EXHIBIT 10.2

DEBTOR-IN-POSSESSION LOAN AGREEMENT

by and among

REDENVELOPE, INC.

as Borrower

GRANITE CREEK PARTNERS AGENT, LLC

as Agent

and

the other Parties Hereto from Time to Time

as Lenders

Dated: April 17, 2008

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TABLE OF CONTENTS

 

          Page

ARTICLE 1 DEFINITIONS, CONSTRUCTION AND RATIFICATION

   2

1.1

  

Terms

   2

1.2

  

Interpretation

   13

1.3

  

Exhibits

   14

1.4

  

UCC

   14

ARTICLE 2 ADVANCES AND TERMS OF PAYMENT

   15

2.1

  

Advance Commitments; Advances; Advance Limit; Increase to Advance Limit; Use of
Proceeds

   15

2.2

  

Authorization to Make Advances

   15

2.3

  

Interest

   16

2.4

  

Principal Repayment

   16

2.5

  

Lender Fees

   17

2.6

  

Agent Fees

   18

2.7

  

Term and Renewal Date

   18

ARTICLE 3 CONDITIONS TO ADVANCES

   18

3.1

  

Conditions Precedent to Effective Date

   18

3.2

  

Conditions Precedent to Each Advance

   20

3.3

  

Post Closing Deliveries and Actions.

   21

ARTICLE 4 SUPERPRIORITY NATURE OF OBLIGATIONS, GRANT OF SECURITY INTEREST AND
PRIORITY OF LIENS

   21

4.1

  

Grant of Security Interest

   21

4.2

  

Security for Obligations

   23

4.3

  

Superpriority Nature of Obligations; Priming Lien

   23

4.4

  

Financing Statements

   24

4.5

  

Agent Appointed Attorney-in-Fact

   24

ARTICLE 5 REPRESENTATIONS AND WARRANTIES

   25

5.1

  

Due Incorporation and Qualification

   25

5.2

  

Due Authorization

   25

5.3

  

Location of Inventory and Equipment

   25

5.4

  

Relocation of Chief Executive Office

   25

5.5

  

Permits and Licenses

   25

5.6

  

Due Execution; Binding Obligation

   25

5.7

  

The Orders

   26

5.8

  

Compliance with Articles; Bylaws

   26

5.9

  

Accuracy of Information and No Material Adverse Change in Financial Statements

   26

5.10

  

Use of Proceeds

   27

5.11

  

Defaults and Events of Default

   27

5.12

  

Administrative Expenses and Lien

   27

5.13

  

Reliance by Agent and Lenders; Cumulative

   27

5.14

  

Right to Inspect

   27

5.15

  

Title to Assets; Liens

   28

5.16

  

SBA License Application and Related Requirements

   28

5.17

  

Small Business Administration Documentation

   28

5.18

  

Small Business Concern

   29

 

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ARTICLE 6 AFFIRMATIVE COVENANTS

   29

6.1

  

Notices and Other Reports

   29

6.2

  

Tax Returns, Receipts

   30

6.3

  

Title to Equipment

   30

6.4

  

Maintenance of Equipment

   30

6.5

  

Taxes

   30

6.6

  

Insurance

   30

6.7

  

Compliance With Law

   31

6.8

  

Compliance with Bankruptcy Court

   31

6.9

  

Cash Management System and Collateral Account

   31

6.10

  

Schedule of Financial Affairs

   31

6.11

  

Use of Cash Collateral

   31

6.12

  

Delivery of Copy of Financing Order

   31

6.13

  

Sale Process

   31

6.14

  

Prior Notice of Filings

   31

ARTICLE 7 NEGATIVE COVENANTS

   32

7.1

  

Extraordinary Transactions and Disposal of Assets

   32

7.2

  

Guaranty

   32

7.3

  

Restructure

   32

7.4

  

Payments

   32

7.5

  

Investments, Loans and Advances

   32

7.6

  

Capital Expenditures

   32

7.7

  

Accounting Methods

   33

7.8

  

Business Suspension

   33

7.9

  

Bankruptcy Case

   33

7.10

  

Limitation on Issuances of Capital Stock and Dividends

   33

7.11

  

Use of Proceeds

   33

7.12

  

Reclamation Claims

   33

7.13

  

Chapter 11 Claims

   34

7.14

  

Fundamental Changes, Line of Business

   34

ARTICLE 8 EVENTS OF DEFAULT

   34

8.1

  

Failure to Pay

   34

8.2

  

Failure to Perform

   34

8.3

  

Misrepresentation

   34

8.4

  

Material Adverse Change

   34

8.5

  

Injunction Against Borrower

   34

8.6

  

Bankruptcy Court

   35

8.7

  

Actions

   37

8.8

  

Reorganization Plan

   37

8.9

  

Budget Variances

   37

8.10

  

ERISA Compliance

   37

8.11

  

Unauthorized Payments

   38

8.12

  

Validity of Loan Documents and Superpriority Claims

   38

8.13

  

Failure to Achieve a Sale Milestone

   38

8.14

  

Failure to Deliver a Variation Report

   38

8.15

  

Event of Default Under Other Financing Agreements

   38

 

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8.16

   Failure to Make Post Closing Deliveries    38

ARTICLE 9 LENDERS’ RIGHTS AND REMEDIES

   39

9.1

  

Rights and Remedies

   39

9.2

  

No Waiver

   39

ARTICLE 10 PAYMENT OF TAXES AND EXPENSES AND INDEMNIFICATION OF LENDERS

   40

10.1

  

Payment of Expenses

   40

10.2

  

Taxes

   41

10.3

  

Payments by Lenders

   42

ARTICLE 11 WAIVERS

   42

ARTICLE 12 NOTICES

   43

ARTICLE 13 AGENT

   44

13.1

  

Appointment

   44

13.2

  

Nature of Duties

   45

13.3

  

Lack of Reliance on Agent and Resignation

   45

13.4

  

Certain Rights of Agent

   46

13.5

  

Reliance

   46

13.6

  

Notice of Default

   46

13.7

  

Indemnification

   47

13.8

  

Agent in its Individual Capacity

   47

13.9

  

Borrower’s Undertaking to Agent

   47

13.10

  

No Reliance on Agent’s Customer Identification Program

   47

13.11

  

Release of Guaranty and Collateral

   47

ARTICLE 14 GENERAL PROVISIONS

   48

14.1

  

Effectiveness

   48

14.2

  

Successors and Assigns

   48

14.3

  

Section Headings

   48

14.4

  

Interpretation

   48

14.5

  

Severability of Provisions

   48

14.6

  

Amendments in Writing

   48

14.7

  

Counterparts

   48

14.8

  

Survival of Representations and Warranties

   48

14.9

  

Absence of Prejudice to the Lenders with Respect to Matters Before the
Bankruptcy Court

   49

14.10

  

Further Assurances

   49

14.11

  

Surcharge Waiver

   49

14.12

  

Release

   49

ARTICLE 15 SBIC REGULATORY PROVISIONS

   49

ARTICLE 16 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

   50

 

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EXHIBITS/SCHEDULES EXHIBITS

 

EXHIBITS

    

Exhibit A

   Approved Budget

Exhibit B

   Form of Borrowing Request

Exhibit C

  

Form of Interim Order

Exhibit D

   Form of Note

SCHEDULES

    

Schedule 1

   Lender Advance Commitments

Schedule 2.2

   Bank Accounts

Schedule 3.3

   Post Closing Deliveries and Actions

Schedule 4.1

   Commercial Tort Claims

Schedule 5.1

   Due Incorporation and Qualification

Schedule 5.3

   Locations of Inventory and Equipment

Schedule 5.15

   Liens

Schedule 7.1(a) and (b)

   Indebtedness/Asset Sales

 

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DEBTOR-IN-POSSESSION LOAN AGREEMENT

This DEBTOR-IN-POSSESSION LOAN AGREEMENT (this “Agreement”) is entered into as
of April 17, 2008 between RedEnvelope, Inc., a Delaware corporation and a debtor
and a debtor-in-possession (“Borrower”), Granite Creek Partners Agent, LLC, a
Delaware limited liability company, as administrative agent (the “Agent”), and
the other parties hereto from time to time as lenders (the “Lenders”).
Capitalized terms utilized herein shall have the meanings ascribed to such terms
in Section 1.1 of this Agreement unless otherwise specified herein.

RECITALS

WHEREAS, on April 17, 2008 (“Petition Date”), the Borrower has filed, or shall
file, a petition under the Bankruptcy Code in the Bankruptcy Court, to retain
possession of its assets and to be authorized under Bankruptcy Code §§ 1107 and
1108 to continue the management and operation of its business as a debtor in
possession;

WHEREAS, as of the Petition Date, the Borrower is a retail catalogue and mail
order miscellaneous consumer goods retailer;

WHEREAS, the Borrower plans to sell all or substantially all of the assets of
the Borrower pursuant to the Asset Sale;

WHEREAS, the Borrower and Creative Catalogs Corporation, a Delaware corporation
(“CCC”), as stalking horse bidder (the “Stalking Horse Bidder”), have entered
into the Asset Purchase Agreement whereby the Borrower plans to sell, and the
Stalking Horse Bidder plans to purchase, subject to higher bidders pursuant to
the Bidding Procedures Order, all or substantially all of the assets of the
Borrower pursuant to the Asset Sale;

WHEREAS, in order to provide liquidity for the Borrower in the Bankruptcy Case
and to facilitate the Asset Sale, the Borrower has requested that the Lender
provide a debtor-in-possession financing facility to the Borrower to provide
ongoing working capital funds that the Borrower requires, in accordance with the
terms of an Approved Budget and the terms herein, principally to (i) pay the
Borrower’s ongoing and budgeted operating expenses, (ii) pay the fees and
expenses associated with this Agreement, the Asset Purchase Agreement and the
transactions contemplated hereby and thereby, and (iii) pay allowed
Administrative Fees and Expenses;

WHEREAS, the Lenders have indicated their willingness to extend financing to
Borrower upon the terms and conditions set forth in this Agreement upon the
entry of the Interim Order and Bidding Procedures Order acceptable to Lenders in
their sole discretion;

WHEREAS, the Borrower has agreed to use its best efforts to provide such other
protection, as described in this Agreement and the Financing Order, subject to
the approval of the Bankruptcy Court; and

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WHEREAS, the Borrower shall use its best efforts to have the Bankruptcy Court
enter the Interim Order, Bidding Procedures Order and Financing Order pursuant
to which the Lenders shall make post-petition loans, advances and other
financial accommodations to the Borrower, subject to any exclusions as set forth
in the Financing Order and/or this Agreement.

NOW, THEREFORE, in consideration of these premises and of the mutual
undertakings set forth herein, the parties hereto agree to as follows:

ARTICLE 1

DEFINITIONS, CONSTRUCTION AND RATIFICATION

1.1 Terms. As used in this Agreement, the following terms shall have the
following meanings:

“Accounts” means, in addition to the definition of accounts in the UCC, all
presently existing and hereafter arising accounts receivable, contract rights,
and all other forms of obligations owing to the Borrower arising out of the
sale, lease, license or assignment of goods or other property, or the rendition
of services by the Borrower, whether or not earned by performance, and
Borrower’s Books relating to any of the foregoing.

“Administrative Expense” means a claim against the Borrower and/or its estate in
the Bankruptcy Case that is an administrative expense claim having priority over
unsecured claims pursuant to Section 503(b) of the Bankruptcy Code.

“Administrative Fees and Expenses” means any claim, as allowed by the Bankruptcy
Court, against the Borrower for fees and/or expenses pursuant to Bankruptcy Code
sections 327, 328 and/or 330.

“Advance Commitments” means with respect to each Lender or all Lenders, as the
context requires, the aggregate commitment of such Lender or Lenders to make
Advances as set forth under their respective signatures on the signature page to
this Agreement or in any assignment or joinder for such Lender and designated as
the “Advance Commitment”. The aggregate Advance Commitment for all Lenders shall
be $4,500,000.00 or such lesser amount as is set forth in the Financing Order.

“Advances” means all loans, advances and other financial accommodations by the
Lenders to or on account of the Borrower under Section 2.1.

“Adverse Claim” means the assertion or joinder in any claim, counter-claim,
action, proceeding, application, motion, objection, defense, or other contested
matter, the purpose of which is to seek any order, judgment, determination, or
similar relief: (x) invalidating, setting aside, avoiding, subordinating, in
whole or in part, the Obligations, or liens and security interests securing such
Obligations; (y) preventing, hindering, or delaying, whether directly or
indirectly, the assertion or enforcement by the Agent or Lenders of their liens
or realization upon any of their respective Collateral, other than to

 

2

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protest in good faith the existence of a Default or Event of Default; or
(z) week challenging the liens or claims of, or seeking an affirmative recovery
from the Agent or the Lenders.

“Agreement” means this Debtor-In-Possession Loan Agreement, as amended,
modified, revised or restated from time to time.

“Approved Budget” means the rolling ten (10) week cash revenue and expense
budget compiled by week and showing the weekly and cumulative expenses,
revenues, Cash Shortfall and Advance needs and otherwise in form and substance
satisfactory to the Agent and Lenders in their sole discretion and that has been
approved in writing (including by attachment to this document) by the Agent and
Lenders. The initial Approved Budget is attached as Exhibit A hereto. The
Approved Budget shall be Exhibit A, as modified or revised from time-to-time in
accordance with Section 6.1 or otherwise with the written approval of the Agent
and the Lenders.

“Assets” means all real and personal property of the Borrower, whether now owned
or existing, or hereafter acquired or arising, and wherever located, and whether
owned before or after the Petition Date including all of the following assets,
properties and interests in property of the Borrower: all Accounts; Equipment;
General Intangibles; Payment Intangibles; Chattel Paper; Inventory; Negotiable
Collateral; Investment Property; Financial Assets; Deposit Accounts; Documents;
money or any assets of the Borrower, including assets which hereafter come into
the possession, custody, or control of the Agent or any Lender; all proceeds and
products, whether tangible or intangible, of any of the foregoing, including
proceeds of insurance covering any or all of the foregoing, and any and all
tangible or intangible property resulting from the sale, lease, license or other
disposition of the foregoing, or any portion thereof or interest therein, and
all proceeds thereof; and all other property of the Borrower’s estate in the
Bankruptcy Case or otherwise.

“Asset Sale” means the sale of substantially all of the Assets of the Borrower
under the terms of the Asset Purchase Agreement.

“Asset Purchase Agreement” means that certain Asset Purchase Agreement by and
between the Stalking Horse Bidder and the Borrower dated as of the date hereof,
as it may be amended, restated or modified from time to time.

“Authorized Officer” means any officer or other representative of the Borrower
authorized to transact business with the Agent or the Lenders.

“Available Cash Surplus” at any time, means an amount not less than zero equal
to Total Cash minus Restricted Cash at such time.

“Avoidance Action” means all actions for preferences, fraudulent conveyances,
and other avoidance power claims and any recoveries under Section 552(b),
Section 506(c) and Sections 542, 544, 545, 547, 548, 549, 550 and 553 of the
Bankruptcy Code.

 

3

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“Bankruptcy Case” means the case of the Borrower under Chapter 11 of the
Bankruptcy Code, pending in the Bankruptcy Court as Case No. 08-______.

“Bankruptcy Code” means title 11 of the United States Code, 11 U.S.C. §§ 101 et
seq.

“Bankruptcy Court” means the United States Bankruptcy Court for the Northern
District of California.

“Bidding Procedures” shall mean the bidding procedures and other requirements
set forth in Exhibit B to the Bidding Procedures Order.

“Bidding Procedures Order” shall mean that certain order approving, among other
things, the Bidding Procedures, including bid protections, approving the form
and manner of notice, establishing procedures to determine cure amounts and
deadlines for objections for certain contracts and leases to be assumed and
assigned by the debtors, approving the Break-Up Fee and Expense Reimbursement
and scheduling a hearing to consider a sale of substantially all of the assets
of the Borrower’s business, as well as the identification of CCC as the Stalking
Horse Bidder.

