Exhibit 10.59

 

LOAN AND SECURITY AGREEMENT

 

FLEET RETAIL FINANCE INC.,

ADMINISTRATIVE AGENT, COLLATERAL AGENT

AND SYNDICATION AGENT FOR

THE LENDERS NAMED HEREIN

 

CONGRESS FINANCIAL CORPORATION (CENTRAL)

and

WELLS FARGO RETAIL FINANCE II, LLC,

CO-DOCUMENTATION AGENTS

 

THE REVOLVING CREDIT LENDERS

NAMED HEREIN

 

BACK BAY CAPITAL FUNDING LLC,

TRANCHE B LENDER

 

FAO, INC. AND ITS SUBSIDIARIES

THE BORROWERS

 

April 23, 2003

 

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TABLE OF CONTENTS

 

1.

DEFINITIONS AND RULES OF INTERPRETATION

1.1

DEFINITIONS

1.2.

RULES OF INTERPRETATION

 

 

2.

THE REVOLVING CREDIT FACILITY.

2.1.

COMMITMENT TO LEND

2.2.

MATURITY

2.3.

UNUSED FEE

2.4.

REDUCTION OF COMMITMENT

2.5.

MANDATORY REPAYMENTS OF REVOLVING CREDIT LOANS

2.6.

OPTIONAL REPAYMENTS OF REVOLVING CREDIT LOANS

2.7.

THE LOAN ACCOUNT AND REVOLVING CREDIT NOTES

2.8.

INTEREST ON REVOLVING CREDIT LOANS.

2.9.

REQUESTS FOR REVOLVING CREDIT LOANS

2.10.

CONVERSION OPTIONS

2.11.

FUNDS FOR REVOLVING CREDIT LOAN

2.12.

BORROWING BASE/REDUCTIONS TO AVAILABILITY

2.13.

SETTLEMENTS

2.14.

REPAYMENTS OF REVOLVING CREDIT LOANS ABSENT AN EVENT OF DEFAULT

2.15.

REPAYMENTS OF REVOLVING CREDIT LOANS AFTER EVENT OF DEFAULT

2.16.

OVERLOANS AND PROTECTIVE OVERADVANCES

 

 

3.

THE TRANCHE B FACILITY

3.1.

COMMITMENT TO LEND

3.2.

THE TRANCHE B NOTE

3.3.

PAYMENTS OF PRINCIPAL OF TRANCHE B LOAN

3.4.

INTEREST ON TRANCHE B LOAN

3.5.

PAYMENTS ON ACCOUNT OF TRANCHE B LOAN

3.6.

BUYOUT OPTION

 

 

4.

LETTERS OF CREDIT

4.1.

LETTER OF CREDIT COMMITMENTS

4.2.

REIMBURSEMENT OBLIGATION OF THE BORROWERS

4.3.

LETTER OF CREDIT PAYMENTS

4.4.

OBLIGATIONS ABSOLUTE

4.5.

RELIANCE BY ISSUER

4.6.

LETTER OF CREDIT FEE

 

 

5.

CERTAIN GENERAL PROVISIONS

5.1.

AGENT FEES

5.2.

TRANCHE B LENDER FEES

5.3.

FUNDS FOR PAYMENTS

 

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5.4.

COMPUTATIONS

5.5.

INABILITY TO DETERMINE EURODOLLAR RATE

5.6.

ILLEGALITY

5.7.

ADDITIONAL COSTS, ETC

5.8.

CERTIFICATE

5.9.

INDEMNITY

5.10.

INTEREST AFTER DEFAULT

5.11.

FEES NON-REFUNDABLE

5.12.

CONCERNING JOINT AND SEVERAL LIABILITY OF THE BORROWERS

 

 

6.

COLLATERAL SECURITY

6.1.

GRANT OF SECURITY INTEREST

6.2.

AUTHORIZATION TO FILE FINANCING STATEMENTS

6.3.

OTHER ACTIONS

6.4.

RELATION TO OTHER SECURITY DOCUMENTS

 

 

7.

REPRESENTATIONS AND WARRANTIES

7.1.

CORPORATE AUTHORITY

7.2.

GOVERNMENTAL APPROVALS

7.3.

TITLE TO PROPERTIES; LEASES

7.4.

FINANCIAL STATEMENTS AND PROJECTIONS

7.5.

NO MATERIAL ADVERSE CHANGES, ETC.

7.6.

FRANCHISES, PATENTS, COPYRIGHTS, ETC.

7.7.

LITIGATION

7.8.

NO MATERIALLY ADVERSE CONTRACTS, ETC.

7.9.

COMPLIANCE WITH OTHER INSTRUMENTS, LAWS, ETC.

7.10.

TAX STATUS

7.11.

NO DEFAULT

7.12.

HOLDING COMPANY AND INVESTMENT COMPANY ACTS

7.13.

ABSENCE OF FINANCING STATEMENTS, ETC.

7.14.

COLLATERAL

7.15.

CERTAIN TRANSACTIONS

7.16.

EMPLOYEE BENEFIT PLANS

7.17.

USE OF PROCEEDS

7.18.

ENVIRONMENTAL COMPLIANCE

7.19.

SUBSIDIARIES, ETC.

7.20.

BANK ACCOUNTS; CREDIT CARD ARRANGEMENTS

7.21.

LABOR RELATIONS

7.22.

