FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 27, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-631
ROSE'S STORES, INC.
Incorporated Under the Laws of Delaware
I.R.S. Employer Identification No. 56-0382475
P. H. Rose Building
218 South Garnett Street
Henderson, North Carolina 27536
Telephone No. 919/430-2600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
As of May 30, 1996, of the 10,000,000 shares of common stock delivered to
First Union National Bank of North Carolina as Escrow Agent pursuant to the
Modified and Restated First Amended Joint Plan of Reorganization, 8,233,951 of
such shares of common stock are outstanding. The remaining 789,139 shares
held in escrow will be distributed by FUNB in satisfaction of disputed Class 3
claims as and when such claims are resolved. If all pending claims are
resolved adversely to the Company, approximately 8,754,096 shares of common
stock will be outstanding. If all pending claims are resolved in accordance
with the Company's records, approximately 8,607,601 shares of common stock
will be outstanding. The foregoing estimates do not include any additional
shares that may be issued with respect to late-filed claims which the
Bankruptcy Court may allow which have not been filed as of the date hereof or
the effect of negotiated settlements made for amounts in excess of amounts
shown in the Company's records. To the extent that escrowed shares of common
stock are not used to satisfy claims, they will revert to the Company and will
be retired or held in the treasury of the Company.
PAGE
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ROSE'S STORES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
(Amounts in thousands except per share amounts)
The following summary of financial information of Rose's Stores, Inc.
(the "Company"), which is unaudited, reflects all adjustments which are, in
the opinion of management, necessary to reflect a fair statement of the
information presented. Beginning in May 1995, the statements of operations
and cash flows reflect the application of Fresh-Start accounting as described
in the Company's annual report on Form 10-K, for the year ended January 27,
1996, and therefore are not comparable to the prior year. The balance sheet
reflects the application of Fresh Start accounting beginning April 1995.
ROSE'S STORES, INC.
STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Thirteen Weeks Ended
Successor Predecessor
April 27, 1996 April 29, 1995
<S> <C> <C>
Revenue:
Gross sales $ 154,426 159,407
Leased department sales 4,281 5,117
Net sales 150,145 154,290
Leased department income 1,080 1,114
Total revenue 151,225 155,404
Costs and Expenses:
Cost of sales 113,040 116,838
Selling, general and administrative 36,819 35,486
Depreciation and amortization (672) 1,812
Interest 1,386 726
Total costs and expenses 150,573 154,862
Earnings Before Reorganization Expense,
Fresh-Start Revaluation, Income Taxes,
and Extraordinary Item 652 542
Reorganization Expense - (3,847)
Fresh-Start Revaluation - (17,432)
Earnings (Loss) Before Extraordinary Item 652 (20,737)
Extraordinary Item - Gain on Debt Discharge - 90,924
Net Earnings $ 652 70,187
Earnings (Loss) Per Share Before
Extraordinary Item $ .07 (1.11)
Net Earnings Per Share $ .07 3.74
Weighted Average Shares 8,754 18,758
</TABLE>
See notes to financial statements
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ROSE'S STORES, INC.
BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
April 27, January 27, April 29,
1996 1996 1995
(Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 578 593 622
Accounts receivable 8,679 7,209 9,235
Inventories 172,294 153,190 185,129
Other current assets 4,246 4,706 8,216
Total current assets 185,797 165,698 203,202
Property and Equipment, at cost,
less accumulated depreciation and amortization 5,780 5,122 -
Other Assets 961 424 -
$ 192,538 171,244 203,202
Liabilities and Stockholders' Equity
Current Liabilities
Short-term debt $ 53,220 33,673 58,654
Bank drafts outstanding 3,926 9,530 5,762
Accounts payable 34,521 23,845 37,642
Accrued salaries and wages 4,620 7,456 5,262
Reserve for store closings 237 261 4,952
Pre-petition liabilities 4,597 4,632 4,352
Other current liabilities 11,260 11,135 12,462
Total current liabilities 112,381 90,532 129,086
Excess of Net Assets Over Reorganization Value,
Net of Amortization 24,496 25,371 32,021
Reserve for Income Taxes 12,673 12,673 -
Deferred Income 804 974 1,481
Other Liabilities 972 1,134 5,614
Stockholders' Equity
Common stock, Authorized 50,000 shares;
issued 8,234 at 4/27/96; 8,158 at 1/27/96
(Note 1) 35,000 35,000 35,000
Preferred stock, Authorized 10,000 shares;
none issued - - -
Paid-in capital 1,159 1,159 -
Retained earnings 5,053 4,401 -
Total stockholders' equity 41,212 40,560 35,000
$ 192,538 171,244 203,202
</TABLE>
See notes to financial statements
PAGE
<PAGE>
ROSE'S STORES, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the Thirteen Weeks Ended
Successor Predecessor
April 27, 1996 April 29, 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 652 70,187
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization (673) 1,812
(Gain) loss on disposal of property and equipment (2) (1)
LIFO expense (credit) - (364)
Fresh-Start revaluation and debt discharge - (73,492)
Cash provided by (used in) assets and liabilities:
(Increase) decrease in accounts receivable (1,470) (630)
(Increase) decrease in inventories (19,104) (40,291)
(Increase) decrease in other current and non-current assets (77) (3 620)
Increase (decrease) in accounts payable 10,676 14,361
Increase (decrease) in other liabilities (2,667) (2,142)
Increase (decrease) in reserve for store closings (24) (1,108)
Increase (decrease) in deferred income (170) (201)
Increase (decrease) in accumulated PBO (100) 7
Net cash provided by (used in) operating activities (12,959) (35,482)
Cash flows from investing activities:
Purchases of property and equipment (860) (510)
Proceeds from disposal of property and equipment 2 5
Net cash used in investing activities (858) (505)
Cash flows from financing activities:
Net activity on line of credit 19,547 58,654
Net activity on debtor-in-possession facility - (600)
Payments on pre-petition secured debt - (26,423)
Payments of unsecured priority and administrative claims (35) (1,593)
Principal payments on capital leases (106) (281)
Increase (decrease) in bank drafts outstanding (5,604) 5,502
Net cash provided by (used in) financing activities 13,802 35,259
Net decrease in cash (15) (728)
Cash and cash equivalents at beginning of period 593 1,350
Cash and cash equivalents at end of period $ 578 622
Supplemental disclosure of additional non-cash
investing and financing activities:
Retirement of net book value of assets in reserve
for store closings $ - 623
</TABLE>
See notes to financial statements
PAGE
<PAGE>
Notes to Financial Statements:
(1) On September 5, 1993, the Company filed a voluntary Petition for Relief
under Chapter 11, Title 11 of the United States Code (the "Bankruptcy
Code") with the United States Bankruptcy Court for the Eastern District
of North Carolina (the "Bankruptcy Court"). The Company's Modified and
Restated First Amended Joint Plan of Reorganization (the "Plan") was
approved by order of the Bankruptcy Court on April 24, 1995. On April 28,
1995 (the "Effective Date"), the Plan became effective. The periods and
dates prior to the Company's emergence from Chapter 11 are referred to as
those of the predecessor company (the "Predecessor"), while the period
and dates subsequent to its emergence are referred to as those of the
successor company (the "Successor").
Since emergence, distributions of the common stock, no par value, of the
Company (the "Common Stock") have been made to holders of Allowed Class 3
Unsecured Claims (as defined in the Plan) in accordance with the
provisions of the Plan. As a result of distributions of the Common Stock
pursuant to the Plan, as of May 30, 1996, the Company had 8,234 shares of
Common Stock outstanding of the 10,000 shares of Common Stock which were
delivered pursuant to the Plan on the Effective Date to First Union
National Bank of North Carolina ("FUNB") as escrow agent. In addition, as
of May 30, 1996, and pursuant to the provisions of the Plan, 977 shares
have reverted to the Company from escrow to be retired.
The remaining 789 shares held in escrow will be distributed by FUNB in
satisfaction of disputed Class 3 claims as and when such claims are
resolved.
The disputed Class 3 claims which remained unresolved at May 30, 1996
were primarily claims of landlords with respect to leases which were
rejected during the course of the Chapter 11 proceeding and general
liability claims being resolved under an alternative dispute resolution
program established by the Bankruptcy Court. If all pending claims are
resolved adversely to the Company, approximately 520 additional shares of
Common Stock will be issued and outstanding, and there will be a total of
approximately 8,754 shares of Common Stock issued and outstanding. If all
pending claims are resolved in accordance with the Company's records
and/or position as to such claims, approximately 374 additional shares of
Common Stock will be issued, and there will be a total of approximately
8,608 shares of Common Stock issued and outstanding. The foregoing
estimates do not include any additional shares that may be issued with
respect to late-filed claims which the Bankruptcy Court may allow which
have not been filed as of the date hereof or the effect of negotiated
settlements made for amounts in excess of amounts shown in the Company's
records. To the extent that escrowed shares of Common Stock are not used
to satisfy claims, they will revert to the Company and will be retired or
held in the treasury of the Company.
PAGE
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Notes to Financial Statements (Continued):
(1) Continued
On the Effective Date, all shares of the Company's pre-emergence Voting
Common Stock and Non-Voting Class B Stock were cancelled and the record
owners of such stock as of such date received warrants to purchase the
new Common Stock of the Company. One warrant was issued for every 4.377
shares of pre-emergence Voting Common Stock or Non-Voting Class B Stock
and allows the holder to purchase one share of the new Common Stock. The
warrants may be exercised at any time until they expire on April 28,2002.
The initial warrant exercise price of $14.45 was calculated pursuant to a
formula set forth in the Plan. The exercise price was adjusted to $12.01
on April 28, 1996, the first anniversary of the Effective Date, and will
be adjusted on the second and third anniversaries of the Effective Date
to reflect adjustments to the total of allowed and disputed claims of the
Company's unsecured creditors. The exercise price will be further
adjusted on the fourth, fifth and sixth anniversaries to reflect 105%,
110% and 115%, respectively, of the total of the allowed and disputed
claims of the unsecured creditors.
Under the New Equity Compensation Plan, nonqualified stock options to
purchase 350 shares of Common Stock were outstanding on April 27, 1996.
The option price per share is $2.875 for one half of the shares and
$5.750 for the remainder of the shares issuable upon the exercise of such
options. The options vest over a three year period (unless earlier vested
by reason of certain acceleration events, including a change of control
of the Company). One half of the options expire five years from the date
of issuance and the remainder seven years from the date of issuance.
The exercise of outstanding stock options and warrants would not result
in a dilution of earnings per share and are excluded from the calculation
of earnings per share.
(2) If the Company had emerged from Chapter 11 at the beginning of fiscal
1995, the application of Fresh Start accounting would have resulted in
net earnings on a pro forma basis of approximately $556 for the thirteen
weeks ended April 29, 1995.
(3) Accounts receivable is net of an allowance for doubtful accounts of $298
as of April 27, 1996; $398 as of January 27, 1996 and $2,513 as of April
29, 1995.
(4) The operating results presented herein are not necessarily indicative of
the operating results for a full year due to seasonal factors, among
other reasons.
(5) The Fresh Start revaluation of $17,432 reflects the net expense to record
assets at their fair values and liabilities at their present values in
accordance with the provisions of SOP 90-7 and to reduce noncurrent
assets below their fair values for the excess of the fair values of
assets over the reorganization value. The extraordinary gain of $90,924
represents the
<PAGE> <PAGE>
Notes to Financial Statements (Continued):
gain on debt discharge for liabilities subject to settlement under the
Plan.
(6) LIFO expense (credit) is included as an adjustment to reconcile net loss
to net cash used in operating activities in the statements of cash flows
because LIFO expense (credit) is a noncash item included in cost of sales
to adjust inventories stated on a FIFO basis to a LIFO basis.
(7) Certain information concerning benefits (expenses) resulting from the
Company's reorganization are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
Thirteen Thirteen
Weeks Ended Weeks Ended
April 27, 1996 April 29, 1995
<S> <C> <C>
DIP financing fees, amortization and expenses $ - (1,342)
Estimated professional fees - (2,318)
Other reorganization costs and expenses - (187)
TOTAL REORGANIZATION EXPENSE $ - (3,847)
</TABLE>
(8) Certain reclassifications were made to 1995 balances to conform to the
1996 presentation. These reclassifications have no effect on stockhold-
ers' equity.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Amounts in thousands)
General
On May 1, 1995, the Company announced that it had satisfied all conditions
required under its plan of reorganization and had emerged from Chapter 11 of the
United States Bankruptcy Code on April 28, 1995 (the "Effective Date"). In
accordance with SOP 90-7, the Company adopted Fresh Start accounting. Under
Fresh Start accounting, a new reporting entity was created, and the Company was
required to adjust its assets and liabilities to reflect their estimated fair
market value at the Effective Date, which reduced depreciation and amortization
related to property and equipment; and created a deferred credit, excess of net
assets over reorganization value, which is being amortized over 8 years.
At the same time, the Company made certain reclassifications between gross mar-
gin and expenses and changed the method of accruing certain expenses between
periods. In addition, as a result of the Company's emergence, reorganization
expense and income taxes recognized by the Company prior to April 28, 1995, are
not comparable to amounts, if any, recognized subsequent to the Effective Date.
To facilitate a better comparison of the Company's operating results for the
periods presented, the following discussion of the results of operations is
presented on a pro forma basis (as described below) for the thirteen weeks ended
April 29, 1995. The historical statement of operations for the thirteen weeks
ended April 29, 1995 (Predecessor) are not included in the discussion due to the
lack of comparability caused by the adoption of Fresh Start accounting at the
end
<PAGE>
of the first quarter of 1995. Certain items in the Successor's pro forma
statement of operations are not affected by Fresh Start adjustments and are
comparable to the historical results of the Predecessor.
The pro forma statement of operations gives effect to the transactions occurring
in conjunction with the Plan as if the Effective Date had occurred, and such
transactions had been consummated, on January 29, 1995. The statement of
operations has been adjusted to reflect: the reduction in depreciation and
amortization expense due to the write-off of property and equipment and property
under capital leases; reclassification of DIP interest from reorganization costs
to interest expense; the elimination of all reorganization costs; amortization
of excess net assets over reorganization value; the effects of changing to the
accrual method for advertising; the reversal of LIFO credits; the accrual of
additional shrinkage; and the recording of an appropriate income tax expense.
Pro Forma Results of Operations (Unaudited)
The following table sets forth the results of operations for the thirteen weeks
ended April 27, 1996, and April 29, 1995:
(Dollar amounts in thousands,
except per share amounts.)
Thirteen Weeks Ended
April 27, April 29,
1996 1995
Historical Pro Forma
Revenue:
Gross sales $ 154,426 159,407(a)
Leased department sales 4,281 5,117(a)
Net sales 150,145 154,290(a)
Leased department income 1,080 1,114(a)
Total revenue 151,225 155,404(a)
Costs and Expenses:
Cost of sales 113,040 115,607
Selling, general and administrative 36,819 38,005
Depreciation and amortization (672) (800)
Interest 1,386 1,696
Total costs and expenses 150,573 154,508
Earnings Before Income Taxes 652 896
Income taxes - 340
Net Earnings 652 556
Earnings Per Share 0.07(b) 0.06(b)
Weighted Average Shares 8,754(b) 8,754(b)
(a) The pro forma amounts represent the Predecessor's historical amounts. See
statements of operations included in the historical financial statements.
PAGE
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(b) The number of shares used in the earnings (loss) per share calculations is
8,754, the number of shares that will be issued and outstanding if all
pending claims are resolved adversely to the Company. If all pending
claims are resolved in accordance with the Company's records, 8,608 shares
will be issued and outstanding. Currently, 8,234 shares are outstanding.
The foregoing estimates do not include any additional shares that may be
issued with respect to late-filed claims which the Bankruptcy Court may
allow which have not been filed as of the date hereof or the effect of
negotiated settlements made for amounts in excess of amounts shown in the
Company's records. To the extent that escrowed shares of Common Stock are
not used to satisfy claims, they will revert to the Company and will be
retired or held in the treasury of the Company.
Revenue
The Company reported sales for the first quarter of 1996 of $154,426, a decrease
of $4,981, or 3.1%, from the first quarter of 1995. The decline in sales was
primarily attributable to a decline in sales on a comparable store basis of
2.2%, together with the decrease in the number of stores (105 in 1996 as compar-
ed to 106 in 1995).
Costs and Expenses
Cost of sales as a percent of net sales was 75.3% for the first quarter and
74.9% (pro forma) for the comparable period of the prior year. Cost of sales
increased .8% for the quarter due to an increase in markdowns, increased .1% for
the quarter due to higher freight costs as a percent of sales, and increased .1%
by a decrease in cash discounts. These increases were offset somewhat by an
increase in the markon percent resulting in a decrease of .5% in cost of sales;
and an increase in co-op income resulting in a decrease of .2% in cost of sales.
Selling, general and administrative expenses (SG&A) as a percent of net sales
for the first quarter were 24.5% in 1996 and 24.6% (pro forma) for the compara-
ble quarter of the prior year. The decrease was due in part to additional
realignment of corporate and administrative costs during the first quarter of
1996.
On a pro forma basis, reorganization costs for 1995 would not have been incurr-
ed. The actual reorganization costs in the first quarter of $3,847 included
professional fees, DIP fees and expense amortizations, and other expenditures
related to the Chapter 11 filing. No reorganization costs were incurred
subsequent to the first quarter of 1995.
The fresh start revaluation of $17,432 reflected the net expense to record
assets at their fair values and liabilities at their present values in accord-
ance with the provisions of SOP 90-7 and to reduce noncurrent assets below their
fair values for the excess of the fair values of assets over the reorganization
value. The extraordinary gain of $90,924 represents the gain on debt discharge
for liabilities subject to settlement under reorganization proceedings.
PAGE
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Liquidity and Capital Resources
On May 23, 1996, the Company closed on a new financing loan with Foothill
Capital, Inc. and PPM Finance, Inc. as co-agents. The financing is a $120,000
three-year revolving credit facility (the "Credit Facility") with a letter of
credit sublimit in the aggregate principal amount of $40,000. The Credit
Facility is secured by a perfected first priority lien and security interest in
all of the assets of the Company and replaced the Company's former revolving
credit agreement which would have expired in two years. As a result of closing
the Credit Facility, approximately $915 of prepaid bank fees related to the
former financing agreement will be written off in the second quarter of 1996.
The interest rate on the direct borrowings under the Credit Facility is prime
rate plus 1.375%, with a minimum rate of 7% payable monthly. The fee on
outstanding letters of credit is 1.5% payable monthly. Although there are no
compensating balances required, the Company is required to pay a fee of .375%
per annum on the average unused portion of the Credit Facility. Borrowing
availability is based upon certain eligible inventory times a borrowing base
percentage that varies by month. Under the Credit Facility, the trade suppliers
which extend credit to the Company will continue to be supported by a $5,000
letter of credit and subordinated lien of $15,000 in the real estate properties
of the Company which expire April 29, 1997.
The Credit Facility includes certain financial covenants and financial
maintenance tests, including those related to minimum working capital and cur-
rent ratios, capital expenditures limitations, maximum total liabilities to
tangible net worth, and minimum tangible net worth which are measured quarterly.
In addition, there is a requirement that cumulative net losses after May 31,
1996 shall not exceed $10,000. The Credit Facility also includes restrictions
on the incurrence of additional liens and indebtedness, a prohibition on paying
dividends, and, except under certain conditions, prepayment penalties. There are
provisions which adapt the Credit Facility to the proposed merger with Fred's,
Inc. described below.
As of June 1, 1996, under the Credit Facility, the Company had $56,680
outstanding in short-term borrowings, $13,392 in outstanding letters of credit
and unused availability of $22,758.
The Company invested $860 in cash for property and equipment in the first quart-
er of 1996 compared to $510 invested in the first quarter of 1995. The 1996
expenditures were primarily for store remodels and new computer software. The
1995 expenditures were primarily for store improvements, new softline fixturing,
and new computer software. Cash used in operating activities, primarily to fund
inventory levels, was $12,959 in the first quarter of 1996, and $35,482 in the
comparable period last year.
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Subsequent Event
On May 7, 1996, the Company and Fred's Inc. ("Fred's") executed a definitive
merger agreement providing for the acquisition of the Company by Fred's (the
"Merger"). Fred's is a publicly traded retailer that operates approximately 200
stores in the southeastern United States. The merger agreement provides that
each share of the Company's Common Stock, issued and outstanding (including
common stock held in escrow in accordance with the Plan) immediately prior to
the effective time of the Merger (other than the shares held in the treasury of
the Company, which will be canceled) will be converted into the "Conversion Num-
ber" of shares of Fred's class A voting common stock ("Fred's Common Stock").
The "Conversion Number" will be determined by dividing $2.15 by the "Fred's Av-
erage Price". The "Fred's Average Price" is an amount equal to the average
price of a share of Fred's Common Stock for the 10 days immediately preceding
the day before the printing of the joint proxy statement to be distributed to
stockholders of Fred's and the Company in connection with the Merger. The Merger
is subject to the approval of the stockholders of the Company and Fred's and to
the satisfaction or, where permissible, the waiver of certain other conditions.
PAGE
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PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) 10.1 Agreement and Plan of Merger dated as of May 7,
1996, by and among Fred's Inc., FR Acquisition
Corp. and the Registrant.
10.2 Loan and Security Agreement among the
Registrant, as Borrower, the Financial
Institutions as listed on the signature pages,
as the Lenders, PPM Finance, Inc., as Co-
Agent, and Foothill Capital Corporation, as
Agent, dated as of May 21, 1996.
10.3 Deed of Trust, Assignment of Rents and Security
Agreement for the headquarters property, dated
as of May 21, 1996, by and among Registrant,
Foothill Capital Corporation, and David L.
Huffstetler, pursuant to the Loan and Security
Agreement.
10.4 Deed of Trust, Assignment of Rents and Security
Agreement for the warehouse property, dated as
of May 21, 1996, by and among Registrant,
Foothill Capital Corporation, and David L.
Huffstetler, pursuant to the Loan and Security
Agreement.
10.5 Subordination Agreement dated as of May 21,
1996, among Registrant, Foothill Capital
Corporation, M.J. Sherman & Associates, Inc.,
and Alan H. Peterson.
10.6 Intellectual Property Security Agreement dated
as of May 21, 1996, among Registrant and
Foothill Capital Corporation, pursuant to the
Loan and Security Agreement.
(b) The Company filed the following reports on Form 8-K
during the quarter covered by this report:
(i) Report on Form 8-K dated December 30, 1995,
reporting under Item 5 the monthly and year-
to-date financial results and other financial
data for the period ended December 30, 1995,
together with projected financial information
for similar periods as contained in the
Company's revised plan for the year ended
January 27, 1996. The financial results were
included as an exhibit in Item 7.
(ii) Report on Form 8-K dated March 1, 1996,
<PAGE>
reporting under Item 5 the agreement in
principle regarding the acquisition by merger
of Rose's by Fred's.
(iii) Report on Form 8-K dated April 28, 1996,
reporting under Item 5 the adjustment of the
exercise price of the New Rose's Warrants.
(iv) Report on Form 8-K dated May 8, 1996, reporting
under Item 5 the definitive merger agreement
regarding the acquisition of Rose's by Fred's.
PAGE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ROSE'S STORES, INC.
Date: June 11, 1996 By /s/ R. Edward Anderson
R. Edward Anderson
President,
Chief Executive Officer
Date: June 11, 1996 By /s/ Jeanette R. Peters
Jeanette R. Peters
Senior Vice President,
Chief Financial Officer
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 7, 1996
BY AND AMONG
FRED'S, INC.,
FR ACQUISITION CORP.
AND
ROSE'S STORES, INC.
<PAGE> <PAGE>
ARTICLE I
THE MERGER . . . . . . . . . . . . . . . . . . . . . . .1
Section 1.1 The Merger . . . . . . . . . . . . . . . . . .1
Section 1.2 Effective Time . . . . . . . . . . . . . . . .1
Section 1.3 Effects of the Merger. . . . . . . . . . . . .1
Section 1.4 Charter and By-laws. . . . . . . . . . . . . .1
Section 1.5 Conversion of Securities . . . . . . . . . . .1
Section 1.6 Fred's to Make Certificates Available. . . . .3
Section 1.7 Dividends; Transfer Taxes; Withholding . . . .3
Section 1.8 No Fractional Securities . . . . . . . . . . .4
Section 1.9 Return of Exchange Fund. . . . . . . . . . . .4
Section 1.10 Adjustment of Conversion Number . . . . . . .5
Section 1.11 No Further Ownership Rights in Rose's Common
Stock. . . . . . . . . . . . . . . . . . . . . . . . .5
Section 1.12 Closing of Rose's Transfer Books. . . . . . .5
Section 1.13 Lost Certificates . . . . . . . . . . . . . .5
Section 1.14 Affiliates. . . . . . . . . . . . . . . . . .5
Section 1.15 Dissenters' Rights. . . . . . . . . . . . . .5
Section 1.16 Further Assurances. . . . . . . . . . . . . .6
Section 1.17 Closing . . . . . . . . . . . . . . . . . . .6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FRED'S AND SUB . . .6
Section 2.1 Organization, Standing and Power . . . . . . .6
Section 2.2 Capital Structure. . . . . . . . . . . . . . .7
Section 2.3 Authority. . . . . . . . . . . . . . . . . . .7
Section 2.4 Consents and Approvals; No Violation . . . . .8
Section 2.5 SEC Documents and Other Reports. . . . . . . .8
Section 2.6 Registration Statement and Joint Proxy
Statement. . . . . . . . . . . . . . . . . . .9
Section 2.7 Absence of Certain Changes or Events . . . . .9
Section 2.8 Permits and Compliance . . . . . . . . . . . 10
Section 2.9 Tax Matters. . . . . . . . . . . . . . . . . 10
Section 2.10 Actions and Proceedings . . . . . . . . . . 10
Section 2.11 Certain Agreements. . . . . . . . . . . . . 11
Section 2.12 ERISA . . . . . . . . . . . . . . . . . . . 11
Section 2.13 Compliance with Certain Laws. . . . . . . . 12
Section 2.14 Liabilities . . . . . . . . . . . . . . . . 12
Section 2.15 Labor Matters . . . . . . . . . . . . . . . 12
Section 2.16 Intellectual Property . . . . . . . . . . . 12
Section 2.17 Reorganization. . . . . . . . . . . . . . . 13
Section 2.18 Required Vote of Fred's Stockholders. . . . 13
Section 2.19 Ownership of Shares . . . . . . . . . . . . 13
Section 2.20 Operations of Sub . . . . . . . . . . . . . 13
Section 2.21 Brokers . . . . . . . . . . . . . . . . . . 13
Section 2.22 Disclosure. . . . . . . . . . . . . . . . . 13
Section 2.23 Opinion of Investment banker. . . . . . . . 13
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ROSE'S . . . . . . 14
Section 3.1 Organization, Standing and Power . . . . . . 14
Section 3.2 Capital Structure. . . . . . . . . . . . . . 14
Section 3.3 Authority. . . . . . . . . . . . . . . . . . 14
Section 3.4 Consents and Approvals; No Violation . . . . 15
Section 3.5 SEC Documents and Other Reports. . . . . . . 15
Section 3.6 Registration Statement and Joint Proxy
Statement. . . . . . . . . . . . . . . . . . 16
Section 3.7 Absence of Certain Changes or Events . . . . 16
Section 3.8 Permits and Compliance . . . . . . . . . . . 17
Section 3.9 Tax Matters. . . . . . . . . . . . . . . . . 18
Section 3.10 Actions and Proceedings . . . . . . . . . . 18
Section 3.11 Certain Agreements. . . . . . . . . . . . . 18
Section 3.12 ERISA . . . . . . . . . . . . . . . . . . . 18
Section 3.13 Compliance with Certain Laws. . . . . . . . 19
Section 3.14 Liabilities . . . . . . . . . . . . . . . . 19
Section 3.15 Labor Matters . . . . . . . . . . . . . . . 20
Section 3.16 Intellectual Property . . . . . . . . . . . 20
Section 3.17 State Takeover Statutes . . . . . . . . . . 20
Section 3.18 Required Vote of Rose's Stockholders. . . . 20
Section 3.19 Reorganization. . . . . . . . . . . . . . . 20
Section 3.20 Brokers . . . . . . . . . . . . . . . . . . 20
Section 3.21 Disclosure. . . . . . . . . . . . . . . . . 20
Section 3.22 Opinion of Investment Banker. . . . . . . . 21
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS . . . . . . 21
Section 4.1 Conduct of Business Pending the Merger . . . 21
Section 4.2 No Solicitation. . . . . . . . . . . . . . . 24
Section 4.3 Third Party Standstill Agreements. . . . . . 25
Section 4.4 Reorganization . . . . . . . . . . . . . . . 25
ARTICLE V
ADDITIONAL AGREEMENT'S . . . . . . . . . . . . . . . . 25
Section 5.1 Stockholder Meetings . . . . . . . . . . . . 25
Section 5.2 Preparation of the Registration Statement and the
Joint Proxy Statement. . . . . . . . . . . . . . . . 25
Section 5.3 Access to Information. . . . . . . . . . . . 26
Section 5.4 Compliance with the Securities Act . . . . . 27
Section 5.5 NASDAQ Listing . . . . . . . . . . . . . . . 27
Section 5.6 Fees and Expenses. . . . . . . . . . . . . . 27
Section 5.7 Rose's Stock Options; Rose's Warrants. . . . 29
Section 5.8 Reasonable Best Efforts. . . . . . . . . . . 29
Section 5.9 Public Announcements . . . . . . . . . . . . 30
Section 5.10 Real Estate Transfer and Gains Tax. . . . . 30
Section 5.11 State Takeover Laws . . . . . . . . . . . . 30
Section 5.12 Notification of Certain Matters . . . . . . 30
<PAGE>
Section 5.13 Directors and Officers. . . . . . . . . . . 31
Section 5.14 Executive and Employee Agreements . . . . . 31
Section 5.15 Designation of Director. . . . . . . . . . . . . 31
Section 5.16 Indemnification . . . . . . . . . . . . . . 31
Section 5.17 Lending and Credit Arrangements . . . . . . 31
Section 5.18 Tax Representations . . . . . . . . . . . . 32
Section 5.19 Reverse Stock Split . . . . . . . . . . . . 32
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER . . . . . . . . . 32
Section 6.1 Conditions to Each Party's Obligation to Effect
the Merger . . . . . . . . . . . . . . . . . . . . . 32
Section 6.2 Conditions to Obligation of Rose's to Effect the
Merger . . . . . . . . . . . . . . . . . . . . . . . 33
Section 6.3 Conditions to Obligations of Fred's and Sub to
Effect the Merger. . . . . . . . . . . . . . . . . . 34
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . 36
Section 7.1 Termination. . . . . . . . . . . . . . . . . 36
Section 7.2 Effect of Termination. . . . . . . . . . . . 37
ARTICLE VIII
GENERAL PROVISIONS . . . . . . . . . . . . . . . . 37
Section 8.1 Non-Survival of Representations, Warranties and
Agreements . . . . . . . . . . . . . . . . . . . . . 37
Section 8.2 Notices. . . . . . . . . . . . . . . . . . . 38
Section 8.3 Interpretation . . . . . . . . . . . . . . . 38
Section 8.4 Counterparts . . . . . . . . . . . . . . . . 38
Section 8.5 Entire Agreement; No Third-Party
Beneficiaries. . . . . . . . . . . . . . . . . . . . 38
Section 8.6 Governing Law. . . . . . . . . . . . . . . . 39
Section 8.7 Assignment . . . . . . . . . . . . . . . . . 39
Section 8.8 Severability . . . . . . . . . . . . . . . . 39
Section 8.9 Enforcement of this Agreement. . . . . . . . 39
Section 8.10 Amendment . . . . . . . . . . . . . . . . . 39
Section 8.11 Waiver. . . . . . . . . . . . . . . . . . . 39
TABLE OF DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 39
PAGE
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 7, 1996 (this
"Agreement"), among FRED'S, INC., a Tennessee corporation
("Fred's"), FR ACQUISITION CORP., a Delaware corporation and a
wholly-owned subsidiary of Fred's ("Sub"), and ROSE'S, INC., a
Delaware corporation ("Rose's") (Sub and Rose's being hereinafter
collectively referred to as the "Constituent Corporations").
RECITALS
A. The respective Boards of Directors of Fred's, Sub and
Rose's have approved and declared advisable the merger of Sub and
Rose's (the "Merger"), upon the terms and subject to the conditions
set forth herein, whereby each issued and outstanding share of
Common Stock, no par value, of Rose's ("Rose's Common Stock") not
owned directly or indirectly by Fred's or Rose's will be converted
into shares of Class A Voting Common Stock, no par value, of Fred's
("Fred's Common Stock");
B. The respective Boards of Directors of Fred's and Rose's
have determined that the Merger is in the best interests of their
respective stockholders (the holders of Rose's Common Stock, the
"Rose's Stockholders"); and
C. For federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code").
NOW, THEREFORE, in consideration of the premises,
representations, warranties and agreements herein contained, the
parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the
conditions hereof and in accordance with the Delaware General
Corporation Law (the "Del.C."), Sub shall be merged with and into
Rose's at the Effective Time (as defined herein). Following the
Merger, the separate corporate existence of Sub shall cease and
Rose's shall continue as the surviving corporation (the "Surviving
Corporation") and shall succeed to and assume all the rights and
obligations of Sub in accordance with the Del.C.
Section 1.2 Effective Time. The Merger shall become
effective when a Certificate of Merger (the "Certificate of
Merger"), executed in accordance with the relevant provisions of
the Del.C., is filed with the Secretary of State of the State of
Delaware; provided, however, that, upon mutual consent of the
Constituent Corporations, the Certificate of Merger may provide for
a later date of effectiveness of the Merger not more than 30 days
after the date the Certificate of Merger is filed. When used in
this Agreement, the term "Effective Time" shall mean the later of
the date and time at which the Certificate of Merger is filed or
such later time established by the Certificate of Merger. The
filing of the Certificate of Merger shall be made on the date of
the Closing (as defined in Section 1.17), or as promptly thereafter
as practicable.
Section 1.3 Effects of the Merger. The Merger shall have the
effects set forth in the Del.C.
Section 1.4 Charter and By-laws. At the Effective Time, the
Certificate of Incorporation and Bylaws of Sub, as in effect
immediately prior to the Effective Time, shall be the Certificate
of Incorporation and Bylaws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable
law.
Section 1.5 Conversion of Securities. As of the Effective
Time, by virtue of the Merger and without any action on the part of
Sub, Rose's or the holders of any securities of the Constituent
Corporations:
<PAGE>
(a) Each issued and outstanding share of common stock, no par
value per share, of Sub shall be converted into one validly issued,
fully paid and nonassessable share of common stock of the Surviving
Corporation.
(b) (i) Subject to the provisions of Sections 1.10 and 5.19
hereof, each whole share of Rose's Common Stock issued and
outstanding immediately prior to the Effective Time (other than
shares to be canceled in accordance with Section 1.5(c) and other
than Dissenting Shares (as defined herein)) shall be converted into
and become, by virtue of the Merger, automatically and without any
action on the part of Rose's Stockholders, the Conversion Number
(as defined herein) of validly issued, fully paid and nonassessable
shares of Fred's Common Stock. All shares of Rose's Common Stock,
when so converted into shares of Fred's Common Stock pursuant to
this Section 1.5(b)(i) or the right to receive cash pursuant to
Section 1.8 or 5.19, shall no longer be outstanding and shall
automatically be canceled and retired and each holder of a
certificate formerly representing any such shares shall cease to
have any rights with respect thereto, except (x) in the case of the
shares converted into Fred's Common Stock pursuant to this Section
1(b)(i), the right to receive any dividends and other distributions
in accordance with Section 1.7, and certificates representing the
shares of Fred's Common Stock into which such shares are converted,
(y) any cash, without interest, in lieu of fractional shares of
Fred's Common Stock to be issued or paid in consideration therefor
pursuant to Section 1.8, and (z), in the case of the fractional
shares of Rose's Common Stock, the right to receive cash pursuant
to Section 5.19, in each case, upon the surrender of such
certificate in accordance with Section 1.6. Each certificate
shall, from and after the Effective Time until surrendered in
exchange for Fred's Common Stock, for all purposes be deemed to
represent (A) the number of shares of Fred's Common Stock
calculated by taking the number of shares represented by the
certificate times the Conversion Number (in the case of whole
shares of Rose's Common Stock so converted pursuant to this Section
1(b)(i)) or (B) the right to receive cash to which the holder is
entitled pursuant to Section 1.8 or 5.19. No Dissenting Shares
shall be converted into or represent a right to receive Fred's
Common Stock under this Section 1.5 or cash pursuant to Section 1.8
or 5.19, but such Dissenting Shares shall be subject to the
provisions of Section 1.15.
(ii) The shares of Rose's Common Stock (the "Escrow
Shares") held in escrow at the Effective Date by First Union
National Bank of North Carolina ("FUNB") as Escrow Agent pursuant
to the Modified and First Restated Amended Joint Plan of
Reorganization confirmed by order of the United States Bankruptcy
Court for the Eastern District of North Carolina dated December 14,
1994 and April 24, 1995 (the "Plan of Reorganization"), shall be
converted into shares of Fred's Common Stock as provided in
Section 1(b)(i) or the right to receive cash as provided in Section
1.8 or 5.19, and shall be subject to (x) distribution in accordance
with the Plan of Reorganization or (y) return to the Surviving
Corporation also in accordance with the Plan of Reorganization.
(iii) The "Conversion Number" shall be determined by
dividing $2.15 by the Fred's Average Price (as defined herein).
The "Fred's Average Price" shall mean an amount equal to the
average of the daily high and low prices for a share of Fred's
Stock on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), as printed in The Wall Street Journal,
for the 10 days during which Fred's Common Stock was actually
traded immediately preceding the day before the printing of the
Joint Proxy Statement (as defined herein).
(c) All shares of Rose's Common Stock that are held in the
treasury of Rose's or by any Subsidiary (as defined herein) of
Rose's shall be canceled at the Effective Time, and no capital
stock of Fred's or other consideration shall be delivered in
exchange therefor.
(d) Without any further action on the part of the holders
thereof, each unexpired and unexercised right to purchase shares of
Rose's Common Stock under any (i) option (a "Rose's Stock Option")
under Rose's Stock Option Plan (as defined herein) and (ii) warrant
(a "Rose's Warrant") issued pursuant to the Plan of Reorganization,
will be assumed by Fred's as hereinafter provided. At the
Effective Time, by virtue of the Merger and without any further
action on the part of Fred's, Sub, Rose's or the holder thereof,
each Rose's
<PAGE>
Stock Option and each Rose's Warrant will be
automatically converted into an option (a "Fred's Stock Option") or
a warrant (a "Fred's Warrant"), respectively, to purchase a number
of shares of Fred's Common Stock equal to the number of shares of
Rose's Common Stock that could have been purchased under such
Rose's Stock Option or Rose's Warrant multiplied by the Conversion
Number, at a price per share of Fred's Common Stock equal to the
per share exercise price specified in the Rose's Stock Option or
Rose's Warrant, divided by the Conversion Number. Such Fred's
Stock Option and Fred's Warrant shall otherwise be subject to the
same terms and conditions as such Rose's Stock Option or Rose's
Warrant, except that at the Effective Time, (i) all references in
the Rose's Stock Option Plan (as defined herein), the applicable
stock option or other awards agreements issued thereunder and in
any other Rose's Stock Options and in all Rose's Warrants and
documents relating thereto to Rose's shall be deemed to refer to
Fred's; (ii) Fred's shall assume the Rose's Stock Options Plans and
all of Rose's obligations with respect to the Rose's Stock Options;
(iii) Fred's shall assume all of Rose's obligations with respect to
the Rose's Warrants under the agreements relating thereto; and (iv)
Fred's shall issue to each holder of any outstanding Rose's Stock
Option or Rose' Warrant a document evidencing the foregoing
assumption by Fred's. It is the intention of the parties that,
subject to applicable law, the Rose's Stock Options assumed by
Fred's qualify, following the Effective Time, as incentive stock
options, as defined in Section 422 of the Code, to the extent that
the Rose's Stock Options qualified as incentive stock options prior
to the Effective Time, and the adjustments referred to in this
Section 1.5(d) shall be effected in a manner which is consistent
with Section 424(a) of the Code.
Section 1.6 Fred's to Make Certificates Available.
(a) Exchange of Certificates. Fred's shall authorize
Union Planters National Bank, N.A., Memphis, or some other
commercial bank reasonably acceptable to Rose's (or such other
person or persons as shall be acceptable to Fred's and Rose's), to
act as Exchange Agent hereunder (the "Exchange Agent"). As soon as
practicable after the Effective Time, Fred's shall deposit with the
Exchange Agent in trust for the holders of shares of Rose's Common
Stock converted in the Merger, certificates representing the shares
of Fred's Common Stock issued pursuant to Section 1.5(b) in
exchange for outstanding certificates representing shares of Rose's
Common Stock and cash, as required to make payments in lieu of any
fractional shares pursuant to Section 1.8 or cash payable pursuant
to Section 5.19 (such cash and shares of Fred's Common Stock,
together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange Fund"). The
Exchange Agent shall, pursuant to irrevocable instructions, deliver
the certificates representing the Fred's Common Stock contemplated
to be delivered pursuant to Section 1.5(b) out of the Exchange
Fund. Except as contemplated by this Section 1.6 and Sections 1.8,
1.9 and 5.19, the Exchange Fund shall not be used for any other
purpose.
(b) Exchange Procedures. As soon as practicable after
the Effective Time, Fred's shall cause the Exchange Agent to mail
to each record holder of a certificate or certificates which
immediately prior to the Effective Time represented outstanding
shares of Rose's Common Stock converted in the Merger (the
"Certificates") a letter of transmittal (which shall be in
customary form, shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon
actual delivery of the Certificates to the Exchange Agent, and
shall contain instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares
of Fred's Common Stock and cash in lieu of fractional shares or
cash payable pursuant to Section 5.19). Upon surrender for
cancellation to the Exchange Agent of a Certificate, together with
such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Fred's
Common Stock into which the shares represented by the surrendered
Certificate shall have been converted at the Effective Time
pursuant to this Article I, cash in lieu of any fractional share in
accordance with Section 1.8, cash payable pursuant to Section 5.19
and certain dividends and other distributions in accordance with
Section 1.7, and any Certificate so surrendered shall forthwith be
canceled.
Section 1.7 Dividends; Transfer Taxes; Withholding. No
dividends or other distributions that are declared on or after the
Effective Time on Fred's Common Stock, or are payable to the
holders of record
<PAGE>
thereof on or after the Effective Time, will be
paid to any person entitled by reason of the Merger to receive, a
certificate representing Fred's Common Stock and no cash payment in
lieu of fractional shares will be paid to any such person pursuant
to Section 1.8 or cash payable pursuant to Section 5.19 until such
person surrenders the related Certificate or Certificates, as
provided in Section 1.6. Subject to the effect of applicable law,
there shall be paid to each record holder of a new certificate
representing such Fred's Common Stock: (i) at the time of such
surrender or as promptly as practicable thereafter, the amount of
any dividends or other distributions theretofore paid with respect
to the shares of Fred's Common Stock represented by such new
certificate and having a record date on or after the Effective Time
and a payment date prior to such surrender; (ii) at the appropriate
payment date or as promptly as practicable thereafter, the amount
of any dividends or other distributions payable with respect to
such shares of Fred's Common Stock and having a record date on or
after the Effective Time but prior to such surrender and a payment
date on or subsequent to such surrender; and (iii) at the time of
such surrender or as promptly as practicable thereafter, the amount
of any cash payable with respect to a fractional share of Fred's
Common Stock to which such holder is entitled pursuant to Section
1.8. In no event shall the person entitled to receive such
dividends or other distributions be entitled to receive interest on
such dividends or other distributions. If any cash or certificate
representing shares of Fred's Common Stock is to be paid to or
issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Certificate so surrendered
shall be properly endorsed and otherwise in proper form for
transfer and that the person requesting such exchange shall pay to
the Exchange Agent any transfer or other taxes required by reason
of the issuance of certificates for such shares of Fred's Common
Stock in a name other than that of the registered holder of the
Certificate surrendered, or shall establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not
applicable. Fred's or the Exchange Agent shall be entitled to
deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Rose's Common
Stock such amounts as Fred's or the Exchange Agent is required to
deduct and withhold with respect to the making of such payment
under the Code or under any provision of state, local or foreign
tax law. To the extent that amounts are so withheld by Fred's or
the Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the
shares of Rose's Common Stock in respect of which such deduction
and withholding was made by Fred's or the Exchange Agent.
Section 1.8 No Fractional Securities. No certificates or
scrip representing fractional shares of Fred's Common Stock shall
be issued upon the surrender for exchange of Certificates pursuant
to this Article I, and no Fred's dividend or other distribution or
stock split shall relate to any fractional share, and no fractional
share shall entitle the owner thereof to vote or to any other
rights of a security holder of Fred's. In lieu of any such
fractional share, each holder of Rose's Common Stock who otherwise
would have been entitled to a fraction of a share of Fred's Common
Stock upon surrender of Certificates for exchange pursuant to this
Article I will be paid an amount in cash (without interest),
rounded to the nearest cent determined by multiplying (i) the
average of the high and low prices for a share of Fred's Common
Stock on NASDAQ on the date of the Effective Time (or, if the
shares of Fred's Common Stock do not trade on NASDAQ on such date,
the first date of trading of shares of Fred's Common Stock on
NASDAQ after the Effective Time) by (ii) the fractional interest to
which such holder otherwise would be entitled. As promptly as
practicable after the determination of the amount of cash, if any,
to be paid to holders of fractional share interests, the Exchange
Agent shall so notify Fred's, and Fred's shall deposit such amount
with the Exchange Agent and shall cause the Exchange Agent to
forward payments to such holders of fractional share interests
subject to and in accordance with the terms of Section 1.7 and this
Section 1.8.
Section 1.9 Return of Exchange Fund. Any portion of the
Exchange Fund which remains undistributed to the former Rose's
Stockholders for one year after the Effective Time (unless required
otherwise by law with respect to the Escrow Shares; in which case,
until such requirement lapses or is terminated) shall be delivered
to Fred's, upon demand of Fred's, and any such former stockholders
who have not theretofore complied with this Article I shall
thereafter look only to Fred's for payment of their claim for
Fred's Common Stock, any cash in lieu of fractional shares of
Fred's Common Stock and any dividends or distributions with respect
to Fred's Common Stock. Neither Fred's nor the Surviving
Corporation shall be liable to any former holder of Rose's
<PAGE>
Common Stock for any such shares of Fred's Common Stock, cash and
dividends and distributions held in the Exchange Fund which is
delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
Section 1.10 Adjustment of Conversion Number. In the event
of any reclassification, stock split or stock dividend with respect
to Fred's Common Stock, any change or conversion of Fred's Common
Stock into other securities, or any other dividend or distribution
with respect to the Fred's Common Stock other than normal quarterly
cash dividends as the same may be adjusted from time to time
pursuant to the terms of this Agreement (or if a record date with
respect to any of the foregoing should occur), and upon the Reverse
Split (as herein defined), prior to the Effective Time, appropriate
and proportionate adjustments, if any, shall be made to the
Conversion Number, and all references to the Conversion Number in
this Agreement shall be deemed to be to the Conversion Number as so
adjusted.
Section 1.11 No Further Ownership Rights in Rose's Common
Stock. All shares of Fred's Common Stock issued pursuant to the
terms hereof (including any cash paid pursuant to Section 1.8)
shall be deemed to have been issued, and cash paid pursuant to
Section 5.19 shall be deemed to have been paid, in full
satisfaction of all rights pertaining to the shares of Rose's
Common Stock represented by such Certificates.
Section 1.12 Closing of Rose's Transfer Books. At the
Effective Time, the stock transfer books of Rose's shall be closed
and no transfer of shares of Rose's Common Stock shall thereafter
be made on the records of Rose's. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, the
Exchange Agent or Fred's, such Certificates shall be canceled and
exchanged as provided in this Article I.
Section 1.13 Lost Certificates. If any Certificate shall
have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by the Surviving
Corporation, the posting by such person of a bond, in such
reasonable amount as the Surviving Corporation may direct (but
consistent with the practices Fred's applies to its own
stockholders), as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent (at
the stockholder's expense) will issue in exchange for such lost
stolen or destroyed Certificate the shares of Fred's Common Stock,
any cash in lieu of fractional shares of Fred's Common Stock to
which the holders thereof are entitled pursuant to Section 1.8 and
any dividends or other distributions to which the holders thereof
are entitled pursuant to Section 1.7 or cash payable pursuant to
Section 5.19.
Section 1.14 Affiliates. Certificates surrendered for
exchange by any "affiliate" (as determined pursuant to Section 5.4)
of Rose's for purposes of Rule 145(c) under the Securities Act of
1933, as amended (together with the rules and regulations
thereunder, the "Securities Act"), shall not be exchanged until
Fred's has received a written agreement from such Person as
provided in Section 5.4 hereof.
Section 1.15 Dissenters' Rights.
(a) In accordance with Section 262 of the Del.C.
("Section 262"), no appraisal rights shall be available to holders
of Rose's Common Stock converted into Fred's Common Stock in
accordance with Section 1.5(b).
(b) Holders of shares of Rose's Common Stock entitled to
receive cash pursuant to Section 5.19 shall be entitled to
appraisal rights in accordance with Section 262, and each such
outstanding share of Rose's Common Stock the holder of which has
timely filed with the Company a written demand for appraisal
pursuant to Section 262 is herein called a "Dissenting Share".
Each Dissenting Share the holder of which, at the Effective Time,
has not effectively withdrawn with the consent of Rose's, if
required, or become ineligible for (through failure to perfect or
otherwise) his dissenter's rights under Section 262 shall not be
converted into or represent the right to receive cash pursuant to
Section 5.19, but the holder thereof shall be entitled only to such
rights as are granted by Section 262. Each holder of Dissenting
Shares who becomes entitled, pursuant to the
<PAGE>
provisions of Section 262, to receive payment for his Rose's Common
Stock shall receive payment therefor from the Surviving Corporation
(but only after the amount thereof shall have been agreed upon or finally
determined pursuant to such provisions).
(c) If any holder of Dissenting Shares shall effectively
withdraw with the consent of Rose's, if required, or become
ineligible for his dissenter's rights under Section 262, such
Dissenting Shares shall be deemed to have been converted into and
represent the right to receive, as of the later of the Effective
Time or the occurrence of such event, cash in accordance with the
provisions of Section 5.19 hereof.
(d) Rose's shall give Fred's (i) prompt notice of any
written demands for appraisal, withdrawals of demands for
appraisal, and any other instruments served pursuant to Section 262
and received by Rose's and (ii) the opportunity to direct all
negotiations and proceedings with respect to holders of Dissenting
Shares. Rose's will not voluntarily make any payment with respect
to any demands for appraisal for shares under Section 262 and will
not, except with the prior written consent of Fred's, settle or
offer to settle any such demands. Each holder of Dissenting Shares
shall have only such rights and remedies as are granted to such a
holder under Section 262.
Section 1.16 Further Assurances. If at any time after the
Effective Time the Surviving Corporation shall consider or be
advised that any deeds, bills of sale, assignments or assurances or
any other acts or things are necessary, desirable or proper (a) to
vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation its right, title or interest in, to or under any of the
rights, privileges, powers, franchises, properties or assets of
either of the Constituent Corporations, or (b) otherwise to carry
out the purposes of this Agreement, the Surviving Corporation and
its proper officers and directors or their designees shall be
authorized to execute and deliver, in the name and on behalf of
either of the Constituent Corporations, all such deeds, bills of
sale, assignments and assurances and to do, in the name and on the
behalf of either Constituent Corporation, all such other acts and
things as may be necessary, desirable or proper to vest, perfect or
confirm the Surviving Corporation's right, title or interest in, to
or under any of the rights, privileges, powers, franchises,
properties or assets of such Constituent Corporation and otherwise
to carry out the purposes of this Agreement.
Section 1.17 Closing. The closing of the transactions
contemplated by this Agreement (the "Closing") and all actions
specified in this agreement to occur at the Closing shall take
place at the offices of Waring Cox PLC, 50 north Front Street,
Memphis, Tennessee, at 9:00 a.m., local time, no later than the
second business day following the day on which the last of the
conditions set forth in Article VI shall have been fulfilled or
waived or at such other time and place as Fred's and Rose's shall
agree.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FRED'S AND SUB
Fred's and Sub jointly and severally represent and warrant to
Rose's as follows:
Section 2.1 Organization, Standing and Power. Fred's is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Tennessee, and has the requisite
corporate power and authority to carry on its business as now being
conducted. Sub is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and
has the requisite corporate power and authority to carry on its
business as now being conducted. Each Subsidiary of Fred's is duly
organized, validly existing and in good standing under the laws of
the jurisdiction in which it is organized and has the requisite
corporate power and authority to carry on its business as now being
conducted, except where the failure to be so organized, existing or
in good standing or to have such power or authority would not,
individually or in the aggregate, have a Material Adverse Effect
(as defined herein) on Fred's. Fred's and each of its Subsidiaries
are duly qualified to do business, and are in good standing, in
each jurisdiction where the character of their
<PAGE>
properties owned or
held under lease or the nature of their activities makes such
qualification necessary, except where the failure to be so
qualified would not, individually or in the aggregate, have a
Material Adverse Effect on Fred's. For purposes of this Agreement
(a) "Material Adverse Change" or "Material Adverse Effect" means,
when used with respect to Fred's or Rose's, as the case may be, any
change or effect that is materially adverse to the business,
assets, liabilities, results of operation, financial condition or
prospects of Fred's and its Subsidiaries, taken as a whole, or
Rose's and its Subsidiaries, taken as a whole, as the case may be,
and (b) "Subsidiary" means any corporation, partnership, joint
venture or other legal entity of which Fred's or Rose's, as the
case may be (either alone or through or together with any other
Subsidiary), owns, directly or indirectly, 50% or more of the stock
or other equity interests the holders of which are generally
entitled to vote for the election of the board of directors or
other governing body of such corporation, partnership, joint
venture or other legal entity.
Section 2.2 Capital Structure. The authorized capital stock
of Fred's consists of 30,000,000 shares of Fred's Class A Voting
Common Stock, 11,500,000 shares of Class B Nonvoting Common Stock,
and 10,000,000 shares of Preferred Stock (the "Fred's Preferred
Stock"). There are at the date hereof (i) 9,335,239 shares of
Fred's Common Stock issued and outstanding, all of which are
validly issued, fully paid and nonassessable and free of preemptive
rights (28,000 shares of which were issued as restricted stock
awards pursuant to Fred's 1993 Long-Term Incentive Plan and are
subject to certain restrictions), and (ii) 500,000 shares of Fred's
Common Stock are reserved for future issuance pursuant to Fred's
1993 Long-Term Incentive Plan. No shares of Fred's Class B
Nonvoting Common Stock or Preferred Stock are issued and
outstanding. All of the shares of Fred's Common Stock issuable in
exchange for Rose's Common Stock at the Effective Time in
accordance with this Agreement will be, when so issued, duly
authorized, validly issued, fully paid and nonassessable and free
of preemptive rights. As of the date of this Agreement, except for
(a) this Agreement, (b) stock options covering 311,595 shares of
Fred's Common Stock, and (c) restricted stock awards pursuant to
Fred's 1993 Long-Term Incentive Plan for 14,000 shares of Fred's
Common Stock, which shares of restricted stock have not yet been
issued, there are no options, warrants, calls, rights or agreements
to which Fred's or any of its Subsidiaries is a party or by which
any of them is bound obligating Fred's or any of its Subsidiaries
to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of Fred's or any of its
Subsidiaries or obligating Fred's or any of its Subsidiaries to
grant, extend or enter into any such option, warrant, call, right
or agreement. Each outstanding share of capital stock of each
Subsidiary of Fred's is duly authorized, validly issued, fully paid
and nonassessable and, except as disclosed in the Fred's SEC
Documents (as defined herein), each such share is owned by Fred's
or another Subsidiary of Fred's, free and clear of all security
interests, liens, claims, pledges, options, rights of first
refusal, agreements, limitations on voting rights, charges and
other encumbrances of any nature whatsoever.
Section 2.3 Authority. The respective Boards of Directors of
Fred's and Sub have on or prior to the date of this Agreement
declared the Merger advisable (subject to the satisfaction of the
conditions to Closing contained herein, including receipt by Fred's
of the fairness opinion of its investment banker) and approved this
Agreement in accordance with applicable law. Each of Fred's and
Sub has all requisite corporate power and authority to enter into
this Agreement and, subject to approval by the stockholders of
Fred's (the "Fred's Stockholders") of this Agreement, the issuance
of Fred's Common Stock in connection with the Merger (the "Share
Issuance"), and the amendment of Fred's 1993 Long-Term Incentive
Plan to increase the number of authorized shares (collectively, the
"Fred's Stockholders' Approvals"), to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement
by Fred's and Sub and the consummation by Fred's and Sub of the
transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Fred's and Sub, subject
to (x) approval by the Fred's Stockholders and (y) the filing of a
Certificate of Merger as required by the Del.C. This Agreement has
been duly executed and delivered by Fred's and Sub and (assuming
the valid authorization, execution and delivery of this Agreement
by Rose's) this Agreement constitutes the valid and binding
obligation of Fred's and Sub enforceable against each of them in
accordance with its terms. The Share Issuance and the filing of a
registration statement on Form S-4 (or other appropriate form) with
the Securities and Exchange Commission (the "SEC") by Fred's under
the Securities Act, for the purpose of registering the shares of
Fred's Common Stock to be issued in the Merger (including the
<PAGE>
Anderson Shares, as defined herein, and the shares issuable upon
exercise of the Rose's Warrants and the Rose's Stock Options to be
assumed by Fred's pursuant to Section 1.5) (together with any
amendments or supplements thereto, whether prior to or after the
effective date thereof, the "Registration Statement") have been
duly authorized by Fred's Board of Directors. The Fred's Common
Stock to be issued in the Merger (including the Anderson Shares,
and the shares issuable upon exercise of the Rose's Warrants and
the Rose's Stock Options to be assumed by Fred's pursuant to
Section 1.5), when issued, will be registered under the Securities
Act and the Securities Exchange Act of 1934, as amended (together
with the rules and regulations promulgated thereunder, the
"Exchange Act") and registered or exempt from registration under
any applicable state securities or "blue sky" laws ("Blue Sky
Laws").
Section 2.4 Consents and Approvals; No Violation. Assuming
that all consents, approvals, authorizations and other actions
described in the second sentence of this Section 2.4 have been
obtained and all filings and obligations described in this Section
2.4 have been made, and subject to Section 5.17, the execution and
delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby and compliance with the provisions
hereof will not, result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give to others
a right of termination, cancellation or acceleration of any
obligation or the loss of a material benefit under, or result in
the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of Fred's or any of its
Subsidiaries under, any provision of (i) the Charter or By-laws of
Fred's, (ii) any provision of the comparable charter or
organization documents of any of Fred's Subsidiaries, (iii) any
loan or credit agreement note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise or
license applicable to Fred's or any of its Subsidiaries or (iv) any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Fred's or any of its Subsidiaries or any
of their respective properties or assets, other than, in the case
of clauses (ii), (iii) or (iv), any such violations, defaults,
rights, liens, security interests, charges or encumbrances that,
individually or in the aggregate, would not have a Material Adverse
Effect on Fred's, or prevent or materially delay the consummation
of any of the transactions contemplated hereby. No filing or
registration with, or authorization, consent or approval of, any
domestic (federal and state), foreign or supranational court,
commission, governmental body, regulatory agency, authority or
tribunal (a "Governmental Entity") is required by or with respect
to Fred's or any of its Subsidiaries in connection with the
execution and delivery of this Agreement by Fred's or Sub or is
necessary for the consummation of the Merger and the other
transactions contemplated by this Agreement, except for (i) in
connection, or in compliance, with the provisions of the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), the Securities Act and the Exchange Act, (ii) the
filing of the Certificate of Merger with the Secretary of State of
the State of Delaware and appropriate documents with the relevant
authorities of other states in which Rose's or any of its
Subsidiaries is qualified to do business, (iii) such filings and
consents as may be required under any environmental, health or
safety law or regulation pertaining to any notification, disclosure
or required approval triggered by the Merger or by the transactions
contemplated by this Agreement, (iv) such filings, authorizations,
orders and approvals as may be required by state takeover laws (the
"State Takeover Approvals"), (v) such filings as may be required in
connection with the taxes described in Section 5.10, (vi) such
consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under the laws of any
foreign country in which Rose's or any of its Subsidiaries conducts
any business or owns any property or assets, (vii) such filings and
consents as may be required under any state or foreign laws
pertaining to debt collection, the issuance of payment instruments
or money transmission, (viii) applicable requirements, if any, of
Blue Sky Laws and NASDAQ, and (ix) such other consents, orders,
authorizations, registrations, declarations and filings the failure
of which to be obtained or made would not, individually or in the
aggregate, have a Material Adverse Effect on Fred's, or prevent or
materially delay the consummation of any of the transactions
contemplated hereby.
