Exhibit 10.59
LOAN AND SECURITY AGREEMENT
WELLS FARGO RETAIL FINANCE, LLC
The Lender
REDENVELOPE, INC.
The Borrower
June 26, 2006

 

--------------------------------------------------------------------------------

 

         
Article 1 - Definitions:
    1  
Article 2 - The Revolving Credit:
    16  
2.1. Establishment of Revolving Credit
    16  
2.2. Increase in Revolving Credit Ceiling
    16  
2.3. Advances in Excess of Borrowing Base (OverLoans)
    17  
2.4. Risks of Value of Collateral
    17  
2.5. Commitment to Make Revolving Credit Loans and Support Letters of Credit
    17  
2.6. Revolving Credit Loan Requests
    18  
2.7. Suspension of Revolving Credit
    19  
2.8. Making of Revolving Credit Loans
    19  
2.9. The Loan Account
    19  
2.10. The Revolving Credit Note
    20  
2.11. Payment of The Loan Account
    20  
2.12. Interest on Revolving Credit Loans
    21  
2.13. Closing Fee
    22  
2.14. Unused Line Fee
    22  
2.15. Service Fee
    22  
2.16. Early Termination Fee
    22  
2.17. Lender’s Discretion
    22  
2.18. Procedures For Issuance of L/C’s
    23  
2.19. Fees For L/C’s
    24  
2.20. Concerning L/C’s
    24  
2.21. Changed Circumstances
    25  
Article 3 - Conditions Precedent:
    26  
3.1. Corporate Due Diligence
    26  
3.2. Opinion
    26  
3.3. Additional Documents
    27  
3.4. Officers’ Certificates
    27  
3.5. Representations and Warranties
    28  
3.6. All Fees and Expenses Paid
    28  
3.7. Borrower Not In Default
    28  
3.8. No Adverse Change
    28  
3.9. Minimum Availability
    28  
3.10. Benefit of Conditions Precedent
    28  
Article 4 - General Representations, Covenants and Warranties:
    28  

ii

--------------------------------------------------------------------------------

 

         
4.1. Payment and Performance of Liabilities
    29  
4.2. Due Organization; Authorization; No Conflicts
    29  
4.3. Trade Names
    30  
4.4. Infrastructure
    30  
4.5. Locations
    30  
4.6. Encumbrances
    31  
4.7. Indebtedness
    31  
4.8. Insurance
    31  
4.9. Licenses
    32  
4.10. Leases
    32  
4.11. Requirements of Law
    32  
4.12. Labor Relations
    33  
4.13. Maintain Properties
    33  
4.14. Taxes
    34  
4.15. No Margin Stock
    34  
4.16. ERISA
    35  
4.17. Hazardous Materials
    35  
4.18. Litigation
    35  
4.19. Dividends; Investments; Corporate Action
    36  
4.20. Loans
    36  
4.21. Protection of Assets
    36  
4.22. Line of Business
    37  
4.23. Affiliate Transactions
    37  
4.24. Further Assurances
    37  
4.25. Adequacy of Disclosure
    38  
4.26. No Restrictions on Liabilities
    38  
4.27. Other Covenants
    38  
Article 5 - Financial Reporting and Performance Covenants:
    38  
5.1. Maintain Records
    38  
5.2. Access to Records
    39  
5.3. Immediate Notice to Lender
    39  
5.4. Borrowing Base Certificate
    40  
5.5. Monthly Reports
    40  
5.6. Annual Reports
    40  
5.7. Officers’ Certificates
    41  

iii

--------------------------------------------------------------------------------

 

         
5.8. Inventories, Appraisals, and Audits
    41  
5.9. Additional Financial Information
    42  
5.10. Financial Performance Covenant
    43  
Article 6 - Use of Collateral:
    43  
6.1. Use of Inventory Collateral
    43  
6.2. Inventory Quality
    43  
6.3. Adjustments and Allowances
    43  
6.4. Validity of Accounts
    44  
6.5. Notification to Account Debtors
    44  
Article 7 - Cash Management. Payment of Liabilities:
    44  
7.1. The Concentration, Blocked, and Operating Accounts
    44  
7.2. Credit Card and Other Credit Financing Receipts
    44  
7.3. Proceeds and Collections
    45  
7.4. Payment of Liabilities
    45  
7.5. The Operating Account
    46  
Article 8 - Grant of Security Interest:
    46  
8.1. Grant of Security Interest
    46  
8.2. Extent and Duration of Security Interest
    47  
Article 9 - Lender As Borrower’s Attorney-In-Fact:
    47  
9.1. Appointment as Attorney-In-Fact
    47  
9.2. No Obligation to Act
    48  
Article 10 - Events of Default:
    48  
10.1. Failure to Pay the Revolving Credit
    48  
10.2. Failure To Make Other Payments
    48  
10.3. Failure to Perform Covenant or Liability (No Grace Period)
    49  
10.4. Failure to Perform Covenant or Liability (Grace Period)
    49  
10.5. Misrepresentation
    49  
10.6. Extension of Lease for Distribution Facility
    49  
10.7. Acceleration of Other Debt; Breach of Lease
    49  
10.8. Default Under Other Agreements
    49  
10.9. Uninsured Casualty Loss
    49  
10.10. Attachment; Judgment; Restraint of Business
    50  
10.11. Business Failure
    50  
10.12. Bankruptcy
    50  
10.13. Indictment - Forfeiture
    50  

iv

--------------------------------------------------------------------------------

 

         
10.14. Challenge to Loan Documents
    50  
10.15. Change in Control
    51  
Article 11 - Rights and Remedies Upon Default:
    51  
11.1. Acceleration
    51  
11.2. Rights of Enforcement
    51  
11.3. Sale of Collateral
    51  
11.4. Occupation of Business Location
    52  
11.5. Grant of Nonexclusive License
    52  
11.6. Assembly of Collateral
    52  
11.7. Rights and Remedies
    52  
Article 12 - Notices:
    53  
12.1. Notice Addresses
    53  
12.2. Notice Given
    54  
12.3. Wire Instructions. Notice Given
    54  
Article 13 - Term:
    54  
13.1. Termination of Revolving Credit
    54  
13.2. Actions On Termination
    54  
Article 14 - General:
    55  
14.1. Protection of Collateral
    55  
14.2. Confidentiality
    55  
14.3. Publicity
    56  
14.4. Successors and Assigns
    56  
14.5. Severability
    56  
14.6. Amendments. Course of Dealing
    57  
14.7. Power of Attorney
    57  
14.8. Application of Proceeds
    57  
14.9. Increased Costs
    57  
14.10. Costs and Expenses of the Lender
    58  
14.11. Copies and Facsimiles
    58  
14.12. Massachusetts Law
    58  
14.13. Consent to Jurisdiction
    59  
14.14. Indemnification
    59  
14.15. Rules of Construction
    59  
14.16. Intent
    61  
14.17. Right of Set-Off
    61  

v

--------------------------------------------------------------------------------

 

         
14.18. Pledges To Federal Reserve Banks
    62  
14.19. Patriot Act Compliance
    62  
14.20. Maximum Interest Rate
    62  
14.21. Waivers
    62  

vi

--------------------------------------------------------------------------------

 

EXHIBITS

         
2.10
  :   Revolving Credit Note
4.2
  :   Organizational ID; Affiliates
4.3
  :   Trade Names
4.5
  :   Locations
4.6
  :   Permitted Encumbrances
4.7
  :   Permitted Indebtedness
4.8
  :   Insurance
4.10
  :   Capital Leases; Other Leases
4.14
  :   Taxes
4.18
  :   Litigation
5.4
  :   Borrowing Base Certificate
5.5
  :   Monthly Financial Reporting Requirements
7.2
  :   Credit Card Arrangements

vii

--------------------------------------------------------------------------------

 

LOAN AND SECURITY AGREEMENT
June 26, 2006
THIS AGREEMENT is made between
     WELLS FARGO RETAIL FINANCE, LLC (in such capacity, herein the “Lender”), a
Delaware limited liability company with offices at One Boston Place — 19th
Floor, Boston, Massachusetts 02108;
     and
     REDENVELOPE, INC. (the “Borrower”), a Delaware corporation with its
principal executive offices at 149 Montgomery Street, San Francisco, California
94105,
     in consideration of the mutual covenants contained herein and benefits to
be derived herefrom,
WITNESSETH:
Article 1 — Definitions:
     As used herein, the following terms have the following meanings or are
defined in the section of this Agreement so indicated:
     "Account Debtor”: Has the meaning given that term in the UCC.
     "Accounts” and “Accounts Receivable”: Include, without limitation,
“accounts” as defined in the UCC, and also all: accounts, accounts receivable,
receivables, and rights to payment (whether or not earned by performance) for:
property that has been or is to be sold, leased, licensed, assigned, or
otherwise disposed of; services rendered or to be rendered; a policy of
insurance issued or to be issued; a secondary obligation incurred or to be
incurred; energy provided or to be provided; for the use or hire of a vessel;
arising out of the use of a credit or charge card or information contained on or
used with that card; winnings in a lottery or other game of chance; and also all
Inventory which gave rise thereto, and all rights associated with such
Inventory, including the right of stoppage in transit; all reclaimed, returned,
rejected or repossessed Inventory (if any) the sale of which gave rise to any
Account.
     "ACH”: Automated clearing house.
     "Affiliate”: The following:
     (a) With respect to any two Persons, a relationship in which one Person,
directly or indirectly, through one or more intermediaries, is Controlled by,
Controls, or is under common Control with the other Person.
     (b) Any Person which: could have such enterprise’s tax returns or financial
statements consolidated with the Borrower’s; could be a member of the same
controlled group of corporations (within the meaning of Section 1563(a)(1),
(2) and (3) of the Internal Revenue Code of 1986, as amended from time to time)
of which the Borrower is a member; or controls or is controlled by the Borrower.
     "Applicable Law”: As to any Person: (i) All statutes, rules, regulations,
orders, or other requirements having the force of law and (ii) all court orders
and injunctions, arbitrator’s decisions, and/or similar rulings, in each
instance ((i) and (ii)) of or by any federal, state, municipal, and other
governmental authority, or court, tribunal, panel, or other body which has or
claims jurisdiction over such Person, or any property of such Person, or of any
other Person for whose conduct such Person would be responsible.

1

--------------------------------------------------------------------------------

 

     “Appraisal Percentage”: Means 85%, provided however, that so long as
Borrower is not In Default, upon the Effective Date of any Seasonal Advance Rate
Request given by the Borrower to the Lender in any calendar year, the Appraisal
Percentage shall be 90% until the earlier of (i) sixty (60) days from such
Effective Date or (ii) December 15th of such year.
     “Availability”: The result of the following:
     (i) The lesser of
     (A) The Revolving Credit Ceiling.
     or
     (B) The Borrowing Base.
     Minus
     (ii) The aggregate unpaid balance of the Loan Account.
     Minus
     (iii) The aggregate undrawn Stated Amount of all then outstanding L/C’s.
     Minus
     (iv) The aggregate of the Availability Reserves.
     “Availability Reserves”: Such reserves as the Lender from time to time
determines in the Lender’s reasonable discretion as being appropriate to reflect
the impediments to the Lender’s ability to realize upon the Collateral, or to
address the anticipated expenditure of funds or the incurrence of obligations by
the Lender, which in each case are made, undertaken, or incurred in the Lender’s
reasonable discretion (i) to protect, preserve, or maintain, directly or
indirectly, the Collateral or the collateral interests granted by the Borrower,
including the Borrower’s business assets and infrastructure, such as with
respect to the payment of rent under any of the Borrower’s leases or the payment
of salary or payroll to any of the Borrower’s employees, (ii) to implement and
exercise the Lender’s rights upon default with respect to any Collateral granted
by the Borrower, or (iii) to otherwise further and protect the Lender’s
interests.
     “Average Excess Availability”: Means, for the subject period, the aggregate
of the amount of Availability on each day in the period, divided by the number
of days in the subject period.
     “Bank Product Agreements”: Those certain cash management service agreements
entered into from time to time by the Borrower in connection with any of the
Bank Products.
     “Bank Product Obligations”: All obligations, liabilities, contingent
reimbursement obligations, fees, and expenses owing by the Borrower to the
Lender, Wells Fargo Bank, N. A., or any of their Affiliates pursuant to or
evidenced by the Bank Product Agreements and irrespective of whether for the
payment of money, whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising, and including all such amounts
that the Borrower is obligated to reimburse to the Lender as a result of the
Lender purchasing participations or executing indemnities or reimbursement
obligations with respect to the Bank Products provided to the Borrower pursuant
to the Bank Product Agreements.
     “Bank Products”: Any service or facility extended to the Borrower by Wells
Fargo Bank, N. A. or any of its Affiliates, including: (a) credit cards,
(b) credit card processing services, (c) debit cards, (d) purchase

2

--------------------------------------------------------------------------------

 

cards, (e) ACH transactions, (f) cash management, including controlled
disbursement, accounts or services, or (g) hedge agreements.
     “Bank Product Reserves”: As of any date of determination, the amount of
reserves that the Lender has established (based upon Wells Fargo Bank, N. A.’s
or its Affiliate’s reasonable determination of the credit exposure in respect of
then extant Bank Products) for Bank Product Obligations then provided or
outstanding.
     “Bankruptcy Code”: Title 11, U.S.C., as amended from time to time.
     “Blocked Account”: Is defined in Section 7.1(a)(ii).
     “Blocked Account Agreement”: An Agreement, in form reasonably satisfactory
to the Lender, which Agreement recognizes the Lender’s Collateral Interest in
the contents of the Blocked Account and provides that such contents shall be
transferred only to the Concentration Account or as otherwise instructed by the
Lender.
     “Borrower”: Is defined in the Preamble.
     “Borrowing Base”: The aggregate of the following:
     The face amount of Eligible Credit Card Receivables multiplied by
Eighty-five (85%).
     Plus
     The lesser of (a) the Cost of Eligible Inventory (net of Inventory
Reserves) multiplied by the Inventory Advance Rate, or (b) Appraisal Percentage
of the NRLV.
     “Borrowing Base Certificate”: Is defined in Section 5.4.
     “Business Day”: Any day other than (a) a Saturday or Sunday; (b) any day on
which banks in Boston, Massachusetts or in San Francisco, California generally
are not open to the general public for the purpose of conducting commercial
banking business; or (c) a day on which the principal office of the Lender is
not open to the general public to conduct business.
     “Business Plan”: The Borrower’s business plan, delivered to the Lender
prior to the Closing Date, and any revision, amendment, or update of such
business plan to which the Lender has provided its written sign-off.
     “Capital Expenditures”: The expenditure of funds or the incurrence of
liabilities which may be capitalized in accordance with GAAP.
     “Capital Lease”: Any lease which may be capitalized in accordance with
GAAP.
     “Cash Dominion Event”: Either (i) the failure of the Borrower to maintain
Availability in an amount greater than or equal $4,000,000.00 at any time, or
(ii) the Borrower becoming In Default or the occurrence of any Event of Default.
     “Cash Equivalents”: Any of the following:
     (a) marketable direct obligations issued by, or unconditionally guaranteed
by, the United States or obligations of a United States federal agency or
government sponsored enterprises, in each case maturing within 1 year from the
date of acquisition thereof;

3

--------------------------------------------------------------------------------

 

     (b) marketable direct obligations issued by any state of the United States
or any political subdivision of any such state or any public instrumentality
thereof maturing within 1 year from the date of acquisition thereof and, at the
time of acquisition, having one of the two highest ratings obtainable from
either Standard & Poor’s Rating Group (“S&P”) or Moody’s Investors Service, Inc.
(“Moody’s”);
     (c) commercial paper maturing no more than 270 days from the date of
creation thereof and, at the time of acquisition, having a rating of at least
A-1 from S&P or at least P-1 from Moody’s;
     (d) certificates of deposit or bankers’ acceptances maturing within 1 year
from the date of acquisition thereof issued by any bank organized under the laws
of the United States or any state thereof having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000;
     (e) Deposit Accounts maintained with (i) any bank that satisfies the
criteria described in clause (d) above, or (ii) any other bank organized under
the laws of the United States or any state thereof so long as the amount
maintained with any such other bank is less than or equal to $100,000 and is
insured by the Federal Deposit Insurance Corporation;
     (f) Master Notes, Repurchase Agreements (collateralized at least 102% by
U.S. Government securities) and Corporate Notes and floating rate notes which
are rated A3/A- or better by S&P and Moody’s, and
     (g) Investments in money market funds substantially all of whose assets are
invested in the types of assets described in clauses (a) through (f) above.
     “Change in Control”: The occurrence of any of the following, unless such
event is on terms and conditions acceptable to the Lender, in its sole and
exclusive discretion, and the Lender has confirmed its approval by providing
written assent thereto:
     (a) Any change in the beneficial ownership (within the meaning of
Rule 13d-3 of the Exchange Act) by any group of persons (within the meaning of
the Exchange Act) or by any Person, of 25% or more of the issued and outstanding
capital stock of the Borrower having the right, under ordinary circumstances, to
vote for the election of directors of the Borrower, that results in such Person
or group of Persons becoming the largest shareholder of Borrower.
     (b) More than half of the persons who were directors of the Borrower on the
Closing Date (together with any new directors whose nomination for election by
the equity holders of the Borrower, was approved by a vote of at least a
majority of the directors then still in office who were directors on the Closing
Date or approved in this manner), cease, for any reason other than death or
disability, to be directors of the Borrower.
     “Chattel Paper”: Has the meaning given that term in the UCC.
     “Clean Down Event”: Is defined in Section 5.8.
     “Closing Date”: June 26, 2006.
     “Closing Fee”: Is defined in Section 2.13.
     “Collateral”: Is defined in Section 8.1.
     “Collateral Interest”: Any interest in property to secure an obligation,
including, without limitation, a security interest, mortgage, and deed of trust.
     “Concentration Account”: Is defined in Section 7.1.

4

--------------------------------------------------------------------------------

 

     “Control”: The possession, directly or indirectly, of the power (a) to vote
50% or more of the securities having ordinary voting power for the election of
directors of a Person, or (b) to direct or cause the direction of the management
or policies of a Person, whether through the ability to exercise voting power,
by contract or otherwise. The terms “Controlling” and “Controlled” have meanings
correlative thereto.
     “Cost”: The lower of (a) or (b), where:
     (a) is the calculated cost of purchases, based upon the Borrower’s
accounting practices, known to the Lender, which practices are in effect on the
date on which this Agreement was executed as such calculated cost is determined
from: invoices received by the Borrower; the Borrower’s purchase journal; or the
Borrower’s stock ledger.
     (b) is the cost equivalent of the lowest ticketed or promoted price at
which the subject Inventory is then offered to the public, after all mark-downs
(whether or not such price is then reflected on the Borrower’s accounting
system), which cost equivalent is determined in accordance with the retail
method of accounting, reflecting the Borrower’s historic business practices.
     (“Cost” does not include inventory capitalization costs or other
non-purchase price charges (such as freight) used in the Borrower’s calculation
of cost of goods sold).
     “Costs of Collection”: Includes, without limitation, all attorneys’
reasonable fees and reasonable out-of-pocket expenses incurred by the Lender’s
attorneys, and all reasonable out-of-pocket costs incurred by the Lender in the
administration of the Liabilities and/or the Loan Documents, including, without
limitation, reasonable costs and expenses associated with travel on behalf of
the Lender, where such costs and expenses are directly or indirectly related to
or in respect of the Lender’s: administration and management of the Liabilities;
negotiation, documentation, and amendment of any Loan Document; or efforts to
preserve, protect, collect, or enforce the Collateral, the Liabilities, and/or
the Lender’s Rights and Remedies and/or any of the rights and remedies of the
Lender against or in respect of any guarantor or other person liable in respect
of the Liabilities (whether or not suit is instituted in connection with such
efforts). The Costs of Collection are Liabilities, and at the Lender’s option
may bear interest at the then effective Prime Margin Rate.
     “Customer Credit Liability”: Gift certificates, gift cards, customer
deposits, merchandise credits, layaway obligations, frequent shopping programs,
and similar liabilities of the Borrower to its retail customers and prospective
customers.
     “DDA”: Any checking or other demand daily depository account maintained by
the Borrower other than any Exempt DDA.
     “Deposit Account”: Has the meaning given that term in the UCC and also
includes all demand, time, savings, passbook, or similar accounts maintained
with a bank.
     “Documents”: Has the meaning given that term in the UCC.
     “Documents of Title”: Has the meaning given that term in the UCC.
     “Effective Date”: Means the effective date of any increase to the Appraisal
Percentage and the Inventory Advance Rate set forth by Borrower in any Seasonal
Advance Rate Request to Lender, which date shall be not less than Fifteen
(15) days after receipt by the Lender of such Seasonal Advance Rate Request.
     “Eligible Credit Card Receivables”: Accounts due on a non-recourse basis
from major credit card processors (which, if due on account of a private label
credit card program, are deemed in the discretion of the Lender to be eligible)
which are outstanding fewer than Six (6) days.