“Borrower’s Books” means all of the Borrower’s books and records including all
of the following: ledgers; records indicating, summarizing, or evidencing the
Borrower’s assets or liabilities; all information relating to the Borrower’s
business operations or financial condition; and all computer programs, disk or
tape files, printouts, runs, or other computer prepared information, and the
facilities containing such information, but specifically excluding the
Borrower’s corporate minute books, stock ledgers and the like.

“Borrowing Request” means a request by the Borrower in the form of Exhibit B.

“Business Day” means any day which is not a Saturday, Sunday, or other day on
which banks in the State of New York are authorized or required to close.

“Carve Out” means the payment of professional fees and disbursements incurred by
the Borrower and any statutory committees in the Bankruptcy Case accrued but
unpaid in an amount not to exceed the amount set forth in the Approved Budget.

“Cash” means money, currency or the available credit balance in dollars in a
Deposit Account.

“Cash Flow Sweep Amount” means the Available Cash Surplus as calculated based on
the weekly Variance Report and officer’s certificate most recently delivered
pursuant to Section 6.1 minus Net Weekly Disbursements as calculated based on
the Approved Budget.

“Cash Shortfall” means, for any period, the amount that (x) cash requirements of
the Borrower for the categories of expenses and costs included in the Approved
Budget exceed (y) cash collections received by the Borrower that are available
for use by the Borrower in the ordinary course of business.

 

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“Chapter 7 Carve-Out” means the fees and expenses of administration (including
attorneys’ fees) of a superseding Chapter 7 case.

“Chattel Paper” shall have the same meaning ascribed to such term in the UCC.

“Collateral” means collectively all of the Borrower’s Assets securing the
Obligations of the Borrower hereunder as set forth in Section 4.1, including
without limitation cash and property of the Borrower in the possession of other
parties as deposits or retainers (subject to the interest of the beneficiaries
of such funds) and any proceeds of Collateral. Notwithstanding any other
provision of any Financing Agreement to the contrary, the Collateral shall not
include the right, title and interest of the Borrower in the Avoidance Actions,
other than Avoidance Actions pursuant to Section 549 of the Bankruptcy Code.

“Collateral Account” means an account satisfactory to the Lenders in its sole
discretion and which is in the name of the Agent or over which the Agent has
“control” as defined in the UCC.

“Committee” means the official committee of unsecured creditors and any other
committee formed, appointed, or approved in the Bankruptcy Case and each of such
committees shall be referred to herein as a Committee.

“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.
“Controlling” and “Controlled” have meanings correlative thereto.

“Daily Balance” means the amount of the Obligations owed at the end of a given
day.

“Default” means any event or occurrence or set of facts which could constitute
an Event of Default with the passage of time or the giving of notice.

“Deposit Account” shall have the meaning ascribed to such term in the UCC.

“DIP Facility” means the revolving credit debtor-in-possession facility in the
aggregate amount not to exceed $4,500,000.

“Documents” shall have the meaning ascribed to such term in the UCC.

“Effective Date” shall have the meaning ascribed to such term in Section 2.7.

“Equipment” means in addition to the definition of equipment in the UCC all of
the Borrower’s present and hereafter acquired equipment, furniture, furnishings,
fixtures, goods (other than consumer goods or farm products) and any interest in
any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions, and improvements to any of the
foregoing, wherever located.

 

5

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“Equity Interests” means shares of capital stock, partnership interests,
membership interests in a limited liability company, beneficial interests in a
trust or other equity ownership interests in a Person, and any warrants, options
or other rights entitling the holder thereof to purchase or acquire any such
equity interest.

“Event of Default” means any event specified in Article 8.

“Extraordinary Receipts” shall have the meaning ascribed to such term in
Section 2.4(b)(iii).

“Final Order” means the order of the Bankruptcy Court entered in the Bankruptcy
Cases after a final hearing under Bankruptcy Rule 4001(c)(2) or such other
procedures as approved by the Bankruptcy Court which order shall be in form and
substance satisfactory to Lenders in the Lenders’ sole discretion, and from
which no appeal or motion to reconsider has been timely filed, or if timely
filed, such appeal or motion to reconsider has been dismissed or denied (unless
Lender waives such requirement), together with all extensions, modifications and
amendments thereto, which, among other matters but not by way of limitation,
authorizes Borrower to obtain credit, incur (or guaranty) indebtedness, and
grant superpriority, priming, first priority liens under this Agreement and the
other Financing Agreements, as the case may be, and provides for the
super-priority administrative expense status of Lenders’ and Agent’s claims.

“Financial Assets” shall have the meaning ascribed to such term in the UCC.

“Financing Agreements” shall mean, collectively, this Agreement, the Financing
Order, and all notes, guarantees, security agreements and other agreements,
documents and instruments now or at any time hereafter executed and/or delivered
by Borrower in connection with this Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.

“Financing Order” shall mean, collectively and individually, the Interim Order,
until such time as it is superseded by the Final Order, and such other orders,
and related findings of fact and conclusions of law in support thereof, relating
thereto or authorizing on or after the Petition Date, the incurrence of
indebtedness by the Borrower, the provision of loans, advances and other
financial accommodations by the Lenders to the Borrower, the granting of liens,
interests, priority claims and other rights in favor of the Lenders and Agent
pursuant to the Financing Agreements, on an emergency, interim, final or other
basis pursuant to Section 364 of the Bankruptcy Code and other applicable
sections of the Bankruptcy Code as may be issued or entered in the Bankruptcy
Case, each and all in form and substance acceptable to the Lenders and the Agent
in their sole and absolute discretion.

“First Day Orders” shall mean, collectively and individually, each order entered
in the Bankruptcy Case as a result of a motion or application filed by the
Borrower in the Bankruptcy Case on or about the Petition Date, each in form and
substance acceptable to the Lenders and the Agent in their sole and absolute
discretion, that is not subject to any stay or injunction pending any appeal or
petition for certiorari, review, rehearing, reconsideration, or otherwise.

 

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“General Intangibles” means, in addition to the definition of general
intangibles in the UCC, all of the Borrower’s present and future general
intangibles and other personal property (including goodwill, Patents, Patent
Applications, Intellectual Property, trade names, trademarks, service marks,
blueprints, drawings, purchase orders, customer lists, infringement claims,
computer programs, computer discs, computer tapes, Borrower’s Books, literature,
reports, catalogs, insurance premium rebates, tax refunds, and tax refund
claims) other than goods and Accounts.

“Governmental Authority” means any United States federal, state or local or any
foreign government, governmental regulatory or administrative authority, agency
or commission or any court, tribunal or judicial or arbitral body.

“Insolvency Proceeding” means any proceeding commenced by or against any person
or entity under any provision of the Bankruptcy Code, as amended, or under any
other state or federal insolvency law, including assignments for the benefit of
creditors, formal or informal moratoria, compositions, or extensions generally
with its creditors.

“Instruments” shall have the meaning ascribed to such term in the UCC.

“Intellectual Property” means the following property of the Borrower: (i) all
inventions (whether patentable or unpatentable and whether or not reduced to
practice), all improvements thereto, and all rights arising under or in
connection with all Patents, Patent Applications and Patent disclosures,
(ii) all trademarks, service marks, trade dress, logos, slogans, trade names and
corporate names, together with all translations, adaptations, derivations and
combinations thereof (including all goodwill associated therewith), and all
applications, registrations and renewals, (iii) all copyrightable works, all
copyrights and all applications, registrations and renewals, (iv) all trade
secrets and confidential business information (including, without limitation,
ideas, research, know-how, techniques, methods, data, product drawings, training
manuals, clinical and regulatory strategies, and business and marketing plans
and proposals), (v) all computer software, (vi) all computer generated data and
documentation, (vii) all Third Party License Rights, (viii) all designs, plans
and documentation in whatever form related to products under development or
products subject to a change in design or composition, (ix) all other
proprietary rights, and (x) all copies and tangible embodiments thereof (in
whatever form or medium).

“Interim Order” means the order of the Bankruptcy Court entered in the
Bankruptcy Case after an interim hearing (assuming satisfaction of the standards
prescribed in Section 364 of the Bankruptcy Code and Bankruptcy Rule 4001 and
other applicable law), together with all extensions, modifications, and
amendments thereto, in form and substance satisfactory to Lenders in the
Lenders’ sole discretion, which, among other matters, but not by way of
limitation, authorizes, on an interim basis, Borrower to execute and perform its
obligations under the terms of this Agreement and the other Loan Documents,
substantially in the form of Exhibit C.

 

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“Inventory” means, in addition to the definition of inventory in the UCC, all
present and future inventory in which the Borrower has any interest, including
goods held for sale or lease or to be furnished under a contract of service, the
Borrower’s present and future raw materials, work in process, finished goods,
tangible property, stock in trade, wares, and materials used in or consumed in
the Borrower’s business, goods which have been returned to, repossessed by, or
stopped in transit by the Borrower, packing and shipping materials, wherever
located, any documents of title representing any of the above, and the
Borrower’s Books relating to any of the foregoing.

“Investment Property” means, in addition to the definition of investment
property in the UCC, all Equity Interests.

“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.

“Lender” or “Lenders” has the meaning ascribed to such term in the caption of
this Agreement.

“Liens” means all liens, security interests, encumbrances and claims (including,
but not limited to, any “claim” as defined in section 101(5) or “lien” as
defined in section 101(37) of the Bankruptcy Code), reclamation claims,
mortgages, deeds of trust, pledges, covenants, restrictions, hypothecations,
charges, indentures, loan agreements, instruments, contracts, leases, licenses,
options, rights of first refusal, contracts, offsets, recoupment, rights of
recovery, judgments, orders and decrees of any court or foreign or domestic
governmental entity, claims for reimbursement, contribution, indemnity or
exoneration, assignment, preferences, debts, charges, suits, licenses, options,
rights of recovery, interests, products liability, alter-ego, environmental,
successor liability, tax and other liabilities, causes of action and claims, or
other encumbrances or restrictions on or conditions to transfer or assignment of
any kind (including without limitation to the generality of the foregoing
restrictions or conditions on or to the transfer, assignment, or renewal of
licenses, permits, registrations, and authorizations or approvals of or with
respect to governmental units and instrumentalities) to the fullest extent of
the law, in each case whether secured or unsecured, choate or inchoate, filed or
unfiled, scheduled or unscheduled, noticed or unnoticed, recorded or unrecorded,
perfected or unperfected, allowed or disallowed, contingent or non-contingent,
liquidated or unliquidated, matured or unmatured, material or non-material,
disputed or undisputed, or known or unknown, whether arising prior to, on, or
subsequent to the commencement of the Bankruptcy Case, whether imposed by
agreement, understanding, law, equity or otherwise.

“Loan Documents” means, collectively, this Agreement, the Note, the Financing
Order, the Approved Budget, each Borrowing Request, and any other agreements,
instruments, amendments, or documents, if any, which create, evidence, create a
security interest in or secure the Obligations, and any other agreement,
instrument, amendment, or document entered into among the Borrower, Agent and/or
any Lender or in favor of Agent or any Lender relating to or in connection with
this Agreement or any other Loan Document or the Obligations if such agreement,
instrument, amendment or document states that it is a “Loan Document”.

 

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“Material Adverse Change” means a material adverse change in (a) the Borrower’s
ability to pay or perform its Obligations in accordance with the terms of the
Loan Documents, or (b) the validity or enforceability of the Financing Order or
any of the other Loan Documents, or (c) the rights and remedies of the Agent or
any Lender under the Financing Order and the other Loan Documents.

“Maturity Date” means the date that is the earliest to occur of (i) ninety
(90) days from the date of this Agreement; (ii) the confirmation of a plan of
reorganization or liquidation; (iii) the conversion of the Bankruptcy Case to a
Chapter 7 case; or (iv) the effective date of a sale of substantially all of
Borrower’s Assets pursuant to the provisions of §§ 105, 363(b), 363(f), 363(m),
363(n) and 365 of the Bankruptcy Code.

“Negotiable Collateral” means all of the Borrower’s present and future letters
of credit, notes, drafts, instruments, documents, leases and Chattel Paper.

“Net Cash Proceeds” means, with respect to any Asset disposition or sale the
aggregate cash, or other payment in kind, goods or services, and any proceeds
thereof received by or for the benefit of Borrower from such Asset disposition
or sale (including, without limitation, cash received by way of deferred payment
pursuant to a note receivable, conversion of non-cash consideration, cash
payments in respect of purchase price adjustments or otherwise, but only as and
when such cash is received and excluding any deferred payment pursuant to any
non-cash consideration to the extent such payment represents interest income to
Borrower) minus (i) the direct costs and expenses incurred in connection
therewith (including in the case of any Asset disposition or sale, the payment
of the outstanding principal amount of, premium, if any, and interest on any
Indebtedness (other than hereunder) required to be repaid as a result of such
Asset disposition or sale); (ii) any provision for taxes in respect thereof made
in accordance with GAAP; provided that such expenses shall only include taxes to
the extent that taxes are payable in cash in the current year or the following
year as a result of such Asset disposition or sale; and (iii) any portion of any
such proceeds which Borrower determines in good faith should be reserved for
post-closing adjustments (to the extent Borrower delivers to the Agent and each
Lender a certificate signed by the senior financial officer of Borrower as to
such determination), it being understood and agreed that on the day that all
such post-closing adjustments have been determined (which shall not be later
than three months following the date of the respective asset disposition or
sale), the amount (if any) by which the reserved amount in respect of such sale
or disposition exceeds the actual post-closing adjustments payable by Borrower
shall constitute Net Cash Proceeds on such date received by Borrower. Any
proceeds received in a currency other than dollars shall, for purposes of the
calculation of the amount of Net Cash Proceeds, be in an amount equal to the
dollar equivalent thereof as of the date of receipt thereof by such Person.

“Net Weekly Disbursements” means, for any week, an amount not less than zero
equal to the Cash Shortfall for the upcoming week pursuant to the Approved
Budget.

 

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“Note” means the promissory note, substantially in the form of Exhibit D hereto,
made by the Borrower to the order of any Lender concurrently herewith or at any
time hereafter.

“Obligations” means all loans, advances, including, but not limited to Advances,
and any overadvances, debts, liabilities, obligations, covenants, and duties
owing by the Borrower to any Lender or the Agent of any kind and description in
connection with any Loan Documents, whether direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter arising, including
any debt, liability or obligation owing from the Borrower to others which any
Lender or the Agent may obtain by assignment or otherwise, all interest thereon.

“Patent” means United States Letters Patent and design patent, including any
extension, registration, confirmation, continuation, division,
continuation-in-part, reissue, re-examination or renewal thereof, and also
including any foreign equivalents of any of the foregoing.

“Patent Application” means an application, including a provisional application,
for a Patent.

“Payment Intangibles” means all “payment intangibles” as such term is defined in
the UCC, now owned or hereinafter acquired by any Person, including a General
Intangible under which an Account debtor’s principal obligation is a monetary
obligation.

“Permitted Liens” means the Liens described in the first sentence of
Section 5.15(b).

“Person” means any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public benefit
corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including any instrumentality, division, agency, body or
department thereof) and shall include such Person’s successors and assigns.

“Petition Date” shall have the meaning ascribed to such term in the above
Recitals.

“Post-Petition” means the time period beginning immediately after the filing of
the Bankruptcy Case.

“Pre-Petition” means the time period ending immediately prior to the filing of
the Bankruptcy Case.

“Pro Rata Share” means as to any Lender, the fraction (expressed as a
percentage) the numerator of which is such Lender’s Advance Commitment and the
denominator of which is the aggregate amount of all of the Advance Commitments
of the Lenders, as adjusted from time to time in accordance with the provisions
of this Agreement.