Section 2.5 SEC Documents and Other Reports. Fred's has
filed all required documents with the SEC since January 1, 1993
(including the Fred's Annual Report, as defined herein, the "Fred's
SEC Documents"). As of their respective dates, the Fred's SEC
Documents complied in all material respects with the requirements
of the Securities Act or the Exchange Act, as the case may be and,
at the respective times they were filed, none of the Fred's SEC
Documents contained any untrue statement of a material fact or
omitted to state a material
<PAGE>
fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
consolidated financial statements (including, in each case, any
notes thereto) of Fred's included in the Fred's SEC Documents
complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of
the SEC with respect thereto, were prepared in accordance with
generally accepted accounting principles ("GAAP") (except, in the
case of the unaudited statements, as permitted by the Securities
Act or the Exchange Act) applied on a consistent basis during the
periods involved (except as may be indicated therein or in the
notes thereto) and fairly presented in all material respects the
consolidated financial position of Fred's and its consolidated
Subsidiaries as at the respective dates thereof and the
consolidated results of their operations and their consolidated
cash flows for the periods then ended (subject, in the case of
unaudited statements, to any other adjustments described therein
and normal year-end audit adjustments). Except as disclosed in the
Fred's SEC Documents or as required by GAAP, Fred's has not since
January 28, 1995, made any change in the accounting practices or
policies applied in the preparation of financial statements. As
used herein, the term "Fred's Annual Report" refers to Fred's
Annual Report on Form 10-K most recently filed with the SEC. As
to Fred's SEC Documents and financial statements filed or to be
filed with the SEC, all representations and warranties of Fred's in
this Agreement relating to such as have been filed prior to the
date hereof (i.e., as to periods already ended) are hereby made by
Fred's as to all such SEC Documents to be filed on or after the
date hereof (i.e., as to periods subsequent to the periods
reflected in the documents already filed) as of the date such
documents are filed in the future.
Section 2.6 Registration Statement and Joint Proxy Statement.
None of the information to be supplied by Fred's or Sub for
inclusion or incorporation by reference in the Registration
Statement or the joint proxy statement/prospectus included therein
(together with any amendments or supplements thereto, the "Joint
Proxy Statement") relating to the Stockholder Meetings (as defined
in Section 5.1) will (i) in the case of the Registration Statement,
at the time it becomes effective, contain any untrue statement of
a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein
not misleading or (ii) in the case of the Joint Proxy Statement, at
the time of the mailing of the Joint Proxy Statement, the time of
each of the Stockholder Meetings and at the Effective Time, contain
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under
which they are made, not misleading. If at any time prior to the
Effective Time any event with respect to Fred's, its officers and
directors or any of its Subsidiaries shall occur which is required
to be described in the Joint Proxy Statement or the Registration
Statement, such event shall be so described, and an appropriate
amendment or supplement shall be promptly filed with the SEC and,
as required by law, disseminated to the Fred's Stockholders and
Rose's. The Registration Statement will comply (with respect to
Fred's) as to form in all material respects with the provisions of
the Securities Act, and the Joint Proxy Statement will comply (with
respect to Fred's) as to form in all material respects with the
provisions of the Exchange Act.
Section 2.7 Absence of Certain Changes or Events. Except as
disclosed in Fred's SEC Documents filed with the SEC prior to the
date of this Agreement, since January 28, 1995, (A) Fred's and its
Subsidiaries have not incurred any material liability or obligation
(indirect, direct or contingent), or entered into any material oral
or written agreement or other transaction, that is not in the
ordinary course of business or that would reasonably be foreseen to
result in a Material Adverse Effect on Fred's, excluding any
changes and effects resulting from changes in economic, regulatory
or political conditions or changes in conditions generally
applicable to the industries in which Fred's and Subsidiaries of
Fred's are involved and except for any such changes or effects
resulting from this Agreement the transactions contemplated hereby
or the announcement thereof; (B) Fred's and its Subsidiaries have
not sustained any loss or interference with their business or
properties from fire, flood, windstorm, accident or other calamity
(whether or not covered by insurance) that has had a Material
Adverse Effect on Fred's; (C) other than any indebtedness incurred
by Fred's after the date hereof as permitted by Section 4.1(a)(vi),
there has been no material change in the consolidated indebtedness
of Fred's and its Subsidiaries, and no dividend or distribution of
any kind declared, paid or made by Fred's on any class of its
stock, except for regular quarterly dividends of not more than
$0.05 per share of Fred's Common Stock; and (D) there has been no
event having a Material Adverse Effect on Fred's, excluding any
changes and effects resulting
<PAGE>
from changes in economic, regulatory
or political conditions or changes in conditions generally
applicable to the industries in which Fred's and Subsidiaries of
Fred's are involved and except for any such changes or effects
resulting from this Agreement, the transactions contemplated hereby
or the announcement thereof. Fred's has not amended since June 30,
1995 its Charter or Bylaws with respect to the indemnification of
its officers and directors.
Section 2.8 Permits and Compliance. Each of Fred's and its
Subsidiaries is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances,
exceptions, consents, certificates, approvals and orders of any
Governmental Entity necessary for Fred's or any of its Subsidiaries
to own, lease and operate its properties or to carry on its
business as it is now being conducted (the "Fred's Permits"),
except where the failure to have any of the Fred's Permits would
not, individually or in the aggregate, have a Material Adverse
Effect on Fred's and, as of the date of this Agreement, no
suspension or cancellation of any of the Fred's Permits is pending
or, to the Knowledge of Fred's (as defined herein), threatened,
except where the suspension or cancellation of any of the Fred's
Permits would not, individually or in the aggregate, have a
Material Adverse Effect on Fred's. Neither Fred's nor any of its
Subsidiaries is in violation of (A) its charter, by-laws or other
organizational documents, (B) any applicable law, ordinance,
administrative or governmental rule or regulation or (C) any order,
decree or judgment of any Governmental Entity having jurisdiction
over Fred's or any of its Subsidiaries, except in the case of
clauses (A), (B) and (C), for any violations that, individually or
in the aggregate, would not have a Material Adverse Effect on
Fred's. Except as disclosed in the Fred's SEC Documents filed
prior to the date of this Agreement, there is no contract or
agreement that is material to the business, financial condition or
results of operations of Fred's and its Subsidiaries, taken as a
whole. Except as set forth in the Fred's SEC Documents, prior to
the date of this Agreement no event of default or event that, but
for the giving of notice or the lapse of time or both, would
constitute an event of default exists or, upon the consummation by
Fred's of the transactions contemplated by this Agreement, will
exist under any indenture, mortgage, loan agreement, note or other
agreement or instrument for borrowed money, any guarantee of any
agreement or instrument for borrowed money or any lease,
contractual license or other agreement or instrument to which
Fred's or any of its Subsidiaries is a party or by which Fred's or
any such Subsidiary is bound or to which any of the properties,
assets or operations of Fred's or any such Subsidiary is subject,
other than any defaults that, individually or in the aggregate,
would not have a Material Adverse Effect on Fred's. "Knowledge of
Fred's" means the actual knowledge of the Chief Executive Officer
and Chief Financial Officer of Fred's.
Section 2.9 Tax Matters. Each of Fred's and its Subsidiaries
has filed all Tax Returns required to have been filed (or
extensions have been duly obtained) and has paid all Taxes required
to have been paid by it, except where failure to file such Tax
Returns or pay such Taxes would not, in the aggregate, have a
Material Adverse Effect on Fred's. For purposes of this Agreement:
(i) "Tax" (and, with correlative meaning, "Taxes") means any
federal, state, local or foreign income, gross receipts, property,
sales, use, license, excise, franchise, employment, payroll,
withholding, alternative or added minimum, ad valorem, transfer or
excise tax, or any other tax, custom, duty, governmental fee or
other like assessment or charge of any kind whatsoever, together
with any interest or penalty, imposed by any governmental authority
and (ii) "Tax Return" means any return, report or similar statement
required to be filed with respect to any Tax (including any
attached schedules), including, without limitation, any information
return, claim for refund, amended return or declaration of
estimated Tax.
Section 2.10 Actions and Proceedings. Except as set forth in
the Fred's SEC Documents, there are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental
Entity against or involving Fred's or any of its Subsidiaries, or
against or involving any of the present or former directors,
officers, employees, consultants, agents or Fred's Stockholders or
any of its Subsidiaries, as such, any of its or their properties,
assets or business or any Fred's Plan (as defined herein) that,
individually or in the aggregate, would have a Material Adverse
Effect on Fred's. As of the date of this Agreement, there are no
actions, suits or claims or legal, administrative or arbitrative
proceedings or investigations pending or, to the Knowledge of
Fred's, threatened against or involving Fred's or any of its
Subsidiaries or any of its or their present or former directors,
officers, employees, consultants, agents or stockholders, as such,
any of its or their properties, assets
<PAGE>
or business or any Fred's
Plan that, individually or in the aggregate, are reasonably likely
to have a Material Adverse Effect on Fred's. As of the date hereof
there are no actions, suits, labor disputes or other litigation,
legal or administrative proceedings or governmental investigations
pending or, to the Knowledge of Fred's, threatened against or
affecting Fred's or any of its Subsidiaries or any of its or their
present or former officers, directors, employees, consultants,
agents or stockholders, as such, or any of its or their properties,
assets or business relating to the transactions contemplated by
this Agreement.
Section 2.11 Certain Agreements. As of the date of this
Agreement, neither Fred's nor any of its Subsidiaries is a party to
any oral or written benefits agreement or plan, including any stock
option plan, stock appreciation rights plan, restricted stock plan
or stock purchase plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
Section 2.12 ERISA.
(a) With respect to each Fred's Plan (as defined
herein), Fred's has made (or as soon as practicable will make)
available to Rose's a true and correct copy (to the extent
applicable) of (i) the three most recent annual reports (Form 5500)
filed with the Internal Revenue Service (the "IRS"), (ii) such
Fred's Plan, (iii) each trust agreement, insurance contract or
administration agreement relating to such Fred's Plan, (iv) the
most recent summary plan description of each Fred's Plan for which
a summary plan description is required and (v) the most recent
determination letter, if any, issued by the IRS with respect to any
Fred's Plan intended to be qualified under section 401(a) of the
Code. Except as would not have a Material Adverse Effect on Fred's
and except as set forth on Schedule 2.12(a), each Fred's Plan
complies in all material respects with the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), the Code and all
other applicable statutes and governmental rules and regulations,
including but not limited to the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), and (i) neither
Fred's nor any of its ERISA Affiliates is or, within the past six
years has been, a contributing employer to a Fred's Multiemployer
Plan (as defined herein), (ii) no Fred's Plan is, or has ever been,
subject to Title IV of ERISA, and (iii) Fred's and its ERISA
Affiliates have complied in all material respects with the
continued medical coverage requirements of COBRA.
(b) With respect to Fred's Plans, no event has occurred
in connection with which Fred's or any of its ERISA Affiliates
would be subject to any liability under the terms of such Fred's
Plans, ERISA, the Code or any other applicable law which would have
a Material Adverse Effect on Fred's. All Fred's Plans that are
intended to be qualified under Section 401(a) of the Code have been
determined by the Internal Revenue Service to be so qualified, or
a timely application (under Revenue Procedure 93-39 or any
subsequent Revenue Procedure with respect to ruling and
determination letters) for such determination is now pending, and
to the Knowledge of Fred's, no event has occurred and no fact
exists that would adversely affect such determination. Except as
set forth on Schedule 2.12(b) or as disclosed in Fred's SEC
Documents, neither Fred's nor any of its ERISA Affiliates has any
liability or obligation under any welfare plan to provide benefits
after termination of employment to any employee or dependent other
than as required by ERISA or as disclosed in Fred's Annual Report.
As used herein, (i) "Fred's Plan" means a "pension plan" (as
defined in Section 3(2) of ERISA (other than a Fred's Multiemployer
Plan)) or a "welfare plan" (as defined in Section 3(1) of ERISA)
established or maintained by Fred's or any of its ERISA Affiliates
or as to which Fred's or any of its ERISA Affiliates has
contributed or otherwise may have any liability, (ii) "Fred's
Multiemployer Plan" means a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) to which Fred's or any of its ERISA
Affiliates is or has been obligated to contribute or otherwise may
have any liability, and (iii) with respect to any person, "ERISA
Affiliate" means any trade or business (whether or not
incorporated) which is under common control or would be considered
a single employer with such person pursuant to Section 414(b), (c),
(m) or (o) of the Code and the regulations promulgated under those
sections or pursuant to Section 4001(b) of ERISA and the
regulations promulgated thereunder.
<PAGE>
(c) A copy of each bonus, deferred compensation,
pension, retirement, profit-sharing, thrift, savings, employee
stock ownership, stock bonus, stock purchase, restricted stock,
stock option, employment, termination, severance, compensation,
medical, health or other plan, agreement, policy or arrangement
that covers employees, directors, former employees or former
directors of Fred's and its Subsidiaries (the "Compensation and
Benefit Plans") and any trust agreements or insurance contracts
forming a part of such Compensation and Benefit Plans has been
provided or made available to Rose's prior to the date hereof.
Fred's has no current plans to modify or terminate any of the
Compensation and Benefit Plans, except as set forth on Schedule
2.12(c); the effect of any such modification or termination is also
set forth on Schedule 2.12(c).
Section 2.13 Compliance with Certain Laws. The properties,
assets and operations of Fred's and its Subsidiaries are in
compliance in all material respects with all applicable federal,
state, local and foreign laws, rules and regulations, orders,
decrees, judgments, permits and licenses relating to public and
worker health and safety (collectively, "Worker Safety Laws") and
the protection and clean-up of the environment and activities or
conditions related thereto, including, without limitation, those
relating to the generation, handling, disposal, transportation or
release of hazardous materials (collectively, "Environmental
laws"), except for any violations that, individually or in the
aggregate, would not have a Material Adverse Effect on Fred's.
With respect to such properties, assets and operations, including
any previously owned, leased or operated properties, assets or
operations, there are no past, present or reasonably anticipated
future events, conditions, circumstances, activities, practices,
incidents, actions or plans of Fred's or any of its Subsidiaries
that may interfere with or prevent compliance or continued
compliance in all material respects with applicable Worker Safety
Laws and Environmental Laws, other than any such interference or
prevention as would not, individually or in the aggregate with any
such other interference or prevention, have a Material Adverse
Effect on Fred's. The term "hazardous materials" shall mean those
substances that are regulated by or form the basis for liability
under any applicable Environmental Laws.
Section 2.14 Liabilities. Except as fully reflected or
reserved against in the financial statements included in the Fred's
Annual Report, Fred's most recent report to the SEC on Form 10-Q ,
or disclosed in the footnotes thereto, Fred's and its Subsidiaries
had no liabilities (including, without limitation, tax liabilities)
at the date of such financial statements, absolute or contingent,
liquidated or unliquidated, other than liabilities that,
individually or in the aggregate, would not have a Material Adverse
Effect on Fred's, and had no liabilities (including, without
limitation, tax liabilities) that were not incurred in the ordinary
course of business. Except as so reflected, reserved or disclosed,
Fred's and its Subsidiaries have no commitments, other than any
commitments which, individually or in the aggregate, would not have
a Material Adverse Effect on Fred's.
Section 2.15 Labor Matters. Neither Fred's nor any of its
Subsidiaries is a party to any collective bargaining agreement or
labor contract. Neither Fred's nor any of its Subsidiaries has
engaged in any unfair labor practice with respect to any persons
employed by or otherwise performing services primarily for Fred's
or any of its Subsidiaries (the "Fred's Business Personnel"), and
there is no unfair labor practice complaint or grievance against
Fred's or any of its Subsidiaries by the National Labor Relations
Board or any comparable state agency pending or threatened in
writing with respect to the Fred's Business Personnel, except where
such unfair labor practice, complaint or grievance would not have
a Material Adverse Effect on Fred's. There is no labor strike,
dispute, slowdown or stoppage pending or, to the Knowledge of
Fred's, threatened against or affecting Fred's or any of its
Subsidiaries which may interfere with the respective business
activities of Fred's or any of its Subsidiaries, except where such
dispute, strike or work stoppage would not have a Material Adverse
Effect on Fred's.
Section 2.16 Intellectual Property. Fred's and its
Subsidiaries have all patents, trademarks, trade names, service
marks, trade secrets, copyrights and other proprietary intellectual
property rights (collectively, "Intellectual Property Rights") as
are necessary in connection with the business of Fred's and its
Subsidiaries, taken as a whole, except where the failure to have
such Intellectual Property Rights would not have a Material Adverse
Effect on Fred's. Neither Fred's nor any of its Subsidiaries has
infringed any Intellectual Property
<PAGE>
Rights of any third party other
than any infringements that, individually or in the aggregate,
would not have a Material Adverse Effect on Fred's.
Section 2.17 Reorganization. To the Knowledge of Fred's,
neither Fred's nor any of its Subsidiaries has taken, or will have
taken, any action or failed to take any action which action or
failure would jeopardize the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
Section 2.18 Required Vote of Fred's Stockholders. The
affirmative vote of a majority of the votes eligible to be cast on
the approval of this Agreement is required to approve this
Agreement. The affirmative vote of a majority of the votes cast on
the Share Issuance is required to approve the Share Issuance and to
amend Fred's 1993 Long-Term Incentive Plan, provided that the total
votes cast on each proposal represents a majority of the
outstanding shares of Fred's Common Stock. No other vote of the
Fred's Stockholders is required by law, the Charter or By-laws of
Fred's or otherwise in order for Fred's to consummate the Merger
and the transactions contemplated hereby.
Section 2.19 Ownership of Shares. Neither Fred's nor any of
its Subsidiaries (i) "beneficially owns" or is the "beneficial
owner" of (as such terms are defined by reference to Section 13(d)
of the Exchange Act), or (ii) "owns", as such term is defined in
Section 203 of the Del.C., any shares of Rose's Common Stock.
Section 2.20 Operations of Sub. Sub is a direct, wholly-owned
subsidiary of Fred's, was formed solely for the purpose of
engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as
contemplated hereby.
Section 2.21 Brokers. No broker, investment banker or other
person, is entitled to any brokers, finder's or other similar fee
or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of
Fred's.
Section 2.22 Disclosure. No representation or warranty by
Fred's contained in this Agreement and no written statement,
certificate, or document furnished by or on behalf of Fred's to
Rose's in connection with this Agreement or any transaction
contemplated hereby, contains, as of the date on which made or
reaffirmed, any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under
which such statements were made, not misleading, or necessary in
order to provide Rose's with full information as to Fred's and its
affairs. None of this Agreement, the financial statements or any
schedule, exhibit, or certificate delivered in accordance with the
terms hereof or any document or statement in writing which has been
supplied by or on behalf of Fred's, or by any of Fred's directors
or officers, in connection with the transactions contemplated
hereby, contains, or will contain, any untrue statement of a
material fact, or omits, or will omit, any statement of a material
fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to Fred's which
materially and adversely affects the business, prospects, working
capital or financial condition of Fred's or its properties or
assets, which has not been set forth in this Agreement or in the
schedules, exhibits or certificates or statements in writing
furnished in connection with the transactions contemplated by this
Agreement.
Section 2.23 Opinion of Investment banker. Fred's has
engaged Morgan Keegan & Co., Inc. as its investment banker to
render a written opinion, as of the day before the printing of the
Joint Proxy Statement, to the effect that the Conversion Number is
fair to Fred's Stockholders from a financial point of view, a copy
of which opinion will be delivered to Rose's promptly upon receipt
by Fred's.
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ROSE'S
Rose's represents and warrants to Fred's and Sub as follows:
Section 3.1 Organization, Standing and Power. Rose's is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the requisite
corporate power and authority to carry on its business as now being
conducted. Each Subsidiary of Rose's is duly organized, validly
existing and in good standing under the laws of the jurisdiction in
which it is organized and has the requisite corporate (in the case
of a Subsidiary that is a corporation) or other power and authority
to carry on its business as now being conducted, except where the
failure to be so organized, existing or in good standing or to have
such power or authority would not, individually or in the
aggregate, have a Material Adverse Effect on Rose's. Rose's and
each of its Subsidiaries are duly qualified to do business, and are
in good standing, in each jurisdiction where the character of their
properties owned or held under lease or the nature of their
activities makes such qualification necessary, except where the
failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect on Rose's.
Section 3.2 Capital Structure. The authorized capital stock
of Rose's consists of 50,000,000 shares of Rose's Common Stock, no
par value, and 10,000,000 shares of Preferred Stock, no par value.
At the date hereof (i) 8,233,951 shares of Rose's Common Stock are
issued and outstanding, all of which are validly issued, fully paid
and nonassessable and free of preemptive rights, (ii) 976,910
shares of Rose's Common Stock are held in the treasury of Rose's,
(iii) the Escrow Shares (789,139 shares) are held by the FUNB, (iv)
not more than 700,000 shares of Rose's Common Stock are reserved
for future issuance pursuant to Rose's New Equity Compensation Plan
(the "Rose's Stock Option Plan"), and (v) 4,285,714 shares are
issuable pursuant to the Rose's Warrants. No shares of Rose's
Preferred Stock are outstanding. As of the date of this Agreement,
except for Rose's Stock Options granted under Rose's Stock Option
Plan for the issuance upon exercise of 388,000 shares of Rose's
Common Stock, and Rose's Warrants for the issuance upon exercise of
4,285,714 shares of Rose's Common Stock, there are no options,
warrants, calls, rights or agreements to which Rose's or any of its
Subsidiaries is a party or by which any of them is bound obligating
Rose's or any of its Subsidiaries to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital
stock of Rose's or any of its Subsidiaries or obligating Rose's or
any of its Subsidiaries to grant, extend or enter into any such
option, warrant, call, right or agreement. Rose's has furnished to
Fred's a specimen copy of every form of Rose's Stock Option and
Rose's Warrant granted and in effect at the date hereof or to
become effective after the date hereof, together with a list of the
grantees and of the actual variable terms and conditions (e.g.,
date of grant, number of shares as to which granted, exercise
price, etc.) contained in the Rose's Stock Options and Rose's
Warrants so granted and effective. Schedule 3.2 lists the holders,
date of grant and exercise price of all Rose's Stock Options. Each
outstanding share of capital stock of each Subsidiary of Rose's
that is a corporation is duly authorized, validly issued, fully
paid and nonassessable and, except as disclosed in Rose's SEC
Documents (as defined herein), each such share is owned by Rose's
or another Subsidiary of Rose's, free and clear of all security
interests, liens, claims, pledges, options, rights of first
refusal, agreements, limitations on voting rights, charges and
other encumbrances of any nature whatsoever.
Section 3.3 Authority. The Board of Directors of Rose's has
on or prior to the date of this Agreement (a) declared the Merger
advisable and fair to and in the best interest of Rose's and Rose's
Stockholders (subject to the satisfaction of the conditions to
Closing contained herein, including receipt by Rose's of the
fairness opinion of its investment banker), (b) approved this
Agreement in accordance with the Del.C., (c) resolved to
recommend the approval of this Agreement by Rose's Stockholders and
(d) directed that this Agreement be submitted to Rose's
Stockholders for approval. Rose's has all requisite corporate
power and authority to enter into this Agreement and, subject to
approval by the Rose's Stockholders of this Agreement (which, for
all purposes in this Agreement, shall be deemed to include any
necessary approval of amendments to Rose's stock
<PAGE>
plans), to
consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by Rose's and the consummation by Rose's
of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Rose's, subject to
(x) approval of this Agreement by Rose's Stockholders and (y) the
filing of a Certificate of Merger as required by the Del.C. This
Agreement has been duly executed and delivered by Rose's and
(assuming the valid authorization, execution and delivery of this
Agreement by Fred's and Sub) constitutes the valid and binding
obligation of Rose's enforceable against Rose's in accordance with
its terms. The filing of the Joint Proxy Statement with the SEC
has been duly authorized by Rose's Board of Directors.
Section 3.4 Consents and Approvals; No Violation. Assuming
that all consents, approvals, authorizations and other actions
described in this Section 3.4 have been obtained and all filings
and obligations described in this Section 3.4 have been made, and
subject to Section 5.17, the execution and delivery of this
Agreement do not and the consummation of the transactions
contemplated hereby and compliance with the provisions hereof will
not, result in any violation of, or default (with or without notice
or lapse of time, or both) under, or give to others a right of
termination, cancellation or acceleration of any obligation or the
loss of a material benefit under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the
properties or assets of Rose's or any of its Subsidiaries under,
any provision of (i) the Certificate of Incorporation or By-laws of
Rose's, (ii) any provision of the comparable charter or
organization documents of any of Rose's Subsidiaries, (iii) any
loan or credit agreement, note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise or
license applicable to Rose's or any of its Subsidiaries or (iv) any
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Rose's or any of its Subsidiaries or any
of their respective properties or assets, other than, in the case
of clauses (ii), (iii) or (iv), any such violations, defaults,
rights, liens, security interests, charges or encumbrances that,
individually or in the aggregate, would not have a Material Adverse
Effect on Rose's, or prevent the consummation of any of the
transactions contemplated hereby. No filing or registration with,
or authorization, consent or approval of, any Governmental Entity
is required by or with respect to Rose's or any of its Subsidiaries
in connection with the execution and delivery of this Agreement by
Rose's or is necessary for the consummation of the Merger and the
other transactions contemplated by this Agreement, except for (i)
in connection, or in compliance, with the provisions of the HSR
Act, the Securities Act and the Exchange Act, (ii) the filing of
the Certificate of Merger with the Secretary of State of the State
of Delaware and appropriate documents with the relevant authorities
of other states in which Rose's or any of its Subsidiaries is
qualified to do business, (iii) such filings and consents as may be
required under any environmental, health or safety law or
regulation pertaining to any notification, disclosure or required
approval triggered by the Merger or by the transactions
contemplated by this Agreement, (iv) such filings, authorizations,
orders and approvals as may be required to obtain the State
Takeover Approvals, (v) such filings as may be required in
connection with the taxes described in Section 5.10, (vi) such
consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under the laws of any
foreign country in which Rose's or any of its Subsidiaries conducts
any business or owns any property or assets, (vii) such filings and
consents as may be required under any state or foreign laws
pertaining to debt collection, the issuance of payment instruments
or money transmission, (viii) applicable requirements, if any, of
Blue Sky Laws and NASDAQ, and (ix) such other consents, orders,
authorizations, registrations, declarations and filings the failure
of which to be obtained or made would not, individually or in the
aggregate, have a Material Adverse Effect on Rose's or prevent the
consummation of any of the transactions contemplated hereby.
Section 3.5 SEC Documents and Other Reports.
(a) SEC Documents. Rose's has filed all required
documents with the SEC since January 28, 1995 (the "Rose's SEC
Documents"). As of their respective dates, Rose's SEC Documents
complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the
regulations promulgated thereunder, and, at the respective times
they were filed, none of Rose's SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made,
not misleading.
<PAGE>
(b) Other Reports. Rose's has furnished to Fred's
unaudited balance sheets, and related unaudited statements of
income and retained earnings and cash flows for each month and
year-to-date period subsequent to the last month and period most
recently reflected in a Rose's SEC Document (the "Period Reports").
(c) Compliance, Presentation, Absence of Changes in
Preparation. The consolidated financial statements (including, in
each case, any notes thereto) of Rose's included in Rose's SEC
Documents and in the Period Reports complied as to form in all
material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto,
were prepared in accordance with GAAP (except, in the case of the
unaudited statements, as permitted by the Securities Act or the
Exchange Act) applied on a consistent basis during the periods
involved (except as may be indicated therein or in the notes
thereto) and fairly presented in all material respects the
consolidated financial position of Rose's and its consolidated
Subsidiaries as at the respective dates thereof and the
consolidated results of their operations and their consolidated
cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments and to
any other adjustments described therein). Except as disclosed in
Rose's SEC Documents or as required by GAAP, Rose's has not, since
January 28, 1995, made any change in the accounting practices or
policies applied in the preparation of financial statements. As
used herein, the term "Rose's Annual Report" refers to Rose's
Annual Report on Form 10-K most recently filed with the SEC. As to
Rose's SEC Documents, Audited Financial Statements (as defined
herein), Period Reports and Management Correspondence (as defined
herein) and financial statements which have been or are to be filed
with the SEC, prepared by Rose's, or delivered to Fred's by Rose's,
all representations and warranties of Rose's in this Agreement
relating to such as have been filed, prepared or delivered prior to
the date hereof (i.e., as to periods already ended) are hereby made
by Rose's as to all such SEC Documents to be filed on or after the
date hereof (i.e., as to periods subsequent to the periods
reflected in the documents already filed, prepared or delivered) as
of the date such documents are filed, prepared or delivered in the
future.
(d) Management Correspondence. Rose's has furnished to
Fred's the letters of KPMG Peat Marwick, LLP ("Rose's Auditors") to
the management of Rose's relating to the audited financial
statements certified by Rose's Auditors contained in Rose's SEC
Documents for the fiscal years ended January 29, 1994 and January
28, 1995 (the "Audited Financial Statements") and Rose's written
responses thereto (collectively, the "Management Correspondence").
All Management Correspondence delivered and to be delivered to
Fred's reflects and will reflect that there is no adjustment to any
Audited Financial Statements delivered to Fred's that Rose's
Auditors waived.
Section 3.6 Registration Statement and Joint Proxy Statement.
None of the information to be supplied by Rose's for inclusion or
incorporation by reference in the Registration Statement or the
Joint Proxy Statement will (i) in the case of the Registration
Statement, at the time it becomes effective, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading or (ii) in the case of the Joint
Proxy Statement, at the time of the mailing of the Joint Proxy
Statement, the time of each of the Stockholder Meetings and at the
Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any
time prior to the Effective Time any event with respect to Rose's,
its officers and directors or any of its Subsidiaries shall occur
which is required to be described in the Joint Proxy Statement or
the Registration Statement, such event shall be so described, and
an appropriate amendment or supplement shall be promptly filed with
the SEC and, as required by law, disseminated to the Fred's
Stockholders and Rose's. The Joint Proxy Statement will comply
(with respect to Rose's) as to form in all material respects with
the Exchange Act.
Section 3.7 Absence of Certain Changes or Events. Except as
disclosed in Rose's SEC Documents filed with the SEC prior to the
date of this Agreement or in Schedule 3.7, since January 28, 1995,
(A) Rose's and its Subsidiaries have not incurred any material
liability or obligation (indirect, direct or contingent), or
entered into
<PAGE>
any material oral or written agreement or other
transaction, that is not in the ordinary course of business or that
would reasonably be foreseen to result in a Material Adverse Effect
on Rose's, excluding any changes and effects resulting from changes
in economic, regulatory or political conditions or changes in
conditions generally applicable to the industries in which Rose's
and Subsidiaries of Rose's are involved and except for any such
changes or effects resulting from this Agreement, the transactions
contemplated hereby or the announcement thereof, (B) Rose's and its
Subsidiaries have not sustained any loss or interference with their
business or properties from fire, flood, windstorm, accident or
other calamity (whether or not covered by insurance) that has had
a Material Adverse Effect on Rose's; (C) other than any
indebtedness incurred by Rose's after the date hereof as permitted
by Section 4.1(b)(vi), there has been no material change in the
consolidated indebtedness of Rose's and its Subsidiaries, and no
dividend or distribution of any kind declared, paid or made by
Rose's on any class of its stock; and (D) there has been no event
causing a Material Adverse Effect on Rose's, excluding any changes
and effects resulting from changes in economic, regulatory or
political conditions or changes in conditions generally applicable
to the industries in which Rose's and Subsidiaries of Rose's are
involved and except for any such changes or effects resulting from
this Agreement, the transactions contemplated hereby or the
announcement thereof. Rose's has not amended since prior to June
30, 1995 its Certificate of Incorporation or Bylaws with respect to
the indemnification of its officers and directors.
Section 3.8 Permits and Compliance. Each of Rose's and its
Subsidiaries is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances,
exceptions, consents, certificates, approvals and orders of any
Governmental Entity necessary for Rose's or any of its Subsidiaries
to own, lease and operate its properties or to carry on its
business as it is now being conducted (the "Rose's Permits"),
except where the failure to have any of Rose's Permits would not,
individually or in the aggregate, have a Material Adverse Effect on
Rose's, and, as of the date of this Agreement, no suspension or
cancellation of any of Rose's Permits is pending or, to the
knowledge of Rose's (as defined herein), threatened, except where
the suspension or cancellation of any of Rose's Permits would not,
individually or in the aggregate, have a Material Adverse Effect on
Rose's. Neither Rose's nor any of its Subsidiaries is in violation
of (A) its charter, by-laws or other organizational documents, (B)
any applicable law, ordinance, administrative or governmental rule
or regulation or (C) any order, decree or judgment of any
Governmental Entity having jurisdiction over Rose's or any of its
Subsidiaries, except, in the case of clauses (A), (B) and (C), for
any violations that, individually or in the aggregate, would not
have a Material Adverse Effect on Rose's. Except as disclosed in
Rose's SEC Documents filed with the SEC prior to the date of this
Agreement, as of the date hereof there is no contract or agreement
that is material to the business, financial condition or results of
operations of Rose's and its Subsidiaries, taken as a whole.
Except as set forth in Rose's SEC Documents filed with the SEC
prior to the date of this Agreement, no event of default or event
that, but for the giving of notice or the lapse of time or both,
would constitute an event of default exists or, upon the
consummation by Rose's of the transactions contemplated by this
Agreement, will exist under any indenture, mortgage, loan
agreement, note or other agreement or instrument for borrowed
money, any guarantee of any agreement or instrument for borrowed
money or any lease, contractual license or other agreement or
instrument to which Rose's or any of its Subsidiaries is a party or
by which Rose's or any such Subsidiary is bound or to which any of
the properties, assets or operations of Rose's or any such
Subsidiary is subject, other than any defaults that, individually
or in the aggregate, would not have a Material Adverse Effect on
Rose's. Set forth in Schedule 3.8 to this Agreement is a
description of (i) all material leases to which Rose's or any of
its Subsidiaries is a party or by which Rose's or any such
Subsidiary is bound or to which any of the properties, assets or
operations of Rose's or any such Subsidiary is subject and all
amendments thereto (including, as to real property leased, its
location by street address, city or township, county and state),
(ii) all material contracts, licenses or other agreements or
instruments (including, but not limited to, security agreements and
evidences of indebtedness) to which Rose's or any of its
Subsidiaries is a party or by which Rose's or any such Subsidiary
is bound or to which any of the properties, assets or operations of
Rose's or any such Subsidiary is bound or to which any of the
properties, assets or operations of Rose's or any such Subsidiary
is subject and all amendments thereto, and (iii) any material
changes to the amount and terms of the indebtedness for borrowed
money of Rose's and its Subsidiaries as described in Rose's Annual
Report. "Knowledge of Rose's" means the actual knowledge of the
Chief Executive Officer and the Chief Financial Officer.
<PAGE>
Section 3.9 Tax Matters. Each of Rose's and its Subsidiaries
has filed all Tax Returns required to have been filed (or
extensions have been duly obtained) and has paid all Taxes required
to have been paid by it, except where failure to file such Tax
Returns or pay such Taxes would not, in the aggregate, have a
Material Adverse Effect on Rose's or as set forth on Schedule 3.9.
Section 3.10 Actions and Proceedings. Except as set forth in
Rose's SEC Documents or in Schedule 3.10, there are no outstanding
orders, judgments, injunctions, awards or decrees of any
Governmental Entity against or involving Rose's or any of its
Subsidiaries, or against or involving any of the present or former
directors, officers, employees, consultants, agents or Rose's
Stockholders or any of its Subsidiaries, as such, any of its or
their properties, assets or business or any Rose's Plan (as defined
herein) that, individually or in the aggregate, would have a
Material Adverse Effect on Rose's. Except as set forth in Rose's
SEC Documents, as of the date of this Agreement, there are no
actions, suits or claims or legal, administrative or arbitrative
proceedings or investigations pending or, to the Knowledge of
Rose's, threatened against or involving Rose's or any of its
Subsidiaries or any of its or their present or former directors,
officers, employees, consultants, agents or stockholders, as such,
or any of its or their properties, assets or business or any Rose's
Plan that, individually or in the aggregate, would have a Material
Adverse Effect on Rose's. As of the date hereof, there are no
actions, suits, labor disputes or other litigation, legal or
administrative proceedings or governmental investigations pending
or, to the Knowledge of Rose's, threatened against or affecting
Rose's of any of its Subsidiaries or any of its or their present or
former officers, directors, employees, consultants, agents or
stockholders, as such, or any of its or their properties, assets or
business relating to the transactions contemplated by this
Agreement.
Section 3.11 Certain Agreements. As of the date of this
Agreement, except as set forth on Schedule 3.11, neither Rose's nor
any of its Subsidiaries is a party to any oral or written benefits
agreement or plan, including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase
plan (other than pursuant to the New Equity Compensation Plan), any
of the benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of
the transactions contemplated by this Agreement or the value of any
of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the value
of any of the benefits of which will be calculated on the basis of
any of the transactions contemplated by this Agreement. No holder
of any option to purchase shares of Rose's Common Stock, or shares
of Rose's Common Stock granted in connection with the performance
of services for Rose's or its Subsidiaries, is or will be entitled
to receive cash from Rose's or any Subsidiary in lieu of or in
exchange for such option or shares as a result of the transactions
contemplated by this Agreement (provided that a cashless exercise
currently permitted with no other authorization under the terms of
a Rose's Stock Option shall not be considered such a prohibited
cash payment). Neither Rose's nor any Subsidiary is a party to any
termination benefits agreement or severance agreement or employment
agreement one trigger of which would be the consummation of the
transactions contemplated by this Agreement, except as set forth in
Schedule 3.11.
Section 3.12 ERISA.
(a) With respect to each Rose's Plan (as defined
herein), Rose's has made (or as soon as practicable will make)
available to Fred's a true and correct copy (to the extent
applicable) of (i) the three most recent annual reports (Form 5500)
filed with the Internal Revenue Service (the "IRS"), (ii) such
Rose's Plan, (iii) each trust agreement, insurance contract or
administration agreement relating to such Rose's Plan, (iv) the
most recent summary plan description of each Rose's Plan for which
a summary plan description is required and (v) the most recent
determination letter, if any, issued by the IRS with respect to any
Rose's Plan intended to be qualified under section 401(a) of the
Code. Except as would not have a Material Adverse Effect on Rose's
and except as set forth on Schedule 3.12(a), each Rose's Plan
complies in all material respects with ERISA, the Code and all
other applicable statutes and governmental rules and regulations,
including but not limited to COBRA, and (i) neither Rose's nor any
of its ERISA Affiliates is or, within the past six years has been,
a contributing employer to a Rose's Multiemployer Plan (as defined
herein), (ii) no Rose's Plan is, or has ever
<PAGE>
been, subject to Title
IV of ERISA, and (iii) Rose's and its ERISA Affiliates have
complied in all material respects with the continued medical
coverage requirements of COBRA.
(b) With respect to Rose's Plans, except as set forth on
Schedule 3.12(b)no event has occurred in connection with which
Rose's or any of its ERISA Affiliates would be subject to any
liability under the terms of such Rose's Plans, ERISA, the Code or
any other applicable law which would have a Material Adverse Effect
on Rose's. All Rose's Plans that are intended to be qualified
under Section 401(a) of the Code have been determined by the
Internal Revenue Service to be so qualified, or a timely
application (under Revenue Procedure 93-39 or any subsequent
Revenue Procedure with respect to ruling and determination letters)
for such determination is now pending, and to the Knowledge of
Rose's, no event has occurred and no fact exists that would
adversely affect such determination. Except as set forth on
Schedule 3.12(b) or as disclosed in Rose's SEC Documents, neither
Rose's nor any of its ERISA Affiliates has any liability or
obligation under any welfare plan to provide benefits after
termination of employment to any employee or dependent other than
as required by ERISA or as disclosed in Rose's Annual Report. As
used herein, (i) "Rose's Plan" means a "pension plan" (as defined
in Section 3(2) of ERISA (other than a Rose's Multiemployer Plan))
or a "welfare plan" (as defined in Section 3(1) of ERISA)
established or maintained by Rose's or any of its ERISA Affiliates
or as to which Rose's or any of its ERISA Affiliates has
contributed or otherwise may have any liability, and (ii) "Rose's
Multiemployer Plan" means a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) to which Rose's or any of its ERISA
Affiliates is or has been obligated to contribute or otherwise may
have any liability.
(c) A copy of each bonus, deferred compensation,
pension, retirement, profit-sharing, thrift, savings, employee
stock ownership, stock bonus, stock purchase, restricted stock,
stock option, employment, termination, severance, compensation,
medical, health or other plan, agreement, policy or arrangement
that covers employees, directors, former employees or former
directors of Rose's and its Subsidiaries (the "Compensation and
Benefit Plans") and any trust agreements or insurance contracts
forming a part of such Compensation and Benefit Plans has been
provided or made available to Fred's prior to the date hereof.
Rose's has no current plans to modify or terminate any of the
Compensation and Benefit Plans, except as set forth on Schedule
3.12(c); the effect of any such modification or termination is also
set forth on Schedule 3.12(c).
Section 3.13 Compliance with Certain Laws. The properties,
assets and operations of Rose's and its Subsidiaries are in
compliance in all material respects with all applicable Worker
Safety Laws, Environmental Laws and consumer credit laws, except
for any violations that, individually or in the aggregate, would
not have a Material Adverse Effect on Rose's or as set forth on
Schedule 3.13. With respect to such properties, assets and
operations, including any previously owned, leased or operated
properties, assets or operations, there are no past, present or
reasonably anticipated future events, conditions, circumstances,
activities, practices, incidents, actions or plans of Rose's or any
of its Subsidiaries that may interfere with or prevent compliance
or continued compliance in all material respects with applicable
Worker Safety Laws and Environmental Laws, other than any such
interference or prevention as would not, individually or in the
aggregate with any such other interference or prevention, have a
Material Adverse Effect on Rose's. Rose's will provide such
certificates and environmental studies as Fred's may reasonably
request.
Section 3.14 Liabilities. Except as fully reflected or
reserved against in the financial statements included in Rose's
Annual Report, Rose's most recent report to the SEC on Form 10-Q
and in the most recent Period Report, or disclosed in the footnotes
thereto, and except as set forth on Schedule 3.14, Rose's and its
Subsidiaries had no liabilities (including, without limitation, tax
liabilities and workmen's compensation liabilities) at the date of
such financial statements, absolute or contingent, liquidated or
unliquidated, other than liabilities that, individually or in the
aggregate, would not have a Material Adverse Effect on Rose's, and
had no liabilities (including, without limitation, tax liabilities)
that were not incurred in the ordinary course of business. Except
as so reflected, reserved or disclosed, Rose's and its Subsidiaries
have no commitments, other than any commitments which, individually
or in the aggregate, would not have a Material Adverse Effect on
Rose's.
<PAGE>
Section 3.15 Labor Matters. Neither Rose's nor any of its
Subsidiaries is a party to any collective bargaining agreement or
labor contract, except as set forth in Schedule 3.15. Neither
Rose's nor any of its Subsidiaries has engaged in any unfair labor
practice with respect to any persons employed by or otherwise
performing services primarily for Rose's or any of its Subsidiaries
(the "Rose's Business Personnel"), and there is no unfair labor
practice complaint or grievance against Rose's or any of its
Subsidiaries by the National Labor Relations Board or any
comparable state agency pending or threatened in writing with
respect to Rose's Business Personnel, except where such unfair
labor practice, complaint or grievance would not have a Material
Adverse Effect on Rose's. There is no labor strike, dispute,
slowdown or stoppage pending or, to the Knowledge of Rose's,
threatened against or affecting Rose's or any of its Subsidiaries
which may interfere with the respective business activities of
Rose's or any of its Subsidiaries, except where such dispute,
strike or work stoppage would not have a Material Adverse Effect on
Rose's.
Section 3.16 Intellectual Property. Rose's and its
Subsidiaries have all Intellectual Property Rights as are necessary
in connection with the business of Rose's and its Subsidiaries,
taken as a whole, except where the failure to have such
Intellectual Property Rights would not have a Material Adverse
Effect on Rose's. Neither Rose's nor any of its Subsidiaries has
infringed any Intellectual Property Rights of any third party other
than any infringements that, individually or in the aggregate,
would not have a Material Adverse Effect on Rose's.
Section 3.17 State Takeover Statutes. As of the date hereof,
assuming the accuracy of Fred's representations and warranties
contained in Section 2.19 (Ownership of Shares), the Board of
Directors of Rose's has taken all action so that prior to the
execution hereof, the Board of Directors has approved the Merger
pursuant to Section 203(a)(1) of the Del.C.
Section 3.18 Required Vote of Rose's Stockholders. The
affirmative vote of the holders of not less than a majority of the
outstanding shares of Rose's Common Stock is required to approve
the transactions contemplated by this Agreement. No other vote of
the Rose's Stockholders is required by law, the Certificate of
Incorporation or Bylaws of Rose's or otherwise in order for Rose's
to consummate the Merger and the transactions contemplated hereby.
Section 3.19 Reorganization. To the Knowledge of Rose's,
neither it nor any of its Subsidiaries or Affiliates has, or will
have, taken any action or failed to take any action which action or
failure would jeopardize the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
Section 3.20 Brokers. No broker, investment banker or other
person, other than Peter J. Solomon Company Limited, the fees and
expenses of which will be paid by Rose's (and are reflected in an
agreement between Peter J. Solomon Company Limited and Rose's, a
copy of which has been furnished to Fred's), is entitled to any
broker's, finder's or other similar fee or commission in connection
with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Rose's.
Section 3.21 Disclosure. No representation or warranty by
Rose's contained in this Agreement and no written statement,
certificate, or document furnished by or on behalf of Rose's to
Fred's in connection with this Agreement or any transaction
contemplated hereby, contains, as of the date on which made or
reaffirmed, any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under
which such statements were made, not misleading, or necessary in
order to provide Fred's with full information as to Rose's and its
affairs. None of this Agreement, the financial statements or any
schedule, exhibit, or certificate delivered in accordance with the
terms hereof or any document or statement in writing which has been
supplied by or on behalf of Rose's, or by any of Rose's directors
or officers, in connection with the transactions contemplated
hereby, contains, or will contain, any untrue statement of a
material fact, or omits, or will omit, any statement of a material
fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to Rose's which
materially and adversely affects the business, prospects, working
capital or financial condition of Rose's or its properties or
assets, which has not been set forth in this Agreement or in the
schedules, exhibits or
<PAGE>
certificates or statements in writing
furnished in connection with the transactions contemplated by this
Agreement.
Section 3.22 Opinion of Investment Banker. Rose's has
engaged Peter J. Solomon Company Limited, as its investment banker,
which investment banker (x) has advised Rose's and (y) will render
a written opinion as of the day before the printing of the Joint
Proxy Statement (a copy of which opinion which will be delivered to
Fred's promptly upon receipt by Rose's), to the effect that the
Merger is fair to Rose's Stockholders from a financial point of
view. Rose's has entered into a written agreement with its
investment banker, and has delivered a copy thereof to Fred's, to
limit such investment banker's compensation relating to the Merger
(including the delivery of a fairness opinion to Rose's) to not
more than $900,000, payable by Rose's $150,000 prior to Closing and
$750,000 at the Closing.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business Pending the Merger.
(a) Actions by Fred's. Except as expressly permitted by
clauses (i) through (xii) of this Section 4.1(a), during the period
from the date of this Agreement through the Effective Time, Fred's
shall, and shall cause each of its Subsidiaries to, in all material
respects carry on its business in the ordinary course of its
business as currently conducted and, to the extent consistent
therewith, use reasonable best efforts to preserve intact its
current business organizations, keep available the services of its
current officers and employees and preserve its relationships with
customers, suppliers and others having business dealings with it to
the end that its goodwill and ongoing business shall be unimpaired
at the Effective Time. Without limiting the generality of the
foregoing, and except as otherwise expressly contemplated by this
Agreement, Fred's shall not and shall not permit any of its
Subsidiaries to, without the prior written consent of Rose's:
(i) (w) declare, set aside or pay any dividends on, or
make any other actual, constructive or deemed distributions in
respect of, any of its capital stock, or otherwise make any
payments to its stockholders in their capacity as such (other
than (A) regular quarterly dividends on Fred's Common Stock
declared and paid on dates consistent with past practice and
(B) dividends and other distributions by Subsidiaries), (x)
other than in the case of any Subsidiary, split (except for
the Reverse Split referred to herein), combine or reclassify
any of its capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (y) purchase,
redeem or otherwise acquire any shares of capital stock of
Fred's or any other securities thereof or those of any
Subsidiary or any other securities thereof or any rights,
warrants or options to acquire any such shares or other
securities;
(ii) issue, deliver, sell, pledge, dispose of or
otherwise encumber any shares of its capital stock, any other
voting securities or equity equivalent or any securities
convertible into, or any rights, warrants or options to
acquire any such shares, voting securities, equity equivalent
or convertible securities, other than (A) the issuance of
stock options and shares of Fred's Common Stock to employees
of Fred's or any of its Subsidiaries in the ordinary course of
business consistent with past practice, and (B) the issuance
by any wholly-owned Subsidiary of Fred's of its capital stock
to Fred's or another wholly-owned Subsidiary of Fred's;
(iii) amend its charter or by-laws; provided,
however, that Fred's may amend its Charter to increase its
authorized capital stock;
<PAGE>
(iv) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of
the assets of or equity in, or by any other manner, any
business or any corporation, partnership, association or other
business organization or division thereof or otherwise acquire
or agree to acquire any assets, unless the entering into a
definitive agreement relating to or the consummation of such
acquisition, merger, consolidation or purchase would not (A)
impose any material delay in the obtaining of, or
significantly increase the risk of not obtaining, any
authorizations, consents, orders, declarations or approvals of
any Governmental Entity necessary to consummate the Merger or
the expiration or termination of any applicable waiting
period, (B) significantly increase the risk of any
Governmental Entity entering an order prohibiting the
consummation of the Merger or (C) significantly increase the
risk of not being able to remove any such order on appeal or
otherwise;
(v) sell, lease or otherwise dispose of, or agree to
sell, lease or otherwise dispose of, any of its assets, other
than (A) transactions that are in the ordinary course of
business consistent with past practice and not material to
Fred's and its Subsidiaries taken as a whole, (B) as may be
required by any Governmental Entity and (C) dispositions to
non-related parties involving fair consideration;
(vi) incur any indebtedness for borrowed money, guarantee
any such indebtedness or make any loans, advances or capital
contributions to, or other investments in, any other person,
other than (A) in the ordinary course of business consistent
with past practice, and (B) indebtedness, loans, advances,
capital contributions and investments between Fred's and any
of its wholly-owned Subsidiaries or between any of such
wholly-owned Subsidiaries;
(vii) knowingly violate or knowingly fail to perform
any material obligation or duty imposed upon it or any
Subsidiary by any applicable material federal, state or local
law, rule, regulation, guideline or ordinance;
(viii) take any action, other than reasonable and
usual actions in the ordinary course of business consistent
with past practice, with respect to accounting policies or
procedures (other than actions required to be taken by GAAP);
(ix) materially increase the annual level of compensation
of any employee, or increase at all the annual level of
compensation of any person whose compensation in the last
preceding fiscal year exceeded $100,000, or grant any unusual
or extraordinary bonuses, benefits or other forms of direct or
indirect compensation to any employee, officer, director or
consultant, except in amounts in keeping with past practices
by formulas or otherwise;
(x) increase, terminate, amend or otherwise modify any
plan for the benefit of employees, except for the termination
of post-retirement welfare benefits;
(xi) engage in any related party transactions; or
(xii) authorize, recommend or announce an intention
to do any of the foregoing, or enter into any contract,
agreement, commitment or arrangement to do any of the
foregoing.
(b) Actions by Rose's. Except as expressly permitted by
clauses (i) through (xv) of this Section 4.1(b), during the period
from the date of this Agreement through the Effective Time, Rose's,
subject to Section 4.2 hereof, shall, and shall cause each of its
Subsidiaries to, in all material respects, carry on its business in
the ordinary course of its business as currently conducted and, to
the extent consistent therewith, use reasonable best efforts to
preserve intact its current business organizations, keep available
the services of its current officers and employees and preserve its
relationships with customers, suppliers and others having business
dealings with it to the end that its goodwill and ongoing business
shall be unimpaired at the Effective Time. Without limiting the
generality of the foregoing, and except as otherwise expressly
contemplated by this
<PAGE>
Agreement, Rose's, subject to Sections 4.1(c)
and 4.2 hereof, shall not and shall not permit any of its
Subsidiaries to, without the prior written consent of Fred's:
(i) (w) declare, set aside or pay any dividends on, or
make any other actual, constructive or deemed distributions in
respect of, any of its capital stock, or otherwise make any
payments to its stockholders in their capacity as such, (x)
other than in the case of any Subsidiary, split, combine or
reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock or (y)
purchase, redeem or otherwise acquire any shares of capital
stock of Rose's or any other securities thereof or any rights,
warrants or options to acquire any such shares or other
securities;
(ii) issue, deliver, sell, pledge, dispose of or
otherwise encumber any shares of its capital stock, any other
voting securities or equity equivalent or any securities
convertible into, or any rights, warrants or options to
acquire any such shares, voting securities, equity equivalent
or convertible securities, other than the issuance of shares
of Rose's Common Stock upon the exercise of Rose's Stock
Options or Rose's Warrants outstanding on the date of this
Agreement in accordance with their current terms or the
delivery of Escrow Shares pursuant to the Plan of
Reorganization;
(iii) amend its charter or by-laws;
(iv) acquire or agree to acquire by merging or
consolidating with, or by purchasing a portion of the assets
of or equity in, or by any other manner, any business or any
corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or
agree to acquire any assets other than transactions that are
in the ordinary course of business consistent with past
practice and that are not material;
(v) sell, lease or otherwise dispose of, or agree to
sell, lease or otherwise dispose of, any of its assets, other
than (A) transactions that are in the ordinary course of
business consistent with past practice and not material to
Rose's and its Subsidiaries taken as a whole or (B) as may be
required by any Governmental Entity;
(vi) incur any indebtedness for borrowed money, guarantee
any such indebtedness or make any loans, advances or capital
contributions to, or other investments in, any other person,
other than (A) indebtedness for borrowed money incurred in the
ordinary course of business, consistent with (1) past practice
(or in accordance with Rose's 1996 Proforma Balance Sheet
dated January 13, 1996 furnished by Rose's to Fred's) or (2)
the provisions of Section 5.17 of this Agreement, and (B)
indebtedness, loans, advances, capital contributions and
investments between Rose's and any of its wholly-owned
Subsidiaries or between any of such wholly-owned Subsidiaries,
or make any payment to any lender to Rose's other than
regularly scheduled payments of principal and interest or
enter into any instrument of waiver or forebearance with any
lender to Rose's;
(vii) alter (through merger, liquidation,
reorganization, restructuring or in any other fashion) the
corporate structure or ownership of Rose's or any Subsidiary
(except for the Reverse Split referred to herein);
(viii) enter into or adopt or amend any existing
severance plan, agreement or arrangement or enter into or
amend any Rose's Plan or employment or consulting agreement,
other than as required by law, this Agreement or as set forth
on Schedule 4.1(b)(viii);
(ix) increase the compensation payable or to become
payable to its officers or employees, except for increases in
the ordinary course of business consistent with past practice
in salaries or wages of employees of Rose's or any of its
Subsidiaries who are not officers of Rose's or any of its
Subsidiaries
<PAGE>
(or increase at all the annual level of
compensation of any person whose compensation in the last
preceding fiscal year exceeded $100,000), or grant any
severance or termination pay to, or enter into any employment
or severance agreement with, any director or officer of Rose's
or any of its Subsidiaries, or establish, adopt, enter into,
or, except as may be required to comply with applicable law,
amend or take action to enhance or accelerate any rights or
benefits under, any labor, collective bargaining, bonus,
profit sharing, thrift, compensation, stock option, restricted
stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund,
policy or arrangement for the benefit of any director, officer
or employee (except for the agreements attached hereto
pursuant to Section 5.14);
(x) increase, terminate, amend or otherwise modify any
plan for the benefit of employees generally, except for the
termination of post-retirement welfare benefits or as
otherwise required by this Agreement or by law;
(xi) knowingly violate or knowingly fail to perform any
material obligation or duty imposed upon it or any Subsidiary
by any applicable material federal, state or local law, rule,
regulation, guideline or ordinance;
(xii) take any action, other than reasonable and
usual actions in the ordinary course of business consistent
with past practice, with respect to accounting policies or
procedures (other than actions required to be taken by GAAP);
(xiii) make any tax election or settle or compromise
any material federal state, local or foreign income tax
liability except as required in connection with the Plan of
Reorganization;
(xiv) engage in any related party transactions;
(vv) amend any agreement with its investment banker to
increase such investment banker's compensation
relating to the Merger; or
(xvi) authorize, recommend, propose or announce an
intention to do any of the foregoing, or enter into any
contract agreement, commitment or arrangement to do any of the
foregoing.
(c) Interim Reporting Committee. Upon the execution and
delivery of this Agreement by each of the parties, the parties
jointly shall establish a committee (the "Interim Reporting
Committee") for the purpose of being notified, as and to the extent
provided in Schedule 4.1(c) [Certain Rose's Actions Requiring
Notice], of certain actions by Rose's and its Subsidiaries after
the date hereof and prior to the Effective Time or the earlier
termination of this Agreement in accordance with Article VII. The
members of the Interim Reporting Committee shall be Michael J.
Hayes, Bruce D. Smith (or such other natural Person as may
hereafter be designated to replace Mr. Hayes or Mr. Smith [or their
successors] from time to time by Fred's Board of Directors), R.
Edward Anderson and Jeanette R. Peters (or such other natural
Person as may hereafter be designated to replace Mr. Anderson or
Ms. Peters [or their successors] from time to time by Rose's Board
of Directors).
Section 4.2 No Solicitation. From and after the date hereof,
Rose's will not, and will use its best efforts to cause its
officers, directors, employees, attorneys, investment bankers,
agents or other representatives or those of any of its Subsidiaries
not to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing information) any Takeover Proposal
(as defined herein) from any person, or engage in or continue
discussions or negotiations relating thereto, or recommend, or fail
to recommend against, the same to Rose's Stockholders; provided,
however, that Rose's may engage in discussions or negotiations
with, or furnish information concerning itself and its
Subsidiaries, business, properties or assets to, any third party
which makes a Takeover Proposal if the Board of Directors of Rose's
concludes in good faith on the basis of the advice of its outside
counsel that
<PAGE>
the failure to take such action would violate the
fiduciary obligations of such Board under applicable law. Rose's
will promptly (but in no case later than 24 hours) notify Fred's of
any Takeover Proposal, including the material terms and conditions
thereof. As used in this Agreement, "Takeover Proposal" shall mean
any proposal or offer, or any expression of interest by any third
party relating to Rose's willingness or ability to receive or
discuss a proposal or offer (other than a proposal or offer by
Fred's or any of its Subsidiaries or as permitted under this
Agreement) for a tender or exchange offer, a merger, consolidation
or other business combination involving Rose's or any of its
Subsidiaries or any proposal to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets of,
Rose's or any of its Subsidiaries.
Section 4.3 Third Party Standstill Agreements. During the
period from the date of this Agreement through the Effective Time,
Rose's shall not terminate, amend, modify or waive any provision of
any confidentiality or standstill agreement to which Rose's or any
of its Subsidiaries is a party (other than any involving Fred's),
unless the Board of Directors of Rose's concludes in good faith on
the basis of the advice of its outside counsel, that the failure to
terminate, amend, modify or waive any such confidentiality or
standstill agreement would violate the fiduciary obligations of the
Board under applicable law. Subject to such fiduciary duties,
during such period, Rose's agrees to enforce, to the fullest extent
permitted under applicable law, the provisions of any such
agreements, including, but not limited to, obtaining injunctions to
prevent any breaches of such agreements and to enforce specifically
the terms and provisions thereof in any court of the United States
or any state thereof having jurisdiction.
Section 4.4 Reorganization. During the period from the date
of this Agreement through the Effective Time, unless the other
party shall otherwise agree in writing, none of Fred's, Rose's or
any of their respective Subsidiaries or Affiliates shall knowingly
take or fail to take any action which action or failure would
jeopardize the qualification of the Merger as a reorganization
within the meaning of Section 368(a) of the Code.
ARTICLE V
ADDITIONAL AGREEMENT'S
Section 5.1 Stockholder Meetings. Except to the extent
legally required for the discharge by the board of directors of its
fiduciary duties as advised by counsel, Rose's and Fred's each
shall call a meeting of its stockholders (respectively, the "Rose's
Stockholder Meeting" and the "Fred's Stockholder Meeting" and,
collectively, the "Stockholder Meetings") to be held as promptly as
practicable for the purpose of considering the approval of this
Agreement (in the case of Rose's) and the Fred's Stockholders'
Approvals (in the case of Fred's). Rose's, Fred's and Sub will,
through their respective Boards of Directors, recommend to their
respective stockholders approval of such matters and shall not
withdraw such recommendation; provided, however, that a Board of
Directors shall not be required to make, and shall be entitled to
withdraw, such recommendation if such Board concludes in good faith
on the basis of the advice of Proskauer Rose Goetz & Mendelsohn LLP
("Rose's Counsel"), in the case of Rose's, and Waring Cox PLC
("Fred's Counsel"), in the case of Fred's, that the making of, or
the failure to withdraw, such recommendation would violate the
fiduciary obligations of such Board under applicable law. The
Boards of Directors of Rose's, Fred's and Sub will not rescind
their respective declarations that the Merger is advisable, fair to
and in the best interest of such company and its stockholders
unless, in any such case, any such Board concludes in good faith on
the basis of the advice of Rose's Counsel in the case of Rose's and
Fred's Counsel in the case of Fred's that the failure to rescind
such determination would violate the fiduciary obligations of such
Board under applicable law. Rose's and Fred's shall coordinate and
cooperate with respect to the timing of such meetings and shall use
their reasonable best efforts to hold such meetings on the same day
and coinciding with the Fred's annual meeting of its stockholders.
