Exhibit 10.2

THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT

AND FIRST AMENDMENT TO RATIFICATION AGREEMENT

This THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT AND FIRST AMENDMENT TO
RATIFICATION AGREEMENT (this “Agreement”), dated as of February 6, 2012, is made
by and among Salus Capital Partners, LLC (as assignee of Wells Fargo Bank,
N.A.), in its capacity as agent (in such capacity, “Agent”) acting for and on
behalf of itself and the lenders from time to time party to the Loan Agreement
(as defined below) (collectively with Agent, the “Lenders”), the Lenders, and
RoomStore Inc., a Virginia corporation, as Debtor and Debtor-in-Possession
(“Borrower” or “Debtor” and collectively with Agent and Lenders, the “Parties”).

W I T N E S S E T H:

WHEREAS, on the Petition Date, Borrower commenced its chapter 11 bankruptcy case
(the “Chapter 11 Case”) in the United States Bankruptcy Court for the Eastern
District of Virginia (the “Bankruptcy Court”), and Borrower retained possession
of its assets and is authorized under title 11 of chapter 11 of the United
States Code (the “Bankruptcy Code”) to continue the operation of its businesses
as a debtor-in-possession; and

WHEREAS, prior to the commencement of the Chapter 11 Case, Wells Fargo Bank,
N.A. (“Wells Fargo”), as successor by merger to Wells Fargo Retail Finance, LLC,
made loans and advances and provided other financial or credit accommodations to
Borrower secured by substantially all assets and properties of Borrower as set
forth in the Pre-Petition Loan Documents (as defined below); and

WHEREAS, the Bankruptcy Court entered the Interim Order (A) Authorizing Debtor
To Obtain Interim Post-Petition Financing and Grant Security Interests and
Superpriority Administrative Expense Status Pursuant to 11 U.S.C. §§ 105 and
364(c); (B) Authorizing the Use of Cash Collateral; (C) Modifying the Automatic
Stay Pursuant to 11 U.S.C. § 362; (D) Authorizing Debtor To Enter Into
Agreements With Wells Fargo Bank, N.A., in Its Capacity as Agent; and
(E) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001 (the “Interim
Financing Order”) [Docket No. 53], pursuant to which Wells Fargo made
post-petition loans and advances and provided other financial accommodations to
Borrower, which advances and other financial accommodations were secured by
substantially all the assets and properties of Borrower as set forth in the
Interim Financing Order; and

WHEREAS, in connection with the Interim Financing Order, Borrower entered into
the Ratification Agreement (as defined below), which modified the terms of the
Pre-Petition Loan Documents (as defined below); and

WHEREAS, the Bankruptcy Court entered the Final Order (A) Authorizing Debtor To
Obtain Interim Post-Petition Financing and Grant Security Interests and
Superpriority Administrative Expense Status Pursuant to 11 U.S.C. §§ 105 and
364(c); (B) Authorizing the Use of Cash Collateral; (C) Modifying the Automatic
Stay Pursuant to 11 U.S.C. § 362; and (D) Authorizing Debtor To Enter Into
Agreements With Wells Fargo Bank, N.A., in Its Capacity as Agent; (the “Final
Financing Order”) [Docket No. 222] on January 5, 2012, as affirmed and modified
by the Supplemental Order (defined below); and

 

BOS 46,869,300v9    

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

WHEREAS, Wells Fargo, as both agent and lender, has assigned to Salus Capital
Partners, LLC all of its right, title, and interest in to, and under the Loan
Documents, such that Salus Capital Partners, LLC is the sole Lender and the
Agent under the Loan Documents and the Pre-Petition Loan Documents; and

WHEREAS, the Borrower, the Agent and the Lenders desire to amend the terms and
conditions of the Loan Documents in accordance with the terms and conditions set
forth herein.

NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Agent, Lenders, and
Borrower mutually covenant, warrant and agree as follows:

1. DEFINITIONS.

1.1 Additional Definitions. As used herein, the following terms shall have the
respective meanings given to them below, and the Loan Agreement and the other
Loan Documents shall be deemed and are hereby amended to include, in addition
and not in limitation, each of the following definitions:

(a) “Cash Collateral Advances” shall mean the Revolving Credit Loans in the
aggregate principal amount of $1,517,250, the proceeds of which were paid to
Wells Fargo as cash collateral for contingent obligations related to certain
standby letters of credit issued by Wells Fargo for the account of Borrower.

(b) “CDS” shall mean Creative Distribution Services, LLC.

(c) “Collateral” shall have the meaning set forth in section 2.1.1 of the Final
Financing Order (as defined below).2

(d) “Guarantor Documents” shall mean that certain General Security Agreement and
that certain Guaranty executed on December 15, 2011 by MDG (as defined below) in
favor of Wells Fargo, each as assigned by Wells Fargo to Agent and Lenders on
January 20, 2011.

(e) “MDG” shall mean Mattress Discounters Group, LLC, which is also referred to
in the Loan Documents as the “Guarantor.”

(f) “MDG Advance Amount” shall mean, as of any date, the lesser of
(i) $2,500,000 and (ii) the product of (x) the trailing twelve-month EBITDA of
MDG, multiplied by (y) 65%, multiplied by (z) 4.0; provided that if at any time
(1) any of the Guarantor Documents shall not be in full force and effect,
effective to grant in favor of Agent, for the benefit of the

 

2 

As provided in footnote 2 to the Final Financing Order, the liens granted to
Agent and Lenders pursuant thereto (a) extend to the proceeds, if any, of the
Debtors’ leasehold interests in real property, but do not extend to any such
leasehold interests themselves and (b) do not extend to avoidance power actions
brought under Sections 542, 545, 547, 548, 549, or 550 of the Bankruptcy Code.

 

BOS 46,869,300v9   2  

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

Lenders, a valid and effective first priority lien on all or substantially all
of the assets of MDG (subject to the limitations set forth in the Guarantor
Documents), or (2) MDG or any other party shall terminate the effectiveness or
enforceability of any of the Guarantor Documents, the MDG Advance Amount shall
be zero.

(g) “MDG/CDS Advances” shall mean any Revolving Credit Loans attributable to the
MDG Advance Amount and the Pledged CDS Equity Amount. The principal amount of
all Revolving Credit Loans outstanding at any time shall constitute MDG/CDS
Advances up to the MDG/CDS Advance Ceiling (as defined below), provided that any
outstanding Cash Collateral Advances shall not constitute MDG/CDS Advances.

(h) “MDG/CDS Advance Ceiling” shall mean the sum of the MDG Advance Amount and
the Pledged CDS Equity Amount (as defined below).

(i) “Obligations”: 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) All Liabilities.

(ii) Any and all direct and indirect liabilities, debts, and obligations of the
Borrower to the Agent or the Lenders, each of every kind, nature, and
description.

(iii) Each obligation to repay any loan, advance, indebtedness, note,
obligation, overdraft, or amount now or hereafter owing by the Borrower to the
Agent or the Lenders (including all future advances whether or not made pursuant
to a commitment by the Agent or the Lenders), 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 Agent or the Lenders, may hold
against the Borrower.

(iv) All notes and other obligations of the Borrower now or hereafter assigned
to or held by the Agent or the Lenders, each of every kind, nature, and
description.

(v) All interest, fees, and charges and other amounts which may be charged by
the Agent or the Lenders, to the Borrower and/or which may be due from the
Borrower to the Agent or the Lenders, from time to time.

(vi) All costs and expenses incurred or paid by the Agent or the Lenders, in
respect of any agreement between the Borrower and the Agent or the Lenders, or
instrument

 

BOS 46,869,300v9   3  

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

furnished by the Borrower to the Agent or Lenders (including, without
limitation, Costs of Collection, attorneys’ reasonable fees, including
reasonable fees and expenses of Lenders’ Special Counsel, and all court and
litigation costs and expenses).

(vii) Any and all covenants of the Borrower to or with the Agent or the Lenders,
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 Agent or the Lenders,
or instrument furnished by the Borrower to the Agent or the Lenders.

(viii) Each of the foregoing as if each reference to “Agent,” were to each
Affiliate of the Agent and each of the foregoing as if each reference to
“Lenders,” were to each Affiliate of the Lenders.

(b) Any and all direct or indirect liabilities, debts, and obligations of the
Borrower to the Agent or the Lenders or any Affiliate of the Agent or Affiliate
of the Lenders, each of every kind, nature, and description owing on account of
any service or accommodation provided to, or for the account of the Borrower, in
each case pursuant to this or any other Loan Document, including Bank Product
Obligations and the issuances of L/C’s.

(j) “Pledged CDS Equity” shall mean the thirty-one percent (31%) membership
interest in CDS owned by Borrower and pledged to Agent, for the benefit of the
Lenders, pursuant to the terms of the Pledge Agreement, dated as of May 27, 2010
by Borrower in favor of Agent.