5

--------------------------------------------------------------------------------

 

     “Eligible In-Transit Inventory” means, as of any date of determination
thereof, without duplication of other Eligible Inventory, Inventory:
     (a) Which has been shipped from a location for receipt by Borrower but
which has not yet been delivered to such Borrower;
     (b) For which the purchase order is in the name of Borrower and title has
passed to such Borrower;
     (c) For which the document of title reflects a Borrower as consignee or, if
requested by the Lender, names the Lender as consignee, and in each case as to
which the Lender has control over the documents of title which evidence
ownership of the subject Inventory (such as, if requested by the Lender, by the
delivery of a customs broker agreement in form and substance reasonably
satisfactory to the Lender)
     (d) Which has been paid for in full by the Borrower;
     (e) Which is insured to the reasonable satisfaction of the Lender;
     (f) Which has not been in transit for more than sixty (60) days; and
     (g) Which otherwise would constitute Eligible Inventory.
     “Eligible In-Transit Inventory Cap” means $1,000,000.00 provided however,
that so long as Borrower is not In Default, upon the Effective Date of any
Seasonal Advance Rate Request given by the Borrower to the Lender in any
calendar year, $2,000,000.00 until the earlier of (i) sixty (60) days from such
Effective Date or (ii) December 15th of such year.
     “Eligible Inventory”: without duplication, (i) Eligible In-Transit
Inventory in the aggregate amount not to exceed the Eligible In-Transit
Inventory Cap and (ii) all of the following: Such of the Borrower’s Inventory,
at such locations, and of such types, character, qualities and quantities, as
the Lender, in its reasonable discretion, from time to time determines to be
acceptable for borrowing, as to which Inventory, the Lender has a perfected
security interest which is prior and superior to all security interests, claims,
and Encumbrances (other than Permitted Encumbrances).
     “Employee Benefit Plan”: As defined in ERISA.
     “Encumbrance”: Each of the following:
     (a) A Collateral Interest or agreement to create or grant a Collateral
Interest; the interest of a lessor under a Capital Lease; conditional sale or
other title retention agreement; sale of accounts receivable or chattel paper;
or other arrangement pursuant to which any Person is entitled to any preference
or priority with respect to the property or assets of another Person or the
income or profits of such other Person; each of the foregoing whether consensual
or non-consensual and whether arising by way of agreement, operation of law,
legal process or otherwise.
     (b) The filing of any financing statement under the UCC or comparable law
of any jurisdiction.
     “End Date”: The date upon which all of the following conditions are met:
(a) all payment Liabilities described in Section 13.2(a) have been paid in full
and (b) all obligations of the Lender to make loans and advances and to provide
other financial accommodations to the Borrower hereunder shall have been
irrevocably terminated and (c) those arrangements concerning L/C’s, Bank
Products, Bank Product Obligations, and indemnification obligations which are
described in Sections 13.2(b) and 13.2(d) have been made.

6

--------------------------------------------------------------------------------

 

     “Environmental Laws”: All of the following:
     (a) Applicable Law which regulates or imposes any standard of conduct or
liability on account of or in respect to environmental protection matters,
including, without limitation, Hazardous Materials, as are now or hereafter in
effect.
     (b) The common law relating to damage to Persons or property from Hazardous
Materials.
     “Equipment”: Includes, without limitation, “equipment” as defined in the
UCC, and also all furniture, store fixtures, motor vehicles, rolling stock,
machinery, office equipment, plant equipment, tools, dies, molds, and other
goods, property, and assets which are used and/or were purchased for use in the
operation or furtherance of the Borrower’s business, and any and all accessions
or additions thereto, and substitutions therefore.
     “ERISA”: The Employee Retirement Income Security Act of 1974, as amended.
     “ERISA Affiliate”: Any Person which is under common control with the
Borrower within the meaning of Section 4001 of ERISA or is part of a group which
includes the Borrower and which would be treated as a single employer under
Section 414 of the Internal Revenue Code of 1986, as amended.
     “Events of Default”: Is defined in Article 10. An “Event of Default” shall
be deemed to have occurred and to be continuing unless and until that Event of
Default has been duly waived by the Lender.
     “Exchange Act ”: Means, the Securities Exchange Act of 1934, as amended.
     “Fee Letter”: Means that certain Fee letter dated June 26 2006 entered into
by and between the Lender and the Borrower.
     “Fiscal”: When followed by “month” or “quarter,” the relevant fiscal period
based on the Borrower’s fiscal year and accounting conventions (e.g. reference
to “Fiscal 2007” is to the fiscal month of the Borrower’s fiscal year ending in
2007). When followed by reference to a specific year, the fiscal year which ends
in a month of the year to which reference is being made (e.g. if the Borrower’s
fiscal year ends in March 2007, reference to that year would be to the
Borrower’s “Fiscal 2007”).
     “Fixtures”: Has the meaning given that term in the UCC.
     “GAAP”: Principles which are consistent with those promulgated or adopted
by the Financial Accounting Standards Board and its predecessors (or successors)
in effect and applicable to that accounting period in respect of which reference
to GAAP is being made.
     “General Intangibles”: Includes, without limitation, “general intangibles”
as defined in the UCC; and also all: rights to payment for credit extended;
deposits; amounts due to the Borrower; credit memoranda in favor of the
Borrower; warranty claims; tax refunds and abatements; insurance refunds and
premium rebates; all means and vehicles of investment or hedging, including,
without limitation, options, warrants, and futures contracts; records; customer
lists; telephone numbers; goodwill; causes of action; judgments; payments under
any settlement or other agreement; royalties; license and/or franchise fees;
licenses; franchises; license agreements, including all rights of the Borrower
to enforce same; permits, certificates of convenience and necessity, and similar
rights granted by any governmental authority; patents, patent applications,
patents pending, and other intellectual property; internet addresses and domain
names; developmental ideas and concepts; proprietary processes; blueprints,
drawings, designs, diagrams, plans, reports, and charts; catalogs; manuals;
technical data; computer software programs (including the source and object
codes therefore), computer records, computer software, rights of access to
computer record service bureaus, service bureau computer contracts, and computer
data; tapes, disks, semi-conductor chips and printouts; trade secret rights,
copyrights, mask work rights and interests, and derivative works and interests;
user, technical reference, and

7

--------------------------------------------------------------------------------

 

other manuals and materials; trade names, trademarks, service marks, and all
goodwill relating thereto; applications for registration of the foregoing; and
all other general intangible property of the Borrower in the nature of
intellectual property, proposals, cost estimates, and reproductions on paper, or
otherwise, of any and all concepts or ideas, and any matter related to, or
connected with, the design, development, manufacture, sale, marketing, leasing,
or use of any or all property produced, sold, or leased, by the Borrower or
credit extended or services performed, by the Borrower, whether intended for an
individual customer or the general business of the Borrower, or used or useful
in connection with research by the Borrower.
     “Goods”: Has the meaning given that term in the UCC, and also includes all
things movable when a security interest therein attaches and also all computer
programs embedded in goods and any supporting information provided in connection
with a transaction relating to the program if (i) the program is associated with
the goods in such manner that it customarily is considered part of the goods or
(ii) by becoming the owner of the goods, a Person acquires a right to use the
program in connection with the goods.
     “Hazardous Materials”: Any (a) substance which is defined or regulated as a
hazardous material in or under any Environmental Law and (b) oil in any physical
state.
     “Indebtedness”: All indebtedness and obligations of or assumed by any
Person on account of or in respect to any of the following:
     (a) In respect of money borrowed (including any indebtedness which is
non-recourse to the credit of such Person but which is secured by an Encumbrance
on any asset of such Person) whether or not evidenced by a promissory note,
bond, debenture or other written obligation to pay money.
     (b) In connection with any letter of credit or acceptance transaction
(including, without limitation, the face amount of all letters of credit and
acceptances issued for the account of such Person or reimbursement on account of
which such Person would be obligated).
     (c) In connection with the sale or discount of accounts receivable or
chattel paper of such Person.
     (d) On account of deposits or advances.
     (e) As lessee under Capital Leases.
     (f) In connection with any sale and leaseback transaction.
     “Indebtedness” also includes:
     (x) Indebtedness of others secured by an Encumbrance on any asset of such
Person, whether or not such Indebtedness is assumed by such Person.
     (y) Any guaranty, endorsement, suretyship or other undertaking pursuant to
which that Person may be liable on account of any obligation of any third party
(including, without limitation, the posting of any bond to secure a Person’s
performance under any agreement).
     (z) The Indebtedness of a partnership or joint venture for which such
Person is liable as a general partner or joint venturer.
     (For the avoidance of doubt, “Indebtedness” shall not include Customer
Credit Liability)
     “In Default”: Any occurrence, circumstance, or state of facts with respect
to the Borrower which (a) is an Event of Default; or (b) would become an Event
of Default if any requisite notice were given and/or any requisite period of
time were to run and such occurrence, circumstance, or state of facts were not
absolutely

8

--------------------------------------------------------------------------------

 

cured within any applicable grace period, provided that the Borrower shall no
longer be deemed “In Default” if such occurrence, circumstance, or state of
facts has been cured prior to it becoming an Event of Default.
     “Indemnified Person”: Is defined in Section 14.14.
     “Insolvency Proceeding”: Any proceeding commenced by or against any Person
under any provision of the Bankruptcy Code or under any other state or federal
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
     “Instruments”: Has the meaning given that term in the UCC.
     “Interest Payment Date”: With reference to:
          Each Libor Loan: The last day of the Interest Period relating thereto;
the Termination Date; and the End Date.
          Each Prime Margin Loan: The first day of each month; the Termination
Date; and the End Date.
     “Interest Period”: The following:
     (a) With respect to each Libor Loan: Subject to Subsection (c), below, the
period commencing on the date of the making or continuation of, or conversion
to, the subject Libor Loan and ending one, two, or three months thereafter, as
the Borrower may elect by notice (pursuant to Section 2.6) to the Lender.
     (b) With respect to each Prime Margin Loan: Subject to Subsection (c),
below, the period commencing on the date of the making or continuation of or
conversion to such Prime Margin Loan and ending on that date (i) as of which the
subject Prime Margin Loan is converted to a Libor Loan, as the Borrower may
elect by notice (pursuant to Section 2.6) to the Lender, or (ii) on which the
subject Prime Margin Loan is paid by the Borrower.
     (c) The setting of Interest Periods is in all instances subject to the
following:
     (i) Any Interest Period for a Prime Margin Loan which would otherwise end
on a day which is not a Business Day shall be extended to the next succeeding
Business Day.
     (ii) Any Interest Period for a Libor Loan which would otherwise end on a
day that is not a Business Day shall be extended to the next succeeding Business
Day, unless that succeeding Business Day is in the next calendar month, in which
event such Interest Period shall end on the last Business Day of the month
during which the Interest Period ends.
     (iii) Subject to Subsection (iv), below, any Interest Period applicable to
a Libor Loan, which Interest Period begins on a day for which there is no
numerically corresponding day in the calendar month during which such Interest
Period ends, shall end on the last Business Day of the month during which that
Interest Period ends.
     (iv) Any Interest Period which would otherwise end after the Termination
Date shall end on the Termination Date.
     (v) The number of Interest Periods in effect at any one time is subject to
Section 2.12(e).
     “Inventory”: Includes, without limitation, “inventory” as defined in the
UCC and also all: (a) Goods which are held by a Person for sale or to be
furnished under a contract of service; are furnished by a Person

9

--------------------------------------------------------------------------------

 

under a contract of service; or consist of raw materials, work in process, or
materials used or consumed in a business; (b) Goods of said description in
transit; (c) Goods of said description which are returned, repossessed and
rejected; (d) packaging, advertising, and shipping materials related to any of
the foregoing; (e) the Borrower’s rights, if any, in and to all names, marks,
and General Intangibles affixed or to be affixed or associated thereto; and
(f) Documents and Documents of Title which represent any of the foregoing.
     “Inventory Advance Rate”: Means 62%, provided however, that so long as
Borrower is not In Default, upon the Effective Date of any Seasonal Advance Rate
Request given by the Borrower to the Lender in any calendar year, the Inventory
Advance Rate shall be 76% until the earlier of (i) sixty (60) days from such
Effective Date or (ii) December 15th of such year.
     “Inventory Reserves”: Such Reserves as may be established from time to time
by the Lender in the Lender’s reasonable discretion with respect to the
determination of the saleability, at retail, of the Eligible Inventory or which
reflect such other factors as affect the market value or the NRLV of the
Eligible Inventory.
     “Investment”: With respect to any Person (a) the direct or indirect
purchase or acquisition of any beneficial interest in, any share of capital
stock of, evidence of Indebtedness of or other security issued by any other
Person, (b) any loan, advance or extension of credit to, or contribution to the
capital of, any other Person, excluding advances to employees in the ordinary
course of business for business expenses, (c) the guaranty of the obligations of
any other Person, or (d) any commitment or option to take any of the actions
described in clauses (a), (b), or (c) above.
     “Investment Property”: Has the meaning given that term in the UCC.
     “Issuer”: The issuer of any L/C.
     “L/C”: Any letter of credit, the issuance of which is procured by the
Lender at the request of the Borrower for the account of the Borrower and any
acceptance made on account of such letter of credit.
     “L/C Landing Costs”: To the extent not included in the Stated Amount of an
L/C, customs, duty, freight, and other out-of-pocket costs and expenses which
will be expended to “land” the Inventory, the purchase of which is supported by
such L/C.
     “Lease”: Any lease or other agreement, no matter how styled or structured,
pursuant to which the Borrower is entitled to the use or occupancy of any space.
     “Leasehold Interest”: Any interest of the Borrower as lessee under any
Lease.
     “Lender”: Is referred to in the Preamble.
     “Lender’s Rights and Remedies”: Is defined in Section 11.7.
     “Letter-of-Credit Right”: Has the meaning given that term in UCC and also
refers to any right to payment or performance under an L/C, whether or not the
beneficiary has demanded or is at the time entitled to demand payment or
performance.
     “Liabilities”: Includes, without limitation, the following:
     (a) All and each of the following, whether now existing or hereafter
arising under this Agreement or under any of the other Loan Documents:
     (i) Any and all direct and indirect liabilities, debts, and obligations of
the Borrower to the Lender, each of every kind, nature, and description.

10

--------------------------------------------------------------------------------

 

     (ii) Each obligation to repay any loan, advance, indebtedness, note,
obligation, overdraft, or amount now or hereafter owing by the Borrower to the
Lender (including all future advances whether or not made pursuant to a
commitment by the Lender), whether or not any of such are liquidated,
unliquidated, primary, secondary, secured, unsecured, direct, indirect,
absolute, contingent, or of any other type, nature, or description, or by reason
of any cause of action which the Lender may hold against the Borrower.
     (iii) All notes and other obligations of the Borrower now or hereafter
assigned to or held by the Lender, each of every kind, nature, and description.
     (iv) All interest, fees, and charges and other amounts which may be charged
by the Lender to the Borrower and/or which may be due from the Borrower to the
Lender from time to time.
     (v) All Bank Product Obligations.
     (vi) All costs and expenses incurred or paid by the Lender in respect of
any agreement between the Borrower and the Lender or instrument furnished by the
Borrower to the Lender (including, without limitation, Costs of Collection,
attorneys’ reasonable fees, and all court and litigation costs and expenses).
     (vii) Any and all covenants of the Borrower to or with the Lender and any
and all obligations of the Borrower to act or to refrain from acting in
accordance with any agreement between the Borrower and the Lender or instrument
furnished by the Borrower to the Lender.
     (viii) Each of the foregoing as if each reference to the “Lender” were to
each Affiliate of the Lender.
     (b) Any and all direct or indirect liabilities, debts, and obligations of
the Borrower to the Lender or any Affiliate of the Lender, each of every kind,
nature, and description owing on account of any service or accommodation
provided to, or for the account of the Borrower pursuant to this or any other
Loan Document, including cash management services and the issuances of L/C’s
and, for the avoidance of doubt, without double-counting, including accounts
payable of the Borrower to any third party whose Accounts are factored to the
Lender or an Affiliate of the Lender.
     “Libor Business Day”: Any day which is both a Business Day and a day on
which the principal interbank market for Libor deposits in London in which Wells
Fargo Bank, N. A. participates is open for dealings in United States Dollar
deposits.
     “Libor Loan”: Any Revolving Credit Loan which bears interest at a Libor
Rate.
     “Libor Margin”: The following applicable percentage, based upon the
corresponding Average Excess Availability:

              Level   LIBOR Margin   Average Excess Availability
I
    1.50 %   Greater than or equal to $6,000,000
 
           
II
    1.75 %   Less than $6,000,000 but greater than or equal to $3,000,000
 
           
III
    2.00 %   Less than $3,000,000

11

--------------------------------------------------------------------------------

 

     The Margin on the Closing Date shall be established at Level II and
adjusted at the end of each Fiscal quarter thereafter based upon the amount of
Average Excess Availability during the preceding quarter.
     “Libor Offer Rate”: That rate of interest (rounded upwards, if necessary,
to the next 1/100 of 1%) determined by the Lender to be the highest prevailing
rate per annum at which deposits on U.S. Dollars are offered to Wells Fargo
Bank, N. A., by first-class banks in the London interbank market in which Wells
Fargo Bank, N. A. participates at or about 10:00AM (Boston Time) Two (2) Libor
Business Days before the first day of the Interest Period for the subject Libor
Loan, for a deposit approximately in the amount of the subject loan for a period
of time approximately equal to such Interest Period.
     “Libor Rate”: That per annum rate which is the aggregate of the Libor Offer
Rate plus the Libor Margin except that, in the event that the Lender determines
that the Lender may be subject to the Reserve Percentage, the “Libor Rate” shall
mean, with respect to any Libor Loans then outstanding (from the date on which
that Reserve Percentage first became applicable to such loans), and with respect
to all Libor Loans thereafter made, an interest rate per annum equal the sum of
(a) plus (b), where:
     (a) is the decimal equivalent of the following fraction:

          Libor   Offer   Rate   1 minus the Reserve Percentage

     (b) is the applicable Libor Margin.
     “Liquidation”: The exercise, by the Lender, of those rights accorded to the
Lender under the Loan Documents as a creditor of the Borrower following and on
account of the occurrence of an Event of Default looking towards the realization
on the Collateral. Derivations of the word “Liquidation” (such as “Liquidate”)
are used with like meaning in this Agreement.
     “Loan Account”: Is defined in Section 2.9(a).
     “Loan Documents”: This Agreement and each other instrument or document from
time to time executed and/or delivered in connection with the arrangements
contemplated hereby or in connection with any transaction with the Lender or any
Affiliate of the Lender, including, without limitation, any transaction which
arises out of any cash management, depository, investment, letter of credit,
interest rate protection, or equipment leasing services provided by the Lender
or any Affiliate of the Lender, including any Bank Product Agreements, as each
may be amended from time to time.
     “Material Adverse Change”: Any event, fact, circumstance, change in, or
effect, on the business of the Borrower, when taken as a whole, which,
individually or in the aggregate or on a cumulative basis with any other
circumstance, changes in, or effects on, the Borrower or the Collateral,
constitutes any of the following:
     (a) A material adverse change in the business, operations, results of
operations, assets, liabilities, or condition (financial or otherwise) of the
Borrower (when taken as a whole).
     (b) The material impairment of the Borrower’s ability to perform its
material obligations under the Loan Documents or of the Lender’s ability to
enforce the Liabilities or to realize on any of the Collateral.
     (c) A material adverse effect on the value of the Collateral or the amount
which the Lender likely would receive (after giving consideration to delays in
payment and costs of enforcement).
     (d) A material impairment to the priority of the Lender’s Collateral
Interests in the Collateral.
     “Maturity Date”: June 30, 2010.