Section 5.2 Preparation of the Registration Statement and the
Joint Proxy Statement. Rose's and Fred's shall promptly prepare
and file with the SEC the Joint Proxy Statement and Fred's shall
prepare and file with the SEC the Registration Statement, in which
the Joint Proxy Statement will be included as a prospectus. Fred's
<PAGE>
shall use its reasonable best efforts to have the Registration
Statement declared effective under the Securities Act as promptly
as practicable after such filing, and Rose's shall provide its and
Rose's Auditors' full cooperation and assistance to Fred's in
obtaining such declaration. Fred's and Rose's shall cause their
respective investment bankers to deliver copies of their written
opinions to Fred's for inclusion in the Joint Proxy Statement,
which opinions shall be dated as of the day before the printing of
the Joint Proxy Statement, to the effect that the Merger is fair to
the Fred's Stockholders and to the Rose's Stockholders,
respectively. As promptly as practicable after the Registration
Statement shall have become effective, each of Fred's and Rose's
shall mail the Joint Proxy Statement to its respective
stockholders. Fred's shall also take any action (other than
qualifying to do business in any jurisdiction in which it is now
not so qualified) required to be taken under any applicable state
securities laws in connection with the issuance of Fred's Common
Stock in the Merger, and Rose's shall furnish all information
concerning Rose's and the holders of Rose's Common Stock as may be
reasonably requested in connection with any such action. No
amendment or supplement to the Joint Proxy Statement or the
Registration Statement will be made by Fred's or Rose's without the
prior approval of the other party. Fred's and Rose's each will
advise the other, promptly after it receives notice thereof of the
time when the Registration Statement has become effective or any
supplement or amendment has been filed, of the issuance of any stop
order, of the suspension of the qualification of the Fred's Common
Stock issuable in connection with the Merger for offering or sale
in any jurisdiction, or of any request by the SEC for amendment of
the Joint Proxy Statement or the Registration Statement or comments
thereon and responses thereto or requests by the SEC for additional
information.
Section 5.3 Access to Information.
(a) Subject to currently existing contractual and legal
restrictions applicable to Fred's or to Rose's or any of their
Subsidiaries, each of Fred's and Rose's shall, and shall cause each
of its Subsidiaries to, afford to the accountants, counsel,
investment bankers and other representatives of the other party
hereto reasonable access to key members of management of the other
party and to, and permit them to make such inspections as they may
reasonably require of, during normal business hours during the
period from the date of this Agreement through the Effective Time,
all their respective properties, books, contracts, commitments and
records (including, without limitation, the work papers of
independent accountants, if available and subject to the consent of
such independent accountants) and, during such period, Fred's and
Rose's shall, and shall cause each of its Subsidiaries to, furnish
promptly to the other (i) a copy of each report, schedule,
registration statement and other document filed by it during such
period pursuant to the requirements of federal or state securities
laws and (ii) all other information concerning its business,
properties and personnel as the other may reasonably request. No
investigation pursuant to this Section 5.3 shall affect any
representation or warranty in this Agreement of any party hereto or
any condition to the obligations of the parties hereto.
(b) With respect to the preparation of the respective
Audited Financial Statements of Fred's and of Rose's for inclusion
in their respective Annual Reports for their respective most
recently ended fiscal years, each party shall cause its auditors:
(i) to comply with all reasonable requests from the
other party or its auditors for access to the other party's
auditor's work papers so as to permit such other auditors to
make copies of the work papers and to assess the progress of
the audit of the respective Audited Financial Statements; and
(ii) meet with representatives of the other party and its
auditors from time to time during the course of the audit to
discuss audit plans, scope, principles and procedures.
Additionally, each party's auditors will have reasonable access to
the books and records of the other party to perform such other
procedures as such party may request.
<PAGE>
(c) Each party shall also furnish to the other party
all Period Reports for all months during the period from the date
of this Agreement until the Effective Time, as well as all
Management Correspondence generated during such period.
(d) (i) Except as and to the extent required by law,
each of Fred's and Rose's shall not disclose or use, and it shall
cause its representatives not to disclose or use, any Confidential
Information (as defined herein) with respect to the other
furnished, or to be furnished, by the other or its representatives
to it or its representatives in connection therewith at any time or
in any manner other than in connection with its evaluation of the
Merger. For purposes of this paragraph, "Confidential
Information" means any information about either signatory entity
stamped "confidential" or identified in writing as such to the
other by the affected entity; provided that it does not include
information which the entity which seeks non-confidential treatment
shall demonstrate (i) is generally available to or known by the
public other than as a result of improper disclosure by such entity
or (ii) is obtained by such entity from a source other than the
other entity, provided that such source was not bound by a duty of
confidentiality to the other entity or another party with respect
to such information. If this Agreement is terminated, each of
Fred's and Rose's shall promptly return to the other any
Confidential Information in its possession concerning the other
entity.
(ii) For a period of one year from and after any
termination of this Agreement, neither Fred's or Rose's shall
solicit or hire any employee of the other whose salary at the
termination of employment with the other was in excess of $80,000.
Section 5.4 Compliance with the Securities Act. Not later
than 10 days prior to the Rose's Stockholder's Meeting, Rose's
shall deliver to Fred's a list of names and addresses of those
persons who, in the opinion of Rose's, at the time of Rose's
Stockholder Meeting would be "affiliates" of Rose's within the
meaning of Rule 145 under the Securities Act. Rose's also shall
provide to Fred's such information and documents as Fred's shall
reasonably request for purposes of reviewing such list. There
shall be added to such list the names and addresses of any other
person (within the meaning of Rule 145) which Fred's reasonably
identifies (by written notice to Rose's not later than the time of
the Rose's Stockholder Meeting) as being a person who may be deemed
to be an affiliate of Rose's within the meaning of Rule 145;
provided, however, that no such person identified by Fred's shall
be added to the list of affiliates of Rose's if Fred's shall
receive from Rose's, on or before the Effective Time, an opinion of
counsel reasonably satisfactory to Fred's to the effect that such
person is not an affiliate. Fred's shall not be required to
maintain the effectiveness of the Registration Statement or any
other registration statement under the Securities Act for the
purposes of resale of Fred's Common Stock by such affiliates, and
the certificates representing Fred's Common Stock received in the
Merger by such affiliates shall bear a customary legend regarding
applicable Securities Act restrictions. Such legend shall be
removed from such certificates upon request by the holders thereof
to Fred's transfer agent and the subsequent delivery to such
transfer agent of an opinion of Fred's counsel (or of counsel
satisfactory to Fred's counsel) to the effect that registration is
not required under the Securities Act or that the proposed transfer
is to be made in compliance with the requirements of Rule 145
promulgated under the Securities Act or some other specified
exemption from registration under the Securities Act. Rose's shall
use its best efforts to cause each affiliate to enter into an
agreement with Fred's in the form attached hereto as Schedule 5.4.
Section 5.5 NASDAQ Listing. Fred's shall use its reasonable
best efforts to list on NASDAQ, upon official notice of issuance,
the shares of Fred's Common Stock to be issued in connection with
the Merger.
Section 5.6 Fees and Expenses.
(a) Except as provided in this Section 5.6 and Section
5.10, whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the
transactions contemplated hereby including, without limitation, the
fees and disbursements of counsel, investment bankers and
accountants, as well as printing expenses, shall be paid by the
party incurring such costs and expenses,
<PAGE>
provided that all filing fees (e.g., SEC, HSR Act, state qualifications,
etc.) shall be divided equally between Fred's and Rose's.
(b) (i) If this Agreement is terminated:
(A) by Fred's pursuant to Section 7.1(b) or (c);
(B) by Rose's or Fred's pursuant to Section 7.1(d);
(C) by Rose's or Fred's pursuant to Section 7.1(e);
(D) by Rose's or Fred's pursuant to Section 7.1(g); or
(E) by Rose's or Fred's pursuant to Section 7.1(h);
then, in each case, Rose's shall pay to Fred's a Termination
Fee (as defined below) in cash..
(c) (i) A "Termination Fee" consists of (x) a "reimbursement
amount" equal to Fred's actual expenses in connection with the Merger
(i.e., the actual out-of-pocket expenses Fred's incurs in connection with
negotiating, preparing and presenting the Letter of Intent dated March 1,
1996 between Fred's and Rose's (the "Letter of Intent"), this Agreement
and related documents, conducting Fred's due diligence of Rose's, preparing
for the Closing, and resolving issues relating to same, which expenses shall
be documented by the submission by Fred's to Rose's of the vendors'invoices
therefor) up to a maximum amount of $250,000, plus (y) if, prior to the first
anniversary of such breach, termination or event, either Rose's or Rose's
Stockholders close a Superior Rose's Acquisition Transaction (as defined
herein), a "topping payment", equal to the sum of 25% of the excess of any
consideration in the Superior Rose's Acquisition Transaction over the sum
of the consideration to be paid by Fred's to the Rose's Stockholders in
connection with the proposed Merger Consideration (the "Merger Consideration").
A Termination Fee thus shall be increased in amount if a breach, termination
or event requiring payment of the reimbursement amount portion of a Termination
Fee is later followed, prior to the first anniversary thereof, by a Superior
Rose's Acquisition Transaction. Payment of any Termination Fee shall be made
promptly, but in no event later than, in the case of the reimbursement amount,
the second business day following the termination giving rise to such payment
and the submission by Fred's to Rose's of the aforesaid invoices, or, in the
case of a topping payment, the closing of the Superior Rose's Transaction.
(ii) A "Superior Rose's Acquisition Transaction" means
Rose's entering into, or announcing that it proposes to enter
into, an agreement, including, without limitation, an
agreement in principle, providing for a merger or other
business combination involving Rose's or the acquisition of a
substantial interest in, or a substantial portion of the
assets, business or operations of, Rose's (other than the
transactions contemplated by this Agreement), provided that
the value of the consideration to be received by Rose's
Stockholders in the transaction referred to therein, when
considered in the aggregate, is reasonably determined by
Rose's Board of Directors (in the good faith exercise of its
fiduciary responsibilities) to be greater than the value of
the Merger Consideration; provided further, however, that in
making such determination Rose's (if Fred's so elects) shall
credit to the value of the Merger Consideration the
Termination Fee that Rose's would be required to pay Fred's
pursuant to this Section 5.6 (and there will be no minimum bid
increment required of Fred's by Rose's in excess of such
credit in comparing the terms of the Merger with any other
proposed transaction).
(iii) Notwithstanding the foregoing, no topping
payment shall be payable in the event that (x) the Merger is
not consummated by August 31, 1996 because Fred's has failed
to perform as required by Section 5.27 of this Agreement and
(y) between the date hereof and such date Rose's shall not
have
<PAGE>
received or entertained a bona fide offer to engage in
negotiations by a third party that could result in a Superior
Rose's Acquisition Transaction. If Rose's determines that it
is not required to make any topping payment based on this
provision, it shall represent to Fred's in writing that the
events recited in (y) have not occurred.
(d) Rose's acknowledges that the agreements contained in
Section 5.6(b) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements,
Fred's and Sub would not enter into this Agreement. Accordingly,
if Rose's fails promptly to pay the amount due pursuant to Section
5.6(b), and, to obtain such payment, Fred's or Sub commences a suit
which results in a judgment for the fee set forth in Section
5.6(b), Rose's shall pay to Fred's or Sub its costs and expenses
(including attorneys' fees) in connection with such suit together
with interest on the amount of the fee at the prime rate of Union
Planters National Bank, N.A., Memphis in effect on the date such
payment was required to be made.
(e) The payments herein contained in this Section 5.6
are the exclusive remedies of the parties hereto in the event of a
breach hereof except for a breach of Section 5.3(d).
Section 5.7 Rose's Stock Options; Rose's Warrants.
(a) In respect of each Rose's Stock Option as
converted into a Fred's Stock Option pursuant to Section 1.5(d) and
assumed by Fred's, and the shares of Fred's Stock underlying such
option, Fred's shall file as soon as practicable after the
Effective Time with the SEC, and keep current the effectiveness of,
a registration statement on Form S-8 or other appropriate form for
as long as such options remain outstanding (and maintain the
current status of the prospectus with respect thereto).
(b) Rose's agrees that it will not grant any stock
options, restricted stock, stock appreciation rights, limited stock
appreciation rights, warrants, or similar instruments or rights,
and will not permit cash payments to holders of Rose's Stock
Options or Rose's Warrants in lieu of the substitution therefor of
Fred's Stock Options and Fred's Warrants, respectively, as
described in Section 1.5(d) (provided that a cashless exercise
currently permitted with no other authorization under the terms of
a Rose's Stock Option shall not be considered such a prohibited
cash payment).
(c) Rose's agrees that it will not amend, or alter or
adjust the number of shares of Rose's Common Stock issuable under,
or the exercise price, the term or the vesting schedule of, any
Rose's Stock Option or of any Rose's Warrant, except to the extent
required by the terms thereof or as contemplated hereby.
Section 5.8 Reasonable Best Efforts.
(a) Upon the terms and subject to the conditions set
forth in this Agreement, each of the parties agrees to use
reasonable best efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, and to assist and cooperate with
the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions
contemplated by this Agreement, including, but not limited to: (i)
the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from all Governmental Entities and the
making of all necessary registrations and filings (including
filings with Governmental Entities) and the taking of all
reasonable steps as may be necessary to obtain an approval or
waiver from, or to avoid an action or proceeding by, any
Governmental Entity (including those in connection with the HSR Act
and State Takeover Approvals), (ii) the obtaining of all necessary
consents, approvals or waivers from third parties, (iii) the
defending of any lawsuits or other legal proceedings, whether
judicial or administrative, challenging this Agreement or the
consummation of the transactions contemplated hereby, including
seeking to have any stay or temporary restraining order entered by
any court or other Governmental Entity vacated or reversed, and
(iv) the execution and delivery of any additional instruments
necessary to consummate the transactions contemplated by this
Agreement. No party to this Agreement shall consent to any
voluntary delay of the consummation of the Merger at the behest of
any
<PAGE>
Governmental Entity without the consent of the other parties to
this Agreement, which consent shall not be unreasonably withheld.
(b) Each party shall use all reasonable best efforts to
not take any action, or enter into any transaction, which would
cause any of its representations or warranties contained in this
Agreement to be untrue or result in a breach of any covenant made
by it in this Agreement.
(c) Notwithstanding anything to the contrary contained
in this Agreement, (i) neither Fred's nor Rose's shall be obligated
to use its reasonable best efforts or to take any action pursuant
to this Section 5.8 if the Board of Directors of Fred's or Rose's,
as the case may be, shall conclude in good faith on the basis of
the advice of Rose's Counsel in the case of Rose's and Fred's
Counsel in the case of Fred's that such action would violate the
fiduciary obligations of such Board under applicable law, and (ii)
in connection with any filing or submission required or action to
be taken by either Fred's or Rose's to effect the Merger and to
consummate the other transactions contemplated hereby, Rose's shall
not, without Fred's prior written consent, commit to any material
divestiture transaction, and neither Fred's nor any of its
Affiliates shall be required to divest or hold separate or
otherwise take or commit to take any action that limits its freedom
of action with respect to, or its ability to retain, Rose's or any
of the material businesses, or assets of Fred's or any of its
Affiliates or that otherwise would have a Material Adverse Effect
on Fred's.
Section 5.9 Public Announcements. The initial press release
relating to the Merger dated March 1, 1996 was a joint press
release, and thereafter Rose's and Fred's each shall consult with
the other prior to issuing any press releases or otherwise making
public announcements with respect to the Merger and the other
transactions contemplated by this Agreement and prior to making any
filings with any third party and/or any Governmental Entity
(including any national securities interdealer quotation service)
with respect thereto, except as may be required by law or by
obligations pursuant to any listing agreement with or rules of
NASDAQ.
Section 5.10 Real Estate Transfer and Gains Tax. The
portion of the consideration allocable to the real property of
Rose's and its Subsidiaries shall be determined by Fred's in its
reasonable discretion. Rose's Stockholders shall be deemed to have
agreed to be bound by the allocation established pursuant to this
Section 5.10 in the preparation of any return with respect to any
state or local tax which is attributable to the transfer of the
beneficial ownership of Rose's or its Subsidiaries' real property.
Section 5.11 State Takeover Laws. If any "fair price",
"business combination" or "control share acquisition" statute or
other similar statute or regulation shall become applicable to the
transactions contemplated hereby, Fred's and Rose's and their
respective Boards of Directors shall use their reasonable best
efforts to grant such approvals and take such actions as are
necessary so that the transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to minimize the effects of any such
statute or regulation on the transactions contemplated hereby.
Section 5.12 Notification of Certain Matters. Fred's shall
use its reasonable best efforts to give prompt notice to Rose's,
and Rose's shall use its reasonable best efforts to give prompt
notice to Fred's, of (i) the occurrence, or non-occurrence, of any
event the occurrence, or nonoccurrence, of which it is aware and
which would be reasonably likely to cause (x) any representation or
warranty contained in this Agreement to be untrue or inaccurate in
any material respect or (y) any covenant, condition or agreement
contained in this Agreement not to be complied with or satisfied in
all material respects, (ii) any failure of Fred's or Rose's, as the
case may be, to comply in a timely manner with or satisfy any
covenant, condition or agreement to be complied with or satisfied
by it hereunder or (iii) any change or event which would be
reasonably likely to have a Material Adverse Effect on Fred's or
Rose's, as the case may be; provided, however, that the delivery of
any notice pursuant to this Section 5.12 shall not limit or
otherwise affect the remedies available hereunder to the party
receiving such notice.
<PAGE>
Section 5.13 Directors and Officers. The directors and
officers of Sub at the Effective Time shall, from and after the
Effective Time, be the directors and officers of the Surviving
Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation
or removal in accordance with the Charter and By-laws.
Section 5.14 Executive and Employee Agreements. On or before
the Closing, Mr. Anderson and Fred's shall enter into written
agreements in the forms attached hereto as Schedule 5.14, providing
for a limitation of compensation payable to him as a result of the
Merger and any termination of his employment, a consulting
arrangement, and the issuance to him of a number of shares of
Fred's Common Stock (the "Anderson Shares") as provided therein.
Section 5.15 Designation of Director. Fred's shall cause a
member of Rose's current Board of Directors (such person to be
designated by the present Rose's Board of Directors, subject to the
reasonable approval of such designee by the Fred's Board of
Directors) to be appointed at the Effective Time to Fred's Board of
Directors, which appointee shall serve with all other current
directors of Fred's until the next annual meeting of Fred's at
which directors are elected or until a successor director has been
duly elected or appointed and qualified or until such person's
earlier death, resignation or removal in accordance with Fred's
Charter and By-laws. Further, Fred's shall use reasonable efforts
to cause such appointee to be nominated as a director of Fred's for
three years from Closing unless the nominating committee of Fred's
Board of Directors determines in good faith that such nomination is
not in the best interest of Fred's Stockholders.
Section 5.16 Indemnification. From and after the Effective
Time, Fred's and the Surviving Corporation shall indemnify the past
and present directors and officers (the "Indemnified Parties") of
Rose's and of its Subsidiaries (including without limitation,
against all losses, expenses (including reasonable attorneys'
fees), claims damages and liabilities, as and when incurred,
arising out of the actions or omissions occurring at or prior to
the Effective Time that are in whole or in part based upon or
arising out of the fact that such person is or was a director or
officer of Rose's and arising out of or pertaining to the
transactions contemplated by this Agreement),to the fullest extent
permitted by Rose's Certificate of Incorporation and Bylaws in
effect at the time of the Merger (in the case of the Surviving
Corporation) and to the fullest extent permitted by Fred's Charter
and Bylaws at the time of the Merger (in the case of Fred's),
provided that such indemnification is permitted by applicable law.
In the event of any such loss, expense, claim, damage, or liability
(whether arising before or after the Effective Time), (i) Fred's or
the Surviving Corporation shall pay the reasonable fees and
expenses of counsel selected by it, which counsel shall be
reasonably satisfactory to the Indemnified Parties, promptly after
statements therefor are received, and (ii) Fred's or the Surviving
Corporation will cooperate in the defense of any such matter;
provided, however, that Fred's or the Surviving Corporation shall
not be liable for any settlement effected without its written
consent (which consent shall not be unreasonably withheld).
(b) If Fred's, the Surviving Corporation, or any of
their respective successors or assigns (i) consolidates with or
merges into any other person and shall not be the continuing or
surviving person of such consolidation or merger or (ii) transfers
all or substantially all of its properties and assets to any
person, then and in each such case, proper provision shall be made
so that such successors or assigns of Fred's or the Surviving
Corporation, as the case may be, shall assume the obligations set
forth in this Section 5.16.
Section 5.17 Lending and Credit Arrangements. Fred's (i)
hereby ratifies and reaffirms its prior consent to the execution
and delivery by Rose's of a financing commitment letter having
substantially the same form and the same substance as that certain
commitment letter draft attached hereto as Schedule 5.17(a) (the
"Financing Commitment") issued by Foothill Capital Corporation and
Jackson National Life Insurance Company (collectively, the
"Prospective Lenders") and incorporating the related list of loan
covenants attached hereto as Schedule 5.17(b) that would be
acceptable to Fred's (provided, however, that Fred's acknowledges
that the attached list of covenants is not necessarily exclusive,
and Rose's acknowledges that Fred's does not agree to accept loan
covenants not listed which are not customary and reasonable), and
to Rose's performance thereunder, and (ii) hereby acknowledges that
the Prospective Lenders have agreed therein to continue to
<PAGE>
finance
the Surviving Corporation after the Merger (subject to there being
no events of default under the relevant loan and security
documentation), without requiring Fred's to guarantee or otherwise
be liable for the Surviving Corporation's loan obligations. Rose's
and Fred's each hereby consent to, and agree to use reasonable best
efforts in accordance with Section 5.8 of this Agreement to enter
into and consummate, a financing transaction as to Rose's and the
Surviving Corporation with the Prospective Lenders, upon terms and
conditions no less favorable in all material respects to Rose's and
the Surviving Corporation, respectively, than those contained in
the Financing Commitment (a "Financing Transaction"), provided,
however, and without in any way limiting the foregoing, that
Rose's, Fred's, Sub and the Surviving Corporation, as applicable,
each shall use such reasonable best efforts to negotiate, execute,
deliver and perform such agreements, financing statements and
instruments reasonably required by the Prospective Lenders to
consummate a Financing Transaction, such that (i) the closing of
the Financing Transaction as to Rose's shall occur no later than
May 31, 1996, and (ii) the closing of the Financing Transaction as
to the Surviving Corporation shall occur simultaneously with the
Closing. Rose's shall notify Fred's in advance of Rose's seeking
or needing to seek waivers from its lenders or the payment of any
material banking fees. Rose's, on or before the Closing, shall
cause (i) repayment of all related party debt and (ii) Rose's
third-party debt to not be deemed in default or accelerated or,
except as contemplated by the Financing Commitment, be made more
costly by virtue of the Merger. Nothing contained herein shall
preclude Rose's from proceeding with the Financing Transaction
without the consent of Fred's.
Section 5.18 Tax Representations. Fred's and Rose's shall
cause their respective chief executive officers and chief financial
officers to execute representations in the respective forms set
forth on Schedule 5.18 hereto with respect to various matters
relating to the tax treatment of the Merger.
Section 5.19 Reverse Stock Split. Rose's shall take all
steps necessary or appropriate to effectuate (including presenting
to Rose's Stockholders for their approval if Rose's counsel shall
advise such is required under applicable law) a one-for-100
combination of the outstanding shares of Rose's Common Stock (the
"Reverse Split") to be effected immediately prior to the Effective
Time, so that each holder of a fractional share of Rose's Common
Stock after the Reverse Split will be paid an amount of cash
(without interest), rounded to the nearest cent, determined by
multiplying (i) the average of the high and low prices for a share
of Fred's Common Stock on NASDAQ on the date of the Effective Time
(or, if Fred's Common Stock does not trade on NASDAQ on such date,
the first date of trading of Fred's Common Stock on NASDAQ after
the Effective Time) by (ii) the number of shares of Fred's Common
Stock into which such holder's fractional share of Rose's Common
Stock would have been converted at the Effective Time pursuant to
Section 1.5(b)(i) if the Reverse Split had not occurred. Upon the
Reverse Split, the Conversion Number shall be adjusted as set forth
in Section 1.10.
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect
the Merger. The respective obligations of each party to effect the
Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement shall have
been duly approved by the requisite vote of Rose's Stockholders in
accordance with applicable law and the Restated Certificate of
Incorporation and By-laws of Rose's, and the Fred's Stockholders'
Approvals shall have been obtained by the requisite vote of the
Fred's Stockholders in accordance with applicable rules of NASDAQ,
applicable law (including the Exchange Act and the regulations
promulgated thereunder) and the Charter and By-laws of Fred's.
(b) Listing on NASDAQ. The Fred's Common Stock issuable
in the Merger shall have been authorized for listing on NASDAQ,
subject to official notice of issuance.
<PAGE>
(c) HSR and Other Approvals. The following shall have
transpired:
(i) The waiting period (and any extension thereof)
applicable to the consummation of the Merger under the HSR Act
shall have expired or been terminated.
(ii) All authorizations, consents, orders, declarations
or approvals of, or filings with, or terminations or
expirations of waiting periods imposed by, any Governmental
Entity, which the failure to obtain, make or occur would have
the effect of making the Merger or any of the transactions
contemplated hereby illegal or would have a Material Adverse
Effect on Fred's (assuming the Merger had taken place), shall
have been obtained, shall have been made or shall have
occurred.
(d) Registration Statement. The Registration Statement
shall have become effective in accordance with the provisions of
the Securities Act. No stop order suspending the effectiveness of
the Registration Statement shall have been issued by the SEC and no
proceedings for that purpose shall have been initiated or, to the
Knowledge of Fred's or Rose's, threatened by the SEC. All
necessary state securities or blue sky authorizations (including
State Takeover Approvals) shall have been received. The shares of
Fred's Stock to be issued to the Rose's Stockholders as Merger
Consideration and the Anderson Shares may be immediately resold
publicly by the Rose's Stockholders and by Mr. Anderson upon
issuance and delivery of the shares to them, subject to compliance
with applicable securities laws and regulations.
(e) No Order. No court or other Governmental Entity
having jurisdiction over Rose's or Fred's, or any of their
respective Subsidiaries, shall have enacted, issued, promulgated,
enforced or entered any law, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary
or permanent) which is then in effect and has the effect of making
the Merger or any of the transactions contemplated hereby illegal.
Section 6.2 Conditions to Obligation of Rose's to Effect the
Merger. The obligation of Rose's to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the
following additional conditions:
(a) Performance of Obligations; Representations and
Warranties. Each of Fred's and Sub shall have performed in all
material respects each of its agreements contained in this
Agreement required to be performed on or prior to the Effective
Time, each of the representations and warranties of Fred's and Sub
contained in this Agreement that is qualified by materiality shall
be true and correct on and as of the Effective Time as if made on
and as of such date (other than representations and warranties
which address matters only as of a certain date, which shall be
true and correct as of such certain date) and each of the
representations and warranties that is not so qualified shall be
true and correct in all material respects on and as of the
Effective Time as if made on and as of such date (other than
representations and warranties which address matters only as of a
certain date, which shall be true and correct in all material
respects as of such certain date), in each case except as
contemplated or permitted by this Agreement, and Rose's shall have
received a certificate signed on behalf of each of Fred's and Sub
by its Chief Executive Officer and its Chief Financial Officer to
such effect.
(b) Legal Opinions. Rose's shall have received an
opinion, in form and substance reasonably satisfactory to Rose's,
dated the Closing, of Fred's Counsel as to the matters set forth on
Schedule 6.2(b).
(c) Certain Executive and Employee Agreements. The
agreements required to have been entered into by Fred's or the
Surviving Corporation with Mr. Anderson on or before the Closing
shall have been entered into and remained in full force and effect
without breach thereof.
<PAGE>
(d) Fairness Opinion. Rose's shall have received a
fairness opinion of its investment banker dated the day before the
printing of the Joint Proxy Statement to the effect that the
consideration to be received by the Rose's Stockholders in the
Merger is fair to the Rose's Stockholders from a financial point of
view.
(e) Designation of Director. Fred's shall have caused
the appointment, effective at the Effective Time, of a designated
Rose's director to the Board of Directors of Fred's as required by
Section 5.15.
(f) Material Adverse Change. There shall not have
occurred any Material Adverse Change as to Fred's since February 3,
1996.
(h) Other. Fred's shall have provided Rose's and its
counsel such other information and documents and assurances as they
may reasonably request.
(i) Tax Representations and Opinion. Rose's shall have
received the representations of Fred's in form satisfactory to
Rose's and of the substance set forth in Schedule 5.18 as to the
tax-free nature of the Merger for federal income tax purposes.
Rose's shall have received an opinion of counsel or auditors per
Section 6.3(e) in form and substance reasonably satisfactory to
Rose's, dated the Effective Time, substantially to the effect that,
on the basis of facts, representations and assumptions set forth in
such opinion which are consistent with the state of facts existing
as of the Effective Time, for federal income tax purposes:
(i) the Merger will constitute a "reorganization" within
the meaning of Section 368(a) of the Code, and Rose's, Sub and
Fred's will each be a party to that reorganization within the
meaning of Section 368(b) of the Code;
(ii) no gain or loss will be recognized by Fred's or
Rose's as a result of the Merger;
(iii) no gain or loss will be recognized by the
Rose's Stockholders upon the conversion of their shares of
Rose's Common Stock into shares of Fred's Common Stock
pursuant to the Merger, except with respect to cash, if any,
received in lieu of fractional shares of Rose's Common Stock
or Fred's Common Stock or for Dissenting Shares;
(iv) the aggregate tax basis of the shares of Fred's
Common Stock received in exchange for shares of Rose's Common
Stock pursuant to the Merger (including fractional shares of
Fred's Common Stock for which cash is received) will be the
same as the aggregate tax basis of such shares of Rose's
Common Stock;
(v) the holding period for shares of Fred's Common Stock
received in exchange for shares of Rose's Common Stock
pursuant to the Merger will include the holder's holding
period for such shares of Rose's Common Stock, provided such
shares of Rose's Common Stock were held as capital assets by
the holder at the Effective Time; and
(vi) a stockholder of Rose's who receives cash in lieu of
a fractional share of Rose's Common Stock or Fred's Common
Stock or for Dissenting Shares will recognize gain or loss
equal to the difference, if any, between such stockholder's
basis in the fractional share or the Dissenting Shares (as
described in clause (iv) above) and the amount of cash
received.
In rendering such opinion, the opining counsel or auditors may
receive and rely upon representations from Fred's, Rose's, and
others, and the opinion shall state that Fred's may also rely on
such opinion.
Section 6.3 Conditions to Obligations of Fred's and Sub to
Effect the Merger. The obligations of Fred's and Sub to effect the
Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following additional conditions:
<PAGE>
(a) Performance of Obligations; Representations and
Warranties. Rose's shall have performed in all material respects
each of its agreements contained in this Agreement required to be
performed on or prior to the Effective Time, each of the
representations and warranties of Rose's contained in this
Agreement that is qualified by materiality shall be true and
correct on and as of the Effective Time as if made on and as of
such date (other than representations and warranties which address
matters only as of a certain date, which shall be true and correct
as of such certain date) and each of the representations and
warranties that is not so qualified shall be true and correct in
all material respects on and as of the Effective Time as if made on
and as of such date (other than representations and warranties
which address matters only as of a certain date, which shall be
true and correct in all material respects as of such certain date),
in each case except as contemplated or permitted by this Agreement
and Fred's shall have received a certificate signed on behalf of
Rose's by its Chief Executive Officer and its Chief Financial
Officer to such effect.
(b) Legal Opinion. Fred's shall have received an
opinion of Rose's Counsel, in form and substance reasonably
satisfactory to Fred's and to Fred's lenders, dated the Closing, as
to the matters set forth on Schedule 6.3(b).
(c) Certain Executive and Employee Agreements. The
agreements required to have been entered into by Fred's with Mr.
Anderson on or before the date of the Closing shall have been
entered into and remained in full force and effect without breach
thereof and Mr. Anderson shall have resigned all offices he may
hold with Rose's, unless the failure to satisfy this condition is
due to failure, refusal or breach by Fred's to execute the forms of
agreement set forth on Schedule 5.14.
(d) Fairness Opinion. Fred's shall have received a
fairness opinion of its investment banker dated the day before the
printing of the Joint Proxy Statement to the effect that the Merger
is fair to the Fred's Stockholders.
(e) Tax Representations and Opinion. Fred's shall have
received the representations of Rose's in form satisfactory to
Fred's and of the substance set forth in Schedule 5.18 as to the
tax-free nature of the Merger for federal income tax purposes.
Fred's shall have received the opinion of counsel or auditors
satisfactory to Fred's in form satisfactory to Fred's and of the
substance set forth in Section 6.2(i) as to the tax-free nature of
the Merger for federal income tax purposes.
(f) Investment Banker Fees. The agreement of Rose's
investment banker to limit its compensation relating to the Merger
(including the delivery of a fairness opinion to Rose's) to not
more than $900,000 in the aggregate shall have been remained in
full force and effect without breach thereof by such investment
banker.
(g) Indebtedness. There shall be in effect at the
Closing (and to be effective from and after the Closing as to the
Surviving Corporation) either (i) financing with Rose's present
lenders with terms and covenants reasonably satisfactory to Fred's
or (ii) the Financing Transaction contemplated by the Financing
Commitment. The payments required to be made to lenders and
creditors of Rose's pursuant to (i) the applicable agreements
relating thereto and (ii) those required to be made pursuant to
Section 5.17, shall have been made, Rose's shall not be in default
and there shall not have occurred an event of default under any
covenants or agreements with the Prospective Lenders, and no fees
shall have been paid by Rose's to the Prospective Lenders except as
contemplated in the Financing Commitment. In addition, Rose's
shall not pay any fees or penalties of any sort to Rose's existing
lenders in connection with the termination of Rose's existing
financing arrangements, except for fees presently outlined in the
existing financing arrangements.
(h) Material Adverse Change. There shall not have
occurred any Material Adverse Change as to Rose's since January 27,
1996.
<PAGE>
(i) Other. Rose's shall have provided Fred's and its
counsel such other information and documents and assurances as they
may reasonably request. All steps necessary to effectuate the
Reverse Split shall have been taken, including any affirmative vote
of the Rose's Stockholders which Rose's counsel may advise is
required under applicable law.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at
any time prior to the Effective Time, whether before or after any
approval of the matters presented in connection with the Merger by
the Rose's Stockholders or Fred's Stockholders:
(a) by mutual written consent of Fred's and Rose's;
(b) by either Fred's or Rose's if the other party shall
have failed to comply in any material respect with any of its
covenants or agreements contained in this Agreement required to be
complied with prior to the date of such termination, which failure
to comply has not been cured within five business days following
receipt by such other party of written notice of such failure to
comply; provided, however, that if any such breach is curable by
the breaching party through the exercise of the breaching party's
best efforts and for so long as the breaching party shall be so
using its best efforts to cure such breach, the non-breaching party
may not terminate this Agreement pursuant to this paragraph;
(c) by either Fred's or Rose's if there has been (i) a
breach by the other party (in the case of Fred's including any
material breach by Sub) of any representation or warranty that is
not qualified as to materiality which has the effect of making such
representation or warranty not true and correct in all material
respects or (ii) a breach by the other party (in the case of
Fred's, including any material breach by Sub) of any representation
or warranty that is qualified as to materiality, in each case which
breach has not been cured within five business days following
receipt by the breaching party of written notice of the breach;
provided, however, that if any such breach is curable by the
breaching party through the exercise of the breaching party's best
efforts and for so long as the breaching party shall be so using
its best efforts to cure such breach, the non-breaching party may
not terminate this Agreement pursuant to this paragraph;
(d) by Fred's or Rose's if the Merger has not been
effected on or prior to the close of business on August 31, 1996
(the "Termination Date"); provided, however, that the right to
terminate this Agreement pursuant to this Section 7.1(d) shall not
be available to any party whose failure to fulfill any of its
obligations contained in this Agreement has been the cause of, or
resulted in, the failure of the Merger to have occurred on or prior
to the aforesaid date;
(e) by Fred's or Rose's if the Rose's Stockholders do
not approve this Agreement at Rose's Stockholder Meeting or any
adjournment or postponement thereof;
(f) by Fred's or Rose's if the Fred's Stockholders'
Approvals are not obtained at the Fred's Stockholder Meeting or any
adjournment or postponement thereof;
(g) by Fred's or Rose's if the Board of Directors of
Rose's reasonably determines that a Takeover Proposal, if
consummated, would constitute a Superior Rose's Acquisition
Transaction; provided, however, that Rose's may not terminate this
Agreement pursuant to this Section 7.1(g) unless and until three
business days have elapsed following delivery to Fred's of a
written notice of such determination by the Board of Directors of
Rose's (which written notice shall inform Fred's of all material
terms and conditions of the Takeover Proposal, including the
identity of such third party);
<PAGE>
(h) by Fred's if (i) the Board of Directors of Rose's
shall not have recommended, or shall have resolved not to
recommend, or shall have modified or withdrawn its recommendation
of the Merger or declaration that the Merger is advisable and fair
to and in the best interest of Rose's and its stockholders, or
shall have resolved to do so, (ii) the Board of Directors of Rose's
shall have recommended to the Rose's Stockholders any Takeover
Proposal or shall have resolved to do so, or (iii) a tender offer
or exchange offer for 20% or more of the outstanding shares of
capital stock of Rose's is commenced, and, after ten (10) business
days, the Board of Directors of Rose's fails to recommend against
acceptance of such tender offer or exchange offer by its
stockholders (including by taking no position with respect to the
acceptance of such tender offer or exchange offer by its
stockholders);
(i) by Rose's if (i) the Board of Directors of Fred's
shall not have recommended, or shall have resolved not to recommend
or shall have modified or withdrawn its recommendation of the
Fred's Stockholders' Approvals or declaration that the Merger is
advisable and fair to and in the best interests of Fred's and its
stockholders, or shall have resolved to do so, (ii) Fred's shall
have entered into, or announced that it proposes to enter into, an
agreement, including, without limitation, an agreement in
principle, providing for a merger or other business combination
involving Fred's or the acquisition of a substantial interest in,
or a substantial portion of the assets, business or operations of,
Fred's (other than the transactions contemplated by this
Agreement), or (iii) any Person shall have commenced a tender or
exchange offer for 20% or more of the then outstanding shares of
Fred's Common Stock or publicly proposed any bona fide merger,
consolidation or acquisition of all or substantially all the assets
of Fred's, or other similar business combination, and after ten
(10) business days, the Board of Directors of Fred's fails to
recommend against acceptance of such offer by its stockholders
(including taking no position with respect to the acceptance of
such offer by its stockholders); or
(j) by Rose's prior to the mailing of the Joint Proxy
Statement if the Fred's Average Price is less than $5.00.
The right of any party hereto to terminate this Agreement pursuant
to this Section 7.1 shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
party hereto, any person controlling any such party or any of their
respective officers or directors, whether prior to or after this
Agreement.
Section 7.2 Effect of Termination. In the event of
termination of this Agreement by either Fred's or Rose's, as
provided in Section 7.1, this Agreement shall forthwith terminate
and there shall be no liability hereunder on the part of Rose's,
Fred's, Sub or their respective officers or directors (except for
the last sentence of Section 5.3 and the entirety of Section 5.6,
which shall survive the termination); provided, however, that
nothing contained in this Section 7.2 shall relieve any party
hereto from any liability for any willful breach of a
representation or warranty contained in this Agreement or the
breach of any covenant contained in this Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement
shall terminate at the Effective Time or upon the termination of
this Agreement pursuant to Section 7.1, as the case may be, except
that the agreements set forth in Article I and Sections 4.4 and
5.12 and this Article VIII shall survive the Effective Time, and
those set forth in Sections 5.6 and 7.2 and this Article VIII and
the Letter of Intent shall survive termination.
<PAGE>
Section 8.2 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given when
delivered personally, one day after being delivered to an overnight
courier or when telecopied (with a confirmatory copy sent by
overnight courier) to the parties at the following addresses (or at
such other address for a party as shall be specified by like
notice):
if to Rose's to:
R. Edward Anderson
Rose's Stores, Inc.
P.H. Rose Building
218 South Garnett Street
Henderson, North Carolina 27536
Facsimile: 919/430-2600
with a copy to:
Henry O. Smith III, Esq.
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036
Facsimile: 212/969-2900
if to Fred's to:
Michael J. Hayes
Fred's, Inc.
4300 New Getwell Road
Memphis, Tennessee 38118
Facsimile: 901/362-3733 ext. 3777
with a copy to:
Sam D. Chafetz, Esq.
Waring Cox, PLC
50 N. Front Street, Suite 1300
Memphis, Tennessee 38103
Facsimile: 901/543-8036
Section 8.3 Interpretation. When a reference is made in this
Agreement to a Section, such reference shall be to a Section of
this Agreement unless otherwise indicated. The table of contents,
headings and list of defined terms contained in this Agreement are
for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement,
they shall be deemed to be followed by the words "without
limitation."
Section 8.4 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other
parties.
Section 8.5 Entire Agreement; No Third-Party Beneficiaries.
This Agreement constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof. This
Agreement is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
<PAGE>
Section 8.6 Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of
Tennessee, regardless of the laws that might otherwise govern under
applicable principles of conflicts of law thereof. EACH OF THE
PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE ACTIONS OF FRED'S, ROSE'S, OR SUB IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.
Section 8.7 Assignment. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties.
Section 8.8 Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced
by any rule of law, or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic and legal substance of the
transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being
enforced, the parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that
the transactions contemplated by this Agreement may be consummated
as originally contemplated to the fullest extent possible.
Section 8.9 Enforcement of this Agreement. The parties
hereto agree that irreparable damage would occur in the event that
any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and
to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, such
remedy being in addition to any other remedy to which any party is
entitled at law or in equity. Each party hereto hereby irrevocably
and unconditionally consents to submit to the exclusive
jurisdiction of the United States District Court located in the
Western District of the State of Tennessee (unless such courts
assert no jurisdiction, in which case Rose's consents to the
exclusive jurisdiction of the courts of the State of Tennessee) for
any actions, suits or proceedings arising out of or relating to
this Agreement and the transactions contemplated hereby (and each
party hereto agrees not to commence any action, suit or proceeding
relating thereto except in such courts), and further agrees that
service of any process, summons, notice or document by U.S.
registered mail to the addresses set forth herein shall be
effective service of process for any such action, suit or
proceeding brought against the each party in such court. Each
party hereto hereby irrevocably and unconditionally waives any
objection to the laying of venue of any action, suit or proceeding
arising out of this Agreement or the transactions contemplated
hereby, in the United States District Courts located in the Western
District of the State of Tennessee (unless such courts assert no
jurisdiction, in which case each party consents to the exclusive
jurisdiction of the courts of the State of Tennessee). Each party
hereby further irrevocably and unconditionally waives and agrees
not to plead or to claim in any such court that any such action,
suit or proceeding brought in any such court has been brought in an
inconvenient forum.
Section 8.10 Amendment. This Agreement may be amended by the
parties hereto, by or pursuant to action taken by their respective
Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the Fred's
Stockholders and Rose's Stockholders, but, after any such approval,
no amendment shall be made which by law requires further approval
by such stockholders without such further approval. This Agreement
may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
Section 8.11 Waiver. At any time prior to the Effective
Time, the parties hereto may (i) extend the time for the
performance of any of the obligations or other acts of the other
parties hereto, (ii) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein which may legally
be waived. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
IN WITNESS WHEREOF, Fred's, Sub and Rose's have caused this
Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first above written.
FRED'S, INC. and
FR ACQUISITION CORP.
By:/s/ Michael J. Hayes
Michael J. Hayes, President and
Chief Executive Officer
ROSE'S STORES, INC.
By:/s/ R. Edward Anderson
R. Edward Anderson, Chairman,
President and Chief Executive
Officer
LOAN AND SECURITY AGREEMENT
among
ROSE'S STORES, INC.,
as Borrower
THE FINANCIAL INSTITUTIONS NAMED HEREIN,
as the Lenders,
PPM FINANCE, INC.,
as Co-Agent
and
FOOTHILL CAPITAL CORPORATION,
as Agent
Dated as of May 21, 1996
PAGE
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . 15
1.3 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.4 Construction . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.5 Schedules and Exhibits . . . . . . . . . . . . . . . . . . . . 15
2. LOAN AND TERMS OF PAYMENT. . . . . . . . . . . . . . . . . . . . . . . 16
2.1 Revolving Advances . . . . . . . . . . . . . . . . . . . . . . 16
2.2 Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . 23
2.3 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.4 [intentionally omitted]. . . . . . . . . . . . . . . . . . . . 27
2.5 Overadvances . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.6 Interest: Rates, Payments, and Calculations . . . . . . . . . 27
2.7 Collection of Accounts . . . . . . . . . . . . . . . . . . . . 28
2.8 Crediting Payments; Application of Collections.. . . . . . . . 29
2.9 Borrower's Designated Account. . . . . . . . . . . . . . . . . 29
2.10 Maintenance of Loan Account; Statements of Obligations . . . . 30
2.11 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3. CONDITIONS; TERM OF AGREEMENT. . . . . . . . . . . . . . . . . . . . . 31
3.1 Conditions Precedent to the Initial Advance and Letter of
Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2 Conditions Precedent to all Advances and all Letters of
Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.3 Condition Subsequent . . . . . . . . . . . . . . . . . . . . . 33
3.4 Term; Automatic Renewal. . . . . . . . . . . . . . . . . . . . 33
3.5 Effect of Termination. . . . . . . . . . . . . . . . . . . . . 34
3.6 Early Termination by Borrower. . . . . . . . . . . . . . . . . 34
3.7 Termination Upon Event of Default. . . . . . . . . . . . . . . 34
3.8 Voluntary Reduction of Maximum Amount. . . . . . . . . . . . . 34
4. CREATION OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . 35
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . 35
4.2 Negotiable Collateral. . . . . . . . . . . . . . . . . . . . . 35
4.3 Collection of Accounts, General Intangibles, and Negotiable
Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.4 Delivery of Additional Documentation Required. . . . . . . . . 35
4.5 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . 36
4.6 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . . 36
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 36
<PAGE>
5.1 No Prior Encumbrances. . . . . . . . . . . . . . . . . . . . . 36
5.2 Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . 37
5.3 Eligible Inventory . . . . . . . . . . . . . . . . . . . . . . 37
5.4 Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.5 Location of Inventory and Equipment. . . . . . . . . . . . . . 37
5.6 Inventory Records. . . . . . . . . . . . . . . . . . . . . . . 37
5.7 Location of Chief Executive Office; FEIN . . . . . . . . . . . 37
5.8 Due Organization and Qualification; Subsidiaries . . . . . . . 37
5.9 Due Authorization; No Conflict . . . . . . . . . . . . . . . . 37
5.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.11 No Material Adverse Change . . . . . . . . . . . . . . . . . . 38
5.12 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.13 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . . 39
5.14 Environmental Condition. . . . . . . . . . . . . . . . . . . . 39
5.15 Reliance by the Lender Group; Cumulative . . . . . . . . . . . 40
6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 40
6.1 Accounting System. . . . . . . . . . . . . . . . . . . . . . . 40
6.2 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . 40
6.3 Financial Statements, Reports, Certificates. . . . . . . . . . 41
6.4 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.5 Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . 42
6.6 Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.7 Title to Equipment . . . . . . . . . . . . . . . . . . . . . . 42
6.8 Maintenance of Equipment . . . . . . . . . . . . . . . . . . . 42
6.9 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.10 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.11 Financial Covenants. . . . . . . . . . . . . . . . . . . . . . 43
6.12 No Setoffs or Counterclaims. . . . . . . . . . . . . . . . . . 44
6.13 Location of Inventory and Equipment. . . . . . . . . . . . . . 44
6.14 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . 44
6.15 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . . 44
6.16 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.17 Collateral Access Agreements . . . . . . . . . . . . . . . . . 45
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.2 Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.3 Restrictions on Fundamental Changes. . . . . . . . . . . . . . 46
7.4 Extraordinary Transactions and Disposal of Assets. . . . . . . 47
7.5 Change Name. . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.6 Guarantee. . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.7 Restructure. . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.8 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.9 Change of Control. . . . . . . . . . . . . . . . . . . . . . . 47
<PAGE>
7.10 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . 48
7.11 Consignments . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.12 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 48
7.13 Accounting Methods . . . . . . . . . . . . . . . . . . . . . . 48
7.14 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.15 Transactions with Affiliates . . . . . . . . . . . . . . . . . 48
7.16 Suspension . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.17 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . 48
7.18 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . 49
7.19 Change in Location of Chief Executive Office; Inventory and
Equipment with Bailees . . . . . . . . . . . . . . . . . . . . 49
7.20 No Prohibited Transactions Under ERISA . . . . . . . . . . . . 49
7.21 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . 50
9. THE LENDER GROUP'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . 52
9.1 Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . 52
9.2 Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . 54
10. TAXES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . 54
11. WAIVERS; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . 55
11.1 Demand; Protest; etc. . . . . . . . . . . . . . . . . . . . . . 55
11.2 The Lender Group's Liability for Collateral . . . . . . . . . . 55
11.3 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 55
12. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . 57
14. DESTRUCTION OF BORROWER'S DOCUMENTS. . . . . . . . . . . . . . . . . . 58
15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS . . . . . . . . . . . . . . 58
15.1 Assignments and Participations. . . . . . . . . . . . . . . . . 58
15.2 Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . 61
16. AMENDMENTS; WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . 61
16.1 Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . 61
16.2 No Waivers; Cumulative Remedies . . . . . . . . . . . . . . . . 62
17. AGENT; THE LENDER GROUP . . . . . . . . . . . . . . . . . . . . . . . 62
17.1 Appointment and Authorization of Agent. . . . . . . . . . . . . 62
17.2 Delegation of Duties. . . . . . . . . . . . . . . . . . . . . . 63
17.3 Liability of Agent-Related Persons. . . . . . . . . . . . . . . 64
<PAGE>
17.4 Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . 64
17.5 Notice of Default or Event of Default . . . . . . . . . . . . . 64
17.6 Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . 65
17.7 Costs and Expenses; Indemnification . . . . . . . . . . . . . . 66
17.8 Agent and Jackson in Individual Capacity. . . . . . . . . . . . 66
17.9 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . 67
17.10 Withholding Tax . . . . . . . . . . . . . . . . . . . . . . . . 67
17.11 Collateral Matters. . . . . . . . . . . . . . . . . . . . . . . 69
17.12 Restrictions on Actions by Lenders; Sharing of Payments . . . . 70
17.13 Agency for Perfection . . . . . . . . . . . . . . . . . . . . . 70
17.14 Payments by Agent to the Lenders. . . . . . . . . . . . . . . . 70
17.15 Concerning the Collateral and Related Loan Documents. . . . . . 71
17.16 Field Audits and Examination Reports; Confidentiality;
Disclaimers by Lenders; Other Reports and Information . . . . . 71
17.17 Several Obligations; No Liability . . . . . . . . . . . . . . . 72
18. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 73
18.1 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . 73
18.2 Section Headings. . . . . . . . . . . . . . . . . . . . . . . . 73
18.3 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . 73
18.4 Severability of Provisions. . . . . . . . . . . . . . . . . . . 73
18.5 [Intentionally Omitted] . . . . . . . . . . . . . . . . . . . . 73
18.6 Counterparts; Telefacsimile Execution . . . . . . . . . . . . . 73
18.7 Revival and Reinstatement of Obligations. . . . . . . . . . . . 73
18.8 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . 74
18.9 Fred's Not Liable . . . . . . . . . . . . . . . . . . . . . . . 74
PAGE
<PAGE>
SCHEDULES AND EXHIBITS
Schedule C-1 Commitments
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule R-1 Real Property
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 5.14 Environmental Condition
Exhibit 6.3 Form of Chief Financial Officer's Certificate
Exhibit 15.1 Form of Assignment and Acceptance
PAGE
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is entered
into as of May 21, 1996, among ROSE'S STORES, INC., a Delaware corporation
("Borrower"), with its chief executive office located at 218 South Garnett
Street, Henderson, North Carolina 27536, on the one hand, and the financial
institutions listed on the signature pages hereof (such financial institutions,
together with their respective successors and assigns, are referred to herein-
after each individually as a "Lender" and collectively as the "Lenders"),
PPM FINANCE, INC., a Delaware corporation, as co-agent for the Lenders ("Co-
Agent"), and FOOTHILL CAPITAL CORPORATION, a California corporation, as agent
and collateral agent for the Lenders ("Agent"), on the other hand.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter arising accounts,
contract rights, and all other forms of obligations owing to a Person arising
out of the sale or lease of goods or the rendition of services by such Person,
irrespective of whether earned by performance, and any and all credit insurance,
guaranties, or security therefor.
"Advances" has the meaning set forth in Section 2.1(a).
"Affiliate" means, as applied to any Person, any other Person who
directly or indirectly controls, is controlled by, is under common control with
or is a director or officer of such Person. For purposes of this definition,
"control" means the possession, directly or indirectly, of the power to vote ten
percent (10%) or more of the securities having ordinary voting power for the
election of directors or the direct or indirect power to direct the management
and policies of a Person.
"Agent" means Foothill, solely in its capacity as agent and collateral
agent for the Lenders, and shall include any successor agent.
"Agent's Account" has the meaning set forth in Section 2.7.
"Agent Advance" has the meaning set forth in Section 2.1(g).
"Agent Loan" has the meaning set forth in Section 2.1(f).
<PAGE>
"Agent-Related Persons" means Agent and Co-Agent, together with
their respective Affiliates, and the officers, directors, employees, counsel,
agents, and attorneys-in-fact of such Persons and Affiliates.
"Agreement" has the meaning set forth in the preamble hereto.
"Applicable Advance Rate" means fifty percent (50%) during the fiscal
month of January, fifty five percent (55%) during the fiscal months of February,
March, April and December, sixty percent (60%) during the fiscal months of May,
June and July, and sixty five percent (65%) during the fiscal months of August,
September, October and November.
"Assignee" has the meaning set forth in Section 15.1.
"Assignment and Acceptance" has the meaning set forth in Section
15.1(a) and shall be in the form of Exhibit A-1.
"Authorized Officer" means any officer or other employee of Borrower.
"Availability" means, as of the date of determination, the result (so
long as such result is a positive number) of (a) the lesser of the Borrowing
Base or the Maximum Amount, minus (b) the outstanding Obligations that arise
under Sections 2.1 and 2.2.
"Average Unused Portion of Maximum Amount" means, as of any date
of determination, (a) the Maximum Amount, less (b) the sum of (i) the average
Daily Balance of Advances that were outstanding during the immediately preceding
month, plus (ii) the average Daily Balance of the undrawn Letters of Credit that
were outstanding during the immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. Section 101 et seq.), as amended or supplemented from time to time, and
any successor statute.
"Benefit Plan" means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any
ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA)
within the past six years, other than a Multiemployer Plan.
"Borrower" has the meaning set forth in the preamble to this
Agreement.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records indicating, summarizing, or evidencing Borrower's
properties or assets (including the Collateral) or liabilities; all information
relating to Borrower's business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs, or other computer
prepared information.
<PAGE>
"Borrower's Designated Account" means account number 503-20422 of
Borrower maintained with Borrower's Designated Account Bank, or such other
deposit account (located within the United States) of Borrower designated, in
writing and from time to time, by Borrower to Agent prior to the date of the
establishment of such other deposit account.
"Borrower's Designated Account Bank" means, as of the Closing Date,
The First National Bank of Boston, whose office is located at 100 Federal
Street, Boston, Massachusetts 02110, and whose ABA number is 011-00039, or such
other financial institution (located within the United States) that Borrower
shall designate to Agent, in writing from time to time.
"Borrowing" means a borrowing hereunder consisting of Advances made
on the same day by the Lenders to Borrower, or by Agent in the case of an Agent
Loan or an Agent Advance.
"Borrowing Base" has the meaning set forth in Section 2.1(a).
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which national banks are authorized or required to close.
"Change of Control" shall be deemed to have occurred at such time as:
a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934), other than Fred's becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934),
directly or indirectly, of more than thirty percent (30%) of the total voting
power of all classes of stock then outstanding of Borrower normally entitled to
vote in the election of directors.
"Closing Date" means the date of the first to occur of the making of
the initial Advance or the issuance of the initial Letter of Credit.
"Co-Agent" means PPM Finance, Inc., a Delaware corporation, solely
in its capacity as co-agent for the Lenders, and shall include any successor
co-agent.
"Code" means the California Uniform Commercial Code, as amended
and supplemented from time to time, and any successor statute.
"Collateral" means any of Borrower's rights, title and interest in and
to each of the following:
(a) Accounts,
(b) Borrower's Books,
(c) Equipment,
(d) General Intangibles,
(e) Inventory,
<PAGE>
(f) Negotiable Collateral,
(g) the Real Property,
(h) any money, or other assets of Borrower that now or
hereafter come into the possession, custody, or control of
the Lender Group, and
(i) the proceeds and products, whether tangible or intangible,
of any of the foregoing, including proceeds of insurance
covering any or all of the Collateral, and any and all
Accounts, Borrower's Books, Equipment, General Intang-
ibles, Inventory, Negotiable Collateral, real property,
money, deposit accounts, or other tangible or intangible
property resulting from the sale, exchange, collection, or
other disposition of any of the foregoing, or any portion
thereof or interest therein, and the proceeds thereof.
"Collateral Access Agreement" means a landlord waiver, mortgagee
waiver, bailee letter, or a similar acknowledgement agreement from any
warehouseman, processor, lessor, or other Person (including Fred's) in posses-
sion of, or having a Lien on or other interest in, any property or assets of
Borrower, in each case in form and substance reasonably satisfactory to Agent.
"Collections" means all cash, checks, notes, instruments, and other
items of payment (including insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds).
"Commitment" means, at any time with respect to a Lender, the
principal amount set forth beside such Lender's name under the heading
"Commitment" on Schedule C-1 or on the signature page of the Assignment and
Acceptance pursuant to which such Lender became a Lender hereunder in
accordance with the provisions of Section 15.1, as such Commitment may be
adjusted from time to time in accordance with the provisions of Section 15.1,
and "Commitments" means, collectively, the aggregate amount of the commitments
of all of the Lenders.
"Consolidated Current Assets" means, as of any date of determination,
the aggregate amount of all current assets of Borrower and its Subsidiaries that
would, in accordance with GAAP, be classified on a balance sheet as current
assets.
"Consolidated Current Liabilities" means, as of any date of
determination, the aggregate amount of all current liabilities of Borrower and
its Subsidiaries that would, in accordance with GAAP, be classified on a balance
sheet as current liabilities. For purposes of this definition, all Advances
outstanding under this Agreement shall be deemed to be current liabilities
without regard to whether they would be deemed to be so under GAAP.
"Daily Balance" means the amount of an Obligation owed at the end
of a given day.
<PAGE>
"Default" means an event, condition, or default that, with the giving of
notice, the passage of time, or both, would be an Event of Default.
"Defaulting Lender" has the meaning set forth in Section 2.1(e)(ii).
"Defaulting Lenders Rate" means the Reference Rate for the first three
(3) days from and after the date the relevant payment is due and thereafter at
the interest rate then applicable to Advances.
"Disbursement Letter" means an instructional letter executed and
delivered by Borrower to Agent regarding the extensions of credit to be made on
the Closing Date, the form and substance of which shall reasonably be satisfac-
tory to Agent.
"Dollars or $" means United States dollars.
"Early Termination Premium" has the meaning set forth in Section 3.6.
"Eligible Inventory" means Borrower's Inventory consisting of finished
goods held for sale in the ordinary course of Borrower's business that are lo-
cated at Borrower's premises identified on Schedule E-1 or are in transit from
one location on Schedule E-1 to another location on such schedule, that strictly
comply with each and all of the representations and warranties respecting Inven-
tory made by Borrower in the Loan Documents, and that are and at all times con-
tinue to be reasonably acceptable to Agent in all respects; provided, however,
that standards of eligibility may be fixed and revised from time to time by
Agent in Agent's reasonable credit judgment. In determining the amount to be so
included, Inventory shall be valued at first-in, first-out cost according to
(i) the Borrower's general ledger for all Inventory located in the Borrower's
retail stores and (ii) the perpetual inventory report for all Inventory located
in warehouses, on a basis consistent with Borrower's current and historical
accounting practices. An item of Inventory shall not be included in Eligible
Inventory if:
(i) it is not owned solely by Borrower or Borrower does not have
good, valid, and marketable title thereto;
(ii) it is not located either (x) on property owned or leased by Borrow-
er, or (y) in a contract warehouse subject to a Collateral Access Agreement
executed by the warehouseman and segregated or otherwise separately identifiable
from goods of others, if any, stored at the contract warehouse;
(iii) it is not subject to a valid and perfected first priority security
interest in favor of Agent for the benefit of the Lender Group; and
(iv) it consists of goods in transit other than from one location on
Schedule E-1 to another location on such schedule.
<PAGE>
"Eligible Transferee" means (a) a commercial bank organized under the
laws of the United States, or any state thereof, and having total assets in ex-
cess of $5,000,000,000, or the asset based lending Affiliate of such bank,
(b) a commercial bank organized under the laws of any other country which is a
member of the Organization for Economic Cooperation and Development or a politi-
cal subdivision of any such country, and having total assets in excess of
$5,000,000,000, or the asset based lending Affiliate of such bank; provided that
such bank is acting through a branch or agency located in the United States,
(c) a finance company, insurance or other financial institution or fund that is
engaged in making, purchasing or otherwise investing in commercial loans in the
ordinary course of its business and having total assets in excess of
$500,000,000, (d) any Affiliate (other than individuals) of an existing Lender,
and (e) any other Person approved by Agent and Borrower.
