendor marketing programs with its vendors. Consideration received from vendors for cooperative advertising programs and other vendor marketing programs is recognized as a reduction of cost of merchandise sold, unless the consideration represents a reimbursement of a specific cost incurred by the Company, in which case the consideration is recognized as a reduction of the related expense. The Company also participates in various volume purchase rebate programs with its vendors. These programs typically include annual purchase targets and offer increasing tiered rebates based on the Company achieving certain purchase levels. The Company recognizes consideration received from vendors for volume purchase rebate programs as a reduction of cost of merchandise sold as the related inventory is sold. For tiered volume purchase rebate programs, the Company estimates the rebates to be earned based on expected purchases during the rebate program period. The Company calculates expected purchases during the rebate program period based on its replenishment model which utilizes a product and store specific algorithm that incorporates recent sales trends, upcoming promotional events and other relevant data to project sales and the related replenishment requirements. The Company revises its purchase expectations at least quarterly throughout the rebate program period. If actual purchases are different than management's expectations, adjustments to the results of operations may be necessary. 20 In November 2002, the FASB Emerging Issues Task Force ("Task Force") issued EITF Issue No. 02-16, "Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addressed the following two issues: (i) the classification in a reseller's financial statements of cash consideration received from a vendor ("Issue 1"); and (ii) the timing of recognition by a reseller of a rebate or refund from a vendor that is contingent upon achieving a specific cumulative level of purchases or remaining a customer for a specified time period ("Issue 2"). Issue 1 stipulates that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendors' products and should, therefore, be recognized as a reduction of cost of merchandise sold when recognized in the reseller's financial statements. However, that presumption is overcome when the consideration is either (a) a payment for assets or services delivered to the vendor, in which case the cash consideration should be recognized as revenue (or other income, as appropriate) when recognized in the reseller's income statement, or (b) a reimbursement of a specific, incremental, identifiable cost incurred by the reseller in selling the vendor's products, in which case the cash consideration should be characterized as a reduction of that cost when recognized in the reseller's income statement. Issue 2 states that vendor rebates should be recognized on a systematic and rational allocation of the cash consideration offered to each of the underlying transactions that results in progress by the reseller toward earning the rebate, provided the amounts are probable and reasonably estimable. Issue 1 was effective for all new arrangements, including modifications of existing arrangements, entered into after December 31, 2002. Issue 2 was effective for all new arrangements initiated after November 21, 2002. As noted above, the Company and its vendors participate in cooperative advertising programs and other vendor marketing programs in which vendors reimburse the Company for a portion of its advertising expenses and other costs. In accordance with the transition provisions of EITF 02-16, the Company is required to adopt the new guidance prospectively as it negotiates agreements with new vendors or modifies existing agreements. The Company's vendor agreements typically do not have expiration dates and remain in effect until replaced, and therefore, it is expected to take up to 18 months to cycle through all vendor program negotiations in the normal course of business. As a result of the more restrictive standards defined in Issue 1 of EITF 02-16, the Company is required to record certain consideration received from its vendors as a reduction of cost of merchandise sold, which previously would have been recognized as a reduction of a related advertising expense. This change in accounting may impact the timing of recognition of cash consideration received from the Company's vendors and increase its gross profit and net advertising expenses. These changes do not affect the total amount of vendor income the Company receives from its vendors. The application of the new guidance reduced earnings by approximately $0.01 per diluted share during the first quarter of fiscal year 2003. The estimated effect of the prospective adoption of EITF 02-16 for the remainder of fiscal year 2003 is a reduction of earnings of $0.01 to $0.02 per diluted share per quarter. Facility Closure Costs The Company continuously reviews its real estate portfolio to identify underperforming facilities and closes those facilities that are no longer strategically or economically viable. Prior to the adoption of FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"), which was effective for exit or disposal activities that are initiated after December 31, 2002, the Company accrued estimated closure costs in the period in which management approved a plan to close a facility. The accrual for estimated closure costs is net of expected future sublease income, which is estimated by management based on real estate studies prepared by independent industry experts. If actual sublease income is different than management's estimate, adjustments to the Company's store closing reserves may be necessary. During January 2003, the Company adopted the provisions of FAS 146. The adoption of FAS 146 had no immediate impact on the Company's financial position, or results of operations, but will affect the timing and recognition of future facility closure costs that may be reported by the Company. 21 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies consolidation requirements for variable interest entities ("VIEs") which establishes additional factors beyond ownership of a majority voting interest to indicate that a company has a controlling financial interest in an entity (or a relationship sufficiently similar to a controlling financial interest that it requires consolidation). Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE's expected losses or residual returns if they occur. This interpretation applies immediately to variable interest entities created or obtained after January 31, 2003 and must be retroactively applied to holdings in variable interest entities acquired before February 1, 2003 in interim and annual financial statements issued for periods beginning after June 15, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. The Company leases two of its PowerMax distribution facilities from VIEs (previously referred to as special purpose entities or SPEs) that have been established by nationally prominent, creditworthy commercial lessors to facilitate the financing of the inventory distribution facilities. The VIEs finance the cost of the property through the issuance of commercial paper. The Company has provided standby letters of credit of approximately $81,000,000 in support of the commercial paper. In the event that the Company defaults on its obligations under the leases, the VIEs could draw on the letters of credit in order to redeem the commercial paper. These letters of credit utilize a portion of the Company's available borrowing capacity under its revolving credit facility. Upon expiration of the synthetic operating leases, the Company can elect to purchase the related assets of both facilities at a total cost specified in the lease agreements of approximately $80,000,000. If the Company does not elect to purchase the related assets, the Company is required to honor certain fair value guarantees. These guarantees require the Company to reimburse the lessor for any shortfall from a fair value specified in the lease agreements. Currently, the Company expects to purchase the related assets upon expiration of the synthetic operating leases, or otherwise enter into an arrangement to maintain the continued use of these facilities. The Company is assessing the impact of adoption of FIN 46. However, based on management's preliminary assessment, it is reasonably possible that the Company will be required to consolidate the VIEs involved in the leasing of its PowerMax inventory distribution facilities beginning in the third quarter of fiscal year 2003. If the Company is required to consolidate the VIEs, the assets and related depreciation, liabilities and non-controlling interests of these VIEs will be reflected in the Company's consolidated financial statements. The Company has not yet determined under which of the transition alternatives it will report the impact, if any, of adopting FIN 46. In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS 149 is generally effective for contracts entered into or modified after June 30, 2003. The provisions of FAS 149 are required to be applied prospectively. The Company does not believe the adoption of FAS 149 will have a material impact on its financial position or results of operations. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("FAS 150"). FAS 150 requires that three classes of freestanding financial instruments that embody obligations for entities be classified as liabilities. Generally, FAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe the adoption of FAS 150 will have a material impact on its financial position or results of operations. 22 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q (including information incorporated by reference) contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any information in this report that is not historical information is a forward-looking statement which may be identified by the use of language such as "may," "will," "should," "expects," "plans," "anticipates," "estimates," "believes," "thinks," "continues," "indicates," "outlook," "looks," "goals," "initiatives," "projects," or similar expressions. These statements are likely to address the Company's growth strategy, future financial performance (including sales, gross margin and earnings), strategic initiatives, marketing and expansion plans, and the impact of operating initiatives. The forward-looking statements, which speak only as of the date of this report, are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those stated, projected or implied in the forward-looking statements. These risks and uncertainties include those described in Exhibit 99.1 of the Company's Annual Report on Form 10-K for the fiscal year ended January 25, 2003, and in other reports and exhibits to those reports filed with the Securities and Exchange Commission. You are strongly urged to review such filings for a more detailed discussion of such risks and uncertainties. The Company's filings with the Securities and Exchange Commission are available at no charge at www.sec.gov and www.freeEDGAR.com, as well as on a number of other web sites, including OfficeMax.com, under the investor relations information section. These risks and uncertainties also include the following: risks associated with general economic conditions (including the effects of continuing hostilities in Iraq and Afghanistan, additional terrorist attacks and hostilities, the stock market decline, currency devaluation, slower than anticipated economic recovery and declining employment rate or other changes in our customers' business environments, including an increase in bankruptcy filings); increasing competition that includes office supply superstores, warehouse clubs, contract stationers, electronics superstore retailers, Internet merchandisers and mass merchandisers, as well as grocery and drug store chains; the result of continuing FAS 142 assessments; and the impact of the adoption of EITF 02-16 and FIN 46 along with other new accounting pronouncements. The foregoing list of important factors is not exclusive. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, principally interest rate risk and foreign exchange rate risk. Market risk can be measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign currency exchange rates over time. None of the market risk sensitive instruments entered into by the Company are for trading purposes. Interest earned on the Company's cash equivalents and short-term investments, as well as interest paid on its debt and lease obligations, are sensitive to changes in interest rates. The interest rate for the Company's revolving credit facility is variable, while the Company's long-term debt and the interest component of its operating leases is generally fixed. The Company manages its interest rate risk by maintaining a combination of fixed and variable rate debt. The Company believes its potential exposure to interest rate risk is not material to the Company's financial position or the results of its operations. The Company is exposed to foreign exchange rate risk through its subsidiary in Mexico. The Company has not entered into any derivative financial instruments to hedge this exposure, and believes its potential exposure is not material to the Company's financial position or the results of its operations. As of April 26, 2003, there had not been a material change in any of the market risk information disclosed by the Company in its Annual Report on Form 10-K for the year ended January 25, 2003. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" on page 36 of the Company's Annual Report on Form 10-K for the year ended January 25, 2003, filed with the Securities and Exchange Commission on April 8, 2003, for more detailed information regarding market risk. ITEM 4. CONTROLS AND PROCEDURES The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Within the 90 day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective. Subsequent to the date of their evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 24 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index on page 28 of this report (b) Reports on Form 8-K: A Current Report on Form 8-K reporting under Item 9, Regulation FD Disclosure, was filed on March 4, 2003, regarding the results for the Company's fiscal year ended January 25, 2003. A Current Report on Form 8-K reporting under Item 9, pursuant to Item 12, Disclosure of Results of Operations and Financial Condition, was filed on May 13, 2003, regarding the results for the Company's fiscal first quarter ended April 26, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OFFICEMAX, INC. Date: June 5, 2003 By: /s/ Michael F. Killeen ---------------------- Michael F. Killeen Senior Executive Vice President, Chief Financial Officer 25 I, Michael Feuer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of OfficeMax, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 5, 2003 /s/ Michael Feuer ----------------- Michael Feuer Chairman and Chief Executive Officer 26 I, Michael F. Killeen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of OfficeMax, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 5, 2003 /s/ Michael F. Killeen ---------------------- Michael F. Killeen Chief Financial Officer 27 EXHIBIT INDEX
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.1 Amended and Restated Loan and Security Agreement dated as of May 2, 2003,by and among Fleet Retail Finance Inc., as administrative agent, Fleet National Bank, as issuer, JPMorgan Business Credit Corp. and JPMorgan Chase Bank, as co-agents, GMAC Commercial Finance LLC, as document agent, The CIT Group/Business Credit Inc., as syndication agent, Fleet Securities, Inc. as arranger, and OfficeMax, Inc., as lead borrower for OfficeMax, Inc., BizMart, Inc., BizMart (Texas), Inc., OfficeMax Corp. and OMX, Inc., as borrowers (filed herewith). 99.1 Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
28 EX-10.1 3 l01262aexv10w1.txt EXHIBIT 10.1 Exhibit 10.1 ============================================ AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ============================================ FLEET RETAIL FINANCE INC. ADMINISTRATIVE AGENT FOR THE LENDERS REFERENCED HEREIN FLEET NATIONAL BANK AS ISSUER JPMORGAN BUSINESS CREDIT CORP. JPMORGAN CHASE BANK AS CO-AGENTS GMAC COMMERCIAL FINANCE LLC AS DOCUMENTATION AGENT THE CIT GROUP/BUSINESS CREDIT INC. AS SYNDICATION AGENT FLEET SECURITIES, INC. AS ARRANGER OFFICEMAX, INC. THE LEAD BORROWER FOR: OFFICEMAX, INC. BIZMART, INC. BIZMART (TEXAS), INC. OFFICEMAX CORP. OMX, INC. THE BORROWERS ============================================ ============================================ ============================================ May 2, 2003 TABLE OF CONTENTS
ARTICLE 1 - DEFINITIONS: ARTICLE 2 - THE REVOLVING CREDIT: 2-1. Establishment of Revolving Credit............................................................. 24 2-2. Advances in Excess of Borrowing Base (OverLoans).............................................. 26 2-3. Risks of Value of Collateral.................................................................. 26 2-4. Commitment to Make Revolving Credit Loans and Support Letters of Credit....................... 26 2-5. Revolving Credit Loan Requests................................................................ 26 2-6 Making of Revolving Credit Loans.............................................................. 28 2-7. SwingLine Loans............................................................................... 28 2-8. The Loan Account.............................................................................. 29 2-9. The Revolving Credit Notes.................................................................... 30 2-10. Payment of The Loan Account................................................................... 30 2-11. Interest on Revolving Credit Loans............................................................ 31 2-12 Voluntary Reduction of Commitment and Revolving Credit Ceiling................................ 32 2-13. Revolving Credit Commitment Fee............................................................... 32 2-14. Administrative Agent's Fee.................................................................... 32 2-15. Unused Fee.................................................................................... 32 2-16. Early Termination Fee......................................................................... 33 2-17. Procedures For Issuance of L/Cs............................................................... 33 2-18. Fees For L/Cs................................................................................. 34 2-19. Concerning L/Cs............................................................................... 35 2-20. Changed Circumstances......................................................................... 36 2-21. Designation of Lead Borrower as Borrowers' Agent.............................................. 37 2-22. Lenders' Commitments.......................................................................... 38 2-23. Replacement of Revolving Credit Lender........................................................ 39 ARTICLE 3 - CONDITIONS PRECEDENT: 3-1. Corporate Due Diligence....................................................................... 40 3-2. Opinion....................................................................................... 40 3-3 Tri-Party Agreement........................................................................... 40 3-4. Additional Documents.......................................................................... 41 3-5. Officers' Certificates........................................................................ 41 3-6 Due Diligence................................................................................. 41 3-7. Representations and Warranties................................................................ 41 3-8. All Fees and Expenses Paid.................................................................... 41 3-9. No Default.................................................................................... 41 3-10. No Adverse Change............................................................................. 41 3-11 Perfection of Encumbrances.................................................................... 41 3-12 Satisfaction of Existing Indebtedness......................................................... 41 3-13 Consents and Approvals........................................................................ 42 3-14 No Defaults under Applicable law or Material Agreements....................................... 42 3-15 No Litigation................................................................................. 42 3-16 No Negative Impact on Syndication............................................................. 42 3-17 No Change in Governmental Regulations......................................................... 42 3-18. Benefit of Conditions Precedent............................................................... 42
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ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES: 4-1. Payment and Performance of Liabilities........................................................ 42 4-2. Due Organization. Authorization. No Conflicts................................................. 43 4-3. Trade Names................................................................................... 44 4-4. Intellectual property......................................................................... 44 4-5. Locations..................................................................................... 44 4-6. Title to Assets............................................................................... 45 4-7. Indebtedness.................................................................................. 46 4-8. Insurance..................................................................................... 47 4-9. Licenses...................................................................................... 48 4-10. Leases........................................................................................ 48 4-11. Requirements of Law........................................................................... 48 4-12. Labor Relations............................................................................... 49 4-13. Maintain Properties........................................................................... 49 4-14. Taxes......................................................................................... 50 4-15. No Margin Stock............................................................................... 51 4-16. ERISA......................................................................................... 51 4-17. Hazardous Materials........................................................................... 52 4-18. Litigation.................................................................................... 52 4-19. Dividends. Investments. Corporate Action...................................................... 52 4-20. Loans......................................................................................... 53 4-21. Protection of Assets.......................................................................... 54 4-22. Line of Business.............................................................................. 54 4-23. Affiliate Transactions........................................................................ 54 4-24. Further Assurances............................................................................ 54 4-25. Adequacy of Disclosure........................................................................ 55 4-26. No Restrictions on Liabilities................................................................ 55 4-27. Other Covenants............................................................................... 55 ARTICLE 5 FINANCIAL REPORTING AND PERFORMANCE COVENANTS: 5-1. Maintain Records.............................................................................. 55 5-2. Access to Records............................................................................. 56 5-3. Immediate Notice to Administrative Agent...................................................... 57 5-4. Borrowing Base Certificate.................................................................... 58 5-5. Monthly Reports............................................................................... 58 5-6. Quarterly Reports............................................................................. 58 5-7. Annual Reports................................................................................ 59 5-8. Officers' Certificates........................................................................ 59 5-9. Inventories, Appraisals, and Audits........................................................... 59 5-10. Additional Financial Information.............................................................. 60 5-11. Financial Performance Covenants............................................................... 61 ARTICLE 6 - USE OF COLLATERAL: 6-1. Use of Inventory Collateral................................................................... 61 6-2. Inventory Quality............................................................................. 62 6-3. Adjustments and Allowances.................................................................... 62 6-4. Validity of Accounts.......................................................................... 62 6-5. Notification to Account Debtors............................................................... 62
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ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES: 7-1. Depository Accounts........................................................................... 62 7-2. Credit Card Receipts.......................................................................... 63 7-3. The Concentration, Blocked, and Operating Accounts............................................ 63 7-4. Proceeds and Collections...................................................................... 64 7-5. Payment of Liabilities........................................................................ 65 ARTICLE 8 - GRANT OF SECURITY INTEREST: 8-1. Grant of Security Interest.................................................................... 65 8-2. Extent and Duration of Security Interest...................................................... 66 ARTICLE 9 - ADMINISTRATIVE AGENT AS BORROWER'S ATTORNEY-IN-FACT: 9-1. Appointment as Attorney-In-Fact............................................................... 66 9-2. No Obligation to Act.......................................................................... 67 ARTICLE 10 - EVENTS OF DEFAULT: 10-1. Failure to Pay the Revolving Credit........................................................... 68 10-2. Failure To Make Other Payments................................................................ 68 10-3. Failure to Perform Covenant or Liability (No Grace Period).................................... 68 10-4. Failure to Perform Covenant or Liability (Grace Period)....................................... 68 10-5. Misrepresentation............................................................................. 69 10-6. Acceleration of Other Debt. Breach of Lease................................................... 69 10-7. Uninsured Casualty Loss....................................................................... 69 10-8. Attachment. Judgment. Restraint of Business................................................... 69 10-9. Business Failure.............................................................................. 69 10-10. Bankruptcy.................................................................................... 70 10-11. Indictment - Forfeiture....................................................................... 70 10-12. Challenge to Loan Documents................................................................... 70 10-13. Change in Control............................................................................. 70 10-14 DEFAULT UNDER ASSOCIATES AGREEMENT............................................................ 70 ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT: 11-1 Acceleration.................................................................................. 71 11-2. Rights of Enforcement......................................................................... 71 11-3. Sale of Collateral............................................................................ 71 11-4. Occupation of Business Location............................................................... 72 11-5. Grant of Nonexclusive License................................................................. 72 11-6. Assembly of Collateral........................................................................ 73 11-7. Rights and Remedies........................................................................... 73 ARTICLE 12 - REVOLVING CREDIT FUNDINGS AND DISTRIBUTIONS: 12-1. Revolving Credit Funding Procedures........................................................... 73 12-2. SwingLine Loans............................................................................... 73 12-3. Administrative Agent's Covering of Fundings:.................................................. 74 12-4. Ordinary Course Distributions................................................................. 76
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ARTICLE 13 - ACCELERATION AND LIQUIDATION: 13-1. Acceleration Notices.......................................................................... 77 13-2. Acceleration.................................................................................. 77 13-3. Initiation of Liquidation..................................................................... 77 13-4. Actions At and Following Initiation of Liquidation............................................ 77 13-5. Administrative Agent's Conduct of Liquidation................................................. 78 13-6. Distribution of Liquidation Proceeds:......................................................... 78 13-7. Relative Priorities To Proceeds of Liquidation................................................ 78 ARTICLE 14 - THE ADMINISTRATIVE AGENT: 14-1. Appointment of The Administrative Agent....................................................... 79 14-2. Responsibilities of Administrative Agent...................................................... 80 14-3. Concerning Distributions By the Administrative Agent.......................................... 80 14-4. Dispute Resolution:........................................................................... 81 14-5. Distributions of Notices and of Documents..................................................... 81 14-6. Confidential Information...................................................................... 82 14-7. Reliance by Administrative Agent.............................................................. 82 14-8. Non-Reliance on Administrative Agent and Other Revolving Credit Lenders....................... 82 14-9. Indemnification............................................................................... 83 14-10. Resignation of Administrative Agent........................................................... 83 ARTICLE 15 - ACTION BY ADMINISTRATIVE AGENT - CONSENTS - AMENDMENTS - WAIVERS: 15-1. Administration of Credit Facilities........................................................... 84 15-2. Actions Requiring or On Direction of Majority Lenders......................................... 84 15-3 Actions Requiring or On Direction of SuperMajority Lenders................................... 84 15-4. Actions Requiring or Directed By Unanimous Consent............................................ 85 15-5. Actions Requiring SwingLine Lender Consent.................................................... 86 15-6. Actions Requiring Issuer Consent............................................................. 86 15-7. Actions Requiring Administrative Agent's Consent.............................................. 86 15-8. Miscellaneous Actions......................................................................... 86 15-9. Actions Requiring Lead Borrower's Consent..................................................... 87 15-10. NonConsenting Revolving Credit Lender......................................................... 87 ARTICLE 16 - ASSIGNMENTS BY REVOLVING CREDIT LENDERS: 16-1. Assignments and Assumptions:.................................................................. 89 16-2. Assignment Procedures......................................................................... 89 16-3. Effect of Assignment.......................................................................... 90 ARTICLE 17 - NOTICES: 17-1. Notice Addresses.............................................................................. 90 17-2. Notice Given.................................................................................. 91 ARTICLE 18 - TERM: 18-1. Termination of Revolving Credit............................................................... 92 18-2. Actions On Termination........................................................................ 92
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ARTICLE 19 - GENERAL: 19-1. Protection of Collateral....................................................................... 93 19-2. Publicity...................................................................................... 93 19-3. Successors and Assigns......................................................................... 93 19-4. Severability................................................................................... 93 19-5. Amendments. Course of Dealing.................................................................. 93 19-6. Power of Attorney.............................................................................. 94 19-7. Application of Proceeds........................................................................ 94 19-8. Increased Costs................................................................................ 94 19-9. Costs and Expenses of the Administrative Agent................................................. 95 19-10. Copies and Facsimiles.......................................................................... 95 19-11. Massachusetts Law.............................................................................. 95 19-12. Consent to Jurisdiction........................................................................ 96 19-13. Indemnification................................................................................ 96 19-14. Rules of Construction.......................................................................... 96 19-15. Intent......................................................................................... 98 19-16. Participations:................................................................................ 98 19-17. Right of Set-Off............................................................................... 98 19-18. Pledges To Federal Reserve Banks:.............................................................. 98 19-19. Maximum Interest Rate.......................................................................... 99 19-20. Waivers........................................................................................ 99 19-21 Additional Waivers............................................................................. 100 19-22. Confidentiality................................................................................ 101
v EXHIBITS 1-1 : Realty Sales 3-1 : Good Standing Certificates 2-7(c) : SwingLine Note 2-9 : Revolving Credit Note 2-18 : Synthetic Leases 2-22 : Revolving Credit Lenders' Commitments 3-4 : Additional Documents 4-2 : Corporate Information 4-3 : Trade Names 4-5 : Locations, Leases, and Landlords 4-6 : Encumbrances 4-7 : Indebtedness 4-8 : Insurance Policies 4-10 : Capital Leases 4-12 : Collective Bargaining Agreements 4-14 : Taxes 4-18 : Litigation 4-19 : Existing Investments 4-23 : Affiliate Transactions 5-4 : Borrowing Base Certificate 5-5 : Financial Reporting Requirements 7-1 : DDA's. 7-2 : Credit Card Arrangements 7-3 : Blocked Account Banks 16-2 : Assignment / Assumption
vi ================================================================================ AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ================================================================================ May 2, 2003 THIS AGREEMENT is made between Fleet Retail Finance Inc. (in such capacity, herein the "ADMINISTRATIVE AGENT"), a Delaware corporation with offices at 40 Broad Street, Boston, Massachusetts 02109, as agent for the ratable benefit of the "REVOLVING CREDIT LENDERS", who are, at present, those financial institutions identified on the signature pages of this Agreement and who in the future are those Persons (if any) who become "Revolving Credit Lenders" in accordance with the provisions of Section 2-22, below; and The Revolving Credit Lenders; Fleet National Bank ("FLEET"), a bank organized under the laws of the United States of America, having an office at 100 Federal Street, Boston, Massachusetts 02210; JPMorgan Business Credit Corp., a corporation organized under the laws of New York, and JPMorgan Chase Bank, a New York banking corporation, each having an office at One Chase Square, Rochester, New York 14643, as Co-Agents (the "CO-AGENTS"); and GMAC Commercial Finance LLC, a duly organized limited liability company having an office at 461 Fifth Avenue, New York, New York 10017 (the "DOCUMENTATION AGENT"); and The CIT Group/Business Credit, Inc., a duly organized corporation, having an office at 1200 Ashwood Parkway, Atlanta, Georgia 30338 (the "SYNDICATION AGENT") and OfficeMax, Inc. (in such capacity, the "LEAD BORROWER"), an Ohio corporation with its principal executive offices at 3605 Warrensville Center Road, Shaker Heights, Ohio 44122, as agent for the following (individually, a "BORROWER" and collectively, the "BORROWERS"): Said OfficeMax, Inc., BizMart, Inc., a Delaware corporation with its principal executive offices at 3605 Warrensville Center Road, Shaker Heights, Ohio 44122, BizMart (Texas), Inc., a Delaware corporation with its principal executive offices at 3605 Warrensville Center Road, Shaker Heights, Ohio 44122 and OfficeMax Corp., an Ohio corporation with its principal executive offices at 3605 Warrensville Center Road, Shaker Heights, Ohio 44122, and OMX, Inc., a Nevada corporation with its 1 principal executive offices at 101 Convention Center Drive, Las Vegas, Nevada 89109. in consideration of the mutual covenants contained herein and benefits to be derived herefrom, WITNESSETH: ARTICLE 1 - DEFINITIONS: As used herein, the following terms have the following meanings or are defined in the section of this Agreement so indicated: "ACCOUNT DEBTOR": Has the meaning given that term in the UCC. "ACCOUNTS" and "ACCOUNTS RECEIVABLE" include, without limitation, "accounts" as defined in the UCC, and also all: accounts, accounts receivable, receivables, and rights to payment (whether or not earned by performance): for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of; for services rendered or to be rendered; arising out of the use of a credit or charge card or information contained on or used with that card; and also all reclaimed, returned, rejected or repossessed Inventory (if any) the sale of which gave rise to any Account. "ACH": Automated clearing house. "ACQUISITION": The purchase or acquisition of all or substantially all of the assets of any Person, the purchase of a controlling equity interest in any Person, or the merger or consolidation of any Person with any other Person, in any transaction or group of transactions which are part of a common plan, in each case excluding any transaction involving a Related Entity. "ADMINISTRATIVE AGENT": Is referred to in the Preamble. "ADMINISTRATIVE AGENT'S COVER": Defined in Section 12-3(c)(i). ADMINISTRATIVE AGENT'S FEE": Is defined in Section 2-14. " ADMINISTRATIVE AGENT'S RIGHTS AND REMEDIES": Is defined in Section 11-7. "AFFILIATE": The following: (a) With respect to any two Persons, a relationship in which (i) one holds, directly or indirectly, not less than twenty five percent (25%) of the capital stock, beneficial interests, partnership interests, or other equity interests of the other; or (ii) one has, directly or indirectly, the right, under ordinary circumstances, to vote for the election of a majority of the directors (or other body or Person who has those powers customarily vested in a board of directors of a corporation); or (iii) not less than twenty five percent (25%) of their respective ownership is directly or indirectly held by the same third Person. (b) Any Person which: is a parent, brother-sister, Subsidiary, or affiliate, of a Borrower; could have such enterprise's tax returns or financial statements 2 consolidated with that Borrower's; could be a member of the same controlled group of corporations (within the meaning of Section 1563(a)(l), (2) and (3) of the Internal Revenue Code of 1986, as amended from time to time) of which any Borrower is a member; controls or is controlled by any Borrower. "AGREEMENT": This Amended and Restated Loan and Security Agreement, as such may hereafter be modified, amended, restated, or supplemented from time to time. "APPLICABLE LAW": As to any Person: (i) All statutes, rules, regulations, orders, or other requirements having the force of law and (ii) all court orders and injunctions, arbitrator's decisions, and/or similar rulings, in each instance ((i) and (ii)) of or by any federal, state, municipal, and other governmental authority, or court, tribunal, panel, or other body which has or claims jurisdiction over such Person, or any property of such Person. "APPLICABLE MARGIN": The rates for Base Margin Loans and Eurodollar Loans based upon the following criteria:
- -------------------------------------------------------------------------------- BASE REVOLVING CREDIT MARGIN EURODOLLAR LOANS AND L/Cs APPLICABLE APPLICABLE LEVEL OUTSTANDING MARGIN MARGIN - -------------------------------------------------------------------------------- 1 Less than $350,000,000 0% 1.75% - -------------------------------------------------------------------------------- 2 Greater than or equal to $350,000,000, but less than $430,000,000 0% 2.00% - -------------------------------------------------------------------------------- 3 Greater than or equal to $430,000,000 0% 2.50% - ---------------------------------------------------------------------------------
The Applicable Margin shall be adjusted monthly as of the first day of each calendar month, commencing March 1, 2003, based upon the average Revolving Credit Loans and L/Cs outstanding during the immediately preceding calendar month. During the existence of an Event of Default, interest shall accrue at the rate set forth in Section 2-11(f). "APPRAISED INVENTORY LIQUIDATION VALUE": The product of (a) the Cost of Eligible Inventory (net of Inventory Reserves) multiplied by (b) that percentage, determined from the then most recent appraisal of the Borrowers' Inventory undertaken at the request of the Administrative Agent by an independent appraiser reasonably acceptable to the Lead Borrower, to reflect the appraiser's estimate of the net recovery on the Borrowers' Inventory in the event of an in-store liquidation of that Inventory. "APPRAISED INVENTORY PERCENTAGE": 80%. "ARRANGER": Fleet Securities, Inc. "ASSIGNING REVOLVING CREDIT LENDER": Defined in Section 16-1 (a). 3 "ASSIGNMENT AND ACCEPTANCE": Defined in Section 16-2. "AVAILABILITY": The lesser of (a) or (b), where: (a) is the result of (i) The Revolving Credit Ceiling Minus (ii) The aggregate unpaid balance of the Loan Account Minus (iii) The aggregate undrawn Stated Amount of all then outstanding L/Cs. (b) is the result of (i) The Borrowing Base Minus (ii) The aggregate unpaid balance of the Loan Account Minus (iii) The aggregate undrawn Stated Amount of all then outstanding L/Cs. Minus (iv) The aggregate of the Availability Reserves. "AVAILABILITY RESERVES": Such reserves as the Administrative Agent from time to time determines (after consultation with the Lead Borrower (whose consent to any Availability Reserve shall not be required)) in the Administrative Agent's reasonable business judgment as being appropriate to reflect the impediments to the Administrative Agent's ability to realize upon the Collateral. Without limiting the generality of the foregoing, Availability Reserves may include (but are not limited to) reserves based on the following: (i) Rent (but only if a landlord's waiver, acceptable to the Administrative Agent, has not been received by the Administrative Agent). (ii) Customer Credit Liabilities. (iii) Taxes and other governmental charges, including, ad valorem, personal property, and other taxes which have priority over the Collateral Interests of the Administrative Agent in the Collateral. (iv) Payables more than forty-five (45) days beyond normal terms. 4 "BANKRUPTCY CODE": Title 11, U.S.C., as amended from time to time. "BASE": For any day, (a) the Prime Rate announced from time to time by Fleet National Bank (or any successor in interest to Fleet National Bank) as its "Prime Rate" or (b) if no such Prime Rate is announced by Fleet National Bank, the Federal Funds Effective Rate in effect on such day plus one-half of one percent (0.50%) per annum. The "Prime Rate" is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. Any change in the Prime Rate due to a change in Fleet National Bank's Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in Fleet National Bank's Prime Rate or the Federal Funds Effective Rate, respectively. "BASE MARGIN LOAN": Each Revolving Credit Loan while bearing interest at the Base Margin Rate. "BASE MARGIN RATE": The aggregate of Base plus the Applicable Margin for Base Margin Loans. "BLOCKED ACCOUNT": Any DDA into which the contents of any other DDA is transferred. "BLOCKED ACCOUNT AGREEMENT": An Agreement, in form satisfactory to the Administrative Agent, which Agreement recognizes the Administrative Agent's Collateral Interest in the contents of the DDA which is the subject of such Agreement and agrees that, after and during the continuance of a Cash Control Event, such contents shall be transferred only to the Concentration Account or as otherwise instructed by the Administrative Agent. "BORROWER" AND "BORROWERS": Is defined in the Preamble and includes all domestic Subsidiaries of any Borrower hereafter acquired or created which own any Inventory or Accounts. "BORROWING BASE": The aggregate of the following: The face amount of Eligible Credit Card Receivables multiplied by the Credit Card Advance Rate. Plus The lesser of (a) the Cost of Eligible Inventory (net of Inventory Reserves) multiplied by the Inventory Advance Rate or (b) the Appraised Inventory Percentage of the Appraised Inventory Liquidation Value, provided that any reduction in the amounts available to be borrowed under this paragraph as a result of a change in the Appraised Inventory Liquidation Value shall not take place until five (5) days after the date that the Lead Borrower is advised by the Administrative Agent of such change in the Appraised Inventory Liquidation Value. "BORROWING BASE CERTIFICATE": Is defined in Section 5-4. "BUSINESS DAY": Any day other than (a) a Saturday or Sunday; (b) any day on which banks in Boston, Massachusetts or in Cleveland, Ohio, and when involving any DDA or Blocked Account, the office of the financial institution at which that DDA or Blocked Account, as the case may be, is maintained, generally are not open to the general public for the purpose of conducting commercial banking business; or (c) a day on which the 5 principal office of the Administrative Agent is not open to the general public to conduct business. "CAPITAL EVENT": The issuance by any Borrower on or after the Closing Date (a) of Indebtedness for borrowed money in an underwritten public offering or private placement with institutional investors or (b) of any equity interest for cash, excluding any sale or issuance to management, employees or directors pursuant to stock option or similar plans and excluding any sale or issuance of an amount not to exceed an aggregate of $20,000,000.00 of proceeds received from and after the Closing Date. Nothing contained in this definition or in any provision relating to Capital Events shall permit or be deemed to permit the Borrowers to effectuate a Capital Event which is otherwise prohibited hereunder. "CAPITAL EXPENDITURES": The expenditure of funds or the incurrence of liabilities which may be capitalized in accordance with GAAP. "CAPITAL LEASE": Any lease which may be capitalized in accordance with GAAP. "CASH CONTROL EVENT": Either (a) the occurrence and continuance of any Event of Default, or (b) the occurrence and continuance of each of the following: (i) Availability at any time is less than $40,000,000, and (ii) the Fixed Charge Coverage Ratio is less than 1:1. For purposes hereof, the occurrence of a Cash Control Event under clause (b) hereof shall be deemed continuing notwithstanding that Availability may thereafter exceed the amounts set forth in the such clause unless and until Availability exceeds such amounts for three consecutive months, in which case a Cash Control Event shall no longer be deemed to be continuing for purposes hereof; provided that a Cash Control Event under clause (b) hereof shall be deemed continuing (even if Availability exceeds the required amounts for three consecutive months) if a Cash Control Event has occurred and been discontinued on three occasions in any twelve month period. "CHANGE IN CONTROL": The occurrence of any of the following: (a) The acquisition, by any group of persons (within the meaning of the Securities Exchange Act of 1934, as amended) or by any Person, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission) of 33 1/3% or more of the issued and outstanding capital stock of the Lead Borrower having the right, under ordinary circumstances, to vote for the election of directors of the Lead Borrower, other than (i) the Lead Borrower, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Lead Borrower, or (iii) any members of the Current Holder Group (as hereinafter defined). As used herein, the term "Current Holder Group" shall mean (1) those Persons who currently hold 5% or more of the issued and outstanding capital stock of the Lead Borrower on Closing Date, (2) Persons who are officers or directors of the Lead Borrower on the Closing Date, (3) the spouses, heirs, legatees, descendants and relatives of any Person described in (1) or (2), (4) the executors, administrators of the estate of any Person described in (1) or (2), and any court appointed guardian of any such Person, and (5) any trust, family partnership or similar investment entity for the benefit of any Person described in (1) or (2). (b) More than half of the persons who were directors of the Lead Borrower on the first day of any period consisting of twelve (12) consecutive calendar months (the first of which twelve (12) month periods commencing with the first day of the month during which this Agreement was executed), cease, for any reason other than 6 retirement, death or disability, to be directors of the Lead Borrower, and their respective replacements are not nominated or appointed by a majority of the Persons who were directors on the first day of such twelve (12) consecutive calendar months or who were nominated or appointed by directors so nominated or appointed. (c) Any failure of the Lead Borrower to own, directly or indirectly, beneficially and of record, 100% of the capital stock of all other Borrowers. "CLOSING DATE": The date upon which the conditions precedent set forth in Article 3 hereof have been satisfied or waived. "CO-AGENTS": Is referred to in the Preamble. "COLLATERAL": Is defined in Section 8-1. "COLLATERAL INTEREST": Any interest in property to secure an obligation, including, without limitation, a security interest, mortgage, and deed of trust. "CONCENTRATION ACCOUNT": Is defined in Section 7-3. "CONSENT": Actual consent given by the Lender from whom such consent is sought; or the passage of seven (7) Business Days from receipt of written notice to a Revolving Credit Lender from the Administrative Agent of a proposed course of action to be followed by the Administrative Agent without such Revolving Credit Lender's giving the Administrative Agent written notice of that Revolving Credit Lender's objection to such course of action, provided that the Administrative Agent may rely on such passage of time as consent by a Revolving Credit Lender only if such written notice states that consent will be deemed effective if no objection is received within such time period. "CONSOLIDATED": When used to modify a financial term, test, statement, or report, refers to the application or preparation of such term, test, statement or report (as applicable) based upon the consolidation, in accordance with GAAP, of the financial condition or operating results of the Lead Borrower and its Subsidiaries. "COST": The lower of (a) or (b), where: (a) is the calculated cost of purchases, based upon the Borrowers' accounting practices in effect on the date on which this Agreement was executed as such calculated cost is determined from: invoices received by the Borrowers; the Borrowers' purchase journal; or the Borrowers' perpetual inventory system. (b) is, without duplication of any Inventory Reserves for Markdowns, the lowest ticketed or promoted price at which the subject Inventory is offered to the public by the Borrowers, after all mark-downs (whether or not such price is then reflected on the Borrowers' accounting system). "Cost" does not include inventory capitalization costs or other non-purchase price charges (such as freight) used in the Borrowers' calculation of cost of goods sold. "COSTS OF COLLECTION": Includes, without limitation, all reasonable attorneys' fees and reasonable out-of-pocket expenses incurred by the Administrative Agent's attorneys, and all reasonable out-of-pocket costs incurred by the Administrative Agent in the administration of the Liabilities and/or the Loan Documents, including, without 7 limitation, reasonable costs and expenses associated with travel on behalf of the Administrative Agent, where such costs and expenses are directly or indirectly related to or in respect of the Administrative Agent's: administration and management of the Liabilities; negotiation, documentation, and amendment of any Loan Document; or efforts to preserve, protect, collect, or enforce the Collateral, the Liabilities, and/or the Administrative Agent's Rights and Remedies and/or any of the rights and remedies of the Administrative Agent against or in respect of any guarantor or other person liable in respect of the Liabilities (whether or not suit is instituted in connection with such efforts). "Costs of Collection" shall also include the reasonable fees and expenses of Lenders' Special Counsel. The Costs of Collection are Liabilities, and at the Administrative Agent's option may bear interest at the then effective Base Margin Rate. "COVENANT COMPLIANCE EVENT": Availability at any time is less than ten (10) percent of the then Revolving Credit Ceiling (rounded to the nearest million). For purposes hereof, the occurrence of a Covenant Compliance Event shall be deemed continuing (a) as long as the Borrowers are not in compliance with the required Fixed Charge Coverage Ratio, notwithstanding that Availability may thereafter exceed the amounts set forth in the preceding sentence, or (b) as long as the Borrowers are in compliance with the required Fixed Charge Coverage Ratio, until Availability exceeds the amounts set forth in the preceding sentence. "CREDIT CARD ADVANCE Rate":85% "CUSTOMER CREDIT LIABILITY": Gift certificates, merchandise credits, layaway obligations, frequent shopping programs, and similar liabilities of any Borrower to its retail customers and prospective customers. "DDA": Any checking or other demand daily depository account maintained by any Borrower in which proceeds of the Borrowers' Inventory and Accounts are deposited. "DEBT SERVICE CHARGES": For any fiscal period, the sum of (i) the expenses of the Lead Borrower and its Subsidiaries for such period for interest paid in cash with respect to Indebtedness (including, without limitation, the Liabilities but excluding any synthetic lease payments) and all fees paid in cash on account of or with respect thereto, plus (ii) principal payments made or required to be made on account of Indebtedness (excluding the Liabilities and any synthetic lease payments but including, without limitation, Capitalized Leases) for such period, in each case determined in accordance with GAAP. "DEFAULT": Any occurrence, circumstance, or state of facts with respect to a Borrower which (a) is an Event of Default; or (b) would become an Event of Default if any requisite notice were given and/or any requisite period of time were to run and such occurrence, circumstance, or state of facts were not absolutely cured within any applicable grace period. "DELINQUENT REVOLVING CREDIT LENDER": Defined in Section 12-3(c). "DEPOSIT ACCOUNT": Has the meaning given that term in the UCC. "DOCUMENTARY L/Cs": L/Cs issued pursuant to this Agreement to support any Borrower's purchases in the ordinary course of business of Inventory for use in its retail store business, the drawing under which requires the delivery of bills of lading, airway bills or other similar types of documents of title. 8 "DOCUMENTATION AGENT": Is referred to in the Preamble. "DOCUMENTS": Has the meaning given that term in the UCC. "EBITDA": Consolidated earnings before interest, taxes, depreciation, and amortization, each as determined in accordance with GAAP. "ELIGIBLE ASSIGNEE": A bank, insurance company, finance company or other financial institution or fund engaged in the business of making or investing in commercial loans in the ordinary course of its business having a combined capital and surplus or assets under management in excess of $300,000,000 or any Affiliate of any Revolving Credit Lender, or any Person to whom a Revolving Credit Lender assigns its rights and obligations under this Agreement as part of a programmed assignment and transfer of such Revolving Credit Lender's rights in and to a material portion of such Revolving Credit Lender's portfolio of asset based credit facilities. "ELIGIBLE CREDIT CARD RECEIVABLES": Accounts due on a non-recourse basis from major credit card processors (which, if due on account of a private label credit card program, are deemed in the reasonable discretion of the Administrative Agent to be eligible) as arise in the ordinary course of business, as have been earned by performance. Unless otherwise approved in writing by the Administrative Agent, none of the following shall be deemed to be Eligible Credit Card Receivables: (a) Accounts that have been outstanding for more than six (6) Business Days from the date of sale; (b) Accounts with respect to which a Borrower does not have good, valid and marketable title thereto, free and clear of any Encumbrance (other than Encumbrances granted to the Administrative Agent, for its benefit and the ratable benefit of the other Revolving Credit Lenders, pursuant to the Loan Documents); (c) Accounts which are disputed, are with recourse, or with respect to which a claim, counterclaim, offset or chargeback has been asserted (to the extent of such claim, counterclaim, offset or chargeback); (d) Accounts which the Administrative Agent determines in its reasonable discretion to be uncertain of collection. "ELIGIBLE INVENTORY": Inventory owned by any Borrower and maintained by a Borrower at a warehouse or held for sale in any of the Borrowers' retail stores, in each case in the United States of America (including its territories and possessions), which is reflected in the Borrowers' perpetual inventory, as to which Inventory, the Administrative Agent has a perfected security interest which is prior and superior to all security interests, claims, and Encumbrances. In no event, however, does "Eligible Inventory" include: any inventory-in-transit to the Borrowers, non-merchandise inventory (such as labels, bags, and packaging materials); damaged goods; return to vendor merchandise; packaways; or consigned inventory. "EMPLOYEE BENEFIT PLAN": As defined in ERISA. "ENCUMBRANCE": Each of the following: 9 (a) A Collateral Interest or agreement to create or grant a Collateral Interest; the interest of a lessor under a Capital Lease; conditional sale or other title retention agreement; sale of accounts receivable or chattel paper; or other arrangement pursuant to which any Person is entitled to any preference or priority with respect to the property or assets of another Person or the income or profits of such other Person; each of the foregoing whether consensual or non-consensual and whether arising by way of agreement, operation of law, legal process or otherwise. (b) The filing of any financing statement under the UCC or comparable law of any jurisdiction. "END DATE": The date upon which both (a) all Liabilities (excluding any contingent Liabilities not then due and payable) have been paid in full and (b) all obligations of any Revolving Credit Lender to make loans and advances and to provide other financial accommodations to the Borrowers hereunder shall have been irrevocably terminated. "ENVIRONMENTAL LAWS": All of the following: (a) Applicable Law which regulates or relates to, or imposes any standard of conduct or liability on account of or in respect to environmental protection matters, including, without limitation, Hazardous Materials, as are now or hereafter in effect. (b) The common law relating to damage to Persons or property from Hazardous Materials. "ERISA": The Employee Retirement Income Security Act of 1974, as amended. "ERISA AFFILIATE": Any Person which is under common control with a Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes any Borrower and which would be treated as a single employer under Section 414 of the Internal Revenue Code of 1986, as amended. "EURODOLLAR BUSINESS DAY": Any day which is both a Business Day and a day on which the principal market in Eurodollars in which Fleet National Bank participates is open for dealings in United States Dollar deposits. "EURODOLLAR LOAN": Any Revolving Credit Loan which bears interest at a Eurodollar Rate. "EURODOLLAR OFFER RATE": That rate of interest (rounded upwards, if necessary, to the next 1/100 of 1%) determined by the Administrative Agent to be the highest prevailing rate per annum at which deposits in U.S. Dollars are offered to Fleet National Bank, by first-class banks in the Eurodollar market in which Fleet National Bank participates at or about 10:OOAM (Boston Time) two (2) Eurodollar Business Days before the first day of the Interest Period for the subject Eurodollar Loan, for a deposit approximately in the amount of the subject loan for a period of time approximately equal to such Interest Period. "EURODOLLAR RATE": That per annum rate which is the aggregate of the Eurodollar Offer Rate plus the Applicable Margin for Eurodollar Loans, except that, in the event that the Administrative Agent determines that any Revolving Credit Lender may be subject to the Reserve Percentage, the "Eurodollar Rate" shall mean, with respect to any Eurodollar Loans then outstanding (from the date on which that Reserve Percentage 10 first became applicable to such Eurodollar Loans), and with respect to all Eurodollar Loans thereafter made, an interest rate per annum equal the sum of (a) plus (b), where: (a) is the decimal equivalent of the following fraction: Eurodollar Offer Rate --------------------- 1 minus Reserve Percentage (b) is the Applicable Margin for Eurodollar Loans. "EVENTS OF DEFAULT": Is defined in Article 10. "EXEMPT DDA": A depository account maintained by any Borrower, the only contents of which may be transfers from the Operating Account and actually used solely (i) for petty cash purposes; or (ii) for payroll. "FEDERAL FUNDS EFFECTIVE RATE". For any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal fund 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 that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by the Administrative Agent. "FEE LETTER": That letter dated November 30, 2000 and styled "Fee Letter" between the Lead Borrower and the Administrative Agent, as amended and supplemented as of the date hereof, and as such letter may from time to time hereafter be amended. "FISCAL": When followed by "month" or "quarter", the relevant fiscal period based on the Borrowers' fiscal year and accounting conventions. "FIXED CHARGE COVERAGE RATIO": As to the Lead Borrower and its Subsidiaries, for any period, the ratio of (a) Consolidated EBITDA minus Capital Expenditures incurred during such period minus income taxes paid in cash during such period, to (b) Debt Service Charges for such period, all as determined in accordance with GAAP. The Fixed Charge Coverage Ratio shall be calculated on a trailing four quarters basis. "FLEET": Is defined in the Preamble hereto. "FRFI": Fleet Retail Finance Inc. "GAAP": Principles which are consistent with those promulgated or adopted by the Financial Accounting Standards Board and its predecessors (or successors) in effect and applicable to that accounting period in respect of which reference to GAAP is being made, provided, however, in the event of a Material Accounting Change, then unless otherwise specifically agreed to by the Administrative Agent, (a) the Borrowers' compliance with the financial performance covenants imposed pursuant to Section 5-11 shall be determined as if such Material Accounting Change had not taken place and (b) the Lead Borrower shall include, with its monthly, quarterly, and annual financial statements a schedule, certified by the Lead Borrower's chief financial officer, on which the effect of such Material Accounting Change on that statement shall be described. 11 "GOODS": Has the meaning given that term in the UCC, and also includes all things movable when a security interest therein attaches and also all computer programs embedded in goods and any supporting information provided in connection with a transaction relating to the program if (i) the program is associated with the goods in such manner that it customarily is considered part of the goods or (ii) by becoming the owner of the goods, a Person acquires a right to use the program in connection with the goods. "HAZARDOUS MATERIALS": Any (a) substance which is defined or regulated as a hazardous material in or under any Environmental Law and (b) oil in any physical state. "HEDGE AGREEMENTS": All obligations of any Person in respect of interest rate swap agreements, currency swap agreements and other similar agreements designed to hedge against fluctuations in interest rates or foreign exchange rates. "INCREASED REPORTING EVENT": Either (a) the occurrence and continuance of any Event of Default, or (b) Availability at any time is less than 14.3 percent of the then Revolving Credit Ceiling (rounded to the nearest million). For purposes hereof, the occurrence of an Increased Reporting Event shall be deemed continuing notwithstanding that Availability may thereafter exceed the amounts set forth in the preceding sentence unless and until Availability exceeds such amounts for thirty (30) consecutive days, in which case a Increased Reporting Event shall no longer be deemed to be continuing for purposes hereof. "INDEBTEDNESS": All indebtedness and obligations of or assumed by any Person on account of or in respect to, without duplication, any of the following: (a) In respect of money borrowed (including any indebtedness which is non-recourse to the credit of such Person but which is secured by an Encumbrance on any asset of such Person) whether or not evidenced by a promissory note, bond, debenture or other written obligation to pay money. (b) In connection with any letter of credit or acceptance transaction (including, without limitation, the face amount of all letters of credit and acceptances issued for the account of such Person or reimbursement on account of which such Person would be obligated). (c) In connection with the sale or discount of accounts receivable or chattel paper of such Person. (d) On account of deposits or advances. (e) As lessee under Capital Leases. (f) On account of Hedge Agreements. (g) In connection with any sale and leaseback transaction. "Indebtedness" also includes: (1) Indebtedness of others secured by an Encumbrance on any asset of such Person, whether or not such Indebtedness is assumed by such Person. 12 (2) Any guaranty, endorsement, suretyship or other undertaking pursuant to which that Person may be liable on account of any obligation of any third party. (3) The Indebtedness of a partnership or joint venture for which such Person is liable as a general partner or joint venturer. "INDEMNIFIED PERSON": Is defined in Section 19-13. "INFORMATION": Is defined in Section 19-22. "INSTRUMENTS": Has the meaning given that term in the UCC. "INTEREST PAYMENT DATE": With reference to: Each Eurodollar Loan: The last day of the Interest Period relating thereto (provided that if the Interest Period is greater than three months in length, the Interest Payment Date shall be the last day of the third month of such Interest Period and the last day of the Interest Period); the Termination Date; and the End Date. Each Base Margin Loan: The first day of each month; the Termination Date; and the End Date. "INTEREST PERIOD": The following: (a) With respect to each Eurodollar Loan: Subject to Subsection (c), below, the period commencing on the date of the making or continuation of, or conversion to, the subject Eurodollar Loan and ending one, two, three, or six months thereafter, as the Lead Borrower may elect by notice (pursuant to Section 2-5) to the Administrative Agent (b) With respect to each Base Margin Loan: Subject to Subsection (c), below, the period commencing on the date of the making or continuation of or conversion to such Base Margin Loan and ending on that date (i) as of which the subject Base Margin Loan is converted to a Eurodollar Loan, as the Lead Borrower may elect by notice (pursuant to Section 2-5) to the Administrative Agent, or (ii) on which the subject Base Margin Loan is paid by the Borrowers. (c) The setting of Interest Periods is in all instances subject to the following: (i) Any Interest Period for a Base Margin Loan which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day. (ii) Any Interest Period for a Eurodollar Loan which would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day, unless that succeeding Business Day is in the next calendar month, in which event such Interest Period shall end on the last Business Day of the month during which the Interest Period ends. (iii) Subject to Subsection (iv) below, any Interest Period applicable to a Eurodollar Loan, which Interest Period begins on a day for which there is no numerically corresponding day in the calendar month during 13 which such Interest Period ends, shall end on the last Business Day of the month during which that Interest Period ends. (iv) Any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (v) The number of Interest Periods in effect at any one time is subject to Section 2-ll(d) hereof. "INVENTORY": Includes, without limitation, "inventory" as defined in the UCC and also all: (a) Goods which are leased by a Person as lessor; are held by a Person for sale or lease or to be furnished under a contract of service; are furnished by a Person under a contract of service; or consist of raw materials, work in process, or materials used or consumed in a business; (b) Goods of said description in transit; (c) Goods of said description which are returned, repossessed and rejected; (d) packaging, advertising, and shipping materials related to any of the foregoing; and (e) Documents which represent any of the foregoing. "INVENTORY ADVANCE RATE": The following percentages for the periods indicated:
- --------------------------------------------------------------------------- Period Inventory Advance Rate - ---------------------------------------------------------------------------- January 1 through June 30 of each year 59% - ---------------------------------------------------------------------------- July 1 through December 31 of each 61% year - ----------------------------------------------------------------------------
"INVENTORY RESERVES": Such Reserves as may be established from time to time by the Administrative Agent (after consultation with the Lead Borrower (whose consent to any Inventory Reserve shall not be required)), without duplication, in the Administrative Agent's reasonable business judgment with respect to the determination of the saleability, at retail, of the Eligible Inventory or which reflect such other factors as affect the market value of the Eligible Inventory. Without limiting the generality of the foregoing, Inventory Reserves may include (but are not limited to) reserves based on, without duplication, the following: (i) Obsolescence (based upon Inventory on hand beyond a given number of days). (ii) Seasonality. (iii) Shrinkage. (iv) Imbalance. (v) Change in Inventory character except as permitted pursuant to Section 4-22 hereof. (vi) Change in Inventory composition. (vii) Change in Inventory mix. 14 (viii) Markdowns (both permanent and point of sale). (ix) Retail markons and markups inconsistent with prior period practice and performance; or advertising calendar and planned advertising events. "ISSUER": The issuer of any L/C. The Issuer shall be Fleet or such other Revolving Credit Lender (or Affiliate of a Revolving Credit Lender) as the Administrative Agent may, in its discretion, select with the consent of the Lead Borrower whose consent shall not be unreasonably delayed or withheld. "L/C": Any letter of credit, the issuance of which is procured by the Administrative Agent for the account of any Borrower and any acceptance made on account of such letter of credit. "LANDLORD'S LIEN STATES": Collectively, Pennsylvania, Washington, Virginia and each other state in which Applicable Law grants a landlord a priority lien for amounts due or to become due under a Lease. "LEAD BORROWER": Is defined in the Preamble hereto. "LEASE": Any lease or other agreement, no matter how styled or structured, pursuant to which a Borrower is entitled to the use or occupancy of any space. "LENDERS' SPECIAL COUNSEL": A single counsel, selected by the Majority Lenders during the existence of an Event of Default, to represent the interests of the Revolving Credit Lenders in connection with the enforcement, attempted enforcement, or preservation of any rights and remedies under this, or any other Loan Document, as well as in connection with any "workout", forbearance, or restructuring of the credit facility contemplated hereby. "LETTER-OF-CREDIT RIGHT": Has the meaning given that term in the UCC and also refers to any right to payment or performance under an L/C, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. "LIABILITIES": Collectively, the following: (a) All and each of the following, whether now existing or hereafter arising, under this Agreement or under any of the other Loan Documents: (i) Any and all direct and indirect liabilities, debts, and obligations of each Borrower to the Administrative Agent or any Revolving Credit Lender, each of every kind, nature, and description. (ii) Each obligation to repay any loan, advance, indebtedness, note, obligation, overdraft, or amount now or hereafter owing by any Borrower to the Administrative Agent or any Revolving Credit Lender (including all future advances whether or not made pursuant to a commitment by the Administrative Agent or any Revolving Credit Lender), whether or not any of such are liquidated, unliquidated, primary, secondary, secured, unsecured, direct, indirect, absolute, contingent, or of any other type, nature, or description, or by reason of any cause of action which the Administrative Agent or any Revolving Credit Lender may hold against any Borrower. 15 (iii) All notes and other obligations of each Borrower now or hereafter assigned to or held by the Administrative Agent or any Revolving Credit Lender, each of every kind, nature, and description. (iv) All interest, fees, and charges and other amounts which may be charged by the Administrative Agent or any Revolving Credit Lender to any Borrower and/or which may be due from any Borrower to the Administrative Agent or any Revolving Credit Lender from time to time. (v) All reasonable costs and expenses incurred or paid by the Administrative Agent or any Revolving Credit Lender in respect of any agreement between any Borrower and the Administrative Agent or any Revolving Credit Lender or instrument furnished by any Borrower to the Administrative Agent or any Revolving Credit Lender (including, without limitation, Costs of Collection, reasonable attorneys' fees, and all reasonable court and litigation costs and expenses). (vi) Any and all covenants of each Borrower to or with the Administrative Agent or any Revolving Credit Lender and any and all obligations of each Borrower to act or to refrain from acting in accordance with any agreement between that Borrower and the Administrative Agent or any Revolving Credit Lender or instrument furnished by that Borrower to the Administrative Agent or any Revolving Credit Lender. (vii) Each of the foregoing as if each reference to the "the Administrative Agent or any Revolving Credit Lender" were to each Affiliate of the Administrative Agent. (b) Any and all direct or indirect liabilities, debts, and obligations of each Borrower to the Administrative Agent or any Affiliate of the Administrative Agent, each of every kind, nature, and description owing on account of any service or accommodation provided to, or for the account of any Borrower pursuant to this or any other Loan Document, including cash management services and the issuances of L/Cs. "LINE FEE": A fee equal to 0.25% per annum of the average difference, during the quarter just ended (or relevant period with respect to the payment being made on the Termination Date) between the Revolving Credit Ceiling and the sum of (a) the aggregate of the unpaid principal balance of the Revolving Credit Loans (other than the SwingLine Loans) and (b) the undrawn Stated Amount of L/Cs outstanding during the relevant period. "LIQUIDATION": The exercise, by the Administrative Agent, of those rights accorded to the Administrative Agent under the Loan Documents as a creditor of the Borrowers during the existence of an Event of Default looking towards the realization on the Collateral. Derivations of the word "Liquidation" (such as "Liquidate") are used with like meaning in this Agreement. "LOAN ACCOUNT": Is defined in Section 2-8. "LOAN DOCUMENTS": This Agreement, each instrument and document executed and/or delivered as contemplated by Article 3, below, and each other instrument or document from time to time executed and/or delivered in connection with the arrangements contemplated hereby or in connection with any transaction with the Administrative Agent or any Affiliate of the Administrative Agent, including, without limitation, any transaction which arises out of any cash management, depository, investment, letter of 16 credit, interest rate protection, or equipment leasing services provided by the Administrative Agent or any Affiliate of the Administrative Agent, as each may be amended from time to time. "MAJORITY LENDERS": Prior to termination of the Revolving Credit Commitments, Revolving Credit Lenders (other than Delinquent Revolving Credit Lenders) holding 51% or more of the Revolving Credit Commitments (other than any Revolving Credit Commitments held by Delinquent Revolving Credit Lenders). After termination of the Revolving Credit Commitments, Revolving Credit Lenders (other than Delinquent Revolving Credit Lenders) holding 51% or more of the Liabilities (other than any Liabilities held by Delinquent Revolving Credit Lenders). "MATERIAL ACCOUNTING CHANGE": Any change in GAAP applicable to accounting periods subsequent to the Borrowers' fiscal year most recently completed prior to the execution of this Agreement, which change has a material effect on the Borrowers' Consolidated financial condition or operating results, as reflected on financial statements and reports prepared by or for the Borrowers, when compared with such condition or results as if such change had not taken place or where preparation of the Borrowers' statements and reports in compliance with such change results in the breach of a financial performance covenant imposed pursuant to Section 5-11 where such a breach would not have occurred if such change had not taken place or visa versa. "MATURITY DATE": February 28, 2007. "NOMINEE": A business entity (such as a corporation or limited partnership) formed by the Administrative Agent to own or manage any Post Foreclosure Asset. "NOTICE OF ACCELERATION": Written notice as follows: (a) From the Administrative Agent to the Revolving Credit Lenders, as provided in 13-l(a). (b) From the Majority Lenders to the Administrative Agent, as provided in Section 13-l(b). "OPERATING ACCOUNT": Is defined in Section 7-3. "OVERLOAN": A loan, advance, or providing of credit support (such as the issuance of any L/C) to the extent that, immediately after its having been made, Availability is less than zero. "PARTICIPANT": Is defined in Section 19-16, hereof. "PAYMENT INTANGIBLE":HAS the meaning given that term in the UCC and also refers to any general intangible under which the Account Debtor's primary obligation is a monetary obligation. "PERMISSIBLE OVERLOANS": Revolving Credit Loans which are OverLoans, but as to which each of the following conditions is satisfied: (a) the Revolving Credit Ceiling is not exceeded; and (b) when aggregated with all other Permissible OverLoans, such Revolving Credit Loans do not aggregate more than three percent (3%) of the aggregate of the Borrowing Base; (c) the Permissible Overloans shall not remain outstanding for more than thirty (30) consecutive days, and (d) such Revolving Credit 17 Loans are made or undertaken in the Administrative Agent's discretion to protect and preserve the interests of the Revolving Credit Lenders. "PERMITTED ACQUISITIONS": An Acquisition in which each of the following conditions are satisfied: (i) No Default or Event of Default then exists or would arise from the consummation of such Acquisition. (ii) Such Acquisition shall have been approved by the Board of Directors of the Person (if such Person is a corporation) which is the subject of such Acquisition and such Person shall not have announced that it will oppose such Acquisition or shall not have commenced any action which alleges that such Acquisition will violate applicable law. (iii) The Lead Borrower shall have furnished the Administrative Agent with thirty (30) days prior notice of such intended Acquisition and shall have furnished the Administrative Agent with a business plan, a current draft of the acquisition agreement, summary of any due diligence undertaken by the Borrowers in connection with such Acquisition, appropriate financial statements of the Person which is the subject of such Acquisition, pro forma financial statements for the twelve month period following such Acquisition after giving effect to such Acquisition, and such other information as the Administrative Agent may reasonably require. (iv) The structure of the Acquisition shall be acceptable to the Administrative Agent in its reasonable judgment, which acceptance shall not be unreasonably withheld or delayed. After consummation of the Acquisition, a Borrower shall own directly or indirectly a majority of the equity interests in the Person being acquired and shall control a majority of any voting interests, and/or shall otherwise control the governance of the Person being acquired. (v) If the Acquisition involves a merger, consolidation or stock acquisition, the Person which is the subject of such Acquisition shall be engaged in a line of business reasonably related to that of the Lead Borrower or as otherwise permitted pursuant to Section 4-22 hereof. (vi) If the Person which is the subject of such Acquisition will be maintained as a Subsidiary of the Borrower, the Administrative Agent shall have received a guaranty of the Liabilities from such Subsidiary and a security interest in such Subsidiary's inventory, accounts and other property of the same nature as constitutes Collateral in order to secure the Liabilities. (vii) The total consideration paid for such Acquisition (in the form of cash, earn outs, property, or assumption of Indebtedness, exclusive of common stock of the Lead Borrower) shall not exceed $150,000,000.00 in the aggregate. (viii) The aggregate consideration furnished in connection with Permitted Acquisitions, howsoever classified (whether in the form of cash, earn outs, property, or assumption of Indebtedness, exclusive of common stock of the Lead Borrower) for all Acquisitions after the Closing Date, after giving effect to the proposed Acquisition, shall not exceed $200,000,000.00. 