 

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“Regulatory Problem” shall mean any transaction, circumstance or situation
whereby (i) any Person and such Person’s affiliates would own, control or have
power over a greater quantity of securities of any kind issued by Borrower than
are permitted under any requirement of the SBA or any other Governmental
Authority, or (ii) any Governmental Authority has asserted (or such Person
believes that there is a risk of such assertion) that such Person and its
affiliates are not entitled to hold, or exercise any significant right with
respect to, the common stock of Borrower held by such Person, including without
limitation the existence of any other set of facts or circumstances wherein it
has been asserted by any Governmental Authority (or any SBIC Holder reasonably
believe that there is a substantial risk of such assertion) that any SBIC Holder
or its affiliates is not entitled to hold, or exercise any significant right
with respect to any of Borrower’s securities.

“Regulatory Violation” shall mean, with respect to any SBIC Holder providing
financing (within the meaning of the SBIC Regulations) under this Agreement,
(i) a diversion of the proceeds of such financing from the reported use thereof
on SBA Form 1031 delivered in connection with the closing of the transactions
contemplated hereby, if such diversion was effected without obtaining the prior
written consent of the SBIC Holders (which may be withheld in their sole
discretion) or (ii) a change in the principal business activity of the Borrower
to an ineligible business activity (within the meaning of the SBIC Regulations).

“Reportable Event” means any of the events set forth in Section 4043(c) of
ERISA, other than those events as to which the thirty (30) day notice period is
waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg.
§ 4043.

“Requisite Lenders” means Lenders that have made and funded commitments
representing an aggregate of more than 50% of the DIP Facility.

“Restricted Cash” at any time, means an amount equal to the book balance amount
of outstanding checks written by Borrower plus $200,000.

“Sale Milestone” means each of the following:

(a) the Asset Purchase Agreement shall be executed on or before the Petition
Date;

(b) a Bidding Procedures Order shall be entered on or before April 26, 2008, or
such other date as soon as reasonably practical thereafter as the Bankruptcy
Court’s schedule permits;

(c) all bids shall have been received at least 3 Business Days prior to the
Bankruptcy Court hearing on the sale;

(d) the auction pursuant to the Bidding Procedures Order shall be conducted at
the sale hearing as provided in clause (e) below;

 

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(e) a hearing shall be held by the Bankruptcy Court no later than May 30, 2008
regarding the sale of all or substantially all of the assets of Borrower in
accordance with the Bidding Procedures Order, or such other date as soon as
reasonably practical thereafter as the Bankruptcy Court’s schedule permits;

(f) an order of the Bankruptcy Court, in form and substance acceptable to the
Lenders in their reasonable discretion, evidencing the approval described in the
foregoing clause (e) entered on or prior to May 30, 2008, or such other date as
soon as reasonably practical thereafter as the Bankruptcy Court’s schedule
permits; and

(g) the closing of the Asset Sale on or prior to June 10, 2008.

“Sale Order” means the order of the Bankruptcy Court entered in the Bankruptcy
Case approving a sale of substantially all of the Borrower’s assets pursuant to
the provisions of §§ 105, 363(b), 363(f), 363(m), 363(n) and 365 of the
Bankruptcy Code.

“SBA” shall mean the U.S. Small Business Administration or any successor agency.

“SBIC” shall mean a small business investment company licensed under the SBIC
Act.

“SBIC Act” shall mean the Small Business Investment Act of 1958, as amended and
the regulations promulgated thereunder.

“SBIC Holder” shall mean any holder of the Note, which is an SBIC.

“SBIC Regulations” shall mean the Small Business Investment Company Act of 1958,
as amended, and the regulations issued by the SBA thereunder, codified as Title
13 of the Code of Federal Regulations, 107 and 121, as amended.

“Stalking Horse Bidder” shall have the meaning ascribed to such term in the
recitals.

“Term” means the period from the Effective Date through and including the
earlier of (a) the Termination Date and (b) the indefeasible payment and
performance in full of the Obligations and termination of the Advance
Commitments.

“Termination Date” means the earliest of (i) the Maturity Date, (ii) the date of
termination in whole of the Advance Commitments pursuant to the terms of this
Agreement, including pursuant to an exercise of remedies pursuant to
Section 9.1, (iii) the date of the closing of the Asset Sale pursuant to the
Asset Purchase Agreement, (iv) the earlier or the date, if any, that the
Borrower executes a definitive agreement for the sale of all or substantially
all of the Borrower’s assets to any party other than the Stalking Horse Bidder
or on which a bid other than the Stalking Horse Bidder’s is selected at any
auction for all of the Borrower’s assets unless a sale of assets of the Borrower
to the Stalking Horse Bidder has been consummated prior to such date; (v) the
effective date of any plan of reorganization; (vi) immediately upon conversion
of the

 

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Bankruptcy Case to a case under Chapter 7 of the Bankruptcy Code;
(vii) immediately upon dismissal of the Bankruptcy Case; (viii) the date of
delivery by Borrower of notice of the termination of the Asset Purchase
Agreement by Borrower, except, if such termination shall be attributable to a
material breach by the Stalking Horse Bidder, or (ix) on the date that is ten
(10) days after the termination of the Asset Purchase Agreement as a result of a
material breach by the Borrower of such agreement.

“Third Party License Rights” means all permissions, licenses, covenants not to
sue, grants, and other express or implied authorization to make, use, sell,
import, create derivative works, publicly display, publicly perform, rent, or
otherwise operate that may be needed in the operation of the Borrower’s business
to avoid violating an Intellectual Property right of a third party.

“Total Cash” at any time, means the actual amount of Cash, excluding cash in the
Collateral Account, held by Borrower.

“UCC” means California’s codification of the Uniform Commercial Code.

“Variance Report” shall mean a report to be delivered by the Borrower to the
Agent and each Lender in form and substance satisfactory to Agent, on a weekly
basis (commencing on the second Wednesday after the entry of the Financing
Order) reflecting without limitation, the following: (i) the actual cash
receipts and disbursements on a line item basis for the preceding week and
(ii) the actual cash receipts and disbursements on a cumulative basis since the
Petition Date, (iii) the Cash Shortfall for the week and on a cumulative basis,
(iv) the Cash Flow Sweep Amount for the week, the dollar amount and percentage
variance of such amounts from those set forth in the Approved Budget for such
preceding week and (v) containing a narrative analysis of Borrower’s performance
for the preceding week and any line-by-line variance from such period in the
Approved Budget.

“Wages Order” shall mean that certain order authorizing, but not directing, the
Borrower to pay certain Pre-Petition wages, compensation and employee benefits
in the ordinary course of business and authorizing, but not directing, the
Borrower to continue to honor their practices, programs, and policies with
respect to their employees.

1.2 Interpretation.

a. Whenever the words “include,” “includes” or “including” are used in this
Agreement they shall be deemed to be followed by the words “without limitation.”

b. Words denoting any gender shall include all genders. Where a word or phrase
is defined herein, each of its other grammatical forms shall have a
corresponding meaning.

c. A reference to any party to this Agreement or any other agreement or document
shall include such party’s successors and permitted assigns.

 

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d. A reference to any legislation or to any provision of any legislation shall
include any modification or re-enactment thereof, any legislative provision
substituted therefor and all regulations and statutory instruments issued
thereunder or pursuant thereto.

e. All references to “$” and dollars shall be deemed to refer to United States
currency.

f. All references to any financial or accounting terms shall be defined in
accordance with GAAP as applicable in the United States and consistently applied
by the Borrower.

g. The words “hereof,” “herein” and “hereunder” and words of similar import when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement, and Article, Section, Recitals, Schedule
and Exhibit references are to this Agreement unless otherwise specified.

h. The meanings given to terms defined herein shall be equally applicable to
both singular and plural forms of such terms.

i. The Borrower, the Lenders and the Agent each hereby acknowledge that (i) the
Borrower, the Lenders and the Agent jointly and equally participated in the
drafting of this Agreement and all other agreements contemplated hereby,
(ii) the Borrower, the Lenders and the Agent have been adequately represented
and advised by legal counsel with respect to this Agreement and the transactions
contemplated hereby, and (iii) no presumption shall be made that any provision
of this Agreement shall be construed against either party by reason of such role
in the drafting of this Agreement and any other agreement contemplated hereby.

j. The headings of the Articles and Sections herein are inserted for convenience
of reference only and are not intended to be a part of, or to affect the meaning
or interpretation of, this Agreement.

k. References to any document, instrument, mortgage or agreement of any kind
shall refer to any permitted amendments, restatements or other modifications
thereof.

1.3 Exhibits. All of the exhibits, addenda or riders attached to this Agreement
shall be deemed incorporated herein by reference.

1.4 UCC. Any terms used in this Agreement that are defined in the UCC shall be
construed and defined as set forth in the UCC, unless otherwise defined herein.

 

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ARTICLE 2

ADVANCES AND TERMS OF PAYMENT

2.1 Advance Commitments; Advances; Advance Limit; Increase to Advance Limit; Use
of Proceeds.

a. Advance Commitments. Subject to the terms and conditions set forth herein,
each Lender severally and jointly agrees to fund its Pro Rata Share of Advances
from time to time in accordance with the Approved Budget during the Term in an
aggregate principal amount that will not result in the Lenders making aggregate
Advances that exceed the Advance Commitment for the Lenders.

b. Advances and Advance Limit. Upon one (1) Business Day written request of the
Borrower in the form of a Borrowing Request, which requests shall not exceed two
(2) per calendar week, during the Term and so long as (i) no Default or Event of
Default has occurred and is continuing and (ii) the conditions precedent in
Section 3 have been satisfied or waived in writing by the Lenders, the Lenders
shall make Advances not to exceed two (2) per week. Subject to the conditions
herein, the Borrower may borrow from time to time between the date of this
Agreement and the Termination Date, in an amount not-to-exceed the lesser of
(a) an amount equal to (i) the aggregate weekly amounts of Cash Shortfall on a
cumulative basis from the Effective Date through the date of determination minus
(ii) the aggregate amount outstanding of all Advances made to the Borrower
hereunder from the Effective Date through such date of determination, and
(b) the actual weekly amounts of Cash Shortfall as indicated in the current
Variance Report as of the time of any request for an Advance, and, in each case,
shall not to exceed at any time the Advance Commitment. Borrowing Requests for
Advances shall be for Advances in the minimum amount of $100,000 and minimum
additional increments of $50,000. The date of determination for any Borrowing
Request shall be the date on which the Advance subject of such Borrowing Request
is to be funded.

c. Use of Proceeds. Borrower is authorized to use said Advances to (i) pay the
Borrower’s operating and working capital expenses in the ordinary course of
business as ongoing and budgeted operating expenses set forth in the Approved
Budget and (ii) pay Administrative Fees and Expenses approved by the Bankruptcy
Court, including, but not limited to, freight forwarding charges and reclamation
charges.

2.2 Authorization to Make Advances. Each Lender is hereby authorized to make
Advances based upon a written Borrowing Request substantially in the form
attached hereto as Exhibit B received by Agent from anyone purporting to be an
Authorized Officer. All requests for Advances shall be made pursuant to a
Borrowing Request delivered to Agent specifying the date on which such Advance
is to be made (which day shall be a Business Day at least three Business Days
after the request of such Advance, other than the initial advance which shall be
delivered on the Effective Date and shall be for an amount not to exceed the
amount for such Advance set forth in the Approved Budget) and the amount of such
Advance. All Advances made under this

 

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Agreement shall be conclusively presumed to have been made to, at the request
of, and for the benefit of the Borrower when deposited to the credit of the
Borrower or otherwise disbursed in accordance with the instructions of the
Borrower or in accordance with the terms and conditions of this Agreement.
Unless otherwise requested by the Borrower, all Advances shall be made by a wire
transfer to the deposit account of the Borrower set forth on Schedule 2.2 or
otherwise designated by the Borrower from time to time to the Agent in a written
notice delivered pursuant to Article 12.

2.3 Interest.

a. Except where specified to the contrary in the Loan Documents, the outstanding
principal balance of the DIP Facility shall bear interest at the fixed rate of
ten percent (10%) per annum. After the occurrence of and during the continuation
of a Default or Event of Default, the Obligations shall accrue interest, at the
applicable rate for each Advance outstanding plus five percent (5.00%) (the
“Default Rate”). All interest payable under the Loan Documents shall be computed
on the basis of a three hundred sixty (360) day year for the actual number of
days elapsed on the Daily Balance. Interest as provided for herein shall
continue to accrue until the obligations are indefeasibly paid in full or
otherwise settled pursuant to a confirmed plan of reorganization consented to by
the Requisite Lenders.

b. In no event shall interest on the DIP Facility exceed the highest lawful rate
in effect from time-to-time. It is not the intention of the parties hereto to
make an agreement which violates any applicable state or federal usury laws. In
no event shall the Borrower pay or any Lender accept or charge any interest
which, together with any other charges upon the principal or any portion
thereof, exceeds the maximum lawful rate of interest allowable under any
applicable state or federal usury laws. Should any provision of this Agreement
or any existing or future Notes or Loan Documents between the parties be
construed to require the payment of interest or any other fees or charges which
could be construed as interest which, together with any other charges upon the
principal or any portion thereof and any other fees or charges which could be
construed as interest, exceeds the maximum lawful rate of interest, then any
such excess shall be applied to the remaining principal balance of the DIP
Facility, if any, and the remainder refunded to the Borrower.

2.4 Principal Repayment. Any prepayment in whole or in part shall include
accrued interest and all other sums then due hereunder. No partial prepayment
shall affect the obligation of Borrower to make any payment of principal or
interest hereunder on the due dates specified.

a. Voluntary Payment. The Borrower shall have the right (i) from time-to-time,
to prepay all or any part of the outstanding principal balance without premium
or penalty in accordance with the Approved Budget, or (ii) at any time, to
indefeasibly pay in full all of the Obligations without premium or penalty
concurrent with the termination of this Agreement and the Advance Commitments.

 

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b. Mandatory Pre-payment.

(i) Termination Date or Acceleration. The Obligations, if not sooner paid, shall
become and be absolutely due and payable by Borrower to the Agent on behalf of
the Lenders upon the Termination Date.

(ii) Asset Sales. Except to the extent expressly set forth in the Approved
Budget, to the extent Net Cash Proceeds arise from an Asset sale, the Borrower
shall immediately deposit such Net Cash Proceeds in an amount equal to 80% of
such Net Cash Proceeds in the Collateral Account.

(iii) Extraordinary Receipts. Except to the extent expressly set forth in the
Approved Budget, to the extent Net Cash Proceeds are received from the payment
of insurance losses or claims, tax refunds, indemnification payments or any
other source other than the sale of goods and services in the ordinary course
(“Extraordinary Receipts”), the Borrower shall immediately deposit such Net Cash
Proceeds in an amount equal to 80% of such Net Cash Proceeds in the Collateral
Account.

(iv) Cash Flow Sweeps. Borrower shall on the Effective Date, and on each Monday
and Thursday (or the immediately succeeding Business Day if Monday or Thursday
is not a Business Day) after the Effective Date, transfer an amount equal to
Cash Flow Sweep Amount to the Collateral Account.

c. Application of Payments and Net Cash Proceeds.

(i) Notwithstanding anything to the contrary contained in this Section 2.4, the
proceeds of any of the mandatory payments described above, except to the extent
expressly contemplated by and set forth in the Approved Budget, shall be applied
first to the fees and expenses of the Agent and the Lenders until paid in full,
second to the accrued but unpaid interest and third to reduce the principal of
the Advances then outstanding.

(ii) All Net Cash Proceeds received by the Borrower pursuant to an Asset sale or
Extraordinary Receipts shall be deposited in the Collateral Account on the date
received. All funds in the Collateral Account shall be first applied to reduce
the aggregate amount of the Advances outstanding and after all Advances have
been repaid in full, shall be held as cash collateral for the Obligations.
Subject to the satisfaction of the conditions set forth in Section 3.2, the
Agent shall release such excess amounts held in the Collateral Account pursuant
to this Section 2.4(c)(ii) to fund expenses set forth in the Approved Budget.

2.5 Lender Fees. a. Subject in all cases to the occurrence of the Effective
Date, Borrower agrees to pay to Agent, for the benefit of the Lenders for their
own accounts, such fees in immediately available funds, a commitment fee of Four
Hundred Thousand Dollars ($400,000), which shall be fully earned, due and
payable from the Advances on the Effective Date.