"Equipment" means all of a Person's present and hereafter acquired
machinery, machine tools, motors, equipment, furniture, furnishings, fixtures,
vehicles (including motor vehicles and trailers), tools, parts, goods (other
than consumer goods, farm products, or Inventory), wherever located, including,
(a) any assets acquired by such Person with the proceeds of any Advance, (b) any
interest of such Person in any of the foregoing, and (c) all attachments, acces-
sories, accessions, replacements, substitutions, additions, and improvements to
any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974,
29 U.S.C. Sections 1000 et seq., amendments thereto, successor statutes, and
regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject to ERISA whose
employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees
of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the employees of Borrower
under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with respect to any
Benefit Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its
Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which
such Person was a "substantial employer" (as defined in Section 4001(a)(2) of
ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a
distress termination (as described in Section 4041(c) of ERISA), (d) the insti-
tution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer
Plan, (e) any event or condition (i) that provides a basis under Section
4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of
a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that
may result
<PAGE>
in termination of a Multiemployer Plan pursuant to Section 4041A of
ERISA, (f) the partial or complete withdrawal within the meaning of Sections
4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates
from a Multiemployer Plan, or (g) providing any security to any Plan under Sec-
tion 401(a)(29) of the IRC by Borrower or its Subsidiaries or any of its ERISA
Affiliates.
"Event of Default" has the meaning set forth in Section 8.
"Existing Agent" The First National Bank of Boston, as administrative
agent under that certain Revolving Credit Agreement with Borrower dated as of
April 28, 1995, as amended.
"FEIN" means Federal Employer Identification Number.
"Foothill" means Foothill Capital Corporation, a California corporation.
"Fred's" means Fred's Inc., a Tennessee corporation.
"Fred's Transactions" means each of the following, but in each case
subject to the prior delivery to Agent and Co-Agent of the form of documentation
that will govern such transaction, which documentation shall be acceptable to
Agent and Co-Agent in their reasonable credit judgment: (i) the purchase by
Fred's of new Inventory from foreign suppliers pursuant to letters of credit for
the account of Fred's, which Inventory would then be resold by Fred's to Borrow-
er at Fred's cost, without markups; (ii) Fred's combination of orders with Bor-
rower for new Inventory to be purchased from vendors in the United States, with
Borrower responsible for paying that portion of the Inventory acquired by it in
accordance with the terms and conditions provided by the vendors, provided that
Borrower's portion of such Inventory is shipped by such vendors directly to Bor-
rower; (iii) the sale by Fred's (at Fred's cost, without markup) of Inventory to
Borrower, which Inventory would be located at Borrower's Henderson, North Caro-
lina distribution center, and which would in turn be resold (at Borrower's cost,
without markup) to Fred's for distribution to certain retail outlets of Fred's;
and (iv) the sale by Borrower (at Borrower's cost, without markup) of Inventory
to Fred's, which Inventory would be located at the Memphis, Tennessee distribu-
tion center of Fred's, and which would in turn be resold (at Fred's cost, with-
out markup) to Borrower upon distribution to certain of Borrower's retail
outlets.
"Funding Date" means the date on which a Borrowing occurs.
"GAAP" means generally accepted accounting principles as in effect
from time to time in the United States, consistently applied.
"General Intangibles" means all of a Person's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes, or regulations, choses or things in
action, goodwill, patents, trade names, trademarks, servicemarks, copyrights,
blueprints, drawings, purchase orders,
<PAGE>
customer lists, monies due or recoverable from pension funds, route lists,
rights to payment and other rights under any royalty, franchise, or licensing
agreements, infringement claims, computer programs, information contained on
computer disks or tapes, literature, reports, catalogs, deposit accounts,
insurance premium rebates, tax refunds, and tax refund claims), other than
goods, Accounts, and Negotiable Collateral.
"Governing Documents" means the certificates or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.
"Governmental Authority" means any nation or government, any state,
province, or other political subdivision thereof, any central bank (or similar
monetary or regulatory authority) thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Hazardous Materials" or "Hazardous Substances" means (a) substances
that are defined or listed in, or otherwise classified pursuant to, any applica-
ble laws or regulations as "hazardous substances," "hazardous materials," "ha-
zardous wastes," "toxic substances," or any other formulation intended to de-
fine, list, or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, or reproductive toxici-
ty, (b) oil, petroleum, or petroleum derived substances, natural gas, natural
gas liquids, synthetic gas, drilling fluids, produced waters, and other regulat-
ed wastes associated with the exploration, development, or production of crude
oil, natural gas, or geothermal resources, (c) any flammable substances or ex-
plosives or any radioactive materials, and (d) asbestos in any form or electri-
cal equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of fifty (50) parts per million.
"Indebtedness" means: (a) all obligations of a Person for borrowed
money, (b) all obligations of a Person evidenced by bonds, debentures, notes, or
other similar instruments and all reimbursement or other obligations of a Person
in respect of letters of credit, bankers acceptances, interest rate swaps, or
other financial products, (c) all obligations of a Person under capital leases
(but excluding operating leases), (d) all obligations or liabilities of others
secured by a lien or security interest on any property or asset of a Person,
irrespective of whether such obligation or liability is assumed, and (e) any
obligation of a Person guaranteeing or intended to guarantee (whether guarante-
ed, endorsed, co-made, discounted, or sold with recourse to such Person) any
indebtedness, lease, dividend, letter of credit, or other obligation of any
other Person.
"Indemnified Liabilities" has the meaning set forth in Section 11.3.
"Indemnified Person" has the meaning set forth in Section 11.3.
<PAGE>
"Insolvency Proceeding" means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"Intangible Assets" means, with respect to any Person, that portion of
the book value of all of such Person's assets that would be treated as intangi-
bles under GAAP.
"Inventory" means all present and future inventory in which a Person
has any interest, including goods held for sale or lease or to be furnished
under a contract of service and all of such Person's present and future raw
materials, work in process, finished goods, and packing and shipping materials,
wherever located, and any documents of title representing any of the above.
"Inventory Letter of Credit" means a documentary Letter of Credit
issued to support the purchase by Borrower of Inventory prior to transit to a
location set forth on Schedule E-1, that satisfy the following conditions:
(a) all draws thereunder must require presentation of customary documentation
(including, if applicable, commercial invoices, packing list, certificate of
origin, bill of lading or airwaybill, customs clearance documents, quota state-
ment, inspection certificate, beneficiaries statement, and bill of exchange,
bills of lading, dock warrants, dock receipts, warehouse receipts, or other
documents of title) in form and substance reasonably satisfactory to Agent and
reflecting the passage to Borrower of title to Inventory conforming to Borrow-
er's contract with the seller thereof, (b) the Inventory covered by such Letter
of Credit would, but for its not being located at a location set forth on Sched-
ule E-1, be Eligible Inventory, and (c) such Letter of Credit shall cease to be
an "Inventory Letter of Credit" at such time, if any, as the goods purchased
thereunder become Eligible Inventory.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Jackson" means The Jackson National Life Insurance Company, a
Michigan life insurance company.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section 2.2(a).
"Lender" and "Lenders" have the respective meanings set forth in the
preamble to this Agreement, and shall include any other Person made a party to
this Agreement in accordance with the provisions of Section 15.1.
"Lender Group" means, individually and collectively, each of the
individual Lenders, Agent, and Co-Agent.
<PAGE>
"Lender Group Expenses" means all: reasonable out-of-pocket costs or
expenses (including taxes, and insurance premiums) required to be paid by Bor-
rower under any of the Loan Documents that are paid or incurred by the Lender
Group; fees or charges paid or incurred by the Lender Group in connection with
the Lender Group's transactions with Borrower, including, fees or charges for
photocopying, notarization, telecommunication, public record searches (including
tax lien, litigation, title and UCC searches), filing, recording, publication,
and appraisal (including periodic Collateral appraisals); title insurance premi-
ums paid; costs and expenses incurred by Agent in the disbursement of funds to
Borrower (by wire transfer or otherwise); charges paid or incurred by Agent re-
sulting from the dishonor of checks; reasonable out-of-pocket costs and expenses
paid or incurred by the Lender Group to correct any default or enforce any pro-
vision of the Loan Documents, or in gaining possession of, maintaining, han-
dling, preserving, storing, shipping, selling, preparing for sale, or advertis-
ing to sell the Collateral, or any portion thereof, irrespective of whether a
sale is consummated; reasonable costs and expenses paid or incurred by the
Lender Group in examining Borrower's Books; costs and expenses of third party
claims or any other suit paid or incurred by the Lender Group in enforcing or
defending the Loan Documents or in connection with the transactions contemplated
by the Loan Documents or the Lender Group's relationship with Borrower; and the
reasonable attorneys fees and expenses incurred by the Lender Group in advising,
structuring, drafting, reviewing, administering, amending, terminating, enforc-
ing (including attorneys fees and expenses incurred in connection with a "work-
out," a "restructuring," or an Insolvency Proceeding concerning Borrower), de-
fending, or concerning the Loan Documents, irrespective of whether suit is
brought.
"Letter of Credit" means an L/C or an L/C Guaranty, as the context
requires.
"Lien" means any interest in property securing an obligation owed to,
or a claim by, any Person other than the owner of the property, whether such
interest shall be based on the common law, statute or contract, whether such
interest shall be recorded or perfected and whether such interest shall be con-
tingent upon the occurrence of some future event or events or the existence of
some future circumstance or circumstances, and including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge, hypotheca-
tion, assignment, deposit arrangement, security agreement, adverse claim or
charge, conditional sale or trust receipt, or from a lease, consignment or bail-
ment for security purposes. The term "Lien" also shall include reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances affecting
property. For the purposes of this Agreement, a Person shall be deemed to be
the owner of any property that such Person shall have acquired or shall hold
subject to a conditional sale agreement or other arrangement (including a
leasing arrangement) pursuant to which title to the property shall have
been retained by or vested in some other Person for security purposes.
"Loan Account" has the meaning set forth in Section 2.10.
<PAGE>
"Loan Documents" means this Agreement, the Security Agreement, the
Mortgages, the Disbursement Letter, the Letters of Credit, the Lockbox Agree-
ments, the Collateral Access Agreements, any note or notes executed by Borrower
and payable to the Lender Group, and any other agreement entered into, now or
in the future, in connection with this Agreement.
"Lockbox Account" shall mean a depositary account established
pursuant to one of the Lockbox Agreements.
"Lockbox Agreements" means those certain Lockbox Operating
Procedural Agreements, those certain Depository Account Agreements, and those
certain letter agreements authorizing transfers to Agent's designated blocked
account, in each case in form and substance satisfactory to Agent, each of which
is among Borrower, Agent, and one of the Lockbox Banks.
"Lockbox Banks" means, as of the Closing Date, The First National
Bank of Boston, Centura Bank, and First Union Bank, and such other financial
institutions as may replace one or more of the foregoing, or be added to the
foregoing, in each case upon the direction of Borrower and with the consent of
Agent (which, prior to an Event of Default, shall not be unreasonably withheld).
"Lockboxes" has the meaning set forth in Section 2.7.
"Material Adverse Change" means (a) a material adverse change in the
business, operations, results of operations, assets, liabilities or condition
(financial or otherwise) of Borrower, (b) the material impairment of Borrower's
ability to perform its obligations under the Loan Documents to which it is a
party or of the Lender Group to enforce the Obligations or realize upon the Col-
lateral, (c) a material adverse effect on the value of the whole or any material
part of the Collateral or the amount that the Lender Group would be likely to
receive (after giving consideration to delays in payment and costs of enforce-
ment) in the liquidation of such Collateral, or (d) a material impairment of the
priority of the Lender Group's liens or security interests in the Collateral.
"Maximum Amount" means, as of the date any determination thereof
is to be made, $120,000,000.
"Merger" means the merger of FR Acquisition Corp. into Borrower
pursuant to the Merger Agreement.
"Merger Agreement" means that certain Agreement and Plan of Merger
dated as of May 7, 1996 among Fred's, FR Acquisition Corp. and Borrower.
"Mortgages" means one or more mortgages, deeds of trust, or deeds to
secure debt, executed by Borrower in favor of Agent, for the benefit of the
Lender Group, the
<PAGE>
form and substance of which shall be reasonably satisfactory to Agent,
that encumber the Real Property and the related improvements thereto.
"Multiemployer Plan" means a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any
ERISA Affiliate has contributed, or was obligated to contribute, within the past
six years.
"Negotiable Collateral" means all of a Person's present and future
letters of credit, notes, drafts, instruments, certificated securities (includ-
ing the shares of stock of Subsidiaries of such Person), documents, personal
property leases (wherein a Person is the lessor), chattel paper, and Borrower's
Books relating to any of the foregoing.
"Non Cash Losses" means any losses of Borrower arising out of its
write downs of Inventory or fixed assets.
"Obligations" means all loans, Advances, debts, principal, interest
(including any interest that, but for the provisions of the Bankruptcy Code,
would have accrued), contingent reimbursement obligations owing to the Lender
Group under any outstanding Letters of Credit, premiums (including Early Termi-
nation Premiums), liabilities (including all amounts charged to Borrower's Loan
Account pursuant hereto), obligations, fees or Lender Group Expenses (including
any fees or expenses that, but for the provisions of the Bankruptcy Code, would
have accrued) lease payments, guaranties, covenants, and duties owing by Borrow-
er to the Lender Group of any kind and description (whether pursuant to or evi-
denced by the Loan Documents or pursuant to any other agreement between the
Lender Group and Borrower, and irrespective of whether for the payment of
money), whether direct or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising, and including any debt, liability, or
obligation owing from Borrower to others that the Lender Group may have obtained
by assignment or otherwise, and further including all interest not paid when due
and all Lender Group Expenses that Borrower is required to pay or reimburse by
the Loan Documents, by law, or otherwise.
"Originating Lender" has the meaning set forth in Section 15.1(e).
"Overadvance" has the meaning set forth in Section 2.5.
"Participant" has the meaning set forth in Section 15.1(e).
"Pay-Off Letter" means a letter, in form and substance reasonably
satisfactory to Agent, from Existing Lender respecting the amount necessary to
satisfy in full all of the obligations of Borrower owing to Existing Lender, ex-
cept as provided in Schedule P-1 and obtain a termination or release of all of
the security interests or liens existing in favor of Existing Lender in and to
the properties or assets of Borrower.
"PBGC" means the Pension Benefit Guaranty Corporation as defined
in Title IV of ERISA, or any successor thereto.
<PAGE>
"Permitted Liens" means (a) Liens held by Agent for the benefit of the
Lender Group, (b) Liens for unpaid taxes, assessments, or other governmental
charges that are not yet due and payable, (c) Liens set forth on Schedule P-1
attached hereto, (d) purchase money Liens and Liens of lessors under capital
leases to the extent that the acquisition or lease of the underlying asset was
permitted under Section 7.10, and so long as the Lien only secures the purchase
price of the asset, (e) easements, rights of way, reservations, covenants, con-
ditions, restrictions, zoning variances, and other similar encumbrances that do
not materially interfere with the use or value of the property subject thereto,
(f) obligations and duties as lessee under any lease existing on the date of
this Agreement, and (g) mechanics', materialmen's, warehousemen's, or similar
Liens that arise by operation of law.
"Permitted Protest" means the right of a Person to protest any Lien,
tax, rental payment, or other charge, other than any such Lien or charge that
secures the Obligations, provided that (a) a reserve with respect to such obli-
gation is established on the books of such Person in an amount that is reason-
ably satisfactory to Agent, (b) any such protest is instituted and diligently
prosecuted by such Person in good faith, and (c) Agent is reasonably satisfied
that, while any such protest is pending, there will be no impairment of the en-
forceability, validity, or priority of any of the Liens of Agent for the benefit
of the Lender Group in and to the Collateral.
"Person" means and includes natural persons, corporations, limited
liability companies, limited partnerships, general partnerships, limited lia-
bility partnerships, joint ventures, trusts, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"Plan" means any employee benefit plan, program, or arrangement
within the meaning of Section 3(3) of ERISA, maintained or contributed to by
Borrower or with respect to which it may incur liability.
"Pro Rata Share" means, with respect to a Lender, a fraction
(expressed as a percentage), the numerator of which is the amount of such
Lender's Commitment and the denominator of which is the aggregate amount of the
Commitments.
"Real Property" means the parcel or parcels of real property and the
related improvements thereto identified on Schedule R-1, and any parcels of real
property hereafter acquired by Borrower.
"Reference Rate" means the variable rate of interest, per annum, most
recently announced by Norwest Bank Minnesota, National Association, or any
successor thereto, as its "base rate," "prime rate" or "reference rate," ir-
respective of whether such announced rate is the best rate available from such
financial institution.
"Renewal Date" has the meaning set forth in Section 3.4.
<PAGE>
"Report" has the meaning set forth in Section 17.16(a).
"Reportable Event" means any of the events described in
Section 4043(c) of ERISA or the regulations thereunder other than a Reportable
Event as to which the provision of thirty (30) days notice to the PBGC is waived
under applicable regulations.
"Required Lenders" means, at any time, Lenders whose Pro Rata
Shares aggregate sixty six and two thirds percent (66.67%) or more of the
Commitments.
"Reserve" means a reserve established by Agent for Inventory from past
seasons, Inventory shrinkage, or Inventory that is obsolete or slow moving, a
restrictive or custom item, live plants, food or other perishable items (other
than soft drinks or packaged candies), work-in-process, a component that is not
part of finished goods, Inventory that constitutes spare parts, packaging and
shipping materials, supplies used or consumed in a Borrower's business, Inven-
tory subject to a security interest or lien in favor of any third Person, bill
and hold goods, samples or demonstration items, defective goods, "seconds," or
Inventory acquired on consignment and the proceeds of the sales thereof to the
extent owed to the consignor.
"Retiree Health Plan" means an "employee welfare benefit plan" within
the meaning of Section 3(1) of ERISA that provides benefits to individuals after
termination of their employment, other than as required by Section 601 of ERISA.
"Revolving Facility Usage" means, as of any date of determination, the
aggregate amount of Advances and undrawn or unreimbursed Letters of Credit
outstanding.
"Security Agreement" means the Intellectual Property Security
Agreement, dated as of even date herewith, between Borrower, on the one hand,
and Agent for the benefit of the Lender Group, on the other hand.
"Settlement" has the meaning set forth in Section 2.1(f).
"Solvent" means, with respect to any Person on a particular date, that
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other commit-
ments as they mature in the normal course of business, and (d) such Person does
not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature. In computing the amount of con-
tingent liabilities at any time, it is intended that such liabilities will be
computed at the amount that, in light of all the facts and circumstances exist-
ing at such time, represents the amount that reasonably can be expected to
become an actual or matured liability.
<PAGE>
"Subsidiary" of a Person means a corporation, partnership, limited
liability company, or other entity in which that Person directly or indirectly
owns or controls the shares of stock or other ownership interests having ordi-
nary voting power to elect a majority of the board of directors or appoint other
managers of such corporation, partnership, limited liability company, or other
entity.
"Tangible Net Worth" means, as of the date any determination thereof
is to be made, the difference of (a) Borrower's total stockholder's equity,
minus (b) the sum of: (i) all Intangible Assets of Borrower, (ii) all of Bor-
rower's prepaid expenses, and (iii) all amounts due to Borrower and its Subsid-
iaries from Affiliates.
"Voidable Transfer" has the meaning set forth in Section 15.8.
"Unfunded Benefit Liability" has the meaning set forth in Section 5.13.
"Working Capital" means the result obtained from subtracting
Consolidated Current Liabilities from Consolidated Current Assets.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein,
the term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean the Borrower, and if Borrower
has a Subsidiary in the future, on a consolidated basis unless the context
clearly requires otherwise.
1.3 Code. Any terms used in this Agreement that are defined
in the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4 Construction. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the term "including" is not
limiting, and the term "or" has, except where otherwise indicated, the inclusive
meaning represented by the phrase "and/or." The words "hereof," "herein,"
"hereby," "hereunder," and similar terms in this Agreement refer to this Agree-
ment as a whole and not to any particular provision of this Agreement. An Event
of Default shall "continue" or be "continuing" until such Event of Default has
been waived in writing by the requisite members of the Lender Group. Section,
subsection, clause, schedule, and exhibit references are to this Agreement
unless otherwise specified. Any reference in this Agreement or in the Loan
Documents to this Agreement or any of the Loan Documents shall include all
alterations, amendments, changes, extensions, modifications, renewals, replace-
ments, substitutions, and supplements, thereto and thereof, as applicable.
1.5 Schedules and Exhibits. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
<PAGE>
2. LOAN AND TERMS OF PAYMENT.
2.1 Revolving Advances.
(a) Amount. Subject to the terms and conditions of this
Agreement, each Lender agrees to make advances ("Advances") to Borrower in an
amount at any one time outstanding not to exceed such Lender's Pro Rata Share of
an amount equal to the difference of: (i) the lesser of: (A) the Maximum Amount,
and (B) the Borrowing Base, minus (ii) the sum of (A) the aggregate amount of
all undrawn or unreimbursed Letters of Credit (other than Inventory Letters of
Credit) plus (B) fifty percent (50%) of the aggregate amount of all undrawn or
unreimbursed Inventory Letters of Credit. For purposes of this Agreement,
"Borrowing Base", as of any date of determination, shall mean the difference of:
(y) the product of (1) Applicable Advance Rate times (2)
the amount of Eligible Inventory, subject to the Reserve which
shall initially be eight and one half percent (8.5%) of Borrow-
er's gross Inventory (which Reserve shall be subject to review
and adjustment from time to time in the reasonable discretion of
Agent, based upon the seasonal composition of Borrower's Inven-
tory and such other factors as Agent reasonably determines affect
Borrower's Inventory or its value).
minus
(z) the aggregate amount of reserves, if any, established
by Agent under Sections 2.1(b), 6.16, 10 or for the net amount
owed by Borrower to JBI Holding Company, Inc. from time to time,
if any.
The Lenders shall have no obligation to make Advances hereunder to the extent
they would cause the outstanding Obligations to exceed the Maximum Amount.
Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the
terms and conditions of this Agreement, reborrowed at any time during the term
of this Agreement.
(b) Advance Rate Adjustments and Reserves. Anything to
the contrary in Section 2.1(a) above notwithstanding, Agent may create reserves
against or reduce its advance rates based upon Eligible Inventory upon three (3)
Business Days advance notice to Borrower that Agent intends to do so because
Agent has reasonably determined that there has occurred a Material Adverse
Change.
(c) Procedure for Borrowing. Each Borrowing shall be made
upon Borrower's irrevocable request therefor delivered to Agent (which notice
must be received by Agent no later than 10:00 a.m. (California time) on the
Funding Date if such advance is for $10,000,000 or less or no later than 10:00
a.m. (California time) on the Business Day immediately preceding the requested
Funding Date if such advance is for more than $10,000,000) specifying (i) the
amount of the Borrowing; and (ii) the requested Funding Date, which shall be a
Business Day. Agent is authorized to make Advances under this
<PAGE>
Agreement based upon telephonic or other instructions received from anyone pur-
porting to be an Authorized Officer, or without instructions if pursuant to
Section 2.6(d). Borrower agrees to establish and maintain Borrower's Designated
Account with Borrower's Designated Account Bank for the purpose of receiving the
proceeds of the Advances requested by Borrower and made by Agent or the Lenders
hereunder. Unless otherwise agreed by Agent and Borrower, any Advance requested
by Borrower and made by Agent hereunder shall be made to Borrower's Designated
Account.
(d) Agent's Election. Promptly after receipt of a request
for a Borrowing pursuant to Section 2.1(c), the Agent shall elect, in its dis-
cretion, (i) to have the terms of Section 2.1(e) apply to such requested Borrow-
ing, or (ii) to make an Agent Loan pursuant to the terms of Section 2.1(f) in
the amount of the requested Borrowing.
(e) Making of Advances.
(i) In the event that the Agent shall elect to have
the terms of this Section 2.1(e) apply to a requested Borrowing as described in
Section 2.1(d), then promptly after receipt of a request for a Borrowing pur-
suant to Section 2.1(c), the Agent shall notify the Lenders, not later than 1:00
p.m. on the Business Day immediately preceding the Funding Date applicable
thereto, by telephone and promptly followed by telecopy, or other similar form
of transmission, of the requested Borrowing. Each Lender shall make the amount
of such Lender's Pro Rata Share of the requested Borrowing available to the
Agent in same day funds, to such account of the Agent as the Agent may desig-
nate, not later than 12:00 p.m. (California time) on the Funding Date applicable
thereto. After the Agent's receipt of the proceeds of such Advances, upon sat-
isfaction of the applicable conditions precedent set forth in Sections 3.1 and
3.2, the Agent shall make the proceeds of such Advances available to Borrower on
the applicable Funding Date by transferring same day funds equal to the proceeds
of such Advances received by the Agent to the Borrower's Designated Deposit
Account; provided, however, that, subject to the provisions of Section 2.1(k),
the Agent shall not request any Lender to make, and no Lender shall have the
obligation to make, any Advance if the Agent shall have received written notice
from any Lender, or otherwise has actual knowledge, that (i) one or more of the
applicable conditions precedent set forth in Sections 3.1 or 3.2 will not be
satisfied on the requested Funding Date for the applicable Borrowing, or (ii)
the requested Borrowing would exceed the Availability on such Funding Date.
(ii) Unless Agent receives notice from a Lender on or
prior to the Closing Date or, with respect to any Borrowing after the Closing
Date, at least one (1) Business Day prior to the date of such Borrowing, that
such Lender will not make available as and when required hereunder to Agent for
the account of Borrower the amount of that Lender's Pro Rata Share of the Bor-
rowing, Agent may assume that each Lender has made or will make such amount
available to Agent in immediately available funds on the Funding Date and Agent
may (but shall not be so required), in reliance upon such assumption, make
available to Borrower on such date a corresponding amount. If and to the extent
any Lender shall not have made its full amount available to Agent in immediately
<PAGE>
available funds and Agent in such circumstances has made available to Borrower
such amount, that Lender shall on the Business Day following such Funding Date
make such amount available to Agent, together with interest at the Defaulting
Lenders Rate for each day during such period. A notice of Agent submitted to
any Lender with respect to amounts owing under this subsection shall be conclu-
sive, absent manifest error. If such amount is paid to Agent such payment to
Agent shall constitute such Lender's Advance on the date of Borrowing for all
purposes of this Agreement. If such amount is not paid to Agent on the Business
Day following the Funding Date, Agent will notify Borrower of such failure to
fund and, upon demand by Agent, Borrower shall pay such amount to Agent for
Agent's account, together with interest thereon for each day elapsed since the
date of such Borrowing, at a rate per annum equal to the interest rate applic-
able at the time to the Advances composing such Borrowing. The failure of any
Lender to make any Advance on any Funding Date shall not relieve any other
Lender of any obligation hereunder to make an Advance on such Funding Date, but
no Lender shall be responsible for the failure of any other Lender to make the
Advance to be made by such other Lender on any Funding Date. Any Lender that
fails to make any Advance that it is required to make hereunder on any Funding
Date and that has not cured such failure by making such Advance within one (1)
Business Day after written demand upon it by Agent to do so, shall constitute a
"Defaulting Lender" for purposes of this Agreement until such Advance is made.
(iii) Agent shall not be obligated to transfer to a
Defaulting Lender any payments made by Borrower to Agent for the Defaulting
Lender's benefit; nor shall a Defaulting Lender be entitled to the sharing of
any payments hereunder. Amounts payable to a Defaulting Lender shall instead be
paid to or retained by Agent. Agent may hold and, in its discretion, re-lend to
Borrower the amount of all such payments received or retained by it for the
account of such Defaulting Lender. Solely for the purposes of voting or con-
senting to matters with respect to the Loan Documents and determining Pro Rata
Shares, such Defaulting Lender shall be deemed not to be a "Lender" and such
Defaulting Lender's Commitment shall be deemed to be zero (-0-). This section
shall remain effective with respect to such Defaulting Lender until (x) the Ob-
ligations under this Agreement shall have been declared or shall have become
immediately due and payable or (y) the requisite non-Defaulting Lenders, Agent,
and Borrower shall have waived such Defaulting Lender's default in writing. The
operation of this section shall not be construed to increase or otherwise affect
the Commitment of any non-Defaulting Lender, or relieve or excuse the perform-
ance by Borrower of its duties and obligations hereunder.
(f) Making of Agent Loans.
(i) In the event the Agent shall elect to have the
terms of this Section 2.1(f) apply to a requested Borrowing as described in Sec-
tion 2.1(d), Agent shall make an Advance in the amount of such Borrowing (any
such Advance made solely by Agent pursuant to this Section 2.1(f) being referred
to as an "Agent Loan" and such Advances being referred to collectively as "Agent
Loans") available to Borrower on the Funding Date applicable thereto by trans-
ferring same day funds to Borrower's Designated Deposit Account. Each Agent
Loan is an Advance hereunder and shall be subject to all the
<PAGE>
terms and conditions applicable to other Advances, except that all payments
thereon shall be payable to Agent solely for its own account (and for the ac-
count of the holder of any participation interest with respect to such Advance).
Subject to the provisions of Section 2.1(k), the Agent shall not make any Agent
Loan if the Agent shall have received written notice from any Lender, or other-
wise has actual knowledge, that (i) one or more of the applicable conditions
precedent set forth in Sections 3.1 or 3.2 will not be satisfied on the request-
ed Funding Date for the applicable Borrowing, or (ii) the requested Borrowing
would exceed the Availability on such Funding Date. Agent shall not otherwise
be required to determine whether the applicable conditions precedent set forth
in Sections 3.1 or 3.2 have been satisfied on the Funding Date applicable there-
to prior to making, in its sole discretion, any Agent Loan.
(ii) The Agent Loans shall be secured by the Col-
lateral and shall constitute Advances and Obligations hereunder, and shall bear
interest at the rate applicable from time to time to Obligations pursuant to
Section 2.6 hereof.
(g) Agent Advances.
(i) Agent hereby is authorized by Borrower and the
Lenders, from time to time in Agent's sole discretion, (1) after the occurrence
of a Default or an Event of Default (but without constituting a waiver of such
Default or Event of Default), or (2) at any time that any of the other applic-
able conditions precedent set forth in Section 3.1 or 3.2 have not been satis-
fied, to make Advances to Borrower on behalf of the Lenders which Agent, in its
reasonable business judgment, deems necessary or desirable (A) to preserve or
protect the Collateral, or any portion thereof, (B) to enhance the likelihood
of, or maximize the amount of, repayment of the Obligations, or (C) to pay any
other amount chargeable to Borrower pursuant to the terms of this Agreement,
including Lender Group Expenses and the costs, fees, and expenses described in
Section 10 (any of the Advances described in this Section 2.1(g) being herein-
after referred to as "Agent Advances"); provided, that Agent shall not make any
Agent Advances to Borrower without the consent of the Required Lenders if the
amount thereof would exceed $500,000 in the aggregate at any one time.
(ii) Agent Advances shall be repayable on demand and
secured by the Collateral, shall constitute Advances and Obligations hereunder,
and shall bear interest at the rate applicable from time to time to the Obliga-
tions pursuant to Section 2.6.
(h) Settlement. It is agreed that each Lender's funded
portion of the Advances is intended by the Lenders to be equal at all times to
such Lender's Pro Rata Share of the outstanding Advances. Such agreement
notwithstanding, the Agent, and the Lenders agree (which agreement shall not be
for the benefit of or enforceable by Borrower) that in order to facilitate the
administration of this Agreement and the other Loan Documents, settlement among
them as to the Advances, the Agent Loans, and the Agent Advances shall take
place on a periodic basis in accordance with the following provisions:
<PAGE>
(i) The Agent shall request settlement ("Settlement")
with the Lenders on a weekly basis, or on a more frequent basis if so determined
by the Agent, (1) for itself, with respect to each Agent Loan and Agent Advance,
and (2) with respect to Collections received, as to each by notifying the
Lenders by telephone and promptly followed by telecopy, or other similar form of
transmission, of such requested Settlement, no later than 1:00 p.m. (California
time) on the Business Date immediately preceding the date of such requested
Settlement (the "Settlement Date"). Such notice of a Settlement Date shall
include a summary statement of the amount of outstanding Advances, Agent Loans,
and Agent Advances for the period since the prior Settlement Date, the amount of
repayments received in such period, and the amounts allocated to each Lender of
the interest, fees, and other charges for such period. Subject to the terms and
conditions contained herein (including Section 2.1(h)(ii)): (y) if a Lender's
balance of the Advances, Agent Loans, and Agent Advances exceeds such Lender's
Pro Rata Share of the Advances, Agent Loans, and Agent Advances as of a Settle-
ment Date, then Agent shall by no later than 1:00 p.m (California time) on the
Settlement Date transfer in same day funds to the account of such Lender as
Lender may designate, an amount such that each such Lender shall, upon receipt
of such amount, have as of the Settlement Date, its Pro Rata Share of the Ad-
vances, Agent Loans, and Agent Advances; and (z) if a Lender's balance of the
Advances Agent Loans, and Agent Advances is less than such Lender's Pro Rata
Share of the Advances Agent Loans, and Agent Advances as of a Settlement Date,
such Lender shall no later than 1:00 p.m. (California time) on the Settlement
Date transfer in same day funds to such account of the Agent as the Agent may
designate, an amount such that each such Lender shall, upon transfer of such
amount, have as of the Settlement Date, its Pro Rata Share of the Advances,
Agent Loans, and Agent Advances. Such amounts made available to the Agent under
clause (z) of the immediately preceding sentence shall be applied against the
amounts of the applicable Agent Loan or Agent Advance and, together with the
portion of such Agent Loan or Agent Advance representing Foothill's Pro Rata
Share thereof, shall constitute Advances of such Lenders. If any such amount
is not made available to the Agent by any Lender on the Settlement Date applica-
ble thereto to the extent required by the terms hereof, the Agent shall be
entitled to recover for its account such amount on demand from such Lender
together with interest thereon at the Defaulting Lenders Rate.
(ii) In determining whether a Lender's balance of the
Advances, Agent Loans, and Agent Advances is less than, equal to, or greater
than such Lender's Pro Rata Share of the Advances, Agent Loans, and Agent Ad-
vances as of a Settlement Date, Agent shall, as part of the relevant Settlement,
apply to such balance the portion of payments actually received by Agent with
respect to principal, interest, fees payable by Borrower and allocable to the
Lenders hereunder, and proceeds of Collateral. To the extent that a net amount
is owed to any such Lender after such application, such net amount shall be dis-
tributed by Agent to that Lender as part of such Settlement; provided, however,
that the arrangement fee payable by Borrower under Section 2.11(a) shall be dis-
tributed to the Lenders within one (1) Business Day following the Closing Date
without regard to the netting of amounts owing to or owed by any Lender as part
of a Settlement.
<PAGE>
(iii) Between Settlement Dates, the Agent, to the extent
no Agent Advances or Agent Loans are outstanding, may pay over to Foothill any
payments received by the Agent, which in accordance with the terms of the
Agreement would be applied to the reduction of the Advances, for application to
Foothill's Pro Rata Share of the Advances. If, as of any Settlement Date,
Collections received since the then immediately preceding Settlement Date have
been applied to Foothill's Pro Rata Share of the Advances other than to Agent
Loans or Agent Advances, as provided for in the previous sentence, Foothill
shall pay to the Agent for the accounts of the Lenders, and Agent shall pay to
the Lenders, to be applied to the outstanding Advances of such Lenders, an
amount such that each Lender shall, upon receipt of such amount, have, as of
such Settlement Date, its Pro Rata Share of the Advances. During the period
between Settlement Dates, the Agent with respect to Agent Loans and Agent Ad-
vances, and each Lender with respect to the Advances other than Agent Loans and
Agent Advances, shall be entitled to interest at the applicable rate or rates
payable under this Agreement on the daily amount of funds employed by the Agent
or the Lenders, as applicable.
(i) Notation. The Agent shall record on its books the
principal amount of the Advances owing to each Lender, including the Agent Loans
and Agent Advances owing to the Agent, and the interests therein of each Lender,
from time to time. In addition, each Lender is authorized, at such Lender's
option, to note the date and amount of each payment or prepayment of principal
of such Lender's Advances in its books and records, including computer records,
such books and records constituting rebuttably presumptive evidence, absent
manifest error, of the accuracy of the information contained therein.
(j) Lenders' Failure to Perform. All Advances (other than
Agent Loans and Agent Advances) shall be made by the Lenders simultaneously and
in accordance with their Pro Rata Shares. It is understood that (i) no Lender
shall be responsible for any failure by any other Lender to perform its obliga-
tion to make any Advances hereunder, nor shall any Commitment of any Lender be
increased or decreased as a result of any failure by any other Lender to perform
its obligation to make any Advances hereunder, and (ii) no failure by any Lender
to perform its obligation to make any Advances hereunder shall excuse any other
Lender from its obligation to make any Advances hereunder.
(k) Overadvances. Agent shall not make any voluntary
Overadvances without the written consent of the Required Lenders except for
amounts charged to the Loan Account for interest, fees or Lender Group Expenses
pursuant to Section 2.1(g)(i). If the condition for borrowing under Section
3.2(d) cannot be fulfilled, the Agent may, but is not obligated to, knowingly
and intentionally continue to make Advances (including Agent Loans) to Borrower
such failure of condition notwithstanding, so long as, at any time, (i) the out-
standing Revolving Facility Usage does not exceed the Borrowing Base by more
than the amount proposed by Agent and agreed to by the Required Lenders, (ii)
such Advances are made pursuant to a plan (proposed by Agent and agreed to by
the Required Lenders) for the elimination of the outstanding Revolving Facility
Usage in excess of the Borrowing Base, and (iii) the outstanding Revolving
Facility Usage (except
<PAGE>
for and excluding amounts charged to the Loan Account for interest, fees, or
Lender Group Expenses) does not exceed the Maximum Amount. The foregoing pro-
visions are for the sole and exclusive benefit of the Agent and the Lenders and
are not intended to benefit Borrower in any way. The Advances and Agent Loans,
as applicable, that are made pursuant to this Section 2.1(k) shall be subject to
the same terms and conditions as any other Agent Advance or Agent Loan, as
applicable, except that the rate of interest applicable thereto shall be the
rates set forth in Section 2.6(b) without regard to the presence or absence of
a Default or Event of Default; provided, that the Required Lenders may, at any
time, revoke Agent's authorization contained in this Section 2.1(k) to make
Overadvances (except for and excluding amounts charged to the Loan Account for
interest, fees, or Lender Group Expenses), any such revocation to be in writing
and to become effective upon Agent's receipt thereof; provided further, however,
that the making of such Overadvances shall not constitute a waiver of such Event
of Default arising therefrom.
In the event Agent obtains actual knowledge that
Revolving Facility Usage exceeds the amount permitted by the preceding para-
graph, regardless of the amount of or reason for such excess, Agent shall notify
Lenders as soon as practicable (and prior to making any (or any further) inten-
tional Overadvances (except for and excluding amounts charged to the Loan
Account for interest, fees, or Lender Group Expenses) unless Agent determines
that prior notice would result in imminent harm to the Collateral or its value),
and Lenders thereupon shall, together with Agent, jointly determine the terms of
arrangements that shall be implemented with Borrower intended to reduce, within
a reasonable time, the outstanding principal amount of the Advances to Borrower
to an amount permitted by the preceding paragraph. In the event any Lender dis-
agrees over the terms of reduction and/or repayment of any Overadvance, the
terms of reduction and/or repayment thereof shall be implemented according to
the determination of the Required Lenders.
Each Lender shall be obligated to settle with Agent as
provided in Section 2.1(h) for the amount of such Lender's Pro Rata Share of any
unintentional Overadvances by Agent reported to such Lender, any intentional
Overadvances made as permitted under this Section 2.1(k), and any Overadvances
resulting from the charging to the Loan Account of interest, fees, or Lender
Group Expenses.
(l) Effect of Bankruptcy. If a case is commenced by or
against Borrower under the Bankruptcy Code, or other statute providing for
debtor relief, then, unless otherwise agreed by all Lenders, the Lender Group
shall not make additional loans or provide additional financial accommodations
under the Loan Documents to Borrower as debtor or debtor-in-possession, or to
any trustee for Borrower, nor consent to the use of cash collateral (provided
that the Loan Account shall continue to be charged, to the fullest extent
permitted by law, for accruing interest, fees, and Lender Group Expenses).
<PAGE>
2.2 Letters of Credit.
(a) Agreement to Cause Issuance; Amounts; Outside
Expiration Date. Subject to the terms and conditions of this Agreement, Agent
agrees to take reasonable steps to cause to be issued for the account of Bor-
rower letters of credit (each, an "L/C") or guarantees of payment (each such
guaranty, an "L/C Guaranty") with respect to letters of credit issued by an
issuing bank for the account of Borrower in an aggregate undrawn and unreimburs-
ed amount (taking into account any Letters of Credit previously issued and out-
standing and calculated after giving effect to any proposed issuance) not to
exceed the least of: (i) the Borrowing Base less the amount of outstanding Ad-
vances, (ii) the Maximum Amount less the amount of outstanding Advances, or
(iii) $40,000,000. Borrower expressly understands and agrees that Agent shall
have no obligation to arrange for the issuance by issuing banks of the letters
of credit that are to be the subject of L/C Guarantees. Borrower and the Lender
Group acknowledge and agree that certain of the letters of credit that are to be
the subject of L/C Guarantees may be outstanding on the Closing Date. Each
Letter of Credit shall have an expiry date no later than the date on which this
Agreement is scheduled to terminate under Section 3.4 (without regard to any
potential renewal term) and all such Letters of Credit shall be in form and
substance acceptable to Agent in its reasonable discretion. If the Lender Group
is obligated to advance funds under a Letter of Credit, the amount so advanced
immediately shall be deemed to be an Advance made by the Lender Group to Borrow-
er pursuant to Section 2.1 and, thereafter, shall bear interest at the rate then
applicable to such Advances under Section 2.6.
(b) Indemnification. Borrower hereby agrees to indemnify,
save, defend, and hold the Lender Group harmless from any loss, cost, expense,
or liability, including payments made by the Lender Group, expenses, and reason-
able attorneys fees incurred by the Lender Group arising out of or in connection
with any Letter of Credit. Borrower agrees to be bound by the issuing bank's
regulations and interpretations of any Letters of Credit guarantied by the Lend-
er Group and opened to or for Borrower's account or by Agent's interpretations
of any letter of credit issued by the Lender Group to or for Borrower's account,
even though this interpretation may be different from Borrower's own, and Bor-
rower understands and agrees that the Lender Group shall not be liable for any
error, negligence, or mistakes, whether of omission or commission, in following
Borrower's instructions or those contained in the Letter of Credit or any modi-
fications, amendments, or supplements thereto. Borrower understands that the
L/C Guarantees may require the Lender Group to indemnify the issuing bank for
certain costs or liabilities arising out of claims by Borrower against such
issuing bank. Borrower hereby agrees to indemnify, save, defend, and hold the
Lender Group harmless with respect to any loss, cost, expense (including reason-
able attorneys fees), or liability incurred by the Lender Group under any L/C
Guaranty as a result of the Lender Group's indemnification of any such issuing
bank.
(c) Supporting Materials. Borrower hereby authorizes and
directs any bank that issues a letter of credit guaranteed by the Lender Group
to deliver to Agent all instruments, documents, and other writings and property
received by the issuing bank
<PAGE>
pursuant to such letter of credit, and to accept and rely upon Agent's instruc-
tions and agreements with respect to all matters arising in connection with such
letter of credit and the related application. Borrower may or may not be the
"applicant" or "account party" with respect to such letter of credit.
(d) Compensation for Letters of Credit. Any and all charges,
commissions, reasonable fees, and out-of-pocket costs incurred by the Agent re-
lating to the letters of credit guaranteed by the Lender Group shall be con-
sidered Lender Group Expenses for purposes of this Agreement and immediately
shall be reimbursable by Borrower to Agent. On the first day of each month,
Borrower will pay the Lender Group, for the pro rata benefit of the Lenders, a
fee (in addition to the aforementioned charges, commissions, fees, and costs)
equal to one and one half percent (1.50%) per annum times the average Daily
Balance of the Letters of Credit that were outstanding during the immediately
preceding month. Charges, commissions, fees, and costs may be charged to Bor-
rower's Loan Account at the time the service is rendered or the commission, fee,
or cost is incurred.
(e) Cash Collateral. Immediately upon the termination of
this Agreement, Borrower agrees to either (i) provide cash collateral to be held
by Agent in an amount equal to the maximum amount of the Lender Group's
obligations under Letters of Credit, or (ii) cause to be delivered to Agent re-
leases of all of the Lender Group's obligations under outstanding Letters of
Credit. At Agent's discretion, any proceeds of Collateral received by Agent
after the occurrence and during the continuation of an Event of Default may be
held as the cash collateral required by this Section 2.2(e).
(f) Increased Costs. If by reason of (i) any change in any
applicable law, treaty, rule, or regulation or any change in the interpretation
or application by any governmental authority of any such applicable law, treaty,
rule, or regulation, or (ii) compliance by the issuing bank or Agent with any
direction, request, or requirement (irrespective of whether having the force of
law) of any governmental authority or monetary authority including, without
limitation, Regulation D of the Board of Governors of the Federal Reserve System
as from time to time in effect (and any successor thereto):
(A) any reserve, deposit, or similar requirement is or
shall be imposed or modified in respect of any Letters of Credit issued here-
under, or
(B) there shall be imposed on the issuing bank or the
Lender Group any other condition regarding any letter of credit, or Letter of
Credit, as applicable, issued pursuant hereto;
and the result of the foregoing is to directly or indirectly increase the cost
to the issuing bank or the Lender Group of issuing, making, guaranteeing, or
maintaining any letter of credit, or Letter of Credit, as applicable, or to
reduce the amount receivable in respect thereof by such issuing bank or the
Lender Group, then, and in any such case, Agent may, at any time within a rea-
sonable period after the additional cost is incurred or the amount
<PAGE>
received is reduced, notify Borrower, and Borrower shall pay on demand such
amounts as the issuing bank or Agent may specify to be necessary to compensate
the issuing bank or the Lender Group for such additional cost or reduced
receipt, together with interest on such amount from the date of such demand
until payment in full thereof at the rate set forth in Section 2.6(a) or (b)(i),
as applicable. The determination by the issuing bank or Agent, as the case may
be, of any amount due pursuant to this Section 2.2(f), as set forth in a certi-
ficate setting forth the calculation thereof in reasonable detail, shall, in the
absence of manifest or demonstrable error, be final and conclusive and binding
on all of the parties hereto.
(g) Participations.
(1) Purchase of Participations. Immediately upon
issuance of any Letter of Credit in accordance with this Section 2.2, each
Lender shall be deemed to have irrevocably and unconditionally purchased and
received without recourse or warranty, an undivided interest and participation
in the credit support or enhancement provided through the Agent to such issuer
in connection with the issuance of such Letter of Credit, equal to such Lender's
Pro Rata Share of the face amount of such Letter of Credit (including, without
limitation, all obligations of Borrower with respect thereto, and any security
therefor or guaranty pertaining thereto).
(2) Documentation. Upon the request of any
Lender, the Agent shall furnish to such Lender copies of any Letter of Credit,
reimbursement agreements executed in connection therewith, application for any
Letter of Credit and credit support or enhancement provided through the Agent in
connection with the issuance of any Letter of Credit, and such other documenta-
tion as may reasonably by requested by such Lender.
(3) Obligations Irrevocable. The obligations of
each Lender to make payments to the Agent with respect to any Letter of Credit
or with respect to any credit support or enhancement provided through the Agent
with respect to a Letter of Credit, and the obligations of Borrower to make pay-
ments to the Agent, for the account of the Lenders, shall be irrevocable, not
subject to any qualification or exception whatsoever, including, without limita-
tion, any of the following circumstances:
(i) any lack of validity or enforceability
of this Agreement or any of the other Loan Documents;
(ii) the existence of any claim, setoff,
defense or other right which Borrower may have at any time against a beneficiary
named in a Letter of Credit or any transferee of any Letter of Credit (or any
Person for whom any such transferee may be acting), any Lender, the Agent, the
issuer of such Letter of Credit, or any other Person, whether in connection with
this Agreement, any Letter of Credit, the transactions contemplated herein or
any unrelated transactions (including any underlying
<PAGE>
transactions between Borrower or any other Person and the beneficiary named in
any Letter of Credit);
(iii) any draft, certificate or any other
document presented under the Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iv) the surrender or impairment of any
security for the performance or observance of any of the terms of any of the
Loan Documents; or
(v) the occurrence of any Default or Event
of Default.
2.3 Payments.
(a) Payments by Borrower.
(i) All payments to be made by Borrower shall be
made without set-off, recoupment, deduction, or counterclaim, except as other-
wise required by law. Except as otherwise expressly provided herein, all pay-
ments by Borrower shall be made to Agent for the account of the Lenders or
Agent, as the case may be, at Agent's address set forth in Section 12, and shall
be made in immediately available funds, no later than 11:00 a.m. (California
time) on the date specified herein. Any payment received by Agent later than
11:00 a.m. (California time), at the option of Agent, shall be deemed to have
been received on the following Business Day and any applicable interest or fee
shall continue to accrue until such following Business Day.
(ii) Whenever any payment is due on a day other
than a Business Day, such payment shall be made on the following Business Day,
and such extension of time shall in such case be included in the computation of
interest or fees, as the case may be.
(iii) Unless Agent receives notice from Borrower
prior to the date on which any payment is due to the Lenders that Borrower will
not make such payment in full as and when required, Agent may assume that Bor-
rower has made such payment in full to Agent on such date in immediately avail-
able funds and Agent may (but shall not be so required), in reliance upon such
assumption, distribute to each Lender on such due date an amount equal to the
amount then due such Lender. If and to the extent Borrower has not made such
payment in full to Agent, each Lender shall repay to Agent on demand such amount
distributed to such Lender, together with interest thereon at the Reference Rate
for each day from the date such amount is distributed to such Lender until the
date repaid.
(b) Apportionment, Application, and Reversal of Payments.
Except as otherwise provided with respect to Defaulting Lenders, aggregate
principal and
<PAGE>
interest payments shall be apportioned ratably among the Lenders (according to
the unpaid principal balance of the Advances to which such payments relate held
by each Lender) and payments of the fees (other than fees designated for
Agent's, Co-Agent's or PPM America, Inc.'s separate accounts) shall, as applic-
able, be apportioned ratably among the Lenders. All payments shall be remitted
to Agent and all such payments not relating to principal or interest of specific
Advances, or not constituting payment of specific fees, and all proceeds of Col-
lateral received by Agent, shall be applied, first, to pay any fees, or expense
reimbursements then due to Agent or Co-Agent from Borrower; second, to pay any
fees or expense reimbursements then due to the Lenders from Borrower; third, to
pay interest due in respect of all Advances, including Agent Loans and Agent
Advances; fourth, to pay or prepay principal of Agent Loans and Agent Advances;
fifth, ratably to pay principal of the Advances (other than Agent Loans and
Agent Advances) and unreimbursed obligations in respect of Letters of Credit;
and sixth, ratably to pay any other Obligations due to Agent or any Lender by
Borrower. Agent shall promptly distribute to each Lender, pursuant to the
applicable wire transfer instructions received from each Lender in writing, such
funds as it may be entitled to receive, subject to a Settlement delay as provid-
ed for in Section 2.1(h).
2.4 [intentionally omitted]
2.5 Overadvances. If, at any time or for any reason, the
amount of Obligations owed by Borrower to the Lender Group pursuant to Sections
2.1 and 2.2 is greater than either the dollar or percentage limitations set
forth in Sections 2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay
to Agent for the benefit of the Lender Group, in cash, the amount of such
excess, which amount shall be used by Agent to reduce the Obligations in accord-
ance with the priority set forth in Section 2.3(b).
2.6 Interest: Rates, Payments, and Calculations.
(a) Interest Rate. All Obligations, except for undrawn
Letters of Credit, shall bear interest at a per annum rate of one and three
eighths (1.375) percentage points above the Reference Rate. After the Merger,
the rate of interest charged on the Obligations will be either: (x) one and one
eighths (1.125) percentage points above the Reference Rate; or (y) seven eighths
(.875) percentage point above the Reference Rate for any month in which Borrow-
er's average unused credit availability based upon Eligible Inventory is
$25,000,000 or more.
(b) Default Rate. (i) All Obligations, except for undrawn
Letters of Credit, shall bear interest, from and after the occurrence and during
the continuance of an Event of Default, at a per annum rate equal to three (3)
percentage points above the pre-default rate, (ii) From and after the occurrence
and during the continuance of an Event of Default, the fee provided in Section
2.2(d) shall be increased to a fee equal to three and one half percent (3.50%)
per annum times the amount of the undrawn Letters of Credit that were outstand-
ing during the immediately preceding month.
<PAGE>
(c) Minimum Interest. In no event shall the rate of interest
chargeable hereunder be less than seven percent (7%) per annum. To the extent
that interest accrued hereunder at the rate set forth herein would be less than
the foregoing minimum rate, the interest rate chargeable hereunder for the
period in question automatically shall be deemed increased to the minimum rate.
(d) Payments. Interest hereunder shall be due and payable,
in arrears, on the first day of each month during the term hereof. Borrower
hereby authorizes Agent, at its option, without prior notice to Borrower, to
charge such interest, all Lender Group Expenses (as and when incurred), and all
installments or other payments due under any Loan Document to Borrower's Loan
Account, which amounts thereafter shall constitute Advances hereunder and accrue
interest at the rate then applicable hereunder. Any interest not paid when due
shall be compounded and shall thereafter accrue interest at the rate then
applicable hereunder.
(e) Computation. The Reference Rate as of the date of this
Agreement is eight and one-quarter percent (8.25%) per annum. In the event the
Reference Rate is changed from time to time hereafter, the applicable rate of
interest hereunder automatically and immediately shall be increased or decreased
by an amount equal to such change in the Reference Rate. All interest and fees
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
(f) Intent to Limit Charges to Maximum Lawful Rate. In no
event shall the interest rate or rates payable under this Agreement, plus any
other amounts paid in connection herewith, exceed the highest rate permissible
under any law that a court of competent jurisdiction shall, in a final deter-
mination, deem applicable. Borrower and the Lender Group, in executing and
delivering this Agreement, intend legally to agree upon the rate or rates of
interest and manner of payment stated within it; provided, however, that, any-
thing contained herein to the contrary notwithstanding, if said rate or rates of
interest or manner of payment exceeds the maximum allowable under applicable
law, then, ipso facto as of the date of this Agreement, Borrower is and shall be
liable only for the payment of such maximum as allowed by law, and payment
received from Borrower in excess of such legal maximum, whenever received, shall
be applied to reduce the principal balance of the Obligations to the extent of
such excess.
2.7 Collection of Accounts. Borrower shall at all times main-
tain lockboxes (the "Lockboxes") and, immediately after the Closing Date, shall
instruct all Account Debtors with respect to the Accounts, General Intangibles,
and Negotiable Collateral of Borrower to remit all Collections in respect there-
of to such Lockboxes. Borrower, Agent, and the Lockbox Banks shall enter into
the Lockbox Agreements, which among other things shall provide for the opening
of a Lockbox Account for the deposit of Collections at a Lockbox Bank. Borrower
agrees that all receipts of cash and checks arising out of sales of Inventory
in the ordinary course of business shall be deposited by its individual stores
into local collection accounts, and that each depositary institution where
<PAGE>
such collection accounts are maintained shall be irrevocably instructed to
immediately forward such Collections to a Lockbox Account. Borrower agrees that
all other Collections and other amounts received by Borrower from any Account
Debtor or any other source immediately upon receipt shall be deposited into a
Lockbox Account. No Lockbox Agreement or arrangement contemplated thereby shall
be modified by Borrower without the prior written consent of Agent which consent
shall not be unreasonably withheld. Upon the terms and subject to the condi-
tions set forth in the Lockbox Agreements, all amounts received in each Lockbox
Account shall be wired each Business Day into an account (the "Agent's Account")
maintained by Agent at a depositary selected by Agent.
2.8 Crediting Payments; Application of Collections. The re-
ceipt of any Collections by Agent (whether from transfers to Agent by the Lock-
box Banks pursuant to the Lockbox Agreements or otherwise) immediately shall be
applied provisionally to reduce the Obligations outstanding under Section 2.1,
but shall not be considered a payment on account unless such Collection item is
a wire transfer of immediately available federal funds and is made to the
Agent's Account or unless and until such Collection item is honored when pre-
sented for payment. From and after the Closing Date, Agent shall be entitled to
charge Borrower for one (1) Business Day of `clearance' or `float' at the rate
set forth in Section 2.6(a) or Section 2.6(b)(i), as applicable, on all Collec-
tions that are received by Agent (regardless of whether forwarded by the Lockbox
Banks to Agent, whether provisionally applied to reduce the Obligations under
Section 2.1, or otherwise). This across-the-board one (1) Business Day clearance
or float charge on all Collections shall be for the sole account of Agent, and
such clearance or float charge is acknowledged by the parties to constitute an
integral aspect of the pricing of the Lender Group's financing of Borrower, and
shall apply irrespective of the characterization of whether receipts are owned
by Borrower or Agent, and whether or not there are any outstanding Advances, the
effect of such clearance or float charge being the equivalent of charging one
(1) Business Day of interest on such Collections. Should any Collection item
not be honored when presented for payment, then Borrower shall be deemed not
to have made such payment, and interest shall be recalculated accordingly. Any-
thing to the contrary contained herein notwithstanding, any Collection item
shall be deemed received by Agent only if it is received into the Agent's
Account on or before 11:00 a.m. California time. If any Collection item is
received into the Agent's Account after 11:00 a.m. California time it shall be
deemed to have been received by Agent as of the opening of business on the
immediately following Business Day.
2.9 Borrower's Designated Account. Agent and the Lenders are
authorized to make the Advances and to issue the Letters of Credit under this
Agreement based upon telephonic or other instructions received from anyone
purporting to be an Authorized Officer, or without instructions if pursuant to
Section 2.6(d). Borrower agrees to establish and maintain Borrower's Designated
Account with Borrower's Designated Account Bank for the purpose of receiving the
proceeds of the Advances requested by Borrower and made by the Lender Group
hereunder. Unless otherwise agreed by Agent and Borrower, any Advance requested
by Borrower and made by the Lender Group hereunder shall be made to Borrower's
Designated Account.
<PAGE>
2.10 Maintenance of Loan Account; Statements of Obligations.
Agent shall maintain an account on its books in the name of Borrower (the "Loan
Account") on which Borrower will be charged with all Advances made by Agent or
the Lenders to Borrower or for Borrower's account, including, Advances, interest
accrued, Lender Group Expenses, and any other payment Obligations of Borrower.
In accordance with Section 2.8, the Loan Account will be credited with all pay-
ments received by Agent from Borrower or for Borrower's account, including all
amounts received in the Agent's Account from any Lockbox Bank. Agent shall
render statements regarding the Loan Account to Borrower, including principal,
nterest, fees, and including an itemization of all charges and expenses consti-
tuting Lender Group Expenses owing, and such statements shall be conclusively
presumed to be correct and accurate and constitute an account stated between
Borrower and the Lender Group unless, within thirty (30) days after receipt
thereof by Borrower, Borrower shall deliver to Agent by registered or certified
mail at its address specified in Section 12, written objection thereto describ-
ing the error or errors contained in any such statements.
2.11 Fees. Borrower shall pay to Agent for the ratable benefit
of the Lender Group (except as otherwise indicated) the following fees:
(a) Arrangement Fee. A fee (the "Arrangement Fee") for the
account of Agent and PPM America, Inc. in an amount equal to (i) $600,000 less
(ii) the amount of the Arrangement Fee paid to Agent for the issuance of a
commitment letter respecting this financing. In the event that the Merger occurs
on or before October 31, 1996, the Arrangement Fee shall be reduced to
$450,000. The balance of the Arrangement Fee shall be fully earned on the
Closing Date and shall be payable as follows: (i) $350,000 on August 31, 1996
and the balance, if any, on October 31, 1996, or (ii) if earlier, in full on the
date of the Merger. The Arrangement Fee shall be non-refundable when paid.