(k) “Pledged CDS Equity Amount” shall mean $500,000; provided that if at any
time (i) Agent, for the benefit of the Lenders, shall not hold a perfected
first-priority pledge of all of Borrower’s membership interests in CDS
(constituting not less than 31% of the total membership interests in CDS), or
(ii) if CDS shall be subject to any proceeding under the Bankruptcy Code or any
other state or federal insolvency proceeding, the Pledged CDS Equity Amount
shall be deemed to be zero.

(l) “Pledged MDG Equity” shall mean the sixty-five percent (65%) membership
interest in MDG owned by Borrower and pledged to Agent, for the benefit of the
Lenders, pursuant to the terms of the Pledge Agreement, dated as of May 27, 2010
by Borrower in favor of Agent.

(m) “Pre-Petition Loan Documents” shall mean the Loan Documents (as defined in
the Pre-Petition Loan Agreement), as amended prior to the Petition Date, in each
instance as in effect immediately prior to the Petition Date.

(n) “Pre-Petition Loan Agreement” shall mean the Loan and Security Agreement,
dated as of May 27, 2010, by and among Borrower, Agent, and Lenders, as amended

 

BOS 46,869,300v9   4  

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

by Amendment No. 1 to Loan and Security Agreement dated as of September 23,
2011, by and among Wells Fargo (as agent and sole lender) and the Borrower, and
as in effect immediately prior to the Petition Date.

(o) “Pre-Petition Liabilities” shall mean all Obligations arising at any time
before the Petition Date, whether incurred by Borrower as principal, surety,
endorser, guarantor or otherwise and including, without limitation, all
principal, interest, financing charges, letter of credit fees, unused line fees,
servicing fees, line increase fees, early termination fees, other fees,
commissions, costs, expenses and attorneys’, accountants’, and consultants’ fees
and expenses incurred in connection with any of the foregoing.

(p) “Post-Petition Liabilities” shall mean all Obligations arising on or after
the Petition Date, and whether arising on or after the conversion or dismissal
of the Chapter 11 Case, or before, during, and after the confirmation of any
plan of reorganization in the Chapter 11 Case, and whether arising under or
related to the Loan Agreement, the other Loan Documents, the Final Financing
Order, by operation of law, or otherwise, and whether incurred by Borrower as
principal, surety, endorser, guarantor, or otherwise and including, without
limitation, all principal, interest, financing charges, letter of credit fees,
unused line fees, servicing fees, line increase fees, debtor-in-possession
facility fees, early termination fees, other fees, commissions, costs, expenses,
and attorneys’, accountants’, and consultants’ fees and expenses incurred in
connection with any of the foregoing.

(q) “Ratification Agreement” shall mean that certain Ratification and Amendment
Agreement dated as of December 14, 2011, by and among Borrower, Guarantor,
Agent, and Lenders.

(r) “Supplemental Order” shall mean an order of the Bankruptcy Court
(i) approving the terms, conditions, and amendments to the Loan Documents set
forth in this Agreement, (ii) authorizing the Parties to enter into this
Agreement, and (iii) supplementing and/or modifying the Final Financing Order
(as defined below), as applicable.

(s) “Third Amendment” shall mean this Agreement.

(t) “Third Amendment Effective Date” shall mean the date of entry by the
Bankruptcy Court of the Supplemental Order.

1.2 Amendments to Definitions.

(a) Appraised Inventory Net Liquidation Value. The definition of “Appraised
Inventory Net Liquidation Value” in the Loan Agreement is hereby deleted in its
entirety and the following substituted therefor:

“Appraised Inventory Net Liquidation Value”: The product of (a) the Cost of
Eligible Inventory (net of Inventory Reserves) multiplied by (b) that
percentage, determined by the Agent from the then most recent appraisal of
Borrower’s Inventory obtained by the Agent, to reflect the

 

BOS 46,869,300v9   5  

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

appraiser’s estimate of the net realization on Cost of the Liquidation of the
Borrower’s Inventory. Agent and Lenders acknowledge and agree that as of the
Third Amendment Effective Date (and without limiting the right of the Agent to
obtain any new appraisal of Borrower’s Inventory), the percentages contemplated
by the forgoing clause (b) shall be as set forth below for the months indicated:

 

Month

   Percentage

January 2012

   67.00%

February 2012

   69.20%

March 2012

   66.10%

April 2012

   66.90%

May 2012

   67.70%

(b) Appraised Real Property Net Liquidation Value. The definition of “Appraised
Real Property Net Liquidation Value” in the Loan Agreement is hereby deleted in
its entirety and the following substituted therefor:

“Appraised Real Property Net Liquidation Value”: $4,700,000 as of the Third
Amendment Effective Date, which amount may be adjusted upward or downward as
determined by the Agent based upon receipt of the most recent appraisal of such
Real Property obtained by the Agent, to reflect the appraiser’s estimate of the
net realization of the Liquidation of such Real Property.

(c) Availability Reserves. The definition of “Availability Reserves” in the Loan
Agreement is hereby deleted in its entirety and the following substituted
therefor:

“Availability Reserves”: Such reserves as the Agent from time to time determines
in the Agent’s reasonable discretion as being appropriate to reflect the
impediments to the Agent’s ability to realize upon the Collateral. Without
limiting the generality of the foregoing, Availability Reserves may include (but
are not limited to) reserves based on the following:

(i) Rent for any location in a Landlord State if a Collateral Access Agreement
has not been received by the Agent (which shall be one (1) month’s rent for any
such location).

(ii) Customer Credit Liabilities.

(iii) Taxes and other governmental charges, including, ad valorem, personal
property, and other taxes which in each case might have priority over the
Collateral Interests of the Agent in the Collateral, in each case unless being
contested in good faith and for which adequate cash reserves for the payment
thereof have been established.

 

BOS 46,869,300v9   6  

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

(iv) Bank Product Obligations.

(v) Payables that are past the Borrower’s normal trade terms.

As of the Third Amendment Effective Date, Agent and Lenders acknowledge and
agree that “Availability Reserves” include the following, provided that the
foregoing shall not in any way limit the ability of the Agent at any time to
impose additional Availability Reserves or modify existing Availability Reserves
in Agent’s reasonable credit judgment:

 

Description

   Amount      Reserve Factor     Reserve Amount   Merchandise Credits        
Gift Certificates    $ 35,234         50 %    $ 17,617    Customer Deposits    $
3,470,168         50 %    $ 1,735,084    Landlord Liens    $ 401,432         1
month      $ 401,432    Self-Insured Medical Claims    $ 474,600         2
months      $ 949,200    Texas Sales Tax    $ 304,624         1 month      $
304,624    Texas Property Tax    $ 468,414         1 year      $ 468,414   
Professional Fee Carve-Out    $ 500,000       $ 75,000/week      $ 500,000   
Wells Fargo Purchase Card    $ 15,000         Credit Limit      $ 15,000   

(d) Bank Product Obligations. The definition of “Bank Product Obligations” in
the Loan Agreement is hereby deleted in its entirety and the following
substituted therefor:

“Bank Product Obligations”: All obligations, liabilities, contingent
reimbursement obligations, fees, and expenses owing by the Borrower or its
Subsidiaries to Bank Product Providers pursuant to or evidenced by a Bank
Product Agreement 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 Borrower is obligated
to reimburse to Lender as a result of Lender purchasing participations or
executing indemnities or reimbursement obligations with respect to the Bank
Products provided to Borrower or its Subsidiaries pursuant to the Bank Product
Agreements.

(e) Bank Product Providers. The definition of “Bank Product Providers” in the
Loan Agreement is hereby deleted in its entirety and the following substituted
therefor:

“Bank Product Providers”: Wells Fargo Bank, N.A. and any other bank satisfactory
to Agent and Borrower that from time to time either provides Bank Products to
the Borrower or its Subsidiaries.

(f) Bank Products. The definition of “Bank Products” in the Loan Agreement is
hereby deleted in its entirety and the following substituted therefor:

“Bank Products”: Any service or facility extended to the Borrower or its
Subsidiaries by a Bank Product Provider, including: (a) credit cards, (b) credit
card processing services, (c) debit cards, (d) purchase cards, (e) ACH
Transactions, (f) cash management, including controlled disbursement, accounts
or services, or (g) Hedge Agreements.

 

BOS 46,869,300v9   7  

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

(g) Base. The definition of “Base” in the Loan Agreement is hereby deleted in
its entirety and the following substituted therefor:

“Base”: The rate of interest per annum publicly announced from time to time by
JPMorgan Chase Bank, N.A. as its “prime rate” in effect in New York, New York,
each change in “Base” to be effective from and including the date such change is
publicly announced as being effective.

(h) Base Margin. The definition of “Base Margin” in the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:

“Base Margin”: Three percent (3.0%).