12

--------------------------------------------------------------------------------

 

     “Non-Assignable Contractual Interest”: Leases, licenses and other
agreements which by their terms prohibit the Borrower from transferring,
assigning or otherwise encumbering its rights thereunder.
     “NRLV”: The net recovery value (liquidation value) of Inventory expressed
as a percentage of the cost of such Inventory, as determined by the Lender in
its discretion based upon the most recent Inventory appraisal available to the
Lender conducted by an appraiser reasonably acceptable to the Lender.
     “Operating Account”: Is defined in Section 7.1.
     “OverLoan”: A loan, advance, or providing of credit support (such as the
issuance of any L/C) to the extent that, immediately after its having been made,
Availability is less than zero.
     “Payment Intangible”: As defined in the UCC and also any general intangible
under which the Account Debtor’s primary obligation is a monetary obligation.
     “Permitted Disposition”: (a) bulk sales of Inventory for fair
consideration, which Inventory has a value at the time of sale below the
Borrower’s original cost, (b) other bulk sales of Inventory as do not exceed Two
Hundred Fifty Thousand Dollars ($250,000.00) in any Twelve (12) month period,
and (c) sales of Inventory in the ordinary course of business.
     “Permitted Encumbrances”: The following:
     (a) Encumbrances in favor of the Lender;
     (b) Encumbrances securing taxes, assessments and other governmental charges
or levies or the claims of materialmen, suppliers, mechanics, carriers,
warehousemen or landlords for labor, materials, supplies or rentals incurred in
the ordinary course of business;
     (c) Encumbrances arising out of or resulting from any judgment or award
that do not constitute an Event of Default under Section 10.10;
     (d) purchase money security interests in Equipment to secure Indebtedness
otherwise permitted hereby;
     (e) Encumbrances on amounts deposited in connection with obtaining worker’s
compensation or other unemployment insurance;
     (f) Encumbrances on amounts deposited in connection with the making or
entering into of bids, tenders, or leases in the ordinary course of business and
not in connection with the borrowing of money;
     (g) Encumbrances on amounts deposited as security for surety or appeal
bonds in connection with obtaining such bonds in the ordinary course of
business;
     (h) with respect to any Leasehold Interest of the Borrower in real
property, easements, rights of way, and zoning restrictions that do not
materially interfere with or impair the use or operation thereof;
     (i) any interest or title of a licensor, lessor or sublicensor or sublessor
under any Lease or license permitted by this Agreement;
     (k) Encumbrances not attaching to any Collateral; and
     (m) Encumbrances listed on EXHIBIT 4.6.
     “Permitted Indebtedness”: The following:

13

--------------------------------------------------------------------------------

 

     (a) any Indebtedness on account of the Revolving Credit;
     (b) the Indebtedness (if any) listed on EXHIBIT 4.7, annexed hereto,
     (c) Indebtedness on account of Equipment acquired in compliance with the
requirements of Section 4.6(c), the incurrence of which would not otherwise be
prohibited by this Agreement,
     (d) trade Indebtedness incurred in the ordinary course of business, and
     (e) Indebtedness in respect of workers’ compensation claims, self-insurance
obligations, bankers’ acceptances, bids, performance, completion, appeal and
surety bonds or guarantees, and similar types of obligations in the ordinary
course of business.
     “Permitted Investments”: The following:
     (a) Investments in cash and Cash Equivalents;
     (b) Investments in negotiable instruments for collection;
     (c) Advances made in connection with purchases of goods or services in the
ordinary course of business;
     (d) Investments received in settlement of amounts due to the Borrower
effected in the ordinary course of business or owing to the Borrower as a result
of Insolvency Proceedings involving an Account Debtor or upon the foreclosure or
enforcement of any Encumbrance in favor of the Borrower; and
     (e) Investments in Auction Rate Securities having one of the two highest
ratings obtainable from either S&P or Moody’s.
     “Person”: Any natural person, and any corporation, limited liability
company, trust, partnership, joint venture, or other enterprise or entity.
     “Prime”: The Prime Rate announced from time to time by Wells Fargo Bank, N.
A. (or any successor in interest to Wells Fargo Bank, N. A.). In the event that
said bank (or any such successor) ceases to announce such a rate, “Prime” shall
refer to that rate or index announced or published from time to time as the
Lender, in good faith, designates as the functional equivalent to said Prime
Rate. Any change in “Prime” shall be effective, for purposes of the calculation
of interest due hereunder, when such change is made effective generally by the
bank on whose rate or index “Prime” is being set.
     “Prime Margin Loan”: Each Revolving Credit Loan while bearing interest at
the Prime Margin Rate.
     “Prime Margin Rate”: The aggregate of Prime plus the following applicable
percentage, based upon the corresponding Average Excess Availability:

              Level   Prime Margin   Average Excess Availability
I
    0.00 %   Greater than or equal to $6,000,000
 
           
II
    0.00 %   Less than $6,000,000 but greater than or equal to $3,000,000
 
           
III
    0.00     Less than $3,000,000

14

--------------------------------------------------------------------------------

 

     The Margin on the Closing Date shall be established at Level II and
adjusted at the end of each Fiscal quarter thereafter based upon the amount of
Average Excess Availability during the preceding quarter.
     “Proceeds”: Includes, without limitation, “Proceeds” as defined in the UCC
and the proceeds from the sale or other disposition of each type of property
described in Section 8.1.
     “Receipts”: All cash, cash equivalents, money, checks, credit card slips,
receipts and other Proceeds from any sale of the Collateral.
     “Receivables Collateral”: That portion of the Collateral which consists of
Accounts, Accounts Receivable, General Intangibles, Chattel Paper, Instruments,
Documents of Title, Documents, Investment Property, Payment Intangibles,
Letter-of-Credit Rights, Health-Care-Insurance-Receivables, bankers’
acceptances, and all other rights to payment.
     “Requirements of Law”: As to any Person:
     (a) Applicable Law.
     (b) That Person’s organizational documents.
     (c) That Person’s by-laws and/or other instruments which deal with
corporate or similar governance, as applicable.
     “Reserves”: Availability Reserves and Inventory Reserves.
     “Reserve Percentage”: The decimal equivalent of that rate applicable to the
Lender under regulations issued from time to time by the Board of Governors of
the Federal Reserve System for determining the maximum reserve requirement of
the Lender with respect to “Eurocurrency liabilities” as defined in such
regulations. The Reserve Percentage applicable to a particular Eurodollar Loan
shall be based upon that in effect during the subject Interest Period, with
changes in the Reserve Percentage which take effect during such Interest Period
to take effect (and to consequently change any interest rate determined with
reference to the Reserve Percentage) if and when such change is applicable to
such loans.
     “Revolving Credit”: Is defined in Section 2.1.
     “Revolving Credit Ceiling”: $12,500,000.00 as of the Closing Date; which
may be increased to $20,000,000.00 in accordance with Section 2.2.
     “Revolving Credit Early Termination Fee”: Is defined in Section 2.16.
     “Revolving Credit Loans”: Loans made under the Revolving Credit, except
that where the term “Revolving Credit Loan” is used with reference to available
interest rates applicable to the loans under the Revolving Credit, it refers to
so much of the unpaid principal balance of the Loan Account as bears the same
rate of interest for the same Interest Period. (See Section 2.12(d)).
     “Revolving Credit Note”: Is defined in Section 2.10.
     “Seasonal Advance Rate Request”: means a written notice from the Borrower
to Lender delivered on or after September 15th of any year but before
November 30th of such year pursuant to which Borrower requests that Lender
increase the Appraisal Percentage and the Inventory Advance Rate on the
Effective Date as set forth in such Seasonal Advance Rate Request.
     “Service Fee”: Is defined in Section 2.15.

15

--------------------------------------------------------------------------------

 

     “Stated Amount”: The maximum amount for which an L/C may be honored.
     “Supporting Obligation”: Has the meaning given that term in the UCC and
also refers to a Letter-of-Credit Right or secondary obligation which supports
the payment or performance of an Account, Chattel Paper, a Document, a General
Intangible, an Instrument, or Investment Property.
     “Termination Date”: The earliest of (a) the Maturity Date; or (b) the
occurrence of any event described in Section 10.12; or (c) the Lender’s notice
to the Borrower setting the Termination Date on account of the occurrence of any
Event of Default other than as described in Section 10.12 or (d) the date which
is Ten (10) days from the date on which Lender receives written notice from the
Borrower of its desire to terminate this Agreement.
     “Transfer”: Wire transfer pursuant to the wire transfer system maintained
by the Board of Governors of the Federal Reserve Board, or as otherwise may be
agreed to from time to time by the Lender. Wire instructions may be changed in
the same manner that Notice Addresses may be changed (Section 12.1), except that
no change of the wire instructions for Transfers to the Lender shall be
effective without the consent of the Lender.
     “UCC”: The Uniform Commercial Code as in effect from time to time in
Massachusetts.
     “Unused Line Fee”: Is defined in Section 2.14.
Article 2 — The Revolving Credit:
     2.1. Establishment of Revolving Credit.
          (a) The Lender hereby establishes a revolving line of credit (the
“Revolving Credit”) in the Borrower’s favor pursuant to which the Lender,
subject to, and in accordance with, this Agreement, shall make loans and
advances and otherwise provide financial accommodations to and for the account
of the Borrower as provided herein.
          (b) Loans, advances, and financial accommodations under the Revolving
Credit shall be made with reference to the Borrowing Base and shall be subject
to Availability. The Borrowing Base and Availability shall be determined by the
Lender by reference to Borrowing Base Certificates furnished as provided in
Section 5.4, and shall be subject to the following:
          (i) Such determination shall take into account such Reserves as the
Lender may reasonably determine as being applicable thereto. As of the Closing
Date, no Reserves have been implemented by the Lender. Subsequent to the Closing
Date, the Lender may, in its reasonable discretion, implement Reserves to
address those material matters as the Lender reasonably may determine, in its
discretion.
          (ii) The Cost of Eligible Inventory will be determined in a manner
consistent with current tracking practices, based on the Borrower’s stock ledger
inventory.
          (c) The proceeds of borrowings under the Revolving Credit shall be
used for the Borrower’s working capital and Capital Expenditures, all solely to
the extent permitted by this Agreement. No proceeds of a borrowing under the
Revolving Credit may be used, nor shall any be requested, with a view towards
the accumulation of any general fund or funded reserve of the Borrower other
than in the ordinary course of the Borrower’s business and consistent with the
provisions of this Agreement.
     2.2. Increase in Revolving Credit Ceiling.

16

--------------------------------------------------------------------------------

 

          (a) So long as the Borrower is not In Default and no Event of Default
exists or would arise therefrom, the Borrower shall have the opportunity at any
time from and after the Closing Date through June 30, 2009, upon not less than
Ten (10) Business Days written notice to the Lender, on one or more occasions,
to request an increase to the Revolving Credit Ceiling by an amount up to
$7,500,000.00 in the aggregate, in minimum increments of $2,500,000.00 each, up
to a total amount not to exceed $20,000,000.00.
          (b) No increase to the Revolving Credit Ceiling shall become effective
unless and until each of the following conditions have been satisfied:
          (i) The Lender shall have approved the requested increase, in the
Lender’s sole and exclusive discretion, and the proposed increase shall be upon
such terms and conditions as the Lender may require, in its sole and exclusive
discretion;
          (ii) The Borrower shall deliver to the Lender an officer’s
certificate, in form and substance reasonably satisfactory to the Lender,
confirming the Borrower’s authorization to obtain such increase;
          (iii) A new Note will be issued, to be in conformity with requirements
of Section 2.10 (with appropriate modification) to the extent necessary to
reflect the new Revolving Credit Ceiling; and
          (iv) The Borrower shall have delivered such other instruments,
documents and agreements as the Lender may reasonably have requested.
     2.3. Advances in Excess of Borrowing Base (OverLoans)
     The Lender has no obligation to the Borrower to make any loan or advance,
or otherwise to provide any credit to or for the benefit of the Borrower where
the result of such loan, advance, or credit is an OverLoan.
     2.4. Risks of Value of Collateral.
     The Lender’s reference to a given asset in connection with the making of
loans, credits, and advances and the providing of financial accommodations under
the Revolving Credit and/or the monitoring of compliance with the provisions
hereof shall not be deemed a determination by the Lender relative to the actual
value of the asset in question. All risks concerning the value of the Collateral
are and remain upon the Borrower. All Collateral secures the prompt, punctual,
and faithful performance of the Liabilities whether or not relied upon by the
Lender in connection with the making of loans, credits, and advances and the
providing of financial accommodations under the Revolving Credit.
     2.5. Commitment to Make Revolving Credit Loans and Support Letters of
Credit.
     Subject to the provisions of this Agreement, the Lender shall make a loan
or advance under the Revolving Credit and the Lender shall endeavor to have an
L/C issued for the account of the Borrower, in each instance if duly and timely
requested by the Borrower as provided herein provided that:
          (a) No OverLoan is then outstanding and none will result therefrom.
          (b) Borrower is not then In Default and will not thereby become In
Default.
          (c) The aggregate amount of the Borrower’s cash and Cash Equivalents,
other than cash on deposit in the Operating Account, is less than $250,000 as
determined by the Lender based upon a certificate furnished by an officer of the
Borrower.

17

--------------------------------------------------------------------------------

 

     2.6. Revolving Credit Loan Requests.
          (a) Requests for loans and advances under the Revolving Credit or for
the continuance or conversion of an interest rate applicable to a Revolving
Credit Loan may be requested by the Borrower in such manner as may from time to
time be acceptable to the Lender.
          (b) Subject to the provisions of this Agreement, including, without
limitation, the definition of Borrowing Base, the Borrower may request a
Revolving Credit Loan and elect an interest rate and Interest Period to be
applicable to that Revolving Credit Loan by giving notice to the Lender by no
later than the following:
          (i) If such Revolving Credit Loan is to be, or is to be converted to,
a Prime Margin Loan: By 2:00PM on the Business Day on which the subject
Revolving Credit Loan is to be made or is to be so converted. Prime Margin Loans
requested by the Borrower, other than those resulting from the conversion of a
Libor Loan, shall not be less than $10,000.00.
          (ii) If such Revolving Credit Loan is to be, or is to be continued as,
or converted to, a Libor Loan: By 2:00PM Three (3) Libor Business Days before
the commencement of any new Interest Period or the end of the then applicable
Interest Period. Libor Loans and conversions to Libor Loans shall each be not
less than $500,000.00 and in increments of $250,000.00 in excess of such
minimum.
          (iii) Any Libor Loan which matures while the Borrower is In Default
shall be converted, at the option of the Lender, to a Prime Margin Loan
notwithstanding any notice from the Borrower that such Loan is to be continued
as a Libor Loan.
          (c) Any request for a Revolving Credit Loan or for the continuance or
conversion of an interest rate applicable to a Revolving Credit Loan which is
made after the applicable deadline therefore, as set forth above, shall be
deemed to have been made at the opening of business on the then next Business
Day or Libor Business Day, as applicable.
          (d) The Borrower may request that the Lender cause the issuance by the
Issuer of L/C’s for the account of the Borrower as provided in Section 2.18.
          (e) The Lender may rely on any request for a loan or advance, or other
financial accommodation under the Revolving Credit which the Lender, in good
faith, believes to have been made by a Person duly authorized to act on behalf
of the Borrower and may decline to make any such requested loan or advance, or
issuance, or to provide any such financial accommodation pending the Lender’s
being furnished with such documentation concerning that Person’s authority to
act as may be satisfactory to the Lender.
          (f) A request by the Borrower for a loan or advance, or other
financial accommodation under the Revolving Credit shall be irrevocable and
shall constitute certification by the Borrower that as of the date of such
request, each of the following is true and correct:
          (i) There has been no Material Adverse Change in the Borrower’s
financial condition from the most recent financial information furnished to the
Lender pursuant to this Agreement.
          (ii) To the extent not therefore paid or set aside, all or a portion
of any loan or advance so requested will be set aside by the Borrower to cover
the Borrower’s obligations for sales tax on account of sales since the then most
recent borrowing pursuant to the Revolving Credit.
          (iii) Each representation which is made herein or in any of the Loan
Documents is then true and complete in all material respects as of and as if
made on the date of such request.

18

--------------------------------------------------------------------------------

 

          (iv) That the Borrower is not In Default, or if the Borrower is In
Default, it shall be accompanied by a written Certificate of the Borrower’s
President or its Chief Financial Officer describing (in reasonable detail) the
facts and circumstances thereof and the steps (if any) being taken to remedy
such condition (but such Certificate shall not relieve the Borrower from being
In Default).
     2.7. Suspension of Revolving Credit.
     If, at any time or from time to time, the Borrower is In Default or there
has occurred a Material Adverse Change:
          (a) The Lender may suspend the Revolving Credit immediately, in which
event, the Lender shall not be obligated, during such suspension, to make any
loans or advance, or to provide any financial accommodation hereunder or to seek
the issuance of any L/C.
          (b) The Lender may suspend the right of the Borrower to request any
Libor Loan or to convert any Prime Margin Loan to a Libor Loan.
     2.8. Making of Revolving Credit Loans.
          (a) A loan or advance under the Revolving Credit shall be made by the
transfer of the proceeds of such loan or advance to the Operating Account or as
otherwise instructed by the Borrower.
          (b) A loan or advance shall be deemed to have been made under the
Revolving Credit (and the Borrower shall be indebted to the Lender for the
amount thereof immediately) at the following:
          (i) The Lender’s initiation of the transfer of the proceeds of such
loan or advance in accordance with the Borrower’s instructions (if such loan or
advance is of funds requested by the Borrower).
          (ii) The charging of the amount of such loan to the Loan Account (in
all other circumstances).
          (c) There shall not be any recourse to or liability of the Lender, on
account of:
          (i) Any delay in the making of any loan or advance requested under the
Revolving Credit.
          (ii) Any delay by any bank or other depository institution in treating
the proceeds of any such loan or advance as collected funds.
          (iii) Any delay in the receipt, and/or any loss, of funds which
constitute a loan or advance under the Revolving Credit, the wire transfer of
which was properly initiated by the Lender in accordance with wire instructions
provided to the Lender by the Borrower.
     2.9. The Loan Account.
          (a) An account (the “Loan Account”) shall be opened on the books of
the Lender in which a record shall be kept of all loans and advances made under
the Revolving Credit.
          (b) The Lender shall also keep a record (either in the Loan Account or
elsewhere, as the Lender may from time to time elect) of all interest, fees,
service charges, costs, expenses, and other debits owed to the Lender on account
of the Liabilities and of all credits against such amounts so owed.

19

--------------------------------------------------------------------------------

 

          (c) All credits against the Liabilities shall be conditional upon
final payment to the Lender for the account of the Lender of the items giving
rise to such credits. The amount of any item credited against the Liabilities
which is charged back against the Lender or is disgorged for any reason or is
not so paid shall be a Liability and shall be added to the Loan Account, whether
or not the item so charged back or not so paid is returned.
          (d) Except as otherwise provided herein, all fees, service charges,
costs, and expenses for which the Borrower is obligated hereunder are payable on
demand. In the determination of Availability, the Lender may deem fees, service
charges, accrued interest, and other payments which will be due and payable
between the date of such determination and the first day of the then next
succeeding month as having been advanced under the Revolving Credit whether or
not such amounts are then due and payable.
          (e) The Lender, without the request of the Borrower, may advance under
the Revolving Credit any interest, fee, service charge, or other payment to
which the Lender is entitled from the Borrower pursuant hereto and may charge
the same to the Loan Account notwithstanding that an OverLoan may result
thereby. Such action on the part of the Lender shall not constitute a waiver of
the Lender’s rights and the Borrower’s obligations under Section 2.11(b). Any
amount which is added to the principal balance of the Loan Account as provided
in this Section 2.9(e) shall bear interest at the interest rate then and
thereafter applicable to Prime Margin Loans.
          (f) Any statement rendered by the Lender to the Borrower concerning
the Liabilities shall be considered correct and accepted by the Borrower and
shall be conclusively binding upon the Borrower unless the Borrower provides the
Lender with written objection thereto within Twenty (20) days from the mailing
of such statement to the Borrower, which written objection shall indicate, with
particularity, the reason for such objection. The Loan Account and the Lender’s
books and records concerning the loan arrangement contemplated herein and the
Liabilities shall be prima facie evidence and proof of the items described
therein.
     2.10. The Revolving Credit Note.
     The Borrower’s obligation to repay loans and advances under the Revolving
Credit, with interest as provided herein, shall be evidenced by a Note (the
“Revolving Credit Note”) in the form of EXHIBIT 2.10, annexed hereto, executed
by the Borrower, payable to the Lender. Neither the original nor a copy of the
Revolving Credit Note shall be required, however, to establish or prove any
Liability. In the event that the Revolving Credit Note is ever lost, mutilated,
or destroyed, the Borrower shall execute a replacement thereof and deliver such
replacement to the Lender.
     2.11. Payment of The Loan Account.
          (a) The Borrower may repay all or any portion of the principal balance
of the Loan Account from time to time until the Termination Date.
          (b) The Borrower, without notice or demand from the Lender, shall pay
the Lender that amount, from time to time, which is necessary so that there is
no OverLoan outstanding.
          (c) The Borrower shall repay the then entire unpaid balance of the
Loan Account and all other Liabilities on the Termination Date.
          (d) The Lender shall endeavor to cause the application of payments (if
any), pursuant to Sections 2.12(a) and 2.12(b) against Libor Loans then
outstanding in such manner as results in the least cost to the Borrower, but
shall have no liability on account of the Lender’s failure to have done so. In
no event shall action or inaction taken by the Lender excuse the Borrower from
any indemnification obligation under Section 2.11(e).

20

--------------------------------------------------------------------------------

 

          (e) The Borrower shall indemnify the Lender and hold the Lender
harmless from and against any loss, cost or expense (including loss of
anticipated profits and amounts payable by the Lender on account of “breakage
fees” (so-called)) which the Lender may sustain or incur (including, without
limitation, by virtue of acceleration after the occurrence of any Event of
Default) as a consequence of the following:
          (i) Default by the Borrower in payment of the principal amount of or
any interest on any Libor Loan as and when due and payable, including any such
loss or expense arising from interest or fees payable by the Lender in order to
maintain its Libor Loans.
          (ii) Default by the Borrower in making a borrowing or conversion after
the Borrower has given (or is deemed to have given) a request for a Revolving
Credit Loan or a request to convert a Revolving Credit Loan from one applicable
interest rate to another.
          (iii) The making of any payment on a Libor Loan or the making of any
conversion of any such Loan to a Prime Margin Loan on a day that is not the last
day of the applicable Interest Period with respect thereto.
     2.12. Interest on Revolving Credit Loans.
          (a) Each Revolving Credit Loan shall bear interest at the Prime Margin
Rate applicable to Revolving Credit Loans, unless timely notice is given (as
provided in Section 2.6) that the subject Revolving Credit Loan (or a portion
thereof) is, or is to be converted to, a Libor Loan.
          (b) Each Revolving Credit Loan which consists of a Libor Loan shall
bear interest at the Libor Rate applicable to Revolving Credit Loans.
          (c) Subject to, and in accordance with, the provisions of this
Agreement, the Borrower may cause all or a part of the unpaid principal balance
of the Loan Account to bear interest at the Prime Margin Rate or the Libor Rate
as specified from time to time by the Borrower by notice to the Lender.
          (d) For ease of reference and administration, each part of the Loan
Account which bears interest at the same rate of interest and for the same
Interest Period is referred to herein as if it were a separate “Revolving Credit
Loan.”
          (e) The Borrower shall not select, renew, or convert any interest rate
for a Revolving Credit Loan such that, in addition to interest at the Prime
Margin Rate, there are more than Three (3) Libor Rates applicable to the
Revolving Credit Loans at any one time.
          (f) The Borrower shall pay accrued and unpaid interest on each
Revolving Credit Loan in arrears as follows:
          (i) On the applicable Interest Payment Date for that Revolving Credit
Loan.
          (ii) On the Termination Date and on the End Date.
          (iii) Following the occurrence and during the continuance of any Event
of Default, with such frequency as may be determined by the Lender.
          (g) (Following the occurrence and during the continuance of any Event
of Default (and whether or not the Lender exercises the Lender’s rights on
account thereof), all Revolving Credit Loans shall bear interest, at the option
of the Lender, at rate which is the aggregate of the rate applicable to Prime
Margin Loans plus Two Percent (2%) per annum.