(b) Unused Line Fee. On the first day of each month during
the term of this Agreement, a fee in an amount equal to three eighths of one
percent (0.375%) per annum times the Average Unused Portion of the Maximum
Amount during the prior month;
(c) Financial Examination, Documentation, and Appraisal
Fees. For each of the respective sole and separate accounts of Agent and, to the
extent Co-Agent accompanies Agent under Section 4.6 hereof, Co-Agent: (i) a
separate fee of Six Hundred Fifty Dollars ($650) per day per examiner, plus out-
of-pocket expenses for each financial analysis and examination (i.e., audits) of
Borrower performed by the respective personnel employed by Agent and, if
applicable, by Co-Agent; (ii) an appraisal fee of One Thousand Five Hundred
Dollars ($1,500) per day per appraiser, plus out-of-pocket expenses for each
appraisal of the Collateral performed by the respective personnel employed by
Agent and, if applicable, by Co-Agent (it being understood and agreed that,
without limiting the generality of Agent's inspection and appraisal rights here-
under, Agent shall have the right to have the Eligible Inventory (or any portion
thereof) appraised by a qualified appraisal company selected by Agent from time
to time for the purpose of determining the value of
<PAGE>
Eligible Inventory); (iii) the actual charges paid or incurred by Agent and, if
applicable, by Co-Agent, if Agent or Co-Agent elects to employ the services of
one or more third Persons to perform such financial analyses and examinations
(i.e., audits) of Borrower or to appraise the Collateral. So long as no Event
of Default has occurred, appraisals by appraisal companies shall not be con-
ducted more frequently than semi-annually and financial analyses and examina-
tions will not be conducted more frequently than quarterly;
(d) Loan Fee. On each anniversary of the Closing Date, a
fee in an amount equal to three eighths of one percent (0.375%) of the Maximum
Amount; provided, however, no loan fee shall be payable by Borrower after the
date of Merger; and
(e) Agency Fee. On the first day of each month during the
term of this Agreement, and thereafter so long as any Obligations are out-
standing, an agency fee in an amount equal to $12,500 per month, for the sole
account of Agent.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 Conditions Precedent to the Initial Advance and Letter of
Credit. The obligation of the Lender Group to make the initial Advance or to
issue the initial Letter of Credit is subject to the fulfillment, in form and
substance to the satisfaction of Agent, Co-Agent and their counsel, of each of
the following conditions on or before the Closing Date. In the event that such
conditions are not met on or before the Closing Date, then this Agreement shall
be null and void, and the Lenders, Agent and Co-Agent shall not have any obliga-
tions, responsibilities or liabilities hereunder.
(a) the Closing Date shall occur on or before May 31, 1996;
(b) Agent shall have received searches reflecting the filing
of its financing statements and fixture filings;
(c) Agent shall have received each of the following docu-
ments, duly executed, and each such document shall be in full force and effect:
(i) the Lockbox Agreements;
(ii) the Disbursement Letter;
(iii) the Pay-Off Letter, together with UCC termination
statements and other documentation evidencing the
termination of Existing Lender's Liens in and to
the properties and assets of Borrower;
(iv) the Mortgages; and
(v) the Security Agreements;
<PAGE>
(d) Agent shall have received a certificate from the Secre-
tary of Borrower attesting to the resolutions of Borrower's Board of Directors
authorizing its execution, delivery, and performance of this Agreement and the
other Loan Documents to which Borrower is a party and authorizing specific
officers of Borrower to execute same;
(e) Agent shall have received copies of Borrower's Govern-
ing Documents, as amended, modified, or supplemented to the Closing Date, certi-
fied by the Secretary of Borrower;
(f) Agent shall have received a certificate of status with
respect to Borrower, dated within ten (10) days of the Closing Date, by the
appropriate officer of the jurisdiction of organization of Borrower, which cer-
tificate shall indicate that Borrower is in good standing in such jurisdiction;
(g) Agent shall have received certificates of status with
respect to Borrower, each dated within ten (10) days of the Closing Date, such
certificates to be issued by the appropriate officer of the jurisdictions in
which Borrower is required to be qualified to do business, which certificates
shall indicate that Borrower is in good standing in such jurisdictions;
(h) Agent shall have received a certificate of insurance,
together with the endorsements thereto, as are required by Section 6.10;
(i) Agent shall have received satisfactory opinions of
Borrower's counsel;
(j) Agent shall have received ALTA Lender's Policies of
Title Insurance, or a commitment therefor, from a title company satisfactory to
Agent, in an amount satisfactory to Agent, insuring its first priority lien upon
each parcel of, or lessee's interest in, the Real Property. Such policies shall
contain such endorsements as shall be required by Agent, shall contain only
those exceptions acceptable to Agent, and shall be in form reasonably satisfac-
tory to Agent.
(k) all other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered
or executed or recorded; and
(l) Borrower shall have on the Closing Date, (after taking
into account the repayment of all existing revolving indebtedness owed to Exist-
ing Lender and the replacement of all existing letters of credit issued or ar-
ranged by Existing Lender, and net of all accounts payable more than thirty (30)
days past due), at least $10,000,000 in the aggregate of unrestricted cash on
hand and unused borrowing availability under Section 2.1(a).
<PAGE>
3.2 Conditions Precedent to all Advances and all Letters of
Credit. The following shall be conditions precedent to all Advances and all
Letters of Credit hereunder:
(a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all respects
on and as of the date of such extension of credit, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
(b) no Default or Event of Default shall have occurred
and be continuing on the date of such extension of credit, nor shall either
result from the making thereof;
(c) no injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the extending of such
credit shall have been issued and remain in force by any Governmental Authority
against Borrower, the Lender Group, or any of their Affiliates;
(d) the amount of the Obligations, after giving effect to
the requested Advance or Letter of Credit, shall not exceed the Availability.
3.3 Condition Subsequent. As a condition subsequent to the
making of the initial Advance or the issuance of the initial Letter of Credit,
Borrower shall, as soon as available and in any event within thirty (30) days
after the Closing Date, deliver to Agent the certified copies of the policies of
insurance, together with the endorsements thereto, as are required by Section
6.10, the form and substance of which shall be reasonably satisfactory to Agent
(the failure by Borrower to so perform or cause to be performed constituting an
Event of Default hereunder).
3.4 Term; Automatic Renewal. This Agreement shall become
effective upon the execution and delivery hereof by Borrower and the Lender
Group and shall continue in full force and effect for a term ending on the date
(the "Renewal Date") that is three (3) years from the Closing Date and automa-
tically shall be renewed for successive three (3) year periods thereafter,
unless sooner terminated pursuant to the terms hereof. Either Borrower or Agent,
on behalf of the Lender Group, may terminate this Agreement effective on the
Renewal Date or on any anniversary of the Renewal Date by giving the other party
at least ninety (90) days prior written notice by registered or certified mail,
return receipt requested. Agent shall give Lenders written notice of the pend-
ing automatic renewal at least one hundred twenty (120) days before the Renewal
Date or such anniversary thereof. Agent must give written notice of Lenders'
election to terminate this Agreement if any Lender so instructs Agent at least
one hundred (100) days before the Renewal Date or such anniversary thereof. The
foregoing notwithstanding, Agent, on behalf of the Lender Group shall have the
right to terminate its obligations under this Agreement immediately and without
notice upon the occurrence and during the continuation of an Event of Default.
<PAGE>
3.5 Effect of Termination. On the date of termination of this
Agreement, all Obligations (including contingent reimbursement obligations of
Borrower with respect to any outstanding Letters of Credit) immediately shall
become due and payable without notice or demand. No termination of this
Agreement, however, shall relieve or discharge Borrower of Borrower's duties,
Obligations, or covenants hereunder, and the continuing security interests of
the Lender Group in the Collateral shall remain in effect until all Obligations
have been fully and finally discharged and the Lender Group's obligation to
provide additional credit hereunder is terminated.
3.6 Early Termination by Borrower. Borrower has the option,
at any time upon sixty (60) days prior written notice to Agent, to terminate
this Agreement by paying to Agent, for the ratable benefit of the Lender Group,
in cash, the Obligations (including an amount equal to the undrawn amount of the
Letters of Credit), in full, together with a premium (the "Early Termination
Premium") equal to: (a) during the period of time from and after the date of
the execution and delivery of this Agreement up to the first anniversary of the
Closing Date, three percent (3.0%) times the Maximum Amount; (b) during the
period of time from and including the first anniversary of the Closing Date up
to the second anniversary of the Closing Date, two percent (2.0%) times the
Maximum Amount; (c) during the period of time from and including the second
anniversary of the Closing Date up to the Renewal Date, one percent (1.0%) times
the Maximum Amount; provided, however, that the Early Termination Premium during
the first year of the Facility shall be reduced to an amount equal to one half
percent (.50%) of the Maximum Amount if the Merger does not occur, and such pre-
payment is made by Borrower from proceeds of an equity or convertible Indebted-
ness investment in Borrower of not less than $17,500,000; provided further, how-
ever, that if (x) the Merger occurs on or before October 31, 1996, (y) Borrower
terminates this Agreement during the earlier of one (1) year immediately follow-
ing the Merger or on or before August 31, 1997, and (z) there is no Event of
Default that has occurred and is continuing, then Borrower shall not be required
to pay an Early Termination Premium.
3.7 Termination Upon Event of Default. If the Lender Group
terminates this Agreement upon the occurrence of an Event of Default, in view of
the impracticability and extreme difficulty of ascertaining actual damages and
by mutual agreement of the parties as to a reasonable calculation of the Lenders
lost profits as a result thereof, Borrower shall pay to Agent, for the ratable
benefit of the Lenders, upon the effective date of such termination, a premium
in an amount equal to the Early Termination Premium. The Early Termination Pre-
mium shall be presumed to be the amount of damages sustained by the Lenders as
the result of the early termination and Borrower agrees that it is reasonable
under the circumstances currently existing. The Early Termination Premium pro-
vided for in this Section 3.7 shall be deemed included in the Obligations.
3.8 Voluntary Reduction of Maximum Amount. Borrower shall have
the option, at any time after the consummation of the Merger, to permanently
reduce the Maximum Amount, without penalty or premium, so long as: (a) no Event
of Default has occurred and is continuing; (b) the amount of such reduction is
in an increment of
<PAGE>
$5,000,000 and is equal to or less than $30,000,000; (c) all accrued but unpaid
fees on such reduced portion of the Maximum Amount as are owing under Section
2.11 (b) and all Obligations in excess of the reduced Maximum Amount are concur-
rently paid in full; and (d) such option may be exercised by Borrower only one
time during the term hereof. Such voluntary reduction shall be applied to each
Lender's Commitment on a pro rata basis so as to maintain each Lender's Pro Rata
Share of all Lenders' Commitments.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower hereby grants to
Agent for the benefit of the Lender Group a continuing Lien in all currently
existing and hereafter acquired or arising Collateral in order to secure prompt
repayment of any and all Obligations and in order to secure prompt performance
by Borrower of each of its covenants and duties under the Loan Documents. The
Liens of the Agent, for the benefit of the Lender Group, on the Collateral shall
attach to all Collateral without further act on the part of the Lender Group or
Borrower. Anything contained in this Agreement or any other Loan Document to
the contrary notwithstanding, except for the sale of Inventory to buyers in the
ordinary course of business and the replacement of Equipment in the ordinary
course of business, Borrower have no authority, express or implied, to dispose
of any item or portion of the Collateral. Subject to Section 2.3(b), the secured
claims of the Lender Group secured by the Collateral shall be of equal priority,
and ratable according to the respective Obligations due each member of the
Lender Group.
4.2 Negotiable Collateral. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral, Bor-
rower, immediately upon the request of Agent, shall endorse and deliver physical
possession of such Negotiable Collateral to Agent for the benefit of the Lender
Group.
4.3 Collection of Accounts, General Intangibles, and Negotiable
Collateral. At any time, Agent or Agent's designee may (a) notify customers or
Account Debtors of Borrower that Borrower's Accounts, General Intangibles, or
Negotiable Collateral have been assigned to the Lender Group or that the Lender
Group has a security interest therein, and (b) collect Borrower's Accounts,
General Intangibles, and Negotiable Collateral directly and charge the out-of-
pocket collection costs and expenses to the Loan Account. Borrower agrees that
it will hold in trust for the Lender Group, as the Lender Group's trustee, any
Collections that it receives and immediately will deliver said Collections to
Agent for the benefit of the Lender Group in their original form as received by
Borrower.
4.4 Delivery of Additional Documentation Required. At any time
upon the request of Agent, Borrower shall execute and deliver to Agent all fi-
nancing statements, continuation financing statements, fixture filings, security
agreements, chattel mortgages, pledges, assignments, endorsements of certifi-
cates of title, applications for title, affidavits, reports, notices, schedules
of accounts, letters of authority, and all other documents that Agent reasonably
may request, in form reasonably satisfactory to Agent, to perfect and
<PAGE>
continue perfected the Lender Group's Liens on the Collateral, and in order to
fully consummate all of the transactions contemplated hereby and under the other
the Loan Documents.
4.5 Power of Attorney. Borrower hereby irrevocably makes,
constitutes, and appoints Agent (and any of Agent's officers, employees, or
agents designated by Agent) as Borrower's true and lawful attorney, with power
to (a) if Borrower refuses to, or fails timely to execute and deliver any of the
documents described in Section 4.4, sign the name of Borrower on any of the
documents described in Section 4.4, (b) at any time that an Event of Default has
occurred and is continuing, sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against Account Debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to Account Debt-
ors, (c) send requests for verification of Accounts, (d) endorse Borrower's name
on any Collection item that may come into the possession of any member of the
Lender Group, (e) at any time that an Event of Default has occurred and is con-
tinuing, notify the post office authorities to change the address for delivery
of Borrower's mail to an address designated by Agent, to receive and open all
mail addressed to Borrower, and to retain all mail relating to the Collateral
and forward all other mail to Borrower, (f) at any time that an Event of Default
has occurred and is continuing, make, settle, and adjust all claims under Bor-
rower's policies of insurance and make all determinations and decisions with
respect to such policies of insurance, and (g) at any time that an Event of
Default has occurred and is continuing, settle and adjust disputes and claims
respecting the Accounts directly with Account Debtors, for amounts and upon
terms that Agent determines to be reasonable, and Agent may cause to be executed
and delivered any documents and releases that Agent determines to be necessary.
The appointment of Agent as Borrower's attorney, and each and every one of
Agent's rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully and finally repaid and performed and the
Lender Group's obligation to extend credit hereunder is terminated.
4.6 Right to Inspect. Agent and Co-Agent (through any of their
respective officers, employees, or agents) shall have the right, from time to
time hereafter to inspect Borrower's Books and to check, test, and appraise the
Collateral in order to verify Borrower's financial condition or the amount,
quality, value, condition of, or any other matter relating to, the Collateral.
Such inspections shall occur during normal business hours unless an Event of
Default has occurred and is continuing or the Lender Group deems itself insecure
in accordance with Section 1208 of the Code.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to the Lender Group as follows:
5.1 No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of liens, claims, security interests, or
encumbrances, except for Permitted Liens.
<PAGE>
5.2 Intentionally Omitted.
5.3 Eligible Inventory. All Eligible Inventory is now and at
all times hereafter shall be of good and merchantable quality.
5.4 Equipment. All of the Equipment owned by Borrower is used
or held for use in Borrower's business and is fit for such purposes.
5.5 Location of Inventory and Equipment. The Inventory and
Equipment are not stored with a bailee, warehouseman, or similar party and are
located only at the locations identified on Schedule E-1.
5.6 Inventory Records. Borrower now keeps, and hereafter at
all times shall keep, correct and accurate records itemizing and describing the
kind, type, quality, and quantity of the Inventory, and Borrower's cost there-
for.
5.7 Location of Chief Executive Office; FEIN. The chief execu-
tive office of Borrower is located at the address indicated in the preamble to
this Agreement. Borrower's FEIN is 58-0382475. After the Merger, the chief
executive office of Borrower may,upon notice to Agent in accordance with Section
6.13, be located at 4300 New Getwell Road, Memphis, Tennessee 38118.
5.8 Due Organization and Qualification; Subsidiaries.
(a) Borrower is duly organized and existing and in good
standing under the laws of the jurisdiction of its incorporation and qualified
and licensed to do business in, and in good standing in, any state where the
failure to be so licensed or qualified could reasonably be expected to have a
Material Adverse Change.
(b) Borrower does not presently have any direct or in-
direct Subsidiaries.
5.9 Due Authorization; No Conflict.
(a) The execution, delivery, and performance by Borrower
of this Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(b) The execution, delivery, and performance by Borrower
of this Agreement and the Loan Documents to which it is a party do not and will
not (i) violate any provision of federal, state, or local law or regulation
(including Regulations G, T, U, and X of the Federal Reserve Board) applicable
to Borrower, the Governing Documents of Borrower, or any order, judgment, or
decree of any court or other Governmental Authority binding on Borrower, (ii)
conflict with, result in a breach of, or constitute (with due notice or lapse of
time or both) a default under any material contractual obligation or material
lease
<PAGE>
of Borrower, (ii) result in or require the creation or imposition of any Lien of
any nature whatsoever upon any properties or assets of Borrower, other than Per-
mitted Liens, or (iv) require any approval of stockholders or any approval or
consent of any Person under any material contractual obligation of Borrower.
(c) Other than the filing of appropriate financing state-
ments, fixture filings, and the Mortgages, the execution, delivery, and perform-
ance by Borrower of this Agreement and the Loan Documents to which Borrower is
a party do not and will not require any registration with, consent, or approval
of, or notice to, or other action with or by, any federal, state, foreign, or
other Governmental Authority or other Person.
(d) This Agreement and the Loan Documents, and all other
documents contemplated hereby and thereby, when executed and delivered by
Borrower will be the legally valid and binding obligations of Borrower, enforce-
able against Borrower in accordance with their respective terms, except as en-
forcement may be limited by equitable principles or by bankruptcy, insolvency,
reorganization, moratorium, or similar laws relating to or limiting creditors'
rights generally.
(e) The Liens granted by Borrower to the Lender Group on
its properties and assets pursuant to the Loan Documents are validly created,
perfected, and first priority Liens, subject only to Permitted Liens.
5.10 Litigation. There are no actions or proceedings pending
by or against Borrower before any court or administrative agency and Borrower
does not have knowledge or belief of any pending, threatened, or imminent liti-
gation, governmental investigations, or claims, complaints, actions, or prosecu-
tions involving Borrower, except for: (a) ongoing collection matters in which
Borrower is the plaintiff; (b) matters disclosed on Schedule 5.10; and (c) mat-
ters arising after the date hereof that, if decided adversely to Borrower, would
not be reasonably likely to cause a Material Adverse Change.
5.11 No Material Adverse Change. All financial statements re-
lating to Borrower that have been delivered by Borrower to the Lender Group have
been prepared in accordance with GAAP (except, in the case of unaudited finan-
cial statements, for the lack of footnotes and being subject to year-end audit
adjustments) and fairly present Borrower's financial condition as of the date
thereof and Borrower's results of operations for the period then ended. There
has not been a Material Adverse Change since the date of the latest financial
statements submitted to the Lender Group on or before the Closing Date.
5.12 Solvency. Borrower is Solvent, and as of the Closing Date,
Borrower is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Borrower's properties and assets
would constitute unreasonably small capital after giving due consideration to
the prevailing practices in the industry in which Borrower is engaged. No trans-
fer of property is being made by Borrower and no obligation is being incurred by
any Borrower in connection with the transactions
<PAGE>
contemplated by this Agreement or the other Loan Documents with the intent to
hinder, delay, or defraud either present or future creditors of Borrower.
5.13 Employee Benefits. Except as provided in Schedule 5.13,
each Plan (other than a Multiemployer Plan) is in compliance in all material
respects with the applicable provisions of ERISA and the IRC, except where fail-
ure to comply could not reasonably be expected to have a material adverse effect
on the financial condition of Borrower. Each Plan intended to be qualified under
Section401(a) of the IRC (other than a Multiemployer Plan) has been determined
by the Internal Revenue Service to be so qualified, and the trusts created
thereunder have been determined to be exempt from tax under Section 501 of the
IRC, and, to the best knowledge of Borrower, nothing has occurred that would
cause the loss of such qualification or tax-exempt status. There are no out-
standing liabilities under Title IV of ERISA with respect to any Plan maintained
or sponsored by Borrower or any ERISA Affiliate, nor with respect to any Plan to
which Borrower or any ERISA Affiliate contributes or is obligated to contribute
which could reasonably be expected to have a material adverse effect on the fi-
nancial condition of Borrower. No Benefit Plan subject to Title IV of ERISA has
any unfunded benefit liability under Section 4001(a)(18) of ERISA (an "Unfunded
Benefit Liability") which could reasonably be expected to have a material ad-
verse effect on the financial condition of Borrower. Neither Borrower nor any
ERISA Affiliate has transferred any Unfunded Benefit Liability to a person other
than Borrower or an ERISA Affiliate or has otherwise engaged in a transaction
that could be subject to Sections 4069 or 4212(c) of ERISA which could reason-
ably be expected to have a material adverse effect on the financial condition of
Borrower. Neither Borrower nor any ERISA Affiliate has incurred nor reasonably
expects to incur (x) any liability (and no event has occurred which, with the
giving of notice under Section 4219 of ERISA, would result in such liability)
under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan, or
(y) any liability under Title IV of ERISA (other than premiums due but not de-
linquent under Section 4007 of ERISA) with respect to a Benefit Plan, which
could, in either event, reasonably be expected to have a material adverse
effect on the financial condition of Borrower. No application for a funding
waiver or an extension of any amortization period pursuant to Section 412 of the
IRC has been made with respect to any Benefit Plan. No ERISA Event has
occurred or is reasonably expected to occur with respect to any Plan which could
reasonably be expected to have a material adverse effect on the financial condi-
tion of Borrower.
5.14 Environmental Condition. Except as provided in Schedule
5.14, none of Borrower's properties or assets has ever been used by Borrower or,
to the best of Borrower's knowledge, by previous owners or operators in the dis-
posal of, or to produce, store, handle, treat, release, or transport, any Haz-
ardous Materials. Except as provided in Schedule 5.14, none of Borrower's pro-
perties or assets has ever been designated or identified in any manner pursuant
to any environmental protection statute as a Hazardous Materials disposal site,
or a candidate for environmental remediation pursuant to any environmental pro-
tection statute. The Borrower has not received any notice that any lien arising
under any environmental protection statute has attached to any revenues or to
any real or personal property owned or operated by Borrower. Borrower has not
received a
<PAGE>
summons, citation, notice, or directive from the federal Environmental Protec-
tion Agency or any other federal or state governmental agency concerning any
action or omission by Borrower resulting in the releasing or disposing of Haz-
ardous Materials into the environment.
5.15 Reliance by the Lender Group; Cumulative. Each warranty
and representation contained in this Agreement automatically shall be deemed
repeated with each extension of credit hereunder and shall be conclusively pre-
sumed to have been relied on by the Lender Group regardless of any investigation
made or information possessed by the Lender Group. The warranties and represen-
tations set forth herein shall be cumulative and in addition to any and all
other warranties and representations that Borrower now or hereafter shall give,
or cause to be given, to the Lender Group.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit here-
under shall be available and until full and final payment of the Obligations,
and unless the Lender Group shall otherwise consent in writing, Borrower shall
do all of the following:
6.1 Accounting System. Maintain a standard and modern system
of accounting in accordance with GAAP with ledger and account cards or computer
tapes, disks, printouts, and records pertaining to the Collateral which contain
information as from time to time may be requested by Agent. Borrower also shall
keep a modern inventory reporting system that shows all additions, sales,
claims, returns, and allowances with respect to its Inventory.
6.2 Collateral Reporting. Provide Agent with the following
documents at the following times in form satisfactory to Agent: (a) as requested
by Agent from time to time, daily flash sales results, (b) on Tuesday of each
week for the week ending on the prior Saturday, a detailed calculation of the
Borrowing Base with Inventory reports specifying Borrower's cost of its Inven-
tory by category, (c) on a monthly basis, as soon as available but, in any event
by no later than the twenty fifth (25th) day of each month during the term of
this Agreement, a summary aging, by vendor, of Borrower's accounts payable and
any book overdraft and an Inventory report specifying Borrower's cost of its
Inventory by category, with additional detail showing additions to and deletions
from its Inventory, (d) no less frequently than weekly, a report detailing all
amounts due and payable by Borrower (i) to JBI Holding Company, Inc. ("JBI")
pursuant to the License Agreement, dated December 1, 1994 between Borrower and
JBI, together with all amounts receivable from JBI under the License Agreement,
(ii) to any consignor to Borrower of goods arising out of Borrower's sales of
such consigned goods, together with all amounts receivable from such consignor
arising out of such consignment relationship; and (e) such other reports as to
the Collateral or the financial condition of Borrower as Agent may reasonably
request from time to time.
<PAGE>
6.3 Financial Statements, Reports, Certificates. Deliver to
Agent and Co-Agent: (a) as soon as available, but in any event within thirty
(30) days after the end of each month during each of Borrower's fiscal years,
a company prepared balance sheet, income statement, and cash flow statement
covering Borrower's operations during such period; and (b) as soon as available,
but in any event within ninety (90) days after the end of each of Borrower's
fiscal years, financial statements of Borrower for each such fiscal year, audit-
ed by independent certified public accountants reasonably acceptable to Agent
and certified, without any qualifications, by such accountants to have been pre-
pared in accordance with GAAP. Borrower shall request its accountants to deliver
to Agent and Co-Agent, concurrently with the completion of the above described
annual statements, a certificate of such accountants addressed to Agent and Co-
Agent stating that such accountants do not have knowledge of the existence of
any Default or Event of Default. Such audited financial statements shall include
a balance sheet, profit and loss statement, and cash flow statement, and, if
prepared, such accountants' letter to management.
Together with the above, Borrower also shall deliver to Agent
and Co-Agent Borrower's, and after the Merger, Fred's, Form 10-Q Quarterly
Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other
filings made by Borrower or Fred's, as applicable, with the Securities and Ex-
change Commission, as soon as the same are filed, or any other information that
is provided by Borrower or Fred's, as applicable, to its shareholders, and any
other report reasonably requested by the Lender Group relating to the Collateral
or the financial condition of Borrower.
Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrower shall deliver to Agent and Co-Agent a
certificate in the form of Exhibit 6.3, addressed to the Lender Group and signed
by its chief financial officer to the effect that: (i) all reports, statements,
or computer prepared information of any kind or nature delivered or caused to be
delivered to Agent hereunder have been prepared in accordance with GAAP (except,
in the case of unaudited financial statements, for the lack of footnotes and
being subject to year-end audit adjustments) and fairly present the financial
condition of Borrower, (ii) the representations and warranties contained in this
Agreement and the other Loan Documents are true and correct in all material
respects on and as of the date of such certificate, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date), (iii) for each month that also is the date on which
a financial covenant in Section 6.11 or Section 7.10 is to be tested, a certifi-
cate demonstrating in reasonable detail compliance at the end of such period
with the applicable financial covenants contained in Section 6.11 or Section
7.10, as applicable, and (iv) on the date of delivery of such certificate to
Agent there does not exist any condition or event that constitutes a Default
or Event of Default (or, in each case, to the extent of any non-compliance,
describing such non-compliance as to which he or she may have knowledge and what
action Borrower has taken, is taking, or proposes to take with respect thereto).
Borrower shall have issued written instructions to its inde-
pendent certified public accountants authorizing them to communicate with Agent
and to release to
<PAGE>
Agent whatever financial information concerning Borrower that Agent may reason-
ably request. Borrower hereby irrevocably authorizes and directs all auditors,
accountants, or other third parties (other than legal counsel) to deliver to
Agent, at Borrower's expense, copies of Borrower's financial statements, papers
related thereto, and other accounting records of any nature in their possession,
and to disclose to Agent any information they may have regarding Borrower's
business affairs and financial conditions.
6.4 Tax Returns. Cause to be delivered to Agent copies of
Borrower's future federal income tax returns, and any amendments thereto, within
thirty (30) days of the filing thereof with the Internal Revenue Service.
6.5 Intentionally Omitted.
6.6 Returns. Returns and allowances, if any, as between
Borrower and its customers shall be on the same basis and in accordance with the
usual customary practices of Borrower, as they exist at the time of the execu-
tion and delivery of this Agreement.
6.7 Title to Equipment. Upon Agent's request, Borrower
immediately shall deliver to Agent, properly endorsed, any and all evidences of
ownership of, certificates of title, or applications for title to any items of
Equipment.
6.8 Maintenance of Equipment. Maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Except for Equipment
that is encumbered by a Mortgage, and Equipment that may be purchased in accord-
ance with Section 7.10, Borrower shall not permit any item of Equipment to
become a fixture to real estate or an accession to other property, and the
Equipment is now and shall at all times remain personal property.
6.9 Taxes. Except for Permitted Protests, all assessments and
taxes, whether real, personal, or otherwise, due or payable by, or imposed,
levied, or assessed against Borrower or any of its property shall be paid in
full, before delinquency or before the expiration of any extension period.
Except for Permitted Protests, Borrower shall make due and timely payment or
deposit of all federal, state, and local taxes, assessments, or contributions
required of it by law, and will execute and deliver to execute and deliver to
Agent, on demand, appropriate certificates attesting to the payment thereof or
deposit with respect thereto. Borrower will make timely payment or deposit of
all tax payments and withholding taxes required of it by applicable laws, in-
cluding those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish or cause to be
furnished to Agent proof satisfactory to Agent indicating that Borrower has made
such payments or deposits.
<PAGE>
6.10 Insurance.
(a) At its expense, Borrower shall keep the Collateral
and the Real Property insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as are ordi-
narily insured against by other owners in similar businesses. Borrower also
shall maintain business interruption, public liability, product liability, and
property damage insurance relating to Borrower's ownership and use of the Col-
lateral and the Real Property, as well as insurance against larceny, embezzle-
ment, and criminal misappropriation.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as may be reasonably satisfactory to
Agent. All such policies of insurance (except those of public liability and
property damage in respect of real property) shall contain a lender's loss pay-
able endorsement in a form reasonably satisfactory to Agent, showing Agent as
loss payee thereof, as its interest appears, and shall contain a waiver of war-
ranties, and shall specify that the insurer must give at least ten (10) days
prior written notice to Agent before canceling its policy for any reason. Bor-
rower shall deliver to Agent certified copies of such policies of insurance and
evidence of the payment of all premiums therefor. All proceeds payable under any
such policy shall be payable to Agent for the benefit of the Lender Group to be
applied on account of the Obligations.
6.11 Financial Covenants. Prior to the Merger, maintain the
following:
(a) Tangible Net Worth. Tangible Net Worth of not less
than $24,000,000 as determined at the end of each fiscal quarter of each fiscal
year of Borrower;
(b) Working Capital. Working Capital of not less than
$40,000,000, measured on a fiscal quarter-end basis;
(c) Current Ratio. A ratio of Consolidated Current
Assets divided by Consolidated Current Liabilities of at least one and one tenth
to one (1.1:1.0), measured on a fiscal quarter-end basis; and
(d) Total Liabilities to Tangible Net Worth Ratio. A
ratio of Borrower's total liabilities divided by Tangible Net Worth of not more
than nine to one (9.0:1.0), measured on a fiscal quarter-end basis.
After the Merger, maintain the following:
(a) Tangible Net Worth. Tangible Net Worth of not less
than $1,000,000 as determined at the end of each fiscal quarter of each fiscal
year of Borrower;
(b) Working Capital. Working Capital of not less than
$30,000,000, measured on a fiscal quarter-end basis;
<PAGE>
(c) Current Ratio. A ratio of Consolidated Current
Assets divided by Consolidated Current Liabilities of at least one to one
(1.0:1.0), measured on a fiscal quarter-end basis; and
(d) Total Liabilities to Tangible Net Worth Ratio. A
ratio of Borrower's total liabilities divided by Tangible Net Worth of not more
than one hundred sixty to one (160:1.0) measured on a fiscal quarter-end basis.
In addition, Borrower's aggregate net losses after May 31,
1996 shall not exceed $10,000,000 (net of Non-Cash Losses, if any, recorded as a
result of additional store closings (but in no event more than $250,000 per
store closing or more than $2,500,000 for all such store closings in any fiscal
year of Borrower) and non-cash losses resulting from accounting pronouncements
issued after the Closing Date).
6.12 No Setoffs or Counterclaims. All payments hereunder and
under the other Loan Documents made by or on behalf of Borrower shall be made
without setoff or counterclaim and free and clear of, and without deduction or
withholding for or on account of, any federal, state, or local taxes.
6.13 Location of Inventory and Equipment. Keep its Inventory
and Equipment only at the locations identified on Schedule 6.13; provided,
however, that Borrower may amend Schedule 6.13 so long as such amendment occurs
by written notice to Agent not less than thirty (30) days prior to the date on
which such Inventory or Equipment is moved to such new location, so long as such
new location is within the continental United States, and so long as, at the
time of such written notification, Borrower provide any financing statements or
fixture filings necessary to perfect and continue perfected the Liens of the
Lender Group on such assets and also provides to Agent a Collateral Access
Agreement. Borrower shall not keep any of its Inventory at a location owned by
or leased to Fred's or any other of Fred's Affiliates, nor shall Borrower keep
any Inventory of Fred's or any of Fred's Affiliates at any location owned by or
leased to Borrower.
6.14 Compliance with Laws. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any governmental authority,
including the Fair Labor Standards Act and the Americans With Disabilities Act,
other than laws, rules, regulations, and orders the non-compliance with which,
individually or in the aggregate, would not have and could not reasonably be
expected to have a Material Adverse Change.
6.15 Employee Benefits.
(a) Furnish to the Agent (i) promptly, and in any event
within thirty (30) Business Days after Borrower knows or has reason to know that
an ERISA Event has occurred, a written statement of the chief financial officer
of Borrower describing such ERISA Event and any action that is being taking with
respect thereto by Borrower or any ERISA Affiliate, and any action taken or
threatened by the IRS, Department of Labor, or
<PAGE>
PBGC shall be furnished to the Agent, (ii) promptly, and in any event within
three (3) Business Days after the filing thereof with the IRS, a copy of each
funding waiver request filed with respect to any Benefit Plan and all communica-
tions received by or, to the knowledge of Borrower, any ERISA Affiliate with
respect to such request, and (iii) promptly, and in any event within fifteen
(15) Business Days after receipt by Borrower, any of its Subsidiaries or, to
the knowledge of Borrower, any ERISA Affiliate, of the PBGC's intention to
terminate a Benefit Plan or to have a trustee appointed to administer a Benefit
Plan, copies of each such notice.
(b) Cause to be delivered to Agent, upon Agent's request,
each of the following: (i) a copy of each Plan (or, where any such plan is not
in writing, complete description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been distri-
buted to employees or former employees of Borrower; (ii) the most recent deter-
mination letter issued by the IRS with respect to each Benefit Plan; (iii) for
the three most recent plan years, annual reports on Form 5500 Series required to
be filed with any governmental agency for each Benefit Plan; (iv) all actuarial
reports prepared for the last three plan years for each Benefit Plan; (v) a
listing of all Multiemployer Plans, with the aggregate amount of the most
recent annual contributions required to be made by Borrower or any ERISA Affil-
iate to each such plan and copies of the collective bargaining agreements re-
quiring such contributions; (vi) any information that has been provided to
Borrower or any ERISA Affiliate regarding withdrawal liability under any Multi-
employer Plan; and (vii) the aggregate amount of the most recent annual payments
made to former employees of Borrower under any Retiree Health Plan.
6.16 Leases. Pay, or cause to be paid, when due all rents and
other amounts payable under any leases to which Borrower is a party or by which
Borrower's properties and assets are bound, unless such payments are the subject
of a Permitted Protest. To the extent that Borrower fails timely to make payment
of such rents and other amounts payable when due under its leases, Agent shall
be entitled, in its discretion, and without the necessity of declaring an Event
of Default, to reserve an amount equal to such unpaid amounts against the Bor-
rowing Base. To the extent that Agent does not receive Collateral Access Agree-
ments for all of Borrower's locations on Schedule E-1 within sixty (60) days of
the date hereof, Agent shall be entitled, in its reasonable discretion, to
establish reserves against the Borrowing Base, in addition to any such reserves
otherwise established under this Section 6.16, for the maximum amount of any
potential liability of Borrower to those landlords who have not entered into
such Collateral Access Agreements, under any applicable state statute providing
for landlord liens, liens for distress or distraint or similar statutory provi-
sions.
6.17 Collateral Access Agreements. Borrower shall use its best
efforts to obtain and deliver to Agent Collateral Access Agreements for all of
Borrower's locations set forth on Schedule E-1. The failure to obtain any such
Collateral Access Agreement after using best efforts shall not constitute an
Event of Default.
<PAGE>
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, Borrower
will not do any of the following:
7.1 Indebtedness. Create, incur, assume, permit, guarantee,
or otherwise become or remain, directly or indirectly, liable with respect to
any Indebtedness, except:
(a) Indebtedness evidenced by this Agreement;
(b) Indebtedness set forth in the latest financial
statements of Borrower submitted to Agent on or prior to the Closing Date (other
than amounts owed to the Existing Lender that will be repaid on the Closing
Date);
(c) Indebtedness secured by Permitted Liens; and
(d) refinancings, renewals or extensions of Indebtedness
permitted under clauses (b) and (c) of this Section 7.1 (and continuance or re-
newal of any Permitted Liens associated therewith) so long as: (i) the terms and
conditions of such refinancings, renewals or extensions do not materially impair
the prospects of repayment of the Obligations by Borrower, (ii) the net cash
proceeds of such refinancings, renewals or extensions do not result in an in-
crease in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or exten-
sions do not result in an increase in the rate of interest charged (other than
in the case of capital leases), an increase in the amortization (other than in
the case of capital leases to the extent arising out of an increase in the rate
of interest charged), a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended or the taking of additional
collateral or guarantees, and (iv) to the extent that Indebtedness that is
refinanced was subordinated in right of payment to the Obligations, then the
subordination terms and conditions of the refinancing Indebtedness must be at
least as favorable to the Lender Group as those applicable to the refinanced
Indebtedness.
7.2 Liens. Create, incur, assume, or permit to exist, directly
or indirectly, any Lien on or with respect to any of its property or assets, of
any kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(d) and so long as the replacement Liens only cover those assets or
property that secured the original Indebtedness).
7.3 Restrictions on Fundamental Changes. Except for the Merger
and the reverse stock split contemplated by the Merger Agreement, enter into any
acquisition, merger, consolidation, reorganization, or recapitalization, or re-
classify its capital stock, or liquidate, wind up, or dissolve itself (or suffer
any liquidation or dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of
<PAGE>
transactions, all or any substantial part of its business, property, or assets,
whether now owned or hereafter acquired, or acquire by purchase or otherwise
all or substantially all of the properties, assets, stock, or other evidence of
beneficial ownership of any Person. In the case of a recapitalization of
Borrower, such recapitalization shall not be completed without the prior written
consent of Agent which consent shall not be unreasonably withheld.
7.4 Extraordinary Transactions and Disposal of Assets. Enter
into any transaction not in the ordinary and usual course of Borrower's busi-
ness, including the sale, lease, or other disposition of, moving, relocation, or
transfer, whether by sale or otherwise, of any of Borrower's properties or
assets other than (a) sales of Inventory to buyers in the ordinary course of
Borrower's business as currently conducted, and (b) the opening or relocation
by Borrower of up to ten (10) stores and the closing by Borrower of up to ten
(10) stores in any fiscal year.
7.5 Change Name. Change Borrower's name, FEIN, corporate
structure (within the meaning of Section 9402(7) of the Code) or identity, or
add any new fictitious name.
7.6 Guarantee. Except for indemnifications of directors and
officers pursuant to Delaware law and Borrower's By-Laws, guarantee or otherwise
become in any way liable with respect to the obligations of any third Person,
except by endorsement of instruments or items of payment for deposit to the
account of Borrower or which are transmitted or turned over to Agent.
7.7 Restructure. Make any change in its financial structure,
the principal nature of its business operations (other than the addition of
pharmacies to Borrower's stores), or the date of its fiscal year (other than to
conform with Fred's after the Merger).
7.8 Prepayments.
(a) Except in connection with a refinancing permitted by
Section 7.1(d) prepay, redeem, retire, defease, purchase, or otherwise acquire
any Indebtedness of Borrower owing to any third Person, other than the Obliga-
tions in accordance with this Agreement; and
(b) directly or indirectly, amend, modify, alter, in-
crease, or change any of the terms or conditions of any agreement, instrument,
document, indenture, or other writing evidencing or concerning Indebtedness per-
mitted under Sections 7.1(b), (c), or (d).
7.9 Change of Control. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
<PAGE>
7.10 Capital Expenditures. Make capital expenditures where the
aggregate amount of such capital expenditures in any fiscal year of Borrower is
in excess of $8,000,000.
7.11 Consignments. Consign any of Borrower's Inventory or sell
any of Borrower's Inventory on bill and hold, sale or return, sale on approval,
or other conditional terms of sale.
7.12 Distributions. Except for reasonable tax allocation pay-
ments to Fred's following the Merger, and payments of not more than $400,000 in
respect of shares as required to consummate the reverse stock split contemplated
to occur in connection with the Merger, make any distribution or declare or pay
any dividends (in cash or other property, other than capital stock) on, or pur-
chase, acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding.
7.13 Accounting Methods. Modify or change its method of
accounting except as may be necessary to comply with GAAP.
7.14 Investments. Directly or indirectly make, acquire, or
incur any liabilities (including contingent obligations) for or in connection
with (a) the acquisition of the securities of (whether debt or equity), or other
interests in, a Person, (b) loans, advances, capital contributions, or transfers
of property to a Person, or (c) the acquisition of all or substantially all of
the properties or assets of a Person except for the acquisition of pharmacy In-
ventory and related assets made in accordance with all applicable federal, state
and local laws and where the purchase price paid by Borrower for such pharmacy
Inventory and related assets does not exceed $200,000, per acquisition, and
would not, in the aggregate with all such other purchases made in the same
Fiscal Year, exceed $1,200,000.
7.15 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate except for:
(a) the Fred's Transactions; (b) reasonable tax allocation payments to Fred's
following the Merger; and (c) transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms, that are fully disclosed to
Agent, and that are no less favorable to Borrower than would be obtained in an
arm's length transaction with a non-Affiliate; provided, however, that no trans-
action between Borrower, on the one hand, and Fred's or any of Fred's Affil-
iates, on the other hand, shall be permitted under this Section 7.15 if the por-
tion of Borrower's aggregate net account receivable due from Fred's or such
Affiliates relating to Fred's Transactions that is more than thirty (30) days
old exceeds $250,000 outstanding at any one time.
7.16 Suspension. Suspend or go out of a substantial portion of
its business.
7.17 Intentionally Omitted.
<PAGE>
7.18 Use of Proceeds. Use the proceeds of the Advances made
hereunder for any purpose other than: (a) on the Closing Date, (i) to repay the
outstanding principal, accrued interest, and accrued fees and expenses of
Borrower owing to Existing Lender, and (ii) to pay transactional costs and ex-
penses incurred in connection with this Agreement; and (b) thereafter, consist-
ent with the terms and conditions hereof, for its lawful and permitted corporate
purposes.
7.19 Change in Location of Chief Executive Office; Inventory
and Equipment with Bailees. Without thirty (30) days prior written notification
to Agent, relocate its chief executive office to a new location, unless, at the
time of such written notification, Borrower provides any financing statements or
fixture filings necessary to perfect and continue perfected the Liens of the
Lender Group and also provides to Agent a Collateral Access Agreement. The
Inventory and Equipment of Borrower shall not at any time now or hereafter be
stored with a bailee, warehouseman, or similar party without Agent's prior
written consent which consent shall not be unreasonably withheld.
7.20 No Prohibited Transactions Under ERISA. Directly or
indirectly:
(a) Engage in any prohibited transaction which is rea-
sonably likely to result in a material civil penalty or excise tax described in
Sections 406 of ERISA or 4975 of the IRC for which a statutory or class exemp-
tion is not available or a private exemption has not been previously obtained
from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;
(c) fail to pay timely required contributions or annual
installments due with respect to any waived funding deficiency to any Benefit
Plan;
(d) terminate any Benefit Plan where such event would
result in any liability of Borrower, any of its Subsidiaries or any ERISA Affil-
iate under Title IV of ERISA;
(e) fail to make any required contribution or payment
to any Multiemployer Plan;
(f) fail to pay any required installment or any other
payment required under Section 412 of the IRC on or before the due date for such
installment or other payment;
(g) amend a Plan resulting in an increase in current
liability for the plan year such that Borrower, any Subsidiary of Borrower, or
any ERISA Affiliate is required to provide security to such Plan under Section
401(a)(29) of the IRC; or
<PAGE>
(h) withdraw from any Multiemployer Plan where such
withdrawal is reasonably likely to result in any liability of any such entity
under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be ex-
pected to result in a claim against or liability of Borrower, or any ERISA
Affiliate in excess of $1,000,000.
7.21 Merger. Notwithstanding anything to the contrary contain-
ed in this Agreement or the Loan Documents, the Merger, as disclosed to the
Lender Group as of the Closing Date, has been consented to by the Lender Group
to the extent that such consent is necessary to avoid an Event of Default
arising solely out of the consummation of the Merger.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event
of default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when de-
clared due and payable, any portion of the Obligations (whether of principal,
interest (including any interest which, but for the provisions of the Bankruptcy
Code, would have accrued on such amounts), fees and charges due the Lender
Group, reimbursement of Lender Group Expenses, or other amounts constituting
Obligations;
8.2 If either Borrower fails or neglects to perform, keep, or
observe any term, provision, condition, covenant, or agreement contained in Sec-
tion 6.2 which failure or neglect continues for five (5) or more days, or in the
case of Sections 6.3, 6.4, 6.13, 6.15, or 6.16 which failure or neglect contin-
ues for ten (10) or more days, or any other term, provision, condition, cove-
nant, or agreement contained in this Agreement, in any of the Loan Documents, or
in any other present or future agreement between such Borrower and the Lender
Group;
8.3 If there is a Material Adverse Change that is not solely a
material adverse change in the financial operations or condition of Borrower at
a time when all financial covenants under the relevant portions of Section 6.11
have been met;
8.4 If any material portion of Borrower's properties or assets
is attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by Borrower;
8.6 If an Insolvency Proceeding is commenced against Borrower
and any of the following events occur: (a) Borrower consents to the institution
of the Insolvency Proceeding against it; (b) the petition commencing the Insolv-
ency Proceeding is not timely controverted; (c) the petition commencing the In-
solvency Proceeding is not dismissed within
<PAGE>
forty-five (45) calendar days of the date of the filing thereof; provided, how-
ever, that, during the pendency of such period, Agent and any other members of
the Lender Group shall be relieved of any obligation to extend credit hereunder;
(d) an interim trustee is appointed to take possession of all or a substantial
portion of the properties or assets of, or to operate all or any substantial
portion of the business of, Borrower; or (e) an order for relief shall have been
issued or entered therein;
8.7 If Borrower is enjoined, restrained, or in any way pre-
vented by court order from continuing to conduct all or any material part of its
business affairs;
8.8 If a notice of Lien, levy, or assessment (other than a
Permitted Lien) is filed of record with respect to any of Borrower's properties
or assets by the United States Government, or any department, agency, or instru-
mentality thereof, or by any state, county, municipal, or governmental agency,
or if any taxes or debts owing at any time hereafter to any one or more of such
entities becomes a Lien (other than a Permitted Lien), whether choate or other-
wise, upon any of an Borrower's properties or assets and the same is not paid on
the payment date thereof; provided, however, that no such notice of Lien, levy,
or assessment, and no such Lien, shall constitute an Event of Default hereunder
to the extent that Borrower is diligently pursuing the cure thereof by appro-
priate means and that (a) the aggregate amount in respect of all such Liens or
notices under this provision is less than $50,000, (b) such Lien, levy or as-
sessment is not a federal tax lien, and (c) such Lien, levy or assessment is
satisfied within thirty (30) days of the date that it arose; provided further,
however, that Agent may establish a reserve as provided under Section 10 during
the pendency of such period;
8.9 If a judgment or other claim becomes a Lien upon any mate-
rial portion of Borrower's assets and such judgment is not satisfied or released
within thirty (30) days of the date thereof.
8.10 If there is a default in any material agreement to which
Borrower is a party with one or more third Persons resulting in a right by such
third Persons, irrespective of whether exercised, to accelerate the maturity of
Borrower's obligations thereunder;
8.11 If Borrower makes any payment on account of Indebtedness
that has been contractually subordinated in right of payment to the payment in
respect of the Obligations, except to the extent such payment is permitted by
the terms of the subordination provisions applicable to such Indebtedness;
8.12 If any material misstatement or material misrepresentation
exists now or hereafter in any warranty, representation, statement, or report
made to the Lender Group by Borrower or any officer, employee, agent, or direct-
or thereof, or if any such material warranty or material representation is with-
drawn; or
<PAGE>
8.13 If (a) with respect to any Plan, there shall occur any of
the following which could reasonably be expected to have a material adverse
effect on the financial condition of Borrower: (i) other than with respect to
any Multiemployer Plan, the violation of any of the provisions of ERISA; (ii)
other than with respect to any Multiemployer Plan, the loss by a Plan intended
to be a Qualified Plan of its qualification under Section 401(a) of the IRC;
(iii) the incurrence of liability under Title IV of ERISA; (iv) a failure to
make full payment when due of all amounts which, under the provisions of any
Plan or applicable law, Borrower or any ERISA Affiliate is required to make;
(v) the filing of a notice of intent to terminate a Plan under Sections 4041 or
4041A of ERISA; (vi) a complete or partial withdrawal of Borrower or an ERISA
Affiliate from any Plan; (vii) the receipt of a notice by the plan administrator
of a Benefit Plan that the PBGC has instituted proceedings to terminate such
Plan or appoint a trustee to administer such Plan; (viii) a commencement or
increase of contributions to, or the adoption of or the amendment of, a Plan;
and (ix) the assessment against Borrower or any ERISA Affiliate of a tax under
Section 4980B of the IRC; or (b) the Unfunded Benefit Liability of all of the
Benefit Plans of Borrower and its ERISA Affiliates shall, in the aggregate,
exceed $1,000,000.
9. THE LENDER GROUP'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence and during the
continuation of an Event of Default, Agent may, pursuant to Sections 17.4 and
17.5 do one or more of the following on behalf of the Lender Group, all of which
are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable;
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement, under any of the Loan Documents,
or under any other agreement between Borrower and the Lender Group;
(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of the Lender Group, but
without affecting the Lender Group's rights in and Liens on the Collateral and
without affecting the Obligations;
(d) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Agent considers commercially
reasonable, and in such cases, Agent will credit Borrower's Loan Account with
only the net amounts received by Agent in payment of such disputed Accounts
after deducting all Lender Group Expenses incurred or expended in connection
therewith;
(e) Intentionally Omitted;
<PAGE>
(f) Without notice to or demand upon Borrower, make
such payments and do such acts as Agent considers necessary or reasonable to
protect the Lender Group's Liens on the Collateral. Borrower agrees to assemble
the Collateral if Agent so requires, and to make the Collateral available to
Agent as Agent may designate. Borrower authorizes Agent to enter the premises
where the Collateral is located, to take and maintain possession of the Collate-
ral, or any part of it, and to pay, purchase, contest, or compromise any Lien or
charge that in Agent's determination appears to conflict with the Lender Group's
Liens and to pay all expenses incurred in connection therewith. With respect to
any of Borrower's owned premises, Borrower hereby grants Agent a license to
enter into possession of such premises and to occupy the same, without charge,
for up to one hundred twenty (120) days in order to exercise any of the Lender
Group's rights or remedies provided herein, at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being ex-
pressly waived), and without constituting a retention of any collateral in sat-
isfaction of an obligation (within the meaning of Section 9505 of the Code), set
off and apply to the Obligations any and all (i) balances and deposits of Bor-
rower held by the Lender Group (including any amounts received in the Lockbox
Accounts), or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by the Lender Group;
(h) Hold, as cash collateral, any and all balances and
deposits of Borrower held by the Lender Group, and any amounts received in the
Lockbox Accounts, to secure the full and final repayment of all of the Obliga-
tions;
(i) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Agent hereby is granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and Borrower's rights under all licenses and all franchise agreements shall
inure to the Lender Group's benefit;
(j) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
Agent determines is commercially reasonable. It is not necessary that the Col-
lateral be present at any such sale;
(k) Agent shall give notice of the disposition of the
Collateral as follows:
(1) Agent shall give Borrower and each holder of a
security interest in the Collateral who has filed with Agent a written request
for notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after
<PAGE>
which the private sale or other disposition is to be made and the proposed terms
of such sale;
(2) The notice shall be personally delivered or
mailed, postage prepaid, to Borrower as provided in Section 12, at least five
(5) days before the date fixed for the sale, or at least five (5) days before
the date on or after which the private sale or other disposition is to be made;
no notice needs to be given prior to the disposition of any portion of the Col-
lateral that is perishable or threatens to decline speedily in value or that is
of a type customarily sold on a recognized market;
(3) If the sale is to be a public sale, Agent
also shall give notice of the time and place by publishing a notice one time at
least five (5) days before the date of the sale in a newspaper of general circu-
lation in the county in which the sale is to be held;
(l) The Lender Group may credit bid and purchase at any
public sale; and
(m) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Agent to Borrower.
9.2 Remedies Cumulative. The rights and remedies of the Lender
Group under this Agreement, the Loan Documents, and all other agreements shall
be cumulative. The Lender Group shall have all other rights and remedies not
inconsistent herewith as provided under the Code, by law, or in equity. No ex-
ercise by the Lender Group of one right or remedy shall be deemed an election,
and no waiver by the Lender Group of any Event of Default shall be deemed a
continuing waiver. No delay by the Lender Group shall constitute a waiver,
election, or acquiescence by it.
10. TAXES AND EXPENSES.
Except for Permitted Protests, if Borrower fails to pay any monies
(whether taxes, assessments, insurance premiums, or, in the case of leased pro-
perties or assets, rents or other amounts payable under such leases) due to
third Persons, or fails to make any deposits or furnish any required proof of
payment or deposit, all as required under the terms of this Agreement, then,
Agent, in its discretion and without notice, may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves in
Borrower's Loan Account as Agent deems necessary to protect the Lender Group
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type described in Section 6.10, and take any action with respect
to such policies as Agent deems prudent. Any such amounts paid by Agent shall
constitute Lender Group Expenses. Any such payments made by Agent shall not
constitute an agreement by the Lender Group to make similar payments in the
future or a waiver by the Lender Group any Event of Default under this Agree-
ment. Agent need not inquire as to, or contest the validity of, any
<PAGE>
such expense, tax, Lien and the receipt of the usual official notice for the
payment thereof shall be conclusive evidence that the same was validly due and
owing.
11. WAIVERS; INDEMNIFICATION.
11.1 Demand; Protest; etc. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and nonpay-
ment, notice of any default, nonpayment at maturity, release, compromise, set-
tlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees at any time held by the Lender Group on which Borrower may
in any way be liable.
11.2 The Lender Group's Liability for Collateral. So long as
the Lender Group complies with its obligations, if any, under Section 9207 of
the Code, the Lender Group shall not in any way or manner be liable or responsi-
ble for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto
occurring or arising in any manner or fashion from any cause; (c) any diminution
in the value thereof; or (d) any act or default of any carrier, warehouseman,
bailee, forwarding agency, or other Person. All risk of loss, damage, or de-
struction of the Collateral shall be borne by Borrower.
11.3 Indemnification. Borrower shall pay, indemnify, defend,
and hold the Agent-Related Persons, each Lender, each Participant, and each of
their respective officers, directors, employees, counsel, agents, and attorneys-
in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitt-
ed by law) from and against any and all claims, demands, suits, actions, invest-
igations, proceedings, and damages, and all reasonable attorneys fees and dis-
bursements and other costs and expenses actually incurred in connection there-
with (as and when they are incurred and irrespective of whether suit is
brought), at any time asserted against, imposed upon, or incurred by any of them
in connection with or as a result of or related to the execution, delivery, en-
forcement, performance, and administration of this Agreement and any other Loan
Documents or the transactions contemplated herein, and with respect to any in-
vestigation, litigation, or proceeding related to this Agreement, any other Loan
Document, or the use of the proceeds of the credit provided hereunder (irrespec-
tive of whether any Indemnified Person is a party thereto), or any act, omis-
sion, event or circumstance in any manner related thereto (all the foregoing,
collectively, the "Indemnified Liabilities"). Borrower shall not have any obli-
gation to any Indemnified Person under this Section 11.3 with respect to any
Indemnified Liability that a court of competent jurisdiction finally determines
to have resulted from the gross negligence or willful misconduct of such Indem-
nified Person. This provision shall survive the termination of this Agreement
and the repayment of the Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other Loan Document shall
be in writing and (except for financial statements and other informational docu-
ments which may be sent by first-class
<PAGE>
mail, postage prepaid) shall be personally delivered or sent by registered or
certified mail, postage prepaid, return receipt requested, or by prepaid telex,
overnight courier, telefacsimile, or telegram (with messenger delivery speci-
fied) to the relevant party at its address set forth below:
If to Borrower: ROSE'S STORES, INC.
P.H. Rose Building
218 South Garnett Street
Henderson, North Carolina 27536
Attn: Ms. Jeanette R. Peters,
Chief Financial Officer
Fax No. 919.430.2930
Prior to the merger
with copies to: PROSKAUER ROSE GOETZ & MENDELSOHN LLP
Counsel to Rose's Stores, Inc.
1585 Broadway
New York, New York 10036-8299
Attn: Michael E. Foreman, Esq.
Fax No. 212.969.2900
After the Merger
with copies to: FRED'S INC.
4300 New Getwell Road
Memphis, Tennessee 38118
Attn: Mr. Bruce D. Smith,
Chief Financial Officer
Fax No. 901.365.6815
And to: WARING COX
50 North Front Street
Suite 1300
Memphis, Tennessee 38103
Attn: Samuel D. Chafetz, Esq.
Fax No. 901.543.8006
If to Agent or to the
Lender Group in care of
Agent: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.575.3435
<PAGE>
with copies to: BUCHALTER, NEMER, FIELDS & YOUNGER
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017-5704
Attn: Robert C. Colton, Esq.
Fax No. 213.896.0400
and to: PPM FINANCE, INC.
225 West Wacker Drive, Suite 1200
Chicago, Illinois 60606
Attn: F. John Stark, III
Fax No. 312.635.0053
and to: ANDERSON, KILL, OLICK & OSHINSKY P.C.
1251 Avenue of the Americas
New York, New York 10020-1182
Attn: Gloria J. Frank, Esq.
Fax No. 212.278.1733
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
all other parties. All notices or demands sent in accordance with this Section
12, other than notices by the Lender Group in connection with Sections 9504 or
9505 of the Code, shall be deemed received on the earlier of the date of actual
receipt or three (3) days after the deposit thereof in the mail. Borrower ac-
knowledges and agrees that notices sent by the Lender Group in connection with
Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the
mail or transmitted by telefacsimile or other similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN
ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN
DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT
HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND
THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR
THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED
UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL
ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE
COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE
OPTION OF THE LENDER GROUP, IN ANY OTHER COURT IN WHICH THE
LENDER GROUP SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS
<PAGE>
AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY. BORROWER AND THE LENDER GROUP WAIVE, TO THE
EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY
HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO
OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 13. BORROWER AND THE LENDER
GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY
OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP EACH
REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers de-
livered to the Lender Group may be destroyed or otherwise disposed of by the
Lender Group four (4) months after they are delivered to or received by the
Lender Group, unless Borrower requests, in writing, the return of said docu-
ments, schedules, or other papers and makes arrangements, at Borrower's expense,
for their return.
15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.
15.1 Assignments and Participations.
(a) Any Lender may, with the written consent of Agent,
assign and delegate to one or more Eligible Transferees (each an "Assignee")
all, or any ratable part of all, of the Obligations, the Commitments and the
other rights and obligations of such Lender hereunder and under the other Loan
Documents, in a minimum amount of $5,000,000; provided, however, that Borrower
and Agent may continue to deal solely and directly with such Lender in connec-
tion with the interest so assigned to an Assignee until (i) written notice of
such assignment, together with payment instructions, addresses and related in-
formation with respect to the Assignee, shall have been given to Borrower and
Agent by such Lender and the Assignee; (ii) such Lender and its Assignee shall
have delivered to Borrower and Agent an Assignment and Acceptance ("Assignment
and Acceptance") in the form of Exhibit 15.1; and (iii) the assignor Lender or
Assignee has paid to Agent for Agent's sole and separate account a processing
fee in the amount of $2,500. Anything contained herein to the contrary notwith-
standing, the consent of Agent shall not be required (and payment of any fees
shall not be required) if such assignment is in
<PAGE>
connection with any merger, consolidation, sale, transfer, or other disposition
of all or any substantial portion of the business or loan portfolio of such
Lender.
(b) From and after the date that Agent notifies the
assignor Lender that it has received an executed Assignment and Acceptance and
payment of the above-referenced processing fee, (i) the Assignee thereunder
shall be a party hereto and, to the extent that rights and obligations here-
under have been assigned to it pursuant to such Assignment and Acceptance, shall
have the rights and obligations of a Lender under the Loan Documents, and (ii)
the assignor Lender shall, to the extent that rights and obligations hereunder
and under the other Loan Documents have been assigned by it pursuant to such
Assignment and Acceptance, relinquish its rights and be released from its obli-
gations under this Agreement (and in the case of an Assignment and Acceptance
covering all or the remaining portion of an assigning Lender's rights and obli-
gations under this Agreement and the other Loan Documents, such Lender shall
cease to be a party hereto and thereto), and such assignment shall effect a
novation between Borrower and the Assignee.
(c) By executing and delivering an Assignment and
Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm
to and agree with each other and the other parties hereto as follows: (1) other
than as provided in such Assignment and Acceptance, such assigning Lender makes
no representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement or any other Loan Document furnished pur-
suant hereto; (2) such assigning Lender makes no representation or warranty and
assumes no responsibility with respect to the financial condition of Borrower or
the performance or observance by Borrower of any of its obligations under this
Agreement or any other Loan Document furnished pursuant hereto; (3) such Assign-
ee confirms that it has received a copy of this Agreement, together with such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such Assignment and Acceptance; (4)
such Assignee will, independently and without reliance upon Agent, such assign-
ing Lender or any other Lender, and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking action under this Agreement; (5) such Assignee appoints
and authorizes Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to Agent by the terms hereof,
together with such powers as are reasonably incidental thereto; and (6) such
Assignee agrees that it will perform in accordance with their terms all of the
obligations which by the terms of this Agreement are required to be performed by
it as a Lender.
