EX-10.7 3 p66297ex10-7.txt EX-10.7 Exhibit 10.7 CREDIT AGREEMENT dated as of April 30, 2001 among PETSMART, INC. as Lead Borrower for: PETSMART, INC. PETSMART DIRECT, INC. PETSMART STORE SUPPORT GROUP, INC. PETSMART.COM., INC. PET CATALOG, LLC as Borrowers The LENDERS Party Hereto FLEET NATIONAL BANK as Issuing Bank FLEET RETAIL FINANCE INC. as Administrative Agent and Collateral Agent CONGRESS FINANCIAL CORPORATION (WESTERN) as Co-Agent and FLEET SECURITIES INC. as Syndication Agent and Arranger --------------------------- TABLE OF CONTENTS

PAGE ARTICLE I............................................................................................ 1 Definitions.......................................................................................... 1 SECTION 1.1....................................................................Defined Terms 1 SECTION 1.2..................................................................Terms Generally 21 SECTION 1.3...........................................................Accounting Terms; GAAP 21 ARTICLE II........................................................................................... 21 Amount and Terms of Credit........................................................................... 21 SECTION 2.1........................................................Commitment of the Lenders 21 SECTION 2.2....................................................Reserves; Changes to Reserves 22 SECTION 2.3..................................................................Making of Loans 23 SECTION 2.4.....................................................................Overadvances 24 SECTION 2.5..................................................................Swingline Loans 24 SECTION 2.6................................................................Letters of Credit 25 SECTION 2.7......................................................Settlements Amongst Lenders 29 SECTION 2.8........................................................Notes; Repayment of Loans 30 SECTION 2.9................................................................Interest on Loans 30 SECTION 2.10................................................................Default Interest 31 SECTION 2.11....................................................................Certain Fees 31 SECTION 2.12...........................................................Unused Commitment Fee 31 SECTION 2.13...........................................................Letter of Credit Fees 31 SECTION 2.14..................................................................Nature of Fees 32 SECTION 2.15.........................................Termination or Reduction of Commitments 32 SECTION 2.16......................................................Alternate Rate of Interest 33 SECTION 2.17............................................Conversion and Continuation of Loans 33 SECTION 2.18...................Mandatory Prepayment; Commitment Termination; Cash Collateral 34 SECTION 2.19..........................Optional Prepayment of Loans; Reimbursement of Lenders 35

(ii) SECTION 2.20..............................Maintenance of Loan Account; Statements of Account 37 SECTION 2.21...................................................................Cash Receipts 37 SECTION 2.22.........................................................Application of Payments 39 SECTION 2.23.................................................................Increased Costs 40 SECTION 2.24..............................................................Change in Legality 41 SECTION 2.25.....................................................Payments; Sharing of Setoff 41 SECTION 2.26...........................................................................Taxes 43 SECTION 2.27................................................Security Interests in Collateral 44 SECTION 2.28..................................Mitigation Obligations; Replacement of Lenders 45 ARTICLE III.......................................................................................... 45 Representations and Warranties....................................................................... 45 SECTION 3.1.............................................................Organization; Powers 45 SECTION 3.2....................................................Authorization; Enforceability 46 SECTION 3.3.............................................Governmental Approvals; No Conflicts 46 SECTION 3.4..............................................................Financial Condition 46 SECTION 3.5.......................................................................Properties 46 SECTION 3.6.............................................Litigation and Environmental Matters 47 SECTION 3.7..............................................Compliance with Laws and Agreements 47 SECTION 3.8............................................Investment and Holding Company Status 47 SECTION 3.9............................................................................Taxes 47 SECTION 3.10...........................................................................ERISA 48 SECTION 3.11......................................................................Disclosure 48 SECTION 3.12....................................................................Subsidiaries 48 SECTION 3.13.......................................................................Insurance 48 SECTION 3.14...................................................................Labor Matters 48 SECTION 3.15..............................................................Security Documents 49 SECTION 3.16.....................................................Federal Reserve Regulations 49 SECTION 3.17........................................................................Solvency 49 ARTICLE IV........................................................................................... 49 (iii) Conditions........................................................................................... 49 SECTION 4.1.....................................................................Closing Date 49 SECTION 4.2......................Conditions Precedent to Each Loan and Each Letter of Credit 52 ARTICLE V............................................................................................ 53 Affirmative Covenants................................................................................ 53 SECTION 5.1.......................................Financial Statements and Other Information 53 SECTION 5.2.......................................................Notices of Material Events 55 SECTION 5.3.................................................Information Regarding Collateral 55 SECTION 5.4...................................................Existence; Conduct of Business 56 SECTION 5.5...........................................................Payment of Obligations 56 SECTION 5.6........................................................Maintenance of Properties 56 SECTION 5.7........................................................................Insurance 56 SECTION 5.8........................................................Casualty and Condemnation 57 SECTION 5.9...................................Books and Records; Inspection and Audit Rights 57 SECTION 5.10............................................................Compliance with Laws 58 SECTION 5.11...........................................Use of Proceeds and Letters of Credit 58 SECTION 5.12.........................................................Additional Subsidiaries 58 SECTION 5.13..............................................................Further Assurances 59 ARTICLE VI........................................................................................... 59 Negative Covenants................................................................................... 59 SECTION 6.1...............................................Indebtedness and Other Obligations 59 SECTION 6.2............................................................................Liens 61 SECTION 6.3..............................................................Fundamental Changes 62 SECTION 6.4........................Investments, Loans, Advances, Guarantees and Acquisitions 62 SECTION 6.5......................................................................Asset Sales 64 SECTION 6.6............................Restricted Payments; Certain Payments of Indebtedness 64 SECTION 6.7.....................................................Transactions with Affiliates 65 SECTION 6.8...........................................................Restrictive Agreements 65 (iv) SECTION 6.9..................................................Amendment of Material Documents 66 SECTION 6.10.........................................................Additional Subsidiaries 66 SECTION 6.11.............................................................Financial Covenants 66 ARTICLE VII.......................................................................................... 66 Events of Default.................................................................................... 66 SECTION 7.2..................................................................When Continuing 69 SECTION 7.3..............................................................Remedies on Default 69 SECTION 7.4..........................................................Application of Proceeds 70 ARTICLE VIII......................................................................................... 70 The Agents........................................................................................... 70 SECTION 8.1...........................................Administration by Administrative Agent 70 SECTION 8.2.............................................................The Collateral Agent 70 SECTION 8.3.......................................................Sharing of Excess Payments 70 SECTION 8.4....................................................Agreement of Required Lenders 71 SECTION 8.5..............................................................Liability of Agents 71 SECTION 8.6................................................Reimbursement and Indemnification 72 SECTION 8.7.................................................................Rights of Agents 73 SECTION 8.8.............................................Independent Lenders and Issuing Bank 73 SECTION 8.9...............................................................Notice of Transfer 73 SECTION 8.10.................................................................Successor Agent 73 SECTION 8.11................................................Reports and Financial Statements 73 SECTION 8.12........................................Co-Agent, Syndication Agent and Arranger 74 ARTICLE IX........................................................................................... 74 Miscellaneous........................................................................................ 