18 (ix) After giving effect to the Acquisition, Availability shall be at least $200,000,000.00 and Availability is projected on a pro forma basis to be at least $200,000,000.00 for the six months immediately following such Acquisition. "PERMITTED ENCUMBRANCES": Any of the following: (a) Encumbrances for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrowers in accordance with GAAP, and provided further that, no notice of tax lien has been filed with respect thereto. (b) Carrier's, warehousemen's, mechanics', materialmen's, repairmen's, landlord's or similar Encumbrances arising in the ordinary course of business which are not overdue by more than thirty (30) days or that are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrowers in accordance with GAAP. (c) Pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation. (d) Deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature in the ordinary course of business. (e) Easements, rights of way, leases, restrictions and other similar encumbrances incurred in the ordinary course of business that in the aggregate are not substantial in amount and which do not in any case materially detract from the value of the real estate subject thereto or materially interfere with the conduct of the business of the Borrowers. (f) Any interest or title of a lessor under any lease entered into by any Borrower in the ordinary course of business but only with respect to the assets so leased. The inclusion of the foregoing as "Permitted Encumbrances" shall not limit or impair the right of the Administrative Agent to impose Reserves on account thereof in accordance with the provisions of this Agreement. "PERMITTED INVESTMENTS": Each of the following: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing not more than one year from the date of acquisition thereof; (b) investments in commercial paper maturing not more than one year from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from Standard & Poors or from Moody's Investment Services, Inc.; 19 (c) investments in certificates of deposit, banker's acceptances and time deposits maturing not more than one year from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above (without regard to the limitation on maturity contained in such clause) and entered into with a financial institution satisfying the criteria described in clause (c) above; (e) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poors or from Moody's Investment Services, Inc.; and (f) investments in money market funds, substantially all the assets of which are comprised of securities of the types described in clauses (a) through (e) above. "PERSON": Any natural person, and any corporation, limited liability company, trust, partnership, joint venture, or other enterprise or entity. "POST FORECLOSURE ASSET": All or any part of the Collateral, ownership of which is acquired by the Administrative Agent or a Nominee on account of the "bidding in" at a disposition as part of a Liquidation or by reason of a "deed in lieu" type of transaction. "PRIMARY BLOCKED ACCOUNT": Account No. 2856777 maintained by the Lead Borrower with National City Bank, or such other account as the Borrower may so designate and the Administrative Agent shall approve (which approval shall not be unreasonably delayed or withheld). The Primary Blocked Account shall be deemed a Blocked Account for all purposes of this Agreement. "PROCEEDS": Includes, without limitation, "Proceeds" as defined in the UCC and each type of property described in Section 8-1 hereof. "REALTY SALE": Any sale, lease, conveyance, transfer, financing, or other disposition by any Borrower (including by way of merger, consolidation or a sale-leaseback transaction) in any transaction or group of transactions that are part of a common plan, of (a) any real estate described on EXHIBIT 1-1 hereto or (b) any real estate which is presently the subject of a synthetic lease and is hereafter acquired by any Borrower or any Subsidiary or Affiliate of any Borrower with proceeds of the Revolving Credit Loans or any L/C. "RECEIPTS": All cash, cash equivalents, money, checks, credit card slips, receipts and other Proceeds from any sale of the Collateral. "RECEIVABLES COLLATERAL": That portion of the Collateral which consists of (i) Accounts, (ii) Instruments arising from, relating to, or constituting proceeds of, the Borrowers' Accounts and Inventory, (iii) Documents relating to the Borrowers' Inventory, (iv) Payment Intangibles arising from, relating to, or constituting proceeds of, the Borrowers' Accounts and Inventory, and (v) Letter-of-Credit Rights, bankers' 20 acceptances, and all other rights to payment arising from, or relating to, or constituting proceeds of, the Borrowers' Accounts and Inventory. "REGISTER": Is defined in Section 16-2(c). "RELATED ENTITY": Any Person in which a Borrower is a partner, joint venturer, stockholder, or member or in which a Borrower holds an equity or other ownership interest, and which Person does not constitute a Subsidiary of any Borrower. "REQUIREMENTS OF LAW": As to any Person: (a) Applicable Law. (b) That Person's organizational documents. (c) That Person's by-laws and/or other instruments which deal with corporate or similar governance, as applicable. "RESERVE PERCENTAGE": The decimal equivalent of that rate applicable to a Revolving Credit Lender under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement of that Revolving Credit Lender with respect to "Eurocurrency liabilities" as defined in such regulations. The Reserve Percentage applicable to a particular Eurodollar Loan shall be based upon that in effect during the subject Interest Period, with changes in the Reserve Percentage which take effect during such Interest Period to take effect (and to consequently change any interest rate determined with reference to the Reserve Percentage) if and when such change is applicable to such loans. "RESERVES": The following: Availability Reserves and Inventory Reserves. Notwithstanding any provisions of this Agreement to the contrary, (a) the imposition of a new Reserve or a change to a then existing Reserve may be made only with not less than ten (10) Business Days prior notice to the Lead Borrower, except that an increase or decrease in the amount of a then existing Reserve, which increase or decrease is calculated in accordance with the same methodology as was utilized to establish the existing Reserve and merely reflects the results of mathematical computations of the items already in the category to which such Reserve applies (such as a change in the aggregate of Customer Credit Liabilities or leases in jurisdictions pursuant to which a priority landlord's lien may exist), may be made without such notice, (b) the Administrative Agent shall impose a new Reserve or change a Reserve only utilizing the same criteria as the Administrative Agent utilizes in imposing or changing Reserves for other of its similar borrowers, and (c) Availability Reserves imposed for Rent shall at no time exceed the sum of (i) three months base rent for any locations in Landlord's Lien States (except no such Reserve shall be established for locations for which the Borrowers have obtained a landlord's waiver reasonably acceptable in form and substance to the Administrative Agent), plus (ii) subject to the provisions of Section 4-5(d) hereof, three months base rent for any warehouses utilized by any Borrower (except no such Reserve shall be established for warehouses for which the Borrowers have obtained a warehouseman's waiver reasonably acceptable in form and substance to the Administrative Agent), plus (iii) an amount equal to all past due rent and warehouse charges for any of the Borrowers' locations, wherever located. "REVOLVING CREDIT": Is defined in Section 2-1. 21 "REVOLVING CREDIT CEILING": $550,000,000.00. "REVOLVING CREDIT COMMITMENT": With respect to each Revolving Credit Lender, that amount set forth on EXHIBIT 2-22, annexed hereto (as such amounts may change in accordance with the provisions of this Agreement). "REVOLVING CREDIT COMMITMENT FEE": Is defined in Section 2-13. "REVOLVING CREDIT COMMITMENT PERCENTAGE": With respect to each Revolving Credit Lender, that percentage set forth on EXHIBIT 2-22, annexed hereto (as such percentages may change in accordance with the provisions of this Agreement). "REVOLVING CREDIT EARLY TERMINATION FEE": Is defined in Section 2-16. "REVOLVING CREDIT LENDERS": Each Person who is or becomes a "Revolving Credit Lender" in accordance with the provisions of this Agreement. "REVOLVING CREDIT LOANS": Loans made under the Revolving Credit, except that where the term "Revolving Credit Loan" is used with reference to available interest rates applicable to the loans under the Revolving Credit, it refers to so much of the unpaid principal balance of the Loan Account as bears the same rate of interest for the same Interest Period. (See Section 2-11. 2-ll(c)). "REVOLVING CREDIT NOTE": Is defined in Section 2-9. "SEC": The Securities and Exchange Commission. "STANDBY L/Cs": L/Cs issued pursuant to this Agreement, the drawing under which does not require the delivery of bills of lading, airway bills or other similar types of documents of title, or which are customarily referred to as standby letters of credit. "STATED AMOUNT": The maximum amount for which an L/C may be honored. "SUBSIDIARY": Any corporation, association, partnership, limited liability company, trust, or other business entity of which the designated parent shall at any time own directly or indirectly through a Subsidiary or Subsidiaries at least a majority (by number of votes or controlling interests) of the outstanding voting interests. "SUPERMAJORITY LENDERS': Prior to termination of the Revolving Credit Commitments, Revolving Credit Lenders (other than Delinquent Revolving Credit Lenders) holding 66 2/3% or more of the Revolving Credit Commitments (other than any Revolving Credit Commitments held by Delinquent Revolving Credit Lenders). After termination of the Revolving Credit Commitments, Revolving Credit Lenders (other than Delinquent Revolving Credit Lenders) holding 66 2/3% or more of the Liabilities (other than any Liabilities held by Delinquent Revolving Credit Lenders). "SUPPORTING OBLIGATION": Has the meaning given that term in the UCC and also refers to a Letter-of-Credit Right or secondary obligation which supports the payment or performance of an Account, a Document, or an Instrument. "SWINGLINE": The facility pursuant to which the SwingLine Lender may advance Revolving Credit Loans aggregating up to the SwingLine Loan Ceiling. 22 "SWINGLINE LENDER": FRFI. "SWINGLINE LOAN CEILING": $30,000,000.00. "SWINGLINE LOANS": Defined in Section 2-7. "SYNDICATION AGENT": Is referred to in the Preamble. "TERMINATION DATE": The earliest of (a) the Maturity Date; or (b) the occurrence of any event described in Section 10-10, below; or (c) the Administrative Agent's notice to the Lead Borrower setting the Termination Date on account of the occurrence of any Event of Default other than as described in Section 10-10, below. "TRANSFER": Wire transfer pursuant to the wire transfer system maintained by the Board of Governors of the Federal Reserve Board, or as otherwise may be agreed to from time to time by the Administrative Agent making such Transfer and the subject Revolving Credit Lender. Wire instructions may be changed in the same manner that Notice Addresses may be changed (Section 17-1), except that no change of the wire instructions for Transfers to any Revolving Credit Lender shall be effective without the consent of the Administrative Agent. "UCC": The Uniform Commercial Code as in effect from time to time in Massachusetts. "UNANIMOUS CONSENT": Prior to termination of the Revolving Credit Commitments, Consent of Revolving Credit Lenders (other than Delinquent Revolving Credit Lenders) holding 100% of the Revolving Credit Commitments (other than Revolving Credit Commitments held by a Delinquent Revolving Credit Lender). After termination of the Revolving Credit Commitments, Revolving Credit Lenders (other than Delinquent Revolving Credit Lenders) holding 100% of the Liabilities (other than any Liabilities held by Delinquent Revolving Credit Lenders) "UNUSED FEE": A fee equal to 0.25% per annum of the average difference, during the quarter just ended (or relevant period with respect to the payment being made on the Termination Date) between the Revolving Credit Ceiling and the sum of (a) the aggregate of the unpaid principal balance of the Revolving Credit Loans (including the SwingLine Loans) and (b) the undrawn Stated Amount of L/Cs outstanding during the relevant period. ARTICLE 2 - THE REVOLVING CREDIT: 2-1. ESTABLISHMENT OF REVOLVING CREDIT (a) The Revolving Credit Lenders hereby establish a revolving line of credit (the "REVOLVING CREDIT") in the Borrowers' favor pursuant to which each Revolving Credit Lender, subject to, and in accordance with, this Agreement, acting through the Administrative Agent, shall make loans and advances and otherwise provide financial accommodations to and for the account of the Borrowers as provided herein. (b) Loans, advances, and financial accommodations under the Revolving Credit shall be made with reference to the Borrowing Base and shall be subject to Availability. The Borrowing Base and Availability shall be determined by the Administrative Agent by reference to Borrowing Base Certificates furnished as provided in Section 5-4, below. Such determination shall 23 take into account those Reserves as may be applicable thereto. The initial Reserves as of the date of this Agreement are the following: (i) Customer Credit Liabilities (an Availability Reserve): An amount equal to 50% of the outstanding Customer Credit Liabilities from time to time. (ii) Intentionally Omitted. (iii) Damaged Goods (an Inventory Reserve): An amount equal to 100% of the return to vendors Inventory as reflected in the Borrowers' books and records. (iv) Rent (an Availability Reserve): An amount equal to three months base rent for all Leases in Landlord's Lien States (except no such Reserve shall be established for locations for which the Borrowers have obtained a landlord's waiver reasonably acceptable in form and substance to the Administrative Agent), plus (ii) subject to the provisions of Section 4-5 (d) hereof, three months base rent for any warehouses utilized by any Borrower (except no such Reserve shall be established for warehouses for which the Borrowers have obtained a warehouseman's waiver reasonably acceptable in form and substance to the Administrative Agent), plus (iii) an amount equal to all past due rent and warehouse charges for any of the Borrowers' locations, wherever located. (v) In-Transit Inventory Reserve (an Inventory Reserve): An amount equal to 100% of the Inventory in transit to any Borrower as reflected on the Borrowers' perpetual inventory records. (vi) Average Consigned Inventory Payables (an Inventory Reserve). An amount equal to the average outstanding payables from time to time on account of inventory consigned to the Borrowers. For purposes hereof, the "average outstanding payables" shall mean the sum of the outstanding payables as of the first day and as of the last day of each month divided by two. (c) The commitment of each Revolving Credit Lender to provide such loans, advances, and financial accommodations is subject to Section 2-22. (d) The proceeds of borrowings under the Revolving Credit shall be used solely to refinance existing Indebtedness and synthetic leases of the Borrowers, to fund stock repurchases, for the Borrowers' working capital and Capital Expenditures, all solely to the extent permitted by this Agreement. 2-2. ADVANCES IN EXCESS OF BORROWING BASE (OVERLOANS). (a) No Revolving Credit Lender has any obligation to make any Revolving Credit Loan, or otherwise to provide any credit to or for the benefit of the Borrowers where the result of such Revolving Credit Loan or credit is an OverLoan. (b) The Revolving Credit Lenders' obligations, among themselves, are subject to Section 12-3(a) (which relates to each Revolving Credit Lender's making amounts available to the Administrative Agent) and to Section 15-3(a) (which relates to Permissible OverLoans). 24 (c) The Revolving Credit Lenders' providing of an OverLoan on any one occasion does not affect the obligations of each Borrower hereunder (including each Borrower's obligation to immediately repay any amount which otherwise constitutes an OverLoan) nor obligate the Revolving Credit Lenders to do so on any other occasion. 2-3. RISKS OF VALUE OF COLLATERAL. The Administrative Agent's reference to a given asset in connection with the making of Revolving Credit Loans and the providing of financial accommodations under the Revolving Credit and/or the monitoring of compliance with the provisions hereof shall not be deemed a determination by the Administrative Agent or any Revolving Credit Lender relative to the actual value of the asset in question. All risks concerning the value of the Collateral are and remain upon the Borrowers. All Collateral secures the prompt, punctual, and faithful performance of the Liabilities whether or not relied upon by the Administrative Agent in connection with the making of Revolving Credit Loans and the providing of financial accommodations under the Revolving Credit. 2-4. COMMITMENT TO MAKE REVOLVING CREDIT LOANS AND SUPPORT LETTERS OF CREDIT. Subject to the provisions of this Agreement, the Revolving Credit Lenders shall make a loan or advance under the Revolving Credit and the Issuer shall issue an L/C for the account of any Borrower, in each instance if duly and timely requested by the Lead Borrower as provided herein provided that: (a) Availability will not be exceeded. (b) No Default has occurred and is continuing. 2-5. REVOLVING CREDIT LOAN REQUESTS. (a) Requests for Revolving Credit Loans or for the continuance or conversion of an interest rate applicable to a Revolving Credit Loan may be requested by the Lead Borrower in such manner as may from time to time be reasonably acceptable to the Administrative Agent. (b) Subject to the provisions of this Agreement, the Lead Borrower may request a Revolving Credit Loan and elect an interest rate and Interest Period to be applicable to that Revolving Credit Loan by giving notice to the Administrative Agent by no later than the following: (i) If such Revolving Credit Loan is to be or is to be converted to a Base Margin Loan: By 12:00 noon on the Business Day on which the subject Revolving Credit Loan is to be made or is to be so converted. Base Margin Loans requested by the Lead Borrower, other than those resulting from the conversion of a Eurodollar Loan, shall not be less than $10,000.00. (ii) If such Revolving Credit Loan is to be, or is to be continued as, or converted to, a Eurodollar Loan: By 1:OOPM three (3) Eurodollar Business Days before the commencement of any new Interest Period or the end of the then applicable Interest Period. Eurodollar Loans and conversions to Eurodollar Loans shall each be not less than $1,000,000 and in increments of $1,000,000 in excess of such minimum. (iii) Any Eurodollar Loan which matures while a Default exists shall be converted, at the option of the Administrative Agent, to a Base Margin Loan notwithstanding any notice from the Lead Borrower that such Loan is to be continued as a Eurodollar Loan. (c) Any request for a Revolving Credit Loan or for the continuance or conversion of an interest rate applicable to a Revolving Credit Loan which is made after the applicable deadline 25 therefor, as set forth above, shall be deemed to have been made at the opening of business on the then next Business Day or Eurodollar Business Day, as applicable. (d) The Lead Borrower may request that the Administrative Agent cause the issuance by the Issuer of L/Cs for the account of the Borrowers as provided in Section 2-17. (e) The Administrative Agent may rely on any request for a Revolving Credit Loan or other financial accommodation under the Revolving Credit which the Administrative Agent, in good faith, believes to have been made by a Person duly authorized to act on behalf of the Lead Borrower and may decline to make any such requested loan or advance, or issuance, or to provide any such financial accommodation pending the Administrative Agent's being furnished with such documentation concerning that Person's authority to act as may be satisfactory to the Administrative Agent. (f) A request by the Lead Borrower for loan or advance, or other financial accommodation under the Revolving Credit shall be irrevocable and shall constitute certification by each Borrower that as of the date of such request, each of the following is true and correct: (i) Each representation which is made herein or in any of the Loan Documents is then true and complete in all material respects as of and as if made on the date of such request (except for representations that relate to an earlier date, in which case that representation shall have been true on such earlier date). (ii) No Default then exists. (g) If, at any time or from time to time, any Default exists: (i) The Administrative Agent may, or at the request of the Majority Lenders shall, suspend the Revolving Credit immediately. (ii) Neither the Administrative Agent nor any Revolving Credit Lender shall be obligated, during such suspension, to make any Revolving Credit Loans or to provide any financial accommodation hereunder nor shall the Administrative Agent, any Revolving Credit Lender or the Issuer be obligated, during such suspension, to issue, or cause to be issued, any L/C. (iii) The Administrative Agent may suspend the right of the Lead Borrower to request any Eurodollar Loan or to convert any Base Margin Loan to a Eurodollar Loan. 2-6 MAKING OF REVOLVING CREDIT LOANS. (a) A Revolving Credit Loan shall be made by the transfer of the proceeds of such Revolving Credit Loan to the Operating Account or as otherwise instructed by the Lead Borrower. (b) A Revolving Credit Loan shall be deemed to have been made under the Revolving Credit (and the Borrowers shall be indebted to the Administrative Agent and the Revolving Credit Lenders for the amount thereof immediately) at the following: (i) The Administrative Agent's initiation of the transfer of the proceeds of such Revolving Credit Loan in accordance with the Lead Borrower's instructions (if such Revolving Credit Loan is of funds requested by the Lead Borrower). (ii) The charging of the amount of such Revolving Credit Loan to the Loan Account (in all other circumstances). 26 (c) There shall not be any recourse to or liability of the Administrative Agent or any Revolving Credit Lender, on account of: (i) Any delay in the making of any Revolving Credit Loan requested under the Revolving Credit. (ii) Any delay by any bank or other depository institution in treating the proceeds of any such Revolving Credit Loan as collected funds. (iii) Any delay in the receipt, and/or any loss, of funds which constitute a Revolving Credit Loan under the Revolving Credit, the wire transfer of which was properly initiated by the Administrative Agent in accordance with wire instructions provided to the Administrative Agent by the Lead Borrower. 2-7. SWINGLINE LOANS. (a) For ease of administration, Base Margin Loans may be made by the SwingLine Lender (in the aggregate, the "SWINGLINE LOANS") in accordance with the procedures set forth in this Agreement for the making of loans and advances under the Revolving Credit, except that the Lead Borrower may request a SwingLine Loan by giving notice to the Administrative Agent by no later than 1:OOPM on the Business Day on which the subject SwingLine Loan is to be made. The unpaid principal balance of the SwingLine Loans shall not at any one time be in excess of the SwingLine Loan Ceiling. (b) The aggregate unpaid principal balance of SwingLine Loans shall bear interest at the rate applicable to Base Margin Loans and shall be repayable as a loan under the Revolving Credit. (c) The Borrowers' obligation to repay SwingLine Loans shall be evidenced by a Note in the form of EXHIBIT 2-7(c), annexed hereto, executed by the Borrowers, and payable to the SwingLine Lender. Neither the original nor a copy of that Note shall be required, however, to establish or prove any Liability. Upon the SwingLine Lender's request and, if applicable, the delivery of an appropriate lost instrument indemnity, the Borrowers shall execute a replacement of any SwingLine Note which has been lost, mutilated, or destroyed thereof and deliver such replacement to the SwingLine Lender. (d) For all purposes of this Loan Agreement, the SwingLine Loans and the Borrowers' obligations to the SwingLine Lender constitute Revolving Credit Loans and are secured as "Liabilities". (e) SwingLine Loans may be subject to periodic settlement with the Revolving Credit Lenders as provided in this Agreement. 2-8. THE LOAN ACCOUNT. (a) An account ("LOAN ACCOUNT") shall be opened on the books of the Administrative Agent in which a record shall be kept of all Revolving Credit Loans made and L/Cs issued under the Revolving Credit. (b) The Administrative Agent shall also keep a record (either in the Loan Account or elsewhere, as the Administrative Agent may from time to time elect) of all interest, fees, service charges, costs, expenses, and other debits owed to the Administrative Agent and each Revolving Credit Lender on account of the Liabilities and of all credits against such amounts so owed. 27 (c) All credits against the Liabilities shall be conditional upon final payment to the Administrative Agent for the account of each Revolving Credit Lender of the items giving rise to such credits. The amount of any item credited against the Liabilities which is charged back against the Administrative Agent or any Revolving Credit Lender for any reason or is not so paid shall be a Liability and shall be added to the Loan Account, whether or not the item so charged back or not so paid is returned. (d) Except as otherwise provided herein, all fees, service charges, costs, and expenses for which any Borrower is obligated hereunder are payable on demand. In the determination of Availability, the Administrative Agent may deem fees, service charges, accrued interest, and other payments which will be due and payable between the date of such determination and the first day of the then next succeeding month as having been advanced under the Revolving Credit whether or not such amounts are then due and payable. (e) The Administrative Agent, without the request of the Lead Borrower, may advance under the Revolving Credit any interest, fee, service charge, or other payment to which the Administrative Agent or any Revolving Credit Lender is entitled from any Borrower pursuant hereto and may charge the same to the Loan Account notwithstanding that such amount so advanced may result in the Borrowing Base being exceeded. Such action on the part of the Administrative Agent shall not constitute a waiver of the Administrative Agent's rights and each Borrower's obligations under Section 2-10(b). Any amount which is added to the principal balance of the Loan Account as provided in this Section 2-8(e) shall bear interest at the interest rate then and thereafter applicable to Base Margin Loans. (f) Any statement rendered by the Administrative Agent or any Revolving Credit Lender to the Lead Borrower concerning the Liabilities shall be considered correct and accepted by each Borrower and shall be conclusively binding upon each Borrower unless the Lead Borrower provides the Administrative Agent with written objection thereto within one hundred twenty (120) days from the mailing of such statement, which written objection shall indicate, with particularity, the reason for such objection. The Loan Account and the Administrative Agent's books and records concerning the loan arrangement contemplated herein and the Liabilities shall be prima facie evidence and proof of the items described therein. 2-9. THE REVOLVING CREDIT NOTES. The Borrowers' obligation to repay loans and advances under the Revolving Credit, with interest as provided herein, shall be evidenced by Notes (each, a "REVOLVING CREDIT NOTE") in the form of EXHIBIT 2-9, annexed hereto, executed by each Borrower, one payable to each Revolving Credit Lender. Neither the original nor a copy of any Revolving Credit Note shall be required, however, to establish or prove any Liability. Upon a Revolving Lender's request and, if applicable, the delivery of an appropriate lost instrument indemnity, each Borrower shall execute a replacement thereof and deliver such replacement to the Administrative Agent in the event that any Revolving Credit Note is ever lost, mutilated, or destroyed. 2-10. PAYMENT OF THE LOAN ACCOUNT. (a) The Borrowers may repay all or any portion of the principal balance of the Loan Account from time to time until the Termination Date. (b) The Borrowers, without notice or demand from the Administrative Agent or any Revolving Credit Lender, shall pay the Administrative Agent that amount, from time to time, which is necessary so that there is no OverLoan outstanding. (c) During the continuance of a Cash Control Event, the Borrowers shall repay the Revolving Credit 28 (i) in an amount equal to the proceeds realized from the sale or other disposition of, or realization upon, any Collateral; (ii) in an amount equal to the proceeds realized from any Realty Sale, Capital Event and/or condemnation and casualty insurance proceeds received by any Borrower to the extent that such proceeds are not reinvested in replacement assets within 180 days after the date of receipt of such proceeds; and (iii) in accordance with the provisions of Article 7 hereof. All amounts prepaid under this Section 2-10(c) may be reborrowed under the Revolving Credit, subject to and in accordance with, the terms of this Agreement. (d) The Borrowers shall repay the then entire unpaid balance of the Loan Account and all other Liabilities on the Termination Date. (e) No payment of Eurodollar Loans shall be permitted hereunder other than on the last day of an Interest Period applicable thereto, unless the Borrowers simultaneously reimburses the Revolving Credit Lenders for all amounts described in Section 2-10(f) below associated therewith. In order to avoid payment of the amounts described in Section 2-10(f) below, as long as no Event of Default has occurred and is continuing, at the request of the Lead Borrower, the Administrative Agent shall hold all amounts required to be applied to Eurodollar Loans in a non-interest bearing cash collateral account and will apply such funds to the applicable Eurodollar Loans at the end of the then pending Interest Period therefor (provided that the foregoing shall in no way limit or restrict the Administrative Agent's rights upon the subsequent occurrence of an Event of Default). (f) The Borrowers shall indemnify the Administrative Agent and each Revolving Credit Lender and hold the Administrative Agent and each Revolving Credit Lender harmless from and against any loss, cost or expense (including loss of anticipated profits and amounts payable by the Administrative Agent or such Revolving Credit Lender on account of "breakage fees" (so-called)) which the Administrative Agent or such Revolving Credit Lender may sustain or incur (including, without limitation, by virtue of acceleration after the occurrence of any Event of Default) as a consequence of the following: (i) Default by any Borrower in payment of the principal amount of or any interest on any Eurodollar Loan as and when due and payable, including any such loss or expense arising from interest or fees payable by such Revolving Credit Lender in order to maintain its Eurodollar Loans. (ii) Default by any Borrower in making a borrowing or conversion after the Lead Borrower has given (or is deemed to have given) a request for a Revolving Credit Loan or a request to convert a Revolving Credit Loan from one applicable interest rate to another. (iii) The making of any payment on a Eurodollar Loan or the making of any conversion of any such Loan to a Base Margin Loan on a day that is not the last day of the applicable Interest Period with respect thereto. 2-11. INTEREST ON REVOLVING CREDIT LOANS. (a) Each Revolving Credit Loan shall bear interest at the Base Margin Rate unless timely notice is given (as provided in Section 2-5) that the subject Revolving Credit Loan (or a portion thereof) is, or is to be converted to, a Eurodollar Loan. 29 (b) Each Revolving Credit Loan which consists of a Eurodollar Loan shall bear interest at the applicable Eurodollar Rate. (c) Subject to, and in accordance with, the provisions of this Agreement, the Lead Borrower may cause all or a part of the unpaid principal balance of the Loan Account to bear interest at the Base Margin Rate or the Eurodollar Rate as specified from time to time by the Lead Borrower. (d) The Lead Borrower shall not select, renew, or convert any interest rate for a Revolving Credit Loan such that, in addition to interest at the Base Margin Rate, there are more than eight (8) Eurodollar Rates applicable to the Revolving Credit Loans at any one time. (e) The Borrowers shall pay accrued and unpaid interest on each Revolving Credit Loan in arrears as follows: (i) On the applicable Interest Payment Date for that Revolving Credit Loan. (ii) On the Termination Date and on the End Date. (iii) During the existence of any Event of Default, with such frequency as may be determined by the Administrative Agent. (f) During the existence of any Event of Default (and whether or not the Administrative Agent exercises the Administrative Agent's rights on account thereof), all Revolving Credit Loans shall bear interest, at the option of the Administrative Agent or at the instruction of the Majority Lenders at a rate which is the aggregate of the rate applicable to Base Margin Loans plus two percent (2%) per annum. (g) Interest shall be calculated (i) with respect to Base Margin Loans, on the basis of a 365 day year and for actual days elapsed, and (ii) with respect to Eurodollar Loans, on the basis of a 360 day year and for actual days elapsed. L/C Fees, the Line Fee and Unused Fees shall be calculated on the basis of a 365 day year and for actual days elapsed. 2-12 VOLUNTARY REDUCTION OF COMMITMENT AND REVOLVING CREDIT CEILING. The Lead Borrower may reduce, or terminate, the Revolving Credit Commitments and the Revolving Credit Ceiling, in whole or in part from time to time, by furnishing three (3) Business Days' written notice to the Administrative Agent, whereupon the Revolving Credit Commitments of the Revolving Credit Lenders shall be reduced pro rata in accordance with their respective Revolving Credit Commitment Percentages. Upon the effective date of any such reduction, (a) the Borrowers shall pay to the Administrative Agent for the benefit of the Revolving Credit Lenders a pro rata portion of any Revolving Credit Early Termination Fee due as a result of such reduction or termination (based upon the amount of the reduction to the then Revolving Credit Commitments), (b) the Borrowers shall pay to the Administrative Agent for the benefit of the Revolving Credit Lenders the accrued Unused Fee as of the date of such reduction or termination, and (c) the Borrowers shall pay to the Administrative Agent for the benefit of the Revolving Credit Lenders any amounts required under Section 2-10(b) and Section 2-10(f) hereof. No reduction or termination of the Revolving Credit Commitments or the Revolving Credit Ceiling may be reinstated. 2-13. REVOLVING CREDIT COMMITMENT FEE. In consideration of the commitment to make loans and advances to the Borrowers under the Revolving Credit, and to maintain sufficient funds available for such purpose, there has been earned and the Borrowers shall pay the "REVOLVING CREDIT COMMITMENT FEE" (so referred to herein) in the amount and payable as provided in the Fee Letter. 30 2-14. ADMINISTRATIVE AGENT'S FEE. In addition to any other fee or expense to be paid by the Borrowers on account of the Revolving Credit, the Borrowers shall pay the Administrative Agent the " ADMINISTRATIVE AGENT'S FEE" at the times and in the amounts as set forth in the Fee Letter. 2-15. UNUSED FEE. In addition to any other fee to be paid by the Borrowers on account of the Revolving Credit, each Revolving Credit Lender shall be paid the Line Fee at the times and in the manner set forth below. The Borrowers shall pay to the Administrative Agent for the account of the Revolving Credit Lenders, the Unused Fee. If the Unused Fee actually paid by the Borrowers is insufficient to pay an amount equal to the Line Fee to the Revolving Credit Lenders, the deficiency shall be paid to the Revolving Credit Lenders by the SwingLine Lender from its own funds (and the Borrowers shall have no liability with respect thereto). The Administrative Agent shall pay the Line Fee (and any amounts payable by the SwingLine Lender hereunder) to the Revolving Credit Lenders based upon their pro rata share of an amount equal to the aggregate Line Fee due to all Revolving Credit Lenders; provided that for purposes of calculating the pro rata share of any Person which is both the SwingLine Lender and a Revolving Credit Lender, such Person's share shall be equal to the difference between (i) the sum of such Person's Revolving Credit Commitment, and (ii) the sum of (A) such Person's Revolving Credit Commitment Percentage of the principal amount of the Revolving Loans then outstanding (including the principal amount of SwingLine Loans then outstanding), and (B) such Person's Revolving Credit Commitment Percentage of the then undrawn Stated Amount of outstanding L/Cs. The Unused Fee shall be paid in arrears, on the first day of each quarter after the execution of this Agreement and on the Termination Date. 2-16. EARLY TERMINATION FEE. In the event that the Termination Date occurs, for any reason, prior to the second anniversary of this Amended and Restated Loan and Security Agreement (other than by virtue of the Borrowers' refinancing of the Liabilities with FRFI or any of its Affiliates, as agent for the refinancing lenders), the Borrowers shall pay to the Administrative Agent, for the benefit of the Revolving Credit Lenders, a "REVOLVING CREDIT EARLY TERMINATION FEE" (so referred to herein) in an amount equal to (a) one-half of one percent (0.50%) of the Revolving Credit Commitments in effect on the date of this Agreement, if the Termination Date occurs before May 3, 2004, or (b) one quarter of one percent (0.25%) of the Revolving Credit Commitments in effect on the date of this Agreement, if the Termination Date occurs on or after May 3, 2004 and on or before May 3, 2005. In addition, in the event that the Revolving Commitments are reduced prior to the second anniversary hereof pursuant to Section 2-12 hereof, the Borrower shall pay to the Administrative Agent, for the benefit of the Revolving Credit Lenders, a pro rata portion of the Revolving Credit Early Termination Fee based on the amount of reduction, provided that no Revolving Credit Early Termination Fee shall be payable with respect to any voluntary reduction of the Revolving Commitments to an amount equal to or greater than $400,000,000. 