(i) Borrowing Base. The definition of “Borrowing Base” in the Loan Agreement is
hereby deleted in its entirety and the following substituted therefor:

(i) The face amount of Eligible Credit Card Receivables (including Borrower’s
private label credit card receivables, so long as such credit card program
remains available for new sales) multiplied by the Credit Card Advance Rate
(less associated Receivables Reserves);

Plus

(ii) The lesser of (x) the Appraised Inventory Net Liquidation Value of Eligible
Inventory multiplied by (1) from the Third Amendment Effective Date through the
date two months thereafter, 95%, and (2) thereafter, 92% (less Inventory
Reserves); and (y) 70% of the value of Eligible Inventory (calculated at the
lower of Cost or market value);

Plus

(iii) The Appraised Real Property Net Liquidation Value of all Eligible Real
Property multiplied by the Real Property Advance Rate (less any Real Property
Reserves);

Plus

(iv) the MDG Advance Amount;

Plus

(v) the Pledged CDS Equity Amount;

Minus

(vi) Any Availability Reserves established by Agent.

 

BOS 46,869,300v9   8  

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

(j) Budget. The definition of Budget is hereby deleted in its entirety and
replaced with the following:

“Budget”: The budget attached to the Third Amendment as Exhibit A and the
Supplemental Order, as amended and supplemented from time to time in accordance
with the Loan Documents and Final Financing Order.

(k) Cost. The definition of “Cost” in the Loan Agreement is hereby deleted in
its entirety and replaced with the following:

“Cost”: The lower of

(a) the calculated cost of purchases, based upon the Borrower’s accounting
practices, on an average cost basis, known to the Agent, which practices are in
effect on the Third Amendment Effective Date, as such calculated cost is
determined from invoices received by the Borrower, the Borrower’s purchase
journal, or the Borrower’s stock ledger, as applicable; and

(b) the cost equivalent of the lowest ticketed or promoted price at which the
subject Inventory is offered to the public, after all mark-downs (whether or not
such price is then reflected on the Borrower’s accounting system), determined in
accordance with the Borrower’s historic business practices;

provided that “Cost” does not include Inventory capitalization costs or other
non-purchase price charges (such as UNICAP) used in the Borrower’s calculation
of cost of goods sold.

(l) Eligible Real Property. The definition of “Eligible Real Property” in the
Loan Agreement is hereby deleted in its entirety and replaced with the
following:

“Eligible Real Property”: The Domestic Distribution Center, provided that Agent
has a perfected security interest, lien, mortgage, deed of trust, or collateral
assignment that is prior and superior to all claims and all Encumbrances (other
than Permitted Encumbrances, subject to the Agent’s rights to establish Reserves
therefor in accordance with the terms of this Agreement).

(m) Interest Payment Date. The definition of “Interest Payment Date” in the Loan
Agreement is hereby deleted in its entirety and replaced with the following:

“Interest Payment Date”: the first day of each month and the Termination Date.

(n) Issuer. The definition of “Issuer” in the Loan Agreement is hereby deleted
in its entirety and replaced with the following:

“Issuer”: The issuer of any L/C, including Sovereign Bank or any other
commercial bank approved by Agent and acceptable to Borrower.

 

BOS 46,869,300v9   9  

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

(o) Material Budget Deviation. The definition of “Material Budget Deviation” in
the Loan Agreement is hereby deleted in its entirety and replaced with the
following:

“Material Budget Deviation” shall mean, with respect to any Test Period, if
(i) the inventory receipts of Borrower during such Test Period are less than
eighty percent (80%) of the projected inventory receipts during such Test Period
as reflected in the Budget, (ii) any line item expense (excluding line items
within the “Bankruptcy Costs” category in the Budget and as further detailed on
a schedule attached to each submission) during such Test Period exceeds one
hundred fifteen percent (115%) of the projected line item expense during such
Test Period as reflected in the Budget, or (iii) aggregate cash disbursements by
Borrower during such Test Period exceed one hundred ten percent (110%) of the
projected aggregate disbursements during such Test Period as reflected in the
Budget.

(p) Maturity Date. The definition of “Maturity Date” in the Loan Agreement is
hereby deleted in its entirety and the following substituted therefor:

“Maturity Date”: June 12, 2013, or, if such day is not a Business Day, the next
succeeding Business Day.

(q) Permitted Encumbrances. The definition of “Permitted Encumbrances” in the
Loan Agreement is hereby amended by adding a new subsections (m) and (n) as
follows:

“(m) Liens in favor of Wells Fargo on Borrower’s cash held by Wells Fargo as
cash collateral for letters of credit issued by Wells Fargo for the account of
Borrower.

(n) Liens in favor of Wells Fargo on Borrower’s cash held by Wells Fargo as cash
collateral for the P-card reserves and general reserve (as described in
Assignment Agreement).”

(r) Real Property Advance Rate. The definition of “Real Property Advance Rate”
in the Loan Agreement is hereby deleted in its entirety and the following
substituted therefor:

“Real Property Advance Rate”: Seventy percent (70%).

(s) Revolving Credit Loan Ceiling. The definition of “Revolving Credit Loan
Ceiling” in the Loan Agreement is hereby deleted in its entirety and the
following substituted therefor:

“Revolving Credit Loan Ceiling”: Fifteen Million Dollars ($15,000,000).

 

BOS 46,869,300v9   10  

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

(t) Termination Date. The definition of “Termination Date” in the Loan Agreement
is hereby deleted in its entirety and the following substituted therefor:

“Termination Date”: The earliest to occur of (a) the Maturity Date; (b) the date
set as the Termination Date in a notice by the Agent to Borrower on account of
the occurrence of any Event of Default (other than the Existing Defaults) or the
occurrence of an event of default as specified under the Final Financing Order;
(c) the effective date of a plan of reorganization or liquidation of Borrower in
the Chapter 11 Case; (d) closing of a sale of all or substantially all of the
assets of the Borrower; and (e) payment in full in cash of all Liabilities, and
cash collateralization of all contingent and continuing Liabilities in
accordance with the Loan Documents, after notice by Borrower to Agent of
Borrower’s intent to terminate this Agreement.

(u) Test Period. The definition of “Test Period” in the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:

“Test Period” shall mean each three-week period ending on Sunday of each week
covered by the Budget; provided that, until the third full Budget week after
January 20, 2012, Budget compliance testing using forecast weeks ending
January 29, 2012 through February 12, 2012 shall proceed under the Loan
Documents and the Final Financing Order without giving effect to the Third
Amendment or the Supplemental Order; provided, however, that during any Test
Period, including but not limited to forecast weeks 1 through 3, “Budget” shall
have the meaning ascribed thereto in the Third Amendment.

(v) Loan Documents. All references to the term “Loan Documents” in the Loan
Agreement or the other Loan Documents shall be deemed, and each such reference
is hereby amended, to include, in addition and not in limitation, this
Agreement, the Ratification Agreement, the Supplemental Order, the Final
Financing Order and all of the Pre-Petition Loan Documents, as ratified,
assumed, and adopted by Borrower pursuant to the terms hereof, as each of the
same now exists or may hereafter be amended, modified, supplemented, extended,
renewed, restated, or replaced.

(w) Loan Agreement. All references to the term “Loan Agreement” in the Loan
Agreement or the other Loan Documents shall be deemed, and each such reference
is hereby amended, to mean the Pre-Petition Loan Agreement, as amended by the
Ratification Agreement and this Agreement and as ratified, assumed and adopted
by Borrower pursuant to the terms hereof, as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.

(x) Liabilities. All references to the term “Liabilities” in the Loan Agreement,
this Agreement or the other Loan Documents shall be deemed, and each such
reference is hereby amended, to mean both the Pre-Petition Liabilities and the
Post-Petition Liabilities.

 

BOS 46,869,300v9   11  

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

1.3 Deleted Definitions.

The following definitions shall be deleted in their entirety from the Loan
Agreement: “Arrangement Fee”, “Eastern Division”, “Eastern Division Appraised
Inventory Liquidation Value”, “Eastern Division Borrowing Base”, “Eastern
Division Inventory Advance Rate”, “Factored Receivables”, “Federal Funds Rate”,
“Fee Letter”, “IT Trigger Date”, “Western Division”, “Western Division Appraised
Inventory Liquidation Value”, “Western Division Borrowing Base” and “Western
Division Inventory Advance Rate” and such definitions and references thereto
shall no longer be applicable to the Loan Agreement.

1.4 Interpretation.

(a) For purposes of this Agreement, unless otherwise defined or amended herein,
including, but not limited to, those terms used or defined in the recitals
hereto, all terms used herein shall have the respective meanings assigned to
such terms in the Loan Agreement.

(b) All references to any term in the singular shall include the plural and all
references to any term in the plural shall include the singular unless the
context of such usage requires otherwise.