(d) Immediately upon each Assignee's making its processing
fee payment under the Assignment and Acceptance, this Agreement shall be deemed
to be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments arising
therefrom. The Commitment allocated to each Assignee shall reduce such Commit-
ments of the assigning Lender pro tanto.
<PAGE>
(e) Any Lender may at any time, with the written consent
of Agent, which consent shall not be unreasonably withheld, sell to one or more
Persons (a "Participant") participating interests in the Obligations, the Com-
mitment, and the other rights and interests of that Lender (the "Originating
Lender") hereunder and under the other Loan Documents; provided, however, that
(i) the Originating Lender's obligations under this Agreement shall remain un-
changed, (ii) the Originating Lender shall remain solely responsible for the
performance of such obligations, (iii) Borrower and Agent shall continue to deal
solely and directly with the originating Lender in connection with the Originat-
ing Lender's rights and obligations under this Agreement and the other Loan Doc-
uments, (iv) no Lender shall transfer or grant any participating interest under
which the Participant has the sole and exclusive right to approve any amendment
to, or any consent or waiver with respect to, this Agreement or any other Loan
Document, except to the extent such amendment to, or consent or waiver with
respect to this Agreement or of any other Loan Document would (A) extend the
final maturity date of the Obligations hereunder in which such participant is
participating; (B) reduce the interest rate applicable to the Obligations here-
under in which such Participant is participating; (C) release all or a material
portion of the Collateral (except to the extent expressly provided herein or in
any of the Loan Documents) supporting the Obligations hereunder in which such
Participant is participating; (D) postpone the payment of, or reduce the amount
of, the interest or fees payable to such Participant through such Lender; or (E)
change the amount or due dates of scheduled principal repayments or prepayments
or premiums; (v) all amounts payable by Borrower hereunder shall be determined
as if such Lender had not sold such participation; except that, if amounts out-
standing under this Agreement are due and unpaid, or shall have been declared or
shall have become due and payable upon the occurrence of an Event of Default,
each Participant shall be deemed to have the right of set-off in respect of its
participating interest in amounts owing under this Agreement to the same extent
as if the amount of its participating interest were owing directly to it as a
Lender under this Agreement; (vi) in the case of Foothill, Foothill, together
with its parents, Subsidiaries, and Affiliates, retain for their own account, at
all times, aggregate Commitments constituting not less than $20,000,000; and
(vii) in the case of Jackson, Jackson, together with its parents, Subsidiaries,
and Affiliates, retain, for their own account, at all times, aggregate Commit-
ments constituting not less than $40,000,000. The rights of any Participant
shall only be derivative through the Lender with whom such Participant partici-
pates and no Participant shall have any direct rights as to the other Lenders,
Agent, Co-Agent, Borrower, the Collections, the Collateral, or otherwise in re-
spect of the Advances. No Participant shall have the right to participate di-
rectly in the making of decisions by the Lenders among themselves. The provi-
sions of this Section 15.1(e) are solely for the benefit of the Lender Group,
and Borrower shall have no rights as a third party beneficiary of any of the
provisions in this Section.
(f) In connection with any such assignment or partici=
pation or proposed assignment or participation, a Lender may disclose to a third
party all documents and information which it now or hereafter may have relating
to Borrower or Borrower's business, provided that such Lender enters into a con-
fidentiality agreement with such third party in the form provided by Borrower to
Agent prior to the Closing Date.
<PAGE>
(g) Notwithstanding any other provision in this Agree-
ment, any Lender may at any time create a security interest in, or pledge, all
or any portion of its rights under and interest in this Agreement in favor of
any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S.
Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may
enforce such pledge or security interest in any manner permitted under applic-
able law.
15.2 Successors. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties; provid-
ed, however, that Borrower may not assign this Agreement or any rights or duties
hereunder without the Lenders' prior written consent and any prohibited assign-
ment shall be absolutely void. No consent to assignment by the Lenders shall
release Borrower from its Obligations. A Lender may assign this Agreement and
its rights and duties hereunder pursuant to Section 15.1 and, except as express-
ly required pursuant to Section 15.1, no consent or approval by Borrower is
required in connection with any such assignment.
16. AMENDMENTS; WAIVERS.
16.1 Amendments and Waivers. No amendment or waiver of any
provision of this Agreement or any other Loan Document, and no consent with
respect to any departure by Borrower therefrom, shall be effective unless the
same shall be in writing and signed by the Required Lenders (or by Agent at the
written request of the Required Lenders) and Borrower and then any such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, however, that no such waiver, amendment, or
consent shall, unless in writing and signed by all the Lenders and Borrower and
acknowledged by Agent, do any of the following:
(a) increase or extend the Commitment of any Lender;
(b) postpone or delay any date fixed by this Agreement
or any other Loan Document for any payment of principal, interest, fees or other
amounts due to the Lenders (or any of them) hereunder or under any other Loan
Document;
(c) reduce the principal of, or the rate of interest
specified herein on any Loan, or any fees or other amounts payable hereunder or
under any other Loan Document;
(d) change the percentage of the Commitments or of the
aggregate unpaid principal amount of the Advances which is required for the
Lenders or any of them to take any action hereunder;
(e) increase the advance rate with respect to Advances
(except for the restoration of an advance rate after the prior reduction there-
of), or change Section 2.1(b);
<PAGE>
(f) amend this Section or any provision of the Agreement
providing for consent or other action by all Lenders;
(g) release Collateral other than as permitted by Sec-
tion 17.11;
(h) increase the sublimit for credit available against
Eligible Inventory (currently contained in clause (y) of Section 2.1(a));
(i) change the definition of "Required Lenders";
(j) release Borrower from any Obligation for the pay-
ment of money; or
(k) amend any of the provisions of Article 17.
and, provided further, that no amendment, waiver or consent shall, unless in
writing and signed by Agent or Co-Agent, as the case may be, affect the rights
or duties of Agent or Co-Agent, respectively, under this Agreement or any other
Loan Document; and, provided further, that the limitation contained in clause
(e) above shall not be deemed to limit the ability of Agent to make Advances or
Agent Loans, as applicable, in accordance with the provisions of Sections
2.1(f), (g), or (k). The foregoing notwithstanding, any amendment, modifica-
tion, waiver, consent, termination, or release of or with respect to any provi-
sion of this Agreement or any other Loan Document that relates only to the re-
lationship of the Lender Group among themselves, and that does not affect the
rights or obligations of Borrower, shall not require consent by or the agreement
of Borrower.
16.2 No Waivers; Cumulative Remedies. No failure by Agent or
any Lender to exercise any right, remedy, or option under this Agreement, any
other Loan Document, or any present or future supplement hereto or thereto, or
in any other agreement between or among Borrower and Agent and/or any Lender, or
delay by Agent or any Lender in exercising the same, will operate as a waiver
thereof. No waiver by Agent or any Lender will be effective unless it is in
writing, and then only to the extent specifically stated. No waiver by Agent or
the Lenders on any occasion shall affect or diminish Agent's and each Lender's
rights thereafter to require strict performance by Borrower of any provision of
this Agreement. Agent's and each Lender's rights under this Agreement and the
other Loan Documents will be cumulative and not exclusive of any other right or
remedy which Agent or any Lender may have.
17. AGENT; THE LENDER GROUP.
17.1 Appointment and Authorization of Agent. Each Lender hereby
designates and appoints Foothill as its Agent under this Agreement and the other
Loan Documents and each Lender hereby irrevocably authorizes Agent to take such
action on its behalf under the provisions of this Agreement and each other Loan
Document and to exercise such powers and perform such duties as are expressly
delegated to it by the terms
<PAGE>
of this Agreement or any other Loan Document, together with such powers as are
reasonably incidental thereto. Agent agrees to act as such on the express con-
ditions contained in this Article 17. The provisions of this Article 17 are
solely for the benefit of Agent and the Lenders; provided, however, that the
provisions of Sections 17.10 and 17.11 also shall be for the benefit of Bor-
rower. Borrower shall have no rights as a third party beneficiary of any of the
provisions contained herein. Any provision to the contrary contained elsewhere
in this Agreement or in any other Loan Document notwithstanding, Agent shall not
have any duties or responsibilities, except those expressly set forth herein,
nor shall Agent have or be deemed to have any fiduciary relationship with any
Lender, and no implied covenants, functions, responsibilities, duties, obliga-
tions or liabilities shall be read into this Agreement or any other Loan Docu-
ment or otherwise exist against Agent. Except as expressly otherwise provided
in this Agreement, Agent shall have and may use its sole discretion with respect
to exercising or refraining from exercising any discretionary rights or taking
or refraining from taking any actions which Agent is expressly entitled to take
or assert under or pursuant to this Agreement and the other Loan Documents,
including, making the determinations contemplated by Section 2.1(b). The iden-
tification of PPM Finance, Inc. as Co-Agent hereunder shall not create any
rights in favor of it in such capacity, except as expressly set forth herein,
nor subject it to any duties or obligations in such capacity. Without limiting
the generality of the foregoing, or of any other provision of the Loan Documents
that provides rights or powers to Agent, Lenders agree that Agent shall have the
right to exercise the following powers as long as this Agreement remains in
effect: (a) maintain, in accordance with its customary business practices,
ledgers and records reflecting the status of the Advances, the Collateral, the
Collections, and related matters; (b) execute and/or file any and all financing
or similar statements or notices, amendments, renewals, supplements, documents,
instruments, proofs of claim for Lenders other than Jackson or on behalf of
Jackson with its written authorization, notices and other written agreements
with respect to the Loan Documents; (c) make Advances for itself or on behalf of
Lenders as provided in the Loan Documents; (d) exclusively receive, apply, and
distribute the Collections as provided in the Loan Documents; (e) open and main-
tain such bank accounts and lock boxes as Agent deems necessary and appropriate
in accordance with the Loan Documents for the foregoing purposes with respect to
the Collateral and the Collections; (f) perform, exercise, and enforce any and
all other rights and remedies of the Lender Group with respect to Borrower, the
Advances, the Collateral, the Collections, or otherwise related to any of same
as provided in the Loan Documents; and (g) incur and pay such Lender Group Ex-
penses as Agent may deem necessary or appropriate for the performance and ful-
fillment of its functions and powers pursuant to the Loan Documents.
17.2 Delegation of Duties. Except as otherwise provided in this
Section, Agent and Co-Agent may execute any of their duties under this Agreement
or any other Loan Document by or through agents, employees or attorneys-in-fact
and shall be entitled to advice of counsel concerning all matters pertaining to
such duties. Neither Agent nor Co-Agent shall be responsible for the negligence
or misconduct of any agent or attorney-in-fact that it selects as long as such
selection was made in compliance with this Section and without gross negligence
or willful misconduct. The foregoing notwithstanding, neither Agent nor Co-
Agent shall make any material delegation of duties to subagents or
<PAGE>
non-employee delegees without the prior written consent of Required Lenders (it
being understood that routine delegation of such administrative matters as
filing financing statements, or conducting appraisals or audits, is not viewed
as a material delegation that requires prior Required Lender approval).
17.3 Liability of Agent-Related Persons. None of the Agent-
Related Persons shall (i) be liable for any action taken or omitted to be taken
by any of them under or in connection with this Agreement or any other Loan
Document or the transactions contemplated hereby (except for its own gross
negligence or willful misconduct), or (ii) be responsible in any manner to any
of the Lenders for any recital, statement, representation or warranty made by
Borrower, or any Subsidiary or Affiliate of Borrower, or any officer or director
thereof, contained in this Agreement or in any other Loan Document, or in any
certificate, report, statement or other document referred to or provided for in,
or received by Agent under or in connection with, this Agreement or any other
Loan Document, or the validity, effectiveness, genuineness, enforceability or
sufficiency of this Agreement or any other Loan Document, or for any failure of
Borrower, or any other party to any Loan Document to perform its obligations
hereunder or thereunder. No Agent-Related Person shall be under any obligation
to any Lender to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or any
other Loan Document, or to inspect the properties, books or records of Borrower,
or any of Borrower's Subsidiaries or Affiliates.
17.4 Reliance by Agent. Agent shall be entitled to rely, and
shall be fully protected in relying, upon any writing, resolution, notice, con-
sent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement or other document or conversation believed by it to be gen-
uine and correct and to have been signed, sent or made by the proper Person or
Persons, and upon advice and statements of legal counsel (including counsel to
Borrower or counsel to any Lender), independent accountants and other experts
selected by Agent. Agent shall be fully justified in failing or refusing to
take any action under this Agreement or any other Loan Document unless it shall
first receive such advice or concurrence of the Required Lenders or all Lenders,
as applicable, and until such instructions are received, Agent shall act, or re-
frain from acting, as it deems advisable so long as it is not grossly negligent
or guilty of wilful misconduct. If Agent so requests, it shall first be indem-
nified to its reasonable satisfaction by Lenders against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action. Agent shall in all cases be fully protected in acting, or
in refraining from acting, under this Agreement or any other Loan Document in
accordance with a request or consent of the Required Lenders or all Lenders, as
applicable, and such request and any action taken or failure to act pursuant
thereto shall be binding upon all of the Lenders.
17.5 Notice of Default or Event of Default. Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default, except with respect to defaults in the payment of principal, interest,
fees, and expenses required to be paid to Agent for the account of Agent, Co-
Agent or the Lenders, except with respect to actual knowledge of the existence
of an Overadvance, and except with respect to Events
<PAGE>
of Default of which Agent has actual knowledge, unless Agent shall have received
written notice from a Lender or Borrower referring to this Agreement, describing
such Default or Event of Default, and stating that such notice is a "notice of
default." Agent promptly will notify the Lenders of its receipt of any such
notice or of any Event of Default of which Agent has, or is deemed to have,
actual knowledge. If any Lender obtains actual knowledge of any Event of
Default, such Lender promptly shall notify the other Lenders, Agent and Co-
Agent of such Event of Default. Each Lender shall be solely responsible for
giving any notices to its Participants, if any. Subject to Section 17.4,
Agent shall take such action with respect to such Default or Event of Default as
may be requested by the Required Lenders; provided, however, that:
(a) Agent may not declare the Obligations immediately due
and payable solely by reason of an Event of Default under Section 8.3 unless all
Lenders request Agent to do so;
(b) At all times, Agent may propose and, with the consent
of Required Lenders (which shall not be unreasonably withheld and which shall be
deemed to have been given by a Lender unless such Lender has notified Agent to
the contrary in writing within three (3) days of notification of such proposed
actions by Agent) exercise, any remedies on behalf of the Lender Group other
than declaring the Obligations immediately due and payable; and
(c) At all times, once Required Lenders or all Lenders,
as the case may be, have approved the exercise of a particular remedy or pursuit
of a course of action, Agent may, but shall not be obligated to, make all ad-
ministrative decisions in connection therewith or take all other actions reason-
ably incidental thereto (for example, if the Required Lenders approve the fore-
closure of certain Collateral, Agent shall not be required to seek consent for
the administrative aspects of conducting such sale or handling of Collateral).
17.6 Credit Decision. Each Lender acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by Agent or Co-Agent hereinafter taken, including any review of the affairs
of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute
any representation or warranty by any Agent-Related Person to any Lender. Each
Lender represents to Agent and Co-Agent that it has, independently and without
reliance upon any Agent-Related Person and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, property, financial and
other condition and creditworthiness of Borrower and any other Person (other
than the Lender Group) party to a Loan Document, and all applicable bank regula-
tory laws relating to the transactions contemplated hereby, and made its own
decision to enter into this Agreement and to extend credit to Borrower. Each
Lender also represents that it will, independently and without reliance upon any
Agent-Related Person and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis, apprai-
sals and decisions in taking or not taking action under this Agreement and the
other Loan Documents, and to make such investigations as it deems
<PAGE>
necessary to inform itself as to the business, prospects, operations, property,
financial and other condition and creditworthiness of Borrower, and any other
Person (other than the Lender Group) party to a Loan Document. Except for
notices, reports and other documents expressly herein required to be furnished
to the Lenders by Agent, Agent shall not have any duty or responsibility to pro-
vide any Lender with any credit or other information concerning the business,
prospects, operations, property, financial and other condition or creditworthi-
ness of Borrower, and any other Person party to a Loan Document that may come
into the possession of any of the Agent-Related Persons.
17.7 Costs and Expenses; Indemnification. Agent or Co-Agent may
incur and pay Lender Group Expenses to the extent Agent or Co-Agent deems
reasonably necessary or appropriate for the performance and fulfillment of its
functions, powers, and obligations pursuant to the Loan Documents, including
without limiting the generality of the foregoing, but subject to any require-
ments of the Loan Documents that it obtain any applicable consents or engage in
any required consultation, court costs, reasonable attorneys fees and expenses,
costs of collection by outside collection agencies and auctioneer fees and costs
of security guards or insurance premiums paid to maintain the Collateral, wheth-
er or not Borrower is obligated to reimburse Agent, Co-Agent or Lenders for such
expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and
directed to deduct and retain sufficient amounts from Collections to reimburse
Agent or Co-Agent for such out-of-pocket costs and expenses prior to the distri-
bution of any amounts to Lenders. In the event Agent or Co-Agent is not reim-
bursed for such costs and expenses from Collections, each Lender hereby agrees
that it is and shall be obligated to pay to or reimburse Agent or Co-Agent for
the amount of such Lender's Pro Rata Share thereof. Whether or not the trans-
actions contemplated hereby are consummated, the Lenders shall indemnify upon
demand the Agent-Related Persons (to the extent not reimbursed by or on behalf
of Borrower and without limiting the obligation of Borrower to do so), according
to their Pro Rata Shares, from and against any and all Indemnified Liabilities;
provided, however, that no Lender shall be liable for the payment to the Agent-
Related Persons of any portion of such Indemnified Liabilities resulting solely
from such Person's gross negligence, bad faith, or willful misconduct. Without
limitation of the foregoing, each Lender shall reimburse Agent or Co-Agent upon
demand for its ratable share of any costs or out-of-pocket expenses (including
attorney fees and expenses) incurred by Agent or Co-Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
any other Loan Document, or any document contemplated by or referred to herein,
to the extent that Agent or Co-Agent is not reimbursed for such expenses by or
on behalf of Borrower. The undertaking in this Section shall survive the pay-
ment of all Obligations hereunder and the resignation or replacement of Agent.
17.8 Agent and Jackson in Individual Capacity. Foothill, Jack-
son and their respective Affiliates may make loans to, issue letters of credit
for the account of, accept deposits from, acquire equity interests in and gene-
rally engage in any kind of banking, trust, financial advisory, underwriting or
other business with Borrower and its
<PAGE>
Subsidiaries and Affiliates and any other Person party to any Loan Documents as
though Foothill were not Agent hereunder and as if Jackson were not a Lender
hereunder without notice to or consent of the Lenders. The Lenders acknowledge
that, pursuant to such activities, Foothill, Jackson or their respective Affil-
iates may receive information regarding Borrower or its Affiliates and any other
Person party to any Loan Documents that is subject to confidentiality obliga-
tions in favor of Borrower or such other Person and that prohibit the disclosure
of such information to the Lenders, and the Lenders acknowledge that, in such
circumstances (and in the absence of a waiver of such confidentiality obliga-
tions, which waiver Agent and Jackson will each use its reasonable best efforts
to obtain), Agent and Jackson shall be under no obligation to provide such in-
formation to them. With respect to the Agent Loans and Agent Advances, Foothill
shall have the same rights and powers under this Agreement as any other Lender
and may exercise the same as though it were not Agent, and the terms "Lender"
and "Lenders" include Foothill in its individual capacity.
17.9 Successor Agent. Agent may resign as Agent upon forty
five (45) days notice to the Lenders. If Agent resigns under this Agreement,
Co-Agent shall have the option to become the successor Agent. If Co-Agent
elects not to exercise its option to become the successor Agent, the Required
Lenders shall appoint a successor Agent for the Lenders. If no successor Agent
is appointed prior to the effective date of the resignation of Agent, Agent may
appoint, after consulting with the Lenders and Borrower, a successor Agent.
Agent may be removed by the Required Lenders and replaced by Co-Agent as suc-
cessor Agent upon Agent's breach of or failure to perform any material provision
of this Agreement or as provided under applicable law. In any such event, upon
the acceptance of its appointment as successor Agent hereunder, such successor
Agent shall succeed to all the rights, powers and duties of the retiring Agent
and the term "Agent" shall mean such successor Agent and the retiring Agent's
appointment, powers and duties as Agent shall be terminated. After any retiring
Agent's resignation hereunder as Agent, the provisions of this Section 17 shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Agent under this Agreement. If no successor Agent has accepted appoint-
ment as Agent by the date which is forty five (45) days following a retiring
Agent's notice of resignation, the retiring Agent's resignation shall neverthe-
less thereupon become effective and the Lenders shall perform all of the duties
of Agent hereunder until such time, if any, as the Lenders appoint a successor
Agent as provided for above; In the absence of Agent and Co-Agent, for whatever
reason, Borrower is deemed to have satisfied its reporting obligations under
Section 6.3 so long as Borrower provides the reports required to be provided by
Section 6.3 to any one of the Lenders.
17.10 Withholding Tax.
(a) If any Lender is a "foreign corporation, partner-
ship or trust" within the meaning of the IRC and such Lender claims exemption
from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of
the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver
to Agent and Borrower:
<PAGE>
(i) if such Lender claims an exemption from, or a
reduction of, withholding tax under a United States tax treaty, properly com-
pleted IRS Forms 1001 and W-8 before the payment of any interest in the first
calendar year and before the payment of any interest in each third succeeding
calendar year during which interest may be paid under this Agreement;
(ii) if such Lender claims that interest paid
under this Agreement is exempt from United States withholding tax because it is
effectively connected with a United States trade or business of such Lender, two
properly completed and executed copies of IRS Form 4224 before the payment of
any interest is due in the first taxable year of such Lender and in each suc-
ceeding taxable year of such Lender during which interest may be paid under
this Agreement, and IRS Form W-9; and
(iii) such other form or forms as may be required
under the IRC or other laws of the United States as a condition to exemption
from, or reduction of, United States withholding tax.
Such Lender agrees to promptly notify Agent and Borrower of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.
(b) If any Lender claims exemption from, or reduction of,
withholding tax under a United States tax treaty by providing IRS Form 1001 and
such Lender sells, assigns, grants a participation in, or otherwise transfers
all or part of the Obligations of Borrower to such Lender, such Lender agrees to
notify Agent of the percentage amount in which it is no longer the beneficial
owner of Obligations of Borrower to such Lender. To the extent of such percent-
age amount, Agent will treat such Lender's IRS Form 1001 as no longer valid.
(c) If any Lender claiming exemption from United States
withholding tax by filing IRS Form 4224 with Agent sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of Bor-
rower to such Lender, such Lender agrees to undertake sole responsibility for
complying with the withholding tax requirements imposed by Sections 1441 and
1442 of the IRC.
(d) If any Lender is entitled to a reduction in the
applicable withholding tax, Agent may withhold from any interest payment to such
Lender an amount equivalent to the applicable withholding tax after taking into
account such reduction. If the forms or other documentation required by subsec-
tion (a) of this Section are not delivered to Agent, then Agent may withhold
from any interest payment to such Lender not providing such forms or other docu-
mentation an amount equivalent to the applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the
United States or other jurisdiction asserts a claim that Agent did not properly
withhold tax from amounts paid to or for the account of any Lender (because the
appropriate form was not delivered, was not properly executed, or because such
Lender failed to notify Agent of a
<PAGE>
change in circumstances which rendered the exemption from, or reduction of,
withholding tax ineffective, or for any other reason) such Lender shall indem-
nify Agent fully for all amounts paid, directly or indirectly, by Agent as tax
or otherwise, including penalties and interest, and including any taxes imposed
by any jurisdiction on the amounts payable to Agent under this Section, together
with all costs and expenses (including attorneys fees and expenses). The obli-
gation of the Lenders under this subsection shall survive the payment of all
Obligations and the resignation of Agent.
17.11 Collateral Matters.
(a) The Lenders hereby irrevocably authorize Agent, to
release any Lien on any Collateral (i) upon the termination of the Commitments
and payment and satisfaction in full by Borrower of all Obligations; and upon
payment in full by Borrower of all Obligations under the Loan Documents, Agent
shall deliver to Borrower, at Borrower's sole cost and expense, all UCC-3 termi-
nation statements and any other documents necessary to terminate the Loan Docu-
ments and release the Liens with respect to the Collateral; (ii) constituting
property being sold or disposed of if a release is required or desirable in con-
nection therewith and if Borrower certifies to Agent that the sale or disposi-
tion is permitted under Section 7.4 of this Agreement or the other Loan Docu-
ments (and Agent may rely conclusively on any such certificate, without further
inquiry); (iii) constituting property in which Borrower owned no interest at the
time the security interest was granted or at any time thereafter; or (iv) con-
stituting property leased to Borrower under a lease that has expired or been
terminated in a transaction permitted under this Agreement. Except as provided
above, Agent will not release any Lien on any Collateral without the prior writ-
ten authorization of the Lenders. Upon request by Agent or Borrower at any time,
the Lenders will confirm in writing Agent's authority to release any such Liens
on particular types or items of Collateral pursuant to this Section 17.11; pro-
vided, however, that (i) Agent shall not be required to execute any document
necessary to evidence such release on terms that, in Agent's opinion, would
expose Agent to liability or create any obligation or entail any consequence
other than the release of such Lien without recourse, representation, or war-
ranty, and (ii) such release shall not in any manner discharge, affect or impair
the Obligations or any Liens (other than those expressly being released) upon
(or obligations of Borrower in respect of) all interests retained by Borrower,
including, the proceeds of any sale, all of which shall continue to constitute
part of the Collateral.
(b) Agent shall have no obligation whatsoever to any of
the Lenders to assure that the Collateral exists or is owned by Borrower is
cared for, protected or insured or has been encumbered, or that the Liens of the
Lender Group have been properly or sufficiently or lawfully created, perfected,
protected or enforced or are entitled to any particular priority, or to exercise
at all or in any particular manner or under any duty of care, disclosure or
fidelity, or to continue exercising, any of the rights, authorities and powers
granted or available to Agent pursuant to any of the Loan Documents, it being
understood and agreed that in respect of the Collateral, or any act, omission or
event related thereto, subject to the terms and conditions contained herein,
Agent may act in any manner
<PAGE>
it may deem appropriate, in its sole discretion given Agent's own interest in
the Collateral in its capacity as one of the Lenders and that Agent shall have
no other duty or liability whatsoever to any Lender as to any of the foregoing,
except as otherwise provided herein.
17.12 Restrictions on Actions by Lenders; Sharing of Payments.
(a) Each of the Lenders agrees that it shall not, with-
out the express consent of Agent, and that it shall, to the extent it is lawful-
ly entitled to do so, upon the request of Agent, set off against the Obliga-
tions, any amounts owing by such Lender to Borrower or any accounts of Borrower
now or hereafter maintained with such Lender. Each of the Lenders further
agrees that it shall not, unless specifically requested to do so by Agent, take
or cause to be taken any action, including, the commencement of any legal or
equitable proceedings, to foreclose any Lien on, or otherwise enforce any se-
curity interest in, any of the Collateral the purpose of which is, or could be,
to give such Lender any preference or priority against the other Lenders with
respect to the Collateral.
(b) Subject to Section 17.8, if, at any time or times
any Lender shall receive (i) by payment, foreclosure, setoff or otherwise, any
proceeds of Collateral or any payments with respect to the Obligations of Bor-
rower to such Lender arising under, or relating to, this Agreement or the other
Loan Documents, except for any such proceeds or payments received by such Lender
from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent
in excess of such Lender's ratable portion of all such distributions by Agent,
such Lender shall promptly (1) turn the same over to Agent, in kind, and with
such endorsements as may be required to negotiate the same to Agent, or in same
day funds, as applicable, for the account of all of the Lenders and for applica-
tion to the Obligations in accordance with the applicable provisions of this
Agreement, or (2) purchase, without recourse or warranty, an undivided interest
and participation in the Obligations owed to the other Lenders so that such ex-
cess payment received shall be applied ratably as among the Lenders in accord-
ance with their Pro Rata Shares; provided, however, that if all or part of such
excess payment received by the purchasing party is thereafter recovered from it,
those purchases of participations shall be rescinded in whole or in part, as
applicable, and the applicable portion of the purchase price paid therefor shall
be returned to such purchasing party, but without interest except to the extent
that such purchasing party is required to pay interest in connection with the
recovery of the excess payment.
17.13 Agency for Perfection. Agent and each Lender hereby ap-
points Co-Agent and each other Lender as agent for the purpose of perfecting the
Liens of the Lender Group in assets which, in accordance with Division 9 of the
UCC can be perfected only by possession. Should Co-Agent or any Lender obtain
possession of any such Collateral, Co-Agent or such Lender, as the case may be,
shall notify Agent thereof, and, promptly upon Agent's request therefor shall
deliver such Collateral to Agent or in accordance with Agent's instructions.
17.14 Payments by Agent to the Lenders. All payments to be
made by Agent to Co-Agent or the Lenders shall be made by bank wire transfer or
internal transfer
<PAGE>
of immediately available funds pursuant to the instructions set forth
on Schedule C-1, or pursuant to such other wire transfer instructions as each
party may designate for itself by written notice to Agent. Concurrently with
each such payment, Agent shall identify whether such payment (or any portion
thereof) represents principal, premium or interest on revolving advances or
otherwise.
17.15 Concerning the Collateral and Related Loan Documents.
Each member of the Lender Group authorizes and directs Agent and Co-Agent to
enter into this Agreement and the other Loan Documents relating to the Col-
lateral, for the ratable benefit (subject to Sections 2.3(b) and 4.1) of the
Lender Group. Each member of the Lender Group agrees that any action taken by
Agent, Co-Agent, Required Lenders, or all Lenders, as applicable, in accordance
with the terms of this Agreement or the other Loan Documents relating to the
Collateral and the exercise by Agent, Co-Agent, Required Lenders, or all
Lenders, as applicable, of their respective powers set forth therein or herein,
together with such other powers that are reasonably incidental thereto, shall be
binding upon all of the Lenders.
17.16 Field Audits and Examination Reports; Confidentiality;
Disclaimers by Lenders; Other Reports and Information. By signing this Agree-
ment, each Lender and Co-Agent:
(a) is deemed to have requested that Agent furnish Co-
Agent or such Lender, promptly after it becomes available, a copy of each field
audit or examination report (each a "Report" and collectively, "Reports") pre-
pared by Agent, and Agent shall so furnish Co-Agent and each Lender with such
Reports;
(b) expressly agrees and acknowledges that Agent (i)
does not make any representation or warranty as to the accuracy of any Report,
and (ii) shall not be liable for any information contained in any Report;
(c) expressly agrees and acknowledges that the Reports
are not comprehensive audits or examinations, that Agent or other party perform-
ing any audit or examination will inspect only specific information regarding
Borrower and will rely significantly upon Borrower's books and records, as well
as on representations of Borrower's personnel;
(d) agrees to keep all Reports and other material in-
formation obtained by it pursuant to the requirements of this Agreement in ac-
cordance with its reasonable customary procedures for handling confidential in-
formation; it being understood and agreed by Borrower that in any event Co-Agent
or such Lender may make disclosures (a) reasonably required by any bona fide
potential or actual Assignee, transferee, or Participant in connection with any
contemplated or actual assignment or transfer by Co-Agent or such Lender of an
interest herein or any participation interest in such Lender's rights hereunder,
(b) of information that has become public by disclosures made by Persons other
than Co-Agent or such Lender, its Affiliates, assignees, transferees, or parti-
cipants,
<PAGE>
or (c) as required or requested by any court, governmental or administrative
agency, pursuant to any subpoena or other legal process, or by any law, statute,
regulation, or court order; provided, however, that, unless prohibited by ap-
plicable law, statute, regulation, or court order, Co-Agent or such Lender shall
notify Borrower of any request by any court, governmental or administrative
agency, or pursuant to any subpoena or other legal process for disclosure of any
such non-public material information concurrent with, or where practicable,
prior to the disclosure thereof; and
(e) without limiting the generality of any other indem-
nification provision contained in this Agreement, agrees: (i) to hold Agent,
Co-Agent and any such other Lender preparing a Report harmless from any action
the indemnifying Co-Agent or Lender may take or conclusion the indemnifying Co-
Agent or Lender may reach or draw from any Report in connection with any loans
or other credit accommodations that the indemnifying Co-Agent or Lender has made
or may make to Borrower, or the indemnifying Lender's participation in, or the
indemnifying Lender's purchase of, a loan or loans of Borrower; and (ii) to pay
and protect, and indemnify, defend and hold Agent, Co-Agent and any such other
Lender preparing a Report harmless from and against, the claims, actions, pro-
ceedings, damages, costs, expenses and other amounts (including, attorney costs)
incurred by Agent, Co-Agent and any such other Lender preparing a Report as the
direct or indirect result of any third parties who might obtain all or part of
any Report through the indemnifying Co-Agent or Lender.
In addition to the foregoing: (x) Any Lender or Co-Agent may from time to time
request of Agent in writing that Agent provide to such Lender or Co-Agent a copy
of any report or document provided by Borrower to Agent, and, upon receipt of
such request, Agent shall provide a copy of same to such Lender or Co-Agent
promptly upon receipt thereof; (y) To the extent that Agent is entitled, under
any provision of the Loan Documents, to request additional reports or informa-
tion from Borrower, any Lender or Co-Agent may, from time to time, reasonably
request Agent to exercise such right as specified in such Lender's or Co-Agent's
notice to Agent, whereupon Agent promptly shall request of Borrower the addi-
tional reports or information specified by such Lender, and, upon receipt there-
of, Agent promptly shall provide a copy of same to such Lender or Co-Agent; and
(z) Any time that Agent renders to Borrower a statement regarding the Loan
Account, Agent shall send a copy of such statement to Co-Agent and each Lender.
17.17 Several Obligations; No Liability. Notwithstanding that
certain of the Loan Documents now or hereafter may have been or will be executed
only by or in favor of Agent in its capacity as such, and not by or in favor of
the Lenders, any and all obligations on the part of Agent (if any) to make any
Advances shall constitute the several (and not joint) obligations of the re-
spective Lenders on a ratable basis, according to their respective Commitments,
to make an amount of such Advances not to exceed, in principal amount, at any
one time outstanding, the amount of their respective Commitments. Nothing con-
tained herein shall confer upon any Lender any interest in, or subject any Lend-
er to any liability for, or in respect of, the business, assets, profits, loss-
es, or liabilities of any other Lender. Each Lender shall be solely responsible
for notifying its Participants of any matters
<PAGE>
relating to the Loan Documents to the extent any such notice may be required,
and no Lender shall have any obligation, duty, or liability to any Participant
of any other Lender. Except as provided in Section 17.7, no member of the Lend-
er Group shall have any liability for the acts of any other member of the Lender
Group. No Lender shall be responsible to Borrower or any other Person for any
failure by any other Lender to fulfill its obligations to make Advances, nor to
advance for it or on its behalf in connection with its Commitment, nor to take
any other action on its behalf hereunder or in connection with the financing
contemplated herein.
18. GENERAL PROVISIONS.
18.1 Effectiveness. This Agreement shall be binding and deemed
effective when executed by Borrower and the Lender Group.
18.2 Section Headings. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
18.3 Interpretation. Neither this Agreement nor any uncertainty
or ambiguity herein shall be construed or resolved against the Lender Group or
Borrower, whether under any rule of construction or otherwise. On the contrary,
this Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
18.4 Severability of Provisions. Each provision of this Agree-
ment shall be severable from every other provision of this Agreement for the
purpose of determining the legal enforceability of any specific provision.
18.5 [Intentionally Omitted]
18.6 Counterparts; Telefacsimile Execution. This Agreement may
be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver a manually executed counter-
part of this Agreement but the failure to deliver a manually executed counter-
part shall not affect the validity, enforceability, and binding effect of this
Agreement.
18.7 Revival and Reinstatement of Obligations. If the incur-
rence or payment of the Obligations by Borrower or the transfer by Borrower to
the Lender Group of any property of either or both of such parties should for
any reason subsequently be declared to be void or voidable under any state or
federal law relating to creditors' rights,
<PAGE>
including provisions of the Bankruptcy Code relating to fraudulent conveyances,
preferences, and other voidable or recoverable payments of money or transfers of
property (collectively, a "Voidable Transfer"), and if the Lender Group is re-
quired to repay or restore, in whole or in part, any such Voidable Transfer, or
elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that the Lender Group is required
or elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of the Lender Group related thereto, the liability of Borrower
automatically shall be revived, reinstated, and restored and shall exist as
though such Voidable Transfer had never been made.
18.8 Integration. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof. In the event of a
conflict between the terms of this Agreement and the terms of the Mortgages de-
livered in connection herewith, the terms of the Loan Agreement shall control,
provided, however, that the mere absence of a provision in this Agreement shall
not be construed as in conflict with affirmative provisions in the Mortgages.
18.9 Fred's Not Liable. Borrower, Agent, Co-Agent, and the
Lenders agree that, irrespective of whether the Merger shall take place, Fred's
does not presently have and will not incur as a result of the Merger, any obli-
gations to the Lender Group arising out of this Agreement or the Loan Documents,
nor is it guaranteeing any Obligations of Borrower.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in Los Angeles, California.
ROSE'S STORES, INC.,
a Delaware corporation
By /s/ Jeanette R. Peters
Title: Chief Financial Officer
PPM FINANCE, INC.,
a Delaware corporation, as Co-Agent
By /s/ Stuart Lissner
Title: Vice President
<PAGE>
JACKSON NATIONAL LIFE INSURANCE
COMPANY, a Michigan life insurance company,
as a Lender
By: PPM AMERICA, INC.,
a Delaware corporation,
its attorney-in-fact
By /s/ Stuart Lissner
Title: Vice President
FOOTHILL CAPITAL CORPORATION,
a California corporation, as Agent
and a Lender
By /s/ James Callas
Title: Senior Vice President
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Suzanne Witkowsky
FUTURE ADVANCE DEED OF TRUST,
ASSIGNMENT OF RENTS AND SECURITY AGREEMENT
THIS DOCUMENT SECURES OBLIGATIONS WHICH CONTAIN
PROVISIONS FOR A VARIABLE RATE OF INTEREST
STATE OF NORTH CAROLINA )
) ss.
COUNTY OF VANCE )
FUTURE ADVANCE DEED OF TRUST, ASSIGNMENT OF RENTS
AND SECURITY AGREEMENT ("Deed of Trust") made this 21st day of
May, 1996, between ROSE'S STORES, INC, a Delaware corporation
("Grantor") having an office at 218 South Garnett Street,
Henderson, North Carolina 27536, as trustor, and DAVID L
HUFFSTETLER, whose address is Two Hanover Square, Suite 2000,
Raleigh, North Carolina 27601, as trustee ("Trustee") and
FOOTHILL CAPITAL CORPORATION, a California corporation, having
an office at 11111 Santa Monica Boulevard, Suite 1500, Los
Angeles, California 90025-3333, Attn: Business Finance
Division Manager, individually as a lender, and as agent for
and on behalf of the financial institutions ("Lenders") who
may from time to time be parties to the Loan Agreement (as
hereinafter defined).
WITNESSETH
FOR THE PURPOSE OF SECURING the following described
obligations, liabilities and indebtedness of Grantor: (a) the
payment of all loans, advances, indebtedness, obligations and
liabilities in the aggregate principal amount of One Hundred
Twenty Million Dollars ($120,000,000), to be paid in
accordance with the terms and with interest as set forth in
that certain Loan and Security Agreement of even date herewith
to which Foothill Capital Corporation, as agent, PPM Finance,
Inc., as co-agent, the financial institutions parties thereto
as lenders, and Grantor are parties (the "Loan Agreement":
Foothill Capital Corporation and any successor agent pursuant
to the Loan Agreement is hereby defined as "Beneficiary":
capitalized terms not otherwise defined herein have the same
<PAGE>
meaning as in the Loan Agreement) including, without
limitation, those contained in Section 11 therein, and all
modifications, extensions and/or renewals thereof, and all
other instruments, agreements and documents referred to or
contemplated thereby, pursuant to which, among other things,
Beneficiary and Lenders have agreed to make revolving loans to
Grantor evidenced by the Loan Agreement, which may be made,
repaid and readvanced in accordance with the Loan Agreement,
(b) the payment and performance of all indebtedness and
obligations of Grantor arising under this Deed of Trust, and
other documents executed by Grantor in connection herewith,
(c) any and all advances made by Beneficiary or Lenders to
protect or preserve the Mortgaged Property (as hereinafter
defined) or the security interest or lien created hereby on
the Mortgaged Property, or for taxes, assessments or insurance
premiums as hereinafter provided or for the performance of any
of Grantor's obligations hereunder or for any other purpose
provided herein (whether or not the original Grantor remains
the owner of the Mortgaged Property at the time of such
advance); (d) payment of any money advanced by Beneficiary to
Grantor, or its successors, with interest thereon, evidenced
by notes (indicating that they are so secured); (e) any and
all renewals, extensions, modifications, substitutions,
replacements or consolidations of the indebtedness described
in clauses (a), (b), (c) or (d) above; and (f) all other
obligations, liabilities and indebtedness of every kind and
character now or hereafter owing by Grantor to Lenders or
Beneficiary, however created, incurred or evidenced, direct or
indirect, absolute or contingent, whether owing under the Loan
Agreement, this Deed of Trust or under any and all other
instruments, agreements and documents referred to or
contemplated by the Loan Agreement, including, without
limitation, all "Obligations" of Trustor to Beneficiary or
Lenders, as such term is defined in the Loan Agreement, and in
consideration of the sum of Ten Dollars ($10.00) and other
valuable consideration, Grantor has granted, bargained, sold,
alienated, enfeoffed, released, conveyed and confirmed, and by
these presents does grant, bargain, sell, alienate, enfeoff,
release, convey and confirm unto the Trustee, and his heirs,
successors and assigns in trust, WITH POWER OF SALE, all its
estate, right, title and interest in, to and under any and all
of the property located in the City of Henderson, County of
Vance, State of North Carolina, and more particularly
described in Exhibit A attached hereto and made a part hereof,
including all easements, rights, privileges, tenements,
hereditaments and appurtenances thereunto belonging or in
anywise appertaining, and all of the estate, right, title,
interest, claim, demand, reversion or remainder whatsoever of
Grantor therein or thereto, either at law or in equity, in
possession or expectancy, now or hereafter acquired,
including, without limitation, all and singular the ways,
waters, water courses, water rights and powers, liberties,
privileges, sewers, pipes, conduits, wires and other
facilities furnishing utility or other services to the
property (collectively, the "Land");
<PAGE>
TOGETHER with all of the right, title and interest
of Grantor in and to all buildings, structures and improve-
ments now or hereafter erected on the Land including all plant
equipment, apparatus, machinery and fixtures of every kind and
nature whatsoever now or hereafter located on or forming part
of said buildings, structures and improvements (collectively,
the "Improvements"; the Land and Improvements being herein-
after collectively referred to as the "Premises");
TOGETHER with all of the right, title and interest
of Grantor in and to the land lying in the bed of any street,
road, highway or avenue in front of or adjoining the Premises;
TOGETHER with any and all award and awards hereto-
fore made or hereafter to be made by any governmental autho-
rities to the present and all subsequent owners of the
Premises which may be made with respect to the Premises as a
result of the return of excess taxes paid on the Mortgaged
Property, the exercise of the right of eminent domain, the
alteration of the grade of any street or any other injury to
or decrease of value of the Premises, which said award or
awards are hereby assigned to Beneficiary and Beneficiary, at
its option, is hereby authorized, directed and empowered to
collect and receive the proceeds of any such award or awards
from the authorities making the same and to give proper
receipts and acquittances therefor, and to apply the same as
hereinafter provided; and Grantor hereby covenants and agrees
to and with Beneficiary, upon request by Beneficiary, to make,
execute and deliver, at Grantor's expense, any and all assign-
ments and other instruments sufficient for the purpose of
assigning the aforesaid award or awards to Beneficiary free,
clear and discharged of any and all encumbrances of any kind
or nature whatsoever;
TOGETHER with all goods, Equipment (as defined in
the Loan Agreement), Inventory (as defined in the Loan
Agreement), building materials, chattels and articles of
personal property (other than personal property which is or at
any time has become Hazardous Substances, as defined in the
Loan Agreement), including any interest therein, now or at any
time hereafter affixed to, attached to, or used in any way in
connection with or to be incorporated at any time into the
Premises, or placed on any part thereof but not attached or
incorporated thereto, together with any and all replacements
thereof, appertaining and adapted to the complete and
compatible use, enjoyment, occupancy, operation or improvement
of the Premises (collectively, the "Chattels");
TOGETHER with leases of the Premises or the Chattels
or any part thereof now or hereafter entered into and all
right, title and interest of Grantor thereunder, including,
without limitation, cash or securities deposited thereunder to
secure performance by the lessees of their obligations there-
under (whether such cash or securities are to be held until
<PAGE>
the expiration of the terms of such leases or applied to one
or more of the installments of rent coming due immediately
prior to the expiration of such terms) and all rights to all
insurance proceeds and unearned premiums arising from or
relating to the Premises and all other rights and easements of
Grantor now or hereafter existing pertaining to the use and
enjoyment of the Premises and all right, title and interest of
Grantor in and to all declarations of covenants, conditions
and restrictions as may affect or otherwise relate to the
Premises;
TOGETHER with all sales agreements, deposit
receipts, escrow agreements and other ancillary documents and
agreements entered into with respect to the sale to any
purchasers of any part of the Premises, and all deposits and
other proceeds thereof;
TOGETHER with all permits, plans, licenses, speci-
fications, subdivision rights, tentative tract maps, final
tract maps, security interests, contracts, contract rights or
other rights as may affect or otherwise relate to the
Premises;
TOGETHER with all rights of Grantor in or to any
fund, program or trust monies and any reimbursement therefrom
directly or indirectly established, maintained or administered
by any governmental authority or any other individual or
entity which is designed to or has the effect of providing
funds (whether directly or indirectly or as reimbursement) for
the repair or replacement of storage tanks (whether above or
below ground) located on the Premises or the remediation or
cleanup of any spill, leakage or contamination from any such
tank or resulting from the ownership, use or maintenance of
any such tank or to compensate third parties for any personal
injury or property damage;
TOGETHER with all rents, issues, profits, revenues,
income and other benefits to which Grantor may now or here-
after be entitled from the Premises or the Chattels (which
Premises, titles, interests, awards, Chattels, easements,
rents, income, benefits, ways, waters, rights, powers, liber-
ties, privileges, utilities, tenements, hereditaments, appur-
tenances, reversions, remainders, rents, issues, profits,
estate, property, possession, claims and demands, are herein-
after collectively referred to as the "Mortgaged Property");
TO HAVE AND TO HOLD the Mortgaged Property unto the
Trustee, his heirs, successors and assigns forever.
It is the intention of the parties hereto that this
Deed of Trust is made and executed to comply with the
provisions of N.C.G.S. 45-67 et seq., and shall secure any and
all present and future obligations which Grantor now or may
hereafter owe to Beneficiary or Lenders (but in no event
incurred more than fifteen (15) years after the date hereof),
<PAGE>
including without limitation, any future loans and advances
made by Beneficiary or Lenders pursuant to the Loan Agreement
to or for the benefit of Grantor, up to a maximum aggregate
amount of principal indebtedness (excluding accrued but unpaid
interest which is added to the principal amount)outstanding at
any one time of One Hundred Twenty Million Dollars
($120,000,000). The principal amount of present obligations
of Grantor to Beneficiary or Lenders secured hereby is in the
sum of $______________ as of the date hereof, and the
principal amount of all present and future obligations of
Grantor to Beneficiary or Lenders secured hereby is in the sum
of One Hundred and Seventy Five Million Dollars
($175,000,000), plus interest, costs and advances made by
Beneficiary or Lenders to protect or preserve the Mortgaged
Property or the lien hereof on the Mortgaged Property, or for
taxes, assessments or insurance premiums as herein provided.
Pursuant to N.C.G.S. 45-68(2), Grantor and Beneficiary agree
that at the time each obligation is incurred, it shall not be
necessary for each such obligation to be evidenced by any
written instrument or notation signed by Grantor and
stipulating that such obligation is secured by this Deed of
Trust.
ARTICLE I
And Grantor further covenants with the Trustee and
Beneficiary as follows:
SECTION 1.01. Grantor has good and marketable title
to an indefeasible fee estate in the Premises subject to no
lien, charge, or encumbrance except such as are approved by
Beneficiary in the title policy issued to Beneficiary in
connection herewith; that it owns the Chattels free and clear
of liens and claims except such as are permitted by the Loan
Agreement or approved by Beneficiary; that this Deed of Trust
is and will remain a valid and enforceable first and prior
lien on the Mortgaged Property subject only to the exceptions
referred to above; and that neither the entry nor the
performance of and compliance with this Deed of Trust or the
Loan Agreement has resulted or will result in any violation
of, or be in conflict with, or result in the creation of any
deed of trust, lien, encumbrance or charge (other than those
created by the execution and delivery of, or permitted by,
this Deed of Trust or the Loan Agreement) upon any of the
properties or assets of Grantor, or constitute a default under
any deed of trust, indenture, contract, agreement, instrument,
franchise, permit, judgment, decree, order, statute, rule or
regulation applicable to Grantor. Grantor has full power and
lawful authority to convey the Mortgaged Property in the
manner and form herein done or intended hereafter to be done
and will preserve such title, and will forever preserve,
warrant and defend the same unto the Trustee and Beneficiary,
and will forever preserve, warrant and defend the validity and
priority of the lien hereof against the claims of all persons
and parties whomsoever.
<PAGE>
SECTION 1.02. Intentionally Deleted.
SECTION 1.03. Intentionally Deleted.
SECTION 1.04. Intentionally Deleted.
SECTION 1.05. All right, title and interest of
Grantor in and to all extensions, improvements, betterments,
renewals, substitutes and replacements of, and all additions
and appurtenances to, the Mortgaged Property, hereafter
acquired by, or released to, or constructed, assembled or
placed by Grantor on the Premises, and all conversions of the
security constituted thereby, immediately upon such acquisi-
tion, release, construction, assembling, placement or conver-
sion, as the case may be, and in each such case, without any
further grant, conveyance, assignment or other act by Grantor,
shall become subject to the first and prior lien and security
interest of this Deed of Trust as fully and completely, and
with the same effect, as though now owned by Grantor and
specifically described in the granting clause hereof, but at
any and all times Grantor will execute and deliver to Trustee
or Beneficiary any and all such further assurances, deeds of
trust, conveyances or assignments thereof with respect thereto
as Beneficiary may reasonably require for the purpose of
expressly and specifically subjecting the same to the lien and
security interest of this Deed of Trust.
SECTION 1.06. Grantor will pay from time to time
when the same shall become due, all lawful claims and demands
of mechanics, materialmen, laborers, and others which, if
unpaid, might result in, or permit the creation of, a lien on
the Mortgaged Property or any part thereof, or on the
revenues, rents, issues, income and profits arising therefrom
and in general will do or cause to be done everything
necessary so that the lien and security interest hereof shall
be fully preserved, at the cost of Grantor, without expense to
Beneficiary.
SECTION 1.07. In the event of the passage, after
the date of this Deed of Trust, of any law of the State of
North Carolina deducting from the value of the Mortgaged
Property for the purpose of taxing the amount of any lien
thereon, or changing in any way the laws now in force for the
taxation of deeds of trust, or debts secured thereby, for
state or local purposes, or the manner of operation of any
such taxes so as to adversely affect the interest of
Beneficiary, then and in such event, Grantor shall bear and
pay the full amount of such taxes, provided that if for any
reason payment by Grantor of any such new or additional taxes
would be unlawful or if the payment thereof would constitute
usury or render the Loan Agreement or the indebtedness secured
hereby wholly or partially usurious under any of the terms or
provisions of the Loan Agreement or this Deed of Trust, or
otherwise, Beneficiary may, at its option, upon thirty (30)
<PAGE>
days' written notice to Grantor, (i) declare the whole
indebtedness secured by this Deed of Trust, with interest
thereon, to be immediately due and payable, or (ii) pay that
amount or portion of such taxes as renders the Loan Agreement
or the indebtedness secured hereby unlawful or usurious, in
which event Grantor shall concurrently therewith pay the
remaining lawful non-usurious portion or balance of said
taxes.
SECTION 1.08. In addition to restrictions contained
in the Loan Agreement, Grantor will not (i) further encumber,
sell, convey or transfer any interest in, or any part of, the
Mortgaged Property, or (ii) except as permitted by the Loan
Agreement, transfer the presently existing ownership interests
in Grantor (including, without limitation, partnership or
stock ownership interests, as the case may be) so as to
effectively transfer control of Grantor named herein to any
other person, firm, corporation or other entity, without the
prior written consent of Beneficiary. Any such encumbrance,
sale, conveyance or transfer made without Beneficiary's prior
written consent shall be an Event of Default hereunder. At
Beneficiary's option, Beneficiary's consent to a further
encumbrance or transfer shall be subject to an increase in
interest rate, modification of loan terms and/or the payment
of a fee.
SECTION 1.09. Beneficiary and the Trustee shall
have access to and the right to inspect the Premises and
Chattels at all reasonable times.
SECTION 1.10. Intentionally Deleted.
SECTION 1.11. If Grantor shall fail to perform any
of the covenants contained herein on its part to be performed,
Beneficiary may, but shall not be required to, make advances
to perform the same, or cause the same to be performed, on
Grantor's behalf, and all sums so advanced shall bear
interest, from and after the date advanced until repaid, at
the lower of (i) the maximum rate permitted by law or (ii) the
default rate set forth in the Loan Agreement, shall be a lien
upon the Mortgaged Property and shall, at Beneficiary's
option, be added to the indebtedness secured hereby. Grantor
will repay on demand all sums so advanced on its behalf with
interest at the rate herein set forth. This Section 1.11
shall not be construed as preventing any default by Grantor in
the observance of any covenant contained in this Deed of Trust
from constituting an Event of Default hereunder.
SECTION 1.12. Grantor will not commit any waste at
or with respect to the Mortgaged Property nor will Grantor do
or fail to do anything which will in any way increase the risk
of fire or other hazard to the Premises, Improvements or
Chattels or to any part thereof. Grantor will, at all times,
maintain the Improvements and Chattels in good order and
condition and will promptly make, from time to time, all
<PAGE>
repairs, renewals, replacements, additions and improvements in
connection therewith which are needful or desirable to such
end. Improvements shall not be removed, demolished or
materially altered, nor shall any Chattels be removed except
as permitted by the Loan Agreement, or after receipt of the
written consent of Beneficiary, provided, however, that if
there shall not have occurred an Event of Default, Grantor may
make appropriate replacements of Chattels, free of superior
title, liens and claims, provided such replacements are
immediately made and are of a value at least equal to the
value of the Chattels removed.
SECTION 1.13. Grantor will immediately notify
Beneficiary of the institution of any proceeding for the
condemnation or taking by eminent domain of the Mortgaged
Property, or any portion thereof. The Trustee and Beneficiary
may participate in any such proceeding and Grantor from time
to time will deliver to Beneficiary all instruments requested
by it to permit such participation. In the event of such
condemnation proceedings, or a conveyance in lieu of such
taking, the award or compensation payable is hereby assigned
to and shall be paid to Beneficiary. Beneficiary shall be
under no obligation to question the amount of any such award
or compensation and may accept the same in the amount in which
the same shall be paid, but shall have no right to bind
Grantor or to make settlement of its claim, except to the
extent of the interest of the Trustee and Beneficiary. In any
such condemnation proceedings the Trustee and Beneficiary may
be represented by counsel selected by Beneficiary. The
proceeds of any award or compensation so received after
reimbursement of any expenses incurred by Beneficiary in
connection with such proceedings, shall, at the option of
Beneficiary, be applied, without premium, to the repayment of
the sums due under the Loan Agreement in such order as
Beneficiary may in its sole discretion elect (regardless of
interest payable on the award by the condemning authority), or
to the cost of restoration of the Improvement or Chattel so
taken and other terms as shall be satisfactory to Beneficiary.
SECTION 1.14. The assignment of rents, income and
other benefits (collectively, "rents") contained in the
granting clause of this Deed of Trust shall be fully operative
without any further action on the part of Grantor or
Beneficiary and specifically Beneficiary shall be entitled, at
its option, to all rents from the Mortgaged Property whether
or not Beneficiary takes possession of the Mortgaged Property.
Grantor hereby further grants to Beneficiary the right (i) to
enter upon and take possession of the Mortgaged Property for
the purpose of collecting the rents, (ii) to dispossess by the
usual summary proceedings any tenant defaulting in the payment
thereof to Beneficiary, (iii) to let the Mortgaged Property or
any part thereof, and (iv) to apply the rents, after payment
of all necessary charges and expenses, on account of the
indebtedness and other sums secured hereby. Such assignment
and grant shall continue in effect until the indebtedness and
<PAGE>
other sums secured hereby are paid, the execution of this Deed
of Trust constituting and evidencing the irrevocable consent
of Grantor to the entry upon and taking possession of the
Mortgaged Property by Beneficiary pursuant to such grant,
whether or not sale or foreclosure has been instituted.
Neither the exercise of any rights under this Section by
Beneficiary nor the application of the rents to the
indebtedness and other sums secured hereby, shall cure or
waive any Event of Default, or notice of default hereunder or
invalidate any act done pursuant hereto, but shall be
cumulative of all other rights and remedies.
The foregoing provisions hereof shall constitute an
absolute and present assignment of the rents from the
Mortgaged Property, subject, however, to the conditional
permission given to Grantor to collect and use the rents until
the occurrence of an Event of Default at which time such
conditional permission shall automatically terminate; and the
existence or exercise of such right of Grantor shall not
operate to subordinate this assignment, in whole or in part,
to any subsequent assignment by Grantor permitted under the
provisions of this Deed of Trust, and any such subsequent
assignment by Grantor shall be subject to the rights of the
Trustee and Beneficiary hereunder.
SECTION 1.15. (a) Grantor will not (i) execute an
assignment of the rents or any part thereof from the Mortgaged
Property unless such assignment shall provide that it is
subject and subordinate to the assignment contained in this
Deed of Trust, and any additional or subsequent assignment
executed pursuant hereto, or (ii) except where the lessee is
in default thereunder, terminate or consent to the
cancellation or surrender of any lease of the Mortgaged
Property or of any part thereof, now existing or hereafter to
be made or (iii) modify any such lease or give consent to any
assignment or subletting without Beneficiary's prior written
consent, or (iv) accept prepayments of any installments of
rent or additional rent to become due under such leases,
except prepayments in the nature of security for the
performance of the lessee's obligations thereunder, or (v) in
any other manner impair the value of the Mortgaged Property or
the security of the Trustee or Beneficiary for the payment of
the indebtedness secured hereby, or (vi) enter into any lease
prohibited under the provisions of the Loan Agreement.
(b) Grantor will not execute any lease of all
or a substantial portion of the Mortgaged Property except for
actual occupancy by the lessee thereunder, and will at all
times promptly and faithfully perform, or cause to be
performed, all of the covenants, conditions and agreements
contained in all leases of the Mortgaged Property now or
hereafter existing, on the part of the lessor thereunder to be
kept and performed. If any such lease provides for the giving
by the lessee of certificates with respect to the status of
such leases, Grantor shall exercise its right to request such
<PAGE>
certificates within five (5) days of any demand therefor by
Beneficiary.
(c) Grantor shall furnish to Beneficiary,
within fifteen (15) days after a request by Beneficiary to do
so, a written statement containing the names of all lessees
for the Mortgaged Property, the terms of their respective
leases, the spaces occupied, the rentals paid and any security
therefor.
(d) Grantor shall, from time to time upon
request of Beneficiary, specifically assign to Beneficiary as
additional security hereunder, by an instrument in writing in
such form as may be approved by Beneficiary, all right, title
and interest of Grantor in and to any and all leases now or
hereafter on or affecting the Mortgaged Property, together
with all security therefor and all monies payable thereunder,
subject to the conditional permission hereinabove given to
Grantor to collect the rentals under any such lease. Grantor
shall also execute and deliver to Beneficiary any
notification, financing statement or other document reasonably
required by Beneficiary to perfect the foregoing assignment as
to any such lease.
SECTION 1.16. Each lease of the Mortgaged Property
or of any part thereof entered into after the date hereof
shall provide that, in the event of the enforcement by the
Trustee or Beneficiary of the remedies provided for by law or
by this Deed of Trust, any person succeeding to the interest
of Grantor as a result of such enforcement shall not be bound
by any payment of rent or additional rent for more than one
(1) month in advance, provided, however, that nothing herein
set forth shall affect or impair the rights of Beneficiary to
terminate any one or more of such leases in connection with
the exercise of its or the Trustee's remedies hereunder.
ARTICLE II
EVENTS OF DEFAULT AND REMEDIES
SECTION 2.01. The occurrence of any one or more of
the following events shall constitute an event of default
("Event of Default") hereunder:
(a) If there shall be an Event of Default (as
such term is defined in the Loan Agreement) under the Loan
Agreement; or
(b) If Grantor shall breach, or be in default
of, any of the covenants or provisions contained in this Deed
of Trust which breach or default continues for five (5) or
more days; or
(c) If Grantor shall breach, or be in default
of, any chattel mortgage, other deed of trust, security
<PAGE>
agreement or other document issued thereunder or in connection
therewith or herewith.