DISCLOSURE

 

 

8.

CERTAIN AFFIRMATIVE COVENANTS

8.1.

PUNCTUAL PAYMENT

8.2.

NOTICE OF CHANGE OF ORGANIZATION/MAINTENANCE OF OFFICE

8.3.

RECORDS AND ACCOUNTS

8.4.

FINANCIAL STATEMENTS, CERTIFICATES AND INFORMATION

8.5.

NOTICES

8.6.

LEGAL EXISTENCE; MAINTENANCE OF PROPERTIES

8.7.

INSURANCE

 

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8.8.

TAXES

8.9.

INSPECTION OF PROPERTIES AND BOOKS, ETC.

8.10.

COMPLIANCE WITH LAWS, CONTRACTS, LICENSES, AND PERMITS

8.11.

EMPLOYEE BENEFIT PLANS

8.12.

USE OF PROCEEDS

8.13.

ADDITIONAL SUBSIDIARIES

8.14.

BANK ACCOUNTS

8.15.

COVENANTS CONCERNING COLLATERAL, ETC.

8.16.

FURTHER ASSURANCES

 

 

9.

 

CERTAIN NEGATIVE COVENANTS

9.1.

RESTRICTIONS ON INDEBTEDNESS

9.2.

RESTRICTIONS ON LIENS

9.3.

RESTRICTIONS ON INVESTMENTS

9.4.

RESTRICTED PAYMENTS; PAYMENTS ON OTHER INDEBTEDNESS

9.5.

MERGER, CONSOLIDATION AND DISPOSITION OF ASSETS

9.6.

SALE AND LEASEBACK

9.7.

COMPLIANCE WITH ENVIRONMENTAL LAWS

9.8.

EMPLOYEE BENEFIT PLANS

9.9.

BUSINESS ACTIVITIES; PERMITTED STORE CLOSINGS

9.10.

FISCAL YEAR

9.11.

TRANSACTIONS WITH AFFILIATES

9.12.

BANK ACCOUNTS

 

 

10.

 

FINANCIAL COVENANTS

10.1

MINIMUM EXCESS AVAILABILITY

 

 

11.

CLOSING CONDITIONS

11.1.

LOAN DOCUMENTS

11.2.

CERTIFIED COPIES OF GOVERNING DOCUMENTS

11.3.

CORPORATE OR OTHER ACTION

11.4.

INCUMBENCY CERTIFICATE

11.5.

VALIDITY OF LIENS

11.6.

PERFECTION CERTIFICATES AND UCC SEARCH RESULTS

11.7.

TAXES

11.8.

PLAN OF REORGANIZATION

11.9.

CAPITAL STRUCTURE

11.10.

CERTIFICATES OF INSURANCE

11.11.

BLOCKED ACCOUNT AGREEMENTS; CREDIT CARD CLEARING HOUSE

11.12.

BORROWING BASE REPORT

11.13.

MINIMUM DAY ONE AVAILABILITY, ETC.

11.14.

CREDIT CARD ACCOUNTS RECEIVABLE REPORT

11.15.

INTERCREDITOR/SUBORDINATION AND OTHER AGREEMENTS

11.16.

OPINION OF COUNSEL

11.17.

PAYMENT OF FEES

11.18.

COMMITMENTS

11.19.

OTHER ITEMS

 

 

12.

CONDITIONS TO ALL BORROWINGS

 

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12.1.

REPRESENTATIONS TRUE; NOT IN DEFAULT

12.2.

NO LEGAL IMPEDIMENT

12.3.

PROCEEDINGS AND DOCUMENTS

12.4.

BORROWING BASE REPORT

12.5.

MATERIAL ADVERSE CHANGE

12.6.

SALES TAXES

 

 

13.

EVENTS OF DEFAULT; ACCELERATION; ETC.

13.1.

EVENTS OF DEFAULT AND ACCELERATION

13.2.

TERMINATION OF COMMITMENTS

13.3.

REMEDIES.

13.4

ACCELERATION NOTICES

13.5.

DISTRIBUTION OF COLLATERAL PROCEEDS

 

 

14.

THE AGENT; CONSENTS, AMENDMENTS AND WAIVERS

14.1.

AUTHORIZATION

14.2.

EMPLOYEES AND AGENT

14.3.

NO LIABILITY

14.4.

NO REPRESENTATIONS

14.5.

PAYMENTS

14.6.

HOLDERS OF NOTES

14.7.

INDEMNITY

14.8.

AGENT AS LENDER

14.9.

RESIGNATION

14.10.

NOTIFICATION IF DEFAULT EXISTS

14.11.

DUTIES IN THE CASE OF ENFORCEMENT

14.12.

AGENT’S OBLIGATIONS AND DUTIES WITH REGARD TO COLLATERAL

14.13.

CONSENT OF LENDERS

14.14.

ACTIONS REQUIRING OR ON DIRECTION OF REQUIRED LENDERS

14.15.

ACTIONS REQUIRING OR ON DIRECTION OF SUPERMAJORITY REVOLVING CREDIT LENDERS

14.16.

ACTIONS REQUIRING CERTAIN CONSENT

14.17.

ACTIONS REQUIRING OR DIRECTED BY UNANIMOUS CONSENT

14.18.

ACTIONS REQUIRING SWING LINE LENDER CONSENT

14.19.

ACTIONS REQUIRING TRANCHE B LENDER CONSENT

14.20.