(c) All terms not specifically defined herein or in the Loan Agreement that are
defined in the Uniform Commercial Code, as in effect in the State of New York as
of the date hereof, shall have the meaning set forth therein, except that the
term “Lien” or “lien” shall have the meaning set forth in § 101(37) of the
Bankruptcy Code.

2. ACKNOWLEDGMENT.

2.1 Pre-Petition Liabilities and Post-Petition Liabilities.

(a) Borrower hereby acknowledges, confirms and agrees that, as of January 20,
2012, (i) all Pre-Petition Liabilities have been paid in full and all Revolving
Credit Loans and other obligations under the Loan Documents constitute
Post-Petition Liabilities and (ii) prior to giving effect to the Assignment
Agreement, Borrower was indebted to Wells Fargo, pursuant to the terms of the
Loan Documents in respect of all Post-Petition Liabilities in the aggregate
principal amount of not less than $4,357,280.00, consisting of (i) Revolving
Credit Loans made pursuant to the Loan Documents (which include the Cash
Collateral Advances), together with interest accrued and accruing thereon, and
(ii) other charges now or hereafter owed by Borrower to Agent and Lenders in
respect thereof, all of which are unconditionally owing by Borrower to Agent and
Lenders, without offset, defense, or counterclaim of any kind, nature, and
description whatsoever.

 

BOS 46,869,300v9   12  

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

(b) Borrower hereby acknowledges, confirms and agrees that, as of the
February 3, 2012, Borrower was indebted to Agent and Lenders in respect of all
Post-Petition Liabilities in the aggregate principal amount of not less than
$6,126,857.95 in respect of all Post-Petition Liabilities, consisting of
(i) Revolving Credit Loans made pursuant to the Loan Documents, together with
interest accrued and accruing thereon, and (ii) other charges now or hereafter
owed by Borrower to Agent and Lenders in respect thereof, all of which are
unconditionally owing by Borrower to Agent and Lenders, without offset, defense,
or counterclaim of any kind, nature, and description whatsoever.

2.2 Acknowledgment of Security Interests.

Borrower hereby acknowledges, confirms, and agrees that Agent, for the benefit
of itself and the Lenders, has and shall continue to have valid, enforceable,
and perfected first-priority and senior security interests in and liens upon all
of the Collateral, for the benefit of itself and Lenders, pursuant to the Loan
Documents, Assignment Agreement, and Final Financing Order, to secure all of the
Liabilities, subject only to Permitted Encumbrances and any other liens or
encumbrances expressly permitted by the Final Financing Order that may have
priority over the liens in favor of Agent and Lenders.

2.3 Binding Effect of Documents.

Borrower hereby acknowledges, confirms, and agrees that (a) each of the Loan
Documents to which it is a party was duly executed and delivered to Agent and
Lenders by Borrower and each is in full force and effect as of the date hereof,
(b) the agreements and obligations of Borrower contained in the Loan Documents
constitute the legal, valid, and binding obligations of Borrower enforceable
against it in accordance with the terms thereof, and Borrower has no valid
defense, offset, or counterclaim to the enforcement of such obligations, and
(c) Agent and Lenders are and shall be entitled to all of the rights, remedies,
and benefits provided for in the Loan Documents and the Final Financing Order.

3. ADOPTION AND RATIFICATION

Borrower hereby (a) ratifies, assumes, adopts, and agrees to be bound by all of
the Loan Documents to which it is a party, consistent with the terms thereof (as
may be amended by this Agreement and the Supplemental Order) and (b) agrees to
pay all of the Liabilities in accordance with the terms of such Loan Documents,
as amended by this Agreement, and in accordance with the Final Financing Order.

4. GRANT OF SECURITY INTEREST.

As collateral security for the prompt performance, observance and payment in
full of all of the Liabilities, Borrower, as debtor and debtor-in-possession,
hereby confirms, reaffirms, and restates Borrower’s prior grant to Agent, for
the benefit of itself and Lenders, of continuing security interests in and liens
upon, and rights of setoff against, all of the Collateral.

 

BOS 46,869,300v9   13  

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

5. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS.

In addition to the continuing representations, warranties, and covenants
heretofore and hereafter made by Borrower to Agent and Lenders, whether pursuant
to the Loan Documents, the Final Financing Order, or otherwise, and not in
limitation thereof, Borrower hereby represents, warrants, and covenants to Agent
and Lenders the following (which shall survive the execution and delivery of
this Agreement), the truth and accuracy of which, or compliance with, to the
extent such compliance does not violate the terms and provisions of the
Bankruptcy Code, shall be a continuing condition of the making of Revolving
Credit Loans and facilitating Letters of Credit by Agent and Lenders:

5.1 Orders.

The Final Financing Order and the Supplemental Order have been duly entered, are
valid, subsisting, and continuing and have not been vacated, modified, reversed
on appeal, or vacated or modified by any order of the Bankruptcy Court (other
than as consented to by Agent) and are not subject to any pending appeal or
stay.

5.2 Use of Proceeds.

All Revolving Credit Loans and L/Cs provided or procured by Agent or any Lender
to Borrower pursuant to the Loan Documents, the Final Financing Order, or
otherwise, shall be used by Borrower for general operating and working capital
purposes in the ordinary course of business of Borrower and in accordance with
the Budget and the Loan Documents. Unless authorized by the Bankruptcy Court and
approved by Agent in writing, no portion of any administrative expense claim or
other claim relating to the Chapter 11 Case shall be paid with the proceeds of
such Revolving Credit Loans or L/Cs provided or facilitated by Agent and Lenders
to or for Borrower, other than those administrative expense claims, and other
claims relating to the Chapter 11 Case directly attributable to the operation of
the business of Borrower in the ordinary course of such business in accordance
with the Budget, the Loan Documents, the Final Financing Order, and any other
order entered by the Bankruptcy Court in the Chapter 11 Case. The payment of
allowed fees and expenses of professionals retained pursuant to an order of the
Bankruptcy Court and entitled to compensation from the Debtor’s estate pursuant
to an order of the Bankruptcy Court shall not require the approval or consent of
Agent; provided that (i) payment of any such allowed fees and expenses from the
Collateral or the proceeds of any Revolving Credit Loans or L/ Cs shall be
subject to the Budget, the Final Financing Order, and the Loan Documents and
(ii) other than with respect to the Carve-Out (as defined in the Final Financing
Order) as and to the extent provided in the Final Financing Order, Agent and
Lenders shall have no obligation to pay, or to ensure that Borrower has the
Availability to pay, any such allowed fees and expenses.

5.3 Reorganization/Emergence Process.

In the event that Borrower has not, on or before the close of business on
April 15, 2012, repaid in full in cash all Liabilities or filed with the
Bankruptcy Court a plan of liquidation or reorganization in form and substance
reasonably satisfactory to Agent, Borrower shall:

 

BOS 46,869,300v9   14  

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

(a) If Borrower obtains a further extension of the 210-day period for any of its
unexpired leases of nonresidential real estate (the “Extended Leases”), then for
each Extended Lease: (i) each of the deadlines set forth below shall be extended
automatically by the duration of such extension; (ii) the terms Fixtures and
Other Assets shall not refer to the Borrower’s assets and properties at the
corresponding store location during the period of the extension of the deadlines
provided in (i) above; and (iii) Other Assets shall not refer to the Borrower’s
intellectual property until such time as the extension of the deadlines provided
in (i) above shall have run for each of the Extended Leases.

(b) Sale Motion. Not later than April 16, 2012, Borrower shall file with the
Bankruptcy Court a motion, in form and substance satisfactory to Agent, seeking
approval, on terms and conditions acceptable to Agent, of (i) an auction, and
subsequent assignment and assumption, of the Leases for each of Borrower’s store
locations, (ii) for an auction sale of the Fixtures located at such store
locations and (iii) for the sale by the liquidator, as described below, of the
remaining assets and properties (other than Leases and Fixtures but including
Inventory and intellectual property) of Borrower (the “Other Assets”).

(c) Bid Package. Simultaneously with the filing of such motion, Borrower shall
distribute bid packages to nationally recognized retail inventory liquidation
firms with respect to the Other Assets. Such bid packages shall require the
submission, not later than April 20, 2012, of bids to conduct the sales of the
Other Assets.

(d) Discussion of Bids. Borrower shall discuss all bids received with Agent and,
in consultation with Agent and the Committee, Borrower may select a “stalking
horse” bidder prior to the auction with respect to the Other Assets.

(e) Auction. Not later than April 23, 2012, Borrower shall auction the right to
conduct the sales of the Other Assets to the highest and best bidder (the
“Second Liquidator”).

(f) Other Asset Sale Order. Not later than April 24, 2012, Borrower shall obtain
the entry of an Order of the Bankruptcy Court, in form and substance
satisfactory to Agent, approving the Second Liquidator with respect to the Other
Assets and authorizing the sale of the Other Assets on terms and conditions
acceptable to Agent (the “Other Asset Sale Order”).