Upon the occurrence of an Event of Default, and in
every such case:
I. During the continuance of any Event of Default,
Beneficiary personally, or by its agents or attorneys may
enter into and upon all or any part of the Mortgaged Property,
and each and every part thereof, and may exclude the party
owning the beneficial interest in same, its agents and
servants wholly therefrom; and having and holding the same,
may use, operate, manage and control the Mortgaged Property
for any lawful purpose and conduct the business thereof,
either personally or by its superintendents, managers, agents,
servants, attorneys or receivers; and upon every such entry,
Beneficiary, at the expense of Grantor, from time to time,
either by purchase, repairs or construction, may maintain and
restore the Mortgaged Property, whereof it shall become
possessed as aforesaid, may complete the construction of the
Improvements and in the course of such completion may make
such changes in the contemplated Improvements as it may deem
desirable; may insure or reinsure the same as provided in the
Loan Agreement, and likewise, from time to time, at the
expense of Grantor, Beneficiary may make all necessary or
proper repairs, renewals, replacements, alterations,
additions, betterments and improvements to the Mortgaged
Property or any part thereof and thereon as it may deem
advisable; and in every such case Beneficiary shall have the
right to manage and operate the Mortgaged Property, possessed
as aforesaid, and to carry on the business thereof and
exercise all rights and powers of the party owning such
property with respect thereto either in the name of such party
or otherwise as it shall deem best; and Beneficiary shall be
entitled to collect and receive all earnings, revenues, rents,
issues, profits and income of the Mortgaged Property and every
part thereof; and after deducting the expenses of conducting
the business thereof and of all maintenance, repairs,
replacements, alterations, additions, betterments and
improvements and all payments which may be made for taxes,
assessments, insurance, in payment of any prior deed of trust
and prior or other proper charges upon the Mortgaged Property
or any part thereof, as well as just and reasonable
compensation of Beneficiary for the services of Beneficiary
and for all attorneys, counsel, agents, clerks, servants and
other employees by it properly engaged and employed,
Beneficiary shall apply the moneys arising as aforesaid,
first, to the payment of any sums, other than interest and
principal due pursuant to the Loan Agreement required to be
paid by Grantor under this Deed of Trust, second, to the
payment of interest due pursuant to the Loan Agreement, third,
to the payment of the principal due pursuant to the terms of
the Loan Agreement when and as the same shall become payable
(whether by acceleration or otherwise) and finally, in an
amount equal to the Early Termination Premium which would have
<PAGE>
been payable if Grantor had voluntarily prepaid the Loan
Agreement.
II. Beneficiary, at its option, may declare the
entire unpaid balance of the indebtedness secured hereby
immediately due and payable and demand that Trustee cause the
Mortgaged Property to be sold.
III. Trustee, upon so being requested to do by
Beneficiary, shall sell the Mortgaged Property under power of
sale on the premises or at the courthouse door in Vance
County, North Carolina, having first given notice of the time
and place of such sale in accordance with the statute in such
case provided, and convey the Mortgaged Property so sold to
the purchaser in fee, either as a whole or in separate
parcels, and in such order as he may determine, at public
auction to the highest bidder for cash in lawful money of the
United States, payable at time of sale. If the Mortgaged
Property consists of several known lots or parcels,
Beneficiary may designate the order in which such parcels
shall be sold or offered for sale. Any person, including
Grantor, Beneficiary, or any Lender may purchase at such sale.
IV. Trustee may postpone sale of all or any portion
of the Mortgaged Property by public announcement at such time
and place of sale, and from time to time thereafter may
postpone such sale by public announcement at the time fixed by
the preceding postponement.
V. On and after the occurrence of an Event of
Default, Grantor shall pay all rents, issues and profits
thereafter received by Grantor from the Mortgaged Property to
Beneficiary and to the extent not paid shall hold such amounts
as trust funds for the benefit of Beneficiary and such rents,
issues and profits shall be deemed "cash collateral" of
Beneficiary under 11 U.S.C., as amended.
SECTION 2.02. (a) Trustee, after making such sale,
and upon receipt of the purchase price, shall make, execute
and deliver to the purchaser or purchasers his deed or deeds
conveying the Mortgaged Property so sold, but without any
covenant or warranty, express or implied, and without any
representation, express or implied, as to the existence, or
lack thereof, of Hazardous Substances on the Mortgaged
Property, and shall apply the proceeds of sale thereof to
payment, FIRSTLY, of the expenses of such sale, together with
the reasonable expenses of Trustee, including a commission
equal to five percent (5%) of the gross proceeds of sale to
the Trustee, or his successor, in payment of his services
hereunder and of collecting the monies secured by this Deed of
Trust and including cost of evidence of title in connection
with sale and revenue stamps on Trustee's deed; SECONDLY, of
all moneys paid, advanced or expended by Beneficiary under the
terms hereof, not then repaid, together with the interest
thereon as herein provided; THIRDLY, of the amount of the
<PAGE>
principal and interest due pursuant to the Loan Agreement then
remaining unpaid together with an amount which would have been
equal to the Early Termination Premium which would have been
paid by Grantor if Grantor had voluntarily prepaid the Loan
Agreement; FOURTHLY, in an amount sufficient, as determined in
the sole and absolute discretion of Beneficiary, acting in
good faith, to satisfy actual or contingent sums owing
pursuant to Section 11 of the Loan Agreement ("Impound Sum"),
and, if not actually incurred, to be held by Beneficiary (not
in trust, without the accrual of interest thereon and without
the obligation to segregate such funds) for a period of two
(2) years from the date of foreclosure, thereafter to be
returned to the person or persons legally entitled thereto,
upon satisfactory proof of such right; and LASTLY, the balance
or surplus, if any, of such proceeds of sale to the person or
persons legally entitled thereto, upon satisfactory proof of
such right.
(b) In the event of a sale of the Mortgaged
Property, or any part thereof, and the execution of a deed or
deeds therefor under these trusts, the recitals therein of any
matters or facts shall be conclusive proof of the truthfulness
thereof and of the fact that said sale was regularly and
validly made in accordance with all requirements of the laws
of the State of North Carolina and of this Deed of Trust; and
any such deed or deeds, with such recitals therein, shall be
effectual and conclusive against Grantor and all other
persons; and the receipt for the purchase money recited or
contained in any deed executed to the purchaser as aforesaid
shall be sufficient discharge to such purchaser from all
obligations to see to the proper application of the purchase
money according to the trusts aforesaid.
SECTION 2.03. After the happening of an Event of
Default by Grantor under this Deed of Trust and immediately
upon the commencement of any action, suit or other legal
proceeding by Beneficiary to obtain judgment for the principal
of or interest due pursuant to the Loan Agreement and other
sums required to be paid by Grantor pursuant to any provisions
of this Deed of Trust, or of any other nature in aid of the
enforcement of the Loan Agreement, or of this Deed of Trust,
Grantor will waive the issuance and service of process and
enter its voluntary appearance in such action, suit or
proceeding. Further, Grantor hereby consents to the
appointment of a receiver or receivers of the Mortgaged
Property and of all the earnings, revenues, rents, issues,
profits and income thereof. After the happening of any such
default and during its continuance or upon the commencement of
any proceedings to foreclose this Deed of Trust or to enforce
the specific performance hereof or in aid thereof or upon the
commencement of any other judicial proceeding to enforce any
right of the Trustee or Beneficiary hereunder, Beneficiary
shall be entitled, as a matter of right, if it shall so elect,
without the giving of notice to any other party and without
regard to the adequacy or inadequacy of any security for the
<PAGE>
Deed of Trust indebtedness, forthwith either before or after
declaring all sums due pursuant to the Loan Agreement to be
due and payable, to the appointment of such a receiver or
receivers.
The Trustee, at Beneficiary's option, is authorized
to foreclose this Deed of Trust subject to the rights of any
tenants of the Property, and the failure to make any such
tenants parties defendant to any such foreclosure proceedings
and to foreclose their rights will not be, nor be asserted by
Grantor to be, a defense to any proceedings instituted by
Beneficiary to collect the sums secured hereby or to collect
any deficiency remaining unpaid after the foreclosure sale of
the Property.
SECTION 2.04. During the continuance of an Event of
Default, Beneficiary shall have the following rights and
remedies:
(i) Beneficiary or its employees, acting by
themselves or through a court-appointed receiver, may enter
upon, possess, manage, operate, dispose of, and contract to
dispose of the Mortgaged Property or any part thereof; take
custody of all accounts; negotiate with governmental authori-
ties with respect to the Mortgaged Property's environmental
compliance and remedial measures; take any action necessary to
enforce compliance with any Act, including but not limited to
spending rents to abate the problem; make, terminate, enforce
or modify leases of the Mortgaged Property upon such terms and
conditions as Beneficiary deems proper; contract for goods and
services, hire agents, employees, and counsel, make repairs,
alterations, and improvements to the Mortgaged Property
necessary, in Beneficiary's judgment, to protect or enhance
the security hereof; incur the risks and obligations
ordinarily incurred by owners of property (without any
personal obligation on the part of the receiver); and/or take
any and all other actions which may be necessary or desirable
to comply with Grantor's obligations hereunder and under the
Loan Agreement. All sums realized by Beneficiary under this
subparagraph, less all costs and expenses incurred by it under
this subparagraph, including attorneys' fees, and less such
sums as Beneficiary deems appropriate as a reserve to meet
future expenses under the subparagraph, shall be applied on
any indebtedness secured hereby in such order as Beneficiary
shall determine. Neither application of said sums to said
indebtedness, nor any other action taken by Beneficiary under
this subparagraph shall cure or waive any Event of Default or
notice of default hereunder, or nullify the effect of any such
notice of default. Beneficiary, or any employee or agent of
Beneficiary, or a receiver appointed by a court, may take any
action or proceeding hereunder without regard to (a) the
adequacy of the security for the indebtedness secured
hereunder, (b) the existence of a declaration that the
indebtedness secured hereby has been declared immediately due
and payable, or (c) the filing of a notice of default.
<PAGE>
(ii) With or without notice, and without
releasing Grantor from any obligation hereunder, to cure any
default of Grantor and, in connection therewith, Beneficiary
or its agents, acting by themselves or through a court
appointed receiver, may enter upon the Mortgaged Property or
any part thereof and perform such acts and things as
Beneficiary deems necessary or desirable to inspect, investi-
gate, assess, and protect the security hereof, including with-
out limitation of any of its other rights: (a) to obtain a
court order to enforce Beneficiary's right to enter and
inspect the Mortgaged Property, to which the decision of
Beneficiary as to whether there exists a release or threatened
release of a Hazardous Substances onto the Mortgaged Property
shall be deemed reasonable and conclusive as between the
parties hereto; and (b) to have a receiver appointed to
enforce Beneficiary's right to enter and inspect the Mortgaged
Property for Hazardous Substances. All costs and expenses
incurred by Beneficiary with respect to the audits, tests,
inspections, and examinations which Beneficiary or its agents
or employees may conduct, including the fees of the engineers,
laboratories, contractors, consultants, and attorneys, shall
be paid by Grantor. All costs and expenses incurred by
Trustee and Beneficiary pursuant to this subparagraph
(including without limitation court costs, consultant fees and
attorneys' fees, whether incurred in litigation or not and
whether before or after judgment) shall bear interest at the
Default Rate set forth in the Loan Agreement from the date
they are incurred until said sums have been paid.
(iii) To seek a judgment that Grantor has
breached its covenants, representations and/or warranties with
respect to the environmental matters set forth in the Loan
Agreement by commencing and maintaining an action or actions
in any court of competent jurisdiction for breach of contract,
whether commenced prior to or after foreclosure of the
Mortgaged Property, and to seek the recovery of any and all
costs, damages, expenses, fees, penalties, fines, judgments,
indemnification payments to third parties, and other out-of-
pocket costs or expenses actually incurred by Beneficiary
(collectively, the "Environmental Costs") incurred or advanced
by Beneficiary relating to the cleanup, remediation or other
response action required by any Act or to which Beneficiary
believes necessary to protect the Mortgaged Property, it being
conclusively presumed between Beneficiary and Grantor that all
such Environmental Costs incurred or advanced by Beneficiary
relating to the cleanup, remediation, or other response action
of or to the Mortgaged Property were made by Beneficiary in
good faith. All Environmental Costs incurred by Beneficiary
under this subparagraph (including without limitation court
costs, consultant fees and attorneys' fees, including, without
limitation, such costs and fees which may be incurred during
the pendency of a case pursuant to 11 U.S.C., whether incurred
in litigation or not and whether before or after judgment)
shall bear interest at the rate set forth in Section 2.6(b)(i)
<PAGE>
of the Loan Agreement (the "Default Rate") from the date of
expenditure until said sums have been paid. Beneficiary shall
be entitled to bid, at the sale of the Mortgaged Property, the
amount of said costs, expenses and interest in addition to the
amount of the other obligations hereby secured as a credit
bid, the equivalent of cash.
Grantor acknowledges and agrees that
notwithstanding any term or provision contained herein or in
the other Loan Documents (as defined in the Loan Agreement),
the Environmental Costs shall be exceptions to any nonrecourse
or exculpatory provision of the Loan Documents, and Grantor
shall be fully and personally liable for the Environmental
Costs hereunder, and such liability shall not be limited to
the original principal amount of the obligations secured by
this Deed of Trust, and Grantor's obligations shall survive
the foreclosure, deed in lieu of foreclosure, release,
reconveyance, or any other transfer of the Mortgaged Property
or this Deed of Trust. For the purposes of any action brought
under this subparagraph, Grantor hereby waives the defense of
laches and any applicable statute of limitations.
(iv) To waive its lien against the Mortgaged
Property or any portion thereof, whether fixtures or personal
property, to the extent such property is found to be environ-
mentally impaired and to exercise any and all rights and
remedies of an unsecured creditor against Grantor and all of
Grantor's assets and property for the recovery of any
deficiency and Environmental Costs, including, but not limited
to, seeking an attachment order. As between Beneficiary and
Grantor, Grantor shall have the burden of proving that Grantor
or any related party (or any affiliate or agent of Grantor or
any related party) was not in any way negligent in permitting
the release or threatened release of the Hazardous Substances.
Grantor acknowledges and agrees that notwithstanding any term
or provision contained herein or in the Loan Agreement, all
judgments and awards entered against Grantor shall be
exceptions to any nonrecourse or exculpatory provision of the
Loan Documents, and Grantor shall be fully and personally
liable for all judgments and awards entered against Grantor
hereunder and such liability shall not be limited to the
original principal amount of the obligations secured by this
Deed of Trust and Grantor's obligations shall survive the
foreclosure, deed in lieu of foreclosure, release,
reconveyance, or any other transfer of the Mortgaged Property
or this Deed of Trust. For the purposes of any action brought
under this subparagraph, Grantor hereby waives the defense of
laches and any applicable statute of limitations.
(v) Nothing contained herein shall be
construed to limit any and all rights that Beneficiary has at
law or pursuant hereto.
SECTION 2.05. No remedy herein conferred upon or
reserved to the Trustee or Beneficiary is intended to be
<PAGE>
exclusive of any other available remedy or remedies, but each
and every such remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now or
hereafter existing at law or in equity or by statute. No
delay or omission of the Trustee or Beneficiary to exercise
any right or power occurring upon the Event of Default shall
impair any such right or power or shall be construed to be a
waiver thereof or an acquiescence therein; and every power and
remedy given by this Deed of Trust to the Trustee or
Beneficiary may be exercised from time to time and as often as
may be deemed expedient by the Trustee or Beneficiary.
Nothing in this Deed of Trust or in the Loan Agreement shall
affect the obligation of Grantor to pay the principal of,
interest on, and Early Termination Premium payable pursuant to
the Loan Agreement in the manner and at the time and place
therein respectively expressed.
SECTION 2.06. To the extent permitted by law,
Grantor will not at any time insist upon, or plead, or in any
manner whatever claim or take any benefit or advantage of, any
stay or extension or moratorium law, any exemption from
execution or sale of the Mortgaged Property or any part
thereof, wherever enacted, now or at any time hereafter in
force, which may affect the covenants and terms of performance
of this Deed of Trust; nor claim, take or insist upon any
benefit or advantage of any law now or hereafter in force
providing for the marshalling of the Mortgaged Property or on
the valuation or appraisal of the Mortgaged Property, or any
part thereof, prior or subsequent to any sale or sales thereof
which may be made pursuant to any provision herein, or
pursuant to the decree, judgment or order of any court of
competent jurisdiction; and Grantor hereby expressly waives
all benefit or advantage of any such law or laws, and
covenants not to hinder, delay or impede the execution of any
power herein granted or delegated to the Trustee or
Beneficiary, but to suffer and permit the execution of every
power as though no such law or laws had been made or enacted.
Grantor hereby waives the right to require any sale to be made
in parcels, or the right to select parcels to be so sold, and
there shall be no requirement for marshalling of assets.
Grantor hereby further waives any rights it may have under
applicable law relating to the prohibition of the obtaining of
a deficiency judgment by Beneficiary against Grantor.
SECTION 2.07. During the continuance of any Event
of Default and pending the exercise by the Trustee or
Beneficiary of its right to exclude Grantor from all or any
part of the Premises, Grantor agrees to pay the fair and
reasonable rental value for the use and occupancy of the
Mortgaged Property for such period and upon default of any
such payment, will vacate and surrender possession of the
Premises to the Trustee or Beneficiary or to a receiver, if
any, and in default thereof may be evicted by any summary
action or proceeding for the recovery or possession of
Premises for non-payment of rent, however designated.
<PAGE>
SECTION 2.08. Without affecting the personal
liability of any person, firm, corporation or other entity,
including Grantor (other than any person released pursuant
hereto), for the payment of the indebtedness secured hereby,
and without affecting the lien of this Deed of Trust for the
full amount of the indebtedness remaining unpaid upon any
property not reconveyed pursuant hereto, Beneficiary and
Trustee are respectively authorized and empowered as follows:
Beneficiary may, at any time and from time to time, either
before or after the maturity or the expiration of the Loan
Agreement, and without notice: (a) release any person liable
for the payment of any of the indebtedness, (b) make any
agreement extending the time or otherwise altering the terms
of payment of any of the indebtedness, (c) accept additional
security therefor of any kind, (d) release any property, real
or personal, securing the indebtedness. Trustee may, without
liability therefor and without notice, at any time and from
time to time so long as the lien or charge hereof shall
subsist, but only upon the written request of Beneficiary and
presentation of this Deed of Trust for endorsement:
(a) consent to the making of any map or plat of the Land,
(b) join in granting any easement thereon or in creating any
covenants restricting use or occupancy thereof, (c) reconvey,
without warranty, any part of the Mortgaged Property, (d) join
in any extension agreement or in any agreement subordinating
the lien or charge hereof.
SECTION 2.09. This Deed of Trust constitutes a
Security Agreement under the laws of the State of North
Carolina so that Grantor hereby grants to Beneficiary and
Beneficiary shall have and may endorse a security interest in
any or all of the Mortgaged Property which may or might now or
hereafter be or be deemed to be personal property, fixtures or
property other than real estate (collectively, "Personal
Property") and Grantor agrees to execute, as debtor, such
financing statement or statements as Beneficiary may now or
hereafter reasonably request in order that such security
interest or interests may be perfected pursuant to such laws.
Notwithstanding the foregoing, Grantor and Beneficiary agree
that any Personal Property which may be considered real
property shall be conclusively presumed to be real property.
Notwithstanding any release of any or all of the
property included in the Premises which is deemed "real
property", any proceedings to foreclose this Deed of Trust, or
its satisfaction of record, the terms hereof shall survive as
a security agreement with respect to the security interest
created hereby and referred to above until the repayment or
satisfaction in full of the obligations of Grantor as are now
or hereafter evidenced by the Loan Agreement.
SECTION 2.10. During the continuance of any Event
of Default, Beneficiary shall have all of the rights and
remedies of a secured party under the Uniform Commercial Code
<PAGE>
(the "Code") of the State of North Carolina, and specifically
the right to direct notice and collections of any obligation
owing to Grantor by any lessee. In addition to its rights to
foreclose this Deed of Trust, Beneficiary shall have the right
to sell the Personal Property or any part thereof, or any
further, or additional, or substituted Personal Property, at
one or more times, and from time to time, at public sale or
sales or at private sale or sales, on such terms as to cash or
credit, or partly for cash and partly on credit, as
Beneficiary may deem proper. Beneficiary shall have the right
to become the purchaser at any such public sale or sales, free
and clear of any and all claims, rights of equity of redemp-
tion in Grantor, all of which are hereby waived and released.
Grantor shall not be credited with the amount of any part of
such purchase price, unless, until and only to the extent that
such payment is actually received in cash. Notice of public
sale, if given, shall be sufficiently given, for all purposes,
if published not less than five (5) days prior to any sale, in
any newspaper of general circulation distributed in the city
in which the property to be sold is located or as otherwise
required by the Code. The net proceeds of any sale of the
Personal Property which may remain after the deduction of all
costs, fees and expenses incurred in connection therewith,
including, but not limited to, all advertising expenses,
broker's or brokerage commissions, documentary stamps,
recording fees, foreclosure costs, stamp taxes and counsel
fees, shall be credited by Beneficiary against the liabili-
ties, obligations and indebtedness of Grantor to Beneficiary
secured by this Deed of Trust and evidenced by the Loan
Agreement. Any portion of the Personal Property which may
remain unsold after the full payment, satisfaction and
discharge of all of the liabilities, obligations and indebted-
ness of Grantor to Beneficiary shall be returned to the
respective parties which delivered the same to Beneficiary.
If at any time Grantor or any other party shall become
entitled to the return of any of the Personal Property here-
under, any transfer or assignment thereof by Beneficiary shall
be, and shall recite that the same is, made wholly without
representation or warranty whatsoever by, or recourse
whatsoever against Beneficiary.
SECTION 2.11. All rights, remedies and powers
provided by Sections 2.01-2.10 hereof may be exercised only to
the extent that the exercise thereof does not violate any
applicable provision of law in the jurisdiction in which the
Premises are located, and all such provisions are intended to
be subject to all applicable provisions of law which may be
controlling in such jurisdiction and to be limited to the
extent necessary so that they will not render this Mortgage
invalid, illegal or unenforceable under the provisions of any
applicable law.
<PAGE>
ARTICLE III
MISCELLANEOUS
SECTION 3.01. In the event any one or more of the
provisions contained in this Deed of Trust shall for any
reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall
not affect any other provision of this Deed of Trust, but this
Deed of Trust shall be construed as if such invalid, illegal
or unenforceable provision had never been contained herein.
SECTION 3.02. All notices or demands by any party
relating to this Deed of Trust or any other agreement entered
into in connection herewith shall be in the form set forth in
the Loan Agreement.
The parties hereto may change the address at which
they are to receive notices hereunder, by notice in writing in
the foregoing manner given to the other. All notices or
demands sent in accordance with this Section 3.02 other than
notices by Beneficiary in connection with Sections 9504 or
9505 of the Code, shall be deemed received on the earlier of
the date of actual receipt or three (3) calendar days after
the deposit thereof in the mail. Grantor acknowledges and
agrees that notices sent by Beneficiary in connection with
Sections 9504 or 9505 of the Code shall be deemed sent when
deposited in the mail or transmitted by telefacsimile or other
similar method permitted by law.
SECTION 3.03. Whenever in this Deed of Trust the
giving of notice by mail or otherwise is required, the giving
of such notice may be waived in writing by the person or
persons entitled to receive such notice.
SECTION 3.04. All of the grants, covenants, terms,
obligations, provisions and conditions herein contained shall
run with the land and shall apply to, bind and inure to the
benefit of, the successors and assigns of Grantor and
Beneficiary and to the successors of the Trustee.
SECTION 3.05. Intentionally Deleted.
SECTION 3.06. Intentionally Deleted.
SECTION 3.07. Notwithstanding the appointment of
any receiver, liquidator or trustee of Grantor, or of any of
its property, or of the Mortgaged Property, or any part
thereof, the Trustee shall be entitled to retain possession
and control of all property now or hereafter held under this
Deed of Trust.
SECTION 3.08. If Grantor shall default in the
payment of any sums due pursuant to the terms of the Loan
Agreement, or this Deed of Trust such default shall be, and be
<PAGE>
deemed to be, an attempt by Grantor to avoid the Early
Termination Premium payable by Grantor pursuant to the terms
of the Loan Agreement and consequently, upon such default
Beneficiary shall be entitled to collect such Early
Termination Premium from Grantor with the same effect as if
Grantor had voluntarily elected to prepay the principal sum
evidenced by the Loan Agreement.
SECTION 3.09. Grantor hereby waives and relin-
quishes unto, and in favor of Beneficiary, all benefit under
all laws, now in effect or hereafter passed, to relieve
Grantor in any manner from the obligations assumed and the
obligation for which this Deed of Trust is security or to
reduce the amount of the said obligation to any greater extent
than the amount actually paid for the Mortgaged Property, in
any judicial proceedings upon the said obligation, or upon
this Deed of Trust.
SECTION 3.10. Neither Grantor nor any other person
now or hereafter obligated for payment for all or any part of
the indebtedness secured hereby shall be relieved of such
obligation by reason of the failure of Beneficiary to comply
with any request of Grantor or of any other person so
obligated to take action to foreclose on this Deed of Trust or
otherwise enforce any provisions hereof or under the Loan
Agreement or by reason of the release, regardless of
consideration, of all or any part of the security held for the
indebtedness secured hereby, or by reason of any agreement of
stipulation between any subsequent owner of the Mortgaged
Property and Beneficiary extending the time of payment or
modifying the terms hereof without first having obtained the
consent of Grantor or such other person; and in the latter
event Grantor and all other such persons shall continue to be
liable to make payment according to the terms of any such
extension or modification agreement, unless expressly released
and discharged in writing by Beneficiary.
SECTION 3.11. By accepting or approving anything
required to be observed, performed or fulfilled or to be given
to Beneficiary pursuant to this Deed of Trust, including (but
not limited to) any certificate, balance sheet, statement of
profit and loss or other financial statement, survey,
appraisal or insurance policy, Beneficiary shall not be deemed
to have warranted or represented the sufficiency, legality,
effectiveness or legal effect of the same, or of any term,
provision or condition thereof, and such acceptance or
approval thereof shall not be or constitute any warranty or
representation with respect thereto by Beneficiary.
SECTION 3.12. Beneficiary may from time to time,
without notice to Grantor or to the Trustee, and with or
without cause and with or without the resignation of the
Trustee substitute a successor or successors to the Trustee
named herein or acting hereunder to execute this trust. Upon
such appointment and without conveyance to the successor
<PAGE>
Trustee, the latter shall be vested with all title, powers and
duties conferred upon the Trustee herein named or acting
hereunder. Each such appointment and substitution shall be
made by written document executed by Beneficiary, containing
reference to this Deed of Trust and its place of record, which
when duly filed for record in the proper office, shall be
conclusive proof of proper appointment of the successor
Trustee. The procedure herein provided for substitution of
the Trustee shall be conclusive of all other provisions for
substitution, statutory or otherwise.
SECTION 3.13. Intentionally Deleted.
SECTION 3.14. Intentionally Deleted.
SECTION 3.15. EXCEPT AS OTHERWISE PROVIDED HEREIN,
THE CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS GRANTED
BY THIS DEED OF TRUST SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF NORTH CAROLINA AND IN ALL OTHER RESPECTS THIS DEED OF
TRUST SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
CALIFORNIA.
SECTION 3.16. Simultaneously with, and in addition
to, the execution of this Deed of Trust, Grantor, and/or
related or affiliated entities of Grantor, has executed and
delivered as security for the Loan Agreement a mortgage or
deed of trust on parcels of property which may or may not be
outside the boundaries of this county. Grantor agrees that
the occurrence of an Event of Default hereunder, or under any
of such other mortgages or deeds of trust, shall be an Event
of Default under each and every one of such mortgages and
deeds of trust, including this Deed of Trust, permitting
Beneficiary to proceed against any or all of the property
comprising the Mortgaged Property or against any other
security for the Loan Agreement in such order as Beneficiary,
in its sole and absolute discretion may determine. Grantor
hereby waives, to the extent permitted by applicable law, the
benefit of any statute or decision relating to the marshalling
of assets which is contrary to the foregoing. Beneficiary
shall not be compelled to release or be prevented from
foreclosing this instrument or any other instrument securing
the Loan Agreement unless all indebtedness evidenced by the
Loan Agreement and all items hereby secured shall have been
paid in full and Beneficiary shall not be required to accept
any part or parts of any property securing the Loan Agreement,
as distinguished from the entire whole thereof, as payment of
or upon the Loan Agreement to the extent of the value of such
part or parts, and shall not be compelled to accept or allow
<PAGE>
any apportionment of the indebtedness evidenced by the Loan
Agreement to or among any separate parts of said property.
IN WITNESS WHEREOF, Grantor has caused this Deed of
Trust to be executed, under seal, as of the day and year first
above written.
ATTEST: "GRANTOR"
/s/ G. Templeton Blackburn, II ROSE'S STORES, INC.,
George Templeton Blackburn, II, a Delaware corporation
Secretary
{CORPORATE SEAL} By /s/ Jeanette R. Peters
Jeanette R. Peters
Chief Financial Officer
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Suzanne Witkowsky
FUTURE ADVANCE DEED OF TRUST,
ASSIGNMENT OF RENTS AND SECURITY AGREEMENT
THIS DOCUMENT SECURES OBLIGATIONS WHICH CONTAIN
PROVISIONS FOR A VARIABLE RATE OF INTEREST
STATE OF NORTH CAROLINA )
) ss.
COUNTY OF VANCE )
FUTURE ADVANCE DEED OF TRUST, ASSIGNMENT OF RENTS
AND SECURITY AGREEMENT ("Deed of Trust") made this 21st day of
May, 1996, between ROSE'S STORES, INC, a Delaware corporation
("Grantor") having an office at 218 South Garnett Street,
Henderson, North Carolina 27536, as trustor, and DAVID L
HUFFSTETLER, whose address is Two Hanover Square, Suite 2000,
Raleigh, North Carolina 27601, as trustee ("Trustee") and
FOOTHILL CAPITAL CORPORATION, a California corporation, having
an office at 11111 Santa Monica Boulevard, Suite 1500, Los
Angeles, California 90025-3333, Attn: Business Finance
Division Manager, individually as a lender, and as agent for
and on behalf of the financial institutions ("Lenders") who
may from time to time be parties to the Loan Agreement (as
hereinafter defined).
WITNESSETH
FOR THE PURPOSE OF SECURING the following described
obligations, liabilities and indebtedness of Grantor: (a) the
payment of all loans, advances, indebtedness, obligations and
liabilities in the aggregate principal amount of One Hundred
Twenty Million Dollars ($120,000,000), to be paid in
accordance with the terms and with interest as set forth in
that certain Loan and Security Agreement of even date herewith
to which Foothill Capital Corporation, as agent, PPM Finance,
Inc., as co-agent, the financial institutions parties thereto
as lenders, and Grantor are parties (the "Loan Agreement":
Foothill Capital Corporation and any successor agent pursuant
to the Loan Agreement is hereby defined as "Beneficiary":
capitalized terms not otherwise defined herein have the same
<PAGE>
meaning as in the Loan Agreement) including, without
limitation, those contained in Section 11 therein, and all
modifications, extensions and/or renewals thereof, and all
other instruments, agreements and documents referred to or
contemplated thereby, pursuant to which, among other things,
Beneficiary and Lenders have agreed to make revolving loans to
Grantor evidenced by the Loan Agreement, which may be made,
repaid and readvanced in accordance with the Loan Agreement,
(b) the payment and performance of all indebtedness and
obligations of Grantor arising under this Deed of Trust, and
other documents executed by Grantor in connection herewith,
(c) any and all advances made by Beneficiary or Lenders to
protect or preserve the Mortgaged Property (as hereinafter
defined) or the security interest or lien created hereby on
the Mortgaged Property, or for taxes, assessments or insurance
premiums as hereinafter provided or for the performance of any
of Grantor's obligations hereunder or for any other purpose
provided herein (whether or not the original Grantor remains
the owner of the Mortgaged Property at the time of such
advance); (d) payment of any money advanced by Beneficiary to
Grantor, or its successors, with interest thereon, evidenced
by notes (indicating that they are so secured); (e) any and
all renewals, extensions, modifications, substitutions,
replacements or consolidations of the indebtedness described
in clauses (a), (b), (c) or (d) above; and (f) all other
obligations, liabilities and indebtedness of every kind and
character now or hereafter owing by Grantor to Lenders or
Beneficiary, however created, incurred or evidenced, direct or
indirect, absolute or contingent, whether owing under the Loan
Agreement, this Deed of Trust or under any and all other
instruments, agreements and documents referred to or
contemplated by the Loan Agreement, including, without
limitation, all "Obligations" of Trustor to Beneficiary or
Lenders, as such term is defined in the Loan Agreement, and in
consideration of the sum of Ten Dollars ($10.00) and other
valuable consideration, Grantor has granted, bargained, sold,
alienated, enfeoffed, released, conveyed and confirmed, and by
these presents does grant, bargain, sell, alienate, enfeoff,
release, convey and confirm unto the Trustee, and his heirs,
successors and assigns in trust, WITH POWER OF SALE, all its
estate, right, title and interest in, to and under any and all
of the property located in the City of Henderson, County of
Vance, State of North Carolina, and more particularly
described in Exhibit A attached hereto and made a part hereof,
including all easements, rights, privileges, tenements,
hereditaments and appurtenances thereunto belonging or in
anywise appertaining, and all of the estate, right, title,
interest, claim, demand, reversion or remainder whatsoever of
Grantor therein or thereto, either at law or in equity, in
possession or expectancy, now or hereafter acquired,
including, without limitation, all and singular the ways,
waters, water courses, water rights and powers, liberties,
privileges, sewers, pipes, conduits, wires and other
facilities furnishing utility or other services to the
property (collectively, the "Land");
<PAGE>
TOGETHER with all of the right, title and interest
of Grantor in and to all buildings, structures and improve-
ments now or hereafter erected on the Land including all plant
equipment, apparatus, machinery and fixtures of every kind and
nature whatsoever now or hereafter located on or forming part
of said buildings, structures and improvements (collectively,
the "Improvements"; the Land and Improvements being herein-
after collectively referred to as the "Premises");
TOGETHER with all of the right, title and interest
of Grantor in and to the land lying in the bed of any street,
road, highway or avenue in front of or adjoining the Premises;
TOGETHER with any and all award and awards hereto-
fore made or hereafter to be made by any governmental autho-
rities to the present and all subsequent owners of the
Premises which may be made with respect to the Premises as a
result of the return of excess taxes paid on the Mortgaged
Property, the exercise of the right of eminent domain, the
alteration of the grade of any street or any other injury to
or decrease of value of the Premises, which said award or
awards are hereby assigned to Beneficiary and Beneficiary, at
its option, is hereby authorized, directed and empowered to
collect and receive the proceeds of any such award or awards
from the authorities making the same and to give proper
receipts and acquittances therefor, and to apply the same as
hereinafter provided; and Grantor hereby covenants and agrees
to and with Beneficiary, upon request by Beneficiary, to make,
execute and deliver, at Grantor's expense, any and all assign-
ments and other instruments sufficient for the purpose of
assigning the aforesaid award or awards to Beneficiary free,
clear and discharged of any and all encumbrances of any kind
or nature whatsoever;
TOGETHER with all goods, Equipment (as defined in
the Loan Agreement), Inventory (as defined in the Loan
Agreement), building materials, chattels and articles of
personal property (other than personal property which is or at
any time has become Hazardous Substances, as defined in the
Loan Agreement), including any interest therein, now or at any
time hereafter affixed to, attached to, or used in any way in
connection with or to be incorporated at any time into the
Premises, or placed on any part thereof but not attached or
incorporated thereto, together with any and all replacements
thereof, appertaining and adapted to the complete and
compatible use, enjoyment, occupancy, operation or improvement
of the Premises (collectively, the "Chattels");
TOGETHER with leases of the Premises or the Chattels
or any part thereof now or hereafter entered into and all
right, title and interest of Grantor thereunder, including,
without limitation, cash or securities deposited thereunder to
secure performance by the lessees of their obligations there-
under (whether such cash or securities are to be held until
<PAGE>
the expiration of the terms of such leases or applied to one
or more of the installments of rent coming due immediately
prior to the expiration of such terms) and all rights to all
insurance proceeds and unearned premiums arising from or
relating to the Premises and all other rights and easements of
Grantor now or hereafter existing pertaining to the use and
enjoyment of the Premises and all right, title and interest of
Grantor in and to all declarations of covenants, conditions
and restrictions as may affect or otherwise relate to the
Premises;
TOGETHER with all sales agreements, deposit
receipts, escrow agreements and other ancillary documents and
agreements entered into with respect to the sale to any
purchasers of any part of the Premises, and all deposits and
other proceeds thereof;
TOGETHER with all permits, plans, licenses, speci-
fications, subdivision rights, tentative tract maps, final
tract maps, security interests, contracts, contract rights or
other rights as may affect or otherwise relate to the
Premises;
TOGETHER with all rights of Grantor in or to any
fund, program or trust monies and any reimbursement therefrom
directly or indirectly established, maintained or administered
by any governmental authority or any other individual or
entity which is designed to or has the effect of providing
funds (whether directly or indirectly or as reimbursement) for
the repair or replacement of storage tanks (whether above or
below ground) located on the Premises or the remediation or
cleanup of any spill, leakage or contamination from any such
tank or resulting from the ownership, use or maintenance of
any such tank or to compensate third parties for any personal
injury or property damage;
TOGETHER with all rents, issues, profits, revenues,
income and other benefits to which Grantor may now or here-
after be entitled from the Premises or the Chattels (which
Premises, titles, interests, awards, Chattels, easements,
rents, income, benefits, ways, waters, rights, powers, liber-
ties, privileges, utilities, tenements, hereditaments, appur-
tenances, reversions, remainders, rents, issues, profits,
estate, property, possession, claims and demands, are herein-
after collectively referred to as the "Mortgaged Property");
TO HAVE AND TO HOLD the Mortgaged Property unto the
Trustee, his heirs, successors and assigns forever.
It is the intention of the parties hereto that this
Deed of Trust is made and executed to comply with the
provisions of N.C.G.S. 45-67 et seq., and shall secure any and
all present and future obligations which Grantor now or may
hereafter owe to Beneficiary or Lenders (but in no event
incurred more than fifteen (15) years after the date hereof),
<PAGE>
including without limitation, any future loans and advances
made by Beneficiary or Lenders pursuant to the Loan Agreement
to or for the benefit of Grantor, up to a maximum aggregate
amount of principal indebtedness (excluding accrued but unpaid
interest which is added to the principal amount)outstanding at
any one time of One Hundred Twenty Million Dollars
($120,000,000). The principal amount of present obligations
of Grantor to Beneficiary or Lenders secured hereby is in the
sum of $______________ as of the date hereof, and the
principal amount of all present and future obligations of
Grantor to Beneficiary or Lenders secured hereby is in the sum
of One Hundred and Seventy Five Million Dollars
($175,000,000), plus interest, costs and advances made by
Beneficiary or Lenders to protect or preserve the Mortgaged
Property or the lien hereof on the Mortgaged Property, or for
taxes, assessments or insurance premiums as herein provided.
Pursuant to N.C.G.S. 45-68(2), Grantor and Beneficiary agree
that at the time each obligation is incurred, it shall not be
necessary for each such obligation to be evidenced by any
written instrument or notation signed by Grantor and
stipulating that such obligation is secured by this Deed of
Trust.
ARTICLE I
And Grantor further covenants with the Trustee and
Beneficiary as follows:
SECTION 1.01. Grantor has good and marketable title
to an indefeasible fee estate in the Premises subject to no
lien, charge, or encumbrance except such as are approved by
Beneficiary in the title policy issued to Beneficiary in
connection herewith; that it owns the Chattels free and clear
of liens and claims except such as are permitted by the Loan
Agreement or approved by Beneficiary; that this Deed of Trust
is and will remain a valid and enforceable first and prior
lien on the Mortgaged Property subject only to the exceptions
referred to above; and that neither the entry nor the
performance of and compliance with this Deed of Trust or the
Loan Agreement has resulted or will result in any violation
of, or be in conflict with, or result in the creation of any
deed of trust, lien, encumbrance or charge (other than those
created by the execution and delivery of, or permitted by,
this Deed of Trust or the Loan Agreement) upon any of the
properties or assets of Grantor, or constitute a default under
any deed of trust, indenture, contract, agreement, instrument,
franchise, permit, judgment, decree, order, statute, rule or
regulation applicable to Grantor. Grantor has full power and
lawful authority to convey the Mortgaged Property in the
manner and form herein done or intended hereafter to be done
and will preserve such title, and will forever preserve,
warrant and defend the same unto the Trustee and Beneficiary,
and will forever preserve, warrant and defend the validity and
priority of the lien hereof against the claims of all persons
and parties whomsoever.
<PAGE>
SECTION 1.02. Intentionally Deleted.
SECTION 1.03. Intentionally Deleted.
SECTION 1.04. Intentionally Deleted.
SECTION 1.05. All right, title and interest of
Grantor in and to all extensions, improvements, betterments,
renewals, substitutes and replacements of, and all additions
and appurtenances to, the Mortgaged Property, hereafter
acquired by, or released to, or constructed, assembled or
placed by Grantor on the Premises, and all conversions of the
security constituted thereby, immediately upon such acquisi-
tion, release, construction, assembling, placement or conver-
sion, as the case may be, and in each such case, without any
further grant, conveyance, assignment or other act by Grantor,
shall become subject to the first and prior lien and security
interest of this Deed of Trust as fully and completely, and
with the same effect, as though now owned by Grantor and
specifically described in the granting clause hereof, but at
any and all times Grantor will execute and deliver to Trustee
or Beneficiary any and all such further assurances, deeds of
trust, conveyances or assignments thereof with respect thereto
as Beneficiary may reasonably require for the purpose of
expressly and specifically subjecting the same to the lien and
security interest of this Deed of Trust.
SECTION 1.06. Grantor will pay from time to time
when the same shall become due, all lawful claims and demands
of mechanics, materialmen, laborers, and others which, if
unpaid, might result in, or permit the creation of, a lien on
the Mortgaged Property or any part thereof, or on the
revenues, rents, issues, income and profits arising therefrom
and in general will do or cause to be done everything
necessary so that the lien and security interest hereof shall
be fully preserved, at the cost of Grantor, without expense to
Beneficiary.
SECTION 1.07. In the event of the passage, after
the date of this Deed of Trust, of any law of the State of
North Carolina deducting from the value of the Mortgaged
Property for the purpose of taxing the amount of any lien
thereon, or changing in any way the laws now in force for the
taxation of deeds of trust, or debts secured thereby, for
state or local purposes, or the manner of operation of any
such taxes so as to adversely affect the interest of
Beneficiary, then and in such event, Grantor shall bear and
pay the full amount of such taxes, provided that if for any
reason payment by Grantor of any such new or additional taxes
would be unlawful or if the payment thereof would constitute
usury or render the Loan Agreement or the indebtedness secured
hereby wholly or partially usurious under any of the terms or
provisions of the Loan Agreement or this Deed of Trust, or
otherwise, Beneficiary may, at its option, upon thirty (30)
<PAGE>
days' written notice to Grantor, (i) declare the whole
indebtedness secured by this Deed of Trust, with interest
thereon, to be immediately due and payable, or (ii) pay that
amount or portion of such taxes as renders the Loan Agreement
or the indebtedness secured hereby unlawful or usurious, in
which event Grantor shall concurrently therewith pay the
remaining lawful non-usurious portion or balance of said
taxes.
SECTION 1.08. In addition to restrictions contained
in the Loan Agreement, Grantor will not (i) further encumber,
sell, convey or transfer any interest in, or any part of, the
Mortgaged Property, or (ii) except as permitted by the Loan
Agreement, transfer the presently existing ownership interests
in Grantor (including, without limitation, partnership or
stock ownership interests, as the case may be) so as to
effectively transfer control of Grantor named herein to any
other person, firm, corporation or other entity, without the
prior written consent of Beneficiary. Any such encumbrance,
sale, conveyance or transfer made without Beneficiary's prior
written consent shall be an Event of Default hereunder. At
Beneficiary's option, Beneficiary's consent to a further
encumbrance or transfer shall be subject to an increase in
interest rate, modification of loan terms and/or the payment
of a fee.
SECTION 1.09. Beneficiary and the Trustee shall
have access to and the right to inspect the Premises and
Chattels at all reasonable times.
SECTION 1.10. Intentionally Deleted.
SECTION 1.11. If Grantor shall fail to perform any
of the covenants contained herein on its part to be performed,
Beneficiary may, but shall not be required to, make advances
to perform the same, or cause the same to be performed, on
Grantor's behalf, and all sums so advanced shall bear
interest, from and after the date advanced until repaid, at
the lower of (i) the maximum rate permitted by law or (ii) the
default rate set forth in the Loan Agreement, shall be a lien
upon the Mortgaged Property and shall, at Beneficiary's
option, be added to the indebtedness secured hereby. Grantor
will repay on demand all sums so advanced on its behalf with
interest at the rate herein set forth. This Section 1.11
shall not be construed as preventing any default by Grantor in
the observance of any covenant contained in this Deed of Trust
from constituting an Event of Default hereunder.
SECTION 1.12. Grantor will not commit any waste at
or with respect to the Mortgaged Property nor will Grantor do
or fail to do anything which will in any way increase the risk
of fire or other hazard to the Premises, Improvements or
Chattels or to any part thereof. Grantor will, at all times,
maintain the Improvements and Chattels in good order and
condition and will promptly make, from time to time, all
<PAGE>
repairs, renewals, replacements, additions and improvements in
connection therewith which are needful or desirable to such
end. Improvements shall not be removed, demolished or
materially altered, nor shall any Chattels be removed except
as permitted by the Loan Agreement, or after receipt of the
written consent of Beneficiary, provided, however, that if
there shall not have occurred an Event of Default, Grantor may
make appropriate replacements of Chattels, free of superior
title, liens and claims, provided such replacements are
immediately made and are of a value at least equal to the
value of the Chattels removed.
SECTION 1.13. Grantor will immediately notify
Beneficiary of the institution of any proceeding for the
condemnation or taking by eminent domain of the Mortgaged
Property, or any portion thereof. The Trustee and Beneficiary
may participate in any such proceeding and Grantor from time
to time will deliver to Beneficiary all instruments requested
by it to permit such participation. In the event of such
condemnation proceedings, or a conveyance in lieu of such
taking, the award or compensation payable is hereby assigned
to and shall be paid to Beneficiary. Beneficiary shall be
under no obligation to question the amount of any such award
or compensation and may accept the same in the amount in which
the same shall be paid, but shall have no right to bind
Grantor or to make settlement of its claim, except to the
extent of the interest of the Trustee and Beneficiary. In any
such condemnation proceedings the Trustee and Beneficiary may
be represented by counsel selected by Beneficiary. The
proceeds of any award or compensation so received after
reimbursement of any expenses incurred by Beneficiary in
connection with such proceedings, shall, at the option of
Beneficiary, be applied, without premium, to the repayment of
the sums due under the Loan Agreement in such order as
Beneficiary may in its sole discretion elect (regardless of
interest payable on the award by the condemning authority), or
to the cost of restoration of the Improvement or Chattel so
taken and other terms as shall be satisfactory to Beneficiary.
SECTION 1.14. The assignment of rents, income and
other benefits (collectively, "rents") contained in the
granting clause of this Deed of Trust shall be fully operative
without any further action on the part of Grantor or
Beneficiary and specifically Beneficiary shall be entitled, at
its option, to all rents from the Mortgaged Property whether
or not Beneficiary takes possession of the Mortgaged Property.
Grantor hereby further grants to Beneficiary the right (i) to
enter upon and take possession of the Mortgaged Property for
the purpose of collecting the rents, (ii) to dispossess by the
usual summary proceedings any tenant defaulting in the payment
thereof to Beneficiary, (iii) to let the Mortgaged Property or
any part thereof, and (iv) to apply the rents, after payment
of all necessary charges and expenses, on account of the
indebtedness and other sums secured hereby. Such assignment
and grant shall continue in effect until the indebtedness and
<PAGE>
other sums secured hereby are paid, the execution of this Deed
of Trust constituting and evidencing the irrevocable consent
of Grantor to the entry upon and taking possession of the
Mortgaged Property by Beneficiary pursuant to such grant,
whether or not sale or foreclosure has been instituted.
Neither the exercise of any rights under this Section by
Beneficiary nor the application of the rents to the
indebtedness and other sums secured hereby, shall cure or
waive any Event of Default, or notice of default hereunder or
invalidate any act done pursuant hereto, but shall be
cumulative of all other rights and remedies.
The foregoing provisions hereof shall constitute an
absolute and present assignment of the rents from the
Mortgaged Property, subject, however, to the conditional
permission given to Grantor to collect and use the rents until
the occurrence of an Event of Default at which time such
conditional permission shall automatically terminate; and the
existence or exercise of such right of Grantor shall not
operate to subordinate this assignment, in whole or in part,
to any subsequent assignment by Grantor permitted under the
provisions of this Deed of Trust, and any such subsequent
assignment by Grantor shall be subject to the rights of the
Trustee and Beneficiary hereunder.
SECTION 1.15. (a) Grantor will not (i) execute an
assignment of the rents or any part thereof from the Mortgaged
Property unless such assignment shall provide that it is
subject and subordinate to the assignment contained in this
Deed of Trust, and any additional or subsequent assignment
executed pursuant hereto, or (ii) except where the lessee is
in default thereunder, terminate or consent to the
cancellation or surrender of any lease of the Mortgaged
Property or of any part thereof, now existing or hereafter to
be made or (iii) modify any such lease or give consent to any
assignment or subletting without Beneficiary's prior written
consent, or (iv) accept prepayments of any installments of
rent or additional rent to become due under such leases,
except prepayments in the nature of security for the
performance of the lessee's obligations thereunder, or (v) in
any other manner impair the value of the Mortgaged Property or
the security of the Trustee or Beneficiary for the payment of
the indebtedness secured hereby, or (vi) enter into any lease
prohibited under the provisions of the Loan Agreement.
(b) Grantor will not execute any lease of all
or a substantial portion of the Mortgaged Property except for
actual occupancy by the lessee thereunder, and will at all
times promptly and faithfully perform, or cause to be
performed, all of the covenants, conditions and agreements
contained in all leases of the Mortgaged Property now or
hereafter existing, on the part of the lessor thereunder to be
kept and performed. If any such lease provides for the giving
by the lessee of certificates with respect to the status of
such leases, Grantor shall exercise its right to request such
<PAGE>
certificates within five (5) days of any demand therefor by
Beneficiary.
(c) Grantor shall furnish to Beneficiary,
within fifteen (15) days after a request by Beneficiary to do
so, a written statement containing the names of all lessees
for the Mortgaged Property, the terms of their respective
leases, the spaces occupied, the rentals paid and any security
therefor.
(d) Grantor shall, from time to time upon
request of Beneficiary, specifically assign to Beneficiary as
additional security hereunder, by an instrument in writing in
such form as may be approved by Beneficiary, all right, title
and interest of Grantor in and to any and all leases now or
hereafter on or affecting the Mortgaged Property, together
with all security therefor and all monies payable thereunder,
subject to the conditional permission hereinabove given to
Grantor to collect the rentals under any such lease. Grantor
shall also execute and deliver to Beneficiary any
notification, financing statement or other document reasonably
required by Beneficiary to perfect the foregoing assignment as
to any such lease.
SECTION 1.16. Each lease of the Mortgaged Property
or of any part thereof entered into after the date hereof
shall provide that, in the event of the enforcement by the
Trustee or Beneficiary of the remedies provided for by law or
by this Deed of Trust, any person succeeding to the interest
of Grantor as a result of such enforcement shall not be bound
by any payment of rent or additional rent for more than one
(1) month in advance, provided, however, that nothing herein
set forth shall affect or impair the rights of Beneficiary to
terminate any one or more of such leases in connection with
the exercise of its or the Trustee's remedies hereunder.
ARTICLE II
EVENTS OF DEFAULT AND REMEDIES
SECTION 2.01. The occurrence of any one or more of
the following events shall constitute an event of default
("Event of Default") hereunder:
(a) If there shall be an Event of Default (as
such term is defined in the Loan Agreement) under the Loan
Agreement; or
(b) If Grantor shall breach, or be in default
of, any of the covenants or provisions contained in this Deed
of Trust which breach or default continues for five (5) or
more days; or
(c) If Grantor shall breach, or be in default
of, any chattel mortgage, other deed of trust, security
<PAGE>
agreement or other document issued thereunder or in connection
therewith or herewith.
Upon the occurrence of an Event of Default, and in
every such case:
I. During the continuance of any Event of Default,
Beneficiary personally, or by its agents or attorneys may
enter into and upon all or any part of the Mortgaged Property,
and each and every part thereof, and may exclude the party
owning the beneficial interest in same, its agents and
servants wholly therefrom; and having and holding the same,
may use, operate, manage and control the Mortgaged Property
for any lawful purpose and conduct the business thereof,
either personally or by its superintendents, managers, agents,
servants, attorneys or receivers; and upon every such entry,
Beneficiary, at the expense of Grantor, from time to time,
either by purchase, repairs or construction, may maintain and
restore the Mortgaged Property, whereof it shall become
possessed as aforesaid, may complete the construction of the
Improvements and in the course of such completion may make
such changes in the contemplated Improvements as it may deem
desirable; may insure or reinsure the same as provided in the
Loan Agreement, and likewise, from time to time, at the
expense of Grantor, Beneficiary may make all necessary or
proper repairs, renewals, replacements, alterations,
additions, betterments and improvements to the Mortgaged
Property or any part thereof and thereon as it may deem
advisable; and in every such case Beneficiary shall have the
right to manage and operate the Mortgaged Property, possessed
as aforesaid, and to carry on the business thereof and
exercise all rights and powers of the party owning such
property with respect thereto either in the name of such party
or otherwise as it shall deem best; and Beneficiary shall be
entitled to collect and receive all earnings, revenues, rents,
issues, profits and income of the Mortgaged Property and every
part thereof; and after deducting the expenses of conducting
the business thereof and of all maintenance, repairs,
replacements, alterations, additions, betterments and
improvements and all payments which may be made for taxes,
assessments, insurance, in payment of any prior deed of trust
and prior or other proper charges upon the Mortgaged Property
or any part thereof, as well as just and reasonable
compensation of Beneficiary for the services of Beneficiary
and for all attorneys, counsel, agents, clerks, servants and
other employees by it properly engaged and employed,
Beneficiary shall apply the moneys arising as aforesaid,
first, to the payment of any sums, other than interest and
principal due pursuant to the Loan Agreement required to be
paid by Grantor under this Deed of Trust, second, to the
payment of interest due pursuant to the Loan Agreement, third,
to the payment of the principal due pursuant to the terms of
the Loan Agreement when and as the same shall become payable
(whether by acceleration or otherwise) and finally, in an
amount equal to the Early Termination Premium which would have
<PAGE>
been payable if Grantor had voluntarily prepaid the Loan
Agreement.
II. Beneficiary, at its option, may declare the
entire unpaid balance of the indebtedness secured hereby
immediately due and payable and demand that Trustee cause the
Mortgaged Property to be sold.
III. Trustee, upon so being requested to do by
Beneficiary, shall sell the Mortgaged Property under power of
sale on the premises or at the courthouse door in Vance
County, North Carolina, having first given notice of the time
and place of such sale in accordance with the statute in such
case provided, and convey the Mortgaged Property so sold to
the purchaser in fee, either as a whole or in separate
parcels, and in such order as he may determine, at public
auction to the highest bidder for cash in lawful money of the
United States, payable at time of sale. If the Mortgaged
Property consists of several known lots or parcels,
Beneficiary may designate the order in which such parcels
shall be sold or offered for sale. Any person, including
Grantor, Beneficiary, or any Lender may purchase at such sale.
IV. Trustee may postpone sale of all or any portion
of the Mortgaged Property by public announcement at such time
and place of sale, and from time to time thereafter may
postpone such sale by public announcement at the time fixed by
the preceding postponement.
V. On and after the occurrence of an Event of
Default, Grantor shall pay all rents, issues and profits
thereafter received by Grantor from the Mortgaged Property to
Beneficiary and to the extent not paid shall hold such amounts
as trust funds for the benefit of Beneficiary and such rents,
issues and profits shall be deemed "cash collateral" of
Beneficiary under 11 U.S.C., as amended.
SECTION 2.02. (a) Trustee, after making such sale,
and upon receipt of the purchase price, shall make, execute
and deliver to the purchaser or purchasers his deed or deeds
conveying the Mortgaged Property so sold, but without any
covenant or warranty, express or implied, and without any
representation, express or implied, as to the existence, or
lack thereof, of Hazardous Substances on the Mortgaged
Property, and shall apply the proceeds of sale thereof to
payment, FIRSTLY, of the expenses of such sale, together with
the reasonable expenses of Trustee, including a commission
equal to five percent (5%) of the gross proceeds of sale to
the Trustee, or his successor, in payment of his services
hereunder and of collecting the monies secured by this Deed of
Trust and including cost of evidence of title in connection
with sale and revenue stamps on Trustee's deed; SECONDLY, of
all moneys paid, advanced or expended by Beneficiary under the
terms hereof, not then repaid, together with the interest
thereon as herein provided; THIRDLY, of the amount of the
<PAGE>
principal and interest due pursuant to the Loan Agreement then
remaining unpaid together with an amount which would have been
equal to the Early Termination Premium which would have been
paid by Grantor if Grantor had voluntarily prepaid the Loan
Agreement; FOURTHLY, in an amount sufficient, as determined in
the sole and absolute discretion of Beneficiary, acting in
good faith, to satisfy actual or contingent sums owing
pursuant to Section 11 of the Loan Agreement ("Impound Sum"),
and, if not actually incurred, to be held by Beneficiary (not
in trust, without the accrual of interest thereon and without
the obligation to segregate such funds) for a period of two
(2) years from the date of foreclosure, thereafter to be
returned to the person or persons legally entitled thereto,
upon satisfactory proof of such right; and LASTLY, the balance
or surplus, if any, of such proceeds of sale to the person or
persons legally entitled thereto, upon satisfactory proof of
such right.
(b) In the event of a sale of the Mortgaged
Property, or any part thereof, and the execution of a deed or
deeds therefor under these trusts, the recitals therein of any
matters or facts shall be conclusive proof of the truthfulness
thereof and of the fact that said sale was regularly and
validly made in accordance with all requirements of the laws
of the State of North Carolina and of this Deed of Trust; and
any such deed or deeds, with such recitals therein, shall be
effectual and conclusive against Grantor and all other
persons; and the receipt for the purchase money recited or
contained in any deed executed to the purchaser as aforesaid
shall be sufficient discharge to such purchaser from all
obligations to see to the proper application of the purchase
money according to the trusts aforesaid.
SECTION 2.03. After the happening of an Event of
Default by Grantor under this Deed of Trust and immediately
upon the commencement of any action, suit or other legal
proceeding by Beneficiary to obtain judgment for the principal
of or interest due pursuant to the Loan Agreement and other
sums required to be paid by Grantor pursuant to any provisions
of this Deed of Trust, or of any other nature in aid of the
enforcement of the Loan Agreement, or of this Deed of Trust,
Grantor will waive the issuance and service of process and
enter its voluntary appearance in such action, suit or
proceeding. Further, Grantor hereby consents to the
appointment of a receiver or receivers of the Mortgaged
Property and of all the earnings, revenues, rents, issues,
profits and income thereof. After the happening of any such
default and during its continuance or upon the commencement of
any proceedings to foreclose this Deed of Trust or to enforce
the specific performance hereof or in aid thereof or upon the
commencement of any other judicial proceeding to enforce any
right of the Trustee or Beneficiary hereunder, Beneficiary
shall be entitled, as a matter of right, if it shall so elect,
without the giving of notice to any other party and without
regard to the adequacy or inadequacy of any security for the
<PAGE>
Deed of Trust indebtedness, forthwith either before or after
declaring all sums due pursuant to the Loan Agreement to be
due and payable, to the appointment of such a receiver or
receivers.
The Trustee, at Beneficiary's option, is authorized
to foreclose this Deed of Trust subject to the rights of any
tenants of the Property, and the failure to make any such
tenants parties defendant to any such foreclosure proceedings
and to foreclose their rights will not be, nor be asserted by
Grantor to be, a defense to any proceedings instituted by
Beneficiary to collect the sums secured hereby or to collect
any deficiency remaining unpaid after the foreclosure sale of
the Property.
SECTION 2.04. During the continuance of an Event of
Default, Beneficiary shall have the following rights and
remedies:
(i) Beneficiary or its employees, acting by
themselves or through a court-appointed receiver, may enter
upon, possess, manage, operate, dispose of, and contract to
dispose of the Mortgaged Property or any part thereof; take
custody of all accounts; negotiate with governmental authori-
ties with respect to the Mortgaged Property's environmental
compliance and remedial measures; take any action necessary to
enforce compliance with any Act, including but not limited to
spending rents to abate the problem; make, terminate, enforce
or modify leases of the Mortgaged Property upon such terms and
conditions as Beneficiary deems proper; contract for goods and
services, hire agents, employees, and counsel, make repairs,
alterations, and improvements to the Mortgaged Property
necessary, in Beneficiary's judgment, to protect or enhance
the security hereof; incur the risks and obligations
ordinarily incurred by owners of property (without any
personal obligation on the part of the receiver); and/or take
any and all other actions which may be necessary or desirable
to comply with Grantor's obligations hereunder and under the
Loan Agreement. All sums realized by Beneficiary under this
subparagraph, less all costs and expenses incurred by it under
this subparagraph, including attorneys' fees, and less such
sums as Beneficiary deems appropriate as a reserve to meet
future expenses under the subparagraph, shall be applied on
any indebtedness secured hereby in such order as Beneficiary
shall determine. Neither application of said sums to said
indebtedness, nor any other action taken by Beneficiary under
this subparagraph shall cure or waive any Event of Default or
notice of default hereunder, or nullify the effect of any such
notice of default. Beneficiary, or any employee or agent of
Beneficiary, or a receiver appointed by a court, may take any
action or proceeding hereunder without regard to (a) the
adequacy of the security for the indebtedness secured
hereunder, (b) the existence of a declaration that the
indebtedness secured hereby has been declared immediately due
and payable, or (c) the filing of a notice of default.