ACTIONS REQUIRING AGENT’S CONSENT

14.21.

MISCELLANEOUS ACTIONS

14.22.

NONCONSENTING REVOLVING CREDIT LENDER

 

 

15.

ASSIGNMENT AND PARTICIPATION

15.1.

CONDITIONS TO ASSIGNMENT

15.2.

CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS

15.3.

NEW NOTES

15.4.

PARTICIPATIONS

15.5.

ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE BORROWERS

15.6.

MISCELLANEOUS ASSIGNMENT PROVISIONS

15.7.

ASSIGNMENT BY BORROWERS

 

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16.

PROVISIONS OF GENERAL APPLICATION

16.1.

SETOFF

16.2.

EXPENSES

16.3.

INDEMNIFICATION

16.4.

TREATMENT OF CERTAIN CONFIDENTIAL INFORMATION

16.5.

SURVIVAL OF COVENANTS, ETC.

16.6.

NOTICES

16.7.

GOVERNING LAW

16.8.

HEADINGS

16.9.

COUNTERPARTS

16.10.

ENTIRE AGREEMENT, ETC.

16.11.

WAIVER OF JURY TRIAL

16.12.

POWER OF ATTORNEY

16.13

SURETYSHIP WAIVERS BY THE BORROWERS

16.14

MARSHALLING

16.15

SEVERABILITY

 

EXHIBITS

 

EXHIBIT A

Form of Borrowing Base Report

EXHIBIT B

Form of Revolving Credit Note

EXHIBIT C

Form of Loan Request

EXHIBIT D

Form of Tranche B Note

EXHIBIT E

Form of Compliance Certificate

EXHIBIT F

Form of Blocked Account Agreement

EXHIBIT G(i)

Assignment and Acceptance/Revolving Credit

EXHIBIT G(ii)

Assignment and Acceptance/Tranche B Loan

 

SCHEDULES

 

SCHEDULE 1.1(a)

Business Plan

SCHEDULE 1.1(b)

Lenders and Commitments

SCHEDULE 1.1(c)

Emergence Vendor Liabilities

SCHEDULE 2.12

Reserves

SCHEDULE 6.3

DDA Notification

SCHEDULE 7.3

Title to Properties; Leases

SCHEDULE 7.4.2

Contingent Liabilities Not Shown on Consolidated Balance Sheet

SCHEDULE 7.5

Material Adverse Changes

SCHEDULE 7.7

Litigation

SCHEDULE 7.8

Contracts

SCHEDULE 7.10

Tax Status

SCHEDULE 7.15

Affiliate Transactions

SCHEDULE 7.19

Subsidiaries Etc.

SCHEDULE 7.20(a)

Local Accounts and Interim Concentration Accounts

SCHEDULE 7.20(b)

Credit Card Arrangements

SCHEDULE 8.4(h)

Certain Required Reports

 

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SCHEDULE 8.7.1

Insurance Policies

SCHEDULE 8.10

Noncompliance with Laws, Contracts, Licenses and Permits

SCHEDULE 9.1

Existing Letters of Credit

SCHEDULE 9.2.2

Negative Pledges

SCHEDULE 9.3

Existing Investments

SCHEDULE 9.9

Permitted Store Closings

SCHEDULE 11.18

Closing Agenda

 

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LOAN AND SECURITY AGREEMENT

 

FLEET RETAIL FINANCE INC.

As of April 23, 2003

Agent

 

 

This LOAN AND SECURITY AGREEMENT is made by and among Fleet Retail Finance Inc.,
as Administrative Agent, Collateral Agent and Syndication Agent for the Lenders
and the Issuing Bank (in each such capacity, the “AGENT”), a Delaware
corporation, with offices at 40 Broad Street, Boston, Massachusetts 02109,

 

and

 

Fleet Retail Finance Inc., a Delaware corporation, with offices at 40 Broad
Street, Boston, Massachusetts 02109 and the other revolving credit lending
institutions listed on SCHEDULE 1.1(b), as Revolving Credit Lenders,

 

and

 

Back Bay Capital Funding LLC, a Delaware limited liability company, with offices
at 40 Broad Street, Boston, Massachusetts 02109, as Tranche B Lender,

 

and

 

FAO, Inc. (“FAO”), a Delaware corporation, FAO Schwarz, Inc. (“SCHWARZ”), a
Delaware corporation, ZB Company, Inc. (“ZB”), a Delaware corporation, The Right
Start, Inc. (“RIGHT START”), a Delaware corporation, and Targoff-RS, LLC
(“TARGOFF”), a New York limited liability company, each having its principal
place of business at 2520 Renaissance Boulevard, King of Prussia, Pennsylvania
19406, and the other Subsidiaries of FAO which hereafter become parties hereto.

 

In consideration of the mutual covenants contained herein and benefits derived
herefrom, the parties hereto agree as follows:

 

1.                                       DEFINITIONS AND RULES OF
INTERPRETATION.

 

1.1                                 DEFINITIONS.  The following terms shall have
the meanings set forth in this Section 1 or elsewhere in the provisions of this
Agreement referred to below:

 

ACCELERATION.  The making of demand or declaration that any indebtedness, not
otherwise due and payable in the ordinary course, is due and payable. 
Derivations of the word “Acceleration” (such as “Accelerate”) are used with like
meaning in this Agreement.