(g) Sale of Other Assets. Not later than April 26, 2012, Borrower shall commence
the sale of the Other Assets in accordance with the Other Asset Sale Order and
otherwise on terms and conditions acceptable to Agent.

(h) Auction Order. Not later than April 30, 2012, Borrower shall obtain the
entry of an Order of the Bankruptcy Court, in form and substance satisfactory to
Agent, authorizing Borrower to conduct an auction sale, on terms and conditions
acceptable to Agent, with respect to the Leases and Fixtures (the “Auction
Order”).

(i) Auction. Not later than May 11, 2012, Borrower shall hold an auction for the
sale of the Leases and Fixtures to the highest and best bidder in accordance
with the Auction Order.

(j) Lease/Fixture Sale Order. Not later than May 14, 2012, Borrower shall obtain
the entry of an Order of the Bankruptcy Court, in form and substance
satisfactory to Agent, approving the results of the auction, authorizing the
sale of the Fixtures, and assignment and assumption of the Leases, to the
highest and best bidder (the “Lease and Fixture Sale Order”).

 

BOS 46,869,300v9   15  

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

(k) Sale of Leases and Fixtures. Not later than May 24, 2012, Borrower shall
consummate the sale of the Fixtures, and assignment and assumption of the
Leases, in accordance with the terms of the Lease and Fixture Sale Order and
otherwise on terms and conditions acceptable to Agent.

5.4 Bankruptcy Reporting.

Borrower shall provide Agent with copies of all financial reports, schedules,
and other materials and information at any time furnished by or on behalf of
Borrower to the Bankruptcy Court, the United States Trustee, or any creditors’
committee appointed in the Chapter 11 Case, in each instance concurrently with
the delivery thereof to the Bankruptcy Court, United States Trustee, or
creditors’ committee, as applicable. Subject to execution by MDG and Ray
Bojanowski (individually and on behalf of MDG) of a nondisclosure agreement
acceptable to Borrower, Borrower shall provide to MDG and Ray Bojanowski copies
of all financial reports delivered to Agent under Section 5.8 of the Loan
Agreement simultaneously with their provision to Agent.

6. AMENDMENTS.

6.1 Revolving Credit Loan Requests.

Section 2.5 of the Loan Agreement is hereby deleted in its entirety and the
following substituted therefor:

“(a) Requests for loans and advances under the Revolving Credit may be requested
by the Borrower in such manner as may from time to time be reasonably acceptable
to the Agent.

(b) The Borrower may request that the Agent cause the issuance of L/C’s for the
account of the Borrower as provided in Section 2.18.

(c) Agent may rely on any request for a loan or advance, or other financial
accommodation under the Revolving Credit that the Agent, 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 Agent’s being furnished
with such documentation concerning that Person’s authority to act as may be
reasonably satisfactory to the Agent.

 

BOS 46,869,300v9   16  

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

(d) 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) Each representation, not relating to a specific date, that is made herein or
in any of the Loan Documents is then true and correct in all material respects
as of and as if made on the date of such request (except (A) to the extent of
changes resulting from transactions contemplated or permitted by this Agreement
or the other Loan Documents and changes occurring in the ordinary course of
business and (B) to the extent that such representations and warranties
expressly relate to an earlier date).

(ii) Neither a Default nor an Event of Default exists.

(e) If, at any time or from time to time, a Default or Event of Default exists
and is continuing, Agent may suspend the Revolving Credit immediately, in which
event neither the Agent nor the Lenders shall be obligated during such
suspension to make any additional loans or advances or to provide any additional
financial accommodation hereunder or to seek the issuance of any L/C.”

6.2 The Loan Account.

Section 2.8 of the Loan Agreement is hereby amended by adding a new subsection
(g) as follows:

“(g) Collections and payments received by Agent shall be applied to the
Obligations on the first Business Day following the Business Day of receipt of
such payment.”

6.3 Payment of the Loan Account.

Section 2.10 of the Loan Agreement is hereby deleted in its entirety and the
following substituted therefor:

“2.10 LOAN ACCOUNT AND MANDATORY PREPAYMENTS

(a) Subject to Section 2.13 hereof, 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 Agent, shall pay the Agent
that amount, from time to time, that is necessary so that there is no Overloan,
including, without limitation, a Permissible Overloan, outstanding.

(c) The Borrower shall repay the then entire unpaid balance of the Revolving
Credit and all other Liabilities on the Termination Date.

 

BOS 46,869,300v9   17  

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

(d) The Agent shall endeavor to cause payments, pursuant to Sections 2.10(a) and
2.10(b), to be applied in accordance with Section 7.5(a) of this Agreement.

(e) In the event that Borrower sells all or any portion of its interest in the
Pledged MDG Equity or the Pledged CDS Equity, or Borrower receives dividends or
distributions on account of the Pledged MDG Equity or the Pledged CDS Equity
outside of the ordinary course of business, the entire amount of the net
proceeds of such sales, dividends, or distributions shall be applied to reduce
the balance of the Revolving Credit and the Revolving Credit Loan Ceiling shall
be permanently reduced by an amount equal to (i) in the case of a sale of the
Pledged MDG Equity or the Pledged CDS Equity, a pro rata percentage of the MDG
Advance Amount or the Pledged CDS Equity Amount, based upon the portion of the
Pledged MDG Equity or Pledged CDS Equity sold, as applicable, or (ii) in the
case of dividends or distributions on account of the Pledged MDG Equity or the
Pledged CDS Equity outside of the ordinary course of business, an amount to be
agreed upon by the parties.”

6.4 Interest on Revolving Credit Loans.

Section 2.11 of the Loan Agreement is hereby deleted in its entirety and the
following substituted therefor:

“2.11 INTEREST ON REVOLVING CREDIT LOANS AND MDG/CDS ADVANCES.

(a) Except as set forth in Section 2.11(b) and 2.11(c), each Revolving Credit
Loan shall bear interest at a per annum rate equal to the greater of (x) the
Base Rate plus the Base Rate Margin and (y) five and one-half percent (5.5%), as
determined based upon a 360-day year and actual days elapsed.

(b) MDG/CDS Advances shall bear interest (i) for the period from the Third
Amendment Effective Date until ninety (90) days after the Third Amendment
Effective Date, at thirteen percent (13%) per annum, and (ii) thereafter, a
percentage determined with reference to the grid set forth below based upon
average Availability during the most recently completed fiscal quarter:

 

Availability

   Interest Rate for
MDG/CDS Advances

$5,000,000 or greater

   9.50%

Less than $5,000,000 but more than $3,000,000

   11.0%

$3,000,000 or less

   13.0%

Following the date ninety (90) days after the Third Amendment Effective Date,
the interest rate for MDG/CDS Advances shall be set as of the first day of each
fiscal quarter of the Borrower based upon the average Availability for the

 

BOS 46,869,300v9   18  

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

immediately preceding fiscal quarter. The principal amount of all Revolving
Credit Loans outstanding at any time shall constitute MDG/CDS Advances up to the
MDG/CDS Advance Ceiling, provided that any outstanding Cash Collateral Advances
shall not constitute MDG/CDS Advances.

(c) Cash Collateral Advances shall bear interest at three percent (3.0%) per
annum.

(d) Accrued and unpaid interest on the outstanding principal balance of the
Revolving Credit Loans (including the MDG/CDS Advances and the Cash Collateral
Advances) shall be due and payable on each Interest Payment Date.

(e) Following the occurrence and during the continuance of any Event of Default
or at any time following the Termination Date, in Agent’s sole discretion, all
Revolving Credit Loans (including the MDG/CDS Advances and the Cash Collateral
Advances) shall bear interest at a rate that is two percent (2.0%) above the
applicable rate set forth above.”

6.5 Unused Line Fee.

Section 2.12 of the Loan Agreement is hereby deleted in its entirety and the
following substituted therefor:

“2.12 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 Agent, for the benefit of the
Lenders, an “Unused Line Fee.” The Unused Line Fee shall equal Three Quarters of
One Percent (0.75%) per annum of the average difference between the Revolving
Credit Loan Ceiling and the sum of (i) the unpaid principal balance of the Loan
Account and (ii) the Stated Amount of issued and undrawn L/Cs. The Unused Line
Fee shall be payable monthly in arrears on the first day of each month, and on
the Termination Date.”

6.6 Early Termination Fee.

Section 2.13 of the Loan Agreement is hereby deleted in its entirety and the
following substituted therefor:

“2.13 EARLY TERMINATION OR EXIT FEES.