 

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The fees paid hereunder shall be paid in dollars, and is separate and in
addition to the other fees and expenses specified in this Agreement. All Fees
pursuant to this Section 2.5 or Section 2.6 shall be fully earned and
non-refundable for any reason when paid.

2.6 Agent Fees. Borrower agrees to pay to the Agent an agent fee in the amount
of Fifty Thousand Dollars ($50,000), which shall be payable in advance upon the
Effective Date. Such agent fee shall be in addition to reimbursement of the
Agents’ expenses and any indemnification payments made pursuant to this
Agreement.

The fees paid hereunder shall be paid in dollars, and are separate and in
addition to the other fees and expenses specified in the Agreement.

2.7 Term and Renewal Date. This Agreement shall become effective upon
(i) execution by the Lenders, Agent and the Borrower, (ii) approval by the
Bankruptcy Court, (iii) entry of the Interim Order, (iv) entry of the Bidding
Procedures Order and (iv) satisfaction of the conditions set forth in
Section 3.1 and, if an Advance is made on the date that the last of the
conditions in Section 3.1 is satisfied, Section 3.2 (the “Effective Date”), and
thereafter shall continue in full force through the Termination Date. This
Agreement may be extended by mutual written agreement of the Borrower, Agent and
the Lenders. In addition, the Agent and the Lenders shall have the right to
terminate this Agreement immediately at any time upon the occurrence of an Event
of Default. No such termination shall relieve or discharge the Borrower of its
duties, Obligations and covenants hereunder until all Obligations have been
indefeasibly paid and performed in full. On the Termination Date of this
Agreement, the Obligations shall be immediately due and payable in full.

The Borrower authorizes the Agent and the Lenders to deduct all fees and
expenses payable from time-to-time pursuant to this Agreement from the Advances.
The Borrower directs the Agent and the Lenders to deduct all fees payable
pursuant to Sections 2.5, 2.6 and 3.1(b) from the initial Advances made on the
Effective Date.

ARTICLE 3

CONDITIONS TO ADVANCES

3.1 Conditions Precedent to Effective Date. The Effective Date of this Agreement
and the obligations of the Agent and Lenders hereunder are subject to the
satisfaction in the Lenders’ sole discretion of each of the following conditions
precedent:

a. Delivery of Certain Documents. The Agent shall have received on or prior to
the Effective Date each of the following, each dated the Effective Date unless
otherwise indicated or agreed to by the Lenders, in form and substance
satisfactory to Lenders:

(i) this Agreement, duly executed and delivered by the Borrower and, for the
account of each Lender requesting the same, a Note of the Borrower in favor of
each Lender, in each case, substantially in the form set forth as Exhibit D
hereto;

 

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(ii) a long form certificate of the Secretary of State of the state of
incorporation of Borrower attesting as of a recent date to the good standing of
Borrower in such state;

(iii) a copy of the certificate of incorporation of Borrower, certified as of a
recent date by the Secretary of State of the state of organization of Borrower;

(iv) a certificate of the Secretary or an Assistant Secretary of Borrower
certifying (A) the names and true signatures of each officer that has been
authorized to execute and deliver any Loan Document or other document required
hereunder to be executed and delivered by or on behalf of the Borrower, (B) the
Borrower’s by-laws as in effect on the date of such certification, (C) the
resolutions of Borrower’s Board of Directors approving and authorizing the
execution, delivery and performance of this Agreement and the other Loan
Documents to which it is a party and (D) that there have been no changes in the
certificate of incorporation, by-laws or resolutions of Borrower from the
applicable documents delivered pursuant to such certificate;

(v) a certificate of the president or senior financial officer of the Borrower
stating that (A) the conditions set forth in Sections 3.1 and 3.2 have been
satisfied and (B) no Default or Event of Default will exist on the Effective
Date both before and after giving effect tot eh execution and delivery of the
Agreement and the other Loan Documents and the borrowing hereunder;

(vi) evidence satisfactory to Lenders that the insurance policies required by
the Loan Documents are in full force and effect, together with endorsements
naming the Agent, as an additional insured or loss payee under all insurance
policies to be maintained with respect to the Borrower; and

(vii) such other certificates, documents, agreements and information respecting
Borrower as Agent or Lenders may reasonably request.

(b) Fee and Expenses Paid. There shall have been paid to the Lenders all fees
and expenses (including reasonable fees and expenses of counsel) due and payable
on or before the Effective Date (including all such fees described in
Sections 2.5 and 2.6).

(c) Consents. Borrower shall have received all consents and authorizations
required pursuant to any material contractual obligation with any other person
and shall have obtained all permits of, and effected all notices to and filings
with, any Governmental Authority, in each case, as may be necessary to allow
Borrower lawfully (i) to execute, deliver and perform, in all material respects,
its obligations hereunder and under the other Loan Documents, and (ii) to create
and perfect the Liens on the Collateral owned by each of them in the manner and
for the purpose contemplated by the Loan Documents.

 

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(d) Interim Order. The Interim Order shall have been duly entered by the
Bankruptcy Court and shall be in form and substance satisfactory to the each of
the Agent and Lenders in their sole discretion; the Wages Order shall have been
duly entered by the Bankruptcy Court and shall be in form and substance
reasonably satisfactory to the each of the Agent and Lenders; and, in each case,
the Borrower shall have delivered to Agent and Lenders certified copies of such
Interim Order and Wages Order duly entered by the Bankruptcy Court in the
Bankruptcy Case.

(e) Bidding Procedures Order. The Bidding Procedures Order shall have been duly
approved and entered by the Bankruptcy Court and shall be in form and substance
satisfactory to each of the Agent and Lenders in their sole discretion and the
Borrower shall have delivered to Agent and Lenders certified copies of such
Bidding Procedures Order duly entered by the Bankruptcy Court in the Bankruptcy
Case.

(f) Wells Fargo Loan Documents. The Agent and the Lenders shall be satisfied in
their sole discretion that all of the obligations under that certain Loan and
Security Agreement dated as of June 26, 2006 between the Borrower and Wells
Fargo Retail Finance, LLC have been indefeasibly paid and performed in full and
the liens relating thereto have been released.

(g) SBA Forms. The SBIC Holders shall have received the SBA documentation
referred to in Section 5.17.

3.2 Conditions Precedent to Each Advance. The obligation of Lenders on any date
(including the Effective Date or the Effective Date) to make any Advance is
subject to the satisfaction of each of the following conditions precedent:

(a) Borrowing Request. With respect to any Advance, the Agent shall have
received a duly executed Borrowing Request.

(b) Cash Management Matters and Cash Sweep. Borrower shall have delivered to
Agent the Approved Budget or any update thereto then due pursuant to
Section 6.1, which has not been previously delivered, all Variance Reports then
due and not previously delivered and the Certificate required pursuant to
Section 6.1 and shall have made the payment, if required, to the Collateral
Account pursuant to Section 6.9 based on such certificate.

(c) Representations and Warranties; No Defaults. The following statements shall
be true on the date of such Advance, both before and after giving effect thereto
and to the application of the proceeds thereof:

(i) the representations and warranties set forth in the Loan Documents shall be
true and correct on and as of the Effective Date and shall be true and correct
in all respects (unless such representation and warranty is already qualified by
materiality, then such representation and warranty shall be true and correct in
all material respects) on and as of any date after the Effective Date with the
same effect as though made on and as of such date, except to the extent such
representations and warranties expressly relate to an earlier date, in which
case such representations and warranties shall have been true and correct in all
material respects as of such earlier date; and

 

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(ii) no Default or Event of Default shall have occurred and be continuing.

(d) No Legal Impediments. The making of the Advance on such date does not
violate any applicable law, regulation, administrative order, order of any court
or other Governmental Authority on the date of or immediately following such
Advance and is not enjoined, temporarily, preliminarily or permanently.

(e) Financing Order. The Financing Order shall be in full force and effect and
shall not have been stayed, vacated or subject to appeal and, if the Final Order
has been entered, file stamped copies of such Final Order duly entered by the
Bankruptcy Court in the Bankruptcy Case shall have been delivered to the Agent
and the Lenders.

Each submission by the Borrower to Agent of a Borrowing Request and the
acceptance by the Borrower of the proceeds of each Advance requested therein
shall be deemed to constitute a representation and warranty by the Borrower as
to the matters specified in this Section 3.2 on the date of the submission of
the Borrowing Request and the making by the Lenders of such Advance.

3.3 Post Closing Deliveries and Actions. The Borrower shall make or perform to
the Lender’s satisfaction the deliveries or actions set forth on Schedule 3.3 on
or before the date set forth for each delivery or action.

ARTICLE 4

SUPERPRIORITY NATURE OF OBLIGATIONS,

GRANT OF SECURITY INTEREST AND PRIORITY OF LIENS

4.1 Grant of Security Interest. The Borrower hereby grants and pledges to the
Agent for the ratable benefit of all Lenders, a pledge and security interest in
all of Borrower’s right, title and interest in and to all of the Borrower’s
Assets, now existing or hereafter acquired, including without limitation, the
Collateral and each of the items of collateral set forth below, which pledge and
security interest shall be subject to the priorities set forth in Section 4.3 of
this Agreement and the Financing Order:

a. all Accounts;

b. all Inventory, subject to reclamation rights;

c. all Equipment;

d. all General Intangibles;

 

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e. all Chattel Paper (including tangible paper and electronic chattel paper),
all documents, all instruments, all notes and debt instruments and all payments
thereunder and instruments and other property from time to time delivered in
respect thereof or in exchange therefor, and all bills of lading, warehouse
receipts and other documents of title and documents, in each instance whether
now owned or hereafter acquired by Borrower;

f. all property or interests in real or personal property now or hereafter
acquired by Borrower and all rights and interests of the Borrower, now existing
or hereafter arising and however and wherever arising, in respect of any and all
(i) notes, drafts, letters of credits, stocks, bonds, and debt and equity
securities, whether or not certificated (including, without limitation, all
(A) securities, whether certificated or uncertificated, (B) security
entitlements, (C) securities and deposit accounts (including without limitation,
the Collateral Account), (D) commodity contracts and (E) commodity accounts),
warrants, options, puts and calls and other rights to acquire or otherwise
relating to the same; (ii) money (including all cash and cash equivalents held
in the Collateral Account); (iii) proceeds of loans, including, without
limitation, Advances made under this Agreement; and (iv) insurance proceeds and
books and records relating to any of the property covered by this Agreement;
together, in each instance, with all accessions and additions thereto,
substitutions therefor, and replacements, proceeds and products thereof;

g. Intellectual Property;

h. commercial tort claims (all of which that are in existence as of the date of
this Agreement are listed on Schedule 4.1);

i. all books, records, ledger cards and other property at any time evidencing or
relating to the Collateral;

j. all investment property, including without limitation, (i) all of the shares
of capital stock owned by Borrower, all of which are listed on Schedule 4.1
hereto, of the issuers listed thereon (individually, an “Issuer,” and
collectively, the “Issuers”) and all shares of capital stock or ownership
interests of any Issuer obtained in the future by Borrower and the certificates
representing or evidencing all such shares or ownership interests (the “Pledged
Shares”); (ii) all other property which may be delivered to and held by the
Agent in respect of the Pledged Shares pursuant to the terms hereof; (iii) all
dividends, cash, instruments and other property from time to time received,
receivable or otherwise distributed, in respect of, in exchange for or upon the
conversion of the securities referred to in clauses (i) and (ii) above; and
(iv) all rights and privileges of Borrower with respect to the securities and
other property referred to in clauses (i), (ii) and (iii) (the items referred to
in clauses (i) through (iv) being collectively called the “Pledged Collateral”);

k. all other real property and personal property of Borrower, whether tangible
or intangible, and whether now owned or hereafter acquired;

 

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l. all other investment property to the extent not otherwise referred to in this
Section 4.1 in which Borrower has now, or acquires from time to time hereafter,
any right, title or interest in any manner, and the certificates or instruments,
if any, representing or evidencing such investment property, and all dividends,
distributions, return of capital, interest, distributions, value, cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of such
investment property and all subscription warrants, rights or options issued
thereon or with respect thereto;

m. Extraordinary Receipts received after the Petition Date; and

n. all proceeds and products of any of the foregoing, in any form, including,
without limitation, any claims against third parties for loss or damage to or
destruction of any or all of the foregoing and to the extent not otherwise
included, all (i) payments under insurance (whether or not the Agent is the loss
payee thereof), or any indemnity, warranty or guaranty, payable by reason of
loss or damage to or otherwise with respect to any of the foregoing Collateral
and (ii) cash.

4.2 Security for Obligations. This Agreement and the Collateral secure the
indefeasible payment in full and performance of the Obligations.

4.3 Superpriority Nature of Obligations; Priming Lien.

a. The Obligations shall be secured by Liens in the Collateral under Sections
364(c)(2) and (c)(3) of the Bankruptcy Code.

b. The Obligations shall have the status in the Case of superpriority
administrative expenses under Section 364(c)(1) of the Bankruptcy Code. Such
administrative claim shall have priority, subject to the provisions of
Section 4.3, over all other claims, costs and expenses of the kinds specified
in, or ordered pursuant to, Sections 105, 326, 330, 331, 503(b), 506(c), 507(a),
507(b), 726 or any other provision of the Bankruptcy Code and shall at all times
be senior to the rights of the Borrower, the Borrower’s estate, and any
successor trustee or estate representative in the Bankruptcy Cases or any
subsequent proceeding or case under the Bankruptcy Code.

c. Lenders’ and Agent’s Liens on the Collateral under Sections 364(c)(2) and
(c)(3) of the Bankruptcy Code, for the benefit of Lenders, and the superpriority
administrative claim under Section 364(c)(1) of the Bankruptcy Code afforded the
Obligations shall be subject only to the Carve-out and the Chapter 7 Carve-Out;
provided that the Carve-out shall not include any such fees and expenses that
were incurred in the prosecution of Adverse Claims; provided, however, that any
payments actually made to such professionals under Sections 330, 331 or 503 of
the Bankruptcy Code in respect of fees and expenses incurred or accrued shall
reduce dollar-for-dollar the Carve-Out; provided, further, that in no event
shall any of the Carve-Out be utilized to prosecute or cause others to prosecute
any Adverse Claims.

d. Subject to the provisions of the Financing Order and this Section 4.3, the
Borrower shall be permitted to pay as the same may become due and payable
(i) administrative expenses of the kind specified in Section 503(b) of the
Bankruptcy Code incurred in the ordinary course of their businesses,
(ii) provided that no Event of Default

 

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has occurred and is continuing, compensation and reimbursement of expenses to
professionals allowed by the Bankruptcy Court and payable under Sections 330 and
331 of the Bankruptcy Code, and (iii) any other Pre-Petition or Post-Petition
expenses of the Borrower, including adequate protection payments, to the extent
approved by the Bankruptcy Court and not otherwise prohibited by the terms of
this Agreement or the other Loan Documents. No costs or expenses of
administration shall be imposed against Agent or any Lender or any of the
Collateral under Sections 105, 506(c) or 552 of the Bankruptcy Code, or
otherwise.

4.4 Financing Statements. Borrower hereby authorizes the Agent to file one or
more initial financing or continuation statements (including the description of
the Collateral as “all assets” or “all personal property” and “all after
acquired property or assets” of the Borrower), and amendments thereto, relative
to all or any part of the Collateral without the signature of the Borrower.