 

ACCELERATION NOTICE.  Written notice as follows:

 

(a)                                  From the Agent to the Lenders as provided
in Section 13.4.1; or

 

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(b)                                 From the SuperMajority Revolving Credit
Lenders to the Agent, as provided in Section 13.4.2.

 

ACCOUNTS or ACCOUNTS RECEIVABLE.  All rights of the Borrowers or any of their
Subsidiaries to payment for goods sold, leased or otherwise marketed in the
ordinary course of business and all rights of the Borrowers or any of their
Subsidiaries to payment for services rendered in the ordinary course of business
and all sums of money or other proceeds due thereon pursuant to transactions
with account debtors, except for that portion of the sum of money or other
proceeds due thereon that relate to sales, use or property taxes in conjunction
with such transactions, recorded on the books of account in accordance with
GAAP.

 

ACH.  Automated clearing house.

 

AFFILIATE.  Any Person that would be considered to be an affiliate of another
Person under Rule 144(a) of the Rules and Regulations of the Securities and
Exchange Commission, as in effect on the date hereof, such other Person were
issuing securities.

 

AGENT.  FRFI, acting as administrative, collateral and syndication agent for the
Lenders, and each other Person appointed as the successor Agent in accordance
with Section 14.9.

 

AGENT FEE LETTER.  The fee letter dated as of the date hereof among the
Borrowers and the Agent, as amended from time to time.

 

AGENT FEES.  See Section 5.1.

 

AGENT’S OFFICE.  The Agent’s office located at 40 Broad Street, Boston,
Massachusetts 02109, or at such other location as the Agent may designate from
time to time.

 

AGENT’S SPECIAL COUNSEL.  Edwards & Angell, LLP, or such other counsel as may be
approved by the Agent.

 

AGREEMENT.  This Loan and Security Agreement, including the Schedules and
Exhibits hereto, as the same may be supplemented, extended, amended, restated or
modified from time to time.

 

APPLICABLE MARGIN.  The Applicable Margin for each calendar quarter shall be the
applicable margin set forth below with respect to the average daily level of
Availability during the previous calendar quarter; PROVIDED, HOWEVER, during the
four complete calendar quarters following the Closing Date, the Applicable
Margin will be set at Level II if the table would otherwise indicate that the
Applicable Margin was to be based on Level I:

 

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Level

 

Availability

 

Applicable Margin
for Base Rate
Loans

 

Applicable Margin
for Eurodollar Rate
Loans

 

I

 

Greater than $25,000,000

 

- 0 -

 

2.00

%

 

 

 

 

 

 

 

 

II

 

Greater than $11,000,000 and equal to or less than $25,000,000

 

0.25

%

2.25

%

 

 

 

 

 

 

 

 

III

 

Equal to or less than $11,000,000

 

0.50

%

2.50

%

 

APPLICABLE PENSION LEGISLATION.  At any time, any pension or retirement benefits
legislation (be it national, federal, provincial, territorial or otherwise) then
applicable to the Borrowers or any of their Subsidiaries.

 

APPRAISED INVENTORY LIQUIDATION VALUE.  The product of (a) the Cost of Eligible
Inventory (net of Inventory Reserves) MULTIPLIED BY (b) that percentage,
determined from the then most recent appraisal of the Borrowers’ Inventory
undertaken at the request of the Agent, to reflect the appraiser’s estimate of
the net recovery on the Borrowers’ Inventory in the event of an in-store
liquidation of that Inventory.

 

APPRAISED INVENTORY PERCENTAGE.  85%.

 

APPRAISED INVENTORY TRANCHE B PERCENTAGE.  95% for the period from November 1
through August 14, and 102.5% for the period from August 15 through October 31.

ASSIGNMENT AND ACCEPTANCE.  See Section 15.1.1.

AVAILABILITY.  The least of (a), (b) and (c), where:

 

(a)                                  is the result of

 

(i)                                     The Total Revolving Commitment,

 

MINUS

 

(ii)                                  The Outstanding amount of the Revolving
Credit Loans (after giving effect to all amounts requested for Revolving Credit
Loans and Letters of Credit),

 

MINUS

 

(iii)                               The Maximum Drawing Amount and all Unpaid
Reimbursement Obligations;

 

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(b)                                 is the result of

 

(i)                                     The Borrowing Base,

 

MINUS

 

(ii)                                  The Outstanding amount of the Revolving
Credit Loans (after giving effect to all amounts requested for Revolving Credit
Loans and Letters of Credit),

 

MINUS

 

(iii)                               The Maximum Drawing Amount and all Unpaid
Reimbursement Obligations,

 

MINUS

 

(iv)                              The aggregate of the Availability Reserves;
and

 

(c)                                  is the result of

 

(i)                                     The Tranche B Borrowing Base,

 

MINUS

 

(ii)                                  The Outstanding amount of the Revolving
Credit Loans and Tranche B Loans (after giving effect to all amounts requested
for Loans and Letters of Credit and including Tranche B Loan PIK Interest),

 

MINUS

 

(iii)                               The Maximum Drawing Amount and all Unpaid
Reimbursement Obligations,

 

MINUS

 

(iv)                              The aggregate of the Availability Reserves.

 

AVAILABILITY BLOCK.  (a) At all times except as specified in (b), $4,000,000 and
(b) from September 7, 2003 through September 30, 2003, $1,500,000, and from
October 1, 2003 through October 31, 2003, $500,000.