(a) If (i) the Revolving Credit is terminated or permanently reduced for any
reason (including by the Agent and Lenders following the occurrence and
continuance of an Event of Default, or upon the Termination Date, or if Borrower
elects to terminate the Revolving Credit or reduce the Revolving Credit Ceiling
on a date prior to the Maturity Date), (ii) the Obligations are paid in full on
the Maturity Date or otherwise and this Agreement is terminated, or (iii) this
Agreement is converted into an exit credit facility upon Borrower’s emergence

 

BOS 46,869,300v9   19  

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

from the Chapter 11 Case with the consent of the Agent and Lenders (it being
understood that any such consent shall be granted in the sole discretion of
Agent and Lenders and there being no commitment on the part of Agent and Lenders
to do so), then Borrower shall pay to Agent, for the benefit of the Lenders, a
fee in an amount equal to three-quarters of one percent (0.75%) of the then
effective Revolving Credit Loan Ceiling (or in the case of a reduction of the
Revolving Credit Loan Ceiling, three-quarters of one percent (0.75%) of the
amount by which the Revolving Credit Loan Ceiling is to be reduced). The fee
payable by the Borrower pursuant to this Section 2.13(a) shall be fully earned
and due and payable upon the date of the occurrence of any event described in
the foregoing clauses (i), (ii), or (iii), and upon the occurrence of any such
event, no portion of the fee payable under this Section 2.13(a) shall be subject
to refund, rebate, or abatement in whole or part.

(b) In addition to the fee described in Section 2.13(a), if either (i) Lenders
offer to provide exit financing in connection with Borrower’s reorganization and
emergence from the Chapter 11 Case (it being understood that any such financing
shall be offered in the sole discretion of Agent and Lenders and there being no
commitment on the part of Agent and Lenders to do so) or (ii) Borrower
voluntarily terminates this Agreement for any reason (including repayment of the
Obligations under this Agreement with the proceeds of an alternative
debtor-in-possession credit facility or exit facility), then Borrower shall pay
to Agent, for the benefit of the Lenders, an additional fee in an amount equal
to three-quarters of one percent (0.75%) of the then effective Revolving Credit
Loan Ceiling. The fee payable by Borrower pursuant to this Section 2.13(b) shall
be fully earned and due and payable upon the date of the occurrence of any event
described in the foregoing clauses (i) and (ii), and upon the occurrence of any
such event no portion of such fee shall be subject to refund, rebate, or
abatement in whole or part.”

6.7 Arrangement Fee.

Section 2.14 of the Loan Agreement is hereby deleted in its entirety and the
following substituted therefor:

“2.14 CLOSING FEE AND COLLATERAL MONITORING FEE

(a) Borrower shall pay to Agent, for the benefit of the Lenders, a “Closing Fee”
in the amount of $150,000, which Closing Fee is fully earned and due and payable
on the Third Amendment Effective Date. No portion of the Closing Fee shall be
subject to refund, rebate, or abatement in whole or part.

(b) From and after the Third Amendment Effective Date, Borrower shall pay to
Agent collateral monitoring fees at the rate of $5,000 per month, which fees
shall be fully earned through the Maturity Date and shall be payable monthly in
advance, on the first day of each month following the Third Amendment Effective
Date.”

 

BOS 46,869,300v9   20  

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

6.8 Concerning Fess.

Section 2.15(b) of the Loan Agreement is hereby deleted in its entirety and
replaced with the following:

“(b) In connection with an increase in the Revolving Credit Loan Ceiling
requested by the Borrower which increases the Revolving Credit Loan Ceiling to
an amount in excess of $15,000,000, Agent reserves the right to negotiate with
the Borrower for the assessment of additional fees, including fees for the
benefit of the Agent.”

6.9 Procedures for Issuance of L/C’S.

Sections 2.17(b)(i) of the Loan Agreement is hereby deleted in its entirety and
replaced with the following:

“ (i) The aggregate Stated Amount of all L/C’s then outstanding (giving effect
to the L/C whose issuance is requested), does not exceed Two Million
($2,000,000) Dollars;”

6.10 Letter of Credit Fees.

Sections 2.18(b)(i), (ii), and (iii) of the Loan Agreement are hereby deleted in
their entirety and replaced with the following:

“(i) For each standby L/C: Three percent (3.0%) per annum of the Stated Amount
of such standby L/C, payable monthly in arrears, on the first day of each month.

(ii) For each documentary L/C: Three percent (3.0%) per annum of the weighted
average of the Stated Amount of such documentary L/ C outstanding at any time
during the period since the then most recent payment of such fee, payable
monthly in arrears, on the first day of each month, and on the End Date.

(iii) Notwithstanding Subsections (i) and (ii), following the occurrence of any
Event of Default (and whether or not the Agent exercises the Agent’s rights on
account thereof), the above fees, at the option of the Agent, shall be two
percent (2%) per annum above the applicable rates above.”

6.11 Additional Covenants.

Section 4.29 of the Loan Agreement, which was previously reserved, is hereby
replaced with the following:

 

BOS 46,869,300v9   21  

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

“4.29 ADDITIONAL COVENANTS.

The Borrower shall not, without the prior written consent of the Agent, except
as expressly permitted in this Agreement, any other Loan Documents, or the Final
Financing Order and as contemplated by the Budget, do any of the following:

(a) conduct any liquidation of its inventory and/or fixtures and equipment
(excluding any store-closing sales conducted pursuant to that certain Order
Approving Entry Into Agency Agreement and Sale Procedures and Authorizing the
Debtor and the Agent To Conduct the Sale entered by the Bankruptcy Court in the
Chapter 11 Case (the “Sale Order”) [Docket No. 223], provided that Borrower
shall not designate any Additional Closing Stores (as that term is used in
paragraph 22 of the Sale Order) without the prior written consent of Agent;

(b) sell all or any portion of the Pledged CDS Equity or Pledged MDG Equity;
provided, however, that the Agent’s consent shall not be required for (i) a sale
of the Pledged MDG Equity pursuant to the terms and conditions of that certain
Buy-Sell Agreement for Mattress Discounters Group, LLC dated as of January 8,
2010 (the “Buy-Sell Agreement”) or (ii) a sale of the Pledged MDG Equity to a
third party for not less than fair market value, so long as, in either case, the
full net proceeds of such sale are immediately delivered to Agent for
application to the balance of the Revolving Credit pursuant to the terms of
Section 2.10(e) hereof, provided further that nothing herein shall modify or
amend the Buy-Sell Agreement;

(c) make payments on account of Indebtedness secured by pre-petition liens;

(d) terminate its private-label credit card program; or

(e) permit MDG to effectuate any recapitalization or amendment of the operating
agreement of MDG that would have the effect of altering the economic rights of
the Pledged MDG Equity (other than pursuant to the Buy-Sell Agreement),
provided, however, that nothing herein shall modify or amend any of the
Guarantor Documents.”

6.12 Financial Reports. Section 5.8 of the Loan Agreement is hereby amended by
adding a new subsection (c) as follows:

“(c) Monthly, within thirty (30) days following the end of each fiscal month of
the Borrower, the Borrower shall furnish the Agent with the following:

(i) A copy of each of the monthly financial statements of MDG and CDS, which
shall include, at a minimum (with comparative information for the same month in
the then prior fiscal year) a balance sheet, income statement, statement of
changes in shareholders’ equity, and cash flows and, in the case of MDG,
accompanied by a certification from MDG as to EBITDA for such monthly period and
the twelve-month period then ended; and

(ii) A report of the cash balances for CDS.”

 

BOS 46,869,300v9   22  

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

6.13 Minimum Availability.

Section 5.12 of the Loan Agreement is hereby deleted in its entirety and the
following substituted therefor:

“5.12 The Borrower shall not permit Excess Availability at any time to be less
than the amount equal to $750,000. The Agent may determine the Borrower’s
compliance with such covenant based upon financial reports and statements
provided by the Borrower to the Agent (whether or not such financial reports and
statements are required to be furnished pursuant to this Agreement) as well as
by reference to interim financial and collateral information provided to, or
developed by, the Agent.”

6.14 The Concentration Account, Blocked, Operating Accounts and Investment
Accounts. Section 7.3(a) of the Loan Agreement is hereby amended by deleting
subsection (a) in its entirety and the following substituted therefor:

“(a) The following deposit accounts have been or will be established (and are so
referred to herein):

(i) The “Concentration Account”: The deposit account no. 4122025331 with Wells
Fargo Bank, N.A. or any other bank satisfactory to the Agent, into which
Borrower shall deposit, or cause to be deposited, proceeds of Collateral and
from which the Borrower shall not make disbursements.

(ii) The “Blocked Account(s)”: Each deposit account now existing or hereafter
established by the Borrower with (A) JP Morgan Chase, (B) Wells Fargo Bank, N.A.
and (C) any other banks satisfactory to the Agent, into which Borrower shall
deposit, or cause to be deposited, proceeds of Collateral and from which the
Borrower shall not make disbursements.

(iii) The “Operating Account”: The deposit account no 4122025349 with Wells
Fargo Bank, N.A. or another deposit account hereafter established by the
Borrower with any bank satisfactory to Agent), from which disbursements may be
made and into which advances under the Revolving Credit may be deposited.”