4.5 Agent Appointed Attorney-in-Fact. The Borrower hereby irrevocably appoints
the Agent, for its benefit and the benefit of the Lenders, such Borrower’s
attorney-in-fact (which appointment shall be irrevocable and deemed coupled with
an interest), with full authority in the place and stead of Borrower and in the
name of Borrower or otherwise, from time to time in the Agent’s discretion, upon
and during the occurrence and continuation of an Event of Default in accordance
with Article 9 of this Agreement and the Financing Order, to take any action and
to execute any instrument which the Agent may deem necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation:

(i) to obtain and adjust insurance required to be paid to the Agent;

(ii) to ask, demand, collect, sue for, recover, compound, receive and give
acquittance and receipts for moneys due and to become due under or in respect of
any of the Collateral,

(iii) to receive, endorse, and collect any drafts or other instruments,
documents and Chattel Paper, in connection with clause (i) or (ii) above,

(iv) to receive, endorse and collect all instruments made payable to the
Borrower representing any dividend or other distribution in respect of the
Pledged Collateral or any part thereof and to give full discharge for the same;
and

(v) to file any claims or take any action or institute any proceedings which the
Agent may deem necessary or desirable for the collection of any of the
Collateral or otherwise to enforce the rights of the Agent or the Lenders with
respect to any of the Collateral.

 

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ARTICLE 5

REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants, to the best of its knowledge, to Agent and
each Lender on the Effective Date and on the date of each borrowing request and
advance made pursuant to Section 2.1, the following and acknowledges:

5.1 Due Incorporation and Qualification. The Borrower is a corporation duly
organized and existing under the laws of the state of Delaware and is qualified
and licensed to do business and is in good standing in any state in which the
conduct of its business or its ownership of assets requires that it be so
qualified, except for any failure to be so qualified or licensed as would not
reasonably be expected to have a Material Adverse Effect. Set forth on Schedule
5.1 are the jurisdictions in which the Borrower is organized and qualified to
conduct business and the location of the principal offices and chief executive
offices.

5.2 Due Authorization. The Borrower has the right and power and is duly
authorized by all appropriate corporate or other required action to enter into
each of the Loan Documents to which it is a party, subject only to the
Bankruptcy Court’s entry of the Financing Order. Except for the Financing Order,
no authorizations of, or registrations or filing with, any Governmental
Authority, or any applicable securities exchange, or other third party are
necessary for the execution, delivery or performance by Borrower of the Loan
Documents to which it is a party, or for the legality, validity or
enforceability hereof or thereof.

5.3 Location of Inventory and Equipment. The Borrower shall keep the Inventory
and Equipment only at the locations set forth on Schedule 5.3, unless Inventory
or Equipment are required to be moved to a different location in the ordinary
course of business to enable the Borrower to provide its services, in which case
the Borrower shall notify Agent in writing as set forth in Article 12 of the new
location of such Inventory and Equipment prior to making such move.

5.4 Relocation of Chief Executive Office. The chief executive offices of the
Borrower is set forth in Article 12 of this Agreement and the Borrower will not,
without prior written consent of the Requisite Lenders, relocate such offices.

5.5 Permits and Licenses. The Borrower holds all licenses, permits, approvals
and consents required for the conduct of its business and the ownership and
operation of its assets, except as would not be reasonably expected to have a
Material Adverse Effect.

5.6 Due Execution; Binding Obligation. Upon entry by the Bankruptcy Court of the
Financing Order, the execution, delivery and performance by the Borrower of each
of the Loan Documents to which it is a party, have been duly executed and
delivered by Borrower. This Agreement is, and each of the other Loan Documents
to which Borrower is or will be a party, when delivered hereunder or thereunder,
and upon entry and subject to the terms of the Financing Order, will be, a
legal, valid and binding obligation of Borrower enforceable against Borrower in
accordance with its terms and the Financing Order.

 

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5.7 The Orders. As of the date of the making of any Borrowing Request or Advance
hereunder, the Financing Order has been entered and has not been stayed,
amended, vacated, reversed, rescinded or otherwise modified in any respect
(except in accordance with the terms hereof).

5.8 Compliance with Articles; Bylaws. The execution by the Borrower of the Loan
Documents to which it is a party does not constitute a breach of any provision
contained in the Borrower’s certificate of incorporation or its bylaws, nor does
it constitute a default or an event of default under any material agreement to
which the Borrower is now or may hereafter become a party.

5.9 Accuracy of Information and No Material Adverse Change in Financial
Statements.

a. The Borrower has delivered to Agent the Approved Budget. The Budget has been
prepared in good faith based upon reasonable assumptions. The Approved Budget is
attached hereto as Exhibit A. To the best of the Borrower’s knowledge,
information and belief, no facts exist that (individually or in the aggregate)
would result in any material change in any of the assumptions or information set
forth in the Approved Budget. The Approved Budget is based upon reasonable
estimates and assumptions, has been prepared on the basis of the assumptions
stated therein and reflects the reasonable estimates of the Borrower of the
results and needs of its operations and other information projected therein. The
financial statements that have been delivered to the Agent and each Lender both
prior to the Effective Date and pursuant to Section 6.1 have been prepared in
accordance with GAAP, subject to year end audit adjustments and the absence of
footnotes in the case of interim financial statements, and accurately and fairly
present in all material respects the results of operations and financial
condition of the Borrower as of the date of such financial statements.

b. Each Loan Document and each report delivered pursuant to any Loan Document,
including any financial statement, Variance Report, notice or other document
delivered pursuant hereto or thereto, taken as a whole and in light of the
circumstances in which made, contain no untrue statement of a material fact and
do not omit to state a material fact necessary to make such statements not
misleading in any case, which have not been, prior to the date hereof,
corrected, supplemented, or remedied by subsequent documents furnished or
statements made orally or in writing to the Agent or any Lender or the
Bankruptcy Court (as appropriate); and, to the extent that any such written
statements constitute projections or other forward-looking statements, such
projections or other forward-looking statements were prepared in good faith on
the basis of assumptions, methods, data, tests and information reasonably
believed by the Borrower to be valid and accurate in all material respects at
the time such projections were furnished to the Agent, any Lender or the
Bankruptcy Court.

 

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c. Except as disclosed in writing to the Agent and each Lender prior to the date
hereof, to Borrower’s knowledge after reasonable inquiry and diligence there are
no unstayed legal or arbitral proceedings, or any proceedings or investigation
by or before any governmental or regulatory authority or agency, pending or
threatened in writing to Borrower, or threatened against Borrower which is
reasonably likely to be determined adversely and if so determined would have a
Material Adverse Change or that seek to enjoin or delay any of the transactions
contemplated hereby.

5.10 Use of Proceeds. All proceeds provided by Lenders to the Borrower pursuant
to any Financing Order, this Agreement or otherwise, have been and shall be used
by the Borrower solely for general operating and working capital purposes in the
ordinary course of Borrower’s business in accordance with the Approved Budget
and for those purposes set forth in Sections 2.1 and 4.3(d) of this Agreement.
No part of the proceeds of any Advances hereunder have been or will be used for
“buying” or “carrying” any “margin stock” within the respective meanings of each
of the quoted terms under Regulation U as now and from time to time hereafter in
effect or for any purpose that violates the provisions of the Regulations of the
Board of Governors.

5.11 Defaults and Events of Default. No Default or Event of Default has occurred
or is existing under any of the Loan Documents.

5.12 Administrative Expenses and Lien. Upon the entry of the Financing Order,
and subject to the Carve Out, the Obligations shall at all times constitute an
Administrative Expense for which the Lenders shall at all times maintain and
have a superpriority claim pursuant to Section 364(c) of the Bankruptcy Code and
shall maintain and have a lien on the Collateral pursuant to Section 364(d) of
the Bankruptcy Code and no other party has or shall have a lien or claim that is
pari passu or superior to the claim of the Lenders, other than Permitted Liens.

5.13 Reliance by Agent and Lenders; Cumulative. Each warranty, representation
and agreement contained in this Agreement shall be automatically be deemed
repeated and made by the Borrower on the date of each request for an Advance by
the Borrower and on each date on which any Lender makes such Advance and on each
date on each date on which an Variance Report is delivered and shall be
conclusively presumed to have been relied on by such Lender regardless of any
investigation made or information possessed by the Agent or any Lender. The
warranties, representations and agreements set forth herein shall be cumulative
and in addition to any and all other warranties, representations and agreements
which the Borrower shall now or hereafter give, or cause to be given, to the
Lender.

5.14 Right to Inspect. Agent, each Lender or Persons designated by Agent
(including without limitation examiners or other representatives of the SBA)
shall have the right, as reasonable, at any time or times hereafter during the
Borrower’s usual business hours (or at any time after the occurrence and during
the continuation of a Default), or, as applicable, to the extent that the
Borrower has the contractual ability to grant Agent and each Lender such rights,
during the usual business hours of any third party having control over the
Borrower’s Books to inspect the Borrower’s Books,

 

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facilities and operations in order to verify the amount or condition of, or any
other matter relating to, the Loan Documents, Obligations or the Borrower’s
financial condition. Borrower shall pay to Agent or any Lender all customary
fees and all reasonable costs and out-of-pocket expenses incurred by Agent or
such Lender in the exercise of its rights hereunder, and all of such fees, costs
and expenses shall constitute liabilities hereunder, shall be payable on demand
and, until paid, shall bear interest at the highest rate then applicable to the
Note.

5.15 Title to Assets; Liens.

a. As of December 30, 2007, Borrower had good and marketable title to the
properties shown to be owned by the Borrower on the Borrower’s balance sheet as
of December 30, 2007. Since December 30, 2007, Borrower has not disposed of any
property except in the ordinary course of business except as disclosed on
Schedule 5.15. Borrower owns and has on the date hereof good and marketable
title, subject to reclamation rights with respect to inventory, or subsisting
leasehold interests subject to Liens permitted hereunder to, and enjoys on the
date hereof peaceful and undisturbed possession of, all such material properties
that are necessary for the operation and conduct of its businesses.

b. There are no Liens of any nature whatsoever on any Assets of the Borrower
other than: (i) Liens granted pursuant to the Financing Order and this
Agreement; (ii) other Liens in existence on the Petition Date as reflected on
Schedule 5.15. The aggregate indebtedness or other obligations secured (or that
may be secured) by each such Lien is correctly described in Schedule 7.1 and
Borrower has no other indebtedness for borrowed money. Borrower is not party to
any contract, agreement, lease or instrument entered into on or after the
Petition Date the performance of which, either unconditionally or upon the
happening of an event, will result in or require the creation of a Lien on any
assets of Borrower in violation of this Agreement.

5.16 SBA License Application and Related Requirements. Borrower hereby
acknowledges that Granite Creek Flex Cap I, L.P. (“GCFC”), in its capacity as a
Lender, is an SBIC pursuant to the SBIC Act. Borrower acknowledges that
compliance by Borrower with the terms of this Agreement and the representations,
warranties and covenants contained herein are necessary for GCFC to be in
compliance under the SBIC Act and Borrower agrees to comply with the terms of
this Agreement for such purpose.

5.17 Small Business Administration Documentation. Borrower acknowledges that it
completed, executed and delivered to Agent the SBA Forms 480, 652 and 1031
(Parts A and B) together with a business plan showing financial projections
(including balance sheets and income and cash flows statements) for the period
described therein and a written statement (whether included in the purchase
agreement or pursuant to a separate statement) from Borrower regarding their use
of proceeds from the DIP Facility (the “Use of Proceeds Statement”). Borrower
represents and warrants to Agent that the information regarding Borrower set
forth in the SBA Form 480, Form 652, Form 1031 and the Use of Proceeds Statement
is accurate and complete.

 

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5.18 Small Business Concern. Borrower represents and warrants to Agent that as
of the date of this Agreement Borrower’s net assets are less than $18 million
and that its average after-tax income (exclusive of loss carry-forwards) for the
2 fiscal years most recently ended is less than $6 million.

ARTICLE 6

AFFIRMATIVE COVENANTS

The Borrower covenants and acknowledges that until the Obligations are
indefeasibly paid in full and performed, unless the Borrower has obtained the
prior written consent of Requisite Lenders, the Borrower shall comply with all
of the following:

6.1 Notices and Other Reports. The Borrower shall provide to the Agent and each
Lender, with a copy to the counsel for the Committee the following:

a. written notice of the occurrence of any Default or Event of Default pursuant
to any Loan Document;

b. prior written notice of any motion, order or other information or document
filed by the Borrower with the Bankruptcy Court or distributed or made available
to the Committee;

c. as soon as available and in any event no later than thirty (30) days after
the end of each month, copies of monthly financial statements;

d. as soon as available and in any event no later than three (3) Business Days
after the end of each weekly period, a Variance Report accompanied by a
certificate of the chief executive officer or the senior financial officer, in
form and substance satisfactory to Lenders, as of the last day of the preceding
weekly period, setting forth the following information for the Borrower for the
preceding weekly period on both a weekly and cumulative basis from the Effective
Date to such date, on a cash basis: (i) total disbursements, (ii) total cash
receipts, (iii) comparative numbers from the Approved Budget, (iv) the weekly
Cash Shortfall, the cumulative Cash Shortfall, and (v) the Cash Flow Sweep
Amount (with associated calculations);

e. at the end of each four (4) week period, an update to the Approved Budget
(extending such budget by four (4) weeks to show the rolling ten (10) week
period) in form and substance satisfactory to the Agent and Requisite Lenders in
all respects; upon the written approval of the Agent and Requisite Lenders, such
updated budget shall become the Approved Budget for all purposes hereunder from
the date of approval;

f. concurrent with the Borrower’s filing thereof with the Bankruptcy Court, all
reports required by the Office of the United States Trustee; and

 

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g. any other information reasonably requested by Agent or any Lender.

6.2 Tax Returns, Receipts. The Borrower shall deliver to the agent and each
Lender copies of each of its future federal or state income or franchise tax
returns, and any amendments thereto, within fifteen (15) days of the filing
thereof. The Borrower further shall promptly deliver to the Lender, upon
request, satisfactory evidence of the Borrower’s payment of any and all
withholding taxes required to be paid by it.

6.3 Title to Equipment. Upon the Agent’s reasonable request, the Borrower shall
deliver to the Agent any and all evidences of ownership of, certificates of
title, or applications for title to any items of Equipment.

6.4 Maintenance of Equipment. The Borrower shall keep and maintain its real
property, the Inventory and Equipment and other assets in good operating
condition and repair, ordinary wear and tear excepted, and shall make all
necessary repairs or replacements thereto so as to maintain and preserve the
same as necessary in the conduct of the Borrower’s business.

6.5 Taxes. All Federal, state and local assessments and taxes, whether real,
personal or otherwise, due or payable by, or imposed, levied or assessed against
the Borrower or any of their assets or in connection with the Borrower’s
business shall hereafter be paid before they become delinquent or before the
expiration of any extension period except for those taxes, assessments and the
like being contested by the Borrower in good faith and by appropriate
proceedings and as to which the Borrower has established appropriate reserves in
accordance with GAAP, provided, that no Lien is placed on any assets of the
Borrower during any such contest as a consequence of the failure to pay such
tax, assessment or the like. The Borrower shall make due and timely payment or
deposit of all federal, state and local taxes, assessments or contributions
required of it by law.

6.6 Insurance. The Borrower shall keep and maintain the Assets insured against
all risk of loss or damage from fire, theft, vandalism, and all other hazards
and risks of physical damage included within the meaning of the term “extended
coverage” in such amounts as are ordinarily insured against by similar
businesses and, in each case, in such amounts and scope of coverage as is
otherwise satisfactory to the Lenders. The Borrower shall also keep and maintain
general liability insurance and property damage insurance, and insurance against
loss from business interruption, insuring against all risks relating to or
arising from the Borrower’s ownership and use of the Assets and the operation of
its business. The Borrower shall not be required to maintain earthquake
insurance. The Borrower shall deliver to the Agent prior to the Effective Date a
standard ACCORD Evidence of Insurance Certificate evidencing insurance policies
maintained by the Borrower and naming the Agent as additional insured for all
liability policies and as loss payee for all property damage and business
interruption insurance.

 

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6.7 Compliance With Law. The Borrower shall comply, in all material respects,
with the requirements of all applicable laws, rules, regulations and orders of
governmental authorities relating to the Borrower and the conduct of its
business.

6.8 Compliance with Bankruptcy Court. The Borrower shall comply with the notice
and other requirements of the Bankruptcy Code and all other applicable rules in
a manner acceptable to Lenders and its counsel.