 

AVAILABILITY LETTER OF CREDIT.  A letter or letters of credit in Agent’s
possession in form and substance satisfactory to the Agent in its sole
discretion in the aggregate maximum drawing amount in increments of $1,000,000
of up to $5,000,000, naming the Agent as beneficiary and with an expiry date of
November 30, 2003, with the Kayne Credit Support Indebtedness Holders as of the
Closing Date as the obligors thereunder, under which the Agent may draw the
amount thereof in one (1) draw upon (x) the occurrence of any Event of Default,
(y) the occurrence of any Default within fourteen (14) days of such expiry date,
or (z) any time within fourteen (14) days prior to such

 

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expiry date if, on any day within such fourteen-day period, an Event of Default
would exist if the Availability Letter of Credit were to expire on such day.

 

AVAILABILITY RESERVES.  Without duplication as to other Reserves, such reserves
as the Agent from time to time determines in the Agent’s reasonable discretion
as then being appropriate (determined in accordance with its customary credit
considerations) 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:

 

(a)                                  Common carrier reserves and
warehousemen/fullfillment servicer reserves, unless common carrier or
warehousemen/third party Lien waivers reasonably acceptable to the Agent have
been obtained therefor and Lease reserves, including without limitation rent due
under Leases but not yet paid and two months rent (whether or not paid) in
states where a landlord Lien could reasonably be expected to prime the Agent’s
Lien under the Security Documents (initially, Washington, Virginia and
Pennsylvania), unless a landlord Lien waiver reasonably acceptable to the Agent
has been obtained therefor);

 

(b)                                 Inventory Landing Costs;

 

(c)                                  Customer Credit Liabilities; PROVIDED (i)
initial reserves with respect to Customer Credit Liabilities (other than gift
certificates in existence for 24 or more months) shall not exceed 50% of the
amount thereof, and (ii) initial reserves with respect to gift certificates in
existence for 24 or more months shall not exceed 50% of the amount of such gift
certificates in excess of $300,000;

 

(d)                                 Taxes and other governmental charges,
including, ad valorem, personal property, and other taxes which could reasonably
be expected to have priority over the security interests of the Agent in the
Collateral;

 

(e)                                  The FAO Royalty Reserve; and

 

(f)                                    the amount of the Availability Block in
effect at such time.

 

BALANCE SHEET DATE.  February 1, 2003.

 

BANKRUPTCY CODE.  Title 11, U.S.C., as amended from time to time.

 

BASE RATE.  The higher of (a) the variable annual rate of interest so designated
from time to time by Fleet (or any successor in interest thereto) as its “prime
rate”, such rate being a reference rate and not necessarily representing the
lowest or best rate being charged to any customer, and (b) one-half of one
percent (1/2%) above the Federal Funds Effective Rate.  For the purposes of this
definition, “FEDERAL FUNDS EFFECTIVE RATE” shall mean for any day, the rate per
annum equal to the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers, as published for such day (or, if such day is

 

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not a Business Day, for the next preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day on such transactions
received by Fleet from three funds brokers of recognized standing selected by
the Agent.  Changes in the Base Rate resulting from any changes in Fleet’s
“Prime Rate” shall take place immediately without notice or demand of any kind.

 

BASE RATE LOANS.  Revolving Credit Loans bearing interest calculated by
reference to the Base Rate.

 

BLOCKED ACCOUNT AGREEMENT.  See Section 6.3.2.

 

BOARD OF DIRECTORS.  The Board of Directors of any Borrower or any committee
thereof duly authorized to act on behalf of such Board.

 

BORROWERS.  FAO, SCHWARZ, RIGHT START, ZB, and TARGOFF, and the Subsidiaries of
the Borrowers hereafter formed or acquired, but excluding The Right Start
Subsidiary I, Inc.

 

BORROWERS’ REPRESENTATIVE.  FAO.

 

BORROWING BASE.  The aggregate of the following:

 

(a)                                  The face amount of Eligible Credit Card
Receivables MULTIPLIED BY the Credit Card Advance Rate,

 

PLUS

 

(b)                                 The lesser of (i) the Cost of Eligible
Inventory (net of Inventory Reserves) MULTIPLIED BY the Inventory Advance Rate
or (ii) the Appraised Inventory Percentage MULTIPLIED BY the Appraised Inventory
Liquidation Value,

 

PLUS

 

(c) If the Availability Letter of Credit exists, until fourteen (14) days prior
to expiry of Availability Letter of Credit, one hundred percent (100%) of the
undrawn amount of the Availability Letter of Credit.

 

BORROWING BASE REPORT.  A Borrowing Base Report signed by the chief financial
officer, senior vice president-finance, vice president-accounting or vice
president-treasury of the Borrowers’ Representative and in substantially the
form of EXHIBIT A hereto.

 

BUSINESS DAY.  Any day on which banking institutions in Boston, Massachusetts,
and New York, New York, are open for the transaction of banking business and, in
the case of Eurodollar Rate Loans, also a day which is a Eurodollar Business
Day.

 

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BUSINESS PLAN.  The Borrowers’ business plan attached hereto as SCHEDULE 1.1(a),
as updated from time to time pursuant to this Agreement.

 

BUYOUT ACCEPTANCE NOTICE.  See Section 3.6.