74 SECTION 9.1..........................................................................Notices 74 SECTION 9.2..............................................................Waivers; Amendments 74 (v) SECTION 9.3...............................................Expenses; Indemnity; Damage Waiver 76 SECTION 9.4.................................Designation of Lead Borrower as Borrowers' Agent 77 SECTION 9.5...........................................................Successors and Assigns 79 SECTION 9.6.........................................................................Survival 81 SECTION 9.7.........................................Counterparts; Integration; Effectiveness 81 SECTION 9.8.....................................................................Severability 82 SECTION 9.9..................................................................Right of Setoff 82 SECTION 9.10......................Governing Law; Jurisdiction; Consent to Service of Process 82 SECTION 9.11............................................................WAIVER OF JURY TRIAL 83 SECTION 9.12........................................................................Headings 83 SECTION 9.13........................................................Interest Rate Limitation 83 SECTION 9.14..............................................................Additional Waivers 84 SECTION 9.15..................................................Designated Senior Indebtedness 85 (vi) EXHIBITS A. Assignment and Acceptance B-1. Notes B-2 Swingline Note C. Opinion of Counsel to Loan Parties D. Borrowing Base Certificate (vii) SCHEDULES 1.1 Lenders and Commitments 1.2 Existing Synthetic Lease Documents 1.3 Facility Guarantors 1.4 Investment Policy 2.21(a)DDAs 2.21(b)Credit Card Arrangements 2.21(c)Blocked Accounts 3.05(c)(i) Title to Properties; Real Estate Owned 3.05(c)(ii) Leased Properties 3.06 Disclosed Matters 3.12 Subsidiaries 3.13 Insurance 5.01(c)Monthly Board Report 5.01(i)Financial Reporting Requirements 6.01 Indebtedness 6.02 Liens 6.04 Investments (viii) CREDIT AGREEMENT dated as of April 30, 2001 among PETSMART, INC., a Delaware corporation, having a principal place of business at 19601 North 27th Avenue, Phoenix, Arizona 85027, as Lead Borrower for the Borrowers, being said PETSMART, INC., and PETSMART DIRECT, INC., a New York corporation, having a principal place of business at 1989 Transit Way, Brockport, New York 14420; PETSMART STORE SUPPORT GROUP, INC., a Delaware corporation, having a principal place of business at 19601 North 27th Avenue, Phoenix, Arizona 85027; PETSMART.COM., INC., a Delaware corporation, having a principal place of business at 35 Hugus Alley, Suite 200, Pasadena, California 91103; and PET CATALOG, LLC, a Delaware limited liability company, having a principal place of business at 19601 North 27th Avenue, Phoenix, Arizona 85027 the LENDERS party hereto; and FLEET NATIONAL BANK, as Issuing Bank, a national banking association having a place of business at 100 Federal Street, Boston, Massachusetts 02110; and FLEET RETAIL FINANCE INC., as Administrative Agent and Collateral Agent for the Lenders, a Delaware corporation, having its principal place of business at 40 Broad Street, Boston, Massachusetts 02109; and CONGRESS FINANCIAL CORPORATION (WESTERN), as Co-Agent. in consideration of the mutual covenants herein contained and benefits to be derived herefrom. ARTICLE I Definitions SECTION 1.1 Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ACH" shall mean automated clearing house transfers. "Account" shall mean any right to payment for goods sold or leased or for services rendered, whether or not earned by performance, or any right to payment for credit extended for goods sold or leased or services rendered. 1 "Adjusted LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Administrative Agent" means FRF, in its capacity as administrative agent for the Lenders hereunder. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Agents" shall mean collectively, the Administrative Agent and the Collateral Agent. "Alternate Base Rate" shall mean, for any day, the higher of (a) the annual rate of interest then most recently announced by Fleet at its head office in Boston, Massachusetts as its "Base Rate" and (b) the Federal Funds Effective Rate in effect on such day plus -1/2 of 1% (0.50%) per annum. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations thereof in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in Fleet's Base Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in Fleet's Base Rate or the Federal Funds Effective Rate, respectively. "Applicable Margin" means initially, the rates for Base Rate Loans and Eurodollar Loans, set forth in Level 2, below:

Level Performance Criteria Base Rate Loans Eurodollar Loans 1 Excess Availability 0.50% 2.50% less than or equal to $50,000,000 2 Excess Availability 0.25% 2.25% greater than $50,000,000 but less than or equal to $150,000,000 3 Excess Availability 0% 2.00% greater than $150,000,000

The Applicable Margin will remain at Level 2 through April 30, 2002, provided that the Applicable Margin shall be immediately increased to the percentages set forth in Level 1 at any time on or after August 1, 2001 that the Excess Availability requirements of Level 2 are not satisfied; in the event that the Applicable Margin is increased to Level 1 prior to April 30, 2002, 2 the Applicable Margin shall not thereafter be reduced to Level 2 unless and until Excess Availability is greater than $50,000,000 for thirty (30) consecutive days. In no event shall the Applicable Margin be set at Level 3 from the Closing Date through April 30, 2002 (even if the Excess Availability requirements for Level 3 have been met). Commencing May 1, 2002, the Applicable Margin shall be adjusted monthly as of the first day of each calendar month, based upon the average Excess Availability for the immediately preceding calendar month. Upon the occurrence of an Event of Default, the Applicable Margin shall be immediately increased to the percentages set forth in Level 1 (even if the Excess Availability requirements for another Level have been met) and interest shall be determined in the manner set forth in Section 2.10. "Appraisal Percentage" shall mean 85%. "Appraised Value" means the net appraised liquidation value of the Borrowers' and Canadian Operating Subsidiary's Inventory as set forth in the Borrowers' stock ledger (expressed as a percentage of the Cost of such Inventory) as determined from time to time by the Administrative Agent in accordance with its standard procedures and with the assistance of an independent appraiser satisfactory to the Administrative Agent. "Arranger" means FSI. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.05), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "Availability Reserves" means such reserves as the Administrative Agent from time to time determines in the Administrative Agent's reasonable discretion as being appropriate to reflect the impediments to the Agents' ability to realize upon the Collateral. Without limiting the generality of the foregoing, Availability Reserves may include (but are not limited to) reserves based on (i) Rent; (ii) Gift Certificates and Merchandise Credit Liability; (iii) Frequent Shopper Programs; (iv) Layaways and Customer Deposits; (v) customs, duties, and other costs to release Inventory which is being imported into the United States; and (vi) outstanding taxes and other governmental charges, including, ad valorem, real estate, personal property, and other taxes which might have priority over the interests of the Collateral Agent in the Collateral. "Base Rate Loan" shall mean any Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Blocked Account Agreements" has the meaning set forth in Section 2.21(c). "Blocked Account Banks" shall mean the banks with whom the Borrowers have entered into Blocked Account Agreements. "Blocked Accounts" shall have the meaning set forth in Section 2.21(c). "Board" means the Board of Governors of the Federal Reserve System of the United States of America. 3 "Bonds" means the convertible subordinated notes issued by the Lead Borrower and dated November 7, 1997 and November 14, 1997. "Borrowers" means collectively, PETsMART, Inc., a Delaware corporation, PETsMART Direct, Inc., a New York corporation, PETsMART Store Support Group, Inc., a Delaware corporation, PETsMART.com., Inc., a Delaware corporation, and Pet Catalog, LLC, a Delaware limited liability company. "Borrowing" shall mean (a) the incurrence of Loans of a single Type, on a single date and having, in the case of Eurodollar Loans, a single Interest Period, or (b) a Swingline Loan. "Borrowing Base" means, at any time of calculation, an amount equal to (a) the Receivables Advance Rate of the face amount of Eligible Credit Card Receivables; plus (b) the lesser of (i) Appraisal Percentage of the Appraised Value of Eligible Inventory, or (ii) the Inventory Advance Rate of (A) the Cost of Eligible Inventory minus (B) Inventory Reserves; plus (c) 100% of all Eligible Cash on Hand, provided that Eligible Cash on Hand included in the Borrowing Base may not be withdrawn from the deposit account at Fleet, thereby reducing the Borrowing Base, unless and until the Lead Borrower furnishes the Administrative Agent with (i) notice of such intended withdrawal and (ii) a Borrowing Base Certificate as of the date of such proposed withdrawal reflecting that, after giving effect to such withdrawal, no Overadvance will result; minus (d) the then amount of all Availability Reserves. "Borrowing Base Certificate" has the meaning assigned to such term in Section 5.01(f). "Borrowing Request" means a request by the Lead Borrower on behalf of the Borrowers for a Borrowing in accordance with Section 2.03. "Breakage Costs" shall have the meaning set forth in Section 2.19(b). "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in Boston, Massachusetts are authorized or required by law to remain closed, provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Canadian Operating Subsidiary" means 3003300 Nova Scotia Company. "Capital Expenditures" means, for any period, the additions to property, plant and equipment and other capital expenditures of the Borrowers that are (or would be) set forth in a consolidated statement of cash flows of the Borrowers for such period prepared in accordance with GAAP. 4 "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Cash Collateral Account" shall mean an interest-bearing account established by the Borrowers with the Collateral Agent at Fleet under the sole and exclusive dominion and control of the Collateral Agent designated as the "PETsMART Cash Collateral Account". "Cash Control Event" means that Excess Availability is less than (a) $35,000,000.00 from the Closing Date through June 30, 2001, or (b) $50,000,000.00 at all times from and after July 1, 2001. For purposes of Section 2.21(h) hereof, the occurrence of a Cash Control Event shall be deemed continuing notwithstanding that Excess Availability may thereafter exceed the amount set forth in the preceding sentence unless and until Excess Availability exceeds such amounts for sixty (60) consecutive days, in which case a Cash Control Event shall no longer be deemed to be continuing for purposes of Section 2.21(h) hereof; provided that a Cash Control Event shall be deemed continuing (even if Excess Availability exceeds the required amounts for sixty consecutive days) if a Cash Control Event has occurred and been discontinued on three (3) occasions in any twelve month period. "Cash Receipts" has the meaning provided therefor in Section 2.21(c). "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq. "Change in Control" means, at any time, (a) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Lead Borrower by Persons who were neither (i) nominated by the board of directors of the Lead Borrower nor (ii) appointed by directors so nominated; or (b) the acquisition of thirty-five percent (35%) or more of the capital stock of the Lead Borrower by any Person or group of Persons, or (c) the failure of the Lead Borrower to own, directly or indirectly, 100% of the capital stock of all of the other Borrowers and the Canadian Operating Subsidiary. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change, after the date of this Agreement, in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority, or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.23(b), by any lending office of such Lender or by such Lender's or the Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Charges" has the meaning provided therefor in Section 9.13. "Closing Date" means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02). "Code" means the Internal Revenue Code of 1986, as amended from time to time. 5 "Collateral" means any and all "Collateral" as defined in any applicable Security Document. "Collateral Agent" means FRF, in its capacity as collateral agent under the Security Documents. "Commercial Letter of Credit" means any Letter of Credit issued for the purpose of providing the primary payment mechanism in connection with the purchase of any materials, goods or services by the Borrowers in the ordinary course of business of the Borrowers. "Commitment" shall mean, with respect to each Lender, the aggregate commitment of such Lender hereunder in the amount set forth opposite its name on SCHEDULE 1.1 hereto or as may subsequently be set forth in the Register from time to time, as the same may be reduced from time to time pursuant to Section 2.15. "Commitment Fee" has the meaning provided therefor in Section 2.12. "Commitment Percentage" shall mean, with respect to each Lender, that percentage equivalent to such Lender's Commitment divided by the Total Commitments hereunder; each Lender's Commitment Percentage shall initially be in the amount set forth opposite its name on SCHEDULE 1.1 hereto. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. The terms "Controlling" and "Controlled" have meanings correlative thereto. "Cost" means the average cost of purchases, as reported on the Borrowers' stock ledger, based upon the Borrowers' accounting practices which are in effect on the date of this Agreement. "Cost" does not include inventory capitalization costs or other non-purchase price charges (such as freight) used in the Borrowers' calculation of cost of goods sold. "Credit Card Notifications" has the meaning provided therefor in Section 2.21(c). "Credit Extensions" as of any day, shall be equal to the sum of (a) the principal balance of all Loans then outstanding, and (b) the then amount of the Letter of Credit Outstandings. "DDAs" means any checking or other demand deposit account maintained by any Borrower. "DDA Notification" has the meaning provided therefor in Section 2.21(c). "Default" means any event or condition that constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Discontinued Subsidiaries" means each of Pet City (ESOT Trustee LTD UK), PETsMART (UK) LTD, PETsMART (N. Ireland) LTD, Pet City (N. Ireland) LTD, 3000970 6 Nova Scotia, Limited, 3003970 Nova Scotia Incorporated, PETsMART Direct.com, Inc., and State Line Tack of Texas, Inc. "dollars" or "$" refers to lawful money of the United States of America. "Early Termination Fees" shall have the meaning set forth in Section 2.15(b). "Eligible Cash On Hand" means cash of a Borrower or the Canadian Operating Subsidiary from time to time deposited in a DDA in the name of a Borrower or the Canadian Operating Subsidiary maintained with Fleet (excluding any amounts on deposit in the Cash Collateral Account or in any other escrow, or special purpose or restricted account, such as an account specifically designated for payroll or sales taxes), which DDA is subject to a first perfected security interest in favor of the Collateral Agent for the benefit of itself and the Secured Parties. "Eligible Credit Card Receivables" means Accounts due to a Borrower or the Canadian Operating Subsidiary on a non-recourse basis from Visa, Mastercard, American Express Co., Discovercard, and other major credit card processors reasonably acceptable to the Administrative Agent as arise in the ordinary course of business, which have been earned by performance and are deemed by the Administrative Agent in its reasonable discretion to be eligible for inclusion in the calculation of the Borrowing Base. Without limiting the foregoing, unless otherwise approved in writing by the Administrative Agent, none of the following shall be deemed to be Eligible Credit Card Receivables: (a) Accounts that have been outstanding for more than seven (7) Business Days from the date of sale; (b) Accounts with respect to which a Borrower or the Canadian Operating Subsidiary does not have good, valid and marketable title thereto, free and clear of any Encumbrance (other than Encumbrances granted to the Collateral Agent, for its benefit and the ratable benefit of the Secured Parties, pursuant to the Security Documents); (c) Accounts that are not subject to a first priority security interest in favor of the Collateral Agent, for the benefit of itself and the Secured Parties. (d) Accounts which are disputed, are with recourse, or with respect to which a claim, counterclaim, offset or chargeback has been asserted (to the extent of such claim, counterclaim, offset or chargeback); or (e) Accounts which the Administrative Agent determines in its reasonable discretion to be uncertain of collection. "Eligible Inventory" shall mean, as of the date of determination thereof, items of Inventory of the Borrowers and the Canadian Operating Subsidiary that are finished goods, merchantable and readily saleable to the public in the ordinary course deemed by the Administrative Agent in its reasonable discretion to be eligible for inclusion in the calculation of the Borrowing Base. Without limiting the foregoing, unless otherwise approved in writing by the Administrative Agent, none of the following shall be deemed to be Eligible Inventory: 7 (a) Inventory that is not owned solely by the Borrowers or the Canadian Operating Subsidiary, or is leased or on consignment or the Borrowers or the Canadian Operating Subsidiary do not have good and valid title thereto; (b) Inventory (including any portion thereof in transit from vendors) that is not located at property that is owned or leased by the Borrowers or the Canadian Operating Subsidiary; (c) Inventory that represents (i) goods damaged, defective or otherwise unmerchantable, (ii) goods that do not conform in all material respects to the representations and warranties contained in this Agreement or any of the Security Documents, or (iii) goods to be returned to the vendor; (d) Inventory that is not located in the United States of America (excluding territories and possessions thereof) or Canada; (e) Inventory that is not subject to a perfected first-priority security interest in favor of the Collateral Agent for the benefit of itself and the Secured Parties; (f) Inventory which consists of samples, labels, bags, packaging, and other similar non-merchandise categories; (g) Inventory as to which insurance in compliance with the provisions of Section 5.07 hereof is not in effect; (h) Inventory which has been sold but not yet delivered or as to which any Borrower or the Canadian Operating Subsidiary has accepted a deposit; (i) Inventory consisting of live stock, animals, fish and other similar Inventory; (j) Inventory consisting of work-in-process; or (k) Inventory consigned by the Borrowers or the Canadian Operating Subsidiary to any other Person, including without limitation, Webvan Group, Inc. "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by or with any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, handling, treatment, storage, disposal, Release or threatened Release of any Hazardous Material or to health and safety matters. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, natural resource damage, costs of environmental remediation, administrative oversight costs, fines, penalties or indemnities), of any Borrower directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any 8 Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Lead Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Lead Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Lead Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Lead Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Lead Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Lead Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. "Eurodollar Loan" shall mean any Loan bearing interest at a rate determined by reference to the Adjusted LIBO Rate in accordance with the provisions of Article II. "Event of Default" has the meaning assigned to such term in Section 7.01. "Excess Availability" means, as of any date of determination, the excess, if any, of (a) the lesser of the Borrowing Base or the aggregate Commitments, over (b) the sum of (i) the outstanding Credit Extensions, and (ii) all then held checks, accounts payable which are beyond credit terms then accorded the Borrowers and overdrafts. "Excluded Taxes" means, with respect to the Agents, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrowers hereunder, (a) income or franchise taxes imposed on (or measured by) its gross or net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which any Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by a 9 Borrower under Section 2.28(b), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender's failure to comply with Section 2.26(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrowers with respect to such withholding tax pursuant to Section 2.26(a). "Existing Synthetic Leases" means the Synthetic Leases with respect to the properties described on SCHEDULE 1.2 and evidenced by the instruments, documents, and agreements described on SCHEDULE 1.2 hereto. "FRF" means Fleet Retail Finance Inc., a Delaware corporation. "FRF Concentration Account" shall have the meaning set forth in Section 2.21(c). "FSI" means Fleet Securities, Inc., a Massachusetts corporation. "Facility Guarantee" means the Guaranty executed by the Facility Guarantors in favor of the Agents, the Issuing Bank and the Lenders. "Facility Guarantors" means the Persons listed on SCHEDULE 1.3 hereto and all other Subsidiaries of each Borrower now existing or hereafter created other than Foreign Subsidiaries. "Facility Guarantors Collateral Documents" means all security agreements, mortgages, pledge agreements, deeds of trust, and other instruments, documents or agreements executed and delivered by any Facility Guarantor to secure the Facility Guarantee. "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by Fleet from three Federal funds brokers of recognized standing selected by it. "Fee Letter" means the letter entitled "Fee Letter" among the Borrowers and the Administrative Agent of even date herewith, as such letter may from time to time be amended. "Financial Officer" means, with respect to any Borrower, the chief financial officer, controller or assistant controller of such Borrower. "Fleet" means Fleet National Bank, a national banking association. "Fleet Disbursement Accounts" has the meaning provided therefor in Section 2.21(f). "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than the United States of America, any State thereof or the District of Columbia. 10 "Foreign Subsidiary" means any Subsidiary that is organized under the laws of a jurisdiction other than the United States of America or any State thereof or the District of Columbia. "GAAP" means generally accepted accounting principles in the United States of America. "Gift Certificate and Merchandise Credit Liability" means, at any time, the aggregate face value at such time of (a) outstanding gift certificates and gift cards of the Borrowers and/or the Canadian Operating Subsidiary entitling the holder thereof to use all or a portion of the certificate to pay all or a portion of the purchase price for any Inventory, and (b) outstanding merchandise credits of the Borrowers and the Canadian Operating Subsidiary. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation, provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law, including any material listed as a hazardous substance under Section 101(14) of CERCLA. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement, or other interest or currency exchange rate or commodity price hedging arrangement. "Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property 11 acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, provided that if such Indebtedness of others is non-recourse to the credit of such Person, then the amount of Indebtedness ascribed to such Person shall not exceed the fair market value of the property securing such Indebtedness of others, (g) all Guarantees by such Person of Indebtedness of others (including, without limitation, under any Synthetic Leases), (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit, (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances, (k) all Hedging Agreements, and (l) the principal and interest portions of all rental obligations of such Person under any Synthetic Lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an operating lease in accordance with GAAP. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Indemnitee" has the meaning provided therefor in Section 9.03(b). "Interest Payment Date" means (a) with respect to any Base Rate Loan (including a Swingline Loan), the last day of each calendar month, and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part, provided that if any Interest Period for a Eurodollar Loan exceeds three (3) months, the Interest Payment Date shall also mean the date which is three (3) months after the commencement of such Interest Period. "Interest Period" means, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Lead Borrower may elect, provided that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period, and (c) any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Inventory" has the meaning assigned to such term in the Security Agreement. 12 "Inventory Advance Rate" means sixty-five percent (65%). "Inventory Reserves" means such reserves as may be established from time to time by the Administrative Agent in the Administrative Agent's reasonable discretion with respect to the determination of the saleability, at retail, of the Eligible Inventory or which reflect such other factors as affect the market value of the Eligible Inventory. Without limiting the generality of the foregoing, Inventory Reserves may include (but are not limited to) reserves based on (i) obsolescence; (ii) seasonality; (iii) Shrink; (iv) imbalance; (v) change in Inventory character; (vi) change in Inventory composition; (vii) change in Inventory mix; (viii) markdowns (both permanent and point of sale); (ix) retail markons and markups inconsistent with prior period practice and performance; industry standards; current business plans; or advertising calendar and planned advertising events. "Investment Policy" means the investment policy of the Lead Borrower adopted by the board of directors of the Lead Borrower and annexed hereto as SCHEDULE 1.4, as such policy may be modified from time to time, with the prior written consent of the Administrative Agent. "Issuing Bank" means Fleet, in its capacity as the issuer of Letters of Credit hereunder, and any successor to Fleet in such capacity as selected by the Administrative Agent. The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "L/C Disbursement" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "Lead Borrower" means PETsMART, Inc., a Delaware corporation. "Lenders" shall mean the Persons identified on SCHEDULE 1.1 hereto and each assignee that becomes a party to this Agreement as set forth in Section 9.05(b). "Letter of Credit" shall mean a letter of credit, in form and substance reasonably satisfactory to the Issuing Bank, that is issued pursuant to this Agreement for the account of any Borrower, and shall include, without limitation, a Standby Letter of Credit or Commercial Letter of Credit issued in connection with the purchase of Inventory by any Borrower, to support obligations of a Borrower under the Existing Synthetic Leases, and for other purposes for which a Borrower has historically obtained letters of credit, or for any other purpose that is reasonably acceptable to the Administrative Agent. "Letter of Credit Fees" shall mean the fees payable in respect of Letters of Credit pursuant to Section 2.13. "Letter of Credit Outstandings" shall mean, at any time, the sum of (a) with respect to Letters of Credit outstanding at such time, the aggregate maximum amount that then is or at any time thereafter may become available for drawing or payment thereunder plus (b) all amounts theretofore drawn or paid under Letters of Credit for which the Issuing Bank has not then been reimbursed. 13 "LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate of interest (rounded upwards, if necessary to the next 1/16 of 1%) determined by the Administrative Agent to be the highest prevailing rate per annum at which deposits in dollars are offered to Fleet by first class banks in the London interbank market in which Fleet participates at 10:00 a.m. (Boston time) not less than two Business Days before the first day of the Interest Period for the subject Eurodollar Borrowing, for a deposit approximately in the amount of the subject Borrowing and for a period of time approximately equal to such Interest Period. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Line Fee" means a fee equal to 0.375% per annum (on the basis of actual days elapsed in a year of 365/366 days, as applicable) of the average daily balance of the difference between (x) each Lender's Commitment and (y) the sum of (i) such Lender's Commitment Percentage of the principal amount of Loans then outstanding, and (ii) such Lender's Commitment Percentage of the then Letter of Credit Outstandings for each day commencing on the date hereof and ending on but excluding the Termination Date. "Loan Documents" means this Agreement, the Notes, the Letters of Credit, the Fee Letter, all Borrowing Base Certificates, the Blocked Account Agreements, the DDA Notifications, the Credit Card Notifications, the Security Documents, the Facility Guarantee, and any other instrument or agreement executed and delivered in connection therewith. "Loan Party or Loan Parties" means the Borrowers and the Facility Guarantors. "Loans" shall mean all loans (including, without limitation, Swingline Loans) at any time made to the Borrowers or for account of the Borrowers pursuant to this Agreement. "Margin Stock" has the meaning assigned to such term in Regulation U. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, property, assets, or financial condition of the Lead Borrower and its Subsidiaries taken as a whole, or (b) the validity or enforceability of this Agreement or any of the other Loan Documents or any of the material rights or remedies of the Administrative Agent, the Collateral Agent or the Lenders hereunder or thereunder. "Material Indebtedness" means Indebtedness (other than the Loans and Letters of Credit) or obligations in respect of one or more Hedging Agreements of any one or more of the Borrowers in an aggregate principal amount exceeding $5,000,000.00. For purposes of determining the amount of Material Indebtedness at any time, the "principal amount" of the obligations in respect of any Hedging Agreement at such time shall be the maximum aggregate amount that a Borrower would be required to pay if such Hedging Agreement were terminated at that time. "Maturity Date" means April 30, 2004. 14 "Maximum Rate" has the meaning provided therefor in Section 9.13. "Minority Lenders" has the meaning provided therefor in Section 9.02(d). "Moody's" means Moody's Investors Service, Inc. "Mortgages" means the Mortgages/Deeds of Trust, Security Agreements and Assignments between the Loan Party owning any real estate encumbered thereby and the Collateral Agent for the benefit of the Secured Parties. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Proceeds" means, with respect to any event, (a) the cash proceeds received in respect of such event, including (i) any cash received in respect of any non-cash proceeds, but only as and when received, (ii) in the case of a casualty, insurance proceeds, and (iii) in the case of a condemnation or similar event, condemnation awards and similar payments, in each case net of (b) the sum of (i) all reasonable fees and out-of-pocket expenses (including appraisals, and brokerage, legal, title and recording tax expenses and commissions) paid by any Borrower to third parties (other than Affiliates) in connection with such event, and (ii) in the case of a sale or other disposition of an asset (including pursuant to a casualty or condemnation), the amount of all payments required to be made by any Borrower as a result of such event to repay (or to establish an escrow for the repayment of) Indebtedness (other than Loans) which is secured by such asset and constitutes a Permitted Encumbrance that is senior to the Lien of the Collateral Agent. "Noncompliance Notice" has the meaning provided therefor in Section 2.05(b). "Notes" shall mean (i) the promissory notes of the Borrowers substantially in the form of Exhibit B-1, each payable to the order of a Lender, evidencing the Loans, and (ii) the promissory note of the Borrowers substantially in the form of Exhibit B-2, payable to the Swingline Lender, evidencing the Swingline Loans. "Obligations" has the meaning assigned to such term in the Security Agreement. "Other Taxes" means any and all current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document. "Overadvance" means, at any time of calculation, a circumstance in which the Credit Extensions exceed the lesser of (a) the Commitments or (b) the Borrowing Base. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Payment Conditions" means, at the time of determination, that (a) no Default or Event of Default then exists or would arise as a result of the making of the subject payment, and (b) 15 prior to, and immediately after giving effect to, the subject payment, and on a pro forma six months basis thereafter, Excess Availability shall be equal to or greater than $85,000,000.00. "Perfection Certificate" means a certificate in the form of Annex 1 to the Security Agreement or any other form approved by the Collateral Agent. "Permitted Encumbrances" means: (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.05; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 60 days or are being contested in compliance with Section 5.05; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII; (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrowers or any Subsidiary; (g) leases and subleases and licenses and sublicenses of property which do not materially interfere with the ordinary conduct of the business of the Lead Borrower and its Subsidiaries; and (h) Liens arising solely by virtue of any statutory or common law provisions relating to banker's liens, liens in favor of securities intermediaries, rights of set-off or similar rights and remedies as to deposit accounts or securities accounts or other funds maintained with depository institutions or securities intermediaries. provided that, except as provided in any one or more of clauses (a) through (f) above, the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "Permitted Investments" means each of the following: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency 16 thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and demand deposit and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above (without regard to the limitation on maturity contained in such clause) and entered into with a financial institution satisfying the criteria described in clause (c) above or with any primary dealer; and (e) Investments made pursuant to the Investment Policy. provided that, notwithstanding the foregoing, no such investments shall be permitted when any Loans are outstanding unless (i) the investment is a temporary investment pending expiration of an Interest Period for a Eurodollar Loan, the proceeds of which investment will be applied to the Obligations after the expiration of such Interest Period, and (ii) such investments are pledged to the Administrative Agent as additional collateral for the Obligations pursuant to such agreements as may be reasonably required by the Administrative Agent. "Permitted Overadvance" means an Overadvance determined by the Administrative Agent, in its reasonable discretion, (a) which is made to maintain, protect or preserve the Collateral and/or the Lenders' rights under the Loan Documents, or (b) which is otherwise in the Lenders' interests; provided that Permitted Overadvances shall not (i) exceed five percent (5%) of the then Borrowing Base in the aggregate outstanding at any time or (ii) remain outstanding for more than forty-five (45) consecutive Business Days, unless in either case the Required Supermajority Lenders otherwise agree; and provided further that the foregoing shall not (1) modify or abrogate any of the provisions of Section 2.06(f) hereof regarding the Lender's obligations with respect to L/C Disbursements, or (2) result in any claim or liability against the Administrative Agent (regardless of the amount of any Overadvance) for "inadvertent Overadvances" (i.e. where an Overadvance results from changed circumstances beyond the control of the Administrative Agent (such as a reduction in the collateral value)), and further provided that in no event shall the Administrative Agent make an Overadvance, if after giving effect thereto, the principal amount of the Credit Extensions would exceed the Commitments. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. 17 "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Lead Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreement" means the Pledge Agreement dated as of April 30, 2001 among certain Borrowers, certain Facility Guarantors, and the Collateral Agent for the benefit of the Secured Parties, as amended and in effect from time to time. "Prepayment Event" means any of the following events: (a) any sale, transfer or other disposition (including pursuant to a sale and leaseback transaction) of any property or asset of a Borrower; (b) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of a Borrower; (c) the issuance by a Borrower of any equity securities, other than any such issuance of equity securities to another Borrower; or (d) the incurrence by a Borrower of any Indebtedness of the type described in clause (a), (b) or (c) of the definition of the term "Indebtedness". "Real Estate" means all land, together with the buildings, structures, parking areas, and other improvements thereon, now or hereafter owned or leased by any Borrower, including all easements, rights-of-way, and similar rights relating thereto and all leases, tenancies, and occupancies thereof. "Receivables Advance Rate" means eighty-five percent (85%). "Register" has the meaning set forth in Section 9.05(c). "Regulation U" means Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" means Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Release" has the meaning set forth in Section 101(22) of CERCLA. "Required Lenders" shall mean, at any time, Lenders having Commitments at least equal to 51% of the Commitments, or if the Commitments have been terminated, Lenders whose 18 percentage of the outstanding Obligations (after settlement and repayment of all Swingline Loans by the Lenders) aggregate not less than 51% of all such Obligations. "Required Supermajority Lenders" shall mean, at any time, Lenders having Commitments outstanding representing at least 66 2/3% of the total Commitments outstanding or if the Commitments have been terminated, Lenders whose percentage of the outstanding Obligations (after settlement and repayment of all Swingline Loans by the Lenders) aggregate not less than 66 2/3% of all such Obligations. "Reserves" means all (if any) Inventory Reserves, and Availability Reserves. "Restricted Payment" means any dividend or other distribution (whether in cash, securities or other property) with respect to any shares of any class of capital stock or membership interests of any Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of (a) any such shares of capital stock or membership interests of any Borrower or any Subsidiary or (b) any option, warrant or other right to acquire any such shares of capital stock or membership interests of any Borrower or any Subsidiary. "S&P" means Standard & Poor's. "Secured Parties" has the meaning assigned to such term in the Security Agreement. "Security Agreement" means the Security Agreement dated as of April 30, 2001 among the Borrowers and the Collateral Agent for the benefit of the Secured Parties, as amended and in effect from time to time. "Security Documents" means the Security Agreement, the Pledge Agreement, the Facility Guarantors Collateral Documents, the Mortgages, and each other security agreement or other instrument or document executed and delivered pursuant to Section 5.12 to secure any of the Obligations. "Settlement Date" has the meaning provided in Section 2.07(b) hereof. "Shrink" means Inventory which has been lost, misplaced, stolen, or is otherwise unaccounted for. "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 saleable value of the properties and assets of such Person is not less than the amount that would 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 commitments as they mature in the normal course of business, (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, and (e) such Person is not engaged in a business or a transaction, and is not about to engage in a business or transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. 19 "Standby Letter of Credit" means any Letter of Credit other than a Commercial Letter of Credit. "Statutory Reserve Rate" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Swingline Lender" means FRF, in its capacity as lender of Swingline Loans hereunder. "Swingline Loan" shall mean a Loan made by the Swingline Lender to the Borrowers pursuant to Section 2.05 hereof. "Synthetic Lease" means any lease or other agreement for the use or possession of property creating obligations which do not appear as Indebtedness on the balance sheet of the lessee thereunder but which, upon the insolvency or bankruptcy of such Person, may be characterized as Indebtedness of such lessee without regard to the accounting treatment. "Taxes" means any and all current or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Termination Date" shall mean the earliest to occur of (i) the Maturity Date, or (ii) the date on which the maturity of the Loans is accelerated and the Commitments are terminated, or (iii) the date of the occurrence of any Event of Default pursuant to Section 7.01(h) or 7.01(i) hereof. "Total Commitment" shall mean, at any time, the sum of the Commitments at such time. 20 "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "Unused Commitment" shall mean, on any day, (a) the then Total Commitment minus (b) the sum of (i) the principal amount of Loans then outstanding (including the principal amount of Swingline Loans then outstanding) and (ii) the then Letter of Credit Outstandings. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.2 Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.3 Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time, provided that, in the event that there is any change occurring after the date hereof in GAAP such that the covenants contained in Section 6.11(b) would then be calculated in a different manner or with different components, the parties hereto agree to amend this Agreement in such respects as are necessary to conform those covenants as criteria for evaluating the Borrowers' financial condition to substantially the same criteria as were effective prior to such change in GAAP. ARTICLE II Amount and Terms of Credit SECTION 2.1 Commitment of the Lenders. 21 (a) Each Lender severally and not jointly with any other Lender, agrees, upon the terms and subject to the conditions herein set forth, to extend credit to the Borrowers on a revolving basis, in the form of Loans and Letters of Credit and in an amount not to exceed the lesser of such Lender's Commitment or such Lender's Commitment Percentage of the Borrowing Base, subject to the following limitations: (i) The aggregate outstanding amount of the Loans and Letters of Credit Outstandings shall not at any time exceed the lower of (i) $250,000,000 or, in each case, any lesser amount to which the Commitments have then been reduced by the Borrowers pursuant to Section 2.15, and (ii) the then amount of the Borrowing Base. (ii) No Lender shall be obligated to issue any Letter of Credit, and Letters of Credit shall be available from the Issuing Bank, subject to the ratable participation of all Lenders, as set forth in Section 2.06. The Borrowers will not at any time permit the aggregate Letter of Credit Outstandings to exceed $150,000,000. (iii) Subject to all of the other provisions of this Agreement, Loans that are repaid may be reborrowed prior to the Termination Date. No new Credit Extension, however, shall be made to the Borrowers after the Termination Date. (b) Each Borrowing of Loans (other than Swingline Loans) shall be made by the Lenders pro rata in accordance with their respective Commitments. The failure of any Lender to make any Loan shall neither relieve any other Lender of its obligation to fund its Loan in accordance with the provisions of this Agreement nor increase the obligation of any such other Lender. SECTION 2.2 Reserves; Changes to Reserves. (a) The initial Inventory and Availability Reserves as of the date of this Agreement are the following: (i) Rent (an Availability Reserve): An amount equal to two months base rents for a leased premises located in Canada, in the states of Washington, Virginia, Pennsylvania and any other state which grants a landlord a priority lien for unpaid rent. (ii) Shrink (an Inventory Reserve): An amount equal to one percent (1%) of the gross sales from each of the Borrowers' and the Canadian Operating Subsidiary's stores since the date of the last physical inventory at each such store. (iii) Gift Certificate and Merchandise Credit Liability (an Availability Reserve): An amount equal to fifty percent of the Borrowers' and the Canadian Operating Subsidiary's Gift Certificate and Merchandise Credit Liability outstanding from time to time. 22 (iv) Canadian Provincial and Governmental Sales Taxes (an Availability Reserve): An amount equal to 100% of the outstanding amount accrued and unpaid for such taxes. (v) PETsMART Direct Shrink Reserve (an Inventory Reserve): An amount equal to $200,000. (vi) PETsMART Direct General Ledger Reserve (an Inventory Reserve): An amount equal to 100% of the inventory reserve from time to time on the general ledger of the Borrowers for inventory of PETsMART Direct, Inc. (b) The Administrative Agent may hereafter establish additional Reserves or change any of the foregoing Reserves, in the exercise of the reasonable judgment of the Administrative Agent. SECTION 2.3 Making of Loans. (a) Except as set forth in Sections 2.16 and 2.24, Loans (other than Swingline Loans) by the Lenders shall be either Base Rate Loans or Eurodollar Loans as the Lead Borrower on behalf of the Borrowers may request subject to and in accordance with this Section 2.03, provided that all Swingline Loans shall be only Base Rate Loans. All Loans made pursuant to the same Borrowing shall, unless otherwise specifically provided herein, be Loans of the same Type. Each Lender may fulfill its Commitment with respect to any Loan by causing any lending office of such Lender to make such Loan; but any such use of a lending office shall not affect the obligation of the Borrowers to repay such Loan in accordance with the terms of the applicable Note. Each Lender shall, subject to its overall policy considerations, use reasonable efforts (but shall not be obligated) to select a lending office which will not result in the payment of increased costs by the Borrowers pursuant to Section 2.23. Subject to the other provisions of this Section 2.03 and the provisions of Section 2.24, Borrowings of Loans of more than one Type may be incurred at the same time, but no more than five (5) Borrowings of Eurodollar Loans may be outstanding at any time. (b) The Lead Borrower shall give the Administrative Agent three Business Days' prior telephonic notice (thereafter confirmed in writing) of each Borrowing of Eurodollar Loans and one Business Day's prior notice of each Borrowing of Base Rate Loans. Any such notice, to be effective, must be received by the Administrative Agent not later than 2:00 p.m., Boston time, on the third Business Day in the case of Eurodollar Loans prior to, and on the first Business Day in the case of Base Rate Loans prior to, the date on which such Borrowing is to be made. Such notice shall be irrevocable and shall specify the amount of the proposed Borrowing (which shall be in an integral multiple of $500,000, but not less than $3,000,000 in the case of Eurodollar Loans) and the date thereof (which shall be a Business Day) and shall contain disbursement instructions. Such notice shall specify whether the Borrowing then being requested is to be a Borrowing of Base Rate Loans or Eurodollar Loans and, if Eurodollar Loans, the Interest Period with respect thereto. If no election of Interest Period is specified in any such notice for a Borrowing of Eurodollar Loans, such notice shall be deemed a request for an Interest Period of 23 one month. If no election is made as to the Type of Loan, such notice shall be deemed a request for Borrowing of Base Rate Loans. The Administrative Agent shall promptly notify each Lender of its proportionate share of such Borrowing, the date of such Borrowing, the Type of Borrowing being requested and the Interest Period or Interest Periods applicable thereto, as appropriate. On the borrowing date specified in such notice, each Lender shall make its share of the Borrowing available at the office of the Administrative Agent at 40 Broad Street, Boston, Massachusetts 02109, no later than 1:00 p.m., Boston time, in immediately available funds. Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with this Section and may, in reliance upon such assumption, make available to the Borrowers a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrowers severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrowers to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrowers, the interest rate applicable to Base Rate Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. Upon receipt of the funds made available by the Lenders to fund any Borrowing, the Administrative Agent shall disburse such funds in the manner specified in the notice of borrowing delivered by the Lead Borrower and shall use reasonable efforts to make the funds so received from the Lenders available to the Borrowers no later than 4:00 p.m., Boston time. SECTION 2.4 Overadvances. The Agents and the Lenders have no obligation to make any Loan or to provide any Letter of Credit if an Overadvance would result. The Administrative Agent may, in its discretion, make Permitted Overadvances without the consent of the Lenders and each Lender shall be bound thereby. Any Permitted Overadvances may constitute Swingline Loans. The making of any Permitted Overadvance is for the benefit of the Borrowers; such Permitted Overadvances constitute Loans and Obligations. The making of any such Permitted Overadvances on any one occasion shall not obligate the Administrative Agent or any Lender to make or permit any Permitted Overadvances on any other occasion or to permit such Permitted Overadvances to remain outstanding. SECTION 2.5 Swingline Loans (a) The Swingline Lender is authorized by the Lenders, but is not obligated, to make Swingline Loans up to $12,500,000.00 plus the Permitted Overadvance in the aggregate outstanding at any time, consisting only of Base Rate Loans, upon a notice of Borrowing received by the Administrative Agent and the Swingline Lender (which notice, at the Swingline Lender's discretion, may be submitted prior to 2:00 p.m., Boston time, on the Business Day on which such Swingline Loan is requested). Swingline Loans shall be subject to periodic settlement with the Lenders under Section 2.07 below. 24 (b) Swingline Loans may be made only in the following circumstances: (A) for administrative convenience, the Swingline Lender may, but is not obligated to, make Swingline Loans in reliance upon the Borrowers' actual or deemed representations under Section 4.02, that the applicable conditions for borrowing are satisfied or (B) for Permitted Overadvances, or (C) if the conditions for borrowing under Section 4.02 cannot be fulfilled, the Lead Borrower shall give immediate notice thereof to the Administrative Agent and the Swingline Lender (a "Noncompliance Notice"), and the Administrative Agent shall promptly provide each Lender with a copy of the Noncompliance Notice. If the conditions for borrowing under Section 4.02 cannot be fulfilled, the Required Lenders may direct the Swingline Lender to, and the Swingline Lender thereupon shall, cease making Swingline Loans (other than Permitted Overadvances) until such conditions can be satisfied or are waived in accordance with Section 9.02 hereof. Unless the Required Lenders so direct the Swingline Lender, the Swingline Lender may, but is not obligated to, continue to make Swingline Loans beginning one Business Day after the Non-Compliance Notice is furnished to the Lenders. Notwithstanding the foregoing, no Swingline Loans shall be made pursuant to this subsection (b) (other than Permitted Overadvances) if the aggregate outstanding amount of the Loans and Letter of Credit Outstandings would exceed the lower of (i) $250,000,000.00 or any lesser amount to which the Commitments have then been reduced by the Borrowers pursuant to Section 2.15, and (ii) the then amount of the Borrowing Base. SECTION 2.6 Letters of Credit. (a) Upon the terms and subject to the conditions herein set forth, the Lead Borrower on behalf of the Borrowers may request the Issuing Bank, at any time and from time to time after the date hereof and prior to the Termination Date, to issue, and subject to the terms and conditions contained herein, the Issuing Bank shall issue, for the account of the Borrowers one or more Letters of Credit; provided that no Letter of Credit shall be issued if after giving effect to such issuance (i) the aggregate Letter of Credit Outstandings shall exceed $150,000,000, or (ii) the aggregate Loans and Letter of Credit Outstandings would exceed the limitation set forth in Section 2.01(a)(i); and provided, further, that no Letter of Credit shall be issued if the Issuing Bank shall have received notice from the Administrative Agent or the Required Lenders that the conditions to such issuance have not been met. (b) Each Standby Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Maturity Date, provided that each Standby Letter of Credit may, upon the request of the Lead Borrower, include a provision whereby such Letter of Credit shall be renewed automatically for additional consecutive periods of 12 months or less (but not beyond the date that is five Business Days prior to the Maturity Date) unless the Issuing Bank notifies the beneficiary thereof at least 30 days prior to the then-applicable expiration date that such Letter of Credit will not be renewed. 25 (c) Each Commercial Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date 120 days after the date of the issuance of such Commercial Letter of Credit and (ii) the date that is five Business Days prior to the Maturity Date. (d) Drafts drawn under each Letter of Credit shall be reimbursed by the Borrowers in dollars on the same Business Day of any such drawing by paying to the Administrative Agent an amount equal to such drawing not later than 2:00 p.m., Boston time, on (i) the date that the Borrowers shall have received notice of such payment, if such notice is received prior to 10:00 a.m., Boston time, on such date, or (ii) the Business Day immediately following the day that the Borrowers receive such notice, if such notice is received after 10:00 a.m., Boston time on the day of receipt, provided that the Lead Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.03 that such payment be financed with an Base Rate Loan or Swingline Loan in an equivalent amount and, to the extent so financed, the Borrowers' obligation to make such payment shall be discharged and replaced by the resulting Base Rate Loan or Swingline Loan. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrowers by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make payment thereunder, provided that any failure to give or delay in giving such notice shall not relieve the Borrowers of their obligation to reimburse the Issuing Bank and the Lenders with respect to any such payment. (e) If the Issuing Bank shall make any L/C Disbursement, then, unless the Borrowers shall reimburse the Issuing Bank in full on the date such payment is made, the unpaid amount thereof shall bear interest, for each day from and including the date such payment is made to but excluding the date that the Borrowers reimburse the Issuing Bank therefor, at the rate per annum then applicable to Base Rate Loans, provided that, if the Borrowers fail to reimburse such Issuing Bank when due pursuant to paragraph (d) of this Section, then Section 2.10 shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (g) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (f) Immediately upon the issuance of any Letter of Credit by the Issuing Bank (or the amendment of a Letter of Credit increasing the amount thereof), and without any further action on the part of the Issuing Bank, the Issuing Bank shall be deemed to have sold to each Lender, and each such Lender shall be deemed unconditionally and irrevocably to have purchased from the Issuing Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Lender's Commitment Percentage, in such Letter of Credit, each drawing thereunder and the obligations of the Borrowers under this Agreement and the other Loan Documents with respect thereto. Upon any change in the Commitments pursuant to Section 9.05, it is hereby agreed that with respect to all Letter of Credit Outstandings, there shall be an automatic adjustment to the participations hereby created to reflect the new Commitment Percentages of the assigning and assignee Lenders. Any action taken or omitted by the Issuing Bank under or in connection with a Letter of Credit, if taken or omitted in the absence of gross 26 negligence or willful misconduct, shall not create for the Issuing Bank any resulting liability to any Lender. (g) In the event that the Issuing Bank makes any L/C Disbursement and the Borrowers shall not have reimbursed such amount in full to the Issuing Bank pursuant to this Section 2.06, the Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Lender of such failure, and each Lender shall promptly and unconditionally pay to the Administrative Agent for the account of the Issuing Bank the amount of such Lender's Commitment Percentage of such unreimbursed payment in dollars and in same day funds. If the Issuing Bank so notifies the Administrative Agent, and the Administrative Agent so notifies the Lenders prior to 11:00 a.m., Boston time, on any Business Day, each such Lender shall make available to the Issuing Bank such Lender's Commitment Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Lender shall not have so made its Commitment Percentage of the amount of such payment available to the Issuing Bank, such Lender agrees to pay to the Issuing Bank, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Administrative Agent for the account of the Issuing Bank at the Federal Funds Effective Rate. Each Lender agrees to fund its Commitment Percentage of such unreimbursed payment notwithstanding a failure to satisfy any applicable lending conditions or the provisions of Sections 2.01 or 2.06, or the occurrence of the Termination Date. The failure of any Lender to make available to the Issuing Bank its Commitment Percentage of any payment under any Letter of Credit shall neither relieve any Lender of its obligation hereunder to make available to the Issuing Bank its Commitment Percentage of any payment under any Letter of Credit on the date required, as specified above, nor increase the obligation of such other Lender. Whenever any Lender has made payments to the Issuing Bank in respect of any reimbursement obligation for any Letter of Credit, such Lender shall be entitled to share ratably, based on its Commitment Percentage, in all payments and collections