21

--------------------------------------------------------------------------------

 

     2.13. Closing Fee.
     In consideration of the commitment to make loans and advances to the
Borrower under the Revolving Credit, and to maintain sufficient funds available
for such purpose, there has been earned and the Borrower shall pay on or before
the Closing Date the “Closing Fee” (so referred to herein) in the amount set
forth in the Fee Letter. The full amount of the Closing Fee has been earned in
full by the Lender as of the Closing Date.
     2.14. Unused Line Fee.
     In addition to any other fee to be paid by the Borrower on account of the
Revolving Credit, the Borrower shall pay the Lender the “Unused Line Fee” (so
referred to herein) of 0.25% per annum of the average difference, during the
month just ended (or relevant period with respect to the payment being made on
the Termination Date) between the Revolving Credit Ceiling and the aggregate of
the unpaid principal balance of the Loan Account and the undrawn Stated Amount
of L/C’s outstanding during the relevant period. The Unused Line Fee shall be
paid in arrears, on the first day of each month after the execution of this
Agreement and on the Termination Date.
     2.15. Service Fee.
     In addition to any other fee to be paid by the Borrower hereunder, the
Borrower shall pay the Lender a “Service Fee” (so referred to herein) in the
amount set forth in the Fee Letter each month on the first day of each calendar
month. The full amount of the Service Fee has been earned in full by the Lender
as of the Closing Date.
     2.16. Early Termination Fee.
          (a) In the event that the Termination Date occurs prior to the
Maturity Date, for any reason other than by virtue of the Borrower’s refinancing
of the Liabilities with financing provided by the Lender or any of its
Affiliates, the Borrower shall pay to the Lender, the “Revolving Credit Early
Termination Fee” (so referred to herein) in the amounts set forth in the Fee
Letter. The Borrower acknowledges and agrees that the Lender will have suffered
damages on account of the early termination of the Revolving Credit and that, in
view of the difficulty in ascertaining the amount of such damages, that the
Early Termination Fee constitutes reasonable compensation and liquidated damages
to compensate Lender on account thereof.
     2.17. Lender’s Discretion.
          (a) Each reference in the Loan Documents to the exercise of discretion
or the like by the Lender shall be to such Person’s exercise of its judgment, in
good faith (which shall be presumed), based upon such information of which that
Person then has actual knowledge.
          (b) In the exercise of such discretion, the following may be taken
into account:
          (i) The reasonable anticipation of an adverse change to the value of
the Collateral; the enforceability of the Lender’s Collateral Interests therein;
or the amount which the Lender would likely realize therefrom (taking into
account delays which may possibly be encountered in the Lender’s realizing upon
the Collateral and likely Costs of Collection).
          (ii) The content, completeness, and accuracy of any report or
financial information delivered to the Lender by or on behalf of the Borrower
and the manner by which such report or financial information was prepared.
          (iii) The existence of circumstances which suggest an increase in the
likelihood that the Borrower may become the subject of an Insolvency Proceeding.

22

--------------------------------------------------------------------------------

 

          (iv) The existence of circumstances that suggest that the Borrower is
In Default.
          (c) In the exercise of such discretion, the Lender also may take into
account any of the following factors to the extent that they have a material
bearing on credit risks associated with the providing of loans and financial
accommodations to the Borrower:
          (i) Those included in, or tested by, the definitions of “Eligible
Credit Card Receivables,” “Eligible Inventory” and “Cost.”
          (ii) The current financial and business climate of the industry in
which the Borrower competes (having regard for the Borrower’s position in that
industry).
          (iii) General macroeconomic conditions which have a material effect on
the Borrower’s cost structure.
          (iv) Material changes in or to the mix of the Borrower’s Inventory.
          (v) Seasonality with respect to the Borrower’s Inventory and patterns
of retail sales.
          (vi) Such other factors as the Lender reasonably determines as having
a material bearing on credit risks associated with the providing of loans and
financial accommodations to the Borrower.
          (d) The burden of establishing the failure of the Lender to have acted
in a reasonable manner in such Person’s exercise of such discretion shall be the
Borrower’s and may be made only by clear and convincing evidence.
     2.18. Procedures For Issuance of L/C’s.
          (a) The Borrower may request that the Lender cause the issuance by the
Issuer of L/C’s for the account of the Borrower. Each such request shall be in
such manner as may from time to time be acceptable to the Lender.
          (b) The Lender will endeavor to cause the issuance of any L/C so
requested by the Borrower, provided that, at the time that the request is made,
the Revolving Credit has not been suspended as provided in Section 2.7 and if so
issued:
          (i) The aggregate Stated Amount of all L/C’s then outstanding, does
not exceed $5,000,000.00.
          (ii) The expiry of the L/C is not later than the earlier of Thirty
(30) days prior to the Maturity Date or the following:
          (A) Standby’s: One (1) year from initial issuance.
          (B) Documentary’s: Sixty (60) days from issuance.
          (iii) If the expiry of an L/C is later than the Maturity Date, it is
105% cash collateralized at its issuance.
          (iv) An OverLoan will not result from the issuance of the subject L/C.
          (c) The Borrower shall execute such documentation to apply for and
support the issuance of an L/C as may be required by the Issuer.

23

--------------------------------------------------------------------------------

 

          (d) There shall not be any recourse to, nor liability of, the Lender
on account of:
          (i) Any delay or refusal by an Issuer to issue an L/C.
          (ii) Any action or inaction of an Issuer on account of, or in respect
to, any L/C.
          (e) The Borrower shall reimburse the Issuer for the amount of any
honoring of a drawing under an L/C on the same day on which such honoring takes
place. The Lender, without the request of the Borrower, may advance under the
Revolving Credit (and charge to the Loan Account) the amount of any honoring of
any L/C and other amount for which the Borrower, the Issuer, or the Lender
become obligated on account of, or in respect to, any L/C. Such advance shall be
made whether or not the Borrower is In Default or such advance would result in
an OverLoan. Such action shall not constitute a waiver of the Lender’s rights
under Section 2.11(b).
     2.19. Fees For L/C’s.
     The Borrower shall pay to the Lender a fee, on account of L/C’s, the
issuance of which had been procured by the Lender, monthly in arrears, and on
the Termination Date and on the End Date, equal to the weighted average Stated
Amount of all L/C’s outstanding during the period in respect of which such fee
is being paid multiplied by (i) the Libor Margin with respect to stand-by L/C’s,
and (ii) the Libor Margin minus One-half percent (.50%) with respect to
documentary L/C’s, except that, following the occurrence and during the
continuance of any Event of Default, such fee shall be increased by two percent
(2%) per annum.
          (a) In addition to the fee to be paid as provided in Subsection
2.18(a), above, the Borrower shall pay to the Lender (or to the Issuer, if so
requested by Lender), on demand, all issuance, processing, negotiation,
amendment, and administrative fees and other amounts charged by the Issuer on
account of, or in respect to, any L/C.
          (b) If any change in Applicable Law shall either:
          (i) impose, modify or deem applicable any reserve, special deposit or
similar requirements against letters of credit heretofore or hereafter issued by
any Issuer or with respect to which the Lender or any Issuer has an obligation
to lend to fund drawings under any L/C; or
          (ii) impose on any Issuer any other condition or requirements relating
to any such letters of credit;
     and the result of any event referred to in Section 2.19(b)(i) or
2.19(b)(ii), shall be to increase the cost to the Lender or to any Issuer of
issuing or maintaining any L/C (which increase in cost shall be the result of
such Issuer’s reasonable allocation among the Lender’s or Issuer’s letter of
credit customers of the aggregate of such cost increases resulting from such
events), then, upon demand by the Lender and delivery by the Lender to the
Borrower of a certificate of an officer of the Lender or the subject Issuer
describing such change in law, executive order, regulation, directive, or
interpretation thereof, its effect on the Lender or such Issuer, and the basis
for determining such increased costs and their allocation, the Borrower shall
immediately pay to the Lender, from time to time as specified by the Lender,
such amounts as shall be sufficient to compensate the Lender or the subject
Issuer for such increased cost. The Lender’s or any Issuer’s determination of
costs incurred under Section 2.19(b)(i) or 2.19(b)(ii), and the allocation, if
any, of such costs among the Borrower and other letter of credit customers of
the Lender or such Issuer, if done in good faith and made on an equitable basis
and in accordance with such officer’s certificate, shall be conclusive and
binding on the Borrower.
     2.20. Concerning L/C’s.

24

--------------------------------------------------------------------------------

 

          (a) None of the Issuer, the Issuer’s correspondents, the Lender, or
any advising, negotiating, or paying bank with respect to any L/C shall be
responsible in any way for:
          (i) The performance by any beneficiary under any L/C of that
beneficiary’s obligations to the Borrower.
          (ii) The form, sufficiency, correctness, genuineness, authority of any
person signing, falsification, or the legal effect of, any documents called for
under any L/C if (with respect to the foregoing) such documents on their face
appear to be in order.
          (b) The Issuer may honor, as complying with the terms of any L/C and
of any drawing thereunder, any drafts or other documents otherwise in order, but
signed or issued by an administrator, executor, conservator, trustee in
bankruptcy, debtor in possession, assignee for the benefit of creditors,
liquidator, receiver, or other legal representative of the party authorized
under such L/C to draw or issue such drafts or other documents.
          (c) Unless otherwise agreed to, in the particular instance, the
Borrower hereby authorizes any Issuer to:
          (i) Select an advising bank, if any.
          (ii) Select a paying bank, if any.
          (iii) Select a negotiating bank.
          (d) All directions, correspondence, and funds transfers relating to
any L/C are at the risk of the Borrower. The Issuer shall have discharged the
Issuer’s obligations under any L/C which, or the drawing under which, includes
payment instructions, by the initiation of the method of payment called for in,
and in accordance with, such instructions (or by any other commercially
reasonable and comparable method). Neither the Lender nor the Issuer shall have
any responsibility for any inaccuracy, interruption, error, or delay in
transmission or delivery by post, telegraph or cable, or for any inaccuracy of
translation.
          (e) The Lender’s and the Issuer’s rights, powers, privileges and
immunities specified in or arising under this Agreement are in addition to any
heretofore or at any time hereafter otherwise created or arising, whether by
statute or rule of law or contract.
          (f) The obligations of the Borrower under this Agreement with respect
to L/C’s are absolute, unconditional, and irrevocable and shall be performed
strictly in accordance with the terms hereof under all circumstances, whatsoever
including, without limitation, the following:
          (i) Any lack of validity or enforceability or restriction, restraint,
or stay in the enforcement of this Agreement, any L/C, or any other agreement or
instrument relating thereto.
          (ii) The Borrower’s consent to any amendment or waiver of, or consent
to the departure from, any L/C.
          (iii) The existence of any claim, set-off, defense, or other right
which the Borrower may have at any time against the beneficiary of any L/C.
          (iv) Any good faith honoring of a drawing under any L/C, which drawing
possibly could have been dishonored based upon a strict construction of the
terms of the L/C.
     2.21. Changed Circumstances.

25

--------------------------------------------------------------------------------

 

          (a) The Lender may advise the Borrower that the Lender has made the
good faith determination (which determination shall be final and conclusive) of
any of the following:
          (i) Adequate and fair means do not exist for ascertaining the rate for
Libor Loans.
          (ii) The continuation of, or conversion of any Revolving Credit Loan
to, a Libor Loan has been made impracticable or unlawful by the occurrence of a
contingency that materially and adversely affects the applicable market or the
compliance by the Lender in good faith with any Applicable Law.
          (iii) The indices on which the interest rates for Libor Loans are
based shall no longer represent the effective cost to the Lender for U.S. dollar
deposits in the interbank market for deposits in which it regularly
participates.
          (b) In the event that the Lender advises the Borrower of an occurrence
described in Section 2.20(a), then, until the Lender notifies the Borrower that
the circumstances giving rise to such notice no longer apply:
          (i) The obligation of the Lender to make loans of the type affected by
such changed circumstances or to permit the Borrower to select the affected
interest rate as otherwise applicable to any Revolving Credit Loans shall be
suspended.
          (ii) Any notice which the Borrower had given the Lender with respect
to any Libor Loan, the time for action with respect to which has not occurred
prior to the Lender’s having given notice pursuant to Section 2.12(a), shall be
deemed at the option of the Lender to not having been given.
Article 3 — Conditions Precedent:
     As a condition to the effectiveness of this Agreement, the establishment of
the Revolving Credit, and the making of the first loan under the Revolving
Credit, each of the documents respectively described in Sections 3.1 through and
including 3.4, (each in form and substance satisfactory to the Lender) shall
have been delivered to the Lender, and the conditions respectively described in
Sections 3.5 through and including 3.8, shall have been satisfied:
     3.1. Corporate Due Diligence.
          (a) Certificate of corporate good standing for the Borrower issued by
the Secretary of State for the State of Delaware.
          (b) Certificates of due qualification, in good standing, issued by the
Secretary(ies) of State of each State in which the nature the Borrower’s
business conducted or assets owned could require such qualification.
          (c) Certificate of the Borrower’s Secretary of the due adoption,
continued effectiveness, and setting forth the texts of, each corporate
resolution adopted in connection with the establishment of the loan arrangement
contemplated by the Loan Documents and attesting to the true signatures of each
Person authorized as a signatory to any of the Loan Documents.
     3.2. Opinion.

26

--------------------------------------------------------------------------------

 

     An opinion of counsel to the Borrower in form and substance satisfactory to
the Lender based upon customary practice, in the Lender’s sole and exclusive
discretion, including relevant opinions with respect to enforceability and
perfection, and similar matters.
     3.3. Additional Documents.
     Such additional instruments and documents as the Lender or its counsel
reasonably may require or request including, without limitation, the following:
          (a) Satisfactory background checks for key management.
          (b) All Loan Documents.
          (c) Lien search results with respect to the Borrower’s locations.
          (d) Confirmation of filing of all necessary and appropriate Financing
Statements and such other documents as may be required to perfect the Lender’s
security interest in the Collateral.
          (e) Receipt of discharges, releases, and terminations required to
afford the Lender a first, perfected security interest in and to all Collateral,
free and clear of all liens and Encumbrances, other than Permitted Encumbrances.
          (f) Confirmation of insurance and appropriate endorsements in favor of
the Lender.
          (g) Collateral access agreements, as may be necessary, including an
agreement with Creekside III LLC, all in form and substance reasonably
acceptable to the Lender in its sole and exclusive discretion.
          (h) Receipt of an appraisal of the NRLV of the Borrower’s Inventory in
form and substance acceptable to the Lender, in the Lender’s sole and exclusive
discretion.
          (i) Receipt of a field audit and examination in form and substance
acceptable to the Lender, in the Lender’s sole and exclusive discretion.
          (j) Receipt of the Business Plan in form and substance acceptable to
the Lender, in the Lender’s sole and exclusive discretion, including a monthly
balance sheet, profit and loss statements, and cash flow analysis that presents
expected Revolving Credit usage and Availability consistent with the terms and
conditions of this Agreement.
     3.4. Officers’ Certificates.
     Certificates executed by the President and the Chief Financial Officer of
the Borrower which state that:
          (a) Such officer, acting on behalf of the Borrower, has reviewed each
of the Loan Documents and has had the benefit of independent counsel (Attorneys
Heller Erhman LLP) of the Borrower’s selection in connection with the review and
negotiation of the Loan Documents. In particular, and without limiting the
generality of such review, the following provisions of the Loan Documents have
been brought to the attention of the undersigned by such counsel:
          (i) The waiver of the right to a trial by jury in connection with
controversies arising out of the loan arrangement contemplated by the Loan
Documents.

27

--------------------------------------------------------------------------------

 

          (ii) The designation of, and submission to the exclusive jurisdiction
and venue of, certain courts.
          (iii) Various other waivers and indemnifications included therein.
          (iv) The circumstances under which the Liabilities could be
accelerated and the grace periods available with respect to certain Events of
Default.
          (b) Such person has no knowledge that the representations and
warranties made by the Borrower to the Lender in the Loan Documents are not true
and complete in all material respects as of the date of such Certificate, and
has no knowledge that an event has occurred which is or which, solely with the
giving of notice or passage of time (or both), would be an Event of Default.
     3.5. Representations and Warranties.
     Each of the representations made by or on behalf of the Borrower in this
Agreement or in any of the other Loan Documents or in any other report,
statement, document, or paper provided by or on behalf of the Borrower shall be
true and complete as of the date as of which such representation or warranty was
made.
     3.6. All Fees and Expenses Paid.
     All fees due at or immediately after the first funding under the Revolving
Credit and all costs and expenses incurred by the Lender in connection with the
establishment of the credit facility contemplated hereby (including the fees and
expenses of counsel to the Lender) shall have been paid in full.
     3.7. Borrower Not In Default.
     The Borrower is not In Default.
     3.8. No Adverse Change.
     There has been no Material Adverse Change and no event shall have occurred
or failed to occur, which occurrence or failure is reasonably likely to have a
materially adverse effect upon the Borrower’s financial condition since the date
of the most recent financial information delivered to the Lender.
     3.9. Minimum Availability.
     On the Closing Date, after giving effect to the first funding under the
Revolving Credit; any charges to the Loan Account made in connection with the
establishment of the credit facility contemplated hereby; and L/C’s to be issued
at, or immediately subsequent to, such establishment, and the establishment of
all required Reserves, Availability shall not be less than $5,000,000.00.
     3.10. Benefit of Conditions Precedent.
     The conditions set forth in this Article 3, are for the sole benefit of the
Lender and may be waived by the Lender in whole or in part without prejudice to
the Lender.
     No document shall be deemed delivered to the Lender until received and
accepted by the Lender at its offices in Boston, Massachusetts. Under no
circumstances shall this Agreement take effect until executed and accepted by
the Lender at said offices.
Article 4 — General Representations, Covenants and Warranties:

28

--------------------------------------------------------------------------------

 

     To induce the Lender to establish the credit facility contemplated herein
and to induce the Lender to provide loans and advances under the Revolving
Credit (each of which loans shall be deemed to have been made in reliance
thereupon) the Borrower, in addition to all other representations, warranties,
and covenants made by the Borrower in any other Loan Document, makes those
representations, warranties, and covenants included in this Agreement. For the
avoidance of doubt, it is understood and agreed that the covenants set forth
below do not prohibit the Borrower from taking any action with the prior written
consent of Lender.
     4.1. Payment and Performance of Liabilities.
     The Borrower shall pay each payment Liability when due (or when demanded,
if payable on demand) and shall promptly, punctually, and faithfully perform
each other Liability.
     4.2. Due Organization; Authorization; No Conflicts.
          (a) The Borrower presently is and hereafter shall remain in good
standing as a corporation under the laws of the State of Delaware and is and
shall hereafter remain duly qualified and in good standing in every other State
in which, by reason of the nature or location of the Borrower’s assets or
operation of the Borrower’s business, such qualification may be necessary,
except where the failure to be so qualified would not result in a Material
Adverse Change.
          (b) The Borrower’s organizational identification number assigned to it
by the State of its incorporation and its respective federal employer
identification number is listed on EXHIBIT 4.2, annexed hereto.
          (c) The Borrower shall not change its State of organization; any
organizational identification number assigned to the Borrower by that State; or
the Borrower’s federal taxpayer identification number.
          (d) Each Affiliate is listed on EXHIBIT 4.2. The Borrower shall
provide the Lender with written notice of any entity’s becoming or ceasing to be
an Affiliate within fifteen (15) days of the Borrower obtaining knowledge of
such information.
          (e) The Borrower has all requisite power and authority to execute and
deliver all Loan Documents to which the Borrower is a party and has and will
hereafter retain all requisite power to perform all Liabilities.
          (f) The execution and delivery by the Borrower of each Loan Document
to which it is a party; the Borrower’s consummation of the transactions
contemplated by such Loan Documents (including, without limitation, the creation
of Collateral Interests by the Borrower to secure the Liabilities); the
Borrower’s performance under those of the Loan Documents to which it is a party:
          (i) Have been duly authorized by all necessary action.
          (ii) Do not, and will not, contravene in any material respect any
provision of any Requirement of Law or obligation of the Borrower.
          (iii) Will not result in the creation or imposition of, or the
obligation to create or impose, any Encumbrance upon any assets of the Borrower
pursuant to any Requirement of Law or obligation, except pursuant to the Loan
Documents.
          (g) The Loan Documents have been duly executed and delivered by the
Borrower and are the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms.