 

BUYOUT EXERCISE NOTICE.  The Agent giving the Tranche B Lender notice that the
Agent intends to grant, consent to, or otherwise approve, a sale or transfer by
the Borrowers of assets at a time when an OverLoan exists or an OverLoan will
exist, or is projected to exist, upon the completion of such sale or transfer.

 

BUYOUT EXERCISE PERIOD.  Any time (a) within sixty (60) days following any
Standstill Termination Date, (b) within ten (10) days following the Tranche B
Lender’s receipt of a Buyout Exercise Notice, or (c) within five (5) days
following any Funding Breach.

 

CAPITAL ASSETS.  Fixed assets, both tangible (such as land, buildings, fixtures,
machinery and equipment) and intangible (such as patents, copyrights,
trademarks, franchises and good will); PROVIDED that Capital Assets shall not
include any item customarily charged directly to expense or depreciated over a
useful life of twelve (12) months or less in accordance with GAAP.

 

CAPITAL EXPENDITURES.  Amounts paid or Indebtedness incurred by any of the
Borrowers or any of their Subsidiaries in connection with (i) the purchase or
lease by the Borrowers or any of their Subsidiaries of Capital Assets that would
be required to be capitalized and shown on the balance sheet of such Person in
accordance with GAAP or (ii) the lease of any assets by the Borrowers or any of
their Subsidiaries as lessee under any Synthetic Lease to the extent that such
assets would have been Capital Assets had the Synthetic Lease been treated for
accounting purposes as a Capitalized Lease.

 

CAPITAL STOCK.  Any and all shares, interests, participations or other
equivalents (however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation) and any
and all warrants, rights or options to purchase any of the foregoing.

 

CAPITALIZED LEASES.  Any and all leases under which any of the Borrowers or any
of their Subsidiaries is the lessee or obligor, the discounted future rental
payment obligations under which are required to be capitalized on the balance
sheet of the lessee or obligor in accordance with GAAP.

 

CASH EQUIVALENTS.  As to the Borrowers and their Subsidiaries, (a) cash money in
U.S. Dollars; (b) securities issued or directly and fully guaranteed or insured
by the United States of America and having a maturity of not more than six (6)
months from the date of acquisition; (c) certificates of deposit, time deposits
and eurodollar time deposits with maturities of six (6) months or less from the
date of acquisition, bankers’ acceptances with maturities not exceeding six (6)
months and overnight bank deposits, in each case, (i) with any Lenders or (ii)
with any domestic commercial bank organized under the laws of the United States
of America or any state thereof, in each case having a

 

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rating of not less than A or its equivalent by S&P or any successor and having
capital and surplus in excess of $1,000,000,000; (d) repurchase obligations with
a term of not more than seven (7) days for underlying securities of the types
described in clauses (b) and (c) above; and (e) any commercial paper or finance
company paper issued by (i) any Lender or any holding company controlling any
Lender or (ii) any other Person that is rated not less than “P-1” or “A-1” or
their equivalents by Moody’s or S&P or their successors.

 

CERCLA.  See definition of “ENVIRONMENTAL LAWS”.

 

CHANGE OF CONTROL.  An event or series of events by which (a) the Permitted
Holders cease to own beneficial ownership and control, directly or indirectly,
of shares of Capital Stock of FAO representing thirty five percent (35%) or more
of the combined voting power of all Capital Stock of FAO (on a fully diluted
basis) entitled to vote in the election of the Board of Directors; (b) any
Person (other than a Permitted Holder) or any group (within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of Persons
(other than Permitted Holders) shall have acquired beneficial ownership and
control, directly or indirectly, of shares of Capital Stock of FAO representing
more than the percentage amount held by the Permitted Holders of the combined
voting power of the Capital Stock of FAO (on a fully diluted basis) entitled to
vote in the election of the Board of Directors; (c) the individuals on the
Closing Date that constituted the Board of Directors of FAO (together with any
new directors whose election by such Board of Directors or whose nomination for
election by the stockholders of FAO was approved by a vote of a majority of the
directors of FAO then still in office who were either directors on the Closing
Date or whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of Directors of FAO
then in office; or (d) any of the Borrowers ceases to own beneficially and
legally one hundred percent (100%) of the outstanding shares of Capital Stock of
each of its Subsidiaries on a fully diluted basis.

 

CLOSING DATE.  The first date on which the conditions set forth in Section 11
have been satisfied and any Revolving Credit Loans or Tranche B Loans are to be
made or any Letter of Credit is to be issued hereunder, which date shall not be
later than May 9, 2003.

 

CODE.  The Internal Revenue Code of 1986.

 

COLLATERAL.  See Section 6.1.

 

COMMITMENT.  With respect to each Revolving Credit Lender, the amount set forth
on SCHEDULE 1.1(b) hereto as the amount of such Revolving Credit Lender’s
commitment to make Revolving Credit Loans to, and to participate in the
issuance, extension and renewal of Letters of Credit for the account of, the
Borrowers, as the same may be reduced from time to time; or if such commitment
is terminated pursuant to the provisions hereof, zero.  With respect to the
Tranche B Lender, the outstanding principal amount of the Tranche B Loan.

 

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COMMITMENT PERCENTAGE.  With respect to each Revolving Credit Lender, the
percentage set forth on SCHEDULE 1.1(b) hereto as such Revolving Credit Lender’s
percentage of the aggregate Commitments of all of the Revolving Credit Lenders.