thereafter received on account of such reimbursement obligation. (h) Whenever the Borrowers desire that the Issuing Bank issue a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Lead Borrower shall give to the Issuing Bank and the Administrative Agent at least two Business Days' prior written (including telegraphic, telex, facsimile or cable communication) notice (or such shorter period as may be agreed upon in writing by the Issuing Bank and the Lead Borrower) specifying the date on which the proposed Letter of Credit is to be issued, amended, renewed or extended (which shall be a Business Day), the stated amount of the Letter of Credit so requested, the expiration date of such Letter of Credit, the name and address of the beneficiary thereof, and the provisions thereof. If requested by the Issuing Bank, the Borrowers shall also submit a letter of credit application on the Issuing Bank's standard form in connection with any request for the issuance, amendment, renewal or extension of a Letter of Credit. (i) The obligations of the Borrowers to reimburse the Issuing Bank for any L/C Disbursement shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation (it being understood that any such payment by the Borrowers shall be without prejudice to, and shall not 27 constitute a waiver of, any rights the Borrowers might have or might acquire as a result of the payment by the Issuing Bank of any draft or the reimbursement by the Borrowers thereof): (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, setoff, defense or other right which the Borrowers may have at any time against a beneficiary of any Letter of Credit or against any of the Lenders, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction; (iii) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the Issuing Bank of any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (v) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrowers' obligations hereunder; or (vi) the fact that any Event of Default shall have occurred and be continuing. None of the Administrative Agent, the Lenders, the Issuing Bank or any of their Affiliates shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank, provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrowers to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrowers to the extent permitted by applicable law) suffered by the Borrowers that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of the Issuing Bank, the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented that appear on their face to be in compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (j) If any Event of Default shall occur and be continuing, on the Business Day that the Borrowers receive notice from the Administrative Agent or the Required Lenders demanding the deposit of cash collateral pursuant to this paragraph, the Borrowers shall deposit in the Cash Collateral Account an amount in cash equal to 103% of the Letter of Credit Outstandings as of such date plus any accrued and unpaid interest thereon. Each such deposit shall be held by the Collateral Agent as collateral for the payment and performance of the Obligations of the Borrowers under this Agreement. The Collateral Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such Cash Collateral Account. Other than any interest earned on the investment of such deposits, which investments shall be made at 28 the option and sole discretion of the Collateral Agent at the request of the Borrowers and at the Borrowers' risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such Cash Collateral Account shall be applied by the Collateral Agent to reimburse the Issuing Bank for payments on account of drawings under Letters of Credit for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrowers for the Letter of Credit Outstandings at such time or, if the Loans have matured or the maturity of the Loans has been accelerated, be applied to satisfy other Obligations of the Borrowers under this Agreement. SECTION 2.7 Settlements Amongst Lenders (a) The Swingline Lender may (but shall not be obligated to), at any time, on behalf of the Borrowers (which hereby authorize the Swingline Lender to act in their behalf in that regard) request the Administrative Agent to cause the Lenders to make a Loan (which shall be an Base Rate Loan) in an amount equal to such Lender's Commitment Percentage of the outstanding amount of Swingline Loans made in accordance with Section 2.05, which request may be made regardless of whether the conditions set forth in Article IV have been satisfied. Upon such request, each Lender shall make available to the Administrative Agent the proceeds of such Loan which proceeds shall be paid to the Swingline Lender to be applied in reduction of the Swingline Loans. If the Swingline Lender requires a Loan to be made by the Lenders and the request therefor is received prior to 12:00 Noon, Boston time, on a Business Day, such transfers shall be made in immediately available funds no later than 3:00 p.m., Boston time, that day; and, if the request therefor is received after 12:00 Noon, Boston time, then no later than 3:00 p.m., Boston time, on the next Business Day. The obligation of each Lender to transfer such funds is irrevocable, unconditional and without recourse to or warranty by the Administrative Agent or the Swingline Lender. If and to the extent any Lender shall not have so made its transfer to the Administrative Agent, such Lender agrees to pay to the Administrative Agent, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Administrative Agent at the Federal Funds Effective Rate. (b) The amount of each Lender's Commitment Percentage of outstanding Loans (excluding Swingline Loans) shall be computed weekly (or more frequently in the Administrative Agent's discretion) and shall be adjusted upward or downward based on all Loans (excluding Swingline Loans) and repayments of Loans (excluding Swingline Loans) received by the Administrative Agent as of 3:00 p.m., Boston time, on the first Business Day following the end of the period specified by the Administrative Agent (such date, the "Settlement Date"). (c) The Administrative Agent shall deliver to each of the Lenders promptly after the Settlement Date a summary statement of the amount of outstanding Loans (excluding Swingline Loans) for the period and the amount of repayments received for the period. As reflected on the summary statement: (x) the Administrative Agent shall transfer to each Lender its applicable Commitment Percentage of repayments, and (y) each Lender shall transfer to the Administrative Agent (as provided below), or the Administrative Agent shall transfer to each Lender, such 29 amounts as are necessary to insure that, after giving effect to all such transfers, the amount of Loans made by each Lender with respect to Loans (excluding Swingline Loans) shall be equal to such Lender's applicable Commitment Percentage of Loans (excluding Swingline Loans) outstanding as of such Settlement Date. If the summary statement requires transfers to be made to the Administrative Agent by the Lenders and is received prior to 12:00 Noon, Boston time, on a Business Day, such transfers shall be made in immediately available funds no later than 4:00 p.m., Boston time, that day; and, if received after 12:00 Noon, Boston time, then no later than 4:00 p.m., Boston time, on the next Business Day. The obligation of each Lender to transfer such funds is irrevocable, unconditional and without recourse to or warranty by the Administrative Agent. If and to the extent any Lender shall not have so made its transfer to the Administrative Agent, such Lender agrees to pay to the Administrative Agent, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Administrative Agent at the Federal Funds Effective Rate. SECTION 2.8 Notes; Repayment of Loans. (a) The Loans outstanding to each Lender (and to the Swingline Lender, with respect to Swingline Loans) shall be evidenced by a Note duly executed on behalf of the Borrowers, dated the Closing Date, in substantially the form attached hereto as Exhibit B-1 or B-2, as applicable, payable to the order of each such Lender (or the Swingline Lender, as applicable) in an aggregate principal amount equal to such Lender's Commitment (or, in the case of the Note evidencing the Swingline Loans, $12,500,000.00). (b) The outstanding principal balance of all Swingline Loans shall be repaid on the earlier of the Termination Date or, on the date otherwise requested by the Swingline Lender in accordance with the provisions of Section 2.07(a). The outstanding principal balance of all other Obligations shall be payable on the Termination Date (subject to earlier repayment as provided below). Each Note shall bear interest from the date thereof on the outstanding principal balance thereof as set forth in this Article II. Each Lender is hereby authorized by the Borrowers to endorse on a schedule attached to each Note delivered to such Lender (or on a continuation of such schedule attached to such Note and made a part thereof), or otherwise to record in such Lender's internal records, an appropriate notation evidencing the date and amount of each Loan from such Lender, each payment and prepayment of principal of any such Loan, each payment of interest on any such Loan and the other information provided for on such schedule; provided, however, that the failure of any Lender to make such a notation or any error therein shall not affect the obligation of the Borrowers to repay the Loans made by such Lender in accordance with the terms of this Agreement and the applicable Notes. SECTION 2.9 Interest on Loans. (a) Subject to Section 2.10, each Base Rate Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as applicable) at a rate per annum that shall be equal to the then Alternate Base Rate, plus the Applicable Margin for Base Rate Loans. 30 (b) Subject to Section 2.10, each Eurodollar Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal, during each Interest Period applicable thereto, to the Adjusted LIBO Rate for such Interest Period, plus the Applicable Margin for Eurodollar Loans. (c) Accrued interest on all Loans shall be payable in arrears on each Interest Payment Date applicable thereto, at maturity (whether by acceleration or otherwise), after such maturity on demand and (with respect to Eurodollar Loans) upon any repayment or prepayment thereof (on the amount prepaid). SECTION 2.10 Default Interest. Effective upon the occurrence of any Event of Default and at all times thereafter while such Event of Default is continuing, at the option of the Administrative Agent or upon the direction of the Required Lenders, interest shall accrue on all outstanding Loans (including Swingline Loans) (after as well as before judgment, as and to the extent permitted by law) at a rate per annum equal to the rate (including the Applicable Margin for Loans) in effect from time to time plus 2.00% per annum, and such interest shall be payable on demand. SECTION 2.11 Certain Fees. The Borrowers shall pay to the Administrative Agent, for the account of the Administrative Agent, the fees set forth in the Fee Letter as and when payment of such fees is due as therein set forth. SECTION 2.12 Unused Commitment Fee. Each Lender shall be paid the Line Fee at the times and in the manner set forth below. The Borrowers shall pay to the Administrative Agent for the account of the Lenders, a commitment fee (the "Commitment Fee") equal to 0.375% per annum (on the basis of actual days elapsed in a year of 365 or 366 days, as applicable) of the average daily balance of the Unused Commitment for each day commencing on and including the Closing Date and ending on but excluding the Termination Date. The Commitment Fee so accrued in any calendar quarter shall be payable on the first Business Day of the immediately succeeding calendar quarter, except that all Commitment Fees so accrued as of the Termination Date shall be payable on the Termination Date. If the