<PAGE>
(ii) With or without notice, and without
releasing Grantor from any obligation hereunder, to cure any
default of Grantor and, in connection therewith, Beneficiary
or its agents, acting by themselves or through a court
appointed receiver, may enter upon the Mortgaged Property or
any part thereof and perform such acts and things as
Beneficiary deems necessary or desirable to inspect, investi-
gate, assess, and protect the security hereof, including with-
out limitation of any of its other rights: (a) to obtain a
court order to enforce Beneficiary's right to enter and
inspect the Mortgaged Property, to which the decision of
Beneficiary as to whether there exists a release or threatened
release of a Hazardous Substances onto the Mortgaged Property
shall be deemed reasonable and conclusive as between the
parties hereto; and (b) to have a receiver appointed to
enforce Beneficiary's right to enter and inspect the Mortgaged
Property for Hazardous Substances. All costs and expenses
incurred by Beneficiary with respect to the audits, tests,
inspections, and examinations which Beneficiary or its agents
or employees may conduct, including the fees of the engineers,
laboratories, contractors, consultants, and attorneys, shall
be paid by Grantor. All costs and expenses incurred by
Trustee and Beneficiary pursuant to this subparagraph
(including without limitation court costs, consultant fees and
attorneys' fees, whether incurred in litigation or not and
whether before or after judgment) shall bear interest at the
Default Rate set forth in the Loan Agreement from the date
they are incurred until said sums have been paid.
(iii) To seek a judgment that Grantor has
breached its covenants, representations and/or warranties with
respect to the environmental matters set forth in the Loan
Agreement by commencing and maintaining an action or actions
in any court of competent jurisdiction for breach of contract,
whether commenced prior to or after foreclosure of the
Mortgaged Property, and to seek the recovery of any and all
costs, damages, expenses, fees, penalties, fines, judgments,
indemnification payments to third parties, and other out-of-
pocket costs or expenses actually incurred by Beneficiary
(collectively, the "Environmental Costs") incurred or advanced
by Beneficiary relating to the cleanup, remediation or other
response action required by any Act or to which Beneficiary
believes necessary to protect the Mortgaged Property, it being
conclusively presumed between Beneficiary and Grantor that all
such Environmental Costs incurred or advanced by Beneficiary
relating to the cleanup, remediation, or other response action
of or to the Mortgaged Property were made by Beneficiary in
good faith. All Environmental Costs incurred by Beneficiary
under this subparagraph (including without limitation court
costs, consultant fees and attorneys' fees, including, without
limitation, such costs and fees which may be incurred during
the pendency of a case pursuant to 11 U.S.C., whether incurred
in litigation or not and whether before or after judgment)
shall bear interest at the rate set forth in Section 2.6(b)(i)
<PAGE>
of the Loan Agreement (the "Default Rate") from the date of
expenditure until said sums have been paid. Beneficiary shall
be entitled to bid, at the sale of the Mortgaged Property, the
amount of said costs, expenses and interest in addition to the
amount of the other obligations hereby secured as a credit
bid, the equivalent of cash.
Grantor acknowledges and agrees that
notwithstanding any term or provision contained herein or in
the other Loan Documents (as defined in the Loan Agreement),
the Environmental Costs shall be exceptions to any nonrecourse
or exculpatory provision of the Loan Documents, and Grantor
shall be fully and personally liable for the Environmental
Costs hereunder, and such liability shall not be limited to
the original principal amount of the obligations secured by
this Deed of Trust, and Grantor's obligations shall survive
the foreclosure, deed in lieu of foreclosure, release,
reconveyance, or any other transfer of the Mortgaged Property
or this Deed of Trust. For the purposes of any action brought
under this subparagraph, Grantor hereby waives the defense of
laches and any applicable statute of limitations.
(iv) To waive its lien against the Mortgaged
Property or any portion thereof, whether fixtures or personal
property, to the extent such property is found to be environ-
mentally impaired and to exercise any and all rights and
remedies of an unsecured creditor against Grantor and all of
Grantor's assets and property for the recovery of any
deficiency and Environmental Costs, including, but not limited
to, seeking an attachment order. As between Beneficiary and
Grantor, Grantor shall have the burden of proving that Grantor
or any related party (or any affiliate or agent of Grantor or
any related party) was not in any way negligent in permitting
the release or threatened release of the Hazardous Substances.
Grantor acknowledges and agrees that notwithstanding any term
or provision contained herein or in the Loan Agreement, all
judgments and awards entered against Grantor shall be
exceptions to any nonrecourse or exculpatory provision of the
Loan Documents, and Grantor shall be fully and personally
liable for all judgments and awards entered against Grantor
hereunder and such liability shall not be limited to the
original principal amount of the obligations secured by this
Deed of Trust and Grantor's obligations shall survive the
foreclosure, deed in lieu of foreclosure, release,
reconveyance, or any other transfer of the Mortgaged Property
or this Deed of Trust. For the purposes of any action brought
under this subparagraph, Grantor hereby waives the defense of
laches and any applicable statute of limitations.
(v) Nothing contained herein shall be
construed to limit any and all rights that Beneficiary has at
law or pursuant hereto.
SECTION 2.05. No remedy herein conferred upon or
reserved to the Trustee or Beneficiary is intended to be
<PAGE>
exclusive of any other available remedy or remedies, but each
and every such remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now or
hereafter existing at law or in equity or by statute. No
delay or omission of the Trustee or Beneficiary to exercise
any right or power occurring upon the Event of Default shall
impair any such right or power or shall be construed to be a
waiver thereof or an acquiescence therein; and every power and
remedy given by this Deed of Trust to the Trustee or
Beneficiary may be exercised from time to time and as often as
may be deemed expedient by the Trustee or Beneficiary.
Nothing in this Deed of Trust or in the Loan Agreement shall
affect the obligation of Grantor to pay the principal of,
interest on, and Early Termination Premium payable pursuant to
the Loan Agreement in the manner and at the time and place
therein respectively expressed.
SECTION 2.06. To the extent permitted by law,
Grantor will not at any time insist upon, or plead, or in any
manner whatever claim or take any benefit or advantage of, any
stay or extension or moratorium law, any exemption from
execution or sale of the Mortgaged Property or any part
thereof, wherever enacted, now or at any time hereafter in
force, which may affect the covenants and terms of performance
of this Deed of Trust; nor claim, take or insist upon any
benefit or advantage of any law now or hereafter in force
providing for the marshalling of the Mortgaged Property or on
the valuation or appraisal of the Mortgaged Property, or any
part thereof, prior or subsequent to any sale or sales thereof
which may be made pursuant to any provision herein, or
pursuant to the decree, judgment or order of any court of
competent jurisdiction; and Grantor hereby expressly waives
all benefit or advantage of any such law or laws, and
covenants not to hinder, delay or impede the execution of any
power herein granted or delegated to the Trustee or
Beneficiary, but to suffer and permit the execution of every
power as though no such law or laws had been made or enacted.
Grantor hereby waives the right to require any sale to be made
in parcels, or the right to select parcels to be so sold, and
there shall be no requirement for marshalling of assets.
Grantor hereby further waives any rights it may have under
applicable law relating to the prohibition of the obtaining of
a deficiency judgment by Beneficiary against Grantor.
SECTION 2.07. During the continuance of any Event
of Default and pending the exercise by the Trustee or
Beneficiary of its right to exclude Grantor from all or any
part of the Premises, Grantor agrees to pay the fair and
reasonable rental value for the use and occupancy of the
Mortgaged Property for such period and upon default of any
such payment, will vacate and surrender possession of the
Premises to the Trustee or Beneficiary or to a receiver, if
any, and in default thereof may be evicted by any summary
action or proceeding for the recovery or possession of
Premises for non-payment of rent, however designated.
<PAGE>
SECTION 2.08. Without affecting the personal
liability of any person, firm, corporation or other entity,
including Grantor (other than any person released pursuant
hereto), for the payment of the indebtedness secured hereby,
and without affecting the lien of this Deed of Trust for the
full amount of the indebtedness remaining unpaid upon any
property not reconveyed pursuant hereto, Beneficiary and
Trustee are respectively authorized and empowered as follows:
Beneficiary may, at any time and from time to time, either
before or after the maturity or the expiration of the Loan
Agreement, and without notice: (a) release any person liable
for the payment of any of the indebtedness, (b) make any
agreement extending the time or otherwise altering the terms
of payment of any of the indebtedness, (c) accept additional
security therefor of any kind, (d) release any property, real
or personal, securing the indebtedness. Trustee may, without
liability therefor and without notice, at any time and from
time to time so long as the lien or charge hereof shall
subsist, but only upon the written request of Beneficiary and
presentation of this Deed of Trust for endorsement:
(a) consent to the making of any map or plat of the Land,
(b) join in granting any easement thereon or in creating any
covenants restricting use or occupancy thereof, (c) reconvey,
without warranty, any part of the Mortgaged Property, (d) join
in any extension agreement or in any agreement subordinating
the lien or charge hereof.
SECTION 2.09. This Deed of Trust constitutes a
Security Agreement under the laws of the State of North
Carolina so that Grantor hereby grants to Beneficiary and
Beneficiary shall have and may endorse a security interest in
any or all of the Mortgaged Property which may or might now or
hereafter be or be deemed to be personal property, fixtures or
property other than real estate (collectively, "Personal
Property") and Grantor agrees to execute, as debtor, such
financing statement or statements as Beneficiary may now or
hereafter reasonably request in order that such security
interest or interests may be perfected pursuant to such laws.
Notwithstanding the foregoing, Grantor and Beneficiary agree
that any Personal Property which may be considered real
property shall be conclusively presumed to be real property.
Notwithstanding any release of any or all of the
property included in the Premises which is deemed "real
property", any proceedings to foreclose this Deed of Trust, or
its satisfaction of record, the terms hereof shall survive as
a security agreement with respect to the security interest
created hereby and referred to above until the repayment or
satisfaction in full of the obligations of Grantor as are now
or hereafter evidenced by the Loan Agreement.
SECTION 2.10. During the continuance of any Event
of Default, Beneficiary shall have all of the rights and
remedies of a secured party under the Uniform Commercial Code
<PAGE>
(the "Code") of the State of North Carolina, and specifically
the right to direct notice and collections of any obligation
owing to Grantor by any lessee. In addition to its rights to
foreclose this Deed of Trust, Beneficiary shall have the right
to sell the Personal Property or any part thereof, or any
further, or additional, or substituted Personal Property, at
one or more times, and from time to time, at public sale or
sales or at private sale or sales, on such terms as to cash or
credit, or partly for cash and partly on credit, as
Beneficiary may deem proper. Beneficiary shall have the right
to become the purchaser at any such public sale or sales, free
and clear of any and all claims, rights of equity of redemp-
tion in Grantor, all of which are hereby waived and released.
Grantor shall not be credited with the amount of any part of
such purchase price, unless, until and only to the extent that
such payment is actually received in cash. Notice of public
sale, if given, shall be sufficiently given, for all purposes,
if published not less than five (5) days prior to any sale, in
any newspaper of general circulation distributed in the city
in which the property to be sold is located or as otherwise
required by the Code. The net proceeds of any sale of the
Personal Property which may remain after the deduction of all
costs, fees and expenses incurred in connection therewith,
including, but not limited to, all advertising expenses,
broker's or brokerage commissions, documentary stamps,
recording fees, foreclosure costs, stamp taxes and counsel
fees, shall be credited by Beneficiary against the liabili-
ties, obligations and indebtedness of Grantor to Beneficiary
secured by this Deed of Trust and evidenced by the Loan
Agreement. Any portion of the Personal Property which may
remain unsold after the full payment, satisfaction and
discharge of all of the liabilities, obligations and indebted-
ness of Grantor to Beneficiary shall be returned to the
respective parties which delivered the same to Beneficiary.
If at any time Grantor or any other party shall become
entitled to the return of any of the Personal Property here-
under, any transfer or assignment thereof by Beneficiary shall
be, and shall recite that the same is, made wholly without
representation or warranty whatsoever by, or recourse
whatsoever against Beneficiary.
SECTION 2.11. All rights, remedies and powers
provided by Sections 2.01-2.10 hereof may be exercised only to
the extent that the exercise thereof does not violate any
applicable provision of law in the jurisdiction in which the
Premises are located, and all such provisions are intended to
be subject to all applicable provisions of law which may be
controlling in such jurisdiction and to be limited to the
extent necessary so that they will not render this Mortgage
invalid, illegal or unenforceable under the provisions of any
applicable law.
<PAGE>
ARTICLE III
MISCELLANEOUS
SECTION 3.01. In the event any one or more of the
provisions contained in this Deed of Trust shall for any
reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall
not affect any other provision of this Deed of Trust, but this
Deed of Trust shall be construed as if such invalid, illegal
or unenforceable provision had never been contained herein.
SECTION 3.02. All notices or demands by any party
relating to this Deed of Trust or any other agreement entered
into in connection herewith shall be in the form set forth in
the Loan Agreement.
The parties hereto may change the address at which
they are to receive notices hereunder, by notice in writing in
the foregoing manner given to the other. All notices or
demands sent in accordance with this Section 3.02 other than
notices by Beneficiary in connection with Sections 9504 or
9505 of the Code, shall be deemed received on the earlier of
the date of actual receipt or three (3) calendar days after
the deposit thereof in the mail. Grantor acknowledges and
agrees that notices sent by Beneficiary in connection with
Sections 9504 or 9505 of the Code shall be deemed sent when
deposited in the mail or transmitted by telefacsimile or other
similar method permitted by law.
SECTION 3.03. Whenever in this Deed of Trust the
giving of notice by mail or otherwise is required, the giving
of such notice may be waived in writing by the person or
persons entitled to receive such notice.
SECTION 3.04. All of the grants, covenants, terms,
obligations, provisions and conditions herein contained shall
run with the land and shall apply to, bind and inure to the
benefit of, the successors and assigns of Grantor and
Beneficiary and to the successors of the Trustee.
SECTION 3.05. Intentionally Deleted.
SECTION 3.06. Intentionally Deleted.
SECTION 3.07. Notwithstanding the appointment of
any receiver, liquidator or trustee of Grantor, or of any of
its property, or of the Mortgaged Property, or any part
thereof, the Trustee shall be entitled to retain possession
and control of all property now or hereafter held under this
Deed of Trust.
SECTION 3.08. If Grantor shall default in the
payment of any sums due pursuant to the terms of the Loan
Agreement, or this Deed of Trust such default shall be, and be
<PAGE>
deemed to be, an attempt by Grantor to avoid the Early
Termination Premium payable by Grantor pursuant to the terms
of the Loan Agreement and consequently, upon such default
Beneficiary shall be entitled to collect such Early
Termination Premium from Grantor with the same effect as if
Grantor had voluntarily elected to prepay the principal sum
evidenced by the Loan Agreement.
SECTION 3.09. Grantor hereby waives and relin-
quishes unto, and in favor of Beneficiary, all benefit under
all laws, now in effect or hereafter passed, to relieve
Grantor in any manner from the obligations assumed and the
obligation for which this Deed of Trust is security or to
reduce the amount of the said obligation to any greater extent
than the amount actually paid for the Mortgaged Property, in
any judicial proceedings upon the said obligation, or upon
this Deed of Trust.
SECTION 3.10. Neither Grantor nor any other person
now or hereafter obligated for payment for all or any part of
the indebtedness secured hereby shall be relieved of such
obligation by reason of the failure of Beneficiary to comply
with any request of Grantor or of any other person so
obligated to take action to foreclose on this Deed of Trust or
otherwise enforce any provisions hereof or under the Loan
Agreement or by reason of the release, regardless of
consideration, of all or any part of the security held for the
indebtedness secured hereby, or by reason of any agreement of
stipulation between any subsequent owner of the Mortgaged
Property and Beneficiary extending the time of payment or
modifying the terms hereof without first having obtained the
consent of Grantor or such other person; and in the latter
event Grantor and all other such persons shall continue to be
liable to make payment according to the terms of any such
extension or modification agreement, unless expressly released
and discharged in writing by Beneficiary.
SECTION 3.11. By accepting or approving anything
required to be observed, performed or fulfilled or to be given
to Beneficiary pursuant to this Deed of Trust, including (but
not limited to) any certificate, balance sheet, statement of
profit and loss or other financial statement, survey,
appraisal or insurance policy, Beneficiary shall not be deemed
to have warranted or represented the sufficiency, legality,
effectiveness or legal effect of the same, or of any term,
provision or condition thereof, and such acceptance or
approval thereof shall not be or constitute any warranty or
representation with respect thereto by Beneficiary.
SECTION 3.12. Beneficiary may from time to time,
without notice to Grantor or to the Trustee, and with or
without cause and with or without the resignation of the
Trustee substitute a successor or successors to the Trustee
named herein or acting hereunder to execute this trust. Upon
such appointment and without conveyance to the successor
<PAGE>
Trustee, the latter shall be vested with all title, powers and
duties conferred upon the Trustee herein named or acting
hereunder. Each such appointment and substitution shall be
made by written document executed by Beneficiary, containing
reference to this Deed of Trust and its place of record, which
when duly filed for record in the proper office, shall be
conclusive proof of proper appointment of the successor
Trustee. The procedure herein provided for substitution of
the Trustee shall be conclusive of all other provisions for
substitution, statutory or otherwise.
SECTION 3.13. Intentionally Deleted.
SECTION 3.14. Intentionally Deleted.
SECTION 3.15. EXCEPT AS OTHERWISE PROVIDED HEREIN,
THE CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS GRANTED
BY THIS DEED OF TRUST SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF NORTH CAROLINA AND IN ALL OTHER RESPECTS THIS DEED OF
TRUST SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
CALIFORNIA.
SECTION 3.16. Simultaneously with, and in addition
to, the execution of this Deed of Trust, Grantor, and/or
related or affiliated entities of Grantor, has executed and
delivered as security for the Loan Agreement a mortgage or
deed of trust on parcels of property which may or may not be
outside the boundaries of this county. Grantor agrees that
the occurrence of an Event of Default hereunder, or under any
of such other mortgages or deeds of trust, shall be an Event
of Default under each and every one of such mortgages and
deeds of trust, including this Deed of Trust, permitting
Beneficiary to proceed against any or all of the property
comprising the Mortgaged Property or against any other
security for the Loan Agreement in such order as Beneficiary,
in its sole and absolute discretion may determine. Grantor
hereby waives, to the extent permitted by applicable law, the
benefit of any statute or decision relating to the marshalling
of assets which is contrary to the foregoing. Beneficiary
shall not be compelled to release or be prevented from
foreclosing this instrument or any other instrument securing
the Loan Agreement unless all indebtedness evidenced by the
Loan Agreement and all items hereby secured shall have been
paid in full and Beneficiary shall not be required to accept
any part or parts of any property securing the Loan Agreement,
as distinguished from the entire whole thereof, as payment of
or upon the Loan Agreement to the extent of the value of such
part or parts, and shall not be compelled to accept or allow
<PAGE>
any apportionment of the indebtedness evidenced by the Loan
Agreement to or among any separate parts of said property.
IN WITNESS WHEREOF, Grantor has caused this Deed of
Trust to be executed, under seal, as of the day and year first
above written.
ATTEST: "GRANTOR"
/s/ G. Templeton Blackburn, II ROSE'S STORES, INC.,
George Templeton Blackburn, II, a Delaware corporation
Secretary
[CORPORATE SEAL] By/s/ Jeanette R. Peters
Jeanette R. Peters
Chief Financial Officer
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Loan Security Dept.
SUBORDINATION AGREEMENT
NOTICE TO SUBORDINATED CREDITORS: THIS SUBORDINATION AGREEMENT
RESULTS IN YOUR SECURITY INTEREST AND OTHER INTERESTS IN THE
REAL PROPERTY BECOMING SUBJECT AND SUBORDINATE TO SOME OTHER OR
LATER SECURITY INSTRUMENT.
STATE OF NORTH CAROLINA )
) ss.
COUNTY OF VANCE )
SUBORDINATION AGREEMENT, dated as of May 21, 1996,
among (1) FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), as Agent for itself and the other financial
institutions ("Lenders") who may from time to time be parties
to the Loan Agreement, as defined below (Foothill, as Agent and
as Lender in the Loan Agreement, as defined below, and all
Lenders therein are collectively, the "Banks") under that
certain Loan and Security Agreement (the "Loan Agreement") dated
as of even date herewith among Rose's Stores, Inc., a Delaware
corporation ("Mortgagor") and the Banks and (2) M.J. SHERMAN &
ASSOCIATES, INC., a New York corporation, as trustee (the "Trade
Trustee") under that certain Letter of Credit and Mortgage Trust
Agreement dated as of May _, 1995 between Mortgagor and the
Trade Trustee, as amended by that certain Consent and Amendment
to Subordination Agreement (the "Amendment to Subordination")
dated April 29, 1996, and executed by The First National Bank
of Boston ("FNBB"), The CIT Group/Business Credit, Inc. ("CIT"),
BankAmerica Business Credit, Inc., Congress Financial
Corporation (New England), NatWest Bank, N.A., LaSalle Business
Credit, Inc., Sanwa Business Credit Corporation, and Trade
Trustee (as amended, the "Trade Credit Trust Agreement"), and
(3) ALAN H. PETERSON, Substitute Trustee, whose address is Two
Hanover Square, 434 Fayatteville Street, Mall, Raliegh, North
Carolina 27602, as Trustee under the
PAGE
<PAGE>
Subordinate Mortgage, as defined below (the "Subordinate Mortgage
Trustee").
R E C I T A L S
A. WHEREAS, that certain real property, and all
improvements and fixtures thereon, which is located in the County
of Vance, State of North Carolina, and whose legal description is
set forth on Exhibit "A" attached hereto and hereby incorporated
herein by reference (the "Mortgaged Property") is encumbered by
the following deeds of trust:
(i) That certain Deed of Trust, Assignment of Rents
and Security Agreement (the "Old Senior Mortgage") executed by
Mortgagor, as trustor and FNBB as "Administrative Agent" and for
itself as a "Bank" under that certain Revolving Credit Agreement
(the "Old Loan Agreement") dated as of April 28, 1995 entered into
among Mortgagor, FNBB, and CIT as a "Bank" under the Old Loan
Agreement, as beneficiary, dated as of April 27, 1995 and recorded
on April 27, 1995 in Book 748, at Page 729 in the office of the
Register of Deeds of the County of Vance, State of North Carolina
(the "Official Records").
(ii) That certain Second Deed of Trust, Assignment of
Rents and Security Agreement (the "Subordinate Mortgage") dated as
of May 8, 1995 executed by Mortgagor, as trustor to the Subordinate
Mortgage Trustee, as trustee for the benefit of the Trade Trustee,
as beneficiary, recorded in Book 749, at Page 499 in the Official
Records, which Second Deed of Trust was amended by the certain
First Amendment to Second Deed of Trust, Assignment of Rents and
Security Agreement dated as of April 29, 1996 and thereafter
recorded in the Official Records.
WHEREAS, the Subordinate Mortgage is subordinate, junior,
and subject to the Old Senior Mortgage, both by operation of law
and as a result of that certain Subordination Agreement dated
May 8, 1995 and executed by FNBB, CIT, and the Trade Trustee, as
amended by the Amendment to Subordination;
WHEREAS, contemporaneously herewith, the Banks are extending
financial accommodations to Mortgagor by means of the Loan
Agreement;
WHEREAS, the obligations of Mortgagor under the Loan
Agreement shall be secured by those certain two Future Advance
Deeds of Trust, Assignments of Rents, and Security Agreements of
even date herewith (the "Senior Mortgage"), executed by Mortgagor,
as trustor, to David L. Huffstetler, as trustee, for the
PAGE
<PAGE>
benefit of Foothill, in its capacity as agent for the Banks, as
beneficiary, which Senior Mortgage shall be recorded in the
Official Records;
WHEREAS, the Trade Trustee has a direct financial
stake in the financial health of Mortgagor and will benefit from
the loans and advances to be made by the Banks under the Loan
Agreement;
WHEREAS, the Banks are unwilling to enter into the
Loan Agreement unless the Trade Trustee executes and delivers
this Agreement;
WHEREAS, the Subordinate Mortgage at present is
subordinate, junior, and subject to the Old Senior Mortgage and
the Trade Trustee acknowledges and consents to the subordination
to the Senior Mortgage of its Subordinate Mortgage, which
Subordinate Mortgage would be senior to the Senior Mortgage but
for this Agreement and the Trade Trustee has requested the
Subordinate Mortgage Trustee to join with it in the execution
of this Agreement;
NOW, THEREFORE, in consideration of the foregoing, of
the premises, and for ten dollars and other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Definitions.
(a) Capitalized terms used in this Agreement
shall have the same meaning given to them in the Loan Agreement.
In addition, the following terms shall have the indicated
meanings whenever identified by initial capital letters (such
meanings to be equally applicable to both the singular and the
plural forms of the terms defined):
"Agreement" means this Subordination
Agreement.
"Drawing Event" shall mean any of the
following events occurring after the date hereof and on or
before the Draw Termination Date:
(a) there shall have occurred a default in
the payment of principal or interest on the obligations under
and as defined in the Loan Agreement and such payment default
shall have continued for a period of at least thirty (30) days
and not been cured or waived at any time; or
(b) the Mortgagor shall have commenced a
bankruptcy case under Section 301 of title 11 of the United
States Code; or
(c) Foothill, in its capacity as agent for
the Banks, shall have, by notice in writing to Mortgagor,
<PAGE>
declared all amounts owing with respect to the Loan Agreement
and to the Notes, if any, to be immediately due and payable.
"Draw Termination Date" means the earlier
of (i) either (a) April 29, 1997 or (b) in the event and only
in the event that there exists on April 29, 1997, a continuing
default in the payment of principal or interest under and as
defined in the Loan Agreement, the earlier of (x) the date
thirty one (31) days after such payment default occurred, (y)
the date such payment default has been cured or waived and (z)
May 30, 1997 and (ii) in the event that the Mortgagor (or any
successor by merger or otherwise) enters into a substitute
working capital facility that is not by its terms secured by a
security interest in the Mortgagor's inventory, the effective
date of such facility.
"Plan" shall mean the Modified and Restated
First Amended Joint Plan of Reorganization of Rose's Stores.
Inc. dated April 19, 1995 and approved by the United States
Bankruptcy Court for the Eastern District of North Carolina on
April 24, 1995 in the bankruptcy proceeding (Case
No. 93-013655-ATS) of Rose's Stores, Inc. as debtor and debtor
in possession.
"Senior Indebtedness" means any indebtedness
at any time owed by Mortgagor to the Banks under or on account
of any of the Senior Loan Documents, including, but not limited
to, indebtedness for principal, interest, reimbursement
obligations, expenses, charges and other sums owed pursuant to
the Senior Loan Documents, and any advances, readvances,
extensions, or increases from time to time of any of the
foregoing.
"Senior Liens" means any lien, mortgage,
pledge, security interest, collateral assignment, charge or
encumbrance of any kind pursuant to or created by the Senior
Mortgage or any of the other Senior Loan Documents.
"Senior Loan Documents" means, collectively,
the Loan Agreement, all notes issued from time to time pursuant
to the Loan Agreement (the "Notes"), if any, the Senior Mortgage
and all other agreements and documents executed and delivered
from time to time pursuant to or in connection with the Loan
Agreement.
"Subordinate Indebtedness" means any
indebtedness at any time owed by Mortgagor and secured by the
Subordinate Mortgage, including, but not limited to, the Trade
Debt Note, expenses, charges and other sums owing pursuant to
the Subordinate Loan Documents.
"Subordinate Liens" means any lien,
mortgage, pledge, security interest, collateral assignment,
charge or encumbrance of any kind on the Mortgaged Property
pursuant to or created by the Subordinate Loan Documents.
<PAGE>
"Subordinate Loan Documents" means,
collectively, the Subordinate Mortgage, the Trade Debt Note and
the Trade Credit Trust Agreement and all related documents,
agreements and instruments evidencing or creating the
Subordinate liens or the Subordinate Indebtedness.
"Trade Debt Note" means that certain Trade
Debt Note, dated the date hereof, in the maximum principal
amount of Fifteen Million Dollars ($15,000,000) made by the
Mortgagor to the Trade Trustee, as such note may from time to
time be amended, amended and restated, supplemented, modified,
extended or replaced.
"Trade Letter of Credit" means that certain
letter(s) of credit issued by the Administrative Agent for the
benefit of the Trade Trustee, as such letter of credit may be
amended, amended and restated, supplemented, renewed, replaced
or otherwise modified from time to time.
(b) References herein to each of the Loan
Agreement, the Notes, the Senior Mortgage, this Agreement, the
Security Agreement and the other Senior Loan Documents shall
mean, in the case of each such document, such document as
amended, supplemented, modified, restated or assigned from time
to time, including, without limitation, all consents and waivers
issued under or in connection with any thereof. As set forth
in Section 6 below, the Subordinate Loan Documents may not be
amended, amended and restated, supplemented, modified, extended
or replaced or assigned, and the Subordinate Indebtedness may
not be increased or extended, without the prior written consent
of the Banks in each instance.
(c) As employed herein, the term "Banks" means
Foothill, as Agent for Lenders and for itself as Lender, and
all Lenders under the Loan Agreement. Trade Trustee
acknowledges that additional lending institutions may from time
to time become Lenders under the Loan Agreement and that from
time to time one or more lending institutions that are Lenders
under the Loan Agreement may cease to be one of the Lenders
under the Loan Agreement. Accordingly, as employed herein the
term Lenders means each lending institution that as of any date
of determination is a Lender under the Loan Agreement.
2. Subordination of Liens.
(a) By means of this Agreement, the Subordinate
Mortgage and all other Subordinate Liens, and all the rights,
powers, and privileges of the Subordinate Mortgage Trustee and
the Trade Trustee thereunder are hereby made unconditionally
subject, subordinate, junior, and inferior to the Senior
Mortgage and all other Senior Liens, with full knowledge and
understanding of the effect thereof by Trade Trustee. The Trade
Trustee agrees and acknowledges that the Banks have a first
priority perfected security interest in the Mortgaged Property
<PAGE>
pursuant to the Senior Mortgage, the other Senior Loan
Documents, and the Plan. The Subordinate Liens are and shall
remain subject and subordinate to the Senior Liens, regardless
of the actual order of attachment, perfection, recordation or
filing of the Senior Loan Documents evidencing the Senior Liens
and of the Subordinate Mortgage and regardless of any provision
in the Senior Loan Documents or the Subordinate Loan Documents,
any applicable law or decision or any other circumstance; and
the terms, conditions and covenants of the Subordinate Loan
Documents and all of the rights of the Trade Trustee thereunder
(including, without limitation, any rights of the Trade Trustee
to insurance proceeds, condemnation awards and rents) are hereby
made subject and subordinate to the terms, conditions and
covenants of the Senior Loan Documents and all of the rights of
the Banks thereunder. The Trade Trustee agrees not to contest
or support any other person or entity, in contesting, in any
proceeding the priority or the validity or enforceability of
the Senior Liens.
(b) In furtherance of the foregoing, but not in
limitation thereof, the Trade Trustee hereby assigns and
releases to the Banks (i) all of its right, title, interest or
claim, if any, in and to the proceeds of all policies of
insurance covering the Mortgaged Property or any part thereof,
for payment of the Senior Indebtedness or other disposition
thereof in accordance with the provisions of the Senior Loan
Documents, and (ii) all of its right, title, interest or claim,
if any, in and to all awards or other compensation made for any
taking or condemnation of any part of the Mortgaged Property,
for payment of the Senior Indebtedness or other disposition
thereof in accordance with the provisions of the Senior Loan
Documents. In the event that following any such payment or
disposition of the insurance proceeds or condemnation awards any
balance remains, then such excess shall be made payable to the
order of the Trade Trustee to be allocated among the Trade
Trustee, Mortgagor and such other parties as may be entitled
thereto in accordance with the Subordinate Loan Documents and
applicable law.
(c) During the term of this Agreement, the
Subordinate Liens shall be subject and subordinate to any and
all leases, now existing or hereafter entered into, between
Mortgagor and any third party for any part of the Mortgaged
Property.
3. Enforcement Action by the Trade Trustee. The
Trade Trustee agrees that, so long as this Agreement is in
effect, it will not, without the prior written consent of the
Banks, take any action to foreclose or realize upon any of the
Subordinate Loan Documents or the Subordinate Liens or commence,
prosecute or participate in any administrative, legal or
equitable action, or take any other enforcement action, or
assert any right or remedy whatsoever against Mortgagor or the
Mortgaged Property under the Subordinate Loan Documents, whether
under applicable state law, in any Bankruptcy Proceeding (as
<PAGE>
defined in Section 5 hereof) or otherwise, unless, in the case
of each such action (hereinafter an "Enforcement Action"), at
or prior to the time at which the Trade Trustee wishes to take
such Enforcement Action, all Senior Indebtedness shall have been
paid in full in cash and all commitments in respect of the
Senior Loan Documents shall have terminated. The Trade Trustee
waives any equitable rights to marshalling of assets or
proration of security interests and agrees that it shall not,
without first obtaining the written consent of the Banks, join
as a party defendant in any suit to enforce its rights under the
Subordinate Loan Documents any lessee under any lease of any
portion of the Mortgaged Property. The Trade Trustee shall
immediately assign and pay over to the Banks any property (or
the proceeds thereof) acquired by the Trade Trustee in
contravention of this Agreement.
4. Other Prior Liens. The Trade Trustee shall not
acquire, by subrogation or otherwise, any lien upon or other
estate, right or interest in the Mortgaged Property or any part
thereof (including but not limited to any such lien, estate,
right or interest which may arise in respect of real estate
taxes or assessments or other governmental charges) which is or
may be prior in right to the Senior Liens.
5. Bankruptcy of Mortgagor. Any insolvency or
bankruptcy proceedings, or any receivership, liquidation,
reorganization or other similar proceedings in connection
therewith relative to Mortgagor or the Mortgaged Property, or
any proceedings for voluntary liquidation, dissolution or other
winding up of Mortgagor, whether or not involved in insolvency
or bankruptcy is hereinafter referred to as a "Bankruptcy
Proceeding"). The Trade Trustee agrees not to take any action
in opposition to the Banks in any Bankruptcy Proceeding with
respect to the Senior Mortgage or the Mortgaged Property, or any
position inconsistent with any position taken by the Banks in
any Bankruptcy Proceeding and to exercise its rights and
remedies in any Bankruptcy Proceeding with respect to the
Subordinate Mortgage or the Mortgaged Property in such a manner
as Senior Mortgagee may direct.
6. Additional Prohibited Actions. The Trade Trustee
shall not amend, supplement, modify, restate or assign, or grant
any waivers, consents or extensions under, the Subordinate Loan
Documents or any of them, without first receiving the written
consent of the Banks thereto in each instance, which consent may
be withheld in the sole and absolute discretion of the Banks.
Any such amendment, supplement, modification, restatement,
assignment extension, waiver or consent in violation of the
foregoing shall be void.
7. Notice of Default under Subordinate Loan
Documents. The Trade Trustee shall promptly after becoming
aware thereof notify the Banks of any default under the
Subordinate Loan Documents or a request or direction by the
beneficiaries of the Trade Credit Trust Agreement or the Trade
<PAGE>
Committee (as defined in the Trade Credit Trust Agreement) that
a drawing be made under the Trade Letter of Credit or that the
Trustee take any action including, without limitation, the
exercise of remedies in respect of the Subordinate Mortgage or
the Subordinate Liens. The Trade Trustee shall deliver to the
Banks a copy of any notice of default or similar notice
delivered to Mortgagor under the Subordinate Loan Documents,
such delivery to be made simultaneously with the delivery of the
notice of default or similar notice to Mortgagor.
8. Releases; Consents; Further Action.
(a) At any time and from time to time upon or
after the Banks or a designee of the Banks take any action to
foreclose or realize upon any of the Senior Loan Documents or
the Senior Liens or commence, prosecute or participate in any
administrative, legal or equitable action, or take any other
enforcement action, or assert any right or remedy whatsoever
against Mortgagor or the Mortgaged Property under the Senior
Loan Documents, whether under applicable state law, in any
Bankruptcy Proceeding (as defined in Section 5 hereof) or
otherwise, the Trade Trustee shall promptly perform such acts
and execute and deliver to the Banks such documents and
instruments to release, or evidence the release of, all or any
part of the Mortgaged Property from the Subordinate Mortgage or
the Subordinate Liens as the Banks or a designee of the Banks
may request.
(b) If the Banks shall propose to grant any
waiver or consent under any of the Senior Loan Documents, the
Trade Trustee shall, promptly following request therefor from
the Banks, execute and deliver to the Banks such agreements as
shall be reasonably requested by the Banks to evidence the
waiver or consent of the Trade Trustee under the Subordinate
Loan Documents to the same matter or thing constituting the
subject of such proposed waiver or consent by the Banks, which
waiver or consent of the Trade Trustee shall become effective
concurrently with the effectiveness of such waiver or consent
given by the Banks.
(c) The Trade Trustee agrees at any time to
execute and deliver to the Banks for recording or filing, at
the Mortgagor's sole cost and expense and at the request of the
Banks (or at the cost and expense of the Banks if the Mortgagor
is unable to pay such costs and expenses), such amendments to
any Subordinate Loan Documents as the Banks in its reasonable
discretion shall consider necessary or appropriate to establish
or to evidence the priority of the Senior Liens established
pursuant to this Agreement, and shall take all such steps as
shall be necessary or appropriate or as the Banks may direct to
maintain such priority in effect and of record. The Trade
Trustee agrees at any time and from time to time to take all
such other and further action as the Banks shall reasonably
request in order to effectuate the intent of this Agreement and
the rights and priorities of the Banks hereunder.
<PAGE>
(d) The Trade Trustee agrees and acknowledges
that notwithstanding anything in the Subordinate Loan Documents
to the contrary, it shall not draw under the Trade Letter of
Credit unless a Drawing Event occurs.
9. Mortgagor's Obligations to the Trade Trustee
Unimpaired. Nothing contained in this Agreement is intended to
or shall operate to impair, as between Mortgagor and the Trade
Trustee, the obligation of Mortgagor, which is unconditional and
absolute (except for the conditions imposed by this Agreement),
to pay the Subordinate Indebtedness.
10. Action by Banks. The signature by Foothill (or
its successor as Agent under the Loan Agreement) on any consent,
request, demand or other action taken in writing hereunder shall
constitute conclusive evidence that the same constitutes the
consent, request, demand or other action of the Banks for the
purposes of this Agreement.
11. Termination. This Agreement shall remain in full
force and effect until the earlier of the date on which (a) the
Senior Indebtedness shall have been paid in full in cash and all
commitments under the Senior Loan Documents shall have been
permanently terminated and Banks shall have satisfied and
cancelled of record the Senior Mortgage, and (b) the term of the
Subordinate Mortgage shall have expired and the Subordinate
Mortgage and all other instruments or filings evidencing the
Subordinate Liens shall have been cancelled of record.
12. Release of Subordinate Mortgage; Trade Letter of
Credit. In the event a Drawing Event has not occurred on or
prior to the Draw Termination Date, the Trade Trustee agrees to
(i) release the Subordinate Mortgage and all Subordinate Liens
and execute and deliver to the Banks such documents and perform
such other acts as are requested by the Banks to effectuate such
release and (ii) return for cancellation all documents and
certificates related to the Trade Letter of Credit and take all
other actions requested by the Banks to effectuate such
cancellation. Without limiting the generality of the foregoing,
and in order to effectuate the provisions of this paragraph and
paragraph 8(a), the Trade Trustee is delivering together with
this Agreement fully executed and acknowledged release
instruments and documents to be held in escrow by the Agent.
The Trade Trustee agrees and acknowledges that the Agent may
deliver such instruments and documents from escrow to the Banks
and the Banks may file or record such release instruments and
documents and complete or add any required information
(including recording information for the Subordinate Mortgage)
in the event that the Banks have not received notice of a
Drawing Event on or before the Draw Termination Date or a
Drawing Event has not occurred on or before the Draw Termination
Date.
<PAGE>
13. Extension of Trade Letter of Credit. Provided
that no Draw Termination Date has occurred prior to such time,
in the event that on or after April 1, 1997 and on or before
April 29, 1997, there occurs a default in the payment of
principal or interest under and as defined in the Loan
Agreement, the Trade Trustee shall have the right, if such
payment default is continuing and has not been cured or waived,
to extend the expiration date of the Trade Letter of Credit to
the earlier of (i) the date thirty one (31)) days after such
payment default occurred and (ii) May 30, 1997 in accordance
with the terms of the Trade Letter of Credit. If such default
in the payment of principal or interest under and as defined in
the Loan Agreement is cured or waived after the date of the
occurrence thereof, and the expiration date of the Trade Letter
of Credit has been extended as provided in the preceding
sentence, the Trade Trustee agrees, promptly upon the occurrence
of the later of (i) April 30, 1997 and (ii) the date that such
payment default has been cured or waived, to return for
cancellation all documents and certificates related to the Trade
Letter of Credit and take all other actions requested by the
Banks to effectuate such cancellation.
14. No Waiver. The failure of the Banks to avail
itself of any of the terms, covenants and conditions of this
Agreement for any period of time or at any time or times shall
not be construed or deemed to be a waiver of the right to do
so, and nothing herein contained, nor anything done or omitted
to be done by the Banks pursuant hereto shall be deemed a waiver
by the Banks of any of its rights or remedies under any of the
Senior Loan Documents.
15. Binding Effect. This Agreement shall be binding
upon the Trade Trustee and its successors and assigns and shall
inure to the benefit of the Banks and their successors and
assigns.
16. Amendment. No amendment or waiver of any
provision of this Agreement or consent to any departure by the
Trade Trustee from the terms of hereof shall in any event be
effective unless the same shall be in writing and signed by the
Banks and each such amendment, waiver or consent shall be
effective only in the specific instance and for the specific
purpose for which given.
17. Notices. Any notice, demand or request required
hereunder shall be given in writing by any of the following
means: (i) personal service; (ii) registered or certified first
class mail, postage prepaid, return receipt requested; or (iii)
by a nationally recognized overnight courier service, addressed
in each case as follows:
<PAGE>
If to the Banks, to:
Foothill Capital Corporation
11111 Santa Monica Blvd.
Suite 1500
Los Angeles, California 90025-3333
Attention: Business Finance Division
Manager
If to the Trade Trustee, to:
M.J. Sherman & Associates, Inc.
333 East 68th Street
New York N.Y. 10021
Attention: Michael J. Sherman
Such addresses may be changed by notice to the other parties
given in the same manner as above provided. The first to occur
of the date of execution of a receipt or four (4) days after the
date of mailing by certified or registered mail shall constitute
delivery of notice by mail. The date on which personal delivery
with receipt acknowledged or courier delivery with receipt
acknowledged is made shall constitute the date of delivery by
such means.
18. Execution in Counterparts. This Agreement may
be executed in any number of counterparts, each of which when
so executed and delivered shall be deemed to be an original and
all of which counterparts taken together shall constitute but
one and the same instrument.
19. Headings. The section headings herein in no way
define, limit, extend or interpret the scope of this Agreement
or of any particular section hereof.
20. Number and Gender. When the context in which
the words are used in this Agreement indicates that such is the
intent, words in the singular number shall include the plural
and vice-versa. References to any one gender shall include the
neuter and the other gender, and references to the neuter shall
include both genders, if applicable under the circumstances.
21. Severability. In case any one or more of the
provisions contained in this Agreement or any instrument
evidencing or securing part or all of the Senior Indebtedness
or the Senior Loan Documents shall be invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and
therein shall not in any way be affected or impaired thereby.
The parties shall endeavor in good faith negotiations to replace
the invalid, illegal or unenforceable provisions with valid
provisions the economic effect of which is as close as possible
to that of the invalid, illegal or unenforceable provisions.
<PAGE>
22. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of New York.
IN WITNESS WHEREOF, the parties have executed this
Subordination Agreement, under seal, the day and the year first
above written.
ATTEST: FOOTHILL CAPITAL CORPORATION,
a California corporation
/s/ Signature not shown
__________ Secretary By:/s/ Signature not shown
[CORPORATE SEAL] Name:_________________________
Title:________________________
ATTEST: M.J. SHERMAN & ASSOCIATES, INC.,
a New York corporation
/s/ Signature not shown
__________ Secretary By:/s/ Signature not shown
[CORPORATE SEAL] Name:_________________________
Title:________________________
ATTEST: SPRUILLCO, LTD.
/s/ Signature not shown By:/s/ Signature not shown
__________ Secretary Name:_____________________
[CORPORATE SEAL] Title"____________________
PAGE
<PAGE>
Acknowledged and Consented
to:
ROSE'S STORES, INC.,
a Delaware corporation
By:/s/ Signature not shown
Name:____________________
Title:___________________
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This INTELLECTUAL PROPERTY SECURITY AGREEMENT
("Agreement"), dated as of May 21, 1996, is entered into between ROSE'S STORES,
INC., a Delaware corporation ("Debtor") and FOOTHILL CAPITAL
CORPORATION, a California corporation, as agent for the Lenders, as such term
is defined in the Loan Agreement, in light of the following:
A. Debtor, Lenders, Agent and Co-Agent are, contemporaneously
entering into that certain Loan and Security Agreement, dated as of even date
(as may hereafter be amended, supplemented or restated from time-to-time in
accordance with the terms thereof, the "Loan Agreement").
B. Debtor is the owner of certain intellectual property, identified
below, in which Debtor is granting a security interest to Agent.
NOW THEREFORE, in consideration of the mutual promises,
covenants, conditions, representations, and warranties hereinafter set forth and
for other good and valuable consideration, the parties hereto mutually agree as
follows:
1. DEFINITIONS AND CONSTRUCTION.
1. Definitions. All initially capitalized terms used but not defined
in this Agreement shall have the meanings assigned to such terms in the Loan
Agreement. In addition, the following terms, as used in this Agreement, have the
following meanings:
2. Additional Definitions. The following terms, as used in this
Agreement, have the following meanings:
"Code" means the California Uniform Commercial Code, as
amended and supplemented from time to time, and any successor statute.
"Collateral" means:
(i) Each of the service marks and rights and interest which are
capable of being protected as service marks (including trademarks, service
marks, designs, logos, indicia, tradenames, corporate names, company names,
business names, fictitious business names, trade styles, and other source or
business identifiers, and applications pertaining thereto), which are pre-
sently, or in the future may be, owned, created, acquired, or used (whether
pursuant to a license or otherwise) by Debtor, in whole or in part, and all
trademark and service mark rights with respect thereto throughout the world,
including all proceeds thereof (including license royalties and proceeds of
infringement suits), and rights to renew and extend such service marks and
service mark rights;
(ii) All of Debtor's right to the service marks and trademark
registrations listed on Schedule A, attached hereto, as the same may be
updated hereafter from time to time;
<PAGE>
(iii)All of Debtor's right, title and interest to register service mark
claims under any state or federal service mark law or regulation of any for-
eign country and to apply for, renew, and extend the service mark registra-
tions and service mark rights, the right (without obligation) to sue or bring
opposition or cancellation proceedings in the name of Debtor or in the name
of Agent for past, present, and future infringements of the service marks,
registrations, or service mark rights and all rights (but not obligations)
corresponding thereto in the United States and any foreign country, and the
associated goodwill;
(iv) All general intangibles relating to the foregoing; and
(v) All proceeds of any and all of the foregoing (including, without
limitation, license royalties and proceeds of infringement suits) and, to the
extent not otherwise included, all payments under insurance, or any indemni-
ty, warranty, or guaranty payable by reason of loss or damage to or otherwise
with respect to the Collateral.
"Secured Obligations" means the Obligations (as defined in the Loan
Agreement) and the obligations of Debtor hereunder.
3. Construction. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, and the term "including" is not limiting. The
words "hereof," "herein," "hereby," "hereunder," and other similar terms refer
to this Agreement as a whole and not to any particular provision of this Agree-
ment. Any initially capitalized terms used but not defined herein shall have
the meaning set forth in the Loan Agreement. Any reference herein to any of the
Loan Documents includes any and all alterations, amendments, extensions, modifi-
cations, renewals, or supplements thereto or thereof, as applicable. Neither
this Agreement nor any uncertainty or ambiguity herein shall be construed or re-
solved against Agent or Debtor, whether under any rule of construction or other-
wise. On the contrary, this Agreement has been reviewed by Debtor, Agent, and
their respective counsel, and shall be construed and interpreted according to
the ordinary meaning of the words used so as to fairly accomplish the purposes
and intentions of Agent and Debtor.
2. GRANT OF SECURITY INTEREST.
Debtor hereby grants to Agent, for the ratable benefit of the Lenders,
a first-priority security interest in all of Debtor's right, title, and interest
in and to the Collateral to secure the Secured Obligations.
<PAGE>
3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Debtor hereby represents, warrants, and covenants that:
1. Marks. A true and complete schedule setting forth all federal
trademark and service mark registrations owned or controlled by Debtor or li-
censed to Debtor, together with a summary description and full information in
respect of the filing or issuance thereof and expiration dates is set forth on
Schedule A;
2. Validity; Enforceability. Each of the service marks and
trademarks is valid and enforceable, and Debtor is not presently aware of any
past, present, or prospective claim by any third party that any of the service
marks are invalid or unenforceable, or that the use of any service marks vio-
lates the rights of any third person, or of any basis for any such claims;
3. Title. Debtor is the sole and exclusive owner of the entire and
unencumbered right, title, and interest in and to each of the trademarks, ser-
vice marks, and trademark and service mark registrations, free and clear of any
liens, charges, and encumbrances, including pledges, assignments, licenses, and
covenants by Debtor not to sue third persons;
4. Notice. Debtor has used and will continue to use proper
statutory notice in connection with its use of each of the trademarks and ser-
vice marks;
5. Quality. Debtor has used and will continue to use consistent
standards of high quality (which may be consistent with Debtor's past practices)
in the manufacture, sale, and delivery of products and services sold or deliver-
ed under or in connection with the trademarks and service marks, including, to
the extent applicable, in the operation and maintenance of its merchandising
operations, and will continue to maintain the validity of the trademarks and
service marks;
6. Perfection of Security Interest. Except for the filing of a
financing statement with the Secretary of State of North Carolina and filings
with the United States Patent and Trademark Office necessary to perfect the
security interests created hereunder, no authorization, approval, or other ac-
tion by, and no notice to or filing with, any governmental authority or regula-
tory body is required either for the grant by Debtor of the security interest
hereunder or for the execution, delivery, or performance of this Agreement by
Debtor or for the perfection of or the exercise by Agent of its rights hereunder
to the Collateral in the United States.
4. AFTER-ACQUIRED TRADEMARK AND SERVICE MARK
RIGHTS.
If Debtor shall obtain rights to any new trademarks and service marks,
the provisions of this Agreement shall automatically apply thereto. Debtor
shall give prompt notice in writing to Agent with respect to any new trademarks
and service marks, or renewal or extension of any trademark and service marks
registration. Debtor shall bear any expenses incurred in connection with future
trademarks and service marks registrations.
<PAGE>
5. LITIGATION AND PROCEEDINGS.
Debtor shall commence and diligently prosecute in its own name, as the
real party in interest, for its own benefit, and its own expense, such suits,
administrative proceedings, or other action for infringement or other damages as
are in its reasonable business judgment necessary to protect the Collateral.
Debtor shall provide to Agent any information with respect thereto requested by
Agent. Agent shall provide at Debtor's expense all necessary cooperation in
connection with any such suits, proceedings, or action, including, without limi-
tation, joining as a necessary party. Following Debtor's becoming aware thereof,
Debtor shall notify Agent of the institution of, or any adverse determination
in, any proceeding in the United States Patent and Trademark Office, or any
United States, state, or foreign court regarding Debtor's claim of ownership in
any of the service marks, its right to apply for the same, or its right to keep
and maintain such service marks rights.
6. POWER OF ATTORNEY.
Debtor grants Agent power of attorney, having the full authority, and
in the place of Debtor and in the name of Debtor, from time to time following an
Event of Default in Agent's discretion, to take any action and to execute any
instrument which Agent may deem necessary or advisable to accomplish the pur-
poses of this Agreement, including, without limitation, as may be subject to the
provisions of this Agreement: to endorse Debtor's name on all applications,
documents, papers, and instruments necessary for Agent to use or maintain the
Collateral; to ask, demand, collect, sue for, recover, impound, receive, and
give acquittance and receipts for money due or to become due under or in respect
of any of the Collateral; to file any claims or take any action or institute any
proceedings that Agent may deem necessary or desirable for the collection of any
of the Collateral or otherwise to enforce Agent's rights with respect to any of
the Collateral and to assign, pledge, convey, or otherwise transfer title in or
dispose of the Collateral to any person.
7. RIGHT TO INSPECT.
Debtor grants to Agent and its employees and agents the right to visit
Debtor's plants and facilities at which Debtor inspects or stores products sold
under any of the service marks, and to inspect the products and quality control
records relating thereto at reasonable times during regular business hours.
8. EVENTS OF DEFAULT.
Any of the following events shall be an Event of Default:
1. Loan Agreement. An Event of Default shall occur under the
Loan Agreement;
2. Misrepresentation. Any representation or warranty made herein
by Debtor or in any document furnished to Agent by Debtor under this Agreement
is incorrect in any material respect when made or when reaffirmed; and
<PAGE>
3. Breach. Debtor fails to observe or perform any covenant,
condition, or agreement to be observed or performed pursuant to the terms hereof
which materially and adversely affects the Lender Group.
9. SPECIFIC REMEDIES.
Upon the occurrence of any Event of Default, Agent shall have, in
addition to, other rights given by law or in this Agreement, the Loan Agreement,
or in any other Loan Document, all of the rights and remedies with respect to
the Collateral of a secured party under the Code, including the following:
1. Notification. Agent may notify licensees to make royalty
payments on license agreements directly to Agent;
2. Sale. Agent may sell or assign the Collateral and associated
goodwill at public or private sale for such amounts, and at such time or times
as Agent deems advisable. Any requirement of reasonable notice of any disposi-
tion of the Collateral shall be satisfied if such notice is sent to Debtor five
(5) days prior to such disposition. Debtor shall be credited with the net pro-
ceeds of such sale only when they are actually received by Agent, and Debtor
shall continue to be liable for any deficiency remaining after the Collateral is
sold or collected. If the sale is to be a public sale, Agent shall also give
notice of the time and place by publishing a notice one time at least five (5)
days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held. To the maximum extent permitted by
applicable law, Agent may be the purchaser of any or all of the Collateral and
associated goodwill at any public sale and shall be entitled, for the purpose of
bidding and making settlement or payment of the purchase price for all or any
portion of the Collateral sold at any public sale, to use and apply all or any
part of the Obligations as a credit on account of the purchase price of any
collateral payable by Agent at such sale.
10. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES
HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR
RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA, WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS
PRINCIPLES. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS
ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE
COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE
OPTION OF AGENT, IN ANY OTHER COURT IN WHICH AGENT SHALL
INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF
DEBTOR AND AGENT WAIVES, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE
OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT
ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 10.
<PAGE>
DEBTOR AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS,
TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW
OR STATUTORY CLAIMS. DEBTOR AND AGENT REPRESENT THAT EACH
HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT
MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
11. GENERAL PROVISIONS.
1. Effectiveness. This Agreement shall be binding and deemed
effective when executed by Debtor and Agent.
2. Successors and Assigns. This Agreement shall bind and inure
to the benefit of the respective successors and assigns of each of the parties;
provided, however, that Debtor may not assign this Agreement or any rights or
duties hereunder without Agent's prior written consent and any prohibited
assignment shall be absolutely void. Agent may assign this Agreement and its
rights and duties hereunder and no consent or approval by Debtor is required in
connection with any such assignment.
3. Section Headings. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
4. Interpretation. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Agent or Debtor, whether
under any rule of construction or otherwise. On the contrary, this Agreement
has been reviewed by all parties and shall be construed and interpreted accord-
ing to the ordinary meaning of the words used so as to fairly accomplish the
purposes and intentions of all parties hereto.
5. Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
6. Amendments in Writing. This Agreement can only be amended
by a writing signed by both Agent and Debtor.
7. Counterparts; Telefacsimile Execution. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver a manually executed counter-
part of this Agreement but
<PAGE>
the failure to deliver a manually executed counter-
part shall not affect the validity, enforceability, and binding effect of this
Agreement.
8. Fees and Expenses. Debtor shall pay to Agent on demand all costs
and expenses that the Agent pays or incurs in connection with the negotiation,
preparation, consummation, administration, enforcement, and termination of this
Agreement, including: (a) reasonable attorneys' and paralegals' fees and dis-
bursements of counsel to Agent; (b) costs and expenses (including reasonable
attorneys' and paralegals' fees and disbursements) for any amendment, supple-
ment, waiver, consent, or subsequent closing in connection with this Agreement
and the transactions contemplated hereby; (c) costs and expenses of lien and
title searches; (d) taxes, fees, and other charges for filing this Agreement at
the United States Patent and Trademark Office, or for filing financing state-
ments, and continuations, and other actions to perfect, protect, and continue
the security interest created hereunder; (e) sums paid or incurred to pay any
amount or take any action required of Debtor under this Agreement that Debtor
fails to pay or take; (f) costs and expenses of preserving and protecting the
Collateral; and (g) costs and expenses (including reasonable attorneys' and
paralegals' fees and disbursements) paid or incurred to enforce the security
interest created hereunder, sell or otherwise realize upon the Collateral, and
otherwise enforce the provisions of this Agreement, or to defend any claims made
or threatened against the Agent arising out of the transactions contemplated
hereby (including preparations for the consultations concerning any such
matters). The foregoing shall not be construed to limit any other provisions of
this Agreement or the Loan Documents regarding costs and expenses to be paid by
Debtor. The parties agree that reasonable attorneys' and paralegals' fees and
costs incurred in enforcing any judgment are recoverable as a separate item in
addition to fees and costs incurred in obtaining the judgment and that the
recovery of such attorneys' and paralegals' fees and costs is intended to sur-
vive any judgment, and is not to be deemed merged into any judgment.
9. Notices. Except as otherwise provided herein, all notices, demands,
and requests that either party is required or elects to give to the other shall
be in writing and shall be governed by the provisions of Section 12 of the Loan
Agreement.
10. Termination By Agent. After termination of the Loan Agreement
and when Lenders have received payment and performance, in full, of all
Obligations, Agent shall execute and deliver to Debtor a termination of all of
the security interests granted by Debtor hereunder.
11. Debtors Use of Collateral. Notwithstanding the foregoing, unless
and until Agent exercises the rights and remedies accorded to it under the Loan
Agreement and by law with respect to the realization upon its security interest
in the service marks and trademarks, Debtor shall continue to own, and may use
and enjoy, the services marks and trademarks in connection with its business
operations, but only in a manner consistent with the preservation of their
current substance, validity, registration and the collateral assignment herein
contained.
12. Licensing. Notwithstanding anything herein to the contrary,
Agent acknowledges that in the ordinary course of its business, Debtor has
granted
<PAGE>
and will hereafter grant licenses of the service marks and trademarks to
third parties, including, but not limited to, franchisees, without consent of or
notice to Agent. Agent agrees not to take any action inconsistent with the
rights of any such licensee pursuant to any license or franchise agreement to
use or enjoy the services marks and trademarks.
13. No Action to Halt Use. In the event that Agent exercises any
rights and remedies with respect to the realization upon its security interest
in the service marks and trademarks, Agent shall not take any action and shall
not threaten to take any action to halt any licensee's use and enjoyment of the
service marks and trademarks, except as may be provided for in the documents
establishing such licensee's rights to use and enjoy the service marks and
trademarks.
14. Integration. This Agreement, together with the other Loan
Documents, reflect the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first written above.
FOOTHILL CAPITAL CORPORATION,
a California corporation, as agent
By:/s/ Signature not shown
Title:
ROSE'S STORES, INC.,
a Delaware corporation
By:/s/ Signature not shown
Title: Senior Vice President
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Rose's
Stores, Inc., Form 10-Q for the quarter ended April 27, 1996, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000085149
<NAME> ROSE'S STORES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-END> APR-27-1996
<CASH> 578
<SECURITIES> 0
<RECEIVABLES> 8,977
<ALLOWANCES> 298
<INVENTORY> 172,294
<CURRENT-ASSETS> 185,797
<PP&E> 6,136
<DEPRECIATION> 356
<TOTAL-ASSETS> 192,538
<CURRENT-LIABILITIES> 112,381
<BONDS> 0
0
0
<COMMON> 35,000
<OTHER-SE> 6,212
<TOTAL-LIABILITY-AND-EQUITY> 192,538
<SALES> 150,145
<TOTAL-REVENUES> 151,225
<CGS> 113,040
<TOTAL-COSTS> 149,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,386
<INCOME-PRETAX> 652
<INCOME-TAX> 0
<INCOME-CONTINUING> 652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 652
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