6.9 Cash Management System and Collateral Account. The Borrower shall at all
times maintain a system of deposit accounts and cash management systems
satisfactory to the Lenders and consistent with the guidelines of the Office of
the United States Trustee, including the Collateral Account. Borrower shall on
the Effective Date, and on each Monday (or the immediately succeeding Business
Day if Monday is not a Business Day) after the Effective Date, transfer an
amount equal to Cash Flow Sweep Amount to the Collateral Account. Upon the
request of the Agent or any Lender, the Borrower shall promptly, and in any
event within five (5) Business Days, cause control agreements satisfactory to
Lenders to be executed by each deposit bank where any deposit account is
maintained and cause cash management systems satisfactory to the Lenders in
their sole discretion to be established.

6.10 Schedule of Financial Affairs. The Borrower shall file with the Bankruptcy
Court completed statements of financial affairs and schedules of assets and
liabilities as required by the Bankruptcy Code, the Federal Rules of Bankruptcy
Procedure and applicable local rules or as otherwise extended by order of the
Court.

6.11 Use of Cash Collateral. Until the Obligations are indefeasibly paid in full
and the Advance Commitments have been terminated, the Borrower shall use any
Cash Collateral permitted to be used by the Borrower pursuant to the Financing
Order solely in accordance with the Approved Budget notwithstanding the timing
of receipt of cash or levels of cash balances.

6.12 Delivery of Copy of Financing Order. Within one (1) Business Day of the
entry of any Financing Order, the Borrower shall deliver to the Agent a true and
correct copy of such Financing Order.

6.13 Sale Process. The Borrower shall pursue, on a schedule in accordance with
the Sale Milestones, authorization and approval of the sale of substantially all
of its assets under the Asset Purchase Agreement and the consummation thereof,
subject to any higher or better offers that may be received in accordance with
the Bidding Procedures.

6.14 Prior Notice of Filings. The Borrower shall deliver to the Agent, at least
one (1) day prior to such filing or distribution, copies of all pleadings,
motions, applications, judicial information, financial information and other
documents to be filed by or on behalf of the Borrower with the Bankruptcy Court
in the Bankruptcy Case, or to be distributed by or on behalf of the Borrower to
the Committee (other than emergency pleadings, motions or other filings where,
despite the Borrower’s commercially reasonable efforts, such one-day notice is
impracticable)

 

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ARTICLE 7

NEGATIVE COVENANTS

The Borrower covenants and acknowledges that until the Obligations are
indefeasibly paid in full and performed that it shall not undertake any of the
following without the prior written consent of the Requisite Lenders:

7.1 Extraordinary Transactions and Disposal of Assets. Enter into any
acquisition, merger, consolidation or amalgamation, or liquidate, wind up or
dissolve itself (or suffer any liquidation or dissolution), or form any
subsidiaries, or convey, sell, lease, assign, transfer or otherwise dispose of,
all or substantially all of its property, business or assets or make any
material change in its present method of conducting business or enter into any
transaction not in the ordinary and usual course of its business, including but
not limited to the sale, lease, disposal, movement, relocation or transfer,
whether by sale or otherwise, of, or grant any Lien on, any its Assets, other
than the sale of Inventory in the ordinary course of business or as otherwise
expressly permitted by this Agreement and set forth in the Approved Budget or
any approved Asset sale listed on Schedule 7.1(a); incur any indebtedness for
borrowed money or any other indebtedness (other than trade payables in the
ordinary course of business and Pre-Petition indebtedness existing on the date
hereof and set forth on Schedule 7.1(b)) except as expressly approved by the
Bankruptcy Court and the Lenders; or sell or transfer any property or assets to,
or otherwise engage in any other transactions with, any of its stockholders.

7.2 Guaranty. Guaranty or otherwise become in any way liable with respect to the
obligations of any third party, except by endorsement of instruments or items of
payment for deposit to the accounts of the Borrower for negotiation and delivery
to the Lender.

7.3 Restructure. Make any material change in their financial structures or
business operations, except as otherwise authorized or approved by the
Bankruptcy Court and the Lender.

7.4 Payments. Pay any Post Petition indebtedness owing to any third party, other
than expenses in the Approved Budget; or pay any Pre-Petition indebtedness or
settle any claim relating thereto, or as otherwise ordered by the Court (e.g.,
allowed reclamation claims, pre-petition wages, shipper’s or warehouse lien
claims, if any, etc.).

7.5 Investments, Loans and Advances. Make any loans, advances or extensions of
credit; or make any capital contribution or other investment, excluding travel
advances and similar transactions with employees or directors of the Borrower in
the conduct of the business of the Borrower.

7.6 Capital Expenditures. Make any capital expenditure, or any commitment
therefor, or purchase or lease any real or personal assets or replacement
Equipment except as set forth in the Approved Budget.

 

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7.7 Accounting Methods. Modify or change its methods of accounting or enter
into, modify or terminate or allow to exist any agreement presently existing or
at any time hereafter entered into with any third party for the preparation or
storage of the Borrower’s records of Accounts and financial condition without
said parties agreeing to provide the Lender with information regarding the
Assets and/or the Borrower’s financial condition.

7.8 Business Suspension. Suspend or go out of business or convert the Bankruptcy
Case to a liquidation.

7.9 Bankruptcy Case. Seek, consent or suffer to exist: (a) any modification,
stay, vacation or amendment to any Financing Order, unless the Requisite Lenders
have consented to such modification, stay, vacation or amendment in writing, or
(b) a priority claim for any administrative expense or unsecured claim against
the Borrower, (now existing or hereafter arising of the kind specified in
Section 503(b), 506(c) or 507(b) of the Bankruptcy Code) superior to the
superpriority claim of the Lenders in respect of the Obligations, other than any
allowed claim for Administrative Fees and Expenses.

7.10 Limitation on Issuances of Capital Stock and Dividends. Declare or pay,
directly or indirectly, any dividends or make any other distribution or payment,
whether in cash, property, securities or a combination thereof, with respect to
(whether by reduction of capital or otherwise) any shares of capital stock, or
set apart any sum for the aforesaid purposes.

7.11 Use of Proceeds. No part of the proceeds of any Advances hereunder, will be
used for purposes other than those set forth in Section 2.1. No part of the
proceeds of any Advances hereunder will be used for “buying” or “carrying” any
“margin stock” within the respective meanings of each of the quoted terms under
Regulation U as now and from time to time hereafter in effect or for any purpose
that violates the provisions of the Regulations of the Board of Governors. If
requested by agent or any Lender, the Borrower will furnish to Agent or such
Lender a statement to the foregoing effect in conformity with the requirements
of FR Form G-3 or FR Form U-1, as applicable, referred to in Regulation U. No
proceeds of Advances shall be used for any purpose not set forth in the Approved
Budget or to directly or indirectly or indirectly support an Adverse Claim.

7.12 Reclamation Claims. The Borrower shall not enter into any agreement to
return any of its Inventory to any of its creditors for application against any
Pre-Petition trade payables or other Pre-Petition claims under Section 546(h) of
the Bankruptcy Code or allow any creditor to take any setoff or recoupment
against any of its Pre-Petition trade payables or other Pre-Petition claims
based upon any such return pursuant to Section 553(b)(1) of the Bankruptcy Code
or otherwise if, after giving effect to any such agreement, setoff or
recoupment, the aggregate amount of Pre-Petition indebtedness, Pre-Petition
trade payables and other Pre-Petition claims subject to all such agreements,
setoffs and recoupments since the Petition Date would exceed $500,000.

 

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7.13 Chapter 11 Claims. The Borrower shall not incur, create, assume, suffer to
exist or permit any other super-priority administrative expense claim which is
pari passu with or senior to the claims of Lender against the Borrower.

7.14 Fundamental Changes, Line of Business. Borrower shall not amend its
organizational documents or change its name or jurisdiction of organization or
change its fiscal year or enter into a new line of business (other than pursuant
to the Bankruptcy Case) materially different from Borrower’s current business
without the consent of Agent. Without limiting the generality of the foregoing,
Borrower will not change it business activities to a business activity which a
licensee under the SBIC Act is prohibited from funding by the SBIC Act.

ARTICLE 8

EVENTS OF DEFAULT

The occurrence of any one or more of the following events shall constitute an
Event of Default by the Borrower hereunder:

8.1 Failure to Pay. The Borrower’s failure to pay when due and payable,
including when declared due and payable, or within one (1) Business Day after
receipt of written notice from the Agent of such failure, any amounts or any
portion of the Obligations (whether principal, interest, taxes, or otherwise);

8.2 Failure to Perform. The failure of the Borrower to perform, keep or observe
any term, provision, condition, representation, warranty, covenant or agreement
contained in this Agreement, in any of the other Loan Documents, including the
Financing Order, or the Asset Purchase Agreement, the Bidding Procedure Order,
or in any other present or future agreement among the Borrower, the Agent and/or
Lender or any other order of the Bankruptcy Court and such failure shall
continue for ten (10) Business Days after written notice of such failure from
the Agent to the Borrower;

8.3 Misrepresentation. Any warranty, representation, statement or report made in
this Agreement, in any of the other Loan Documents, including the Financing
Order, or in the Asset Purchase Agreement or the Sale Order, or in any other
present or future agreement among the Borrower, the Agent and/or Lender or any
other order of the Bankruptcy Court or to the Bankruptcy Court with respect to
the Sale Order, Financing Order or the Loan Documents, the Bidding Procedures
Order, the Asset Purchase Agreement or, in each case, any of the transactions
contemplated thereby, or to the Agent or any Lender by the Borrower or any
officer, employee, or agent of the Borrower, contains a material misstatement or
material misrepresentation on the date such warranty, representation, statement
or report is given or made;

8.4 Material Adverse Change. There is a Material Adverse Change;

8.5 Injunction Against Borrower. The Borrower is enjoined, restrained or in any
way prevented by court order from continuing to conduct all or any material part
of its business;

 

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8.6 Bankruptcy Court. The occurrence of any of the following in the Bankruptcy
Case:

a. The Borrower shall bring a motion or take any action or file any plan of
reorganization or liquidation, or disclosure statement attendant thereto: (A) to
obtain additional financing not otherwise permitted pursuant to this Agreement;
(B) to grant any lien upon or affecting any Collateral; (C) except as provided
in the Financing Order, to use cash collateral of the Lenders under
Section 363(c) of the Bankruptcy Code without the prior written consent of the
Requisite Lenders; or (D) any other action or actions directly adverse to the
Lenders or their rights and remedies hereunder or its interest in the
Collateral; or

b. An order is entered confirming a plan of reorganization or a sale of all or
substantially all of the assets or capital stock of the Borrower that does not
contain a provision for termination of the Advance Commitments and repayment in
full in cash of all of the Obligations under this Agreement on or before the
effective date of such plan; or

c. An order is entered amending, supplementing, staying, vacating or otherwise
modifying the Financing Agreements or the Financing Order without the written
consent of the Requisite Lenders; or

d. The Final Order is not entered immediately following the expiration of the
Interim Order and, in any event, within twenty (20) days of the entry of the
Interim Order; provided that if the Bankruptcy Court is not available to issue
such Final Order within such 20-day period, then such date shall be extended by
a reasonable period of time to accommodate the Bankruptcy Court’s schedule, not
to exceed 14 days; or

e. Other than payments permitted pursuant to this Agreement or the Financing
Order, the Borrower shall make any payment (whether by way of adequate
protection or otherwise) of principal or interest or otherwise on account of any
Pre-Petition indebtedness for borrowed money; or

f. The payment is made of, or application for authority to pay, any Pre-Petition
claim without the prior written consent of the Requisite Lenders or pursuant to
an order of the Bankruptcy Court after notice and hearing unless otherwise
permitted under this Agreement; or

g. Any claim or claims are allowed under Section 506(c) during the period in
which the Debtor is authorized to borrow funds or use cash collateral of the
Bankruptcy Code against or with respect to any of the Collateral or Pre-Petition
Collateral, other than for the Carve Out; or

h. The Borrower shall file, support or fail to oppose a motion seeking, or the
Bankruptcy Court shall enter, an order appointing (x) a trustee under Chapter 7
or Chapter 11 of the Bankruptcy Code, (y) a responsible officer or (z) an
examiner, in each case with enlarged powers relating to the operation of the
business (powers beyond those set forth in sub clauses (3) and (4) of
Section 1106(a) of the Bankruptcy Code) under Section 1106(b) of the Bankruptcy
Code; or

 

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i. Except as provided in the Bidding Procedures Order, absent the written
consent of Requisite Lenders, the Bankruptcy Court shall enter an order under
Section 363 or 365 of the Bankruptcy Code authorizing or approving the sale or
assignment of a material portion of any of the Borrower’s assets, or procedures
in respect thereof, or the Borrower shall seek, support, or fail to contest in
good faith, the entry of such an order; or

j. A Chapter 11 plan of reorganization or liquidation, or disclosure statement
attendant thereto, with respect to the Borrower is filed and (i) the treatment
of the claims of the Lenders in such plan is not approved by the Requisite
Lenders or (ii) such plan does not provide for the payment in full in cash of
the Obligations on or prior to the date of consummation thereof; or

k. The Bankruptcy Case shall be dismissed or converted from one under Chapter 11
to one under Chapter 7 of the Bankruptcy Code or the Borrower shall file a
motion or other pleading seeking the dismissal of the Bankruptcy Case under
Section 1112 of the Bankruptcy Code or otherwise; or

l. The Bankruptcy Court shall enter an order granting relief from the automatic
stay to any creditor or party in interest (i) to permit foreclosure (or the
granting of a deed in lieu of foreclosure or the like) on any assets of the
Borrower which have an aggregate value in excess of $100,000.00 or (ii) to
permit other actions that would have a Material Adverse Change; or

m. The Borrower shall commence or join with or actively support the Committee or
any other party in interest in the Bankruptcy Case in a suit, action or
contested matter against the Agent or the Lenders or affecting the Collateral,
or shall join or actively support a suit, action or contested matter against the
Lender or the Agent or affecting the Collateral, that sets forth (a) a claim in
excess of $100,000.00, (b) any claim or legal or equitable remedy which seeks
reduction, setoff, subordination or any recharacterization of the claim or lien
of the Lender; or (c) a claim that would otherwise have a material adverse
effect on the rights and remedies of the Lender under any Financing Agreement
and related documents or the collectability of all or any portion of the
Obligations; or

n. An order shall be entered avoiding or requiring repayment of any portion of
the payments made on account of the Obligations owing under this Agreement; or

o. (i) The Borrower shall fail to comply with the terms of the Financing Order
in any material respect, (ii) the Borrower shall file a motion for
reconsideration with respect to the Financing Order, or (iii) the right of the
Borrower to borrow under this Agreement is terminated by an order entered by the
Bankruptcy Court; or

 

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p. The Borrower shall file, support or fail to oppose a motion seeking, or the
Bankruptcy Court shall enter, an order (i) approving additional financing under
Section 364(c) or (d) of the Bankruptcy Code not otherwise permitted pursuant to
this Agreement, (ii) granting any lien upon or affecting any Collateral which
are pari passu or senior to the liens on the Collateral in favor of the Agent
for the benefit of the Agent the Lenders, (iii) granting any claim priority
senior to or pari passu with the claims of the Lenders under the Loan Documents
or any other claim having priority over any or all administrative expenses of
the kind specified in Section 503(b) or Section 507(b) of the Bankruptcy Code,
or (iv) granting any other relief that is adverse to the Lenders’ interests
under any Financing Agreement or its rights and remedies hereunder or their
interest in the Collateral;

8.7 Actions. One or more actions shall be commenced which could result in, or
judgments or decrees required to be satisfied as an administrative expense claim
are entered after the Petition Date against Borrower involving in the aggregate
a liability (to the extent not paid or fully covered by insurance) of $100,000
or more and all such actions, judgments or decrees shall not have been vacated,
stayed or bonded pending appeal within the time required by the terms of such
judgment or applicable law; or (ii) an action shall be commenced or there shall
be rendered against Borrower a non-monetary judgment with respect to a
post-Petition Date event which causes or would reasonably be expected to cause a
Material Adverse Change or a suit or action against the Agent or any Lender is
commenced by the Borrower, any federal, state environmental protection or health
and safety agency, any suit or action which asserts any claim or legal or
equitable remedy contemplating subordination of any claim of the Agent or any
Lender or its affiliates, and shall remain undismissed or unstayed for thirty
(30) days after its commencement without any preliminary relief of the nature
sought having been granted, or it shall be determined (whether by the Bankruptcy
Court or by any other judicial or administrative forum) that Borrower is liable
for the payment of claims arising out of any failure to comply (or to have
complied) with applicable environmental, health or safety laws or regulations;

8.8 Reorganization Plan. The Borrower files a plan of reorganization in the Case
or a motion for the sale of a material portion of its Assets pursuant to
Section 363 of the Bankruptcy Code which does not provide for indefeasible
payment of the Obligations on the effective date thereof, or as otherwise agreed
by the Lenders in writing, and to which the Requisite Lenders do not consent;

8.9 Budget Variances. If, as of any date that occurs four (4) weeks or more
after the Effective Date, in each case, cumulative expenses and costs exceed the
amounts set forth in the Approved Budget by an amount in excess of 5%, or
cumulative revenue is less than the amounts set forth in the Approved Budget by
an amount in excess of 10%.