29

--------------------------------------------------------------------------------

 

     4.3. Trade Names.
          (a) EXHIBIT 4.3, annexed hereto, is a listing of:
          (i) All names under which the Borrower has conducted its business
since January 1, 2001.
          (ii) All Persons with whom the Borrower has consolidated or merged
since January 1, 2001, or from whom the Borrower has acquired since such date in
a single transaction or in a series of related transactions substantially all of
such Person’s assets.
          (b) The Borrower will provide the Lender with not less than twenty-one
(21) days prior written notice (with reasonable particularity) of any change to
the Borrower’s name from that under which the Borrower is conducting its
business at the execution of this Agreement and will not effect such change if
an Event of Default has occurred and is continuing.
     4.4. Infrastructure.
          (a) The Borrower has and will maintain a sufficient infrastructure,
when combined with any outsourcing to conduct its business as presently
conducted and as contemplated to be conducted following its execution of this
Agreement.
          (b) To the Borrower’s knowledge, the Borrower owns and possesses, or
has the right to use (and will hereafter own, possess, or have such right to
use) all material patents, industrial designs, trademarks, trade names, trade
styles, brand names, service marks, logos, copyrights, trade secrets, know-how,
confidential information, and other intellectual or proprietary property of any
third Person necessary for the Borrower’s conduct of the Borrower’s business.
          (c) The conduct by the Borrower of the Borrower’s business does not
presently and materially infringe (nor will the Borrower conduct its business in
the future so as to materially infringe) the patents, industrial designs,
trademarks, trade names, trade styles, brand names, service marks, logos,
copyrights, trade secrets, know-how, confidential information, or other
intellectual or proprietary property of any third Person.
     4.5. Locations.
          (a) The Collateral, and the books, records, and papers of the
Borrower’s pertaining thereto, are kept and maintained solely at those locations
which are listed on EXHIBIT 4.5, annexed hereto, which EXHIBIT 4.5 includes,
with respect to each such location, the name and address of the landlord on the
Lease which covers such location (or an indication that the Borrower owns the
subject location) and of all service bureaus with which any such records are
maintained.
          (b) The Borrower shall not remove any of the Collateral from those
locations listed on EXHIBIT 4.5 except for the following purposes:
          (i) To accomplish sales of Inventory in the ordinary course of
business.
          (ii) To move Inventory from one such location to another such
location.
          (iii) To utilize such of the Collateral as is removed from such
locations in the ordinary course of business (such as motor vehicles).
          (c) The Borrower shall not:

30

--------------------------------------------------------------------------------

 

          (i) Execute or materially alter, modify, or amend any Lease, other
than renewals or extensions of any Lease upon substantially similar terms as
exist on the Closing Date .
          (ii) Commit to, or open or close any location at which the Borrower
maintains, offers for sale, or stores any of the Collateral, other than in the
Borrower’s ordinary course of business locations from which drop shipments are
made by the Borrower.
          (d) Except as set forth on EXHIBIT 4.5, no material tangible personal
property of the Borrower is in the care or custody of any third party or stored
or entrusted with a bailee or other third party and none shall hereafter be
placed under such care, custody, storage, or entrustment.
     4.6. Encumbrances.
          (a) The Borrower is, and shall hereafter remain, the owner of the
Collateral free and clear of all Encumbrances other than any Permitted
Encumbrance.
          (b) Other than property held on consignment which is not included in
the calculation of the Borrowing Base and shall not in any event exceed
$100,000.00 in value at any time, the Borrower does not have, and shall not
have, possession of any property on consignment to the Borrower.
          (c) The Borrower shall not acquire or obtain the right to use any
Equipment, the acquisition or right to use of which Equipment is otherwise
permitted by this Agreement, in which Equipment any third party has an interest,
except for:
          (i) Equipment which is merely incidental to the conduct of the
Borrower’s business.
          (ii) Equipment set forth on EXHIBIT 4.6, the acquisition or right to
use of which has been consented to by the Lender, which consent may be
conditioned upon the Lender’s receipt of such agreement with the third party
which has an interest in such Equipment as is satisfactory to the Lender.
          (iii) Equipment subject to one or more Capital Leases with aggregate
future obligations outstanding to the lessor, at any one time, not to exceed
$1,500,000.00.
     4.7. Indebtedness.
     The Borrower does not and shall not hereafter have any Indebtedness other
than any Permitted Indebtedness, except for:
          (a) Any Indebtedness on account of the Revolving Credit.
          (b) The Indebtedness (if any) listed on EXHIBIT 4.7, annexed hereto.
          (c) Indebtedness otherwise associated with the acquisition of
Equipment otherwise in compliance with the requirements of Section 4.6.
     4.8. Insurance.
          (a) EXHIBIT 4.8, annexed hereto, is a schedule of all insurance
policies owned by the Borrower or under which the Borrower is the named insured.
Each of such policies is in full force and effect. Neither the Borrower nor, to
the best of Borrower’s knowledge, the issuer of any such policy, is in default
or violation of any such policy in any material respect.

31

--------------------------------------------------------------------------------

 

          (b) The Borrower shall have and maintain at all times insurance
covering such risks, in such amounts, containing such terms, in such form, for
such periods, and written by such companies as may be satisfactory to the
Lender.
          (c) All insurance carried by the Borrower shall provide for a minimum
of Thirty (30) days’ prior written notice of cancellation to the Lender and all
such insurance which covers the Collateral shall:
          (i) Include an endorsement in favor of the Lender, which endorsement
shall provide that the insurance, to the extent of the Lender’s interest
therein, shall not be impaired or invalidated, in whole or in part, by reason of
any act or neglect of the Borrower or by the failure of the Borrower to comply
with any warranty or condition of the policy.
          (ii) Not include an endorsement in favor of any other Person.
          (d) The coverage reflected on EXHIBIT 4.8 presently satisfies the
foregoing requirements, it being recognized by the Borrower, however, that such
requirements may change hereafter to reflect changing circumstances.
          (e) The Borrower shall furnish the Lender from time to time with
certificates or other evidence reasonably satisfactory to the Lender regarding
compliance by the Borrower with the foregoing requirements.
          (f) In the event of the failure by the Borrower to maintain insurance
as required herein, the Lender, at its option and the Borrower’s expense, may
obtain such insurance at the reasonable expense of the Borrower; provided,
however, the Lender’s obtaining of such insurance shall not constitute a cure or
waiver of any Event of Default occasioned by the Borrower’s failure to have
maintained such insurance.
     4.9. Licenses.
     Each license, distributorship, franchise, and similar agreement issued to,
or to which the Borrower is a party is in full force and effect, except those
the termination of which would not result in a Material Adverse Change. To the
best of Borrower’s knowledge, no party to any such license or agreement is in
default or violation thereof, which default or violation would be reasonably
likely to result in a Material Adverse Change. The Borrower has not received any
notice or threat of cancellation of any license or agreement, except those the
termination of which would not result in a Material Adverse Change.
     4.10. Leases.
     EXHIBIT 4.10, annexed hereto, is a schedule of all presently effective
Capital Leases and Leases. To the best of Borrower’s knowledge, no party to any
such Lease or Capital Lease is in default or violation of any such Lease or
Capital Lease, which default or violation would be reasonably likely to result
in a Material Adverse Change. The Borrower has not received any notice or threat
of cancellation of any such Lease or Capital Lease, except those the termination
of which would not result in a Material Adverse Change. Following the occurrence
and during the continuance of an Event of Default, the Borrower hereby
authorizes the Lender at any time and from time to time to contact any of the
Borrower’s respective landlords in order to confirm the Borrower’s continued
compliance with the terms and conditions of the Lease(s) between the Borrower
and that landlord and to discuss such issues, concerning the Borrower’s
occupancy under such Lease(s), as the Lender may determine.
     4.11. Requirements of Law.
     The Borrower is in compliance with, and shall hereafter comply with and use
its assets in compliance in all material respects with, all Requirements of Law,
except as could not be reasonably likely to result in a Material Adverse Change.
The Borrower has not received any notice of any material violation of any

32

--------------------------------------------------------------------------------

 

Requirement of Law, which violation has not been cured or otherwise remedied or,
if it occurs after the Closing Date, will not be cured within a commercially
reasonable period of time or does not result in a Material Adverse Change.
     4.12. Labor Relations.
          (a) The Borrower has not been, and shall not be, a party to any
collective bargaining or other multi-party labor contract.
          (b) There is not presently pending and, to the Borrower’s knowledge,
there is not threatened any of the following:
          (i) Any strike, slowdown, picketing, work stoppage, or material
employee grievance process which is reasonably likely to result in a Material
Adverse Change.
          (ii) Any proceeding against or affecting the Borrower relating to the
alleged violation of any Applicable Law pertaining to labor relations or before
National Labor Relations Board, the Equal Employment Opportunity Commission, or
any comparable governmental body, organizational activity, or other labor or
employment dispute against or affecting the Borrower, which, if determined
adversely to the Borrower, is reasonably likely to result in a Material Adverse
Change.
          (iii) Any material lockout of any employees by the Borrower (and no
such action is contemplated by the Borrower).
          (iv) Any application for the certification of a collective bargaining
agent.
          (c) No event has occurred or circumstance exists which are reasonably
likely to provide the basis for any material work stoppage or other material
labor dispute with a collective bargaining unit.
          (d) The Borrower:
          (i) Has complied in all material respects with all Applicable Law
relating to employment, equal employment opportunity, nondiscrimination,
immigration, wages, hours, benefits, collective bargaining, the payment of
social security and similar taxes, occupational safety and health, and plant
closing.
          (ii) Is not liable for the payment of any material amount of
compensation, damages, taxes, fines, penalties, or other amounts, however
designated, for the Borrower’s failure to comply with any Applicable Law
referenced in Section 4.12(d)(i).
     4.13. Maintain Properties.
     The Borrower shall:
          (a) Keep the Collateral in good order and repair (ordinary reasonable
wear and tear and insured casualty excepted).
          (b) Not suffer or cause the waste or destruction of any material part
of the Collateral.
          (c) Not use any of the Collateral in violation of any policy of
insurance thereon.
          (d) Not sell, lease, or otherwise dispose of any of the Collateral,
other than the following:

33

--------------------------------------------------------------------------------

 

          (i) The sale of Inventory in compliance with this Agreement, including
the sale of Inventory in the ordinary course of business.
          (ii) The disposal of Equipment which is obsolete, worn out, or damaged
beyond repair, so long as such Equipment is replaced to the extent necessary to
preserve or improve the operating efficiency of the Borrower.
          (iii) Permitted Dispositions.
          (iv) The turning over to the Lender of all Receipts as provided in
Article 7.
     4.14. Taxes.
          (a) With respect to the Borrower’s federal, state, and local tax
liability and obligations:
          (i) The Borrower, in material compliance with all Applicable Law, has
properly filed all returns due to be filed up to the Closing Date.
          (ii) Except as described on EXHIBIT 4.14, annexed hereto:
          (A) From January 1, 2001 until the Closing Date, the Borrower has not
received from any taxing authority any request to perform any examination of or
with respect to the Borrower nor any other written or verbal notice in any way
relating to any claimed failure by the Borrower to comply with all Applicable
Law concerning payment of any taxes or other amounts in the nature of taxes.
          (B) From January 1, 2001 until the Closing Date, no agreement was
entered into which waived or extended any statute of limitations applicable to
the right of any taxing authority to assert a deficiency or make any other claim
for or in respect to federal income taxes.
          (C) From January 1, 2001 until the Closing Date, no issue has been
raised in any tax examination of the Borrower which, by application of similar
principles, reasonably could be expected to result in the assertion of a
deficiency for any Fiscal year open for examination, assessment, or claim by any
taxing authority.
          (b) The Borrower has, and hereafter shall: pay, as they become due and
payable, all taxes and unemployment contributions and other charges of any kind
or nature levied, assessed or claimed against the Borrower or the Collateral by
any person, entity or governmental authority whose claim could result in an
Encumbrance upon any asset of the Borrower, except for those immaterial and
inadvertently late payments which are promptly cured and have no more than a de
minimis effect on the Borrower’s business or assets and except for those
payments which are being contested in good faith and for which adequate reserves
have been set aside; properly exercise any trust responsibilities imposed upon
the Borrower by reason of withholding from employees’ pay or by reason of the
Borrower’s receipt of sales tax or other funds for the account of any third
party; timely make all material contributions and other payments as may be
required pursuant to any Employee Benefit Plan now or hereafter established by
the Borrower; and timely file all tax and other returns and other reports with
each governmental authority to whom the Borrower is obligated to so file.
     4.15. No Margin Stock.
     The Borrower is not engaged in the business of extending credit for the
purpose of purchasing or carrying any margin stock (within the meaning of
Regulations U, T, and X of the Board of Governors of the

34

--------------------------------------------------------------------------------

 

Federal Reserve System of the United States). No part of the proceeds of any
borrowing hereunder will be used at any time to purchase or carry any such
margin stock or to extend credit to others for the purpose of purchasing or
carrying any such margin stock.
     4.16. ERISA.
          (a) Neither the Borrower nor any ERISA Affiliate has since January 1,
2001:
          (i) Violated or failed to be in compliance in all material respects
with the Borrower’s Employee Benefit Plan.
          (ii) Failed timely to file all reports and filings required by ERISA
to be filed by the Borrower, other than reports and filings which are
inadvertently late, which are promptly cured and have no more than a de minimis
effect on the Borrower’s business or assets.
          (iii) Engaged in any nonexempt “prohibited transactions” or
“reportable events” (respectively as described in ERISA).
          (iv) Engaged in, or committed, any act such that a tax or penalty that
would have more than a de minims effect could be imposed upon the Borrower on
account thereof pursuant to ERISA.
          (v) Accumulate any material cumulative funding deficiency within the
meaning of ERISA.
          (vi) Terminated any Employee Benefit Plan such that a lien could be
asserted against any assets of the Borrower on account thereof pursuant to
ERISA.
          (vii) Been a member of, contributed to, or have any obligation under
any Employee Benefit Plan which is a multiemployer plan within the meaning of
Section 4001(a) of ERISA.
          (b) Neither the Borrower nor any ERISA Affiliate shall ever engage in
any action of the type described in Section 4.16(a).
     4.17. Hazardous Materials.
          (a) Since January 1, 2001 until the Closing Date, the Borrower has
not: (i) been legally responsible for any release or threat of release of any
Hazardous Material or (ii) received notification of the incurrence of any
expense in connection with the assessment, containment, or removal of any
Hazardous Material for which the Borrower would be responsible.
          (b) Since January 1, 2001 until the Closing Date, the Borrower has
not: (i) disposed of any Hazardous Material, except in compliance with all
Environmental Laws and (ii) had possession of any Hazardous Material, except in
the ordinary course of the Borrower’s business and in compliance with all
Environmental Laws.
     4.18. Litigation.
     Except as described in EXHIBIT 4.18, annexed hereto, there is not presently
pending or threatened by or against the Borrower any suit, action, proceeding,
or investigation which would be reasonably likely to cause a Material Adverse
Change.

35

--------------------------------------------------------------------------------

 

     4.19. Dividends; Investments; Corporate Action.
     The Borrower shall not:
          (a) Pay any cash dividend or make any other distribution in respect of
any class of the Borrower’s capital stock (other than dividends paid in the form
of capital stock of the Borrower).
          (b) Make or agree to pay or make, directly or indirectly, any payment
or other distribution (whether in cash, securities or other property) of or in
respect of principal of or interest on any Indebtedness, or any payment or other
distribution (whether in cash, securities or other property), including any
sinking fund or similar deposit, on account of the purchase, redemption,
retirement, acquisition, cancellation or termination of any Indebtedness, except
(i) the Liabilities, and (ii) as long as no Event of Default has occurred and is
continuing or would result therefrom, payment of regularly scheduled interest
and principal payments as and when due in respect of Permitted Indebtedness.
          (c) Own, redeem, retire, purchase, or acquire any of the Borrower’s
capital stock provided, however, so long as Borrower is not In Default and no
Event of Default would arise therefrom Borrower shall be permitted to repurchase
at cost any shares of capital stock of the Borrower held by any former
employees, consultants or service providers of Borrower in connection with the
termination of the services of such former employees, consultants or other
service providers under the terms of the applicable agreements, in the aggregate
amount not to exceed $250,000 during any Fiscal year.
          (d) Except as otherwise set forth herein, invest in or purchase any
stock or securities or rights to purchase any such stock or securities, of any
Person other than a Permitted Investment.
          (e) Merge or consolidate or be merged or consolidated with or into any
other corporation or other entity.
          (f) Consolidate any of the Borrower’s operations with those of any
other Person.
          (g) Organize or create any Affiliate, other than wholly owned
subsidiaries.
          (h) Subordinate any debts or obligations owed to the Borrower by any
third party to any other debts owed by such third party to any other Person.
          (i) Acquire any assets other than in the ordinary course and conduct
of the Borrower’s business as conducted at the execution of this Agreement.
     4.20. Loans.
     The Borrower shall not make any loans or advances to, nor acquire the
Indebtedness of, any Person; provided, however, the foregoing does not prohibit
any of the following:
          (a) Advance payments made to the Borrower’s suppliers and service
providers in the ordinary course of Borrower’s business.
          (b) Advances to the Borrower’s officers, employees, and salespersons
with respect to reasonable expenses to be incurred by such officers, employees,
and salespersons for the benefit of the Borrower, which expenses are properly
substantiated by the person seeking such advance and properly reimbursable by
the Borrower.
     4.21. Protection of Assets.

36

--------------------------------------------------------------------------------

 

     The Lender, in the Lender’s discretion, and from time to time, may (i) upon
prior written notice to Borrower, discharge any tax or Encumbrance on any of the
Collateral, or (ii) take any other action which the Lender may deem necessary or
desirable to repair, insure, maintain, preserve, collect, or realize upon any of
the Collateral. The Lender shall not have any obligation to undertake any of the
foregoing and shall have no liability on account of any action so undertaken
except where there is a specific finding in a judicial proceeding (in which the
Lender has had an opportunity to be heard), from which finding no further appeal
is available, that the Lender had acted in actual bad faith or in a grossly
negligent manner. The Borrower shall pay to the Lender, on demand, or the
Lender, in its discretion, may add to the Loan Account, all amounts paid or
incurred by the Lender pursuant to this Section 4.21.
     4.22. Line of Business.
     The Borrower shall not engage in any business other than the business in
which it is currently engaged or a business reasonably related thereto.
     4.23. Affiliate Transactions.
     The Borrower shall not make any payment, nor give any value to any
Affiliate or any holder of more than 10% of the Borrower’s then outstanding
capital stock except for goods and services actually purchased by the Borrower
from, or sold by the Borrower to, such Affiliate or any holder of more than 10%
of the Borrower’s then outstanding capital stock for a price and on terms which
shall:
          (a) be competitive and fully deductible as an “ordinary and necessary
business expense” and/or fully depreciable under the Internal Revenue Code of
1986 and the Treasury Regulations, each as amended; and
          (b) be no less favorable to the Borrower than those which would have
been charged and imposed in an arm’s length transaction.
     4.24. Further Assurances.
          (a) The Borrower is not the owner of, nor has it any interest in, any
property or asset, other than Non-Assignable Contractual Interests, which will
not be subject to a perfected Collateral Interest in favor of the Lender
(subject only to Permitted Encumbrances and Permitted Dispositions) to secure
the Liabilities.
          (b) The Borrower will not hereafter acquire any asset or any interest
in property, other than Non-Assignable Contractual Interests, which is not,
immediately upon such acquisition, subject to such a perfected Collateral
Interest in favor of the Lender to secure the Liabilities (subject only to
Permitted Encumbrances).
          (c) The Borrower shall execute and deliver to the Lender such
instruments, documents, and papers, and shall do all such things from time to
time hereafter as the Lender may request to carry into effect the provisions and
intent of this Agreement; to protect and perfect the Lender’s Collateral
Interests in the Collateral; and to comply with all applicable statutes and
laws, and facilitate the collection of the Receivables Collateral. The Borrower
shall execute all such instruments as may be required by the Lender with respect
to the recordation and/or perfection of the Collateral Interests created or
contemplated herein.
          (d) The Borrower hereby designates the Lender as and for the
Borrower’s true and lawful attorney, with full power of substitution, to sign
and file any financing statements in order to perfect or protect the Lender’s
Collateral Interests in the Collateral.