Commitment Fee actually paid by the Borrowers is insufficient to pay the Line Fee due the Lenders, the deficiency shall be paid to the Lenders by the Swingline Lender from its own funds (and the Borrowers shall have no liability with respect thereto). The Administrative Agent shall pay the Commitment Fee (and any amounts payable by the Swingline Lender hereunder) to the Lenders based upon their pro rata share of the aggregate Line Fee due to all Lenders; provided that for purposes of calculating the pro rata share of any Person which is both the Swingline Lender and a Lender, such Person's share shall be equal to the difference between (i) the sum of such Person's Commitment, and (ii) the sum of (A) such Person's Commitment Percentage of the principal amount of Loans then outstanding (including the principal amount of Swingline Loans then outstanding), and (B) such Person's Commitment Percentage of the then Letter of Credit Outstandings. SECTION 2.13 Letter of Credit Fees. 31 (a) The Borrowers shall pay the Administrative Agent, for the account of the Lenders, on the last day of each calendar quarter, in arrears, a fee (each, a "Letter of Credit Fee") equal to the following per annum percentages of the average face amount of the following categories of Letters of Credit outstanding during the subject quarter: (i) Standby Letters of Credit: The Applicable Margin for Eurodollar Loans. (ii) Commercial Letters of Credit: The Applicable Margin for Eurodollar Loans minus 0.50%. (iii) After the occurrence and during the continuance of an Event of Default, at the option of the Administrative Agent or upon the direction of the Required Lenders, the Letter of Credit Fee shall be increased by an amount equal to two percent (2%) per annum. (b) The Borrowers shall pay to the Administrative Agent, for the account of the Issuing Bank, and in addition to all Letter of Credit Fees otherwise provided for hereunder, such fronting fees and other fees and charges in connection with the issuance, negotiation, settlement, amendment and processing of each Letter of Credit issued by the Issuing Bank as are customarily imposed by the Issuing Bank to account parties of comparable credit quality from time to time in connection with letter of credit transactions. SECTION 2.14 Nature of Fees. All fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent, for the respective accounts of the Administrative Agent, the Issuing Bank, and the Lenders, as provided herein. Once paid, all fees shall be fully earned (absent manifest error) and shall not be refundable under any circumstances. SECTION 2.15 Termination or Reduction of Commitments. (a) Subject to the provisions of Section 2.15(b), upon at least two Business Days' prior written notice to the Administrative Agent, the Borrowers may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments. Each such reduction shall be in the amount of $5,000,000 or any integral multiple thereof. Each such reduction or termination shall (i) be applied ratably to the Commitments of each Lender and (ii) be irrevocable when given. At the effective time of each such reduction or termination, the Borrowers shall pay to the Administrative Agent for application as provided herein (i) all Commitment Fees accrued on the amount of the Commitments so terminated or reduced through the date thereof, (ii) any amount by which the Credit Extensions outstanding on such date exceed the amount to which the Commitments are to be reduced effective on such date, in each case pro rata based on the amount prepaid, and (iii) the Early Termination Fee on the amount of the Commitments so terminated or reduced. 32 (b) In the event that, prior to April 30, 2003, either (i) the Borrowers terminate or reduce the Commitments pursuant to Section 2.15(a) hereof, or (ii) the Termination Date occurs for any reason, the Borrowers shall pay the Administrative Agent, for the benefit of the Lenders, a fee (the "Early Termination Fee") in an amount equal to (x) if any of the events described in clauses (i) or (ii) hereof occurs on or before April 30, 2002, one-half of one percent (0.50%) of the Commitments so reduced or terminated, or (y) if any of the events described in clauses (i) or (ii) hereof occurs after April 30, 2002 and on or before April 30, 2003, one-quarter of one percent (0.25%) of the Commitments so reduced or terminated. SECTION 2.16 Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or (b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrowers and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrowers and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Borrowing Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as a Borrowing of Base Rate Loans. SECTION 2.17 Conversion and Continuation of Loans. The Lead Borrower on behalf of the Borrowers shall have the right at any time, on three Business Days' prior irrevocable notice to the Administrative Agent (which notice, to be effective, must be received by the Administrative Agent not later than 2:00 p.m., Boston time, on the third Business Day preceding the date of any conversion), (x) to convert any outstanding Borrowings of Loans (but in no event Swingline Loans) of one Type (or a portion thereof) to a Borrowing of Loans of the other Type or (y) to continue an outstanding Borrowing of Eurodollar Loans for an additional Interest Period, subject to the following: (a) no Borrowing of Loans may be converted into, or continued as, Eurodollar Loans at any time when an Event of Default has occurred and is continuing (nothing contained herein being deemed to obligate the Borrowers to incur Breakage Costs upon the occurrence of an Event of Default unless the Obligations are accelerated); 33 (b) if less than a full Borrowing of Loans is converted, such conversion shall be made pro rata among the Lenders, as applicable, in accordance with the respective principal amounts of the Loans comprising such Borrowing held by such Lenders immediately prior to such refinancing; (c) the aggregate principal amount of Loans being converted into or continued as Eurodollar Loans shall be in an integral of $500,000 and at least $3,000,000; (d) each Lender shall effect each conversion by applying the proceeds of its new Eurodollar Loan or Base Rate Loan, as the case may be, to its Loan being so converted; (e) the Interest Period with respect to a Borrowing of Eurodollar Loans effected by a conversion or in respect to the Borrowing of Eurodollar Loans being continued as Eurodollar Loans shall commence on the date of conversion or the expiration of the current Interest Period applicable to such continuing Borrowing, as the case may be; (f) a Borrowing of Eurodollar Loans may be converted only on the last day of an Interest Period applicable thereto; (g) each request for a conversion or continuation of a Borrowing of Eurodollar Loans which fails to state an applicable Interest Period shall be deemed to be a request for an Interest Period of one month; and (h) no more than five (5) Borrowings of Eurodollar Loans may be outstanding at any time. If the Lead Borrower does not give notice to convert any Borrowing of Eurodollar Loans, or does not give notice to continue, or does not have the right to continue, any Borrowing as Eurodollar Loans, in each case as provided above, such Borrowing shall automatically be converted to a Borrowing of Base Rate Loans at the expiration of the then-current Interest Period. The Administrative Agent shall, after it receives notice from the Lead Borrower, promptly give each Lender notice of any conversion, in whole or part, of any Loan made by such Lender. SECTION 2.18 Mandatory Prepayment; Commitment Termination; Cash Collateral. The outstanding Obligations shall be subject to mandatory prepayment as follows: (a) If at any time the amount of the Credit Extensions exceeds the lower of (i) the then amount of the Commitments and (ii) the then amount of the Borrowing Base, the Borrowers will immediately upon notice from the Administrative Agent (A) prepay the Loans in an amount necessary to eliminate such excess, and (B) if, after giving effect to the prepayment in full of all outstanding Loans such excess has not been eliminated, deposit cash into the Cash Collateral Account in an amount equal to 103% of the Letters of Credit Outstanding. 34 (b) The Loans shall be repaid daily in accordance with the provisions of Sections 2.21(h) and 2.22 hereof. (c) Subject to the foregoing, outstanding Base Rate Loans shall be prepaid before outstanding Eurodollar Loans are prepaid. Each partial prepayment of Eurodollar Loans shall be in an integral multiple of $500,000. No prepayment of Eurodollar Loans shall be permitted pursuant to this Section 2.18 other than on the last day of an Interest Period applicable thereto, unless the Borrowers simultaneously reimburse the Lenders for all "Breakage Costs" (as defined below) associated therewith. In order to avoid such Breakage Costs, as long as no Event of Default has occurred and is continuing, at the request of the Lead Borrower, the Administrative Agent shall hold all amounts required to be applied to Eurodollar Loans in the Cash Collateral Account and will apply such funds to the applicable Eurodollar Loans at the end of the then pending Interest Period therefor (provided that the foregoing shall in no way limit or restrict the Agents' rights upon the subsequent occurrence of an Event of Default). No partial prepayment of a Borrowing of Eurodollar Loans shall result in the aggregate principal amount of the Eurodollar Loans remaining outstanding pursuant to such Borrowing being less than $3,000,000. Any prepayment of the Loans shall not permanently reduce the Commitments. (d) All amounts required to be applied to all Loans hereunder (other than Swingline Loans) shall be applied ratably in accordance with each Lender's Commitment Percentage. (e) Upon the Termination Date, the credit facility provided hereunder shall be terminated in full and the Borrowers shall pay, in full and in cash, all outstanding Loans and all other outstanding Obligations. SECTION 2.19 Optional Prepayment of Loans; Reimbursement of Lenders. (a) The Borrowers shall have the right at any time and from time to time to prepay outstanding Loans in whole or in part, (x) with respect to Eurodollar Loans, upon at least two Business Days' prior written, telex or facsimile notice to the Administrative Agent prior to 2:00 p.m., Boston time, and (y) with respect to Base Rate Loans, on the same Business Day if written, telex or facsimile notice is received by the Administrative Agent prior to 2:00 p.m., Boston time, subject to the following limitations: (i) Subject to Section 2.18, all prepayments shall be paid to the Administrative Agent for application, first, to the prepayment of outstanding Swingline Loans, second, to the prepayment of other outstanding Loans ratably in accordance with each Lender's Commitment Percentage, and third, to the funding of a cash collateral deposit in the Cash Collateral Account in an amount equal to 103% of all Letter of Credit Outstandings. (ii) Subject to the foregoing, outstanding Base Rate Loans shall be prepaid before outstanding Eurodollar Loans are prepaid. Each partial prepayment of Eurodollar Loans shall be in an integral multiple of $500,000. No prepayment of Eurodollar Loans shall be permitted pursuant to this Section 2.19 other than on the last day of an Interest Period applicable thereto, unless the Borrowers 35 simultaneously reimburse the Lenders for all "Breakage Costs" (as defined below) associated therewith. No partial prepayment of a Borrowing of Eurodollar Loans shall result in the aggregate principal amount of the Eurodollar Loans remaining outstanding pursuant to such Borrowing being less than $3,000,000. (iii) Each notice of prepayment shall specify the prepayment date, the principal amount and Type of the Loans to be prepaid and, in the case of Eurodollar Loans, the Borrowing or Borrowings pursuant to which such Loans were made. E