 

COMMITMENT REDUCTION FEE.  See Section 2.4.

 

COMPLIANCE CERTIFICATE.  See Section 8.4(d).

 

CONSOLIDATED.  With reference to any term defined herein, shall mean that term
as applied to the accounts of FAO and its Subsidiaries, consolidated in
accordance with GAAP.

 

CONVERSION REQUEST.  A notice given by the Borrowers’ Representative to the
Agent of the Borrowers’ election to convert or continue a Loan in accordance
with Section 2.10.

 

COPYRIGHT SECURITY AGREEMENT.  The Copyright Security Agreement, dated or to be
dated on the Closing Date, made by the Borrowers and their Subsidiaries in favor
of the Agent, in form and substance satisfactory to the Lenders and the Agent.

 

COST.  The calculated cost of purchases, based upon the Borrowers’ accounting
practices, known to the Agent, 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 Borrowers; the Borrowers’ purchase journal; or the
Borrowers’ stock ledger.  “Cost” does not include inventory capitalization costs
or other non-purchase price charges used in the Borrowers’ calculation of cost
of goods sold (other than freight expense which may be capitalized consistent
with GAAP to the extent included in the Agent’s Inventory appraisal and
consistent with the Borrowers’ prior practices).  The Cost of Eligible Inventory
will be determined in a manner consistent with the Borrowers’ then current
tracking practices, based on the Borrowers’ stock ledger inventory.

 

CREDIT CARD ADVANCE RATE.  85%.

 

CUSTOMER CREDIT LIABILITY.  Gift certificates, customer deposits, offsets,
merchandise credits, layaway obligations, frequent shopping programs, and
similar liabilities of the Borrowers and their Subsidiaries to their retail
customers and prospective customers.

 

CUSTOMS BROKER AGREEMENTS.  Agreements between the Agent and customs brokers
with respect to Eligible L/C Inventory, each in form and substance satisfactory
to the Agent.

 

DDA NOTIFICATION.  See Section 6.3.2.

 

DEFAULT.  Any occurrence, circumstance, or state of facts with respect to the
Borrowers which (a) is an Event of Default; or (b) would become an Event of
Default if

 

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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 cured
within any applicable grace period.

 

DELINQUENT LENDER.  See Section 14.5.3.

 

DEPOSIT ACCOUNT.  See Section 6.3.2.

 

DERIVATIVE CONTRACT.  See definition of “Indebtedness”.

 

DESIGNATED BORROWER OFFICER.  As to any Borrower or Subsidiary thereof, the
President, Chief Executive Officer, Chief Financial Officer, Chief Accounting
Officer, any Executive Vice President, Senior Vice President-Finance,
Controller, the General Counsel, and any other Person who delivers or is
authorized or permitted hereunder to deliver any certificates or reports
hereunder.

 

DISTRIBUTION.  The declaration or payment of any dividend on or in respect of
any shares of any class of Capital Stock of the Borrowers, other than dividends
payable solely in shares of Capital Stock of the Borrowers; the purchase,
redemption, defeasance, retirement or other acquisition of any shares of any
class of Capital Stock of the Borrowers, directly or indirectly through a
Subsidiary of the Borrowers or otherwise (including the setting apart of assets
for a sinking or other analogous fund to be used for such purpose); the return
of capital by the Borrowers to their shareholders as such; or any other
distribution on or in respect of any shares of any class of Capital Stock of the
Borrowers.

 

DOLLARS or $.  Dollars in lawful currency of the United States of America.

 

DOMESTIC LENDING OFFICE.  Initially, the office of each Revolving Credit Lender
designated as such in SCHEDULE 1.1(b) hereto; thereafter, such other office of
such Revolving Credit Lender, if any, located within the United States that will
be making or maintaining Base Rate Loans.

 

DRAWDOWN DATE.  The date on which any Revolving Credit Loan or Tranche B Loan is
made or is to be made, and the date on which any Revolving Credit Loan is
converted or continued in accordance with Section 2.10.

 

ELIGIBLE CREDIT CARD RECEIVABLES.  Accounts due to a Borrower within three (3)
to five (5) Business Days from the date of sale on a non-recourse basis from (a)
Visa, MasterCard, American Express Co. or Discover, and (b) other credit card
issuers and/or processors acceptable to the Agent and the Tranche B Lender in
their reasonable discretion as arise in the ordinary course of business for the
purchase of merchandise or services which have been earned by performance;
PROVIDED, none of the following shall be deemed to be Eligible Credit Card
Receivables:

 

(i)                                     Accounts that are past due;

 

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(ii)                                  Accounts with respect to which a Borrower
does not have good, valid and marketable title thereto, free and clear of any
Lien (other than Liens granted to the Agent hereunder);

 

(iii)                               Accounts that are not subject to a first
priority security interest in favor of the Agent;

 

(iv)                              Accounts which are disputed, are with
recourse, or with respect to which a claim, counterclaim, offset or chargeback
has been asserted (to the extent of such claim, counterclaim, offset or
chargeback); and

 

(v)                                 Accounts which the Agent determines in its
reasonable discretion to be unlikely to be collected.

 

ELIGIBLE INVENTORY.