37

--------------------------------------------------------------------------------

 

          (e) This Agreement constitutes an authenticated record which
authorizes the Lender to file such financing statements as the Lender determines
as appropriate to perfect or protect the Collateral Interests created by this
Agreement.
          (f) A carbon, photographic, or other reproduction of this Agreement or
of any financing statement or other instrument executed pursuant to this
Section 4.24 shall be sufficient for filing to perfect the security interests
granted herein.
     4.25. Adequacy of Disclosure.
          (a) All financial statements furnished to the Lender by the Borrower
have been prepared in accordance with GAAP consistently applied and present
fairly the condition of the Borrower at the date(s) thereof and the results of
operations and cash flows for the period(s) covered (provided, however, that
unaudited financial statements are subject to normal year end adjustments and to
the absence of footnotes). There has been no change in the financial condition,
results of operations, or cash flows of the Borrower since the date(s) of such
financial statements, other than changes in the ordinary course of business,
which changes have not been materially adverse, either singularly or in the
aggregate.
          (b) Other than obligations under operating Leases which are
(x) reflected in the footnotes to the financial statements or (y) which are set
forth on EXHIBIT 4.10, annexed hereto, the Borrower has no contingent
obligations or obligation under any Lease or Capital Lease which is not noted in
the Borrower’s financial statements furnished to the Lender prior to the
execution of this Agreement.
          (c) No document, instrument, agreement, or paper now or hereafter
given to the Lender by or on behalf of the Borrower in connection with the
execution of this Agreement by the Lender contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements therein not misleading. There is no
fact known to the Borrower which has, or which, in the foreseeable future could
reasonably be expected to have, a material adverse effect on the financial
condition of the Borrower which has not been disclosed in writing to the Lender.
     4.26. No Restrictions on Liabilities.
     Other than Non-Assignable Contractual Interests and the Subordination
Agreement, the Borrower shall not enter into or directly or indirectly become
subject to any agreement, which prohibits or restricts, in any manner, the
Borrower’s:
          (a) Creation of, and granting of Collateral Interests in favor of the
Lender.
          (b) Incurrence of the Liabilities hereunder.
     4.27. Other Covenants.
     The Borrower shall not indirectly do or cause to be done any act which, if
done directly by the Borrower, would breach any covenant contained in this
Agreement.
Article 5 — Financial Reporting and Performance Covenants:
     5.1. Maintain Records.
     The Borrower shall:

38

--------------------------------------------------------------------------------

 

          (a) At all times, keep proper books of account, in which full, true,
and accurate entries shall be made of all of the Borrower’s financial
transactions, consistent with prior periods to fairly reflect the financial
condition of the Borrower at the close of, and its results of operations for,
the periods in question.
          (b) Timely provide the Lender with those financial reports,
statements, and schedules required by this Article 5 or otherwise in this
Agreement, each of which reports, statements and schedules shall be prepared, to
the extent applicable, in accordance with GAAP applied consistently with prior
periods to fairly reflect the financial condition of the Borrower at the close
of, and the results of operations for, the period(s) covered therein.
          (c) At all times, keep accurate current records of the Collateral
including, without limitation, accurate current stock, cost, and sales records
of its Inventory, accurately and sufficiently itemizing and describing the
kinds, types, and quantities of Inventory and the cost and selling prices
thereof.
          (d) At all times, retain independent certified public accountants who
are reasonably satisfactory to the Lender and instruct such accountants to fully
cooperate with, and be available to, the Lender to discuss the Borrower’s
financial performance, financial condition, operating results, controls, and
such other matters, within the scope of the retention of such accountants, as
may be reasonably requested by the Lender.
          (e) Not change the Borrower’s Fiscal year.
     5.2. Access to Records.
          (a) The Borrower shall accord the Lender with access from time to
time, which, except following the occurrence and during the continuance of an
Event of Default, shall be on not less than One (1) business day prior notice
and during reasonable business hours as the Lender may require to all properties
owned by or over which the Borrower has control. The Lender shall have the
right, and the Borrower will permit the Lender from time to time as Lender may
reasonably request, to examine, inspect, copy, and make extracts from any and
all of the Borrower’s books, records, electronically stored data, papers, and
files. The Borrower shall make all of the Borrower’s copying facilities
available to the Lender.
          (b) The Borrower hereby authorizes the Lender to:
          (i) Inspect, copy, duplicate, review, cause to be reduced to hard
copy, run off, draw off, and otherwise use any and all computer or
electronically stored information or data which relates to the Borrower, or any
service bureau, contractor, accountant, or other person, and directs any such
service bureau, contractor, accountant, or other person fully to cooperate with
the Lender with respect thereto.
          (ii) Verify at any time the Collateral or any portion thereof,
including verification with Account Debtors, and/or with the Borrower’s computer
billing companies, collection agencies, and accountants and to sign the name of
the Borrower on any notice to the Borrower’s Account Debtors or verification of
the Collateral.
          (c) The Lender from time to time may designate one or more
representatives to exercise the Lender’s rights under this Section 5.2 as fully
as if the Lender were doing so.
     5.3. Immediate Notice to Lender.
          (a) The Borrower shall provide the Lender with written notice promptly
upon the occurrence of any of the following events, which written notice shall
be with reasonable particularity as to the then known facts and circumstances in
respect of which such notice is being given:

39

--------------------------------------------------------------------------------

 

          (i) Any change in the Borrower’s President, Chief Executive Officer,
Chief Operating Officer, and Chief Financial Officer (without regard to the
title(s) actually given to the Persons discharging the duties customarily
discharged by officers with those titles).
          (ii) Any ceasing of the Borrower’s making of payment, in the ordinary
course, to any of its creditors (other than its ceasing of making of such
payments on account of a good faith dispute that is not reasonably likely to
result in a Material Adverse Change.
          (iii) Any failure by the Borrower to pay rent at any of the Borrower’s
locations, which failure continues for more than Seven (7) days following the
last day on which such rent was payable and which is reasonably likely to result
in a Material Adverse Change.
          (iv) Any event which is reasonably likely to result in a Material
Adverse Change .
          (v) The Borrower’s becoming In Default.
          (vi) Any intention on the part of the Borrower to discharge the
Borrower’s present independent accountants or any withdrawal or resignation by
such independent accountants from their acting in such capacity (as to which,
see Subsection 5.1(d)).
          (vii) Any litigation which, if determined adversely to the Borrower,
is reasonably likely to have a material adverse effect on the financial
condition of the Borrower.
          (b) The Borrower shall:
          (i) Other than with respect to routine, day-to-day communications,
provide the Lender, when so distributed, with copies of any materials
distributed to the stockholders of the Borrower.
          (ii) Add the Lender as an addressee on all mailing lists maintained by
or for the Borrower.
          (iii) At the request of the Lender, from time to time, provide the
Lender with copies of all advertising (including copies of all print advertising
and duplicate tapes of all video and radio advertising).
          (iv) Provide the Lender, promptly after received by the Borrower, with
a copy of any management letter or similar communications from any accountant of
the Borrower.
     5.4. Borrowing Base Certificate.
     The Borrower shall provide the Lender with a Borrowing Base Certificate (in
the form of EXHIBIT 5.4, annexed hereto, as such form may be revised from time
to time by the Lender) at the times, and in the manner set forth on EXHIBIT 5.4,
annexed hereto.
     5.5. Monthly Reports.
     Monthly, the Borrower shall provide the Lender with those financial
statements and reports described in EXHIBIT 5.5, annexed hereto, at the times
set forth therein.
     5.6. Annual Reports.

40

--------------------------------------------------------------------------------

 

          (a) Annually, in addition to the timely submission of the monthly
reporting required at the end of every month, within Ninety (90) days following
the end of the Borrower’s Fiscal year, the Borrower shall furnish the Lender
with a signed counterpart of the Borrower’s annual financial statement, which
statement shall have been prepared by, and bear the unqualified opinion of, the
Borrower’s independent certified public accountants (i.e. said statement shall
be “certified” by such accountants) and shall include, at a minimum (with
comparative information for the then prior Fiscal year) a balance sheet, income
statement, statement of changes in shareholders’ equity, and cash flows.
          (b) No later than the earlier of Fifteen (15) days prior to the end of
each of the Borrower’s Fiscal years or the date on which such accountants
commence their work on the preparation of the Borrower’s annual financial
statement, the Borrower shall give written notice to such accountants (with a
copy of such notice, when sent, to the Lender) that:
          (i) Such annual financial statement will be delivered by the Borrower
to the Lender (for subsequent distribution to the Lender).
          (ii) It is the intention of the Borrower, in its engagement of such
accountants, to satisfy the financial reporting requirements set forth in this
Article 5.
          (iii) The Borrower has been advised that the Lender will rely thereon
with respect to the administration of, and transactions under, the credit
facility contemplated by this Agreement.
          (c) Upon Lender’s request therefore, each annual statement shall be
accompanied by such accountant’s Certificate indicating that, in conducting the
audit for such annual statement, nothing came to the attention of such
accountants to believe that the Borrower is not In Default (or that if the
Borrower is in Default, the facts and circumstances thereof).
     5.7. Officers’ Certificates
     The Borrower shall cause either the Borrower’s President or its Chief
Financial Officer, in each instance, to provide such Person’s Certificate with
those financial statements to be provided within Thirty (30) days of the end of
each month, unless such month is the last month of Borrower’s Fiscal quarter
then with in Forty Five (45) days, and Ninety (90) days with those annual
statements to be furnished pursuant to this Agreement, which Certificate shall:
          (a) Indicate that the subject statement was prepared in accordance
with GAAP consistently applied and presents fairly the financial condition of
the Borrower at the close of, and the results of the Borrower’s operations and
cash flows for, the period(s) covered, subject, however to the following:
          (b) Indicate either that (i) the Borrower is not In Default, or
(ii) if such an event has occurred, its nature (in reasonable detail) and the
steps (if any) being taken or contemplated by the Borrower to be taken on
account thereof.
          (c) Include confirmation that all of the Borrower’s taxes, insurance
premiums, and rental payments are current in all material respects.
     5.8. Inventories, Appraisals, and Audits.
          (a) The Lender, at the reasonable expense of the Borrower, may
participate in and/or observe each physical count and/or inventory of so much of
the Collateral as consists of Inventory which is undertaken on behalf of the
Borrower.

41

--------------------------------------------------------------------------------

 

          (b) The Borrower, at its own expense, shall cause at least one
(1) physical inventory to be undertaken during each year in which this Agreement
is in effect (the scheduling of which shall be subject to the Lender’s
reasonable discretion) following such methodology as may be reasonably
satisfactory to the Lender. If the Borrower is not In Default it may conduct
such physical inventory using its own personnel; provided, however, the Lender
in its reasonable discretion may require the Borrower to have such physical
inventory be conducted by such independent inventory takers as reasonably
acceptable to the Lender. Notwithstanding the foregoing, from and after and
during the continuance of an Event of Default, the Lender may require such
additional physical inventories as it shall deem necessary, each at the
Borrower’s expense.
          (i) The Borrower shall provide the Lender with a copy of the
preliminary results of each such inventory (as well as of any other physical
inventory undertaken by the Borrower) within Ten (10) days following the
completion of such inventory.
          (ii) The Borrower, within Thirty (30) days following the completion of
such inventory, shall provide the Lender with a reconciliation of the results of
each such inventory (as well as of any other physical inventory undertaken by
the Borrower) and shall post such results to the Borrower’s stock ledger and, as
applicable to the Borrower’s other financial books and records.
          (iii) The Lender, in its reasonable discretion, may cause such
additional inventories to be taken as the Lender determines (each at the
Lender’s expense).
          (c) So long as the outstanding balance of the Revolving Credit is
maintained at $0.00 for at least Ninety (90) consecutive days (a “Clean Down
Event”) during each calendar year, then the Lender contemplates conducting only
One (1) appraisal of the Collateral during any Twelve (12) month period during
which this Agreement is in effect, conducted by such appraisers as are
satisfactory to the Lender, each at the expense of the Borrower. The Lender, in
its discretion, may conduct such additional appraisals as the Lender determines
(each at the Lender’s expense); provided, however, that (i) during any calendar
year that the Borrower does not achieve a Clean Down Event, and (ii) from and
after and during the continuance of an Event of Default, the Lender may require
such additional appraisals as it shall deem necessary, each at the Borrower’s
expense.
          (d) So long as the Borrower achieves a Clean Down Event in each
calendar year, the Lender contemplates conducting One (1) commercial finance
field examinations and audits of the Borrower’s books and records during any
Twelve (12) month period during which this Agreement is in effect, each at the
expense of the Borrower. The Lender, in its discretion, may conduct such
additional commercial finance field examinations and audits as the Lender
determines (each at the Lender’s expense) provided, however, that (i) during any
calendar year that the Borrower does not achieve a Clean Down Event, and
(ii) from and after and during the continuance of an Event of Default, the
Lender may require such additional commercial finance field examinations as it
shall deem necessary, each at the Borrower’s expense.
     5.9. Additional Financial Information.
          (a) In addition to all other information required to be provided
pursuant to this Article 5, the Borrower promptly shall provide the Lender, with
such other additional information concerning the Borrower, the Collateral, the
operation of the Borrower’s business, and the Borrower’s financial condition,
including original counterparts of financial reports and statements, as the
Lender may from time to time reasonably request from the Borrower.
          (b) The Borrower may provide the Lender, from time to time hereafter,
with updated forecasts of the Borrower’s anticipated performance and operating
results.
          (c) In all events, the Borrower, no sooner than Ninety (90) nor later
than Thirty (30) days prior to the end of each of the Borrower’s Fiscal years,
shall provide the Lender with an updated and extended forecast which shall go
out at least through the end of the then next Fiscal year and shall include an
income

42

--------------------------------------------------------------------------------

 

statement, balance sheet, and statement of cash flow, by month, and each
prepared in conformity with GAAP and in a manner consistent with the Borrower’s
then current practices.
          (d) The Lender, following the receipt of any of such forecast, may,
but shall not be under any obligation to, provide its written acceptance of such
forecast (in which event, such forecast shall become the Business Plan).
          (e) The Borrower recognizes that all appraisals, inventories,
analysis, financial information, and other materials which the Lender may
obtain, develop, or receive with respect to the Borrower is confidential to the
Lender and that, except for the physical inventories and collateral appraisals
and as otherwise provided herein, the Borrower is not entitled to receipt of any
of such appraisals, inventories, analysis, financial information, and other
materials, nor copies or extracts thereof or therefrom.
          (f) The Lender agrees to keep all appraisals, inventories, analysis,
financial information, and other materials which Lender may obtain, develop, or
receive with respect to the Borrower in a confidential manner pursuant to the
terms of Section 14.2.
     5.10. Financial Performance Covenant
     The Borrower shall at all times maintain Availability, calculated without
regard to the Revolving Credit Loan Ceiling, in an amount not less than Twelve
and one-half percent (12.5%) of the then extant Revolving Credit Loan Ceiling.
Article 6 — Use of Collateral:
     6.1. Use of Inventory Collateral.
          (a) The Borrower shall not engage in any of the following with respect
to its Inventory:
          (i) Any sale other than for fair consideration in the conduct of the
Borrower’s business in the ordinary course, or a Permitted Disposition.
          (ii) Sales or other dispositions to creditors.
          (iii) Sales or other dispositions in bulk (other than as part of a
Permitted Disposition).
          (iv) Sales of any Collateral in breach of any provision of this
Agreement.
          (b) No sale of Inventory shall be on consignment, approval, or under
any other circumstances such that such Inventory may be returned to the Borrower
without the consent of the Lender, other than Inventory returnable by customers
in the ordinary course of Borrower’s business.
     6.2. Inventory Quality.
     All Inventory included in the calculation of the Borrowing Base now owned
or hereafter acquired by the Borrower is and will be of good and merchantable
quality and free from defects (other than defects within customary trade
tolerances).
     6.3. Adjustments and Allowances.

43

--------------------------------------------------------------------------------

 

     The Borrower may grant such allowances or other adjustments to the
Borrower’s Account Debtors (exclusive of extending the time for payment of any
Account or Account Receivable, which shall not be done without first obtaining
the Lender’s prior written consent in each instance) as the Borrower may
reasonably deem to accord with sound business practice; provided, however, the
authority granted the Borrower pursuant to this Section 6.3 may be limited or
terminated by the Lender at any time following the occurrence and during the
continuance of an Event of Default in the Lender’s discretion.
     6.4. Validity of Accounts.
          (a) The amount of each Account shown on the books, records, and
invoices of the Borrower represented as owing by each Account Debtor is and will
be the correct amount actually owing by such Account Debtor and shall have been
fully earned by performance by the Borrower.
          (b) The Lender from time to time may verify the Receivables Collateral
directly with the Borrower’s Account Debtors, such verification to be undertaken
in keeping with commercially reasonable commercial lending standards.
          (c) The Borrower has no knowledge of any impairment of the validity or
collectability of any of the Accounts except with respect to doubtful Accounts
as indicated on the current Borrowing Base Certificate. The Borrower shall
notify the Lender of any such impairment immediately after the Borrower becomes
aware of any such impairment.
     6.5. Notification to Account Debtors.
     The Lender shall have the right if the Borrower is In Default to notify any
of the Borrower’s Account Debtors to make payment directly to the Lender and to
collect all amounts due on account of the Collateral.
Article 7 — Cash Management. Payment of Liabilities:
     7.1. The Concentration, Blocked, and Operating Accounts.
          (a) The following checking accounts have been or will be established
(and are so referred to herein):
          (i) The “Concentration Account” (so referred to herein): Established
by the Lender with Wells Fargo Bank, N. A.
          (ii) The “Blocked Account” (so referred to herein): Established by the
Borrower with Silicon Valley Bank or such other financial institution reasonable
acceptable to the Lender.
          (iii) The “Operating Account” (so referred to herein): Established by
the Borrower with Silicon Valley Bank or such other financial institution
reasonable acceptable to the Lender.
          (b) The contents of the Blocked Account constitutes Collateral and
Proceeds of Collateral. The contents of the Concentration Account constitutes
the Lender’s property.
          (c) The Borrower shall pay all fees and charges of, and maintain such
impressed balances as may be required by the depository in which any account is
opened as required hereby (even if such account is opened by and/or is the
property of the Lender).
     7.2. Credit Card and Other Credit Financing Receipts.

44

--------------------------------------------------------------------------------

 

          (a) Annexed hereto as EXHIBIT 7.2, is a Schedule which describes all
arrangements to which the Borrower is a party with respect to the payment to the
Borrower of the proceeds of credit card charges and other credit finance
arrangements for sales by the Borrower.
          (b) The Borrower shall deliver to the Lender, as a condition to the
effectiveness of this Agreement, notification, executed on behalf of the
Borrower, to each of the Borrower’s credit card clearinghouses and processors
and other providers of credit financing of notice (in form satisfactory to the
Lender), which notice provides that payment of all credit card charges and
credit financings submitted by the Borrower to that clearinghouse or other
processor or provider and any other amount payable to the Borrower by such
clearinghouse or other processor or provider shall be directed to the Blocked
Account or as otherwise designated by the Lender upon the occurrence and during
the continuance of a Cash Dominion Event. The Borrower shall not change such
direction or designation except upon and with the prior written consent of the
Lender.
     7.3. Proceeds and Collections.
          (a) All Receipts and all cash proceeds of any sale or other
disposition of any of the Borrower’s assets:
          (i) Constitute Collateral and proceeds of Collateral.
          (ii) Shall be held in trust by the Borrower for the Lender.
          (iii) Shall not be commingled with any of the Borrower’s other funds.
          (iv) Shall be deposited and/or transferred only to the Operating
Account, Blocked Account or the Concentration Account in accordance with this
Article 7.
          (b) The Borrower shall cause the ACH or wire transfer to the Blocked
Account or, upon the occurrence and during the continuance of a Cash Dominion
Event, the Concentration Account, not less frequently than daily (and whether or
not there is then an outstanding balance in the Loan Account) of the proceeds of
all credit card charges not otherwise provided for pursuant hereto. Telephone
advice (confirmed by written notice) shall be provided to the Lender on each
Business Day on which any such transfer is made.
          (c) Whether or not any Liabilities are then outstanding, from and
after the occurrence and during the continuance of any Cash Dominion Event, the
Borrower shall cause the ACH or wire transfer to the Concentration Account, no
less frequently than daily, of then entire ledger balance of the Blocked
Account, net of such minimum balance, not to exceed $1,000.00 as may be required
to be maintained in the Blocked Account by the depository which the Blocked
Account is maintained.
          (d) In the event that, notwithstanding the provisions of this
Section 7.3, the Borrower receives or otherwise has dominion and control of any
Receipts, or any proceeds or collections of any Collateral, such Receipts,
proceeds, and collections shall be held in trust by the Borrower for the Lender
and shall not be commingled with any of the Borrower’s other funds or deposited
in any account of the Borrower other than as instructed by the Lender.
     7.4. Payment of Liabilities.
          (a) On each Business Day after the occurrence and during the
continuance of a Cash Dominion Event, the Lender shall apply the then collected
balance of the Concentration Account (net of fees charged, and of such impressed
balances as may be required by the bank at which the Concentration Account is
maintained) towards the unpaid balance of the Loan Account and all other
Liabilities, provided, however, for purposes of the calculation of interest on
the unpaid principal balance of the Loan Account, such payment shall be deemed
to have been made One (1) Business Day after such transfer.

45

--------------------------------------------------------------------------------

 

          (b) The following rules shall apply to deposits and payments under and
pursuant to this Section 7.3:
          (i) Funds shall be deemed to have been deposited to the Concentration
Account on the Business Day on which deposited, provided that notice of such
deposit is available to the Lender by 2:00PM on that Business Day.
          (ii) Funds paid to the Lender, other than by deposit to the
Concentration Account, shall be deemed to have been received on the Business Day
when they are good and collected funds, provided that notice of such payment is
available to the Lender by 2:00PM on that Business Day.
          (iii) If notice of a deposit to the Concentration Account (Section
7.4(b)(i) or payment (Section 7.4(b)(ii)) is not available to the Lender until
after 2:00PM on a Business Day, such deposit or payment shall be deemed to have
been made at 9:00AM on the then next Business Day.
          (iv) All deposits to the Concentration Account and other payments to
the Lender are subject to clearance and collection.
          (c) The Lender shall transfer to the Operating Account any surplus in
the Concentration Account remaining after the application towards the
Liabilities referred to in Section 7.4(a) (less those amount which are to be
netted out, as provided therein) provided, however, in the event that
          (i) the Borrower is In Default; and
          (ii) one or more L/C’s are then outstanding,
     then the Lender may establish a funded reserve of up to 105% of the
aggregate Stated Amounts of such L/C’s. Such funded reserve shall either be
(i) returned to the Borrower provided that no Borrower is In Default or
(ii) applied towards the Liabilities following the occurrence of any Event of
Default described in Section 10.12 or acceleration following the occurrence of
any other Event of Default.
     7.5. The Operating Account.
     Except as otherwise specifically provided in, or permitted by, this
Agreement, all checks shall be drawn by the Borrower upon, and other
disbursements shall be made by the Borrower solely from, the Operating Account.
Article 8 — Grant of Security Interest:
     8.1. Grant of Security Interest.
     To secure the Borrower’s prompt, punctual, and faithful performance of all
and each of the Liabilities, the Borrower hereby grants to the Lender, a
continuing security interest in and to, and assigns to the Lender, the
following, and each item thereof, whether now owned or now due, or in which the
Borrower has an interest, or hereafter acquired, arising, or to become due, or
in which the Borrower obtains an interest, and all products, Proceeds,
substitutions, and accessions of or to any of the following (all of which,
together with any other property in which the Lender may in the future be
granted a security interest, is referred to herein as the “Collateral”):
          (a) All Accounts and accounts receivable.