2-17. PROCEDURES FOR ISSUANCE OF L/Cs. (a) The Lead Borrower may request that the Administrative Agent cause the issuance by the Issuer of L/Cs for the account of any Borrower. Each such request shall be in such manner as may from time to time be acceptable to the Administrative Agent. (b) The Issuer shall issue any L/C so requested by the Lead Borrower, provided that, at the time that the request is made, the Revolving Credit has not been suspended as provided in Section 2-5 (g) and if so issued: (i) The aggregate Stated Amount of all L/Cs then outstanding, does not exceed Two Hundred Million Dollars and No Cents ($200,000,000.00). 31 (ii) The expiry of the L/C is not later than the earlier of thirty (30) days prior to the Maturity Date or the following: (A) Standby's: One (1) year from initial issuance. (B) Documentary's: One hundred eighty (180) days from issuance, (iii) An OverLoan will not result from the issuance of the subject L/C. (c) Each Borrower shall execute such documentation to apply for and support the issuance of an L/C as may be required by the Issuer. (d) There shall not be any recourse to, nor liability of, the Administrative Agent or any Revolving Credit Lender on account of (i) Any delay or refusal by an Issuer to issue an L/C; (ii) Any action or inaction of an Issuer on account of or in respect to, any L/C. (e) The Borrowers shall reimburse the Issuer for the amount of any honoring of a drawing under an L/C on the same day on which such honoring takes place. The Administrative Agent, without the request of any Borrower, may advance under the Revolving Credit (and charge to the Loan Account) the amount of any honoring of any L/C and other amount for which any Borrower, the Issuer, or the Revolving Credit Lenders become obligated on account of, or in respect to, any L/C. Such advance shall be made whether or not any Default exists or such advance would result in an OverLoan. Such action shall not constitute a waiver of the Administrative Agent's rights under Section 2-10(b) hereof. 2-18. FEES FOR L/Cs. (a) The Borrowers shall pay to the Administrative Agent (for the benefit of the Revolving Credit Lenders) a fee, on account of L/Cs, the issuance of which had been procured by the Administrative Agent, quarterly in arrears, and on the Termination Date and on the End Date, equal to the following: (i) With respect to Standby L/Cs issued in connection with the synthetic leases described on EXHIBIT 2-18: At a rate per annum equal to 0.375% less than the Applicable Margin for Eurodollar Loans at the time of calculation of such fees multiplied by the weighted average Stated Amount of all such Standby L/Cs outstanding during the period in respect of which such fee is being paid; and (ii) With respect to all other Standby L/Cs: At a rate per annum equal to 0.125% less than the Applicable Margin for Eurodollar Loans at the time of calculation of such fees multiplied by the weighted average Stated Amount of all such Standby L/Cs outstanding during the period in respect of which such fee is being paid; and (iii) With respect to all Documentary L/Cs: At a rate per annum equal to 0.50% less than the Applicable Margin for Eurodollar Loans at the time of calculation of such fees multiplied by the weighted average Stated 32 Amount of all such Documentary L/Cs outstanding during the period in respect of which such fee is being paid; provided that, during the existence of any Event of Default, such fees shall be increased by two percent (2%) per annum. (b) In addition to the fees to be paid as provided in Subsection 2-18(a), above, the Borrowers shall pay to the Administrative Agent (or to the Issuer, if so requested by Administrative Agent), on demand, all issuance, processing, negotiation, amendment, and administrative fees and other amounts charged by the Issuer on account of, or in respect to, any L/C. (c) If any change in Applicable Law shall either: (i) impose, modify or deem applicable any reserve, special deposit or similar requirements against letters of credit heretofore or hereafter issued by any Issuer or with respect to which any Revolving Credit Lender or any Issuer has an obligation to lend to fund drawings under any L/C; or (ii) impose on any Issuer any other condition or requirements relating to any such letters of credit; and the result of any event referred to in Section 2-18(c)(i) or 2-18(c)(ii), above, shall be to increase the cost to any Revolving Credit Lender or to any Issuer of issuing or maintaining any L/C (which increase in cost shall be the result of such Issuer's reasonable allocation among that Revolving Credit Lender's or Issuer's letter of credit customers of the aggregate of such cost increases resulting from such events), then, upon demand by the Administrative Agent and delivery by the Administrative Agent to the Lead Borrower of a certificate of an officer of the subject Revolving Credit Lender or the subject Issuer describing such change in law, executive order, regulation, directive, or interpretation thereof, its effect on such Revolving Credit Lender or such Issuer, and the basis for determining such increased costs and their allocation, the Borrowers shall, within thirty (30) days after demand therefor, pay to the Administrative Agent, from time to time as specified by the Administrative Agent, such amounts as shall be sufficient to compensate the subject Revolving Credit Lender or the subject Issuer for such increased cost. Any Revolving Credit Lender's or any Issuer's determination of costs incurred under Section 2-18(c)(i) or 2-18(c)(ii), above, and the allocation, if any, of such costs among the Borrowers and other letter of credit customers of such Revolving Credit Lender or such Issuer, if done in good faith and made on an equitable basis and in accordance with such officer's certificate, shall be conclusive and binding on the Borrowers. 2-19. CONCERNING L/CS. (a) None of the Issuer, the Issuer's correspondents, any Revolving Credit Lender, the Administrative Agent, or any advising, negotiating, or paying bank with respect to any L/C shall be responsible in any way for: (i) The performance by any beneficiary under any L/C of that beneficiary's obligations to any Borrower. (ii) The form, sufficiency, correctness, genuineness, authority of any person signing; falsification; or the legal effect of; any documents called for under any L/C if (with respect to the foregoing) such documents on their face appear to be in order. (b) The Issuer may honor, as complying with the terms of any L/C and of any drawing thereunder, any drafts or other documents otherwise in order, but signed or issued by an 33 administrator, executor, conservator, trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, liquidator, receiver, or other legal representative of the party authorized under such L/C to draw or issue such drafts or other documents. (c) Unless otherwise agreed to, in the particular instance, each Borrower hereby authorizes any Issuer to: (i) Select an advising bank, if any. (ii) Select a paying bank, if any. (iii) Select a negotiating bank. (d) All directions, correspondence, and funds transfers relating to any L/C are at the risk of the Borrowers. The Issuer shall have discharged the Issuer's obligations under any L/C which, or the drawing under which, includes payment instructions, by the initiation of the method of payment called for in, and in accordance with, such instructions (or by any other commercially reasonable and comparable method). None of the Administrative Agent, any Revolving Credit Lender, or the Issuer shall have any responsibility for any inaccuracy, interruption, error, or delay in transmission or delivery by post, telegraph or cable, or for any inaccuracy of translation. (e) The Administrative Agent's, each Revolving Credit Lender's, and the Issuer's rights, powers, privileges and immunities specified in or arising under this Agreement are in addition to any heretofore or at any time hereafter otherwise created or arising, whether by statute or rule of law or contract. (f) Except to the extent otherwise expressly provided hereunder or agreed to in writing by the Issuer and the Lead Borrower, documentary L/Cs will be governed by the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce, Publication No. 500, and standby L/Cs will be governed by International Standby Practices ISP98 (adopted by the International Chamber of Commerce on April 6, 1998) and any respective subsequent revisions thereof. (g) The obligations of the Borrowers under this Agreement with respect to L/Cs are absolute, unconditional, and irrevocable and shall be performed strictly in accordance with the terms hereof under all circumstances, whatsoever including, without limitation, the following: (i) Any lack of validity or enforceability or restriction, restraint, or stay in the enforcement of this Agreement, any L/C, or any other agreement or instrument relating thereto. (ii) Any Borrower's consent to any amendment or waiver of, or consent to the departure from, any L/C. (iii) The existence of any claim, set-off, defense, or other right which any Borrower may have at any time against the beneficiary of any L/C. (iv) Absent the gross negligence or willful misconduct of the Issuer, any honoring of a drawing under any L/C, which drawing possibly could have been dishonored due to a non-material technicality based upon a strict construction of the terms of the L/C. 34 2-20. CHANGED CIRCUMSTANCES. (a) The Administrative Agent may advise the Lead Borrower that the Administrative Agent has made the good faith determination (which determination shall be final and conclusive) of any of the following: (i) Adequate and fair means do not exist for ascertaining the rate for Eurodollar Loans. (ii) The continuation of or conversion of any Revolving Credit Loan to a Eurodollar Loan has been made impracticable or unlawful by the occurrence of a contingency that materially and adversely affects the applicable market or the compliance by the Administrative Agent or any Revolving Credit Lender in good faith with any Applicable Law. (iii) The indices on which the interest rates for Eurodollar Loans are based shall no longer represent the effective cost to the Administrative Agent or any Revolving Credit Lender for U.S. dollar deposits in the interbank market for deposits in which it regularly participates. (b) In the event that the Administrative Agent advises the Lead Borrower of an occurrence described in Section 2-20(a), then, until the Administrative Agent notifies the Lead Borrower that the circumstances giving rise to such notice no longer apply: (i) The obligation of the Administrative Agent or each Revolving Credit Lender to make loans of the type affected by such changed circumstances or to permit the Lead Borrower to select the affected interest rate as otherwise applicable to any Revolving Credit Loans shall be suspended. (ii) Any notice which the Lead Borrower had given the Administrative Agent with respect to any Eurodollar Loan, the time for action with respect to which has not occurred prior to the Administrative Agent's having given notice pursuant to Section 2-20(a), shall be deemed at the option of the Administrative Agent to not having been given. 2-21. DESIGNATION OF LEAD BORROWER AS BORROWERS' AGENT. (a) Each Borrower hereby irrevocably designates and appoints the Lead Borrower as that Borrower's agent to obtain Revolving Credit Loans and L/Cs under the Revolving Credit, the proceeds of which shall be available to each Borrower for those uses as those set forth in Section 2- l(d). As the disclosed principal for its agent, each Borrower shall be obligated to the Administrative Agent and each Revolving Credit Lender on account of Revolving Credit Loans so made and L/Cs so issued under the Revolving Credit as if made directly by the Revolving Credit Lenders to that Borrower, notwithstanding the manner by which such Revolving Credit Loans and L/Cs are recorded on the books and records of the Lead Borrower and of any Borrower. (b) Each Borrower recognizes that credit available to it under the Revolving Credit is in excess of and on better terms than it otherwise could obtain on and for its own account and that one of the reasons therefor is its joining in the credit facility contemplated herein with all other Borrowers. Consequently, each Borrower hereby assumes and agrees to discharge all Liabilities of all other Borrowers as if the Borrower so assuming were each other Borrower. (c) The Lead Borrower shall act as a conduit for each Borrower (including itself, as a "Borrower") on whose behalf the Lead Borrower has requested a Revolving Credit Loan. 35 (d) The proceeds of each loan and advance provided under the Revolving Credit which is requested by the Lead Borrower shall be deposited into the Operating Account or as otherwise indicated by the Lead Borrower. The Lead Borrower shall cause the transfer of the proceeds thereof to the (those) Borrower(s) on whose behalf such loan and advance was obtained. Neither the Administrative Agent nor any Revolving Credit Lender shall have any obligation to see to the application of such proceeds. (e) If, for any reason, and at any time during the term of this Agreement, (i) any Borrower, including the Lead Borrower, as agent for the Borrowers, shall be unable to, or prohibited from carrying out the terms and conditions of this Agreement (as determined by the Administrative Agent in the Administrative Agent's sole and absolute discretion); or (ii) the Administrative Agent deems it inexpedient (in the Administrative Agent's sole and absolute discretion) to continue making Revolving Credit Loans and issue L/Cs to or for the account of any particular Borrower, or to channel such Revolving Credit Loans and L/Cs through the Lead Borrower, then the Revolving Credit Lenders may make Revolving Credit Loans directly to, and issue L/Cs directly for the account of such of the Borrowers as the Administrative Agent determines to be expedient, which loans or advances may be made without regard to the procedures otherwise included herein. (f) In the event that the Administrative Agent determines to forgo the procedures included herein pursuant to which Revolving Credit Loans and L/Cs are to be channeled through the Lead Borrower, then the Administrative Agent may designate one or more of the Borrowers to fulfill the financial and other reporting requirements otherwise imposed herein upon the Lead Borrower. (g) Each of the Borrowers shall remain liable to the Administrative Agent and the Revolving Credit Lenders for the payment and performance of all Liabilities (which payment and performance shall continue to be secured by all Collateral granted by each of the Borrowers) notwithstanding any determination by the Administrative Agent to cease making Revolving Credit Loans or L/Cs to or for the benefit of any Borrower. (h) The authority of the Lead Borrower to request loans on behalf of, and to bind, the Borrowers, shall continue unless and until the Administrative Agent acts as provided in Section 2-21(e), above, or the Administrative Agent actually receives (i) written notice of: (i) the termination of such authority, and (ii) the subsequent appointment of a successor Lead Borrower, which notice is signed by the respective Presidents of each Borrower (other than the President of the Lead Borrower being replaced) then eligible for borrowing under this Agreement; and (j) written notice from such successive Lead Borrower (i) accepting such appointment; (ii) acknowledging that such removal and appointment has been effected by the respective Presidents of such Borrowers eligible for borrowing under this Agreement; and (iii) acknowledging that from and after the date of such appointment, the newly appointed Lead Borrower shall be bound by the terms hereof, and that as used herein, the term "Lead Borrower" shall mean and include the newly appointed Lead Borrower. 36 2-22. LENDERS ' COMMITMENTS (a) Subject to Section 16-1 (which provides for assignments and assumptions of commitments), each Revolving Credit Lender's 'REVOLVING CREDIT COMMITMENT PERCENTAGE", and "REVOLVING CREDIT COMMITMENT" (respectively so referred to herein) is set forth on EXHIBIT 2-22, annexed hereto. (b) The obligations of each Revolving Credit Lender are several and not joint. No Revolving Credit Lender shall have any obligation to make any loan or advance under the Revolving Credit in excess of the lesser of the following: (i) That Revolving Credit Lender's Revolving Credit Commitment Percentage of the subject loan or advance or of Availability. (ii) that Revolving Credit Lender's Revolving Credit Commitment. (c) No Revolving Credit Lender shall have any liability to the Borrowers on account of the failure of any other Revolving Credit Lender to provide any loan or advance under the Revolving Credit nor any obligation to make up any shortfall which may be created by such failure. (d) The Revolving Credit Commitments, Revolving Credit Commitment Percentages, and identities of the Revolving Credit Lenders may be changed, from time to time by the reallocation or assignment of Revolving Credit Commitments and Revolving Credit Commitment Percentages amongst the Revolving Credit Lenders or with other Persons who determine to become "Revolving Credit Lenders" in accordance with the provisions of Article 16 hereof', provided, however FRFI shall at all times prior to the occurrence of an Event of Default retain at least ten percent (10%) of the Revolving Credit Commitments outstanding from time to time. (e) Upon written notice given the Lead Borrower from time to time by the Administrative Agent, of any assignment or allocation referenced in Section 2-22(d): (i) Each Borrower shall execute one or more replacement Revolving Credit Notes to reflect such changed Revolving Credit Commitments, Revolving Credit Commitment Percentages, and identities and shall deliver such replacement Revolving Credit Notes to the Administrative Agent (which promptly thereafter shall deliver to the Lead Borrower the Revolving Credit Notes so replaced) provided however, in the event that a Revolving Credit Note is to be exchanged following its acceleration or the entry of an order for relief under the Bankruptcy Code with respect to any Borrower, the Administrative Agent, in lieu of causing the Borrowers to execute one or more new Revolving Credit Notes, may issue the Administrative Agent's Certificate confirming the resulting Revolving Credit Commitments and Revolving Credit Commitment Percentages. (ii) Such change shall be effective from the effective date specified in such written notice and any Person added as a Revolving Credit Lender shall have all rights and privileges of a Revolving Credit Lender hereunder thereafter as if such Person had been a signatory to this Agreement and any other Loan Document to which a Revolving Credit Lender is a signatory and any Person removed as a Revolving Credit Lender shall be relieved of any obligations or responsibilities of a Revolving Credit Lender hereunder thereafter. 37 2-23. REPLACEMENT OF REVOLVING CREDIT LENDER (a) If any Revolving Credit Lender requests compensation under Sections 2-18 (c) or 19-8, then such Revolving Credit Lender shall use its reasonable best efforts to designate a different lending office for funding or booking L/Cs hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Revolving Credit Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Sections 2-18(c) or 19-8, in the future and (ii) would not subject such Revolving Credit Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Revolving Credit Lender. The Borrowers hereby agree to pay all reasonable costs and expenses incurred by any Revolving Credit Lender in connection with any such designation or assignment. (b) If any Revolving Credit Lender requests compensation under Sections 2-18 (c) or 19-8, then the Borrowers may, at their sole expense and effort, upon notice to such Revolving Credit Lender and the Administrative Agent, require such Revolving Credit Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Article 16), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Revolving Credit Lender, if a Revolving Credit Lender accepts such assignment), provided that (i) if such assignee is not an existing Revolving Credit Lender, the Borrowers shall have received the prior written consent of the Administrative Agent, the Issuers and SwingLine Lender, which consent shall not unreasonably be delayed or withheld, (ii) such Revolving Credit Lender shall have received payment of an amount equal to the outstanding principal of its Revolving Credit Loans and participations in unreimbursed drawings under L/Cs and SwingLine Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrowers (in the case of all other amounts) and (iii) such assignment will result in a reduction in such compensation, payments or costs. A Revolving Credit Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Revolving Credit Lender or otherwise, the circumstances entitling the Borrowers to require such assignment and delegation cease to apply. ARTICLE 3 - CONDITIONS PRECEDENT: As a condition to the effectiveness of this Agreement, each of the documents respectively described in Sections 3-1 through and including 3-5, (each in form and substance satisfactory to the Administrative Agent) shall have been delivered to the Administrative Agent, and the conditions respectively described in Sections 3-6 through and including 3-18, shall have been satisfied: 3-1. CORPORATE DUE DILIGENCE. (a) Certificates of corporate good standing for each Borrower, respectively issued by the Secretary of State for the state in which that Borrower is incorporated. (b) Certificates of due qualification, in good standing, issued by the Secretary(ies) of State of each State in which the nature of the business conducted by OfficeMax, Inc., or assets owned by OfficeMax, Inc. could require such qualification. (c) Certificates of each Borrower's Secretary of the due adoption, continued effectiveness, and setting forth the texts of, each corporate resolution adopted in connection with the establishment of the loan arrangement contemplated by the Loan Documents and attesting to the true signatures of each Person authorized as a signatory to any of the Loan Documents. 3-2. OPINION. An opinion of counsel to the Borrowers in form and substance reasonably satisfactory to the Administrative Agent. 38 3-3 TRI-PARTY AGREEMENT. An agreement in form and substance reasonably satisfactory to the Administrative Agent with OMX, Inc. furnishing the Administrative Agent with rights to use the Lead Borrower's distribution facility in Las Vegas, Nevada and certain trademarks owned by said OMX, Inc. during the existence of an Event of Default. 3-4. ADDITIONAL DOCUMENTS. Such additional instruments and documents as the Administrative Agent or its counsel may reasonably require or request including, without limitation, the documents described on EXHIBIT 3-4 hereto. 3-5. OFFICERS ' CERTIFICATES. Certificates executed by the President and the Chief Financial Officer of the Lead Borrower and stating that the representations and warranties made by the Borrowers to the Administrative Agent and the Revolving Credit Lenders in the Loan Documents are true and complete in all material respects as of the date of such Certificate, and that no event has occurred which is or which, solely with the giving of notice or passage of time (or both) would be an Event of Default. 3-6 DUE DILIGENCE. The Administrative Agent shall have completed its due diligence to its reasonable satisfaction. Without limiting the foregoing, the Administrative Agent shall have received commercial finance examinations, appraisals of the Borrowers' inventory, and such other information (financial or otherwise) as the Administrative Agent may reasonably request, and such examinations, appraisals and information shall be reasonably satisfactory to the Administrative Agent. 3-7. REPRESENTATIONS AND WARRANTIES. Each of the representations made by or on behalf of each Borrower in this Agreement or in any of the other Loan Documents or in any other report, statement, document, or paper provided by or on behalf of each Borrower shall be true and complete in all material respects as of the date as of which such representation or warranty was made. 3-8. ALL FEES AND EXPENSES PAID. (a) The Borrowers shall have paid to the Administrative Agent for the account of each Revolving Credit Lender an amendment fee in an amount equal to 0.375% of each such Revolving Credit Lender's Revolving Credit Commitment. Such amendment fee shall be fully earned upon the execution hereof and shall not be subject to refund or rebate under any circumstances. (b) All other fees due at or immediately after the effectiveness of this Agreement and all costs and expenses incurred by the Administrative Agent in connection with the credit facility contemplated hereby (including the fees and expenses of counsel to the Administrative Agent) shall have been paid in full. 3-9. NO DEFAULT. No Default shall then exist. 3-10. NO ADVERSE CHANGE. No event shall have occurred or failed to occur, which occurrence or failure has had or could reasonably be expected to have a materially adverse effect upon any Borrower's financial condition, operations, assets or income when compared with such at the Fiscal quarter ending on or about October 31, 2002. 3-11 PERFECTION OF ENCUMBRANCES. The Administrative Agent shall have received all documents and instruments, including Uniform Commercial Code financing statements, required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded to create or perfect the first priority Encumbrances intended to be created under the Loan Documents and all such documents and instruments shall have been so filed, registered or recorded to the satisfaction of the Administrative Agent. 3-12 INTENTIONALLY OMITTED. 39 3-13 CONSENTS AND APPROVALS. All necessary consents and approvals to the transactions contemplated hereby shall have been obtained and shall be reasonably satisfactory to the Administrative Agent. 3-14 No DEFAULTS UNDER APPLICABLE LAW OR MATERIAL AGREEMENTS. The consummation of the transactions contemplated hereby shall not (a) violate any Requirement of Law or (b) conflict with, or result in a default or event of default under, any material agreement of any Borrower. No event shall exist which is, or solely with the passage of time, the giving of notice or both, would be a default under any material agreement of any Borrower including, without limitation, under the synthetic leases to which any Borrower or any Affiliate of any Borrower is a party. 3-15 No LITIGATION. There shall not exist any litigation or other proceedings the result of which would have a material adverse effect on the Borrowers, their financial condition or business, taken as a whole. 3-16 INTENTIONALLY OMITTED. 3-17 No CHANGE IN GOVERNMENTAL REGULATIONS. No material changes shall have occurred in governmental regulations or policies affecting the Borrowers, the Administrative Agent or the Revolving Credit Lenders prior to the Closing Date. 3-18. BENEFIT OF CONDITIONS PRECEDENT. The conditions set forth in this Article 3 are for the sole benefit of the Administrative Agent and each Revolving Credit Lender and may be waived by the Administrative Agent in whole or in part without prejudice to the Administrative Agent or any Revolving Credit Lender. No document shall be deemed delivered to the Administrative Agent or any Revolving Credit Lender until received and accepted by the Administrative Agent at its offices in Boston, Massachusetts. Under no circumstances shall this Agreement take effect until executed and accepted by the Administrative Agent at said offices. ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES: To induce each Revolving Credit Lender and the Issuer to establish the credit facility contemplated herein and to induce the Revolving Credit Lenders to provide Revolving Credit Loans and the Issuer to issue L/Cs under the Revolving Credit (each of which Revolving Credit Loans shall be deemed to have been made, and L/Cs to have been issued, in reliance thereupon) the Borrowers, in addition to all other representations, warranties, and covenants made by any Borrower in any other Loan Document, make those representations, warranties, and covenants included in this Agreement. 4-1. PAYMENT AND PERFORMANCE OF LIABILITIES. The Borrowers shall pay each payment Liability when due (or when demanded, if payable on demand) and shall promptly, punctually, and faithfully perform each other Liability. 4-2. DUE ORGANIZATION. AUTHORIZATION. No CONFLICTS. (a) Each Borrower presently is and hereafter shall remain in good standing as a corporation under the laws of the State in which it is organized, as set forth in the Preamble to this Agreement and is and shall hereafter remain duly qualified and in good standing in every other State in which, by reason of the nature or location of each Borrower's assets or operation of each Borrower's business, such qualification may be necessary, except where the failure to so qualify would not have a material adverse effect on the business or assets of the Borrowers taken as a whole. 40 (b) As of the Closing Date, each Borrower's respective organizational identification number assigned to it by the State of its incorporation and its respective federal employer identification number is stated on EXHIBIT 4-2, annexed hereto. (c) No Borrower shall change its State of organization; any organizational identification number assigned to that Borrower by that State; or that Borrower's federal taxpayer identification number. (d) Each Affiliate, as of the Closing Date, is listed on EXHIBIT 4-2. The Lead Borrower shall provide the Administrative Agent with prior written notice of any entity's becoming or ceasing to be an Affiliate. (e) Each Borrower has all requisite corporate power and authority to execute and deliver all Loan Documents to which that Borrower is a party and has and will hereafter retain all requisite corporate power to perform all Liabilities. (f) The execution and delivery by each Borrower of each Loan Document to which it is a party; each Borrower's consummation of the transactions contemplated by such Loan Documents (including, without limitation, the creation of Collateral Interests by that Borrower to secure the Liabilities); each Borrower's performance under those of the Loan Documents to which it is a party; the borrowings hereunder; and the use of the proceeds thereof: (i) Have been duly authorized by all necessary corporate action. (ii) Do not, and will not, contravene in any material respect any provision of any Requirement of Law or obligation of that Borrower. (iii) Will not result in the creation or imposition of, or the obligation to create or impose, any Encumbrance upon any assets of that Borrower pursuant to any Requirement of Law or obligation, except pursuant to the Loan Documents. (g) The Loan Documents have been duly executed and delivered by each Borrower and are the legal, valid and binding obligations of each Borrower, enforceable against each Borrower in accordance with their respective terms, except as enforceability is limited by bankruptcy, insolvency, or other laws relating to or affecting generally the enforcement of creditors' rights and except to the extent that the availability of the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. 4-3. TRADE NAMES. (a) EXHIBIT 4-3, annexed hereto, is a listing, as of the Closing Date, of: (i) All names under which any Borrower ever conducted its business during the preceding five (5) years. (ii) All Persons with whom any Borrower ever consolidated or merged, or from whom any Borrower ever acquired in a single transaction or in a series of related transactions substantially all of such Person's assets, in each case within the preceding five (5) years. (b) The Lead Borrower will provide the Administrative Agent with not less than twenty-one (21) days prior written notice (with reasonable particularity) of any change to any Borrower's name from that under which that Borrower is conducting its business at the execution of this 41 Agreement and will not effect such change unless each Borrower is then in compliance with all provisions of this Agreement. 4-4. INTELLECTUAL PROPERTY. (a) Each Borrower owns and possesses, or has the right to use (and will hereafter own, possess, or have such right to use) all patents, industrial designs, trademarks, trade names, trade styles, brand names, service marks, logos, copyrights, trade secrets, know-how, confidential information, and other intellectual or proprietary property of any third Person reasonably necessary for that Borrower's conduct of that Borrower's business. (b) The conduct by each Borrower of that Borrower's business does not presently infringe (nor will any Borrower conduct its business in the future so as to infringe) the patents, industrial designs, trademarks, trade names, trade styles, brand names, service marks, logos, copyrights, trade secrets, know-how, confidential information, or other intellectual or proprietary property of any third Person in any manner that would have a material adverse effect on the business or assets of the Borrowers taken as a whole. 4-5. LOCATIONS. (a) The Collateral, and the books, records, and papers of Borrowers' pertaining thereto, are kept and maintained solely at the following locations: (i) The Lead Borrower's chief executive offices which, as of the Closing Date, are at 3605 Warrensville Center Road, Shaker Heights, Ohio 44122. (ii) Those locations which are listed on EXHIBIT 4-5, annexed hereto, which EXHIBIT includes, as of the Closing Date, with respect to each such location, the name and address of the landlord on the Lease which covers such location (or an indication that a Borrower owns the subject location) and of all service bureaus with which any such records are maintained and the names and addresses of each of the Borrowers' landlords. (b) No Borrower shall remove any of the Collateral from said chief executive office or those locations listed on EXHIBIT 4-5 or any location opened in accordance with Section 4-5(c) hereof except for the following purposes: (i) To accomplish sales of Inventory in the ordinary course of business. (ii) To move Inventory from one such location to another such location. (iii) To utilize such of the Collateral as is removed from such locations in the ordinary course of business. (iv) To dispose of Inventory that is not Eligible Inventory. (v) To open or close stores or to move the chief executive office. (c) The Borrowers will not open any new locations at which any Borrower maintains, offers for sale or stores any of the Collateral unless, to the extent required by the Administrative Agent, the Administrative Agent shall have received and filed additional UCC financing statements with respect to Collateral at such new location. The Lead Borrower will promptly notify the Administrative Agent in writing of any new location at which any Borrower maintains, offers for sale, or stores any of the Collateral. The Borrowers will not enter into any leases for any new locations at any 42 time that (i) the Liabilities have been or are deemed to have been accelerated or (ii) the Administrative Agent has notified the Borrowers in writing that an Event of Default exists and that such new leases are not permitted hereunder. (d) Except as otherwise disclosed pursuant to this Section 4-5 or as hereafter disclosed to the Administrative Agent, no Inventory of the Borrowers with an aggregate Cost greater than $5,000,000.00 is in the care or custody of any third party or stored or entrusted with a bailee or other third party and Inventory with an aggregate Cost greater than $5,000,000.00 shall not hereafter be placed under such care, custody, storage, or entrustment unless a landlord's or bailee's agreement reasonably acceptable to the Administrative Agent has been provided to the Administrative Agent in respect thereof. 4-6. TITLE TO ASSETS. (a) The Borrowers are, and shall hereafter remain, the owners of all Collateral, in each case free and clear of all Encumbrances with the exceptions of the following: (i) Encumbrances in favor of the Administrative Agent. (ii) Those Encumbrances (if any) listed on EXHIBIT 4-6, annexed hereto and any renewals or refinancings thereof that does not increase the amount of Indebtedness secured thereby. (iii) Permitted Encumbrances. (iv) Encumbrances granted to secure Indebtedness permitted pursuant to Section 4-7(c) hereof, provided that such Encumbrance shall attach only to the asset so acquired by the Borrowers with the proceeds of such Indebtedness and shall not extend to any other assets of the Borrowers. (v) Encumbrances granted to secure Indebtedness permitted pursuant to Sections 4-7(d) and 4-7(e) hereof, provided that such Encumbrance shall attach only to the real estate so financed by the Borrowers with the proceeds of such Indebtedness and shall not extend to any other assets of the Borrowers, and further provided that if there is located on such real estate any Inventory of the Borrowers or any books and records relating to the Collateral, the mortgagee obtaining such Encumbrance shall have furnished the Administrative Agent with an agreement permitting the Administrative Agent with reasonable access to the real estate on which the mortgagee holds such Encumbrance for the purpose of repossessing and/or disposing of any Collateral located therein and waiving any rights in and to all Collateral, on terms reasonably acceptable to the Administrative Agent. (vi) Judgment liens with respect to judgments that do not constitute an Event of Default under Section 10-8 hereof. (vii) Encumbrances securing the Indebtedness of any Borrower to any other Borrower. (viii) Intentionally Omitted. (ix) Encumbrances upon any property or assets (other than inventory and accounts) of any Person existing immediately prior to the time of any Permitted Acquisition of such Person or such Person's property or assets by a Borrower, provided that such 43 Encumbrances were not granted in contemplation of, or in connection with, such Permitted Acquisition. (b) No Borrower has, and none shall have, possession of any property on consignment to that Borrower unless (i) the Lead Borrower has furnished the Administrative Agent with ten (10) days prior written notice of its intent to acquire such property on consignment, and (ii) if the Administrative Agent so requests, an intercreditor agreement with the consignor on terms reasonably acceptable to the Administrative Agent has been delivered to the Administrative Agent, and (iii) the aggregate amount of property consigned to the Borrowers shall not exceed thirty percent of the Cost of the Borrowers' Inventory at any time. 4-7. INDEBTEDNESS. The Borrowers do not and shall not hereafter have any Indebtedness with the exceptions of: (a) Any Indebtedness on account of the Revolving Credit. (b) The Indebtedness (if any) listed on EXHIBIT 4-7, annexed hereto and any renewals or refinancings thereof that does not increase the principal amount thereof. (c) Subject to the proviso to this Section 4-7, Indebtedness incurred after the date hereof to finance the acquisition of assets (other than those described in Sections 4-7(d) or (e) hereof) which do not constitute Collateral hereunder in an amount not to exceed $75,000,000.00 in the aggregate outstanding at any time. (d) Subject to the proviso to this Section 4-7, Indebtedness incurred in connection with mortgage financing of real estate owned by any of the Borrowers in an amount not to exceed, in the aggregate outstanding at any time, $300,000,000.00 less any outstanding Indebtedness of the type described in clause 4-7(e) below. (e) Subject to the proviso to this Section 4-7, Indebtedness incurred in connection with construction, mortgage, and equipment financing of new PowerMax facilities by a Borrower in an amount not to exceed $200,000,000.00 in the aggregate outstanding at any time. (f) Indebtedness due to any of Borrower by any other Borrower. (g) Subject to the proviso to this Section 4-7, Guaranties of Indebtedness of Subsidiaries, Related Entities and Affiliates of the Lead Borrower in an amount not to exceed $50,000,000.00 in the aggregate outstanding at any time. (h) Intentionally Omitted. (i) Subject to the proviso to this Section 4-7, Indebtedness, not to exceed $300,000,000.00 in the aggregate at any time outstanding, subordinated to the payment of the Obligations on terms which are reasonably acceptable to the Administrative Agent. (j) Indebtedness on account of Hedge Agreements on terms and in such amounts as may be reasonably acceptable to the Administrative Agent. (k) Subject to the proviso to this Section 4-7, other unsecured Indebtedness not to exceed $50,000,000.00 in the aggregate outstanding at any time. 44 provided, however, that in no event shall the Indebtedness incurred pursuant to clauses (c), (d), (e),(g), (i), and (k) exceed $600,000,000.00 in the aggregate outstanding at any time. 4-8. INSURANCE. (a) EXHIBIT 4-8, annexed hereto, is a schedule of all insurance policies owned by the Borrowers or under which any Borrower is the named insured as of the Closing Date. Each of such material policies is in full force and effect. Neither the issuer of any such policy nor any Borrower is in default or violation of any such policy in any material respect. (b) The Borrowers shall have and maintain at all times insurance covering such risks, in such amounts, containing such terms, in such form, for such periods, and written by such companies as is customarily maintained by prudent companies in the Borrowers' industry (including such levels of self-insurance as are deemed prudent by the Lead Borrower). The Borrowers shall also have and maintain at all times insurance covering the Collateral, in such amounts, containing such terms, in such form, for such periods, and written by such companies as may be reasonably satisfactory to the Administrative Agent. (c) All insurance carried by the Borrowers shall provide for a minimum of sixty (60) days' written notice of cancellation to the Administrative Agent and all such insurance which covers the Collateral shall include an endorsement in favor of the Administrative Agent, which endorsement shall provide that the insurance, to the extent of the Administrative Agent's interest therein, shall not be impaired or invalidated, in whole or in part, by reason of any act or neglect of any Borrower or by the failure of any Borrower to comply with any warranty or condition of the policy. (d) The coverage reflected on EXHIBIT 4-8 presently satisfies the foregoing requirements, it being recognized by each Borrower, however, that such requirements may change hereafter to reflect changing circumstances. (e) The Lead Borrower shall furnish the Administrative Agent from time to time with certificates or other evidence satisfactory to the Administrative Agent regarding compliance by the Borrowers with the foregoing requirements. (f) In the event of the failure by the Borrowers to maintain insurance as required herein, the Administrative Agent, at its option, may obtain such insurance, provided, however, the Administrative Agent's obtaining of such insurance shall not constitute a cure or waiver of any Event of Default occasioned by the Borrowers' failure to have maintained such insurance. 