6.15 The Concentration Account, Blocked, Operating Accounts and Investment
Accounts. Section 7.3(e) of the Loan Agreement is hereby amended by deleting
subsection (a) in its entirety and the following substituted therefor:

“(e) Notwithstanding anything to the contrary contained in this Section 7.3 or
elsewhere in this Agreement, each Blocked Account Agreement (other than any
Control Agreement in respect of any Investment Account) shall provide (except as
the Agent may otherwise agree in writing) that all amounts in the applicable
Blocked Account shall be remitted to the Concentration Account or such other
account as the Agent may specify. On each Business Day, the Borrower shall cause
all funds in the Concentration Account to be remitted to an account specified by
Agent.”

 

BOS 46,869,300v9   23  

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

6.16 SwingLine Loans.

Notwithstanding anything to the contrary in the Loan Documents, no outstanding
Revolving Credit Loans, and no future Revolving Credit Loans, shall constitute
SwingLine Loans. Borrower shall not request, and Agent and Lenders shall have no
obligation to provide, any SwingLine Loans.

6.17 Appraisals and Audits.

Notwithstanding anything to the contrary contained in the Loan Documents, Agent
shall have the right to (a) obtain such number of appraisals of the Inventory
and Real Property of Borrower and Guarantor as Agent reasonably determines is
necessary or appropriate and (b) conduct such number of commercial finance
audits of the books and records of Borrower and Guarantor as Agent reasonably
determines is necessary or appropriate, in each instance, at the cost and
expense of Borrower.

6.18 Sale of Assets, Consolidation, Merger, Disabilities, Etc.

Notwithstanding anything to the contrary contained in the Loan Documents,
Borrower shall not directly or indirectly sell, transfer, lease, encumber,
return, or otherwise dispose of any portion of the Collateral, or any other
assets of Borrower, including, without limitation, assume, reject, or assign any
leasehold interest or enter into any agreement to return Inventory to vendors,
whether pursuant to section 546 of the Bankruptcy Code or otherwise, without the
prior written consent (electronic mail is sufficient) of Agent (and no such
consent shall be implied, from any other action, inaction or acquiescence by
Agent or any Lender), except for (i) sales of Borrower’s Inventory, (ii) returns
of damaged, defective, or otherwise unsalable inventory, each in the ordinary
course of its business, and (iii) the sale of the Pledged MDG Equity in
accordance with the terms and conditions of Section 4.29(b) of the Loan
Agreement, as amended hereby.

6.19 Additional Events of Default.

The occurrence or existence of any one or more of the following events shall
constitute an additional “Event of Default” under the Loan Documents:

(a) any failure of Borrower to comply with the terms and conditions of this
Agreement, or any breach by Borrower of any representation or warranty made by
Borrower in this Agreement;

(b) any failure of Borrower to repay in full, in cash, all Liabilities on or
before the Termination Date;

(c) the occurrence of any condition or event which permits Agent or Lenders to
exercise any of the remedies set forth in the Final Financing Order, including,
without limitation, any “Event of Default” (as defined in the Final Financing
Order);

 

BOS 46,869,300v9   24  

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

(d) the grant of a lien on or other interest in any property of any Borrower or
Guarantor, other than a lien or encumbrance permitted by the Final Financing
Order or expressly permitted by the Loan Agreement, that is superior to or ranks
in parity with Agent’s and Lenders’ security interest in or lien upon the
Collateral;

(e) the grant of an administrative expense claim in the Chapter 11 Case, other
than such administrative expense claims permitted by the Final Financing Order,
that is superior to or ranks in parity with Agent’s and Lenders’ Superpriority
Claim (as defined in the Final Financing Order);

(f) any material portion of the Collateral becomes subject to surcharge or
marshalling;

(g) the entry of an order by the Bankruptcy Court granting relief from or
modifying the automatic stay of Section 362 of the Bankruptcy Code to allow any
creditor to execute upon or enforce a lien on any Collateral having a value in a
material amount as reasonably determined by the Lender or which would have a
Material Adverse Effect;

(h) the Borrower (1) obtains or seeks approval to obtain additional financing
under Section 364(c) or (d) of the Bankruptcy Code (unless such financing is
proposed to refinance and pay the obligations in full in cash under the
debtor-in-possession facility with the termination of all related lending
commitments thereunder), (2) grants or seeks approval to grant any lien (other
than Permitted Encumbrances) upon or affecting any cash collateral under
Section 363(c) of the Bankruptcy Code without the prior written consent of the
Agent and Lenders, or (3) files any action or challenge against the Agent or
Lenders under the debtor-in-possession facility;

(i) the Final Financing Order or the Supplemental Order shall be modified,
reversed, revoked, remanded, stayed, rescinded, vacated, or amended on appeal or
by the Bankruptcy Court without the prior written consent of Agent (and no such
consent shall be implied from any other authorization or acquiescence by Agent
or any Lender);

(j) the filing of a plan of reorganization or liquidation by or on behalf of
Borrower in the Chapter 11 Case, to which Agent has not consented in writing
(electronic mail being sufficient), that does not provide for payment in full in
cash of all Liabilities on the effective date thereof in accordance with the
terms and conditions of the Loan Documents;

(k) the confirmation of any plan of reorganization or liquidation in the Chapter
11 Case, to which Agent has not consented to in writing, that does not provide
for payment in full in cash of all Liabilities on the effective date thereof in
accordance with the terms and conditions of the Loan Documents;

(l) any actual or asserted impairment of any guarantee or security document or
security interests granted to Agent for the benefit of the Lenders;

(m) any reportable event as described under ERISA, which Agent in good faith
believes to constitute sufficient grounds for termination of any Employee
Benefit Plan or for the appointment of a trustee to administer any Employee
Benefit Plan, has occurred and is continuing thirty (30) days after Borrower
gives notice to Agent of such reportable event; or a

 

BOS 46,869,300v9   25  

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

trustee is appointed by an appropriate court to administer any Employee Benefit
Plan; or the Pension Benefit Guaranty Corporation institutes proceedings to
terminate or appoint a trustee to administer any Employee Benefit Plan; or
Borrower or any ERISA Affiliate files for a distress termination of any Employee
Benefit Plan under Title IV of ERISA; or Borrower or any ERISA Affiliate fails
to make any quarterly Employee Benefit Plan contribution required under
Section 412(m) of the Internal Revenue Code of 1986, as amended from time to
time), which Agent in good faith believes may, either by itself or in
combination with other failures, result in the imposition of a Lien on
Borrower’s assets in favor of the Employee Benefit Plan; or any withdrawal,
partial withdrawal, reorganization or other event occurs with respect to a
Employee Benefit Plan which could reasonably be expected to result in a material
liability by Borrower to the Employee Benefit Plan under Title IV of ERISA;

(n) The Board of Managers of MDG shall adopt any resolutions that have a
material adverse effect on the economic value of MDG; and

(o) Any of the Guarantor Documents shall not be in full force and effect,
effective to guaranty the Obligations and grant in favor of Agent, for the
benefit of the Lenders, a valid and effective first priority lien on all or
substantially all of the assets of MDG (in each case, subject to the limitations
set forth in the Guarantor Documents).

6.20 Reserves.

Agent shall be permitted to establish and maintain, in addition to and not in
limitation of all other Reserves, (a) the Carve-Out Expenses Reserve provided
for in Section 2.3 of the Final Financing Order, (b) Reserves to reflect the
value of Inventory at leased locations with respect to which the lease therefor
has not been assumed at least forty-five (45) days prior to the expiration of
the applicable period to assume or reject the leases at such locations or as to
which there has been filed a landlord’s motion to compel the assumption or
rejection of the lease, (c) Reserves to reflect the amount of any senior liens
or claims in or against the Collateral that, in Agent’s reasonable
determination, have priority over the liens and claims of Agent and Lenders,
(d) Reserves to reflect the amount of priority or administrative expense claims
that, in Agent’s reasonable determination, require payment during the Chapter 11
Case, and (e) Availability Reserves to reflect Bank Product Obligations, to the
extent such Bank Product Obligations are not fully cash collateralized. The
amount of the Reserve established in respect of the Carve-Out (as defined in the
Final Financing Order) shall be equal to $500,000.