46

--------------------------------------------------------------------------------

 

          (b) All Inventory.
          (c) All General Intangibles (other than a Non-Assignable Contractual
Interest).
          (d) All Goods.
          (e) All Chattel Paper.
          (f) All Letter-of-Credit Rights.
          (g) All Payment Intangibles.
          (h) All Supporting Obligations.
          (i) All books, records, and information relating to the Collateral
and/or to the operation of the Borrower’s business, and all rights of access to
such books, records, and information, and all property in which such books,
records, and information are stored, recorded, and maintained.
          (j) All Leasehold Interests (other than a Non-Assignable Contractual
Interest).
          (k) All Investment Property, Instruments, Documents, Deposit Accounts,
money, policies and certificates of insurance, deposits, impressed accounts,
compensating balances, cash, or other property.
          (l) All insurance proceeds, refunds, and premium rebates, including,
without limitation, proceeds of fire and credit insurance, whether any of such
proceeds, refunds, and premium rebates arise out of any of the foregoing
(Section 8.1(a) through 8.1(k)) or otherwise.
          (m) All liens, guaranties, rights, remedies, and privileges pertaining
to any of the foregoing (Section 8.1(a) through 8.1(l)), including the right of
stoppage in transit.
     8.2. Extent and Duration of Security Interest.
          (a) The security interest created and granted herein is in addition
to, and supplemental of, any security interest previously granted by the
Borrower to the Lender and shall continue in full force and effect applicable to
all Liabilities until both:
          (i) all Liabilities have been paid and/or satisfied in full, including
those arrangements set forth in Section 13.2(d); and
          (ii) the security interest created herein is specifically terminated
in writing by a duly authorized officer of the Lender.
          (b) It is intended that the Collateral Interests created herein extend
to and cover all assets of the Borrower.
Article 9 — Lender As Borrower’s Attorney-In-Fact:
     9.1. Appointment as Attorney-In-Fact.
     The Borrower hereby irrevocably constitutes and appoints the Lender (acting
through any officer of the Lender) as the Borrower’s true and lawful attorney,
with full power of substitution, following the occurrence and during the
continuance of an Event of Default, to convert the Collateral into cash in a
commercially reasonable

47

--------------------------------------------------------------------------------

 

manner at the sole risk, cost, and expense of the Borrower, but for the sole
benefit of the Lender. The rights and powers granted to the Lender by this
appointment include but are not limited to the right and power to:
          (a) Prosecute, defend, compromise, or release any action relating to
the Collateral.
          (b) Sign change of address forms to change the address to which the
Borrower’s mail is to be sent to such address as the Lender shall designate;
receive and open the Borrower’s mail; remove any Receivables Collateral and
Proceeds of Collateral therefrom and turn over the balance of such mail either
to the Borrower or to any trustee in bankruptcy or receiver of the Borrower, or
other legal representative of the Borrower whom the Lender determines to be the
appropriate person to whom to so turn over such mail.
          (c) Endorse the name of the Borrower in favor of the Lender upon any
and all checks, drafts, notes, acceptances, or other items or instruments; sign
and endorse the name of the Borrower on, and receive as secured party, any of
the Collateral, any invoices, schedules of Collateral, freight or express
receipts, or bills of lading, storage receipts, warehouse receipts, or other
documents of title respectively relating to the Collateral.
          (d) Sign the name of the Borrower on any notice to the Borrower’s
Account Debtors or verification of the Receivables Collateral; sign the
Borrower’s name on any proof of claim in bankruptcy against Account Debtors, and
on notices of lien, claims of mechanic’s liens, or assignments or releases of
mechanic’s liens securing the Accounts.
          (e) Take all such action as may be necessary to obtain the payment of
any letter of credit and/or banker’s acceptance of which the Borrower is a
beneficiary.
          (f) Repair, manufacture, assemble, complete, package, deliver, alter
or supply goods, if any, necessary to fulfill in whole or in part the purchase
order of any customer of the Borrower.
          (g) Use, license or transfer any or all General Intangibles of the
Borrower.
     9.2. No Obligation to Act.
     The Lender shall not be obligated to do any of the acts or to exercise any
of the powers authorized by Section 9.1, but if the Lender elects to do any such
act or to exercise any of such powers, it shall not be accountable for more than
it actually receives as a result of such exercise of power, and shall not be
responsible to the Borrower for any act or omission to act except for any act or
omission to act as to which there is a final determination made in a judicial
proceeding (in which proceeding the Lender has had an opportunity to be heard)
which determination includes a specific finding that the subject act or omission
to act had been grossly negligent or in actual bad faith.
Article 10 — Events of Default:
     The occurrence of any event described in this Article 10 respectively shall
constitute an “Event of Default” herein. The occurrence of any Event of Default
shall also constitute, without notice or demand, a default under all other
agreements between the Lender and the Borrower and instruments and papers
heretofore, now, or hereafter given to the Lender by the Borrower.
     10.1. Failure to Pay the Revolving Credit.
     The failure by the Borrower to pay when due any principal of, interest on,
or fees in respect of, the Revolving Credit.
     10.2. Failure To Make Other Payments.

48

--------------------------------------------------------------------------------

 

     The failure by the Borrower to pay when due (or upon demand, if payable on
demand) any payment Liability other than any payment liability on account of the
principal of, or interest on, or fees in respect of, the Revolving Credit, and
such failure continues without cure for a period of Five (5) days.
     10.3. Failure to Perform Covenant or Liability (No Grace Period).
     The failure by the Borrower to promptly, punctually, faithfully and timely
perform, discharge, or comply with any covenant or Liability included in any of
the following provisions hereof:

          Section Relates to 4.7   Indebtedness 4.19   Dividends. Investments.
Other Corporate Actions 4.23   Affiliate Transactions Article 7   Cash
Management

     10.4. Failure to Perform Covenant or Liability (Grace Period).
     The failure by the Borrower to comply with (i) any covenant or Liability in
Section 4.14 or Article 5 which failure continues without cure for a period of
Five (5) days following the earlier of the Borrower’s knowledge of such breach
or of its receipt of written notice from the Lender of such breach) or (ii) any
covenant or Liability not described in Sections 10.1, 10.2 or 10.3, or 10.4(i)
which failure continues without cure for a period of Ten (10) days following the
earlier of the Borrower’s knowledge of such breach or of its receipt of written
notice from the Lender of such breach).
     10.5. Misrepresentation.
     The determination by the Lender that any representation or warranty at any
time made by the Borrower to the Lender was not true or complete in all material
respects when given.
     10.6. Extension of Lease for Distribution Facility.
     The failure of the Borrower to have entered into a renewal and extension of
the lease for the Borrower’s distribution center with Creeekside III LLC on
terms and conditions acceptable to the Lender, on or before January 1, 2008.
     10.7. Acceleration of Other Debt; Breach of Lease.
     The occurrence of any event such that any Indebtedness in excess of
$100,000.00 of the Borrower to any creditor other than the Lender could be
accelerated, or, without the consent of the Borrower, any material Lease could
be terminated (whether or not the subject creditor or lessor takes any action on
account of such occurrence).
     10.8. Default Under Other Agreements.
     The occurrence of any breach in any material respect of any covenant or
Liability imposed by, or of any default under, any agreement (including any Loan
Document) between the Lender and the Borrower or instrument given by the
Borrower to the Lender and the expiry, without cure, of any applicable grace
period (notwithstanding that the Lender may not have exercised all or any of its
rights on account of such breach or default).
     10.9. Uninsured Casualty Loss.
     The occurrence of any uninsured loss, theft, damage, or destruction of or
to any material portion of the Collateral.

49

--------------------------------------------------------------------------------

 

     10.10. Attachment; Judgment; Restraint of Business.
          (a) Other than claims which the Lender determines in its commercially
reasonable judgment are frivolous or which are for less than $250,000.00 in the
aggregate, the service of process upon the Lender seeking to attach, by trustee,
mesne, or other process, any funds of the Borrower on deposit with, or assets of
the Borrower in the possession of, the Lender.
          (b) The entry of any judgment in excess of $250,000.00 against the
Borrower, which judgment is not satisfied (if a money judgment) or appealed from
(with execution or similar process stayed) within Thirty (30) days of its entry.
          (c) The entry of any order or the imposition of any other process
having the force of law, the effect of which is to restrain in any material way
the conduct by the Borrower of its business in the ordinary course.
     10.11. Business Failure.
     Any act by, against, or relating to the Borrower, or its property or
assets, which act constitutes the determination, by the Borrower, to initiate a
program of partial or total self-liquidation; application for, consent to, or
sufferance of the appointment of a receiver, trustee, or other person, pursuant
to court action or otherwise, over all, or a material part of the Borrower’s
property; the granting of any trust mortgage or execution of an assignment for
the benefit of the creditors of the Borrower, or the occurrence of any other
voluntary or involuntary liquidation; the offering by or entering into by the
Borrower of any composition, extension, or any other arrangement seeking relief
from or extension of the debts of the Borrower; or the initiation of any
judicial or non-judicial proceeding or agreement by, against, or including the
Borrower which seeks or intends to accomplish a reorganization or arrangement
with creditors; and/or the initiation by or on behalf of the Borrower of the
liquidation or winding up of all or any material part of the Borrower’s business
or operations.
     10.12. Bankruptcy.
     The failure by the Borrower to generally pay the debts of the Borrower as
they mature; adjudication of bankruptcy or insolvency relative to the Borrower;
the entry of an order for relief or similar order with respect to the Borrower
in any proceeding pursuant to the Bankruptcy Code or any other federal
bankruptcy law; the filing of any complaint, application, or petition by the
Borrower initiating any matter in which the Borrower is or may be granted any
relief from the debts of the Borrower pursuant to the Bankruptcy Code or any
other insolvency statute or procedure; the filing of any complaint, application,
or petition against the Borrower initiating any matter in which the Borrower is
or may be granted any relief from the debts of the Borrower pursuant to the
Bankruptcy Code or any other insolvency statute or procedure, which complaint,
application, or petition is not timely contested in good faith by the Borrower
by appropriate proceedings or, if so contested, is not dismissed within Sixty
(60) days of when filed.
     10.13. Indictment — Forfeiture.
     The indictment of, or institution of any legal process or proceeding
against, the Borrower, under any Applicable Law where the relief, penalties, or
remedies sought or available include the forfeiture of a material portion of the
Borrower’s property and/or the imposition of any stay or other order, the effect
of which is reasonably likely to result in a Material Adverse Change.
     10.14. Challenge to Loan Documents.
          (a) Any challenge by or on behalf of the Borrower to the validity of
any Loan Document or the applicability or enforceability of any Loan Document
strictly in accordance with the subject Loan

50

--------------------------------------------------------------------------------

 

Document’s terms or which seeks to void, avoid, limit, or otherwise adversely
affect any security interest created by or in any Loan Document or any payment
made pursuant thereto.
          (b) Any determination by any court or any other judicial or government
authority that any Loan Document is not enforceable strictly in accordance with
the subject Loan Document’s terms or which voids, avoids, limits, or otherwise
adversely affects any security interest created by any Loan Document or any
payment made pursuant thereto.
     10.15. Change in Control.
     Any Change in Control.
Article 11 — Rights and Remedies Upon Default:
     11.1. Acceleration.
     Upon the occurrence and during the continuance of any Event of Default as
described in Section 10.12, all Indebtedness of the Borrower to the Lender shall
be immediately due and payable. Upon the occurrence and during the continuance
of any Event of Default other than as described in Section 10.12, the Lender may
declare all Indebtedness of the Borrower to the Lender to be immediately due and
payable and may exercise all of the Lender’s Rights and Remedies as the Lender
from time to time thereafter determines as appropriate.
     11.2. Rights of Enforcement.
     The Lender shall have all of the rights and remedies of a secured party
upon default under the UCC, in addition to which the Lender shall have all and
each of the following rights and remedies:
          (a) To give notice to any bank at which any DDA or Blocked Account is
maintained and in which Proceeds of Collateral are deposited, to turn over such
Proceeds directly to the Lender.
          (b) To give notice to any customs broker of the Borrower to follow the
instructions of the Lender as provided in any written agreement or undertaking
of such broker in favor of the Lender.
          (c) To collect the Receivables Collateral with or without the taking
of possession of any of the Collateral.
          (d) To take possession of all or any portion of the Collateral.
          (e) To sell, lease, or otherwise dispose of any or all of the
Collateral, in its then condition or following such preparation or processing as
the Lender deems advisable and with or without the taking of possession of any
of the Collateral.
          (f) To apply the Receivables Collateral or the Proceeds of the
Collateral towards (but not necessarily in complete satisfaction of) the
Liabilities.
          (g) To exercise all or any of the rights, remedies, powers,
privileges, and discretions under all or any of the Loan Documents.
     11.3. Sale of Collateral.

51

--------------------------------------------------------------------------------

 

          (a) Any sale or other disposition of the Collateral may be at public
or private sale upon such terms and in such manner as the Lender deems
advisable, having due regard to compliance with any statute or regulation which
might affect, limit, or apply to the Lender’s disposition of the Collateral.
          (b) Unless the Collateral is perishable or threatens to decline
speedily in value, or is of a type customarily sold on a recognized market (in
which event the Lender shall provide the Borrower such notice as may be
practicable under the circumstances), the Lender shall give the Borrower at
least Ten (10) days prior notice, by authenticated record, of the date, time,
and place of any proposed public sale, and of the date after which any private
sale or other disposition of the Collateral may be made. The Borrower agrees
that such written notice shall satisfy all requirements for notice to the
Borrower which are imposed under the UCC or other applicable law with respect to
the exercise of the Lender’s rights and remedies upon default.
          (c) The Lender may purchase the Collateral, or any portion of it at
any public sale held under this Article.
          (d) If any of the Collateral is sold, leased, or otherwise disposed of
by the Lender on credit, the Liabilities shall not be deemed to have been
reduced as a result thereof unless and until payment is finally received thereon
by the Lender.
     The Lender shall apply the proceeds of the Lender’s exercise of its rights
and remedies upon default pursuant to this Article 11.
     11.4. Occupation of Business Location.
     In connection with the Lender’s exercise of the Lender’s rights under this
Article 11 upon the occurrence and during the continuance of an Event of
Default, the Lender may enter upon, occupy, and use any premises owned or
occupied by the Borrower, and may exclude the Borrower from such premises or
portion thereof as may have been so entered upon, occupied, or used by the
Lender. The Lender shall not be required to remove any of the Collateral from
any such premises upon the Lender’s taking possession thereof, and may render
any Collateral unusable to the Borrower. In no event shall the Lender be liable
to the Borrower for use or occupancy by the Lender of any premises pursuant to
this Article 11, nor for any charge (such as wages for the Borrower’s employees
and utilities) incurred in connection with the Lender’s exercise of the Lender’s
Rights and Remedies.
     11.5. Grant of Nonexclusive License.
     The Borrower hereby grants to the Lender a royalty-free nonexclusive
irrevocable license to, upon the occurrence and during the continuance of an
Event of Default, use, apply, and affix any trademark, trade name, logo, or the
like in which the Borrower now or hereafter has rights, such license being with
respect to the Lender’s exercise of the rights hereunder including, without
limitation, in connection with any completion of the manufacture of Inventory or
sale or other disposition of Inventory.
     11.6. Assembly of Collateral.
     In connection with the Lender’s exercise of the Lender’s rights under this
Article 11 upon the occurrence and during the continuance of an Event of
Default, the Lender may require the Borrower to assemble the Collateral and make
it available to the Lender at the Borrower’s sole risk and expense at a place or
places which are reasonably convenient to both the Lender and the Borrower.
     11.7. Rights and Remedies.
     The rights, remedies, powers, privileges, and discretions of the Lender
hereunder (herein, the “Lender’s Rights and Remedies”) shall be cumulative and
not exclusive of any rights or remedies which it would otherwise have. No delay
or omission by the Lender in exercising or enforcing any of the Lender’s

52

--------------------------------------------------------------------------------

 

Rights and Remedies shall operate as, or constitute, a waiver thereof. No waiver
by the Lender of any Event of Default or of any default under any other
agreement shall operate as a waiver of any other default hereunder or under any
other agreement. No single or partial exercise of any of the Lender’s Rights or
Remedies, and no express or implied agreement or transaction of whatever nature
entered into between the Lender and any person, at any time, shall preclude the
other or further exercise of the Lender’s Rights and Remedies. No waiver by the
Lender of any of the Lender’s Rights and Remedies on any one occasion shall be
deemed a waiver on any subsequent occasion, nor shall it be deemed a continuing
waiver. The Lender’s Rights and Remedies may be exercised at such time or times
and in such order of preference as the Lender may determine. The Lender’s Rights
and Remedies may be exercised without resort or regard to any other source of
satisfaction of the Liabilities.
Article 12 — Notices:
     12.1. Notice Addresses.
     All notices, demands, and other communications made in respect of any Loan
Document (other than a request for a loan or advance or other financial
accommodation under the Revolving Credit) shall be made to the following
addresses, each of which may be changed upon Seven (7) days written notice to
all others given by certified mail, return receipt requested:

                  If to the Lender:
 
                Wells Fargo Retail Finance, LLC
One Boston Place — 18th Floor
Boston, Massachusetts 02108
 
  Attention   :   David Molinario
 
          Vice President
 
  Fax   :   617-523-4032
 
                With a copy to:
 
                Riemer & Braunstein LLP
Three Center Plaza
Boston, Massachusetts 02108
 
  Attention   :   Kevin J. Simard, Esquire
 
  Fax   :   617-880-3456
 
                If to the Borrower:
 
                RedEnvelope, Inc.
149 Montgomery Street
San Francisco, California 94105
 
  Attention       Polly E. Boe
 
          Chief Financial Officer
 
  Fax   :   415 371 1134
 
                With a copy to:
 
                Heller Erhman LLP
333 South Hope Street
39th Floor
Los Angeles, CA 90071
 
  Attention   :   Steven O. Weise, Esquire
 
  Fax   :   213-614-1868

53

--------------------------------------------------------------------------------

 

     12.2. Notice Given.
          (a) Except as otherwise specifically provided herein, notices shall be
deemed made and correspondence received, as follows (all times being local to
the place of delivery or receipt):
          (i) By mail: the sooner of when actually received or Three (3) days
following deposit in the United States mail, postage prepaid.
          (ii) By recognized overnight express delivery: the Business Day
following the day when sent.
          (iii) By Hand: If delivered on a Business Day after 9:00 AM and no
later than Three (3) hours prior to the close of customary business hours of the
recipient, when delivered. Otherwise, at the opening of the then next Business
Day.
          (iv) By Facsimile transmission (which must include a header on which
the party sending such transmission is indicated): If sent on a Business Day
after 9:00 AM and no later than Three (3) hours prior to the close of customary
business hours of the recipient, one (1) hour after being sent. Otherwise, at
the opening of the then next Business Day.
          (b) Rejection or refusal to accept delivery and inability to deliver
because of a changed address or Facsimile Number for which no due notice was
given shall each be deemed receipt of the notice sent.
     12.3. Wire Instructions. Notice Given.
     Subject to change in the same manner that a notice address may be changed
(as to which, see Section 12.1), wire transfers to the Lender shall be made in
accordance with the following wire instructions:
Wells Fargo Bank
San Francisco, CA
ABA # 121-000-248
Wells Fargo Retail Finance, LLC
Account Number 4945088607
Ref: RedEnvelope, Inc.
Article 13 — Term:
     13.1. Termination of Revolving Credit.
     The Revolving Credit shall remain in effect (subject to suspension as
provided in Section 2.7) until the Termination Date.
     13.2. Actions On Termination.
          (a) On the Termination Date, the Borrower shall pay the Lender
(whether or not then due), in immediately available funds, all then Liabilities
including, without limitation: the following:
          (i) The entire balance of the Loan Account (including the unpaid
principal balance of the Revolving Credit Loans).
          (ii) Any payments due on account of the indemnification obligations
included in Section 2.11(e).