4-9. LICENSES. Each material license, distributorship, franchise, and similar agreement issued to, or to which any Borrower is a party is in full force and effect, except where the failure to be in full force and effect would not have a material adverse effect on the business or assets of the Borrowers taken as a whole. No party to any such license or agreement is in default or violation thereof, where such default or violation would have a material adverse effect on the business or assets of the Borrowers taken as a whole. As of the Closing Date, no Borrower has received any notice or threat of cancellation of any such license or agreement. The Lead Borrower shall promptly furnish the Administrative Agent with copies of any notice or threat of cancellation of any such license or agreement which would have a material adverse effect on the business or assets of the Borrowers taken as a whole. 4-10. LEASES. EXHIBIT 4-10, annexed hereto, is a schedule of all effective Capital Leases as of the Closing Date. (EXHIBIT 4-5 includes a list of all other effective Leases as of the Closing Date). Each of such Leases and Capital Leases is in full force and effect, except where the failure to be in full force and effect would not have a material adverse effect on the business or assets of 45 the Borrowers taken as a whole. No party to any such Lease or Capital Lease is in default or violation of any such Lease or Capital Lease where such default or violation would have a material adverse effect on the business or assets of the Borrowers taken as a whole. As of the Closing Date, no Borrower has received any notice or threat of cancellation of any such Lease or Capital Lease, except for cancellations which would not have a material adverse effect on the business or assets of the Borrowers taken as a whole. Each Borrower hereby authorizes the Administrative Agent at any time and from time to time during the existence of an Event of Default to contact any of the Borrowers' respective landlords in order to confirm the Borrowers' continued compliance with the terms and conditions of the Lease(s) between the subject Borrower and that landlord and to discuss such issues, concerning the subject Borrower's occupancy under such Lease(s), as the Administrative Agent may determine. 4-11. REQUIREMENTS OF LAW. Each Borrower is in compliance with, and shall hereafter comply with and use its assets in compliance with, all Requirements of Law except where the failure of such compliance will not have a material adverse effect on the Borrowers' business or assets taken as a whole. No Borrower has received any notice of any violation of any Requirement of Law (other than of a violation which would not have a material adverse effect on the Borrowers' business or assets taken as a whole), which violation has not been cured or otherwise remedied. 4-12. LABOR RELATIONS. (a) As of the Closing Date, no Borrower is a party to any collective bargaining or other labor contract. (b) There is not presently pending and, to any Borrower's knowledge, there is not threatened any of the following which would have a material adverse effect on the business or assets of the Borrowers taken as a whole: (i) Any strike, slowdown, picketing, work stoppage, or employee grievance process. (ii) Any proceeding against or affecting any Borrower relating to the alleged violation of any Applicable Law pertaining to labor relations or before National Labor Relations Board, the Equal Employment Opportunity Commission, or any comparable governmental body, organizational activity, or other labor or employment dispute against or affecting any Borrower, which would reasonably be expected to have a material adverse effect on the Borrowers' business or assets taken as a whole. (iii) Any lockout of any employees by any Borrower (and no such action is contemplated by any Borrower). (iv) Any application for the certification of a collective bargaining agent. (c) No event has occurred or circumstance exists which would provide the basis for any work stoppage or other labor dispute that would have a material adverse effect on the business or assets of the Borrowers taken as a whole. (d) Except as set forth on EXHIBIT 4-12, each Borrower: (i) Has complied with all Applicable Law relating to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining, the payment of social security and similar taxes, occupational safety and health, and 46 plant closing, except where the failure to so comply would not have a material adverse effect on the business or assets of the Borrowers taken as a whole. (ii) Is not liable for the payment of more than any amount of compensation, damages, taxes, fines, penalties, or other amounts, however designated, for that Borrower's failure to comply with any Applicable Law referenced in Section 4-12(d)(i), which would have a material adverse effect on the Borrowers' business or assets taken as a whole. (e) The Lead Borrower shall furnish prompt notice to the Administrative Agent of the occurrence of any event described in subparagraphs 4-12(a) through and including 4-12(d) which would have been disclosed to the Administrative Agent had such occurrence existed as of the Closing Date. 4-13. MAINTAIN PROPERTIES. The Borrowers shall: (a) Keep the Collateral in good order and repair (ordinary wear and tear and insured casualty excepted). (b) Not suffer or cause the waste or destruction of any material part of the Collateral. (c) Not use any of the Collateral in violation in any material respect of any policy of insurance thereon. (d) Not sell, lease, or otherwise dispose of any of the Collateral, other than the following: (i) The sale of Inventory in compliance with this Agreement. (ii) The turning over to the Administrative Agent of all Receipts during the existence of a Cash Control Event as provided herein. 4-14. TAXES. (a) With respect to the Borrowers' federal, state, and local tax liability and obligations: (i) The Lead Borrower, in material compliance with all Applicable Law, has properly filed all returns due to be filed up to the date of this Agreement. (ii) As of the Closing Date, except as described on EXHIBIT 4-14: (A) At no time has any Borrower received from any taxing authority any request to perform any examination of or with respect to any Borrower nor any other written or verbal notice in any way relating to any claimed failure by any Borrower to comply with all Applicable Law concerning payment of any taxes or other amounts in the nature of taxes. (B) No agreement exists which waives or extends any statute of limitations applicable to the right of any taxing authority to assert a deficiency or make any other claim for or in respect to federal income taxes. 47 (C) No issue has been raised in any tax examination of any Borrower which, by application of similar principles, reasonably would be expected to result in the assertion of a deficiency for any fiscal year open for examination, assessment, or claim by any taxing authority. (b) The Borrowers have, and hereafter shall: pay, as they become due and payable, all taxes and unemployment contributions and other charges of any kind or nature levied, assessed or claimed against any Borrower or the Collateral by any person or entity whose claim could result in an Encumbrance upon any asset of any Borrower or by any governmental authority (provided that the Borrowers shall not be required to pay any such taxes or claims as long as such tax or claim is being disputed by the Borrowers in good faith, the Borrowers have established adequate reserves therefor in accordance with GAAP, and no notice of tax lien has been filed with respect thereto); properly exercise any trust responsibilities imposed upon any Borrower by reason of withholding from employees' pay or by reason of any Borrower's receipt of sales tax or other funds for the account of any third party; timely make all contributions and other payments as may be required pursuant to any Employee Benefit Plan now or hereafter established by any Borrower; and timely file all tax and other returns and other reports with each governmental authority to whom any Borrower is obligated to so file. (c) During the existence of any Event of Default, at its option, the Administrative Agent may, but shall not be obligated to, pay any such taxes, unemployment contributions, and any and all other charges levied or assessed upon any Borrower or the Collateral by any Person or governmental authority, and make any contributions or other payments on account of the Borrowers' Employee Benefit Plan as the Administrative Agent, in the Administrative Agent's discretion, may deem necessary or desirable, to protect, maintain, preserve, collect, or realize upon any or all of the Collateral or the value thereof or any right or remedy pertaining thereto, provided, however, the Administrative Agent's making of any such payment shall not constitute a cure or waiver of any Event of Default occasioned by the Borrowers' failure to have made such payment. 4-15. NO MARGIN STOCK. No Borrower is engaged in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulations U, T, and X of the Board of Governors of the Federal Reserve System of the United States). No part of the proceeds of any borrowing hereunder will be used at any time to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. 4-16. ERISA. (a) Neither any Borrower nor any ERISA Affiliate has ever taken any of the following actions that would have a material adverse effect on the business or assets of the Borrowers taken as a whole: (i) Violated or failed to be in compliance with any Borrower's Employee Benefit Plan. (ii) Failed timely to file all reports and filings required by ERISA to be filed by any Borrower. (iii) Engaged in any nonexempt "prohibited transactions" or "reportable events" (respectively as described in ERISA). (iv) Engaged in, or committed, any act such that a tax or penalty reasonably could be imposed upon any Borrower on account thereof pursuant to ERISA. 48 (v) Accumulated any material cumulative funding deficiency within the meaning of ERISA. (vi) Terminated any Employee Benefit Plan such that a lien could be asserted against any assets of any Borrower on account thereof pursuant to ERISA. (vii) Have any obligation under any Employee Benefit Plan which is a multiemployer plan within the meaning of Section 4001 (a) of ERISA for withdrawal liability. (b) Neither any Borrower nor any ERISA Affiliate shall ever engage in any action of the type described in Section 4-16(a) to the extent that any of the foregoing would have a material adverse effect on the Borrowers taken as a whole. 4-17. HAZARDOUS MATERIALS. (a) No Borrower has ever: (i) been legally responsible for any release or threat of release of any Hazardous Material or (ii) received notification of the incurrence of any expense in connection with the assessment, containment, or removal of any Hazardous Material for which that Borrower would be responsible, except where such release or threat of release or incurrence of such expense would not have a material adverse effect on the Borrowers' business or assets. (b) Each Borrower shall: (i) dispose of any Hazardous Material only in compliance with all Environmental Laws and (ii) have possession of any Hazardous Material only in the ordinary course of that Borrower's business and in compliance with all Environmental Laws, except, in each case, where the failure to do so would not have a material adverse effect on the business or assets of the Borrowers taken as a whole. 4-18. LITIGATION. As of the Closing Date, except as described in EXHIBIT 4-18, annexed hereto, there is not presently pending or threatened by or against any Borrower any suit, action, proceeding, or investigation which, if determined adversely to any Borrower, would have a material adverse effect upon a Borrower's financial condition or ability to conduct its business as such business is presently conducted or is contemplated to be conducted in the foreseeable future. 4-19. DIVIDENDS. INVESTMENTS. CORPORATE ACTION. No Borrower shall: (a) Pay any cash dividend in respect of any class of that Borrower's capital stock or make any other distribution in respect of any class of that Borrower's capital stock, except that (i) the Subsidiaries of the Lead Borrower may pay such dividends or make such distributions to the Lead Borrower without any limitation, and (ii) as long as no Default exists or would arise therefrom, the Lead Borrower may pay cash dividends to its stockholders so long as for each of the thirty (30) days prior to, and after giving effect to, the payment of such dividends Availability is at least $200,000,000.00 and Availability is projected on a pro forma basis to be at least $200,000,000.00 for 180 day period immediately following the payment of such dividends. (b) Redeem, retire, purchase, or acquire any of the Lead Borrower's capital stock, provided that, as long as no Default exists or would arise therefrom, the Lead Borrower may redeem, purchase, retire or acquire any of its capital stock so long as for each of the thirty (30) days prior to, and after giving effect to, such repurchase Availability is at least $200,000,000.00 and Availability is projected on a pro forma basis to be at least $200,000,000.00 for 180 day period immediately following such redemption, purchase, retirement or acquisition. 49 (c) Invest in or purchase any stock or securities or rights to purchase any such stock or securities, of any Person, except for (i) investments described in EXHIBIT 4-19, (ii) investments and purchase of equity in a Subsidiary of a Borrower or an investment or purchase that would make an Affiliate or a Related Entity a Subsidiary as long as no Default then exists or would arise therefrom, (iii) Permitted Investments, (iv) investments representing stock or obligations issued to a Borrower in settlement of claims against any other Person by reason of a composition or adjustment of debt or a reorganization of any debtor of a Borrower, and (v) Permitted Acquisitions, as long as no Default exists or would arise therefrom. (d) Merge or consolidate or be merged or consolidated with or into any other Person, except that (i) any Subsidiary of a Borrower may merge with or into the Lead Borrower or any other wholly owned Subsidiary of the Lead Borrower, and (ii) Permitted Acquisitions, as long as no Default exists or would arise therefrom. (e) Consolidate any of that Borrower's operations with those of any other Person, except that any Subsidiary of a Borrower may consolidate its operations with or into the Lead Borrower or any other wholly owned Subsidiary of the Lead Borrower. (f) Organize or create any Affiliate or Related Entity to the extent that the Borrowers' investment in all such Affiliates and Related Entities after the Closing Date (whether as equity, intercompany loan or otherwise and whether such Affiliate or Related Entity is organized or created after the Closing Date) exceeds $40,000,000.00 in the aggregate, provided that no such investment shall be made during the existence of a Cash Control Event. (g) Subordinate any debts or obligations owed to that Borrower by any third party to any other debts owed by such third party to any other Person. (h) Acquire any assets other than in the ordinary course and conduct of that Borrower's business as conducted at the execution of this Agreement (except for Permitted Acquisitions), as long as no Default exists or would arise therefrom. 4-20. LOANS. No Borrower shall make any loans or advances to, nor acquire the Indebtedness of, any Person, provided, however, the foregoing does not prohibit any of the following: (a) Advance payments made to that Borrower's suppliers in the ordinary course. (b) Advances to that Borrower's officers, employees, and salespersons with respect to reasonable expenses to be incurred by such officers, employees, and salespersons for the benefit of that Borrower, which expenses are properly substantiated by the person seeking such advance and properly reimbursable by that Borrower. (c) Intercompany loans amongst the Borrowers. (d) Loans to Affiliates and Related Entities of the Borrowers provided that the Borrowers' investment in all such Affiliates and Related Entities after the Closing Date (whether as equity, intercompany loans or otherwise and whether such Affiliate or Related Entity is organized or created after the Closing Date) shall not exceed $100,000,000.00 in the aggregate provided that no such loans shall be made during the existence of a Cash Control Event. (e) Loans to employees, officers and salespersons of the Borrowers consistent with past practices provided that (i) any loans to any individual shall not exceed $250,000.00 in the aggregate outstanding at any time, and (ii) all such loans to employees, officers and 50 salespersons of the Borrowers shall not exceed $3,000,000.00 in the aggregate outstanding at anytime. 4-21. PROTECTION OF ASSETS. The Administrative Agent, in the Administrative Agent's reasonable discretion, and from time to time during the existence of an Event of Default, may discharge any tax or Encumbrance on any of the Collateral, or take any other action which the Administrative Agent may deem necessary or desirable to repair, insure, maintain, preserve, collect, or realize upon any of the Collateral. The Administrative Agent shall not have any obligation to undertake any of the foregoing and shall have no liability on account of any action so undertaken except where there is a specific finding in a judicial proceeding (in which the Administrative Agent has had an opportunity to be heard), from which finding no further appeal is available, that the Administrative Agent had acted in actual bad faith or in a grossly negligent manner. The Borrowers shall pay to the Administrative Agent, on demand, or the Administrative Agent, in its discretion, may add to the Loan Account, all amounts paid or incurred by the Administrative Agent pursuant to this Section 4-21. 4-22. LINE OF BUSINESS. No Borrower shall engage in any business other than the business in which it is currently engaged or a business reasonably related thereto. Notwithstanding anything to the contrary herein contained, the Borrowers may offer any product or service reasonably anticipated to serve the needs and desires of the Borrowers' customers, including, without limitation, small and medium sized businesses, home office customers and individual business customers. Similarly, the Borrowers may offer any product or service offered to the Borrowers' customers by the Borrowers' competitors. 4-23. AFFILIATE TRANSACTIONS. Except as described on EXHIBIT 4-23 or as otherwise permitted under this Agreement, no Borrower shall make any payment, nor give any value to any Affiliate that is not a Borrower except for goods and services actually purchased by that Borrower from, or sold by that Borrower to, such Affiliate for a price and on terms which shall be no less favorable to that Borrower than those which would have been charged and imposed in an arms length transaction. 4-24. FURTHER ASSURANCES. (a) Each Borrower shall execute and deliver to the Administrative Agent such instruments, documents, and papers, and shall do all such things from time to time hereafter as the Administrative Agent may reasonably request to carry into effect the provisions and intent of this Agreement; to protect and perfect the Administrative Agent's Collateral Interests in the Collateral; and to comply in all material respects with all applicable statutes and laws, and facilitate the collection of the Receivables Collateral. Each Borrower shall execute all such instruments as may be reasonably required by the Administrative Agent with respect to the recordation and/or perfection of the Collateral Interests created or contemplated herein. (b) Each Borrower hereby designates the Administrative Agent as and for that Borrower's true and lawful attorney, with full power of substitution, to sign and file any financing statements in order to perfect or protect the Administrative Agent's Collateral Interests in the Collateral during the existence of an Event of Default. (c) A carbon, photographic, or other reproduction of this Agreement or of any financing statement or other instrument executed pursuant to this Section 4-24 shall be sufficient for filing to perfect the security interests granted herein. 51 4-25. ADEQUACY OF DISCLOSURE. (a) All financial statements furnished to the Administrative Agent and to each Revolving Credit Lender by each Borrower have been prepared in accordance with GAAP consistently applied and present fairly in all material respects the condition of the Borrowers at the date(s) thereof and the results of operations and cash flows for the period(s) covered (provided however, that unaudited financial statements are subject to normal year end adjustments and to the absence of footnotes). There has been no change in the Consolidated financial condition, results of operations, or cash flows of the Borrowers since the date(s) of such financial statements, other than changes in the ordinary course of business, and changes which have not been materially adverse, either singularly or in the aggregate. (b) As of the Closing Date, no Borrower has any contingent obligations or obligation under any Lease, excluding synthetic leases not reported under GAAP, or Capital Lease which is not noted in the Borrowers' Consolidated financial statements furnished to the Administrative Agent and to each Revolving Credit Lender prior to the execution of this Agreement. (c) No document, instrument, agreement, or paper now or hereafter given to the Administrative Agent or to any Revolving Credit Lender by or on behalf of each Borrower in connection with the execution of this Agreement by the Administrative Agent and each Revolving Credit Lender (other than projections and forecasts, which are and will be made in good faith using reasonable assumptions) contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements therein not misleading. There is no fact known to any Borrower which has, or which, in the foreseeable future would likely have, a material adverse effect on the financial condition of any Borrower which has not been disclosed in writing to the Administrative Agent and to each Revolving Credit Lender. 4-26. No RESTRICTIONS ON LIABILITIES. Except as disclosed in EXHIBIT 4-7, no Borrower shall enter into or directly or indirectly become subject to any agreement which prohibits or restricts, in any manner, any Borrower's: (a) Creation of, and granting of Collateral Interests in favor of the Administrative Agent. (b) Incurrence of Liabilities. 4-27. OTHER COVENANTS. No Borrower shall indirectly do or cause to be done any act which, if done directly by that Borrower, would breach any covenant contained in this Agreement. ARTICLE 5 FINANCIAL REPORTING AND PERFORMANCE COVENANTS: 5-1. MAINTAIN RECORDS. The Borrowers shall: (a) At all times, keep proper books of account, in which full, true, and accurate entries shall be made in all material respects of all of the Borrowers' financial transactions, all in accordance with GAAP applied consistently with prior periods to fairly reflect the Consolidated financial condition of the Borrowers at the close of, and its results of operations for, the periods in question. (b) Timely provide the Administrative Agent with those financial reports, statements, and schedules required by this Article 5 or otherwise, each of which reports, statements and schedules shall be prepared, to the extent applicable, in accordance with GAAP applied consistently with prior periods to fairly reflect in all material respects the Consolidated 52 financial condition of the Borrowers at the close of, and the results of operations for, the period(s) covered therein. (c) At all times, keep accurate current records of the Collateral including, without limitation, accurate current stock, cost, and sales records of its Inventory, accurately and sufficiently itemizing and describing the kinds, types, and quantities of Inventory and the cost and selling prices thereof. (d) At all times, retain independent certified public accountants who are reasonably satisfactory to the Administrative Agent and instruct such accountants to fully cooperate with, and be available to, the Administrative Agent to discuss the Borrowers' financial performance, financial condition, operating results, controls, and such other matters, within the scope of the retention of such accountants, as may be raised by the Administrative Agent. (e) Not change any Borrower's fiscal year without furnishing the Administrative Agent with at least ninety (90) days prior written notice thereof. 5-2. ACCESS TO RECORDS. (a) Each Borrower shall accord the Administrative Agent with access from time to time during normal business hours and, as long as no Event of Default exists, upon reasonable prior notice, as the Administrative Agent may reasonably require to all properties owned by or over which any Borrower has control. Subject to the provisions of Section 5-9(d) hereof, the Administrative Agent shall have the right (as long as no Event of Default exists, upon reasonable prior notice), and each Borrower will permit the Administrative Agent from time to time as Administrative Agent may reasonably request, to examine, inspect, copy, and make extracts from any and all of the Borrowers' books, records, electronically stored data, papers, and files and in connection therewith, each Borrower shall make all of that Borrower's copying facilities available to the Administrative Agent. (b) Subject to the provisions of Section 5-2(a) hereof, each Borrower hereby authorizes the Administrative Agent to: (i) Inspect, copy, duplicate, review, cause to be reduced to hard copy, run off, draw off, and otherwise use any and all computer or electronically stored information or data which relates to any Borrower, or any service bureau, contractor, accountant, or other person, and directs any such service bureau, contractor, accountant, or other person fully to cooperate with the Administrative Agent with respect thereto. (ii) During the existence of a Cash Control Event, verify at any time the Collateral or any portion thereof, including verification with Account Debtors, and/or with each Borrower's computer billing companies, collection agencies, and accountants and to sign the name of each Borrower on any notice to each Borrower's Account Debtors or verification of the Collateral. (c) The Administrative Agent from time to time may designate one or more representatives to exercise the Administrative Agent's rights under this Section 5-2 as fully as if the Administrative Agent were doing so. 5-3. IMMEDIATE NOTICE TO ADMINISTRATIVE AGENT. (a) The Lead Borrower shall provide the Administrative Agent with written notice promptly upon the occurrence of any of the following events, which written notice shall be with reasonable particularity as to the facts and circumstances in respect of which such notice is being given: 53 (i) Any change in any Borrower's President, chief executive officer, chief operating officer, and chief financial officer (without regard to the title(s) actually given to the Persons discharging the duties customarily discharged by officers with those titles). (ii) Any cessation of any Borrower's making of payment, in the ordinary course, to any of its creditors (other than its cessation of making of such payments on account of a dispute with such creditor), which would have a material adverse effect on the financial condition of the Borrowers taken as a whole. (iii) Any failure by any Borrower to pay rent at any of that Borrower's locations, which failure continues for more than three (3) days following the last day on which such rent was payable without a material adverse effect to the Borrowers taken as a whole, unless such rent is being disputed by the Borrowers in good faith and the Borrowers have established adequate reserves therefor in accordance with GAAP. (iv) Any event which the Lead Borrower determines to have a material adverse effect in the business, operations, or financial affairs of the Borrowers taken as a whole. (v) The occurrence of any Default. (vi) Any intention on the part of any Borrower to discharge that Borrower's present independent accountants or any withdrawal or resignation by such independent accountants from their acting in such capacity (as to which, see Subsection 5-l(d)). (vii) Any litigation which, if determined adversely to any Borrower, would have a material adverse effect on the financial condition of the Borrowers taken as a whole. (b) The Lead Borrower shall: (i) Provide the Administrative Agent, when so distributed, with copies of any materials distributed to the shareholders of the Lead Borrower (qua such shareholders). (ii) Provide the Administrative Agent: (A) When filed, copies of all filings with the SEC. (B) When received, copies of all correspondence from the SEC, other than routine non-substantive general communications from the SEC. (iii) Add the Administrative Agent as an addressee on all investor mailing lists maintained by each Borrower. (iv) Provide the Administrative Agent, when received by any Borrower, with a copy of any management letter or similar communications from any accountant of any Borrower. 5-4. BORROWING BASE CERTIFICATE. The Lead Borrower shall provide the Administrative Agent with a Borrowing Base Certificate (in the form of EXHIBIT 5-4 annexed hereto, as such form may be revised from time to time by the Administrative Agent) monthly on fifth Business Day after the last day of each calendar month (as of the close of business on the last day of each fiscal month), provided that if a Increased Reporting Event occurs, the Lead Borrower shall furnish such Borrowing Base Certificate weekly on Wednesday of each week (or if not a Business Day, the next succeeding Business Day) as of the close of business on the immediately preceding Saturday (which 54 date for delivery of such reports shall thereafter not change until the circumstances giving rise to the Increased Reporting Event are remedied as provided in the definition of "Increased Reporting Event"). Such Certificate may be sent to the Administrative Agent by facsimile transmission, provided that the original thereof is forwarded to the Administrative Agent on the date of such transmission. 5-5. MONTHLY REPORTS. Monthly, the Lead Borrower shall provide the Administrative Agent with original counterparts of the following (each in such form as the Administrative Agent from time to time may specify): (i) those reports described in EXHIBIT 5-5 hereto, at the times set forth in such EXHIBIT; (ii) Within thirty (30) days following the end of each fiscal month (except for any month which corresponds to the end of a fiscal quarter of the Borrowers), an internally prepared financial statement of the Borrowers' Consolidated financial condition and the results of its operations for, the period ending with the end of the subject month, which financial statement shall include, at a minimum, a balance sheet, income statement, cash flow and comparison of same store sales for the corresponding month of the then immediately previous year, as well as to the Borrowers' business plan or most recent forecast. 5-6. QUARTERLY REPORTS. Quarterly, within fifty (50) days following the end of each of the Borrowers' fiscal quarters, the Lead Borrower shall provide the Administrative Agent with the following: (a) An original counterpart of a management prepared financial statement of the Borrowers for the period from the beginning of the Borrowers' then current fiscal year through the end of the subject fiscal quarter, with comparative information for the same period of the previous fiscal year, which statement shall include, at a minimum, a balance sheet, income statement, statement of changes in shareholders' equity, and cash flows and comparisons for the corresponding fiscal quarter of the then immediately previous fiscal year, as well as to the Borrowers' business plan or most recent forecast. (b) The officer's compliance certificate described in Section 5-8. (c) The Borrowers' 10Q report filed with the SEC. 5-7. ANNUAL REPORTS. Annually, within ninety-five (95) days following the end of the Borrowers' fiscal year, the Lead Borrower shall furnish the Administrative Agent with the following: (i) An original signed counterpart of the Borrowers' Consolidated annual financial statement, which statement shall have been prepared by, and bear the unqualified opinion of, the Lead Borrower's independent certified public accountants reasonably acceptable to the Administrative Agent (PricewaterhouseCoopers, LLC or another nationally recognized accounting firm being acceptable) (i.e. said statement shall be "certified" by such accountants) and shall include, at a minimum (with comparative information for the then prior fiscal year) a balance sheet, income statement, statement of changes in shareholders' equity, cash flows, and schedules of consolidation. (ii) The officer's compliance certificate described in Section 5-8. 55 (iii) The Borrowers' 10K report filed with the SEC. 5-8. OFFICERS' CERTIFICATES. The Lead Borrower shall cause either the Lead Borrower's President or its Chief Financial Officer, in each instance, to provide such Person's Certificate with those monthly, quarterly, and annual statements to be furnished pursuant to this Agreement, which Certificate shall: (a) Indicate that the subject statement was prepared in accordance with GAAP consistently applied and presents fairly in all material respects the Consolidated financial condition of the Borrowers at the close of, and the results of the Borrowers' operations and cash flows for, the period(s) covered, subject, however to the following: (i) Usual year end adjustments and the absence of footnotes (this exception shall not be included in the Certificate which accompanies such annual statement). (ii) Material Accounting Changes (in which event, such Certificate shall include a schedule (in reasonable detail) of the effect of each such Material Accounting Change) not previously specifically taken into account in the determination of the financial performance covenant imposed pursuant to Section 5-11. (b) Indicate either that (i) no Default exists, or (ii) if such an event has occurred, its nature (in reasonable detail) and the steps (if any) being taken or contemplated by the Borrowers to be taken on account thereof. (c) Include calculations concerning the Borrowers' compliance (or failure to comply) at the date of the subject statement with the financial performance covenant included in Section 5-11 hereof (whether or not a Covenant Compliance Event then exists). 5-9. INVENTORIES, APPRAISALS, AND AUDITS. (a) The Administrative Agent, at the reasonable expense of the Borrowers (but in no event to exceed $25,000.00 per annum), may participate in and/or observe each physical count and/or inventory of so much of the Collateral as consists of Inventory which is undertaken on behalf of any Borrower. (b) The Borrowers, at their own expense, shall cause not less than one (1) physical inventory of each of their store locations and delivery centers to be undertaken in each twelve (12) month period during which this Agreement is in effect and shall cause cycle counts of their Power Max locations to be undertaken in a manner consistent with their practices in effect on the Closing Date (or such other procedures as may be reasonably satisfactory to the Administrative Agent). (i) The Lead Borrower shall provide the Administrative Agent with a copy of the preliminary results of each such physical inventory and cycle count within thirty (30) days following the completion of such inventory. (ii) The Lead Borrower, within forty-five (45) days following the completion of such physical inventory or cycle count, shall provide the Administrative Agent with a reconciliation of the results of each such physical inventory or cycle count and shall post such results to the Borrowers' perpetual inventory system and, as applicable to the Borrowers' other financial books and records. 56 (iii) The Administrative Agent, in its reasonable discretion, if any Default exists, may cause such additional inventories to be taken as the Administrative Agent reasonably determines (each, at the expense of the Borrowers). (c) The Administrative Agent may obtain appraisals of the Collateral, from time to time (in all events, at the Borrowers' expense) conducted by such appraisers as are reasonably satisfactory to the Administrative Agent. The Administrative Agent shall not conduct more than one (1) appraisal of the Collateral, at the Borrowers' expense (which expense will not exceed $50,000.00 in any twelve month period plus all reasonable out-of-pocket expenses), during any twelve (12) month period during which this Agreement is in effect, unless an Event of Default shall exist, in which case the Administrative Agent may undertake additional such appraisals (at the Borrowers' expense) during such period as the Administrative Agent shall reasonably require. (d) The Administrative Agent contemplates conducting two (2) commercial finance field examinations (in each event, at the Borrowers' expense, which expense will not exceed $30,000.00 in any twelve month period, plus all reasonable out-of-pocket expenses) of the Borrowers' books and records during any twelve (12) month period during which this Agreement is in effect, unless an Event of Default shall have occurred and be continuing, in which case the Administrative Agent may undertake such additional audits (at the Borrowers' expense) during such period as the Administrative Agent shall reasonably require. 5-10. ADDITIONAL FINANCIAL INFORMATION. (a) In addition to all other information required to be provided pursuant to this Article 5, the Lead Borrower promptly shall provide the Administrative Agent with such other and additional information concerning the Borrowers, the Collateral, the operation of the Borrowers' business, and the Borrowers' financial condition, including original counterparts of financial reports and statements, as the Administrative Agent may from time to time reasonably request from the Lead Borrower. (b) The Lead Borrower may provide the Administrative Agent, from time to time hereafter, with updated forecasts of the Borrowers' anticipated performance and operating results. (c) In all events, the Lead Borrower, no later than thirty (30) days after the end of each of the Borrowers' fiscal years, shall provide the Administrative Agent with an updated and extended forecast which shall go out at least through the end of that fiscal year and shall include an income statement, balance sheet, and statement of cash flow, by month, each Consolidated (with consolidating schedules) and each prepared in conformity with GAAP and consistent with the Borrowers' then current practices. (d) Each Borrower recognizes that all inventories, analysis, financial information, and other materials which the Administrative Agent may obtain, develop, or receive with respect to the Borrowers are confidential to the Administrative Agent and that, except as otherwise provided herein, no Borrower is entitled to receipt of any of such inventories, analysis, financial information, and other materials, nor copies or extracts thereof or therefrom. Notwithstanding the foregoing, as long as no Event of Default exists, the Administrative Agent shall furnish the Lead Borrower with a copy of each appraisal obtained by the Administrative Agent. 