6.21 Repayment in Full.

(a) If, upon repayment of the Liabilities and termination of the Loan Documents,
any L/Cs remain outstanding, the Borrower shall deposit in an account with the
Agent, in the name of the Agent and for the benefit of the applicable Lenders
(such account, the “Cash Collateral Account”), an amount in cash equal to 105%
of the aggregate undrawn Stated Amount of the outstanding L/Cs as of such date
plus the amount of any fees and expenses payable under the Loan Agreement with
respect to such L/Cs through the end of the latest expiration date of such L/Cs
and any accrued and unpaid interest thereon (the “L/C Exposure”). Such deposit
shall be held

 

BOS 46,869,300v9   26  

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

by the Agent as collateral for the payment and performance of the Liabilities
with respect to such L/Cs, all of which shall survive such termination. The
Agent shall have exclusive dominion and control, including the exclusive right
of withdrawal, over such Cash Collateral Account. Other than any interest earned
on the investment of such deposit, which investments shall be in direct short
term obligations of, or short term obligations the principal of and interest on
which are unconditionally guaranteed by, the United States of America, such
deposit shall not bear interest. Interest or profits, if any, on such
investments shall accumulate in the Cash Collateral Account. Moneys in such Cash
Collateral Account shall be applied by the Agent to reimburse the Issuer for L/C
disbursements for which the Issuer has not been reimbursed and, to the extent
not so applied, shall be held as cash collateral for the satisfaction of the
Liabilities of Borrower for the L/C Exposure at such time. Within three
(3) Business Days following the expiration of each outstanding L/C and the
payment of all L/C Exposure related thereto, the amount remaining on deposit in
the Cash Collateral Account with respect to such L/C shall be returned to the
Borrower (or transferred to such Person as the Borrower directs).

(b) In connection with any repayment of all Liabilities, including on the
Termination Date, Borrower shall (i) repay in full all Liabilities, including
principal, interest, fees, and expenses (including actual and reasonable legal
fees and expenses) and (ii) remit to Agent cash collateral for outstanding L/Cs
in the amount and manner described above.

6.22 Amendment to Exhibit 2.21(a).

Exhibit 2.21(a), entitled “Commitments.” shall be deleted in its entirety and
replaced with the new Exhibit 2.21(a) attached to this Agreement.

7. WAIVER OF DIP FACILITY FEE.

Upon payment of the Closing Fee contemplated by Section 2.14(a) of the Loan
Agreement (as modified by this Agreement), Agent and Lenders hereby
unconditionally and forever waive the debtor-in-possession financing facility
fee in the amount of $130,000 that was originally due on December 31, 2011, as
set forth in section 8.2 of the Ratification Agreement.

8. RELEASE.

8.1 Release of Pre-Petition Claims.

Borrower hereby confirms, reaffirms, and restates the releases set forth in
Section 9.1 of the Ratification Agreement as of the Third Amendment Effective
Date, and acknowledges that such releases shall fully inure to the benefit of
Agent and Lenders (each as a successor-in-interest to Wells Fargo) and their
respective successors and assigns, and their present and former shareholders,
affiliates, subsidiaries, divisions, predecessors, directors, officers,
attorneys, employees, and other representatives.

 

BOS 46,869,300v9   27  

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

8.2 Releases Generally.

(a) Borrower understands, acknowledges, and agrees that the releases set forth
in the Ratification Agreement and reaffirmed above as of the Third Amendment
Effective Date, may be pleaded as a full and complete defense and may be used as
a basis for an injunction against any action, suit, or other proceeding that may
be instituted, prosecuted, or attempted in breach of the provisions of such
releases.

(b) Borrower agrees that no fact, event, circumstance, evidence, or transaction
that could now be asserted or that may hereafter be discovered shall affect in
any manner the final and unconditional nature of the releases set forth in the
Ratification Agreement and reaffirmed above and, when made, Section 8.2 hereof.

9. CONDITIONS PRECEDENT.

The effectiveness of this Agreement, and Agent’s and Lenders’ obligation to
extend to Borrower further Revolving Credit Loans, advances, or other financial
accommodations hereunder, shall be subject to satisfaction, as determined by
Agent, of the following conditions precedent (which, with respect to further
Revolving Credit Loans and other financial accommodations, shall be continuing
conditions precedent):

 

  9.1 the receipt by Agent of an original (or electronic copy) of this
Agreement, duly authorized, executed, and delivered by Borrower and Lenders;

 

  9.2 the Bankruptcy Court shall have entered the Supplemental Order on terms
and conditions acceptable to Agent;

 

  9.3 Borrower shall furnish to Agent and Lenders all financial information,
projections, budgets, business plans, cash flows, and such other information as
Agent and Lenders shall reasonably request from time to time;

 

  9.4 no trustee, examiner, or receiver or the like shall have been appointed or
designated with respect to Borrower, as debtor and debtor-in- possession, or its
respective business, properties, and assets and no motion or proceeding shall be
pending seeking such relief;

 

  9.5 satisfactory review by counsel for Agent of legal issues attendant to the
post-petition financing transactions contemplated hereunder;

 

  9.6 other than the voluntary commencement of the Chapter 11 Case, no material
impairment of the priority of Agent’s and Lenders’ security interests in the
Collateral shall have occurred from the date of the latest field examinations of
Agent and Lenders to the Petition Date; and

 

  9.7 no Event of Default (other than an Existing Default) shall have occurred
or be existing under any of the Loan Documents.

 

BOS 46,869,300v9   28  

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

10. MISCELLANEOUS.

10.1 Amendments and Waivers.

Neither this Ratification Agreement nor any other instrument or document
referred to herein or therein may be changed, waived, discharged, or terminated
orally, but only by an instrument in writing signed by the party against whom
enforcement of the change, waiver, discharge, or termination is sought.

10.2 Further Assurances.

Borrower shall, at its expense, at any time or times duly execute and deliver,
or shall use its best efforts to cause to be duly executed and delivered, such
further agreements, instruments, and documents, including, without limitation,
additional security agreements, collateral assignments, UCC financing statements
or amendments or continuations thereof, landlord’s or mortgagee’s waivers of
liens and consents to the exercise by Agent and Lenders of all the rights and
remedies hereunder, under any of the other Loan Documents, the Final Financing
Order, or applicable law with respect to the Collateral, and do or use its best
efforts to cause to be done such further acts as may be reasonably necessary or
proper in Agent’s opinion to evidence, perfect, maintain, and enforce the
security interests of Agent and Lenders, and the priority thereof, in the
Collateral and to otherwise effectuate the provisions or purposes of this
Agreement, any of the other Loan Documents, or the Final Financing Order.

10.3 Headings.

The headings used herein are for convenience only and do not constitute matters
to be considered in interpreting this Agreement.

10.4 Counterparts.

This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which taken together shall constitute one and
the same agreement. Delivery of an executed counterpart of this Agreement by
electronic mail (PDF), telefacsimile, or other method of electronic transmission
shall have the same force and effect as the delivery of an original executed
counterpart of this Agreement. In making proof of this Agreement, it shall not
be necessary to produce or account for more than one counterpart thereof signed
by each of the Parties.

10.5 Additional Events of Default.

The Parties acknowledge, confirm, and agree that the failure of Borrower or
Guarantor to comply with any of the covenants, conditions, and agreements
contained herein or in any other agreement, document, or instrument at any time
executed by such Borrower or Guarantor in connection herewith shall constitute
an Event of Default under the Loan Documents.

 

BOS 46,869,300v9   29  

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

10.6 Costs and Expenses.

In addition to all other fees and expenses payable by the Borrower or Guarantor
to Agent and Lenders under the Loan Documents, the Borrower shall reimburse
Agent and Lenders for all costs and expenses, including reasonable actual and
reasonable legal fees and expenses, incurred by Agent or any Lender in the
structuring, negotiation, arrangement, or preparation of this Agreement, the
Supplemental Order, the Loan Documents, and the agreements, documents, and/or
instruments to be executed in connection herewith or contemplated hereby. Agent
shall provide Borrower, the Office of the United States Trustee, and any
statutory committee appointed in the Chapter 11 Case with copies of invoices for
all such fees and expenses, redacted as necessary to remove any attorney-client
privileged information. Borrower, the Office of the United States Trustee, and
any statutory committee appointed in the Chapter 11 Case shall have the right to
object to reimbursement by the Debtor of any such fees and expenses within seven
(7) days of receipt of such invoices therefor. Any such fees and expenses not
objected to within such seven (7) day period shall be added to the Post-Petition
Liabilities and shall be payable in accordance with the terms of the Loan
Documents.

[SIGNATURE PAGE FOLLOWS]

 

BOS 46,869,300v9   30  

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

IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed
as of the day and year first above written.

 

SALUS CAPITAL PARTNERS, LLC By:     /s/ Kyle Shonak   Name:   Title:

 

ROOMSTORE, INC. By:     /s/ Lewis M. Brubaker, Jr.   Name:   Title:

[Signature Page to Third Amendment to Loan and Security Agreement and First
Amendment to Ratification Agreement]

 

BOS 46,869,300v9    

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

EXHIBIT 2.21(a)

Commitments

 

Lender

   Dollar Commitment      Percentage Commitment  

Salus Capital Partners, LLC

   $ 15,000,000         100 % 

Total:

   $ 15,000,000         100 % 

 

BOS 46,869,300v9