54

--------------------------------------------------------------------------------

 

          (iii) Any accrued and unpaid Unused Line Fee.
          (iv) Any applicable Revolving Credit Early Termination Fee.
          (v) All unreimbursed costs and expenses of the Lender for which the
Borrower is responsible.
          (vi) (vi) All other Liabilities, other than Bank Products, Bank
Product Obligations and L/C’s, to the extent the Borrower complies with
Sections 13.2 (b) and (c).
          (b) On the Termination Date, the Borrower shall also shall make such
arrangements concerning any L/C’s and any Bank Products and Bank Product
Obligations then outstanding as are reasonably satisfactory to the Lender.
          (c) Until such payment (Section 13.2(a)) and arrangements concerning
L/C’s, Bank Products, and Bank Product Obligations (Section 13.2(b)), all
provisions of this Agreement, other than those included in Article 2 which place
any obligation on the Lender to make any loans or advances or to provide any
financial accommodations to the Borrower shall remain in full force and effect
until all Liabilities shall have been paid in full.
          (d) On the Termination Date, the Borrower shall make such arrangements
with respect to any other continuing Liabilities (such as the Borrower’s
continuing Liability to reimburse the Lender as set forth in Section 14.10 and
continuing indemnification Liability set forth in Section 14.14) as are
reasonably satisfactory to the Lender, such as by the establishment and funding
of cash collateral reserve accounts in such amounts as the Lender, in its sole
and exclusive discretion, may determine. The release by the Lender of the
Collateral Interests granted to the Lender by the Borrower hereunder may be upon
such other terms, conditions, and indemnifications as the Lender may require.
Article 14 — General:
     14.1. Protection of Collateral.
     The Lender has no duty as to the collection or protection of the Collateral
beyond the safe custody of such of the Collateral as may come into the
possession of the Lender.
     14.2. Confidentiality.
     The Lender agrees to use commercially reasonable efforts to treat in a
confidential manner any non-public information regarding Borrower, its
operations, assets, and existing and contemplated business plans which is
provided by Borrower to Lender pursuant to this Agreement, and not to disclose
such non-public information to Persons who are not parties to this Agreement
except with the prior consent of the Borrower (which consent shall not be
unreasonably withheld or delayed), and except that such restrictions shall not
apply to information:
          (a) provided by Lender to attorneys and other advisors, accountants,
auditors, and consultants who need such information in connection with their
work,
          (b) provided by Lender to subsidiaries and Affiliates of the Lender,
provided that any such subsidiary or Affiliate shall have agreed to receive such
information hereunder subject to the terms of this Section 14.2,
          (c) as may be required by statute, decision, or judicial or
administrative order, rule, or regulation,

55

--------------------------------------------------------------------------------

 

          (d) as may be requested or required by any Governmental Authority
pursuant to any subpoena or other legal process (in which case the Lender shall,
if permitted by law) provide notice to the Borrower and an opportunity to seek a
protective order, in each case to the extent commercially reasonable to do so),
          (e) that is or becomes generally available to the public (other than
as a result of prohibited disclosure by the Lender),
          (f) as was available to Lender on a non-confidential basis prior to
its disclosure by Lender, has becomes available to Lender on a non-confidential
basis from a Person who, to the best knowledge of Lender, is not otherwise bound
by a confidentiality agreement with Borrower or is not otherwise prohibited from
transmitting the information to Lender;
          (g) in connection with any assignment, prospective assignment, sale,
prospective sale, participation or prospective participations, or pledge or
prospective pledge of any of the Lender’s interest under this Agreement,
provided that any such assignee, prospective assignee, purchaser, prospective
purchaser, participant, prospective participant, pledgee, or prospective pledgee
shall have agreed in writing to receive such information hereunder subject to
the terms of this Section 14.2,
          (h) in connection with requests from Borrower’s vendors for credit
reference with respect to Borrower; and
          (i) in connection with any litigation or other adversary proceeding
involving parties hereto which such litigation or adversary proceeding involves
claims related to the rights or duties of such parties under this Agreement or
the other Loan Documents.
     Unless sooner terminated by agreement of the parties, the agreements
contained in this Section 14.2 shall terminate, but Three (3) years after the
termination of this Agreement, and an indefinite period of time with respect to
customer lists, unless and to the extent that disclosure is required by law,
rule, or regulation, or pursuant to any administrative or court order), provided
that any such termination shall not relieve the parties of their obligations
under this Section 14.2 with respect to confidential information disclosed prior
to the termination hereof.
     14.3. Publicity.
     The Lender may issue a “tombstone” notice of the establishment of the
credit facility contemplated by this Agreement and may make reference to the
Borrower (and may utilize any logo or other distinctive symbol associated with
the Borrower) in connection with any advertising, promotion, or marketing
(including reference in any “case study” of the creditor facility contemplated
hereby) undertaken by the Lender. Lender acknowledges that Borrower will be
required to disclose the existence and terms of this Agreement, and make other
disclosures required, pursuant to the requirements of the Securities Exchange
Act of 1934.
     14.4. Successors and Assigns.
     This Agreement shall be binding upon the Borrower and its representatives,
successors, and assigns and shall inure to the benefit of the Lender and their
respective successors and assigns, provided, however, no trustee or other
fiduciary appointed with respect to the Borrower shall have any rights
hereunder. In the event that the Lender assigns or transfers its rights under
this Agreement, the assignee shall thereupon succeed to and become vested with
all rights, powers, privileges, and duties of such assignor hereunder and such
assignor shall thereupon be discharged and relieved from its duties and
obligations hereunder.
     14.5. Severability.

56

--------------------------------------------------------------------------------

 

     Any determination that any provision of this Agreement or any application
thereof is invalid, illegal, or unenforceable in any respect in any instance
shall not affect the validity, legality, or enforceability of such provision in
any other instance, or the validity, legality, or enforceability of any other
provision of this Agreement.
     14.6. Amendments. Course of Dealing.
          (a) This Agreement and the other Loan Documents incorporate all
discussions and negotiations between the Borrower and the Lender, either express
or implied, concerning the matters included herein and in such other
instruments, any custom, usage, or course of dealings to the contrary
notwithstanding. No such discussions, negotiations, custom, usage, or course of
dealings shall limit, modify, or otherwise affect the provisions thereof. No
failure by the Lender to give notice to the Borrower of the Borrower’s having
failed to observe and comply with any warranty or covenant included in any Loan
Document shall constitute a waiver of such warranty or covenant or the amendment
of the subject Loan Document. No change made by the Lender to the manner by
which the Borrowing Base is determined shall obligate the Lender to continue to
determine the Borrowing Base in that manner.
          (b) The Borrower may undertake any action otherwise prohibited hereby,
and may omit to take any action otherwise required hereby, upon and with the
express prior written consent of the Lender. No consent, modification,
amendment, or waiver of any provision of any Loan Document shall be effective
unless executed in writing by or on behalf of the party to be charged with such
modification, amendment, or waiver (and if such party is the Lender then by a
duly authorized officer thereof). Any modification, amendment, or waiver
provided by the Lender shall be in reliance upon all representations and
warranties theretofore made to the Lender by or on behalf of the Borrower (and
any guarantor, endorser, or surety of the Liabilities) and consequently may be
rescinded in the event that any of such representations or warranties was not
true and complete in all material respects when given.
     14.7. Power of Attorney.
     In connection with all powers of attorney included in this Agreement, the
Borrower hereby grants unto the Lender (acting through any of its officers) full
power to do any and all things necessary or appropriate in connection with the
exercise of such powers as fully and effectually as the Borrower might or could
do, hereby ratifying all that said attorney shall do or cause to be done by
virtue of this Agreement. No power of attorney set forth in this Agreement shall
be affected by any disability or incapacity suffered by the Borrower and each
shall survive the same. All powers conferred upon the Lender by this Agreement,
being coupled with an interest, shall be irrevocable until this Agreement is
terminated by a written instrument executed by a duly authorized officer of the
Lender.
     14.8. Application of Proceeds.
     The proceeds of any collection, sale, or disposition of the Collateral, or
of any other payments received hereunder, shall be applied towards the
Liabilities in such order and manner as the Lender determines in its sole
discretion. The Borrower shall remain liable for any deficiency remaining
following such application.
     14.9. Increased Costs.
     If, as a result of any Requirement of Law, or of the interpretation or
application thereof by any court or by any governmental or other authority or
entity charged with the administration thereof, whether or not having the force
of law, which:
          (a) subjects the Lender to any taxes or changes the basis of taxation,
or increases any existing taxes, on payments of principal, interest or other
amounts payable by the Borrower to the Lender

57

--------------------------------------------------------------------------------

 

under this Agreement (except for taxes on the Lender based on net income or
capital imposed by the jurisdiction in which the principal or lending offices of
the Lender is located);
          (b) imposes, modifies or deems applicable any reserve, cash margin,
special deposit or similar requirements against assets held by, or deposits in
or for the account of or loans by or any other acquisition of funds by the
relevant funding office of the Lender;
          (c) imposes on the Lender any other condition with respect to any Loan
Document; or
          (d) imposes on the Lender a requirement to maintain or allocate
capital in relation to the Liabilities;
     and the result of any of the foregoing, in the Lender’s reasonable opinion,
is to increase the cost to the Lender of making or maintaining any loan, advance
or financial accommodation or to reduce the income receivable by the Lender in
respect of any loan, advance or financial accommodation by an amount which the
Lender deems to be material, then upon written notice from the Lender, from time
to time, to the Borrower (such notice to set out in reasonable detail the facts
giving rise to and a summary calculation of such increased cost or reduced
income), the Borrower shall forthwith pay to the Lender, upon receipt of such
notice, that amount which shall compensate the Lender for such additional cost
or reduction in income.
     14.10. Costs and Expenses of the Lender.
          (a) The Borrower shall pay from time to time on demand all Costs of
Collection and all reasonable costs, expenses, and disbursements (including
attorneys’ reasonable fees and expenses) which are incurred by the Lender in
connection with the preparation, negotiation, execution, and delivery of this
Agreement and of any other Loan Documents, and all other reasonable costs,
expenses, and disbursements which may be incurred in connection with or in
respect to the credit facility contemplated hereby or which otherwise are
incurred with respect to the Liabilities, subject to any limits stated in this
Agreement.
          (b) The Borrower shall pay from time to time on demand all reasonable
costs and expenses (including attorneys’ reasonable fees and expenses) incurred,
following the occurrence of any Event of Default, by the Lender.
          (c) The Borrower authorizes the Lender to pay all such fees and
expenses and in the Lender’s discretion, to add such fees and expenses to the
Loan Account.
          (d) The undertaking on the part of the Borrower in this Section 14.10
shall survive payment of the Liabilities and/or any termination, release, or
discharge executed by the Lender in favor of the Borrower, other than a
termination, release, or discharge which makes specific reference to this
Section 14.10.
     14.11. Copies and Facsimiles.
     Each Loan Document and all documents and papers which relates thereto which
have been or may be hereinafter furnished to the Lender may be reproduced by the
Lender by any photographic, microfilm, xerographic, digital imaging, or other
process, and such Person making such reproduction may destroy any document so
reproduced. Any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made in the
regular course of business). Any facsimile which bears proof of transmission
shall be binding on the party which or on whose behalf such transmission was
initiated and likewise shall be so admissible in evidence as if the original of
such facsimile had been delivered to the party which or on whose behalf such
transmission was received.
     14.12. Massachusetts Law.

58

--------------------------------------------------------------------------------

 

     This Agreement and all rights and obligations hereunder, including matters
of construction, validity, and performance, shall be governed by the law of The
Commonwealth of Massachusetts.
     14.13. Consent to Jurisdiction.
          (a) The Borrower agrees that any legal action, proceeding, case, or
controversy against the Borrower with respect to any Loan Document may be
brought in the Superior Court of Suffolk County Massachusetts or in the United
States District Court, District of Massachusetts, sitting in Boston,
Massachusetts, as the Lender may elect in the Lender’s sole discretion. By
execution and delivery of this Agreement, the Borrower, for itself and in
respect of its property, accepts, submits, and consents generally and
unconditionally, to the jurisdiction of the aforesaid courts.
          (b) The Borrower WAIVES personal service of any and all process upon
it, and irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by certified mail, postage prepaid, to the Borrower at the Borrower’s
address for notices as specified herein, such service to become effective five
(5) Business Days after such mailing.
          (c) The Borrower WAIVES any objection based on forum non conveniens
and any objection to venue of any action or proceeding instituted under any of
the Loan Documents and consents to the granting of such legal or equitable
remedy as is deemed appropriate by the Court.
          (d) Nothing herein shall affect the right of the Lender to bring legal
actions or proceedings in any other competent jurisdiction.
          (e) The Borrower agrees that any action commenced by the Borrower
asserting any claim arising under or in connection with this Agreement or any
other Loan Document shall be brought solely in the Superior Court of Suffolk
County Massachusetts or in the United States District Court, District of
Massachusetts, sitting in Boston, Massachusetts, and that such Courts shall have
exclusive jurisdiction with respect to any such action.
     14.14. Indemnification.
     The Borrower shall indemnify, defend, and hold the Lender and any of its
respective employees, officers, or agents (each, an “Indemnified Person”)
harmless of and from any claim brought or threatened against any Indemnified
Person by the Borrower, any guarantor or endorser of the Liabilities, or any
other Person (as well as from attorneys’ reasonable fees, expenses, and
disbursements in connection therewith) on account of the relationship of the
Borrower or of any other guarantor or endorser of the Liabilities, including all
costs, expenses, liabilities, and damages as may be suffered by any Indemnified
Person in connection with (x) the Collateral; (y) the occurrence of any Event of
Default; or (z) the exercise of any rights or remedies under any of the Loan
Documents (each of claims which may be defended, compromised, settled, or
pursued by the Indemnified Person with counsel of the Lender’s selection, but at
the expense of the Borrower) other than any claim as to which a final
determination is made in a judicial proceeding (in which the Lender and any
other Indemnified Person has had an opportunity to be heard), which
determination includes a specific finding that the Indemnified Person seeking
indemnification had acted in a grossly negligent manner or in actual bad faith.
This indemnification shall survive payment of the Liabilities and/or any
termination, release, or discharge executed by the Lender in favor of the
Borrower, other than a termination, release, or discharge duly executed on
behalf of the Lender which makes specific reference to this Section 14.14.
     14.15. Rules of Construction.
     The following rules of construction shall be applied in the interpretation,
construction, and enforcement of this Agreement and of the other Loan Documents:

59

--------------------------------------------------------------------------------

 

          (a) Unless otherwise specifically provided for herein (and then only
to the extent so provided), interest and any fee or charge which is stated as a
per annum percentage shall be calculated based on a 360 day year and actual days
elapsed.
          (b) Words in the singular include the plural and words in the plural
include the singular.
          (c) Unless otherwise specifically provided for herein or in a specific
Loan Document (and then only to the extent so provided), as between the parties
hereto or to any Loan Document, the definitions of the following terms, as
included in the UCC, are deemed to be as follows for purposes of the performance
of obligations arising under or in respect of any Loan Document:
          (i) “Authenticate” means “signed”.
          (ii) “Record” means written information in a tangible form.
          (d) Cross references to Sections in this Agreement begin with the
Article in which that Section appears, and then the Section to which reference
is made.
          (e) Titles, headings (indicated by being underlined or shown in Small
Capitals) and any Table of Contents are solely for convenience of reference; do
not constitute a part of the instrument in which included; and do not affect
such instrument’s meaning, construction, or effect.
          (f) The words “includes” and “including” are not limiting.
          (g) Text which follows the words “including, without limitation” (or
similar words) is illustrative and not limitational.
          (h) Text which is shown in italics (except for parenthesized
italicized text), shown in bold, shown IN ALL CAPITAL LETTERS, or in any
combination of the foregoing, shall be deemed to be conspicuous.
          (i) The words “may not” are prohibitive and not permissive.
          (j) Any reference to a Person’s “knowledge” (or words of similar
import) are to such Person’s actual knowledge assuming that such Person has
undertaken reasonable investigation with respect to the subject of such
“knowledge” (whether or not such investigation has actually been undertaken).
          (k) Terms which are defined in one section of any Loan Document are
used with such definition throughout the instrument in which so defined.
          (l) The term “Dollars” and the symbol “$” each refers to United States
Dollars.
          (m) Unless limited by reference to a particular Section or provision,
any reference to “herein”, “hereof”, or “within” is to the entire Loan Document
in which such reference is made.
          (n) References to “this Agreement” or to any other Loan Document is to
the subject instrument as amended to the date on which application of such
reference is being made.
          (o) Except as otherwise specifically provided, all references to time
are to Boston time.
          (p) In the determination of any notice, grace, or other period of time
prescribed or allowed hereunder:

60

--------------------------------------------------------------------------------

 

          (i) Unless otherwise provided (I) the day of the act, event, or
default from which the designated period of time begins to run shall not be
included and the last day of the period so computed shall be included unless
such last day is not a Business Day, in which event the last day of the relevant
period shall be the then next Business Day and (II) the period so computed shall
end at 5:00 PM on the relevant Business Day.
          (ii) The word “from” means “from and including”.
          (iii) The words “to” and “until” each mean “to, but excluding”.
          (iv) The word “through” means “to and including”.
          (q) The Loan Documents shall be construed and interpreted in a
harmonious manner and in keeping with the intentions set forth in Section 14.16,
provided, however, in the event of any inconsistency between the provisions of
this Agreement and any other Loan Document, the provisions of this Agreement
shall govern and control.
     14.16. Intent.
     It is intended that:
          (a) This Agreement take effect as a sealed instrument.
          (b) The scope of all Collateral Interests created by the Borrower to
secure the Liabilities be broadly construed in favor of the Lender and that they
cover all assets of the Borrower.
          (c) All Collateral Interests created in favor of the Lender at any
time and from time to time secure all Liabilities, whether now existing or
contemplated or hereafter arising.
          (d) All reasonable costs, expenses, and disbursements incurred by the
Lender and, to the extent provided in Section 14.10 the Lender, in connection
with such Person’s relationship(s) with the Borrower shall be borne by the
Borrower, except as otherwise provided in this Agreement.
          (e) Unless otherwise explicitly provided herein, the Lender’s consent
to any action of the Borrower which is prohibited unless such consent is given
may be given or refused by the Lender in its sole discretion and without
reference to Section 2.16(a).
          (f) The statement in any section hereof that (i) an Event of Default
has occurred unless and until cured, or (ii) a provision of this Agreement shall
apply only “during the continuance of an Event of Default,” (or words of similar
import) shall not imply any right or ability of the Borrower to cure any such
Event of Default, or any obligation of the Lender to waive any Event of Default
or permit the cure of any Event of Default, with any such waiver granted, or
cure permitted in the Lender’s sole discretion, and without regard to
Section 2.16(a). No such waiver or cure, if granted or permitted, shall take
effect, unless and until provided for in writing executed by duly authorized
officers of the Borrower and the Lender.
     14.17. Right of Set-Off.
     Any and all deposits or other sums at any time credited by or due to the
Borrower from the Lender or from any Affiliate of any of the Lender, and any
cash, securities, instruments or other property of the Borrower in the
possession of any of the foregoing, whether for safekeeping or otherwise
(regardless of the reason such Person had received the same) shall at all times
constitute security for all Liabilities and for any and all obligations of the
Borrower to the Lender or such Affiliate and may be applied or set off against
the Liabilities

61

--------------------------------------------------------------------------------

 

and against such obligations at any time, whether or not such are then due and
whether or not other collateral is then available to the Lender.
     14.18. Pledges To Federal Reserve Banks.
     Nothing included in this Agreement shall prevent or limit the Lender, to
the extent that the Lender is subject to any of the twelve Federal Reserve Banks
organized under §4 of the Federal Reserve Act (12 U.S.C. §341) from pledging all
or any portion of that Lender’s interest and rights under this Agreement,
provided, however, neither such pledge nor the enforcement thereof shall release
the Lender from any of its obligations hereunder or under any of the Loan
Documents.
     14.19. Patriot Act Compliance.
     The Lender hereby notifies the Borrower that, pursuant to the requirements
of the “USA Patriot Act” (Title III of Pub. Law 107-56, signed into law
effective October 26, 2001), the Lender is required to obtain, verify, and
record information that identifies the Borrower, which includes the name and
address of the Borrower and other information that will allow the Lender to
identify the Borrower in accordance with the USA Patriot Act.
     14.20. Maximum Interest Rate.
     Regardless of any provision of any Loan Document, the Lender shall not be
entitled to contract for, charge, receive, collect, or apply as interest on any
Liability, any amount in excess of the maximum rate imposed by Applicable Law.
Any payment which is made which, if treated as interest on a Liability would
result in such interest’s exceeding such maximum rate shall be held, to the
extent of such excess, as additional collateral for the Liabilities as if such
excess were “Collateral.
     14.21. Waivers.
          (a) The Borrower makes each of the waivers included in
Section 14.21(b), knowingly, voluntarily, and intentionally, and understands
that Lender, in establishing the facilities contemplated hereby and in providing
loans and other financial accommodations to or for the account of the Borrower
as provided herein, whether now or in the future, is relying on such waivers.
          (b) THE BORROWER WAIVES THE FOLLOWING:
          (i) Except as otherwise specifically required hereby, notice of
non-payment, demand, presentment, protest and all forms of demand and notice,
both with respect to the Liabilities and the Collateral.
          (ii) Except as otherwise specifically required hereby or where such
right may not be waived by law, the right to notice and/or hearing prior to the
Lender’s exercising of the Lender’s rights upon default.
          (iii) THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN
WHICH THE LENDER IS OR BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS
INITIATED BY OR AGAINST THE LENDER OR IN WHICH THE LENDER IS JOINED AS A PARTY
LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT OF, ANY
RELATIONSHIP AMONG OR BETWEEN THE BORROWER OR ANY OTHER PERSON AND THE LENDER
LIKEWISE WAIVES THE RIGHT TO A JURY IN ANY TRIAL OF ANY SUCH CASE OR
CONTROVERSY).

62

--------------------------------------------------------------------------------

 

          (iv) The benefits or availability of any stay, limitation, hindrance,
delay, or restriction (including, without limitation, any automatic stay which
otherwise might be imposed pursuant to Section 362 of the Bankruptcy Code) with
respect to any action which the Lender may or may become entitled to take
hereunder.
          (v) Any defense, counterclaim, set-off, recoupment, or other basis on
which the amount of any Liability, as stated on the books and records of the
Lender, could be reduced or claimed to be paid otherwise than in accordance with
the tenor of and written terms of such Liability.
          (vi) Any claim to consequential, special, or punitive damages.
[SIGNATURE PAGE FOLLOWS]

63

--------------------------------------------------------------------------------

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as a sealed instrument as
of the day and year first above written.

     
 
  (The “Borrower”)
 
   
 
  REDENVELOPE, INC.
 
   
 
  By: /s/ Polly Boe
 
   
 
  Print Name: Polly Boe
 
   
 
  Title: Chief Financial Officer
 
   
 
  (The “Lender”)
 
   
 
  WELLS FARGO RETAIL FINANCE, LLC
 
   
 
  By: /s/ David Molinario
 
   
 
  Print Name: David Molinario
 
   
 
  Title: Vice President