5-11. FINANCIAL PERFORMANCE COVENANTS. (a) If a Covenant Compliance Event exists, the Borrowers shall cause its Fixed Charge Coverage Ratio to be at least 1:1 as of the end of each of its fiscal months commencing with the fiscal month ending immediately prior to the date of the Covenant Compliance Event. Compliance with 57 such financial performance covenant shall thereafter be required as provided in the definition of "Covenant Compliance Event". (b) Compliance with such financial performance covenant shall be made as if no Material Accounting Changes had been made (other than any Material Accounting Changes specifically taken into account in the setting of such covenants). The Administrative Agent may determine the Borrowers' compliance with such covenants based upon financial reports and statements provided by the Lead Borrower to the Administrative Agent as well as by reference to interim financial information provided to the Administrative Agent. ARTICLE 6 - USE OF COLLATERAL: 6-1. USE OF INVENTORY COLLATERAL. (a) No Borrower shall engage (i) In any sale of the Inventory other than for fair consideration in the conduct of the Borrowers' business in the ordinary course or as permitted under this Agreement. (ii) Sales or other dispositions to creditors. (iii) Sales or other dispositions in bulk other than in connection with any store closings, provided that in no event shall Inventory sold in bulk as a result of store closings after the Closing Date exceed, in the aggregate, fifteen percent (15%) of the Cost of the Borrowers' Inventory existing as of the Closing Date. (iv) Sales of any Collateral in breach of any provision of this Agreement. (b) No sale of Inventory shall be on consignment, approval, or under any other circumstances such that such Inventory may be returned to a Borrower without the consent of the Administrative Agent (with the exception of the Borrowers' customary return policy applicable to the return of inventory purchased by the Borrowers' retail customers in the ordinary course). 6-2. INVENTORY QUALITY. All Inventory now owned or hereafter acquired by each Borrower and at the time included in the Borrowing Base is and will be of good and merchantable quality and free from defects (other than defects within customary trade tolerances). 6-3. ADJUSTMENTS AND ALLOWANCES. Each Borrower may grant such allowances or other adjustments to that Borrower's Account Debtors (exclusive of extending the time for payment of any Account or Account Receivable, which shall not be done without first obtaining the Administrative Agent's prior written consent in each instance, which consent shall not be unreasonably delayed or withheld) as that Borrower may reasonably deem to accord with sound business practice, provided, however, the authority granted the Borrowers pursuant to this Section 6-3 may be limited or terminated by the Administrative Agent at any time during the existence of an Event of Default in the Administrative Agent's reasonable discretion. 6-4. VALIDITY OF ACCOUNTS. (a) The amount of each Account shown on the books, records, and invoices of the Borrowers represented as owing by each Account Debtor is and will be the correct amount actually owing by such Account Debtor and shall have been fully earned by performance by the Borrowers. 58 (b) No Borrower has any knowledge of any impairment of the validity or collectibility of any of the Accounts included in the Borrowing Base. The Lead Borrower shall notify the Administrative Agent of any such impairment immediately after any Borrower becomes aware of any such impairment (c) Except for Permitted Encumbrances, Standby L/Cs permitted hereunder, and surety bonds in an aggregate amount not to exceed $10,000,000, no Borrower shall post any bond to secure any Borrower's performance under any agreement to which any Borrower is a party nor cause any surety, guarantor, or other third party obligee to become liable to perform any obligation of any Borrower (other than to the Administrative Agent) in the event of any Borrower's failure so to perform. 6-5. NOTIFICATION TO ACCOUNT DEBTORS. The Administrative Agent shall have the right, during the existence of a Cash Control Event or an Event of Default, to notify any of the Borrowers' Account Debtors to make payment directly to the Administrative Agent and to collect all amounts due on account of the Collateral. ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES: 7-1. DEPOSITORY ACCOUNTS. (a) Annexed hereto as EXHIBIT 7-1 is a Schedule of all present DDA's as of the Closing Date, which Schedule includes, with respect to each depository (i) the name and address of that depository; (ii) the account number(s) of the account(s) maintained with such depository; and (iii) a contact person at such depository. (b) The Lead Borrower shall deliver the following to the Administrative Agent, as a condition to the effectiveness of this Agreement: (i) Notification, executed on behalf of each Borrower, to each depository institution with which any DDA is maintained (other than any Exempt DDA and the Blocked Account), in form satisfactory to the Administrative Agent of the Administrative Agent's interest in such DDA. (ii) A Blocked Account Agreement with any depository institution at which either of the following conditions applies: (A) Both any DDA (other than the Operating Account) and the Operating Account is maintained. (B) A Blocked Account is maintained. (c) No Borrower will establish any DDA hereafter (other than an Exempt DDA) unless, contemporaneous with such establishment, the Lead Borrower delivers the following to the Administrative Agent: (i) Notification to the depository at which such DDA is established if the same would have been required pursuant to Section 7-l(b)(ii)(A) if the subject DDA were open at the execution of this Agreement. (ii) A Blocked Account Agreement executed on behalf of the depository at which such DDA is established if the same would have been required pursuant to Section 7-l(b)(ii)(B) if the subject DDA were open at the execution of this Agreement. 59 7-2. CREDIT CARD RECEIPTS. (a) Annexed hereto as EXHIBIT 7-2, is a Schedule which describes all arrangements to which any Borrower is a party as of the Closing Date with respect to the payment to that Borrower of the proceeds of credit card charges for sales by that Borrower. (b) The Lead Borrower shall deliver to the Administrative Agent, as a condition to the effectiveness of this Agreement, notifications, executed on behalf of each Borrower, to each of each Borrower's credit card clearinghouses and processors of notice (in form satisfactory to the Administrative Agent), which notice provides that payment of all credit card charges submitted by that Borrower to that clearinghouse or other processor and any other amount payable to that Borrower by such clearinghouse or other processor shall, (i) whether or not a Cash Control Event has occurred and is continuing, be directed to the Primary Blocked Account, and (ii) during the existence of a Cash Control Event, be directed to the Primary Blocked Account, or the Concentration Account or, during the existence of an Event of Default, as otherwise designated from time to time by the Administrative Agent. No Borrower shall change such direction or designation except upon and with the prior written consent of the Administrative Agent. 7-3. THE CONCENTRATION, BLOCKED, AND OPERATING ACCOUNTS. (a) The following checking accounts have been or will be established (and are so referred to herein): (i) The 'CONCENTRATION ACCOUNT" (so referred to herein): Established by the Administrative Agent with Fleet National Bank. (ii) The 'BLOCKED ACCOUNTS" (so referred to herein): Established by the Lead Borrower with those financial institutions described on EXHIBIT 7-3. (iii) The 'OPERATING ACCOUNT" (so referred to herein): Established by the Lead Borrower with National City Bank (Account No. 2856582). (iv) The PRIMARY BLOCKED ACCOUNT. (b) The contents of each DDA and of the Blocked Accounts constitutes Collateral and Proceeds of Collateral. The contents of the Concentration Account constitutes the Administrative Agent's property and shall be applied to the Liabilities in accordance with the provisions of Section 7-5 hereof. (c) The Borrowers shall pay all fees and charges of, and maintain such impressed balances as may be required by the depository in which any account is opened as required hereby (even if such account is opened by and/or is the property of the Administrative Agent). 7-4. PROCEEDS AND COLLECTIONS. (a) All Receipts and all cash proceeds of any sale or other disposition of Inventory and Accounts of each Borrower: (i) Constitute Collateral and proceeds of Collateral. (ii) During the existence of a Cash Control Event, shall be held in trust by the Borrowers for the Administrative Agent. 60 (iii) During the existence of a Cash Control Event, shall not be commingled with any of any Borrower's other funds. (iv) During the existence of a Cash Control Event, shall be deposited and/or transferred only to the Blocked Accounts or the Concentration Account. (b) During the existence of a Cash Control Event, the Lead Borrower shall cause the ACH or wire transfer to the Primary Blocked Account or the Concentration Account, no less frequently than daily (and whether or not there is then an outstanding balance in the Loan Account) of the following: (i) The then collected funds in each DDA (other than any Exempt DDA), each such transfer to be net of any minimum balance, not to exceed $10,000.00, as may be required to be maintained in the subject DDA by the bank at which such DDA is maintained). (ii) The proceeds of all credit card charges not otherwise provided for pursuant hereto. Telephone advice (confirmed by written notice) shall be provided to the Administrative Agent on each Business Day on which any such transfer is made. (c) Whether or not any Liabilities are then outstanding, during the existence of a Cash Control Event, the Lead Borrower shall cause the ACH or wire transfer to the Concentration Account, no less frequently than daily on each Business Day, of all collected funds in each Blocked Account, net of such minimum balance, not to exceed $10,000.00, as may be required to be maintained in the Blocked Account by the depository which the Blocked Account is maintained. (d) In the event that, notwithstanding the provisions of this Section 7-4, during the existence of a Cash Control Event, any Borrower receives or otherwise has dominion and control of any Receipts, or any proceeds or collections of any Collateral, such Receipts, proceeds, and collections shall be held in trust by that Borrower for the Administrative Agent and shall not be commingled with any of that Borrower's other funds or deposited in any account of any Borrower other than as instructed by the Administrative Agent. 7-5. PAYMENT OF LIABILITIES. (a) During the existence of a Cash Control Event (or as the Lead Borrower may direct), on each Business Day, the Administrative Agent shall apply the then collected balance of the Concentration Account (net of fees charged, and of such impressed balances as may be required by the bank at which the Concentration Account is maintained), as of the day immediately following receipt of such collected funds, first, towards the SwingLine Loans and second, towards the unpaid balance of the Loan Account and all other Liabilities, subject to the provisions of Section 2-10(e). (b) All deposits to the Concentration Account and other payments to the Administrative Agent are subject to clearance and collection. (c) The Administrative Agent shall transfer to the Operating Account any surplus in the Concentration Account remaining after the application towards the Liabilities referred to in Section 7-5(a), above (less those amount which are to be netted out, as provided therein) provided, however, in the event that (i) any Default exists; and 61 (ii) one or more L/Cs are then outstanding, then the Administrative Agent may establish a funded reserve of up to 103% of the aggregate Stated Amounts of such L/Cs. Such funded reserve shall either be (i) returned to the Lead Borrower provided that no Default exists or (ii) applied towards the Liabilities during the existence of any Event of Default described in Section 10-10 or acceleration during the existence of any other Event of Default. ARTICLE 8 - GRANT OF SECURITY INTEREST: 8-1. GRANT OF SECURITY INTEREST. To secure the Borrowers' prompt, punctual, and faithful performance of all and each of the Liabilities, each Borrower hereby grants to the Administrative Agent, for the ratable benefit of the Revolving Credit Lenders, a continuing security interest in and to, and assigns to the Administrative Agent, for the ratable benefit of the Revolving Credit Lenders, the following, and each item thereof, whether now owned or now due, or in which that Borrower has an interest, or hereafter acquired, arising, or to become due, or in which that Borrower obtains an interest, and all Proceeds and substitutions of or to any of the following (all of which, together with any other property in which the Administrative Agent may in the future be granted a security interest, is referred to herein as the 'COLLATERAL"): (a) All Accounts. (b) All Inventory. (c) All Letter-of-Credit Rights arising from or relating to the Borrowers' Accounts and Inventory. (d) All Payment Intangibles arising from, relating to, or constituting proceeds of Accounts and Inventory. (e) All Supporting Obligations arising from, relating to, or constituting proceeds of Accounts and Inventory. (f) All Instruments arising from, relating to, or constituting proceeds of Account and Inventory. (g) All Documents relating to the Borrowers' Inventory. (h) All Deposit Accounts in which any monies deposited therein arise from, relate to or constitute proceeds of Accounts and Inventory. (i) Money, cash, policies and certificates of insurance, in each case, arising from, relating to, or constituting proceeds of Accounts and Inventory. (j) All insurance proceeds, refunds, and premium rebates, including, without limitation, proceeds of fire and credit insurance, arising out of any of the foregoing. (8-1 (a) through 8-l(i)) or otherwise. (k) All liens, guaranties, rights, remedies, and privileges pertaining to any of the foregoing (8-l(a) through 8-l(j)), including the right of stoppage in transit. 62 8-2. EXTENT AND DURATION OF SECURITY INTEREST. (a) The security interest created and granted herein is in addition to, and supplemental of, any security interest previously granted by any Borrower to the Administrative Agent and shall continue in full force and effect applicable to all Liabilities until both (a) all Liabilities have been paid and/or satisfied in full and (b) the security interest created herein is specifically terminated in writing by a duly authorized officer of the Administrative Agent. (b) While the Administrative Agent's rights in and to all Deposit Accounts (in which proceeds of Inventory and Accounts are deposited), money, and cash are limited to those items arising from, relating to, or constituting proceeds of Accounts and Inventory, the Administrative Agent and the Revolving Credit Lenders shall not be bound to inquire into the source of any funds deposited into a DDA, a Blocked Account or the Concentration Account by the Borrowers. Any amounts so deposited by the Borrowers shall conclusively be presumed to be proceeds of the Collateral and the Administrative Agent and the Revolving Credit Lenders shall not be under any liability or responsibility to determine whether the funds so deposited constitute proceeds of the Collateral. ARTICLE 9 - ADMINISTRATIVE AGENT AS BORROWER'S ATTORNEY-IN-FACT: 9-1. APPOINTMENT AS ATTORNEY-IN-FACT. Each Borrower hereby irrevocably constitutes and appoints the Administrative Agent as that (acting through any of its officers) Borrower's true and lawful attorney, with full power of substitution, during the existence of an Event of Default, to convert the Collateral into cash at the sole risk, cost, and expense of that Borrower, but for the sole benefit of the Administrative Agent and the Revolving Credit Lenders. The rights and powers granted the Administrative Agent by this appointment include but are not limited to the right and power to: (a) Prosecute, defend, compromise, or release any action relating to the Collateral. (b) Sign change of address forms to change the address to which each Borrower's mail is to be sent to such address as the Administrative Agent shall designate; receive and open each Borrower's mail; remove any Receivables Collateral and Proceeds of Collateral therefrom and turn over the balance of such mail either to the Lead Borrower or to any trustee in bankruptcy or receiver of the Lead Borrower, or other legal representative of a Borrower whom the Administrative Agent determines to be the appropriate person to whom to so turn over such mail. (c) Endorse the name of the relevant Borrower in favor of the Administrative Agent upon any and all checks, drafts, notes, acceptances, or other items or instruments; sign and endorse the name of the relevant Borrower on, and receive as secured party, any of the Collateral, any invoices, schedules of Collateral, freight or express receipts, or bills of lading, storage receipts, warehouse receipts, or other documents of title respectively relating to the Collateral. (d) Sign the name of the relevant Borrower on any notice to that Borrower's Account Debtors or verification of the Receivables Collateral; sign the relevant Borrower's name on any Proof of Claim in Bankruptcy against Account Debtors, and on notices of lien, claims of mechanic's liens, or assignments or releases of mechanic's liens securing the Accounts. (e) Take all such action as may be necessary to obtain the payment of any letter of credit and/or banker's acceptance of which any Borrower is a beneficiary. 63 (f) Repair, manufacture, assemble, complete, package, deliver, alter or supply goods, if any, necessary to fulfill in whole or in part the purchase order of any customer of each Borrower. 9-2. NO OBLIGATION TO ACT. The Administrative Agent shall not be obligated to do any of the acts or to exercise any of the powers authorized by Section 9-1 herein, but if the Administrative Agent elects to do any such act or to exercise any of such powers, it shall not be accountable for more than it actually receives as a result of such exercise of power, and shall not be responsible to any Borrower for any act or omission to act except for any act or omission to act as to which there is a final determination made in a judicial proceeding (in which proceeding the Administrative Agent has had an opportunity to be heard) which determination includes a specific finding that the subject act or omission to act had been grossly negligent or in actual bad faith. ARTICLE 10 - EVENTS OF DEFAULT: The occurrence of any event described in this Article 10 respectively shall constitute an 'EVENT OF DEFAULT" herein. Upon the occurrence of any Event of Default described in Section 10-10, any and all Liabilities shall become due and payable without any further act on the part of the Administrative Agent. During the existence of any other Event of Default, the Administrative Agent may, and on the instruction of the Majority Lenders as provided in Section 13-l(b) shall, declare any and all Liabilities shall become immediately due and payable. The existence of any Event of Default shall also constitute, without notice or demand, a default under all other agreements between the Administrative Agent or any Revolving Credit Lender and any Borrower and instruments and papers heretofore, now, or hereafter given the Administrative Agent or any Revolving Credit Lender by any Borrower. 10-1. FAILURE TO PAY THE REVOLVING CREDIT. The failure by any Borrower to pay when due any principal of the Revolving Credit (including, without limitation, any reimbursement for any drawing under any L/C). 10-2. FAILURE TO MAKE OTHER PAYMENTS. The failure by any Borrower to pay when due (or upon demand, if payable on demand) any interest on, or fees in respect of, the Revolving Credit (including, without limitation, L/C fees) or any other payment Liability (other than any payment liability on account of the principal of the Revolving Credit), which failure continues for five (5) Business Days. 10-3. FAILURE TO PERFORM COVENANT OR LIABILITY (NO GRACE PERIOD). The failure by any Borrower to promptly, punctually, faithfully and timely perform, discharge, or comply with any covenant or Liability included in any of the following provisions hereof:
Section Relates to: 4-6 Encumbrances 4-7 Indebtedness 4-19 Dividends. Investments. Other Corporate Actions 5-11 Financial Performance Covenant 7-4 Proceeds and Collections
10-4. FAILURE TO PERFORM COVENANT OR LIABILITY (GRACE PERIOD), (a) The failure by the Borrowers to promptly, punctually, faithfully and timely perform, discharge, or comply with the provisions of Section 4-14, which failure continues for five (5) days after the Lead Borrower's receipt of written notice from the Administrative Agent. 64 (b) The failure by the Borrowers to promptly, punctually, faithfully and timely perform, discharge, or comply with the provisions of Article 5, which failure continues for ten (10) Business Days after the Lead Borrower's receipt of written notice from the Administrative Agent, provided, however, the foregoing grace period shall not apply to the following requirements; rather such requirements shall have the benefit of only the following grace periods:
REQUIRED BY NUMBER OF GRACE REPORT / STATEMENT SECTION GRACE PERIOD PERIODS - -------------------------------------------------------------------------------------------------------------------- Borrowing Base Certificates 5-4 One Business Day Three in any 12 months - -------------------------------------------------------------------------------------------------------------------- Monthly Reports 5-5 Three Business Days Three in any 12 months - -------------------------------------------------------------------------------------------------------------------- Quarterly Reports 5-6 Five Business Days Two in any 12 months - -------------------------------------------------------------------------------------------------------------------- Annual Reports 5-7 Ten Business Days One in any 12 months - --------------------------------------------------------------------------------------------------------------------
(c) The failure by any Borrower to perform any covenants under any Loan Document or any other Liabilities, in each case not described in any of Sections 10-1, 10-2, 10-3, 10-4(a) or 10-4(b), which failure continues for twenty (20) days following the Lead Borrower's receipt of written notice from the Administrative Agent of the breach of any such covenants or Liabilities. 10-5. MISREPRESENTATION. The determination by the Administrative Agent that any representation or warranty at any time made by any Borrower to the Administrative Agent or any Revolving Credit Lender was not true or complete in all material respects when given. 10-6. ACCELERATION OF OTHER DEBT. BREACH OF LEASE. (a) The occurrence of any event such that any Indebtedness of any Borrower in excess of $20,000,000.00 to any creditor other than the Administrative Agent or any Revolving Credit Lender could be accelerated (whether or not the subject creditor takes any action on account of such occurrence). (b) The termination of any Lease as the result of a default thereunder, which termination individually or in the aggregate with all other Lease terminations after the date hereof could reasonably be expected to have a materially adverse effect on the Borrowers' business or financial condition, taken as a whole. 10-7. UNINSURED CASUALTY LOSS. The occurrence of any uninsured loss, theft, damage, or destruction of or to any material portion of the Collateral in excess of $20,000,000.00 in any fiscal year of the Borrowers. 10-8. ATTACHMENT. JUDGMENT. RESTRAINT OF BUSINESS. (a) The service of process upon the Administrative Agent or any Revolving Credit Lender or any Participant seeking to attach, by trustee or other process, any funds of any Borrower on deposit with, or assets of any Borrower in the possession of, the Administrative Agent or that Revolving Credit or such Participant unless contested in good faith by the Borrower in appropriate proceedings. (b) The entry of any judgment against any Borrower, which, when aggregated with all other such judgments exceeds $20,000,000.00 (unless adequately insured by a solvent unaffiliated 65 insurance company that has acknowledged coverage), and which judgment is not satisfied (if a money judgment), bonded, or appealed from (with execution or similar process stayed) within thirty (30) days of its entry. (c) The entry of any order or the imposition of any other process having the force of law, the effect of which is to restrain in any material way the conduct by any Borrower of its business in the ordinary course and which has a material adverse effect on the business or assets of the Borrowers taken as a whole. 10-9. BUSINESS FAILURE. Any act by, against, or relating to any Borrower, or its property or assets, which act constitutes the determination, by any Borrower, to initiate a program of substantial or total self-liquidation; application for, consent to, or sufferance of the appointment of a receiver, trustee, or other person, pursuant to court action or otherwise, over all, or any part of any Borrower's property; the granting of any trust mortgage or execution of an assignment for the benefit of the creditors of any Borrower, or the occurrence of any other voluntary or involuntary liquidation or extension of debt agreement for any Borrower; the offering by or entering into by any Borrower of any composition, extension, or any other arrangement seeking relief from or extension of the debts of any Borrower; or the initiation of any judicial or non-judicial proceeding or agreement by, against, or including any Borrower which seeks or intends to accomplish a reorganization or arrangement with creditors; and/or the initiation by or on behalf of any Borrower of the liquidation or winding up of all or any substantial part of any Borrower's business or operations; provided that if any of the foregoing is commenced against a Borrower, no Event of Default shall be deemed to have arisen hereunder if such action is timely contested in good faith by that Borrower by appropriate proceedings and is terminated or dismissed within sixty (60) days of when commenced. 10-10. BANKRUPTCY. The failure by any Borrower to generally pay the debts of that Borrower as they mature; adjudication of bankruptcy or insolvency relative to any Borrower; the entry of an order for relief or similar order with respect to any Borrower in any proceeding pursuant to the Bankruptcy Code or any other federal bankruptcy law; the filing of any complaint, application, or petition by any Borrower initiating any matter in which any Borrower is or may be granted any relief from the debts of that Borrower pursuant to the Bankruptcy Code or any other insolvency statute or procedure; the filing of any complaint, application, or petition against any Borrower initiating any matter in which that Borrower is or may be granted any relief from the debts of that Borrower pursuant to the Bankruptcy Code or any other insolvency statute or procedure, which complaint, application, or petition is not timely contested in good faith by that Borrower by appropriate proceedings or, if so contested, is not dismissed within sixty (60) days of when filed. 10-11. INDICTMENT - FORFEITURE. The indictment of, or institution of any legal process or proceeding against, any Borrower, under any Applicable Law where the relief, penalties, or remedies sought or available include the forfeiture of any property of any Borrower and/or the imposition of any stay or other order, the effect of which would reasonably be expected to have a material adverse effect on the business or assets of the Borrowers taken as a whole. 10-12. CHALLENGE TO LOAN DOCUMENTS. (a) Any challenge by or on behalf of any Borrower of the Liabilities to the validity of any Loan Document or the applicability or enforceability of any Loan Document strictly in accordance with the subject Loan Document's material terms or which seeks to void, avoid, limit, or otherwise adversely affect any security interest created by or in any Loan Document or any payment made pursuant thereto. (b) Any determination by any court or any other judicial or government authority that any Loan Document is not enforceable strictly in accordance with the subject Loan Document's 66 material terms or which voids, avoids, limits, or otherwise adversely affects any security interest created by any Loan Document or any payment made pursuant thereto. 10-13. CHANGE IN CONTROL. Any Change in Control. 10-14 DEFAULT UNDER CITI COMMERCE SOLUTIONS AGREEMENT. The occurrence of any default by the Lead Borrower under the Amended and Restated Merchant Services Agreement dated October 1, 2000 between Citi Commerce Solutions, successor to Associates Capital Bank, and the Lead Borrower (as amended and in effect) pursuant to which the Lead Borrower becomes obligated to pay an amount greater than or equal to $50,000,000.00 to Citi Commerce Solutions (including its successors or assigns) thereunder unless prior to and after giving effect to such payment, Availability is at least $200,000,000.00 and Availability is projected on a pro forma basis to be at least $200,000,000.00 for the two Fiscal quarters immediately following such payment. ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT: 11-1 ACCELERATION. During the existence of any Event of Default as described in Section 10-10, the Revolving Credit Commitments shall be terminated and all Liabilities of the Borrower to the Revolving Credit Lenders shall be immediately due and payable. During the existence of any Event of Default other than as described in Section 10-10, the Administrative Agent may (and on the issuance of Notice(s) of Acceleration, the Administrative Agent shall) terminate the Revolving Credit Commitments and declare all Liabilities of the Borrower to the Revolving Credit Lenders to be immediately due and payable and may exercise all of the Administrative Agent's Rights and Remedies as the Administrative Agent from time to time thereafter determines as appropriate. 11-2. RIGHTS OF ENFORCEMENT. During the existence of any Event of Default, the Administrative Agent shall have all of the rights and remedies of a secured party upon default under the UCC, in addition to which the Administrative Agent shall have all and each of the following rights and remedies: (a) To give notice to any bank at which any DDA or Blocked Account is maintained and in which Proceeds of Collateral are deposited, to turn over such Proceeds directly to the Administrative Agent. (b) To give notice to any customs broker of any of the Borrowers to follow the instructions of the Administrative Agent as provided in any written agreement or undertaking of such broker in favor of the Administrative Agent. (c) To collect the Receivables Collateral with or without the taking of possession of any of the Collateral. (d) To take possession of all or any portion of the Collateral. (e) To sell, lease, or otherwise dispose of any or all of the Collateral, in its then condition or following such preparation or processing as the Administrative Agent deems advisable and with or without the taking of possession of any of the Collateral. (f) To conduct one or more going out of business sales which include the sale or other disposition of the Collateral, subject to the rights of lessors under any Leases and applicable law. (g) To apply the Proceeds of the Collateral in reduction of the Liabilities. 67 (h) To exercise all or any of the rights, remedies, powers, privileges, and discretions under all or any of the Loan Documents. 11-3. SALE OF COLLATERAL. (a) Any sale or other disposition of the Collateral may be at public or private sale upon such terms and in such manner as the Administrative Agent deems advisable, having due regard to compliance with any statute or regulation which might affect, limit, or apply to the Administrative Agent's disposition of the Collateral. (b) The Administrative Agent, in the exercise of the Administrative Agent's rights and remedies during the existence of an Event of Default, may conduct one or more going out of business sales, in the Administrative Agent's own right or by one or more agents and contractors. Such sale(s) may be conducted upon any premises owned, leased, or occupied by any Borrower, subject to the rights of lessors under any Leases and applicable law. (c) Unless the Collateral is perishable or threatens to decline speedily in value, or is of a type customarily sold on a recognized market (in which event the Administrative Agent shall provide the Lead Borrower such notice as may be practicable under the circumstances), the Administrative Agent shall give the Lead Borrower at least ten (10) days prior written notice of the date, time, and place of any proposed public sale, and of the date after which any private sale or other disposition of the Collateral may be made. Each Borrower agrees that such written notice shall satisfy all requirements for notice to that Borrower which are imposed under the UCC or other applicable law with respect to the exercise of the Administrative Agent's rights and remedies upon default. (d) The Administrative Agent and any Revolving Credit Lender may purchase the Collateral, or any portion of it at any sale held under this Article. (e) If any of the Collateral is sold, leased, or otherwise disposed of by the Administrative Agent on credit, the Liabilities shall not be deemed to have been reduced as a result thereof unless and until payment is finally received thereon by the Administrative Agent. (f) The Administrative Agent shall apply the proceeds of the Administrative Agent's exercise of its rights and remedies upon default pursuant to this Article 11 in accordance with Sections 13-6 and 13-7. 11-4. OCCUPATION OF BUSINESS LOCATION. In connection with the Administrative Agent's exercise of the Administrative Agent's rights under this Article 11, during the existence of an Event of Default, the Administrative Agent may enter upon, occupy, and use any premises owned or occupied by each Borrower, subject to the rights of lessors under any Leases and applicable law, and may exclude each Borrower from such premises or portion thereof as may have been so entered upon, occupied, or used by the Administrative Agent. The Administrative Agent shall not be required to remove any of the Collateral from any such premises upon the Administrative Agent's taking possession thereof, and may render any Collateral unusable to the Borrowers. In no event shall the Administrative Agent be liable to any Borrower for use or occupancy by the Administrative Agent of any premises pursuant to this Article 11, nor for any charge (such as wages for any Borrower's employees and utilities) incurred in connection with the Administrative Agent's exercise of the Administrative Agent's Rights and Remedies. 11-5. GRANT OF NONEXCLUSIVE LICENSE. Each Borrower hereby grants to the Administrative Agent a royalty free nonexclusive irrevocable license during the existence of an Event of Default and subject to the rights of any third Person (including, without limitation, any lessor under a Lease) and Applicable Law (a) to use, apply, and affix any trademark, trade name, logo, or the like in 68 which any Borrower now or hereafter has rights, such license being with respect to the Administrative Agent's exercise of the rights hereunder including, without limitation, in connection with any completion of the sale or other disposition of Inventory, and (b) to use any or all furniture, fixtures and equipment located at any of the stores or other leased facilities of the Borrowers in connection with any completion of the sale or other disposition of Inventory, and (c) to use any or all intellectual property, general intangibles (including, without limitation, the Borrowers' trade names), books, records, and information relating to the Collateral and/or to the operation of each Borrower's business, and all rights of access to such books, records, and information, and all property in which such books, records, and information are stored, recorded, and maintained, and other assets of each Borrower. 11-6. ASSEMBLY OF COLLATERAL. The Administrative Agent may require any Borrower to assemble the Collateral and make it available to the Administrative Agent at the Borrowers' sole risk and expense at a place or places which are reasonably convenient to both the Administrative Agent and the Lead Borrower. 11-7. RIGHTS AND REMEDIES. The rights, remedies, powers, privileges, and discretions of the Administrative Agent hereunder (herein, the "ADMINISTRATIVE AGENT'S RIGHTS AND REMEDIES") shall be cumulative and not exclusive of any rights or remedies which it would otherwise have. No delay or omission by the Administrative Agent in exercising or enforcing any of the Administrative Agent's Rights and Remedies shall operate as, or constitute, a waiver thereof. No waiver by the Administrative Agent of any Event of Default or of any default under any other agreement shall operate as a waiver of any other default hereunder or under any other agreement. No single or partial exercise of any of the Administrative Agent's Rights or Remedies, and no express or implied agreement or transaction of whatever nature entered into between the Administrative Agent and any person, at any time, shall preclude the other or further exercise of the Administrative Agent's Rights and Remedies. No waiver by the Administrative Agent of any of the Administrative Agent's Rights and Remedies on any one occasion shall be deemed a waiver on any subsequent occasion, nor shall it be deemed a continuing waiver. The Administrative Agent's Rights and Remedies may be exercised at such time or times and in such order of preference as the Administrative Agent may determine. The Administrative Agent's Rights and Remedies may be exercised without resort or regard to any other source of satisfaction of the Liabilities. ARTICLE 12 - REVOLVING CREDIT FUNDINGS AND DISTRIBUTIONS: 12-1. REVOLVING CREDIT FUNDING PROCEDURES. Subject to Section 12-2: (a) The Administrative Agent shall advise each Revolving Credit Lender, no later than 1:30PM on a date on which any Revolving Credit Loan (other than a SwingLine Loan) is to be made on that date. Such advice, in each instance, may be by telephone or facsimile transmission, provided that if such advice is by telephone, it shall be confirmed in writing. Advice of a Revolving Credit Loan shall include the amount of and interest rate applicable to the subject Revolving Credit Loan. (b) Subject to that Revolving Credit Lender's Revolving Credit Commitment, each Revolving Credit Lender, by no later than the end of business on the day on which the subject Revolving Credit Loan is to be made, shall Transfer that Revolving Credit Lender's Revolving Credit Commitment Percentage of the subject Revolving Credit Loan to the Administrative Agent. 69 12-2. SWINGLINE LOANS. (a) In the event that, when a Revolving Credit Loan is requested, the aggregate unpaid balance of the SwingLine Loan is less than the SwingLine Loan Ceiling, then the SwingLine Lender may advise the Administrative Agent that the SwingLine Lender has determined to include up to the amount of the requested Revolving Credit Loan as part of the SwingLine Loan. In such event, the SwingLine Lender shall Transfer the amount of the requested Revolving Credit Loan to the Administrative Agent. (b) The SwingLine Loan shall be converted to a Revolving Credit Loan in which all Revolving Credit Lenders participate as follows: (i) At any time and from time to time, the SwingLine Lender may advise the Administrative Agent that all, or any part of the SwingLine Loan is to be converted to a Revolving Credit Loan in which all Revolving Credit Lenders participate. (ii) At the initiation of a Liquidation, the then entire unpaid principal balance of the SwingLine Loan shall be converted to a Revolving Credit Loan in which all Revolving Credit Lenders participate. In either such event, the Administrative Agent shall advise each Revolving Credit Lender of such conversion as if, and with the same effect as if such conversion were the making of a Revolving Credit Loan as provided in Section 12-1. (c) The SwingLine Lender, in separate capacities, may also be the Administrative Agent and a Revolving Credit Lender. (d) The SwingLine Lender, in its capacity as SwingLine Lender, is not a "Revolving Credit Lender" for any of the following purposes: (i) Except as otherwise specifically provided in the relevant Section, any distribution pursuant to Section 13-6. (ii) Determination of whether the requisite Revolving Credit Commitments have Consented to action requiring such Consent. 