8.10 ERISA Compliance. Any Person shall engage in any “prohibited transaction”
(as defined in Section 406 of ERISA or Section 4975 of the Code) involving any
plan; (ii) any “accumulated funding deficiency” (as defined in Section 302 of
ERISA), whether or not waived, shall exist with respect to any Plan or any Lien
in favor of the PBGC or a Plan shall arise on the assets of Borrower or any
commonly controlled

 

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entity; (iii) a Reportable Event shall occur with respect to, or proceedings
shall commence to have a trustee appointed, or a trustee shall be appointed, to
administer or to terminate, any single employer plan, which Reportable Event or
commencement of proceedings or appointment of a trustee is likely to result in
the termination of such plan for purposes of Title IV of ERISA; (iv) any single
employer plan shall terminate for purposes of Title IV of ERISA; (v) Borrower or
any commonly controlled entity shall, or in the reasonable opinion of the
Lenders is likely to, incur any liability in connection with a withdrawal from,
or the insolvency or ERISA reorganization of, a multiemployer plan or (vi) any
other event or condition shall occur or exist with respect to a plan; and in
each case in clauses (i) through (vi) above, such event or condition, together
with all other such events or conditions, if any, could reasonably be expected
to have a Material Adverse Change.

8.11 Unauthorized Payments. Borrower shall make any payments (including any
adequate protection payments) relating to Borrower’s Pre-Petition obligations or
interests, other than (i) as permitted under the Financing Order; (ii) in
respect of accrued payroll and related expenses and employee benefits as of the
Petition Date; (iii) in accordance with, and to the extent authorized by, orders
reasonably satisfactory to the Requisite Lenders; (iv) as otherwise permitted
under this Agreement and set forth in the Approved Budget.

8.12 Validity of Loan Documents and Superpriority Claims. Any material provision
of this Agreement or any other Loan Document shall cease to be valid and binding
on the Borrower or cease to be in full force and effect, or Borrower or its
affiliates shall so assert in any pleading filed in any court; or any proceeding
shall be commenced by Borrower or its affiliates seeking, or otherwise
consenting to, the invalidation, subordination or challenging in any respect the
superpriority claims and liens granted to secure the Obligations, or granting
any claim or lien that is senior or pari passu with those of the Agent or the
Lenders.

8.13 Failure to Achieve a Sale Milestone. The Borrower shall fail to achieve any
Sale Milestone within ten (10) Business Days of the date specified in the
definition of Sale Milestone; unless such delay shall be attributable solely to
scheduling constraints of the Bankruptcy Court to the extent permitted in the
definition of Sale Milestone.

8.14 Failure to Deliver a Variation Report. The Borrower shall fail to deliver a
Variation Report not later than three (3) Business Days after the due date
thereof.

8.15 Event of Default Under Other Financing Agreements. There shall be an event
of default under any of the other Financing Agreements.

8.16 Failure to Make Post Closing Deliveries. The Borrower shall fail to make
any post closing delivery set forth on Schedule 3.3 when due or within ten
(10) Business Days after written notice of such failure is given by the Agent to
the Borrower.

 

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ARTICLE 9

LENDERS’ RIGHTS AND REMEDIES

9.1 Rights and Remedies.

a. Upon the occurrence and during the continuance of an Event of Default, Agent,
may and at the direction of the Requisite Lenders shall, do any one or more of
the following:

(i) Declare all Obligations, whether evidenced by the Loan Documents or
otherwise, immediately due and payable in full;

(ii) Cease advancing money or extending credit to or for the benefit of the
Borrower under the Loan Documents or under any other agreement among the
Borrower, the Agent and/or any Lender;

(iii) Terminate this Agreement as to any future liability or obligation of the
Agent or any Lender, but without affecting the Agent’s or any Lender’s rights
and without affecting the Obligations;

(iv) Deliver to the Debtor and the Committee an enforcement notice, stating that
Lenders will exercise their rights and remedies against the Collateral and upon
delivery of such enforcement notice, may file a motion to terminate the
automatic stay provided in section 362 of the Bankruptcy Code in order to
enforce all of the Liens and security interests in the Collateral, enter onto
any premises of Borrower in connection with an orderly liquidation of the
Collateral, and exercise such other lawful rights and remedies as they deem
necessary or advisable, including without limitation credit bidding for the
Collateral in any sale.

(b) The rights, remedies, powers and privileges of the Agent and Lenders
provided in this Article 9 are cumulative and not exclusive of any other rights,
remedies, powers and privileges provided by law or equity. In addition to the
foregoing, the Agent and Lenders shall have all rights and remedies provided by
law or equity and any rights and remedies contained in any of the Loan Documents
and all such rights and remedies shall be cumulative.

9.2 No Waiver. No delay on the part of the Agent or any Lender in exercising any
right, power or privilege under any Loan Document shall operate as a waiver, nor
shall any single or partial exercise of any right, power or privilege under such
Loan Documents or otherwise, preclude other or further exercise of any such
right, power or privilege.

 

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ARTICLE 10

PAYMENT OF TAXES AND EXPENSES AND INDEMNIFICATION OF LENDERS

10.1 Payment of Expenses. The Borrower agrees (a) to pay or reimburse Agent for
all its costs and expenses incurred in connection with the development,
preparation and execution of the Loan Documents, including any amendment,
supplement or modification to, and the enforcement or preservation of any rights
under, this Agreement, the Notes, the other Loan Documents, the Financing Order,
the Asset Purchase Agreement and any other documents prepared in connection
herewith or therewith, and the consummation and administration of the
transactions contemplated hereby and thereby, and the reasonable fees and
disbursements of counsel to Agent and professionals engaged by Agent, (b) to pay
or reimburse Agent and each Lender for all its costs and expenses reasonably
incurred in connection with the enforcement or preservation of any rights under
this Agreement, the Notes, the other Loan Documents, the Financing Order, the
Asset Purchase Agreement and any such other documents following the occurrence
and during the continuance of an Event of Default, including without limitation,
the reasonable fees and disbursements of counsel to Lender and professionals
engaged by Agent and each Lender, (c) to pay, and indemnify and hold harmless
Agent and each Lender from, any and all recording and filing fees and any and
all liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other taxes, if any, which may be payable or determined to be payable
in connection with the execution and delivery of, or consummation or
administration of any of the transactions contemplated by, or any amendment,
supplement or modification of, or any waiver or consent under or in respect of,
this Agreement, the Notes, the other Loan Documents, the Financing Order, the
Asset Purchase Agreement and any such other documents, (d) to pay all the
expenses of Agent related to this Agreement, the other Loan Documents, the
Financing Order, or the Advances in connection with the Cases (including without
limitation, the on-going monitoring by Agent of the Cases, including attendance
by Agent and counsel at hearings or other proceedings and the on-going review of
documents filed with the Bankruptcy Court) and (e) to pay, and indemnify and
hold harmless Agent and each Lender (and their respective directors, officers,
employees and agents) from and against any and all other liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever with respect to the
execution, delivery, enforcement, performance, preservation of rights and
administration of this Agreement, the Notes, the other Loan Documents, the
Financing Order, the Asset Purchase Agreement any other document or agreement
prepared in connection herewith or therewith or the use of the proceeds of the
Advances, including without limitation, any of the foregoing relating to the
violation of, noncompliance with or liability under, any Environmental Law
applicable to the operations of the Borrower or any of its properties (all the
foregoing in this clause (e), collectively, the “indemnified liabilities”),
provided that the Borrower shall have no obligation hereunder to Agent and any
Lender with respect to indemnified liabilities determined by the final
non-appealable judgment of a court of competent jurisdiction to have resulted
from the gross negligence or willful misconduct on the part of such Agent or
such Lender or their respective directors, officers, employees and agents;
provided, further, that the Borrower shall in no event be responsible for
punitive damages pursuant to this Section 10.1. The agreements in this
subsection shall survive repayment of the Advances and all other Obligations
payable or to be performed hereunder.

 

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10.2 Taxes.

a. All payments made by the Borrower under this Agreement and the other Loan
Documents shall be made free and clear of, and without deduction or withholding
for or on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority, excluding net income taxes, gross receipt taxes (imposed in lieu of
net income taxes) and franchise taxes (imposed in lieu of net income taxes)
imposed on the Agent or any Lender as a result of a present or former connection
between Lender and the jurisdiction of the Governmental Authority imposing such
tax or any political subdivision or taxing authority thereof or therein (other
than any such connection arising solely from Agent or such Lenders having
executed, delivered or performed its obligations or received a payment under, or
enforced, this Agreement or any other Loan Document). If any such non-excluded
taxes, levies, imposts, duties, charges, fees, deductions or withholdings
(“Non-Excluded Taxes”) or other taxes are required to be withheld from any
amounts payable to Agent or any Lender hereunder, the amounts so payable to
Agent or such Lender shall be increased to the extent necessary to yield to
Lender (after payment of all Non-Excluded Taxes and other taxes) interest or any
such other amounts payable hereunder at the rates or in the amounts specified in
this Agreement, provided, however, that the Borrower shall not be required to
increase any such amounts payable to Agent or any Lender with respect to any
Non-Excluded Taxes (i) that are attributable to Agent or such Lender’s failure
to comply with the requirements of paragraph (d) or (e) of this Section or
(ii) that are United States withholding taxes imposed on amounts payable to
Agent or such Lender at the time Agent or such Lenders becomes a party to this
Agreement, except to the extent that Agent or such Lender’s assignor (if any)
was entitled, at the time of assignment, to receive additional amounts from the
Borrower with respect to such Non-Excluded Taxes pursuant to this paragraph.

b. In addition, the Borrower shall pay any other taxes to the relevant
Governmental Authority in accordance with applicable law.

c. Whenever any Non-Excluded Taxes or other taxes are payable by the Borrower,
as promptly as possible thereafter the Borrower shall send to the Agent a
certified copy of an original official receipt received, if any, by the Borrower
or other documentary evidence showing payment thereof. If the Borrower fails to
pay any Non-Excluded Taxes or other taxes when due to the appropriate taxing
authority or fails to remit to the Agent the required receipts or other required
documentary evidence, the Borrower shall indemnify Agent and Lenders for any
such taxes and for any incremental taxes, interest or penalties that may become
payable by Agent or such Lenders as a result of any such failure.

 

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d. If Agent or any Lender determines, in its sole discretion, that it has
received a refund of any Non-Excluded Taxes or other taxes as to which it has
been indemnified by the Borrower or with respect to which the Borrower has paid
additional amounts pursuant to this Section 10.3, it shall pay over such refund
to the Borrower (but only to the extent of indemnity payments made, or
additional amounts paid, by the Borrower under this Section 10.3 with respect to
the Non-Excluded Taxes or other taxes giving rise to such refund), net of all
out-of-pocket expenses of Lenders and without interest (other than any interest
paid by the relevant Governmental Authority with respect to such refund);
provided that the Borrower, upon the request of Agent or Lenders, as applicable,
agrees to repay the amount paid over to the Borrower (plus any penalties,
interest or other charges imposed by the relevant Governmental Authority) to
Agent or to Lenders in the event the Agent or the Lenders are required to repay
such refund to such Governmental Authority. This paragraph shall not be
construed to require the Lenders to make available its tax returns (or any other
information relating to its taxes which it deems confidential) to the Borrower
or any other Person.

e. The agreements in this Section 10.3 shall survive the termination of this
Agreement and the payment of the Advances and the other Obligations and all
other amounts payable hereunder.

10.3 Payments by Lenders. If Borrower fails to pay any monies (whether taxes,
assessments, insurance premiums or otherwise) due to third persons or entities,
or fails to make any deposits or furnish any required proof of payment or
deposit, or fails to perform any of Borrower’s other covenants under any of the
Loan Documents, then in the Agent’s or any Lender’s discretion and upon three
(3) Business Days’ prior notice to the Borrower, the Agent or such Lender may do
any or all of the following: (a) make any payment which the Borrower failed to
pay or any part thereof; (b) set up or require the Agent to set up such reserves
in Borrower’s loan account as the Agent or such Lender, in its reasonable
discretion, deems necessary to protect the Lenders from the exposure created by
such failure; (c) obtain and maintain insurance policies of the type described
in Section 6.6 and take any action with respect to such policies as the Agent
and Lenders deem prudent; or (d) take any other action, in its reasonable
discretion, deemed necessary to preserve and protect Agent’s and Lenders’
interests and rights under the Loan Documents. Any payments made by the Agent or
any Lender shall not constitute: (a) an agreement by Agent or any Lender to make
similar payments in the future or (b) a waiver by Agent or Lender of any Default
or Event of Default. The Agent and Lenders need not inquire as to, or contest
the validity of, any such expense, tax, security interest, encumbrance or Lien
and the receipt of notice for the payment thereof shall be conclusive evidence
that the same was validly due and owing.

ARTICLE 11

WAIVERS

Except as otherwise provided in the Financing Order, the Borrower waives demand,
protest, notice of protest, notice of payment and nonpayment, and notice of
nonpayment at maturity. The Borrower hereby consents to any extensions of time
of payment or partial payment at, before or after the Termination Date.

 

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ARTICLE 12

NOTICES

Unless otherwise provided herein, all consents, waivers, notices or demands by
any party relating to the Loan Documents shall be in writing and (except for
financial statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be telecopied, personally delivered or
sent by registered or certified mail, postage prepaid, return receipt requested,
or by receipted overnight delivery service to the Borrower, the Agent or to the
Lenders, as the case may be, at their addresses set forth below:

 

If to the Borrower:    RedEnvelope Inc.    149 New Montgomery Street    San
Francisco, California 94105    Attn: Board of Directors    Fax No. (415)
371-1857 With a copy (which shall not constitute notice) to:    Morrison &
Foerster LLP    12531 High Bluff Drive    San Diego, California 92130-2040   
Attn: Christopher M. Forrester    Fax No: (858) 720-5125 If to the Agent:   
Granite Creek Partners Agent, LLC    222 West Adams Street, Suite 1980   
Chicago, Illinois 60606    Attn: Mark Radzik    Fax No. (312) 895-4509 If to
CCC:    Creative Catalogs Corporation    19W661 101st Street    Lemont, Illinois
60439    Attn: John Semmelhack    Fax No. (630) 276-6512 With a copy (which
shall not constitute notice) to:    Pedersen & Houpt    161 N. Clark Street,
Suite 3100    Chicago, Illinois 60601    Attn: John H. Muehlstein    Fax No.
(312) 261-1112

 

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Any party may change the address at which it is to receive notices hereunder by
notice in writing in the foregoing manner given to the other parties. All
notices or demands sent in accordance with this Article 12 shall be deemed
received on the earlier of the date of actual receipt or five (5) calendar days
after the deposit thereof in the mail or on the date telecommunicated if
telecopied.