12-3. ADMINISTRATIVE AGENT'S COVERING OF FUNDINGS: (a) Each Revolving Credit Lender shall make available to the Administrative Agent, as provided herein, that Revolving Credit Lender's Revolving Credit Commitment Percentage of the following: (i) Each Revolving Credit Loan, up to the maximum amount of that Revolving Credit Lender's Revolving Credit Commitment of the Revolving Credit Loans. (ii) Up to the maximum amount of that Revolving Credit Lender's Revolving Credit Commitment of each L/C Drawing (to the extent that such L/C Drawing is not "covered" by a Revolving Credit Loan as provided herein). (b) In all circumstances, the Administrative Agent may: (i) Assume that each Revolving Credit Lender, subject to Section 12-3(a), timely shall make available to the Administrative Agent that Revolving Credit Lender's 70 Revolving Credit Commitment Percentage of each Revolving Credit Loan, notice of which is provided pursuant to Section 12-1. (ii) In reliance upon such assumption, make available the corresponding amount to the Borrowers. (iii) Assume that each Revolving Credit Lender timely shall pay, and shall make available, to the Administrative Agent all other amounts which that Revolving Credit Lender is obligated to so pay and/or make available hereunder or under any of the Loan Documents. (c) In the event that, in reliance upon any of such assumptions, the Administrative Agent makes available, a Revolving Credit Lender's Revolving Credit Commitment Percentage of one or more Revolving Credit Loans, or any other amount to be made available hereunder or under any of the Loan Documents, which amount a Revolving Credit Lender (a "DELINQUENT REVOLVING CREDIT LENDER") fails to provide to the Administrative Agent within one (1) Business Day of written notice of such failure, then: (i) The amount which had been made available by the Administrative Agent is an "ADMINISTRATIVE AGENT'S COVER" (and is so referred to herein). (ii) All interest paid by the Borrowers on account of the Revolving Credit Loan or coverage of the subject L/C Drawing which consist of the Administrative Agent's Cover shall be retained by the Administrative Agent until the Administrative Agent's Cover, with interest, has been paid. (iii) The Delinquent Revolving Credit Lender shall pay to the Administrative Agent, on demand, interest at a rate equal to the prevailing federal funds rate on any Administrative Agent's Cover in respect of that Delinquent Revolving Credit Lender (iv) The Administrative Agent shall have succeeded to all rights to payment to which the Delinquent Revolving Credit Lender otherwise would have been entitled hereunder in respect of those amounts paid by or in respect of the Borrowers on account of the Administrative Agent's Cover together with interest until it is repaid. Such payments shall be deemed made first towards the amounts in respect of which the Administrative Agent's Cover was provided and only then towards amounts in which the Delinquent Revolving Credit Lender is then participating. For purposes of distributions to be made pursuant to Section 12-4(a) (which relates to ordinary course distributions) or Section 13-6 (which relates to distributions of proceeds of a Liquidation) below, amounts shall be deemed distributable to a Delinquent Revolving Credit Lender (and consequently, to the Administrative Agent to the extent to which the Administrative Agent is then entitled) at the highest level of distribution (if applicable) at which the Delinquent Revolving Credit Lender would otherwise have been entitled to a distribution. (v) Subject to Subsection 12-3(c)(iv), the Delinquent Revolving Credit Lender shall be entitled to receive any payments from the Borrowers to which the Delinquent Revolving Credit Lender is then entitled, provided however there shall be deducted from such amount and retained by the Administrative Agent any interest to which the Administrative Agent is then entitled on account of Section 12-3(c)(ii), above. (d) A Delinquent Revolving Credit Lender shall not be relieved of any obligation of such Delinquent Revolving Credit Lender hereunder (all and each of which shall constitute continuing obligations on the part of any Delinquent Revolving Credit Lender). 71 (e) A Delinquent Revolving Credit Lender may cure its status as a Delinquent Revolving Credit Lender by paying the Administrative Agent the aggregate of the following: (i) The Administrative Agent's Cover (to the extent not previously repaid by the Borrowers and retained by the Administrative Agent in accordance with Subsection 12-3(c)(iv), above) with respect to that Delinquent Revolving Credit Lender. Plus (ii) The aggregate of the amount payable under Subsection 12-3(c)(iii), above (which relates to interest to be paid by that Delinquent Revolving Credit Lender). Plus (iii) All such costs and expenses as may be incurred by the Administrative Agent in the enforcement of the Administrative Agent's rights against such Delinquent Revolving Credit Lender. 12-4. ORDINARY COURSE DISTRIBUTIONS. (This Section 12-4 applies, and sets forth rights and obligations amongst the Lenders only, unless the provisions of Section 13-6 (which relates to distributions in the event of a Liquidation) becomes operative). (a) Weekly, on such day as may be set from time to time by the Administrative Agent (or more frequently at the Administrative Agent's option) the Administrative Agent and each Revolving Credit Lender shall settle up on amounts advanced under the Revolving Credit and collected funds received in the Concentration Account or otherwise paid by the Borrowers. (b) The Administrative Agent shall distribute to the SwingLine Lender and to each Revolving Credit Lender, such Person's respective pro-rata share of interest payments on the Revolving Credit Loans when actually received and collected by the Administrative Agent (excluding the one Business Days for settlement provided for in Section 7-5(a), which shall be for the account of the Administrative Agent only). For purposes of calculating interest due to a Revolving Credit Lender, that Revolving Credit Lender shall be entitled to receive interest on the actual amount contributed by that Revolving Credit Lender towards the principal balance of the Revolving Credit Loans outstanding during the applicable period covered by the interest payment made by the Borrowers. Any net principal reductions to the Revolving Credit Loans received by the Administrative Agent in accordance with the Loan Documents during such period shall not reduce such actual amount so contributed, for purposes of calculation of interest due to that Revolving Credit Lender, until the Administrative Agent has distributed to that Revolving Credit Lender its pro-rata share thereof. (c) The Administrative Agent shall distribute Revolving Credit Early Termination Fees, L/C fees, and, except as otherwise provided in Section 2-15, Line Fees paid on account of the Revolving Credit to the Revolving Credit Lenders pro rata based upon their respective Revolving Credit Commitment Percentages. (d) No Revolving Credit Lender shall have any interest in, or right to receive any part of, the Revolving Credit Commitment Fee or the Administrative Agent's Fee to be paid by the Borrowers to the Administrative Agent pursuant to this Agreement. Each Revolving Credit Lender shall be paid such fees upon becoming a Revolving Credit Lender hereunder as may be agreed between such Revolving Credit Lender and the Arranger. 72 (e) Any amount received by the Administrative Agent as reimbursement for any cost or expense (including without limitation, attorneys' reasonable fees) shall be distributed by the Administrative Agent to that Person which is entitled to such reimbursement as provided in this Agreement (and if such Person(s) is (are) the Revolving Credit Lenders, pro-rata based upon their respective Revolving Credit Commitment Percentages at the date on which the expense, in respect of which such reimbursement is being made, was incurred). (f) Each distribution pursuant to this Section 12-4 is subject to Section 12-3(c), above. ARTICLE 13 - ACCELERATION AND LIQUIDATION: 13-1. ACCELERATION NOTICES (a) The Administrative Agent may give the Revolving Credit Lenders a Notice of Acceleration at any time during the existence of an Event of Default. (b) The Majority Lenders may give the Administrative Agent a Notice of Acceleration at any time during the existence of an Event of Default. Such notice may be by multiple counterparts. 13-2. ACCELERATION Unless stayed by judicial or statutory process, the Administrative Agent shall accelerate the time for payment of the Liabilities and declare the Liabilities immediately due and payable in full within a commercially reasonable time following: (a) The Administrative Agent's giving of a Notice of Acceleration to the Revolving Credit Lenders as provided in Section 13-l(a). (b) The Administrative Agent's receipt of a Notice of Acceleration from the Majority Lenders, in compliance with Section 13-l(b). 13-3. INITIATION OF LIQUIDATION Unless stayed by judicial or statutory process, a Liquidation shall be initiated by the Administrative Agent within a commercially reasonable time following acceleration of the Liabilities. 13-4. ACTIONS AT AND FOLLOWING INITIATION OF LIQUIDATION (a) At the initiation of a Liquidation: (i) The unpaid principal balance of the SwingLine Loan (if any) shall be converted, pursuant to Section 12-2(b)(ii), to a Revolving Credit Loan in which all Revolving Credit Lenders participate. (ii) The Administrative Agent and the Revolving Credit Lenders shall "net out" each Revolving Credit Lender's respective contributions towards the Revolving Credit Loans, so that each Revolving Credit Lender holds that Revolving Credit Lender's Revolving Credit Commitment Percentage of the Revolving Credit Loans and advances. (b) Following the initiation of a Liquidation, each Revolving Credit Lender shall contribute, towards any L/C thereafter honored and not immediately reimbursed by the Borrowers, that Revolving Credit Lender's Revolving Credit Commitment Percentage of such honoring. 73 13-5. ADMINISTRATIVE AGENT'S CONDUCT OF LIQUIDATION (a) Any Liquidation shall be conducted by the Administrative Agent, with the advice and assistance of the Revolving Credit Lenders. (b) The Administrative Agent may establish one or more Nominees to "bid in" or otherwise acquire ownership to any Post Foreclosure Asset, provided that the Administrative Agent may "bid in" for any such assets only at such prices as may be directed by the Majority Lenders. (c) The Administrative Agent shall manage the Nominee and manage and dispose of any Post Foreclosure Assets with a view towards the realization of the economic benefits of the ownership of the Post Foreclosure Assets and in such regard, the Administrative Agent and/or the Nominee may operate, repair, manage, maintain, develop, and dispose of any Post Foreclosure Asset in such manner as the Administrative Agent determines as appropriate under the circumstances. (d) The Administrative Agent may decline to undertake or to continue taking a course of action or to execute an action plan (whether proposed by the Administrative Agent or any Revolving Credit Lender) unless indemnified to the Administrative Agent's satisfaction by the Revolving Credit Lenders against any and all liability and expense which may be incurred by the Administrative Agent by reason of taking or continuing to take that course of action or action plan. (e) Each Revolving Credit Lender shall execute all such instruments and documents not inconsistent with the provisions of this Agreement as the Administrative Agent and/or the Nominee reasonably may request with respect to the creation and governance of any Nominee, the conduct of the Liquidation, and the management and disposition of any Post Foreclosure Asset. 13-6. DISTRIBUTION OF LIQUIDATION PROCEEDS: (a) During the existence of an Event of Default, the Administrative Agent may establish one or more reasonably funded reserve accounts into which proceeds of the conduct of any Liquidation may be deposited in anticipation of future expenses which may be incurred by the Administrative Agent in the exercise of rights as a secured creditor of the Borrowers and prior claims which the Administrative Agent reasonably anticipates may need to be paid. (b) The Administrative Agent shall distribute the net proceeds of Liquidation in accordance with the relative priorities set forth in Section 13-7. (c) Each Revolving Credit Lender, on the written request of the Administrative Agent and/or any Nominee, not more frequently than once each month, shall reimburse the Administrative Agent and/or any Nominee, Pro-Rata, for any cost or expense reasonably incurred by the Administrative Agent and/or the Nominee in the conduct of a Liquidation, which amount is not covered out of current proceeds of the Liquidation, which reimbursement shall be paid over to and distributed by the Administrative Agent. 13-7. RELATIVE PRIORITIES TO PROCEEDS OF LIQUIDATION The relative priorities to the proceeds of a Liquidation are as follows: (a) To the Administrative Agent as reimbursement for all reasonable third party costs and expenses incurred by the Administrative Agent and to Lenders' Special Counsel and to any funded reserve established pursuant to Section 13-6(a); and then 74 (b) To the SwingLine Lender, on account of any SwingLine loans not converted to Revolving Credit Loans pursuant to Section 13-4(a)(i); and then (c) To the Revolving Credit Lenders (other than any Delinquent Revolving Credit Lender), pro-rata, to the unpaid principal balance of the Revolving Credit; and then (d) To the Revolving Credit Lenders (other than any Delinquent Revolving Credit Lender), pro-rata, to accrued interest on the Revolving Credit; and then (e) To the Revolving Credit Lenders (other than any Delinquent Revolving Credit Lender), pro-rata, to those fees distributable hereunder to the Revolving Credit Lenders; and then (f) To any Delinquent Revolving Credit Lenders, pro-rata to amounts to which such Revolving Credit Lenders otherwise would have been entitled pursuant to Sections 13-7(c), 13-7(d), 1313-7(e)13-7(e); and then (g) To the Revolving Credit Lenders, pro-rata, to the extent of the Revolving Credit Early Termination Fee; and then (h) To any other Liabilities then outstanding (including, without limitation on account of any claims then threatened or asserted against the Administrative Agent, the Issuing Bank, or any Revolving Credit Lender for which the Borrowers are obligated to provide an indemnity). (i) To the Lead Borrower. ARTICLE 14 - THE ADMINISTRATIVE AGENT: 14-1. APPOINTMENT OF THE ADMINISTRATIVE AGENT (a) Each Lender appoints and designates Fleet Retail Finance Inc. as the "Administrative Agent" hereunder and under the Loan Documents. (b) Each Revolving Credit Lender authorizes the Administrative Agent: (i) To execute those of the Loan Documents and all other instruments relating thereto to which the Administrative Agent is a party. (ii) To take such action on behalf of the Revolving Credit Lenders and to exercise all such powers as are expressly delegated to the Administrative Agent hereunder and in the Loan Documents and all related documents, together with such other powers as are reasonably incident thereto. 14-2. RESPONSIBILITIES OF ADMINISTRATIVE AGENT; OTHER AGENTS (a) The Administrative Agent shall not have any duties or responsibilities to, or any fiduciary relationship with, any Revolving Credit Lender except for those expressly set forth in this Agreement. (b) Neither the Administrative Agent nor any of its Affiliates shall be responsible to any Revolving Credit Lender for any of the following: 75 (i) Any recitals, statements, representations or warranties made by any Borrower or any other Person. (ii) Any appraisals or other assessments of the assets of any Borrower or of any other Person responsible for or on account of the Liabilities. (iii) The value, validity, effectiveness, genuineness, enforceability, or sufficiency of the Loan Agreement, the Loan Documents or any other document referred to or provided for therein. (iv) Any failure by any Borrower or any other Person (other than the Administrative Agent) to perform its obligations under the Loan Documents. (c) The Administrative Agent may employ attorneys, accountants, and other professionals and agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such attorneys, accountants, and other professionals or agents or attorneys-in-fact selected by the Administrative Agent with reasonable care. No such attorney, accountant, other professional, agent, or attorney-in-fact shall be responsible for any action taken or omitted to be taken by any other such Person. (d) Neither the Administrative Agent, nor any of its directors, officers, or employees shall be responsible for any action taken or omitted to be taken or omitted to be taken by any other of them in connection herewith in reliance upon advice of its counsel nor, in any other event except for any action taken or omitted to be taken as to which a final judicial determination has been or is made (in a proceeding in which such Person has had an opportunity to be heard) that such Person had acted in a grossly negligent manner, in actual bad faith, or in willful misconduct. (e) The Administrative Agent shall not have any responsibility in any event for more funds than the Administrative Agent actually receives and collects. (f) The Administrative Agent, in its separate capacity as a Lender, shall have the same rights and powers hereunder as any other Lender. (g) None of the Documentation Agent, the Syndication Agent, or the Co-Agents shall have any powers, rights, duties, responsibilities, or liabilities with respect to this Agreement and the other Loan Documents. 14-3. CONCERNING DISTRIBUTIONS BY THE ADMINISTRATIVE AGENT (a) The Administrative Agent in the Administrative Agent's reasonable discretion based upon the Administrative Agent's determination of the likelihood that additional payments will be received, expenses incurred, and/or claims made by third parties to all or a portion of such proceeds, may delay the distribution of any payment received on account of the Liabilities. (b) The Administrative Agent may disburse funds prior to determining that the sums which the Administrative Agent expects to receive have been finally and unconditionally paid to the Administrative Agent. If and to the extent that the Administrative Agent does disburse funds and it later becomes apparent that the Administrative Agent did not then receive a payment in an amount equal to the sum paid out, then any Revolving Credit Lender to whom the Administrative Agent made the funds available, on demand from the Administrative Agent, shall refund to the Administrative Agent the sum paid to that person. 76 (c) If, in the opinion of the Administrative Agent, the distribution of any amount received by the Administrative Agent might involve the Administrative Agent in liability, or might be prohibited hereby, or might be questioned by any Person, then the Administrative Agent may refrain from making distribution until the Administrative Agent's right to make distribution has been adjudicated by a court of competent jurisdiction. (d) The proceeds of any Revolving Credit Lender's exercise of any right of, or in the nature of, set-off shall be deemed, First, to the extent that a Revolving Credit Lender is entitled to any distribution hereunder, to constitute such distribution and Second, shall be shared with the other Revolving Credit Lenders as if distributed pursuant to (and shall be deemed as distributions under) Section 13-7. (e) Each Revolving Credit Lender recognizes that the crediting of the Borrowers with the "proceeds" of any transaction in which a Post Foreclosure Asset is acquired is a non-cash transaction and that, in consequence, no distribution of such "proceeds" will be made by the Administrative Agent to any Lender. (f) In the event that (x) a court of competent jurisdiction shall adjudge that any amount received and distributed by the Administrative Agent is to be repaid or disgorged or (y) the Majority Lenders determine to effect such repayment or disgorgement, then each Revolving Credit Lender to which any such distribution shall have been made shall repay, to the Administrative Agent which had made such distribution, that Revolving Credit Lender's Pro-Rata share of the amount so adjudged or determined to be repaid or disgorged. 14-4. DISPUTE RESOLUTION: Any dispute among the Revolving Credit Lenders and/or the Administrative Agent concerning the interpretation, administration, or enforcement of the financing arrangements contemplated by this or any other Loan Document or the interpretation or administration of this or any other Loan Document which cannot be resolved amicably shall be resolved in the United States District Court for the District of Massachusetts, sitting in Boston or in the Superior Court of Suffolk County, Massachusetts, to the jurisdiction of which courts each Revolving Credit Lender hereto hereby submits. 14-5. DISTRIBUTIONS OF NOTICES AND OF DOCUMENTS The Administrative Agent will forward to each Revolving Credit Lender, promptly after the Administrative Agent's receipt thereof, a copy of each notice or other document furnished to the Administrative Agent pursuant to this Agreement, including monthly, quarterly, and annual financial statements received from the Lead Borrower pursuant to Article 5 of this Agreement, other than any of the following: (a) Routine communications associated with requests for Revolving Credit Loans and/or the issuance of L/Cs. (b) Routine or nonmaterial communications. (c) Any notice or document of which the Administrative Agent has knowledge that such notice or document had been forwarded to the Revolving Credit Lenders other than by the Administrative Agent. 14-6. CONFIDENTIAL INFORMATION (a) Each Revolving Credit Lender will maintain, as confidential, all of the following: 77 (i) Proprietary approaches, techniques, and methods of analysis which are applied by the Administrative Agent in the administration of the credit facility contemplated by this Agreement. (ii) Proprietary forms and formats utilized by the Administrative Agent in providing reports to the Revolving Credit Lenders pursuant hereto, which forms or formats are not of general currency. (b) Nothing included herein shall prohibit the disclosure of any such information as may be required to be provided by judicial process or by regulatory authorities having jurisdiction over any party to this Agreement. 14-7. RELIANCE BY ADMINISTRATIVE AGENT The Administrative Agent shall be entitled to rely upon any certificate, notice or other document (including any cable, telegram, telex, or facsimile) reasonably believed by the Administrative Agent to be genuine and correct and to have been signed or sent by or on behalf of the proper person or persons, and upon advice and statements of attorneys, accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for in this Agreement, any Loan Document, or in any other document referred to therein, the Administrative Agent shall in all events be fully protected in acting, or in refraining from acting, in accordance with the applicable Consent required by this Agreement. Instructions given with the requisite Consent shall be binding on all Revolving Credit Lenders. 14-8. NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER REVOLVING CREDIT LENDERS (a) Each Revolving Credit Lender represents to all other Revolving Credit Lenders and to the Administrative Agent that such Revolving Credit Lender: (i) Independently and without reliance on any representation or act by Administrative Agent or by any other Revolving Credit Lender, and based on such documents and information as that Revolving Credit Lender has deemed appropriate, has made such Revolving Credit Lender's own appraisal of the financial condition and affairs of the Borrowers and decision to enter into this Agreement. (ii) Has relied upon that Revolving Credit Lender's review of the Loan Documents by that Revolving Credit Lender and by counsel to that Revolving Credit Lender as that Revolving Credit Lender deemed appropriate under the circumstances. (b) Each Revolving Credit Lender agrees that such Revolving Credit Lender, independently and without reliance upon Administrative Agent or any other Revolving Credit Lender, and based upon such documents and information as such Revolving Credit Lender shall deem appropriate at the time, will continue to make such Revolving Credit Lender's own appraisals of the financial condition and affairs of the Borrowers when determining whether to take or not to take any discretionary action under this Agreement. (c) The Administrative Agent, in the discharge of that Administrative Agent's duties hereunder, shall not be required to make inquiry of, or to inspect the properties or books of, any Person. (d) Except for notices, reports, and other documents and information expressly required to be furnished to the Revolving Credit Lenders by the Administrative Agent hereunder (as to which, see Section 14-5), the Administrative Agent shall not have any affirmative duty or responsibility 78 to provide any Lender with any credit or other information concerning any Person, which information may come into the possession of Administrative Agent or any Affiliate of the Administrative Agent. (e) Each Revolving Credit Lender, at such Revolving Credit Lender's request, shall have reasonable access to all nonprivileged documents in the possession of the Administrative Agent, which documents relate to the Administrative Agent's performance of its duties hereunder. 14-9. INDEMNIFICATION Without limiting the liabilities of the Borrowers under any this or any of the other Loan Documents, each Revolving Credit Lender shall indemnify the Administrative Agent, pro rata based upon their respective Revolving Credit Commitment Percentages, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including reasonable attorneys' fees and expenses and other out-of-pocket expenditures) which may at any time be imposed on, incurred by, or asserted against the Administrative Agent and in any way relating to or arising out of this Agreement or any other Loan Document or any documents contemplated by or referred to therein or the transactions contemplated thereby or the enforcement of any of terms hereof or thereof or of any such other documents, provided, however, no Revolving Credit Lender shall be liable for any of the foregoing to the extent that any of the foregoing arises from any action taken or omitted to be taken by the Administrative Agent as to which a final judicial determination has been or is made (in a proceeding in which the Administrative Agent has had an opportunity to be heard) that the Administrative Agent had acted in a grossly negligent manner, in actual bad faith, or in willful misconduct. 14-10. RESIGNATION OF ADMINISTRATIVE AGENT (a) The Administrative Agent may resign at any time by giving 60 days prior written notice thereof to the Revolving Credit Lenders. Upon receipt of any such notice of resignation, the Majority Lenders shall have the right to appoint a successor to such Administrative Agent, which shall be a Revolving Credit Lender (and if no Event of Default has occurred, with the consent of the Lead Borrower, not to be unreasonably withheld and, in any event, deemed given by the Lead Borrower if no written objection is provided by the Lead Borrower to the (resigning) Administrative Agent within seven (7) Business Days notice of such proposed appointment). If a successor Administrative Agent shall not have been so appointed and accepted such appointment within 30 days after the giving of notice by the resigning Administrative Agent, then the resigning Administrative Agent may appoint a successor Administrative Agent, which shall be a financial institution having a combined capital and surplus in excess of $300,000,000. The consent of the Lead Borrower otherwise required by this Section 14-10(a) shall not be required if an Event of Default has occurred. (b) Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor shall thereupon succeed to, and become vested with, all the rights, powers, privileges, and duties of the (resigning) Administrative Agent so replaced, and the (resigning) Administrative Agent shall be discharged from the (resigning) Administrative Agent's duties and obligations hereunder, other than on account of any responsibility for any action taken or omitted to be taken by the (resigning) Administrative Agent as to which a final judicial determination has been or is made (in a proceeding in which the (resigning) Person has had an opportunity to be heard) that such Person had acted in a grossly negligent manner or in bad faith. (c) After any retiring Administrative Agent's resignation, the provisions of this Agreement and of all other Loan Documents shall continue in effect for the retiring Person's benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. 79 ARTICLE 15 - ACTION BY ADMINISTRATIVE AGENT - CONSENTS - AMENDMENTS - WAIVERS: 15-1. ADMINISTRATION OF CREDIT FACILITIES (a) Except as otherwise specifically provided in this Agreement, the Administrative Agent may take any action with respect to the credit facility contemplated by the Loan Documents as the Administrative Agent determines to be appropriate, provided, however, the Administrative Agent is not under any affirmative obligation to take any action which it is not required by this Agreement or the Loan Documents specifically to so take. (b) Except as specifically provided in the following Sections of this Agreement, whenever a Loan Document or this Agreement provides that action may be taken or omitted to be taken in an Administrative Agent's discretion, the Administrative Agent shall have the sole right to take, or refrain from taking, such action without, and notwithstanding, any vote of the Revolving Credit Lender:
Actions Described in Section Type of Consent Required - ----------------------------------------------------------------- 15-2 Majority Lenders 15-3 Supermajority Lenders 15-4 Unanimous Consent 15-5 Consent of SwingLine Lender 15-6 Consent of Issuer 15-7 Consent of the Administrative Agent
(c) The rights granted to the Revolving Credit Lenders in those sections referenced in Section 15-1 (b) shall not otherwise limit or impair the Administrative Agent's exercise of its discretion under the Loan Documents. 15-2. ACTIONS REQUIRING OR ON DIRECTION OF MAJORITY LENDERS Except as otherwise provided in this Agreement, the Consent or direction of the Majority Lenders is required for any amendment, waiver, or modification of any Loan Document. 15-3 ACTIONS REQUIRING OR ON DIRECTION OF SUPERMAJORITY LENDERS None of the following may take place except with the Consent of the Supermajority Lenders: (a) The increase of the Revolving Credit Ceiling to an amount in excess of $550,000,000.00 (or such greater amount to which such Revolving Credit Ceiling has been previously increased in accordance with the provisions of this Section 15-3(a)). (b) The increase of the SwingLine Loan Ceiling to an amount in excess of $30,000,000.00 (or such greater amount to which such SwingLine Loan Ceiling has been previously increased in accordance with the provisions of this Section 15-3(b)). 15-4. ACTIONS REQUIRING OR DIRECTED BY UNANIMOUS CONSENT None of the following may take place except with the Consent of each Revolving Credit Lender adversely affected thereby or with Unanimous Consent: (a) Any increase in any Revolving Credit Lender's Revolving Credit Commitment or Revolving Credit Commitment Percentage (other than by reason of the application of Section 15-10 (which deals with NonConsenting Revolving Credit Lenders) or Section 16-1 (which deals with assignments and participations)). 80 (b) Any decrease in any interest rate or fee payable to the Revolving Credit Lenders on account of the Revolving Credit Loans. (c) Any extension of the Maturity Date. (d) Any forgiveness of all or any portion of any payment Liability. (e) Any decrease in any interest rate or fee payable under any of the Loan Documents (other than any Administrative Agent's Fee (for which the consent of the Administrative Agent shall also be required) and of any fee provided for by the Fee Letter (which may be amended by written agreement between the Lead Borrower on the one hand, and the Administrative Agent on the other)). (f) Any release of a material portion of the Collateral not otherwise required or provided for in the Loan Documents or to facilitate a Liquidation. (g) Any amendment of the definition of the terms "Borrowing Base" or of any definition of any component thereof, such that more credit would be available to the Borrowers, based on the same assets, as would have been available to the Borrowers immediately prior to such amendment, it being understood, however, that: (i) The foregoing shall not limit the adjustment by the Administrative Agent of any Reserve in the Administrative Agent's administration of the Revolving Credit as otherwise permitted by this Agreement. (ii) The foregoing shall not prevent the Administrative Agent, in its administration of the Revolving Credit, from restoring any component of Borrowing Base which had been lowered by the Administrative Agent back to the value of such component, as stated in this Agreement or to an intermediate value. (h) Any release of any Person obligated on account of the Liabilities. (i) The making of any Revolving Credit Loan which, when made, exceeds Availability and is not a Permissible OverLoan, provided, however, (i) no Consent shall be required in connection with the making of any Revolving Credit Loan to "cover" any honoring of a drawing under any L/C; and (ii) each Lender recognizes that subsequent to the making of a Revolving Credit Loan which does not constitute a Permissible OverLoan, the unpaid principal balance of the Loan Account may exceed Borrowing Base on account of changed circumstances beyond the control of the Administrative Agent (such as a drop in collateral value). (j) The waiver of the obligation of the Borrowers to reduce the unpaid principal balance of loans under the Revolving Credit to an amount which does not exceed a Permissible OverLoan or to eliminate an OverLoan. (k) Any amendment of this Article 15. (1) Amendment of any of the following Definitions: "Appraised Inventory Liquidation Value" 81 "Appraised Inventory Percentage" "Majority Lenders" "Permissible OverLoan" "Unanimous Consent" 15-5. ACTIONS REQUIRING SWINGLINE LENDER CONSENT No action, amendment, or waiver of compliance with, any provision of the Loan Documents or of this Agreement which affects the SwingLine Lender may be undertaken without the Consent of the SwingLine Lender. 15-6. ACTIONS REQUIRING ISSUER CONSENT No action, amendment, or waiver of compliance with, any provision of the Loan Documents or of this Agreement which affects the Issuer may be undertaken without the Consent of the Issuer. 15-7. ACTIONS REQUIRING ADMINISTRATIVE AGENT'S CONSENT (a) No action, amendment, or waiver of compliance with, any provision of the Loan Documents or of this Agreement which affects the Administrative Agent in its capacity as Administrative Agent may be undertaken without the written consent of the Administrative Agent. (b) No action referenced herein which affects the rights, duties, obligations, or liabilities of the Administrative Agent shall be effective without the written consent of the Administrative Agent. 15-8. MISCELLANEOUS ACTIONS (a) Notwithstanding any other provision of this Agreement, no single Revolving Credit Lender independently may exercise any right of action or enforcement against or with respect to any Borrower. (b) The Administrative Agent shall be fully justified in failing or refusing to take action under this Agreement or any Loan Document on behalf of any Revolving Credit Lender unless the Administrative Agent shall first (i) receive such clear, unambiguous, written instructions as the Administrative Agent deems appropriate; and (ii) be indemnified to the Administrative Agent's satisfaction by the Revolving Credit Lenders against any and all liability and expense which may be incurred by the Administrative Agent by reason of taking or continuing to take any such action, unless such action had been grossly negligent, in willful misconduct, or in bad faith. (c) The Administrative Agent may establish reasonable procedures for the providing of direction and instructions from the Revolving Credit Lenders to the Administrative Agent, including its reliance on multiple counterparts, facsimile transmissions, and time limits within which such direction and instructions must be received in order to be included in a determination of whether the requisite Revolving Credit Commitments has provided its direction, Consent, or instructions. 82 15-9. ACTIONS REQUIRING LEAD BORROWER'S CONSENT (a) The Lead Borrower's consent is required for any amendment of this Agreement, except that each of the following Articles of this Agreement may be amended without the consent of the Lead Borrower:
Article Title of Article - ------- ---------------- 12 Revolving Credit Fundings and Distributions 13 Acceleration and Liquidation 14-1 The Administrative Agent 15 Action By Administrative Agent - Consents - Amendments - Waivers (other than as provided in Section 15-9(b))