ARTICLE 13

AGENT

13.1 Appointment. Each Lender hereby designates Granite Creek Partners Agent,
LLC to act as the Agent for such Lender under this Agreement and the Loan
Documents. Each Lender hereby irrevocably authorizes the Agent to take such
action on its behalf under the provisions of this Agreement and the Loan
Documents and to exercise such powers and to perform such duties hereunder and
thereunder as are specifically delegated to or required of the Agent by the
terms hereof and thereof and such other powers as are reasonably incidental
thereto and the Agent shall hold all Collateral, payments of principal and
interest, fees, charges and collections (without giving effect to any collection
days) received by the Agent pursuant to this Agreement, for the ratable benefit
of the Lenders. The Agent may perform any of its duties hereunder by or through
its agents or employees. As to any matters not expressly provided for by this
Agreement (including without limitation, collection of the Note) the Agent shall
not be required to exercise any discretion or take any action, but shall be
required to act or to refrain from acting (and shall be fully protected in so
acting or refraining from acting) upon the instructions of the Lenders, and such
instructions shall be binding; provided, however, that the Agent shall not be
required to take any action which exposes the Agent to liability or which is
contrary to this Agreement or the Loan Documents or applicable law unless the
Agent is furnished with an indemnification reasonably satisfactory to the Agent
with respect thereto.

 

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13.2 Nature of Duties. The Agent shall have no duties or responsibilities except
those expressly set forth in this Agreement and the Loan Documents. Neither the
Agent nor any of its officers, directors, employees or agents shall be
(i) liable for any action taken or omitted by them as such hereunder or in
connection herewith, unless caused by their gross (not mere) negligence or
willful misconduct, or (ii) responsible in any manner for any recitals,
statements, representations or warranties made by Borrower or any officer
thereof contained in this Agreement, or in any of the Loan Documents or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Agent under or in connection with, this Agreement or any of
the Loan Documents, as the case may be, or for the value, validity,
effectiveness, genuineness, due execution, enforceability or sufficiency of this
Agreement, or any of the Loan Documents or for any failure of Borrower to
perform its obligations hereunder. The Agent shall not be under any obligation
to any Lender to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or any of
the Loan Documents, or to inspect the properties, books or records of Borrower.
The duties of the Agent as respects the Advances to the Borrower shall be
mechanical and administrative in nature; the Agent shall not have by reason of
this Agreement a fiduciary relationship in respect of any Lender; and nothing in
this Agreement, expressed or implied, is intended to or shall be so construed as
to impose upon the Agent any obligations in respect of this Agreement except as
expressly set forth herein.

13.3 Lack of Reliance on Agent and Resignation. Independently and without
reliance upon the Agent or any other Lender, each Lender has made and shall
continue to make (i) its own independent investigation of the financial
condition and affairs of Borrower in connection with the making and the
continuance of the Advances hereunder and the taking or not taking of any action
in connection herewith, and (ii) its own appraisal of the creditworthiness of
Borrower. The Agent shall have no duty or responsibility, either initially or on
a continuing basis, to provide any Lender with any credit or other information
with respect thereto, whether coming into its possession before making of the
Advances or at any time or times thereafter except as shall be provided by
Borrower pursuant to the terms hereof. The Agent shall not be responsible to any
Lender for any recitals, statements, information, representations or warranties
herein or in any agreement, document, certificate or a statement delivered in
connection with or for the execution, effectiveness, genuineness, validity,
enforceability, collectibility or sufficiency of this Agreement or any Loan
Document, or of the financial condition of Borrower, or be required to make any
inquiry concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement, the Note, the Loan Documents or the
financial condition of Borrower, or the existence of any Event of Default or any
Default.

The Agent may resign on written notice to the Lenders and the Borrower and upon
such resignation, the Lenders will promptly designate in the Lenders’ sole
discretion a successor of the Agent and such designation shall not require the
consent of the Borrower or the Bankruptcy Court.

 

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Any such successor of the Agent shall succeed to the rights, powers and duties
of the Agent, and the term “Agent” shall mean such successor agent effective
upon its appointment, and the former Agent’s rights, powers and duties as the
Agent shall be terminated, without any other or further act or deed on the part
of such former Agent. After the Agent’s resignation as the Agent, the provisions
of this Article 13 shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was the Agent under this Agreement.

13.4 Certain Rights of Agent. If the Agent shall request instructions from the
Lenders with respect to any act or action (including failure to act) in
connection with this Agreement or any Loan Document, the Agent shall be entitled
to refrain from such act or taking such action unless and until the Agent shall
have received instructions from the Lenders; and the Agent shall not incur
liability to any Person by reason of so refraining. Without limiting the
foregoing, the Lenders shall not have any right of action whatsoever against the
Agent as a result of its acting or refraining from acting hereunder in
accordance with the instructions of the Lenders.

13.5 Reliance. The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any note, writing, resolution, notice, statement, certificate,
telex, teletype or telecopier message, cablegram, order or other document or
telephone message believed by it to be genuine and correct and to have been
signed, sent or made by the proper person or entity, and, with respect to all
legal matters pertaining to this Agreement and the Loan Documents and its duties
hereunder, upon advice of counsel selected by it. The Agent may employ agents
and attorneys-in-fact and shall not be liable for the default or misconduct of
any such agents or attorneys-in-fact selected by the Agent with reasonable care.

13.6 Notice of Default. The Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder or under
the Loan Documents, unless the Agent has received notice from a Lender or
Borrower referring to this Agreement or the Loan Documents, describing such
Default or Event of Default and stating that such notice is a “notice of
default.” In the event that the Agent receives such a notice, the Agent shall
give notice thereof to the Lenders. The Agent shall take such action with
respect to such Default or Event of Default as shall be reasonably directed by
the Lenders; provided, that, unless and until the Agent shall have received such
directions, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interests of the Lenders.

 

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13.7 Indemnification. To the extent the Agent is not reimbursed and indemnified
by the Borrower, each Lender will reimburse and indemnify the Agent in
proportion to its respective portion of the Advances (or, if no Advances are
outstanding, according to its advance commitment percentage), from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever which may be imposed on, incurred by or asserted against the Agent in
performing its duties hereunder, or in any way relating to or arising out of
this Agreement or any Loan Document; provided that, the Lenders shall not be
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from the Agent’s gross (not mere) negligence or willful misconduct.

13.8 Agent in its Individual Capacity. With respect to the obligation of the
Agent to lend under this Agreement, the Advances made by it shall have the same
rights and powers hereunder as any other Lender and as if it were not performing
the duties as the Agent specified herein; and the term “Lender” or any similar
term shall, unless the context clearly otherwise indicates, include the Agent in
its individual capacity as a Lender. The Agent may engage in business with
Borrower as if it were not performing the duties specified herein, and may
accept fees and other consideration from Borrower for services in connection
with this Agreement or otherwise without having to account for the same to the
Lenders.

13.9 Borrower’s Undertaking to Agent. Without prejudice to their respective
obligations to the Lenders under the other provisions of this Agreement,
Borrower hereby undertakes with the Agent to pay to the Agent from time to time
on demand all amounts from time to time due and payable by it for the account of
the Agent or the Lenders or any of them pursuant to this Agreement to the extent
not already paid. Any payment made pursuant to any such demand shall pro tanto
satisfy Borrower’s obligations to make payments for the account of the Lenders
or the relevant one or more of them pursuant to this Agreement.

13.10 No Reliance on Agent’s Customer Identification Program. Each of the
Lenders acknowledges and agrees that neither such Lender nor any of its
Affiliates, participants or assignees, may rely on the Agent to carry out such
Lender’s, Affiliate’s, participant’s or assignee’s customer identification
program, or other obligations required or imposed under or pursuant to the USA
Patriot Act or the regulations thereunder, including the regulations contained
in 31 CFR 103.121 (as hereafter amended or replaced, the “CIP Regulations”), or
any other Anti-Terrorism Law, including any programs involving any of the
following items relating to or in connection with the Borrower, its Affiliates
or their agents, this Agreement, the Loan Documents or the transactions
hereunder or contemplated hereby: (1) any identity verification procedures,
(2) any record keeping, (3) comparisons with government lists, (4) customer
notices or (5) other procedures required under the CIP Regulations or such other
laws.

13.11 Release of Guaranty and Collateral. Each Lender hereby irrevocably
authorizes Agent, on behalf of and for the benefit of Lenders, without further
written consent or authorization from Requisite Lenders, to execute any
documents or instruments necessary to release any Lien encumbering any item of
Collateral that is the subject of a sale or other disposition of assets
permitted hereby or to which Requisite Lenders have otherwise consented.

 

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ARTICLE 14

GENERAL PROVISIONS

14.1 Effectiveness. This Agreement shall be binding and deemed effective on the
Effective Date.

14.2 Successors and Assigns. This Agreement shall bind and inure to the benefit
of the respective successors and assigns of each of the parties; provided,
however, that the Borrower may not assign this Agreement or any rights hereunder
and any prohibited assignment shall be absolutely void. Agent and each Lender
reserves the right to and may from time to time and at any time without the
consent of the Borrower sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in the Agent and each
Lender’s rights and benefits hereunder. In connection therewith, Lender may
disclose all documents and information which each Lender now or hereafter may
have relating to the Borrower or Borrower’s business.

14.3 Section Headings. Headings and numbers have been set forth herein for
convenience only.

14.4 Interpretation. Neither this Agreement nor any uncertainty or ambiguity
herein shall be construed or resolved against any Lender, Agent or the Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by each party and shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly accomplish
the purposes and intentions of the parties hereto.

14.5 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of such provision.

14.6 Amendments in Writing. This Agreement cannot be changed or terminated
orally. This Agreement is the entire agreement between the parties with respect
to the matters contained herein. This Agreement supersedes all prior agreements,
understandings and negotiations, if any, all of which are merged into this
Agreement.

14.7 Counterparts. This Agreement may be executed in any number of counterparts
each of which, when executed and delivered, shall be deemed to be an original
and all of which, when taken together, shall constitute but one and the same
Agreement.

14.8 Survival of Representations and Warranties. All representations and
warranties made herein or in any other Loan Document and in any document,
certificate or statement delivered pursuant hereto or thereto or in connection
herewith or therewith shall survive the execution and delivery of this Agreement
and the Note.

 

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14.9 Absence of Prejudice to the Lenders with Respect to Matters Before the
Bankruptcy Court. Borrower acknowledges that the Bankruptcy Code and Federal
Rules of Bankruptcy Procedure require it to seek Bankruptcy Court authorization
for certain matters that may also be addressed in this Agreement. Borrower will
not without the express consent of Requisite Lenders (a) mention in any pleading
or argument before the Bankruptcy Court in support of, or in any way relating
to, a position that Bankruptcy Court authorization should be granted on the
ground that such authorization is permitted by this Agreement (unless a Person
opposing any such pleading or argument relies on this Agreement to assert or
question the propriety of such) or (b) in any way attempt to support a position
before the Bankruptcy Court based on the provisions of this Agreement. Lenders
shall be free to bring, oppose or support any matter before the Bankruptcy Court
no matter how treated in this Agreement. For the avoidance of doubt, the
Borrower agrees that the Agent and Lenders may credit bid in the Asset Sale.

14.10 Further Assurances. Borrower, at the cost and expense of the Borrower,
shall execute and file all such further agreements, documents and instruments,
and perform such other acts, as the Agent or Lenders may determine is necessary
or advisable with respect to the Liens granted to the Agent on behalf of the
Lenders and the enforcement of the Obligations in connection with this
Agreement, the other Loan Documents and the Financing Order and with respect to
the priority of such Liens purported to be granted pursuant to this Agreement
and the Financing Order.

14.11 Surcharge Waiver. In accordance with and to the extent permitted by the
Financing Order, the Borrower hereby waives any claims to surcharge the
Collateral under Section 506(c) of the Bankruptcy Code during the period in
which the Borrower is authorized to use cash collateral or borrow funds.

14.12 Release. At such time as Borrower has repaid all of the Liabilities and
this Agreement has terminated, Borrower shall deliver to each Lender a release,
in form and substance satisfactory to Agent, of all obligations and liabilities
of each Lender and its officers, directors, employees, agents, parents,
subsidiaries and affiliates to such Borrower.

ARTICLE 15

SBIC REGULATORY PROVISIONS

At the same time Borrower delivers its financial statements to Agent pursuant to
Section 6.1, and at such other times as Agent reasonably requests, Borrower
shall deliver to GCFC, in its capacity as a SBIC Holder, a written statement
certified by an Authorized Signator of Borrower describing in reasonable detail
the use of the proceeds of the Advances. In addition to any other rights granted
hereunder, the Borrower shall grant GCFC and the SBA access to the Borrower’s
books and records for the purpose of verifying the use of such proceeds and
verifying the certifications made in SBA Forms 480 and 652 and for the purpose
of determining whether the principal business activity of Borrower continues to
constitute an eligible business activity (within the meaning of the SBIC
Regulations).

 

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Upon the occurrence of a Regulatory Violation or in the event that any SBIC
Holder determines in its sole discretion that a Regulatory Violation has
occurred, in addition to any other rights and remedies to which it may be
entitled as a Lender (whether under this Agreement or otherwise), such SBIC
Holder shall have the right, to the extent required under the SBIC Regulations,
to demand the immediate repayment of the Obligations owed to such SBIC Holder at
a price equal to the purchase price paid for the Note, plus all accrued interest
thereon, minus any amounts previously repaid to such SBIC Holder, by delivering
written notice of such demand to Borrower. Borrower shall pay the purchase price
for the Note by a cashier’s or certified check or by wire transfer of
immediately available funds to each such SBIC Holder demanding repurchase within
thirty (30) days after Borrower’s receipt of the demand notice, and upon such
payment, each such SBIC Holder shall deliver the Note repurchased duly endorsed
for transfer or accompanied by duly executed forms of assignment.

ARTICLE 16

CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

THE VALIDITY OF THE LOAN DOCUMENTS, THEIR CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE PARTIES AGREE
THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THE LOAN DOCUMENTS
SHALL BE TRIED AND LITIGATED ONLY IN THE BANKRUPTCY COURT, AND/OR THE FEDERAL
COURTS WHOSE VENUE INCLUDES THE STATE OF CALIFORNIA, NORTHERN DISTRICT. THE
BORROWER AND EACH LENDER EACH WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE
LAW, THE RIGHT TO A TRIAL BY JURY IN ANY PROCEEDING UNDER THE LOAN DOCUMENTS OR
RELATING TO THE DEALINGS OF THE BORROWER, THE AGENT AND EACH LENDER AND ANY
RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF “FORUM NON CONVENIENS” OR TO
OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS
ARTICLE 15. THE BORROWER, THE AGENT AND EACH LENDER EACH AGREES THAT SERVICE OF
PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY
THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF
MAIL), POSTAGE PREPAID, TO SUCH PARTY, AS THE CASE MAY BE AT ITS ADDRESS SET
FORTH IN ARTICLE 12 OR AT SUCH OTHER ADDRESS OF WHICH THE PARTY SHALL HAVE BEEN
NOTIFIED PURSUANT THERETO.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders have executed this
Agreement as of the date first above written.

 

BORROWER:     REDENVELOPE INC.       By:   /s/ Philip Neri       Name:   Philip
Neri       Title:   Chief Financial Officer

 

AGENT:     GRANITE CREEK PARTNERS AGENT, LLC       By:   /s/ Mark Radzik      
Name:   Mark Radzik       Title:   Managing Partner

 

LENDERS:     CREATIVE CATALOGS CORPORATION       By:   /s/ John Semmelhack      
Name:   John Semmelhack       Title:   Chief Executive Officer       Advance
Commitment: $3,500,000

 

    GRANITE CREEK FLEXCAP I, L.P.     By:   Granite Creek GP FlexCap I, L.L.C.  
  Its:   General Partner         By:   /s/ Mark Radzik         Name:   Mark
Radzik         Title:   Managing Partner       Advance Commitment: $1,000,000

 

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