(b) Subject to Section 15-9(c), the Section 15-4 (Unanimous Consent) may not be amended without the consent of the Lead Borrower: (c) The Lead Borrower's consent to the amendment of those provisions referenced in Section 15-9(b) (i) Shall be deemed given unless written objection is made, within seven (7) Business Days following the Administrative Agent's giving notice to the Lead Borrower of the proposed amendment; and (ii) shall not be required during the existence of any Event of Default. 15-10. NONCONSENTING REVOLVING CREDIT LENDER (a) In the event that a Revolving Credit Lender (in this Section 15-10, a "NONCONSENTING REVOLVING CREDIT LENDER") does not provide its Consent to a proposal by the Administrative Agent to take action which requires consent under this Article 15, then subject to the prior consent of the Administrative Agent, one or more Revolving Credit Lenders who provided Consent to such action may require the assignment, without recourse and in accordance with the procedures outlined in Section 16-1, below, of the NonConsenting Revolving Credit Lender's commitment hereunder on fifteen (15) days written notice to the Administrative Agent and to the NonConsenting Revolving Credit Lender. (b) At the end of such fifteen (15) days, and provided that the NonConsenting Revolving Credit Lender delivers the Revolving Credit Note held by the NonConsenting Revolving Credit Lender to the Administrative Agent, the Revolving Credit Lenders who have given such written notice shall Transfer the following to the NonConsenting Revolving Credit Lender: (i) Such NonConsenting Revolving Credit Lender's Pro-Rata share of the principal and interest of the Revolving Credit Loans to the date of such assignment. (ii) All fees distributable hereunder to the NonConsenting Revolving Credit Lender to the date of such assignment. (iii) Any out-of-pocket costs and expenses for which the NonConsenting Revolving Credit Lender is entitled to reimbursement from the Borrowers. 83 (c) In the event that the NonConsenting Revolving Credit Lender fails to deliver to the Administrative Agent the Revolving Credit Note held by the NonConsenting Revolving Credit Lender as provided in Section 15-10(b), then: (i) The amount otherwise to be Transferred to the NonConsenting Revolving Credit Lender shall be Transferred to the Administrative Agent and held by the Administrative Agent, without interest, to be turned over to the NonConsenting Revolving Credit Lender upon delivery of the Revolving Credit Note held by that NonConsenting Revolving Credit Lender. (ii) The Revolving Credit Note held by the NonConsenting Revolving Credit Lender shall have no force or effect whatsoever. (iii) The NonConsenting Revolving Credit Lender shall cease to be a "Revolving Credit Lender". (iv) The Revolving Credit Lender(s) which have Transferred the amount to the Administrative Agent as described above shall have succeeded to all rights and become subject to all of the obligations of the NonConsenting Revolving Credit Lender as "Revolving Credit Lender". (d) In the event that more than one (1) Revolving Credit Lender wishes to require such assignment, the NonConsenting Revolving Credit Lender's commitment hereunder shall be divided among such Revolving Credit Lenders, pro-rata based upon their respective Revolving Credit Commitment Percentages, with the Administrative Agent coordinating such transaction. (e) The Administrative Agent shall coordinate the retirement of the Revolving Credit Note held by the NonConsenting Revolving Credit Lender and the issuance of Revolving Credit Notes to those Revolving Credit Lenders which "take-out" such NonConsenting Revolving Credit Lender, provided, however, no processing fee otherwise to be paid as provided in Section 16-2(b) shall be due under such circumstances. ARTICLE 16 - ASSIGNMENTS BY REVOLVING CREDIT LENDERS : 16-1. ASSIGNMENTS AND ASSUMPTIONS: (a) Except as provided herein, each Revolving Credit Lender (in this Section 16-l(a), an "ASSIGNING REVOLVING CREDIT LENDER") may assign to one or more Eligible Assignees (in this Section 16-1(a), each an "ASSIGNEE REVOLVING CREDIT LENDER") all or a portion of that Revolving Credit Lender's interests, rights and obligations under this Agreement and the Loan Documents (including all or a portion of its Commitment) and the same portion of the Revolving Credit Loans at the time owing to it, and of the Revolving Credit Note held by the Assigning Revolving Credit Lender, provided that: (i) The Administrative Agent (and if no Event of Default then exists, the Lead Borrower) shall have given its prior written consent to such assignment, which consent shall not be unreasonably withheld, but need not be given if the proposed assignment would result in any resulting Revolving Credit Lender's having a Dollar Commitment of less than the "minimum hold" amount specified in Section 16-l(a)(iii), provided that. any assignment complying with all other terms of this Article 16 to a Person then a Revolving Credit Lender shall not be subject to the prior consent of the Administrative Agent or the Lead Borrower. 84 (ii) Each such assignment shall be of a constant, and not a varying, percentage of all the Assigning Revolving Credit Lender's rights and obligations under this Agreement. (iii) Following the effectiveness of such assignment, the Assigning Revolving Credit Lender's Dollar Commitment (if not an assignment of all of the Assigning Revolving Credit Lender's Commitment) shall not be less than $10,000,000. 16-2. ASSIGNMENT PROCEDURES. (This Section 16-2 describes the procedures to be followed in connection with an assignment effected pursuant to this Article 16 and permitted by Section 16-1). (a) The parties to such an assignment shall execute and deliver to the Administrative Agent, for recording in the Register, an Assignment and Acceptance substantially in the form of EXHIBIT 16-1, annexed hereto. (b) The Assigning Revolving Credit Lender shall deliver to the Administrative Agent, with such Assignment and Acceptance, the Revolving Credit Note held by the subject Assigning Revolving Credit Lender and the Administrative Agent's processing fee of $3,500.00, provided, however, no such processing fee shall be due where the Assigning Revolving Credit Lender is one of the Revolving Credit Lenders at the initial execution of this Agreement. (c) The Administrative Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register or similar list (the "REGISTER") for the recordation of the names and addresses of the Revolving Credit Lenders and of the Revolving Credit Commitment Percentage and Revolving Credit Commitment Percentage of each Revolving Credit Lender. The Register shall be available for inspection by the Revolving Credit Lenders at any reasonable time and from time to time upon reasonable prior notice. In the absence of manifest error, the entries in the Register shall be conclusive and binding on all Revolving Credit Lenders. The Administrative Agent and the Revolving Credit Lenders may treat each Person whose name is recorded in the Register as a "Revolving Credit Lender" hereunder for all purposes of this Agreement. (d) The Assigning Revolving Credit Lender and Assignee Revolving Credit Lender, directly between themselves, shall make all appropriate adjustments in payments for periods prior to the effective date of an Assignment and Assumption. 16-3. EFFECT OF ASSIGNMENT. (a) From and after the effective date specified in an Assignment and Acceptance which has been executed, delivered, and recorded (which effective date the Administrative Agent may delay by up to five (5) Business Days after the delivery of such Assignment and Acceptance): (i) The Assignee Revolving Credit Lender: (A) Shall be a party to this Agreement and the Loan Documents (and to any amendments thereof) as fully as if the Assignee Revolving Credit Lender had executed each. (B) Shall have the rights of a Revolving Credit Lender hereunder to the extent of the Revolving Credit Commitment Percentage and Revolving Credit Commitment Percentage assigned by such Assignment and Acceptance. 85 (ii) The Assigning Revolving Credit Lender shall be released from the Assigning Revolving Credit Lender's obligations under this Agreement and the Loan Documents to the extent of the Commitment assigned by such Assignment and Acceptance. (iii) The Administrative Agent shall undertake to obtain and distribute replacement Revolving Credit Notes to the subject Assigning Revolving Credit Lender and Assignee Revolving Credit Lender. (b) By executing and delivering an Assignment and Acceptance, the parties thereto confirm to and agree with each other and with all parties to this Agreement as to those matters which are set forth in the subject Assignment and Acceptance. ARTICLE 17 - NOTICES: 17-1. NOTICE ADDRESSES. All notices, demands, and other communications made in respect of any Loan Document (other than a request for a loan or advance or other financial accommodation under the Revolving Credit) shall be made to the following addresses, each of which may be changed upon seven (7) days written notice to all others given by certified mail, return receipt requested: If to the Administrative Agent: Fleet Retail Finance Inc. 40 Broad Street Boston, Massachusetts 02109 Attention : James R. Dore Fax : (617) 434-4339 With a copy to: Riemer & Braunstein LLP Three Center Plaza Boston, Massachusetts 02108 Attention : David S. Berman, Esquire Fax : 617880-3456 If to the Lead Borrower And All Borrowers: OfficeMax, Inc. 3605 Warrensville Center Road Shaker Heights, Ohio 44122 Attention : Michael Killeen Fax : 86 With a copy to: OfficeMax, Inc. 3605 Warrensville Center Road Shaker Heights, Ohio 44122 Attention : General Counsel Fax : and Baker & Hostetler LLP 3200 National City Center 1900 East Ninth Street Cleveland, Ohio 44114-3485 Attention : Phillip M. Callesen Fax: : (216) 696-0740 17-2. NOTICE GIVEN. (a) Except as otherwise specifically provided herein, notices shall be deemed made and correspondence received, as follows (all times being local to the place of delivery or receipt): (i) By mail: the sooner of when actually received or three (3) days following deposit in the United States mail, postage prepaid. (ii) By recognized overnight express delivery: the Business Day following the day when sent. (iii) By Hand: If delivered on a Business Day after 9:00 AM and no later than three (3) hours prior to the close of customary business hours of the recipient, when delivered. Otherwise, at the opening of the then next Business Day. (iv) By Facsimile transmission (which must include a header on which the party sending such transmission is indicated): If sent on a Business Day after 9:00 AM and no later than three (3) hours prior to the close of customary business hours of the recipient, one (1) hour after being sent. Otherwise, at the opening of the then next Business Day. (b) Rejection or refusal to accept delivery and inability to deliver because of a changed address or facsimile number for which no due notice was given shall each be deemed receipt of the notice sent. ARTICLE 18 - TERM: 18-1. TERMINATION OF REVOLVING CREDIT. The Revolving Credit shall remain in effect (subject to suspension as provided in Section 2-5(g) hereof) until the Termination Date. 18-2. ACTIONS ON TERMINATION. (a) On the Termination Date, the Borrowers shall pay the Administrative Agent (whether or not then due), in immediately available funds, all Liabilities then due and owing, including, without limitation: the following: 87 (i) The entire balance of the Loan Account (including the unpaid principal balance of the Revolving Credit Loans, and the SwingLine Loan ). (ii) Any then remaining installments of the Administrative Agent's Fee. (iii) Any payments due on account of the indemnification obligations included in Section 2-10(f). (iv) Any accrued and unpaid Unused Fee. (v) All unreimbursed costs and expenses of the Administrative Agent and of Lenders' Special Counsel for which each Borrower is responsible. (b) On the Termination Date, the Borrowers shall also shall make such arrangements concerning any L/Cs then outstanding as are reasonably satisfactory to the Administrative Agent. (c) Until such payment (Section 18-2(a)) and arrangements concerning L/Cs (Section 18-2(b)), all provisions of this Agreement, other than those included in Article 2 which place any obligation on the Administrative Agent or any Revolving Credit Lender to make any loans or advances or to provide any financial accommodations to any Borrower shall remain in full force and effect until all Liabilities shall have been paid in full. (d) The release by the Administrative Agent of the Collateral Interests granted the Administrative Agent by the Borrowers hereunder may be upon such conditions and indemnifications as the Administrative Agent may reasonably require. ARTICLE 19 - GENERAL: 19-1. PROTECTION OF COLLATERAL. The Administrative Agent has no duty as to the collection or protection of the Collateral beyond the safe custody of such of the Collateral as may come into the possession of the Administrative Agent. 19-2. PUBLICITY. The Administrative Agent may issue a "tombstone" notice of the establishment of the credit facility contemplated by this Agreement and may make reference to each Borrower (and may utilize any logo or other distinctive symbol associated with each Borrower with the Borrower's consent, which will not be unreasonably withheld) in connection with any advertising, promotion, or marketing undertaken by the Administrative Agent. 19-3. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Borrowers and their respective representatives, successors, and assigns and shall enure to the benefit of the Administrative Agent and each Revolving Credit Lender and their respective successors and permitted assigns, provided, however, no trustee or other fiduciary appointed with respect to any Borrower shall have any rights hereunder, and provided further that no Borrower may assign or otherwise transfer any of its rights or obligations hereunder. In the event that the Administrative Agent or any Revolving Credit Lender assigns or transfers its rights under this Agreement, the assignee shall thereupon succeed to and become vested with all rights, powers, privileges, and duties of such assignor hereunder and such assignor shall thereupon be discharged and relieved from its duties and obligations hereunder. 19-4. SEVERABILITY. Any determination that any provision of this Agreement or any application thereof is invalid, illegal, or unenforceable in any respect in any instance shall not affect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality, or enforceability of any other provision of this Agreement. 88 19-5. AMENDMENTS. COURSE OF DEALING. (a) This Agreement and the other Loan Documents incorporate all discussions and negotiations between each Borrower and the Administrative Agent and each Revolving Credit Lender, either express or implied, concerning the matters included herein and in such other instruments, any custom, usage, or course of dealings to the contrary notwithstanding. No such discussions, negotiations, custom, usage, or course of dealings shall limit, modify, or otherwise affect the provisions thereof. No failure by the Administrative Agent or any Revolving Credit Lender to give notice to the Lead Borrower of any Borrower's having failed to observe and comply with any warranty or covenant included in any Loan Document shall constitute a waiver of such warranty or covenant or the amendment of the subject Loan Document. (b) Each Borrower may undertake any action otherwise prohibited hereby, and may omit to take any action otherwise required hereby, upon and with the express prior written consent of the Administrative Agent. Subject to Article 15, no consent, modification, amendment, or waiver of any provision of any Loan Document shall be effective unless executed in writing by or on behalf of the party to be charged with such modification, amendment, or waiver (and if such party is the Administrative Agent then by a duly authorized officer thereof). Any modification, amendment, or waiver provided by the Administrative Agent shall be in reliance upon all representations and warranties theretofore made to the Administrative Agent by or on behalf of the Borrowers (and any guarantor, endorser, or surety of the Liabilities) and consequently may be rescinded in the event that any of such representations or warranties was not true and complete in all material respects when given. (c) Each reference in the Loan Documents to the exercise of discretion or the like by the Administrative Agent or any Revolving Credit Lender shall be to such Person's exercise of its judgment, in good faith, based upon such Person's consideration of any such factors as the Administrative Agent or that Revolving Credit Lender, determines as having a material bearing on credit risks associated with the providing of Revolving Credit Loans and financial accommodations to the Borrowers, taking into account information of which that Person then has actual knowledge. The burden of establishing the failure of the Administrative Agent or any Revolving Credit Lender to have acted in a reasonable manner in such Person's exercise of such discretion shall be the Borrowers'. 19-6. POWER OF ATTORNEY. In connection with all powers of attorney included in this Agreement, each Borrower hereby grants unto the Administrative Agent (acting through any of its officers) full power to do any and all things necessary or appropriate during the existence of an Event of Default in connection with the exercise of such powers as fully and effectually as that Borrower might or could do, hereby ratifying all that said attorney shall do or cause to be done by virtue of this Agreement. No power of attorney set forth in this Agreement shall be affected by any disability or incapacity suffered by any Borrower and each shall survive the same. All powers conferred upon the Administrative Agent by this Agreement, being coupled with an interest, shall be irrevocable until this Agreement is terminated by a written instrument executed by a duly authorized officer of the Administrative Agent. 19-7. APPLICATION OF PROCEEDS. The proceeds of any collection, sale, or disposition of the Collateral, or of any other payments received hereunder, shall be applied towards the Liabilities in such order and manner as the Administrative Agent determines in its sole discretion, consistent, however, with Sections 13-6 and 13-7 and any other applicable provisions of this Agreement. The Borrowers shall remain liable for any deficiency remaining following such application. 19-8. INCREASED COSTS. If, as a result of any change in any Requirement of Law, or of the interpretation or application thereof by any court or by any governmental or other authority or entity charged with the administration thereof, whether or not having the force of law, which: 89 (a) subjects any Revolving Credit Lender to any taxes or changes the basis of taxation, or increases any existing taxes, on payments of principal, interest or other amounts payable by any Borrower to the Administrative Agent or any Revolving Credit Lender under this Agreement (except for taxes on the Administrative Agent or any Revolving Credit Lender based on net income or capital imposed by the jurisdiction in which the principal or lending offices of the Administrative Agent or that Revolving Credit Lender are located); (b) imposes, modifies or deems applicable any reserve, cash margin, special deposit or similar requirements against assets held by, or deposits in or for the account of or loans by or any other acquisition of funds by the relevant funding office of any Revolving Credit Lender; (c). imposes on any Revolving Credit Lender any other condition with respect to any Loan Document; or (d) imposes on any Revolving Credit Lender a requirement to maintain or allocate capital in relation to the Liabilities; and the result of any of the foregoing, in such Revolving Credit Lender's reasonable opinion, is to increase the cost to that Revolving Credit Lender of making or maintaining any loan, advance or financial accommodation or to reduce the income receivable by that Revolving Credit Lender in respect of any loan, advance or financial accommodation by an amount which that Revolving Credit Lender deems to be material, then upon written notice from the Administrative Agent, from time to time, to the Lead Borrower (such notice to set out in reasonable detail the facts giving rise to and a summary calculation of such increased cost or reduced income), the Borrowers shall forthwith pay to the Administrative Agent, for the benefit of the subject Revolving Credit Lender, within thirty (30) days after receipt of such notice, that amount which shall compensate the subject Revolving Credit Lender for such additional cost or reduction in income. 19-9. COSTS AND EXPENSES OF THE ADMINISTRATIVE AGENT . (a) The Borrowers shall pay from time to time on demand all Costs of Collection and all reasonable costs, expenses, and disbursements (including reasonable attorneys' fees and expenses) which are incurred by the Administrative Agent in connection with the preparation, negotiation, execution, and delivery of this Agreement and of any other Loan Documents, and all other reasonable costs, expenses, and disbursements which may be incurred connection with or in respect to the credit facility contemplated hereby or which otherwise are incurred with respect to the Liabilities. (b) The Borrowers shall pay from time to time on demand all reasonable costs and expenses (including reasonable attorneys' fees and expenses) incurred, during the existence of any Event of Default, by the Revolving Credit Lenders to Lenders' Special Counsel. (c) Each Borrower authorizes the Administrative Agent to pay all such fees and expenses and in the Administrative Agent's discretion, to add such fees and expenses to the Loan Account. (d) The undertaking on the part of each Borrower in this Section 19-9 shall survive payment of the Liabilities and/or any termination, release, or discharge executed by the Administrative Agent in favor of any Borrower, other than a termination, release, or discharge which makes specific reference to this Section 19-9. 19-10. COPIES AND FACSIMILES. Each Loan Document and all documents and papers which relates thereto which have been or may be hereinafter furnished the Administrative Agent or any 90 Revolving Credit Lender may be reproduced by that Revolving Credit Lender or by the Administrative Agent by any photographic, microfilm, xerographic, digital imaging, or other process, and such Person making such reproduction may destroy any document so reproduced. Any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made in the regular course of business). Any facsimile which bears proof of transmission shall be binding on the party which or on whose behalf such transmission was initiated and likewise shall be so admissible in evidence as if the original of such facsimile had been delivered to the party which or on whose behalf such transmission was received. 19-11. MASSACHUSETTS LAW. This Agreement and all rights and obligations hereunder, including matters of construction, validity, and performance, shall be governed by the law of The Commonwealth of Massachusetts. 19-12. CONSENT TO JURISDICTION. (a) Each Borrower agrees that any legal action, proceeding, case, or controversy against any Borrower with respect to any Loan Document may be brought in the Superior Court of Suffolk County Massachusetts or in the United States District Court, District of Massachusetts, sitting in Boston, Massachusetts, as the Administrative Agent may elect in the Administrative Agent's sole discretion. By execution and delivery of this Agreement, each Borrower, for itself and in respect of its property, accepts, submits, and consents generally and unconditionally, to the jurisdiction of the aforesaid courts. (b) Each Borrower WAIVES personal service of any and all process upon it, and irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by certified mail, postage prepaid, to the Lead Borrower at the Lead Borrower's address for notices as specified herein, such service to become effective five (5) Business Days after such mailing. (c) Each Borrower WAIVES any objection based on forum non conveniens and any objection to venue of any action or proceeding instituted under any of the Loan Documents and consents to the granting of such legal or equitable remedy as is deemed appropriate by the Court. (d) Nothing herein shall affect the right of the Administrative Agent to bring legal actions or proceedings in any other competent jurisdiction. (e) Each Borrower agrees that any action commenced by any Borrower asserting any claim arising under or in connection with this Agreement or any other Loan Document shall be brought solely in the Superior Court of Suffolk County Massachusetts or in the United States District Court, District of Massachusetts, sitting in Boston, Massachusetts, and that such Courts shall have exclusive jurisdiction with respect to any such action. 19-13. INDEMNIFICATION. Each Borrower shall indemnify, defend, and hold the Administrative Agent and each Revolving Credit Lender and any Participant and any of their respective employees, officers, or agents (each, an "INDEMNIFIED PERSON") harmless of and from any claim brought or threatened against any Indemnified Person by any Borrower, any guarantor or endorser of the Liabilities, or any other Person (as well as from reasonable attorneys' fees, expenses, and disbursements in connection therewith) on account of the relationship of the Borrowers or of any other guarantor or endorser of the Liabilities, including all costs, expenses, liabilities, and damages as may be suffered by any Indemnified Person in connection with (x) the Collateral; (y) the occurrence of any Event of Default; or (z) the exercise of any rights or remedies under any of the Loan Documents (each of claims which may be defended, compromised, settled, or pursued by the Indemnified Person with 91 counsel of the Lender's selection, but at the expense of the Borrowers) other than any claim as to which a final determination is made in a judicial proceeding (in which the Administrative Agent and any other Indemnified Person has had an opportunity to be heard), which determination includes a specific finding that the Indemnified Person seeking indemnification had acted in a grossly negligent manner or in actual bad faith. This indemnification shall survive payment of the Liabilities and/or any termination, release, or discharge executed by the Administrative Agent in favor of the Borrowers, other than a termination, release, or discharge duly executed on behalf of the Administrative Agent which makes specific reference to this Section 19-13. 19-14. RULES OF CONSTRUCTION. The following rules of construction shall be applied in the interpretation, construction, and enforcement of this Agreement and of the other Loan Documents: (a) Words in the singular include the plural and words in the plural include the singular. (b) Titles, headings (indicated by being underlined or shown in SMALL CAPITALS) and any Table of Contents are solely for convenience of reference; do not constitute a part of the instrument in which included; and do not affect such instrument's meaning, construction, or effect. (c) The words "includes" and "including" are not limiting. (d) Text which follows the words "including, without limitation" (or similar words) is illustrative and not limitational. (e) Text which is shown in italics (except for parenthesized italicized text), shown in BOLD, shown IN ALL CAPITAL LETTERS, or in any combination of the foregoing, shall be deemed to be conspicuous. (f) The words "may not" are prohibitive and not permissive. (g) Any reference to a Person's "knowledge" (or words of similar import) are to such Person's knowledge assuming that such Person has undertaken reasonable and diligent investigation with respect to the subject of such "knowledge" (whether or not such investigation has actually been undertaken). (h) Terms which are defined in one section of any Loan Document are used with such definition throughout the instrument in which so defined. (i) The symbol "$" refers to United States Dollars. (j) Unless limited by reference to a particular Section or provision, any reference to "herein", "hereof, or "within" is to the entire Loan Document in which such reference is made. (k) References to "this Agreement" or to any other Loan Document is to the subject instrument as amended to the date on which application of such reference is being made. (1) Except as otherwise specifically provided, all references to time are to Boston time. (m) In the determination of any notice, grace, or other period of time prescribed or allowed hereunder: 92 (i) Unless otherwise provided (A) the day of the act, event, or default from which the designated period of time begins to run shall not be included and the last day of the period so computed shall be included unless such last day is not a Business Day, in which event the last day of the relevant period shall be the then next Business Day and (B) the period so computed shall end at 5:00 PM on the relevant Business Day. (ii) The word "from" means "from and including". (iii) The words "to" and "until" each mean "to, but excluding". (iv) The word "through" means "to and including". (n) The Loan Documents shall be construed and interpreted in a harmonious manner and in keeping with the intentions set forth in Section 19-15 hereof, provided, however, in the event of any inconsistency between the provisions of this Agreement and any other Loan Document, the provisions of this Agreement shall govern and control. 19-15. INTENT. It is intended that: (a) This Agreement take effect as a sealed instrument. (b) The scope of all Collateral Interests created by any Borrower to secure the Liabilities be broadly construed in favor of the Administrative Agent. (c) All Collateral Interests created in favor of the Administrative Agent at any time and from time to time by any any secure all Liabilities, whether now existing or contemplated or hereafter arising. (d) All reasonable costs, expenses, and disbursements incurred by the Administrative Agent and, to the extent provide in Section 19-9 each Revolving Credit Lender, in connection with such Person's relationship(s) with any Borrower shall be borne by the Borrowers. (e) Unless otherwise explicitly provided herein, the Administrative Agent's consent to any action of any Borrower which is prohibited unless such consent is given may be given or refused by the Administrative Agent in its sole discretion. 19-16. PARTICIPATIONS: Each Revolving Credit Lender may sell participations to one or more financial institutions (each, a "PARTICIPANT") in that Revolving Credit Lender's interests herein provided that no such participation shall include any provision which accords that Participant with any rights, vis a vis the Administrative Agent, with respect to any requirement herein for approval by a requisite number or proportion of the Revolving Credit Lenders. No such sale of a participation shall relieve a Revolving Credit Lender from that Revolving Credit Lender's obligations hereunder nor obligate the Administrative Agent to any Person other than a Revolving Credit Lender. 19-17. RIGHT OF SET-OFF. Any and all deposits or other sums at any time credited by or due to any Borrower from the Administrative Agent or any Revolving Credit Lender or any Participant or from any Affiliate of any of the foregoing, and any cash, securities, instruments or other property of any Borrower in the possession of any of the foregoing, whether for safekeeping or otherwise (regardless of the reason such Person had received the same) shall at all times constitute security for all Liabilities and for any and all obligations of each Borrower to the Administrative Agent and such Revolving Credit Lender or any Participant or such Affiliate and may be applied or set off against the Liabilities and against such obligations at any time an Event of Default exists, whether or not such are 93 then due and whether or not other collateral is then available to the Administrative Agent or that Revolving Credit Lender. 19-18. PLEDGES TO FEDERAL RESERVE BANKS: Nothing included in this Agreement shall prevent or limit any Revolving Credit Lender, to the extent that such Revolving Credit Lender is subject to any of the twelve Federal Reserve Banks organized under Section 4 of the Federal Reserve Act (12 U.S.C. Section 341) from pledging all or any portion of that Lender's interest and rights under this Agreement, provided, however, neither such pledge nor the enforcement thereof shall release the pledging Revolving Credit Lender from any of its obligations hereunder or under any of the Loan Documents. 19-19. MAXIMUM INTEREST RATE. Regardless of any provision of any Loan Document, neither the Administrative Agent nor any Revolving Credit Lender shall be entitled to contract for, charge, receive, collect, or apply as interest on any Liability, any amount in excess of the maximum rate imposed by Applicable Law. Any payment which is made which, if treated as interest on a Liability would result in such interest's exceeding such maximum rate shall be held, to the extent of such excess, as additional collateral for the Liabilities as if such excess were "Collateral." 19-20. WAIVERS. (a) The Borrowers make each of the waivers included in Section 19-20(b), below, knowingly, voluntarily, and intentionally, and understands that Administrative Agent and each Revolving Credit Lender, in establishing the facilities contemplated hereby and in providing loans and other financial accommodations to or for the account of the Borrowers as provided herein, whether not or in the future, is relying on such waivers. (b) EACH BORROWER RESPECTIVELY WAIVES THE FOLLOWING: (i) Except as otherwise specifically required hereby, notice of non-payment, demand, presentment, protest and all forms of demand and notice, both with respect to the Liabilities and the Collateral. (ii) Except as otherwise specifically required hereby, the right to notice and/or hearing prior to the Administrative Agent's exercising of the Administrative Agent's rights upon default. (iii) THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE ADMINISTRATIVE AGENT OR ANY REVOLVING CREDIT LENDER IS OR BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE ADMINISTRATIVE AGENT OR ANY REVOLVING CREDIT LENDER OR IN WHICH THE ADMINISTRATIVE AGENT OR ANY REVOLVING CREDIT LENDER IS JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT OF, ANY RELATIONSHIP AMONGST OR BETWEEN ANY BORROWER OR ANY OTHER PERSON AND THE ADMINISTRATIVE AGENT OR ANY REVOLVING CREDIT LENDER (EACH OF WHOM LIKEWISE WAIVES THE RIGHT TO A JURY IN ANY TRIAL OF ANY SUCH CASE OR CONTROVERSY). THE ADMINISTRATIVE AGENT AND THE REVOLVING CREDIT LENDERS LIKEWISE WAIVE ANY SUCH RIGHT TO A JURY. (iv) The benefits or availability of any stay, limitation, hindrance, delay, or restriction (including, without limitation, any automatic stay which otherwise might be imposed 94 pursuant to Section 362 of the Bankruptcy Code) with respect to any action which the Administrative Agent may or may become entitled to take hereunder. (v) Any defense, counterclaim, set-off, recoupment, or other basis on which the amount of any Liability, as stated on the books and records of the Administrative Agent, could be reduced or claimed to be paid otherwise than in accordance with the tenor of and written terms of such Liability. (vi) Any claim to consequential, special, or punitive damages. 19-21 ADDITIONAL WAIVERS. (a) The Liabilities are the joint and several obligations of each Borrower. To the fullest extent permitted by applicable law, the obligations of each Borrower hereunder shall not be affected by (i) the failure of the Administrative Agent or any Revolving Credit Lender to assert any claim or demand or to enforce or exercise any right or remedy against any other Borrower under the provisions of this Agreement, any other Loan Document or otherwise, (ii) any rescission, waiver, amendment or modification of, or any release from any of the terms or provisions of, this Agreement, any other Loan Document, or any other agreement, including with respect to any other Borrower of the Liabilities under this Agreement, or (iii) the failure to perfect any security interest in, or the release of, any of the security held by or on behalf of the Administrative Agent. (b) The obligations of each Borrower hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than the indefeasible payment in full in cash of the Liabilities), including any claim of waiver, release, surrender, alteration or compromise of any of the Liabilities, and shall not be subject to any defense or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Liabilities or otherwise. Without limiting the generality of the foregoing, the obligations of each Borrower hereunder shall not be discharged or impaired or otherwise affected by the failure of the Administrative Agent or any Revolving Credit Lender to assert any claim or demand or to enforce any remedy under this Agreement, any other Loan Document or any other agreement, by any waiver or modification of any provision of any thereof, by any default, failure or delay, wilful or otherwise, in the performance of the Liabilities, or by any other act or omission that may or might in any manner or to any extent vary the risk of any Borrower or that would otherwise operate as a discharge of any Borrower as a matter of law or equity (other than the indefeasible payment in full in cash of all the Liabilities). (c) To the fullest extent permitted by applicable law, each Borrower waives any defense based on or arising out of any defense of any other Borrower or the unenforceability of the Liabilities or any part thereof from any cause, or the cessation from any cause of the liability of any other Borrower, other than the indefeasible payment in full in cash of all the Liabilities. The Administrative Agent may, at its election, foreclose on any security held by it by one or more judicial or nonjudicial sales, accept an assignment of any such security in lieu of foreclosure, compromise or adjust any part of the Liabilities, make any other accommodation with any other Borrower, or exercise any other right or remedy available to them against any other Borrower, without affecting or impairing in any way the liability of any Borrower hereunder except to the extent that all the Liabilities have been indefeasibly paid in full in cash. Pursuant to applicable law, each Borrower waives any defense arising out of any such election even though such election operates, pursuant to applicable law, to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of such Borrower against any other Borrower, as the case may be, or any security. (d) Upon payment by any Borrower of any Liabilities, all rights of such Borrower against any other Borrower arising as a result thereof by way of right of subrogation, contribution, reimbursement, indemnity or otherwise shall in all respects be subordinate and junior in right of payment 95 to the prior indefeasible payment in full in cash of all the Liabilities. In addition, any indebtedness of any Borrower now or hereafter held by any other Borrower is hereby subordinated in right of payment to the prior payment in full of the Liabilities. None of the Borrowers will demand, sue for, or otherwise attempt to collect any such indebtedness. If any amount shall erroneously be paid to any Borrower on account of (a) such subrogation, contribution, reimbursement, indemnity or similar right or (b) any such indebtedness of any Borrower, such amount shall be held in trust for the benefit of the Administrative Agent and the Revolving Credit Lenders and shall forthwith be paid to the Administrative Agent to be credited against the payment of the Liabilities, whether matured or unmatured, in accordance with the terms of the Loan Documents. 19-22. CONFIDENTIALITY. The Administrative Agent and the Revolving Credit Lenders agree to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to their and their Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrowers or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Revolving Credit Lender on a nonconfidential basis from a source other than the Borrowers. For the purposes of this Section, the term "Information" means all information received from the Borrowers relating to their businesses, other than any such information that is available to the Administrative Agent or any Revolving Credit Lender on a nonconfidential basis prior to disclosure by the Borrowers. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. OFFICEMAX, INC. ("LEAD BORROWER") By________________________________________ Print Name: Michael F. Killeen Title: Senior Executive Vice President and Chief Financial Officer "BORROWERS": OFFICEMAX, INC. By________________________________________ Print Name: Michael F. Killeen Title: Senior Executive Vice President and Chief Financial Officer 96 BIZMART, INC. By________________________________________ Print Name: Michael F. Killeen Title: Senior Executive Vice President BIZMART (TEXAS), INC. By________________________________________ Print Name: Michael F. Killeen Title: Senior Executive Vice President OFFICEMAX CORP. By________________________________________ Print Name: Michael F. Killeen Title: Senior Executive Vice President OMX, INC. By________________________________________ Print Name: Michael F. Killeen Title: Senior Executive Vice President FLEET RETAIL FINANCE INC. ("ADMINISTRATIVE AGENT") By________________________________________ Print Name: James R. Dore Title: Director 97 The "REVOLVING CREDIT LENDERS AND OTHER AGENTS" FLEET RETAIL FINANCE INC. By________________________________________ Print Name: James R. Dore Title: Director JPMORGAN CHASE BANK, as Co- Agent and Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ JPMORGAN BUSINESS CREDIT CORPORATION, as Co-Agent By________________________________________ Print Name:_______________________________________ Title:_______________________________________ 98 CONGRESS FINANCIAL CORPORATION By________________________________________ Print Name:_______________________________________ Title:_______________________________________ FOOTHILL CAPITAL CORPORATION By________________________________________ Print Name:_______________________________________ Title:_______________________________________ 99 GENERAL ELECTRIC CAPITAL CORPORATION By________________________________________ Print Name:_______________________________________ Title:_______________________________________ GMAC COMMERCIAL FINANCE, LLC, as Documentation Agent and Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ WHITEHALL RETAIL FINANCE, a division of Whitehall Business credit Corporation, as Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ 100 NATIONAL CITY COMMERCIAL FINANCE, INC. By________________________________________ Print Name:_______________________________________ Title:_______________________________________ THE CIT GROUP/BUSINESS CREDIT, INC., As Syndication Agent and Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ LASALLE RETAIL FINANCE, a division of LASALLE BUSINESS CREDIT, LLC, as agent for Standard Federal Bank National Association, as Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ ORIX FINANCIAL SERVICES, INC., as Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ 101 SIEMENS FINANCIAL SERVICES, INC., as Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ PNC BANK, N.A., as Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ PROVIDENT BANK, as Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ TRANSAMERICA BUSINESS CAPITAL CORPORATION, as Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ UPS CAPITAL CORPORATION, as Revolving Credit Lender By________________________________________ Print Name:_______________________________________ Title:_______________________________________ 102 EX-99.1 4 l01262aexv99w1.txt EXHIBIT 99.1 Exhibit 99.1 [LETTER HEAD OF OFFICEMAX(R)] June 5, 2003 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Ladies and Gentlemen: Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Quarterly Report on Form 10-Q of OfficeMax, Inc. (the "Company") for the quarter ended April 26, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, that, to such officer's knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. /s/ Michael Feuer - ---------------------------------------- Name: Michael Feuer Title: Chief Executive Officer /s/ Michael F. Killeen - ---------------------------------------- Name: Michael F. Killeen Title: Senior Executive Vice President, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----