 

(a)                                  Such of the Borrowers’ Inventory which is
finished goods, merchantable and readily saleable, and located at such
locations, and of such types, character, qualities and quantities, as the Agent
in its reasonable discretion (based on customary credit considerations of the
Agent) from time to time determines to be acceptable for borrowing, as to which
Inventory, the Agent has a perfected security interest which is prior and
superior to all security interests, claims, and Liens, PROVIDED none of the
following shall be Eligible Inventory: (i) Inventory that is not owned solely by
a Borrower or for which a Borrower does not have good and valid title thereto or
Inventory that is leased or on consignment; (ii) Inventory (including any
portion thereof in transit from vendors) that is not located at a distribution
center used by a Borrower in the ordinary course or at a property that is owned
or leased by a Borrower, unless in each case appropriate waivers have been
obtained by the Agent, except Inventory owned by a Borrower and in transit from
a distribution center to a retail store may be deemed Eligible Inventory
provided adequate Reserves therefor are established by the Agent with respect to
overdue common carrier charges in accordance with the terms of this Agreement;
(iii) Inventory that represents (A) goods damaged, defective or otherwise
unmerchantable, (B) goods that do not conform in all material respects to the
representations and warranties contained in this Agreement or any of the other
Loan Documents, or (C) return to vendor goods; (iv) Inventory that is not
located in the United States of America (excluding territories and possessions
thereof); (v) Inventory that is not subject to a perfected first-priority
security interest in favor of the Agent for the benefit of the Lenders; (vi)
Inventory which consists of samples, labels, bags, packaging, and other similar
non-merchandise categories; (vii) Inventory as to which insurance in compliance
with the provisions of this Agreement is not in effect; and (viii) Inventory
which has been sold but not yet delivered; and

 

(b)                                 Eligible L/C Inventory.

 

ELIGIBLE L/C INVENTORY.  Inventory (other than Eligible Inventory described in
subparagraph (a) of the definition thereof), the purchase of which by a Borrower
is

 

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supported by a documentary Letter of Credit issued by the Letter of Credit
Issuer and having an initial expiry of sixty (60) or fewer days, PROVIDED

 

(a)                                  Such Inventory is of such types, character,
qualities and quantities (net of Inventory Reserves) as the Agent in its
reasonable discretion from time to time determines to be eligible for borrowing;
and

 

(b)                                 The documentary Letter of Credit supporting
such purchase names the Agent as consignee of the subject Inventory and the
Agent has control over the documents which evidence ownership of the subject
Inventory (such as by the providing to the Agent of a Customs Broker Agreement).

 

EMERGENCE VENDOR LIABILITIES.  Existing Liabilities of the Borrowers owed to
holders of Allowed Class 8 Claims under and as defined in the Plan of
Reorganization, as set forth on SCHEDULE 1.1(c) to this Agreement.

 

EMPLOYEE BENEFIT PLAN.  Any employee benefit plan within the meaning of Section
3(3) of ERISA maintained or contributed to by the Borrowers or any ERISA
Affiliate, other than a Guaranteed Pension Plan or a Multiemployer Plan.

 

ENVIRONMENTAL LAWS.  Any decree, order, law, license, rule or regulation
pertaining to environmental matters, including without limitation, those arising
under the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 as amended
(“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986 (“SARA”),
the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances
Control Act, or any state, local or foreign law, statute, regulation, ordinance,
order or decree relating to health, safety or the environment.

 

EPA.  See Section 7.18.

 

EQUIPMENT.  All of Borrowers’ now owned or hereafter acquired right, title, and
interest with respect to “equipment”, as such term is defined from time to time
in the UCC, fixtures and vehicles (including motor vehicles) including all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing.

 

EQUIPMENT FINANCING INDEBTEDNESS.  Indebtedness for borrowed money incurred
after the Closing Date, including without limitation the Kayne Credit Support
Indebtedness, secured by an Equipment Financing Lien.

 

EQUIPMENT FINANCING LIEN.  A Lien granted by FAO, Schwarz or ZB on Equipment
owned by such Borrower as of the Closing Date.

 

ERISA.  The Employee Retirement Income Security Act of 1974.

 

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ERISA AFFILIATE.  Any Person which is treated as a single employer with the
Borrowers under Section 414(b), (c), (m) and (o) of the Code.

 

ERISA REPORTABLE EVENT.  A reportable event with respect to a Guaranteed Pension
Plan within the meaning of Section 4043 of ERISA and the regulations promulgated
thereunder.

 

EUROCURRENCY RESERVE RATE.  For any day with respect to a Eurodollar Rate Loan,
the maximum rate (expressed as a decimal) at which any bank subject thereto
would be required to maintain reserves under Regulation D of the Board of
Governors of the Federal Reserve System (or any successor or similar regulations
relating to such reserve requirements) against “EUROCURRENCY LIABILITIES” (as
that term is used in Regulation D), if such liabilities were outstanding.  The
Eurocurrency Reserve Rate shall be adjusted automatically on and as of the
effective date of any change in the Eurocurrency Reserve Rate.

 

EURODOLLAR BUSINESS DAY.  Any day on which commercial banks are open for
international business (including dealings in Dollar deposits) in London or such
other eurodollar interbank market as may be selected by the Agent in its sole
reasonable discretion acting in good faith.

 

EURODOLLAR LENDING OFFICE.  Initially, the office of each Revolving Credit
Lender designated as such in SCHEDULE 1.1(b) hereto; thereafter, such other
office of such Lender, if any, that shall be making or maintaining Eurodollar
Rate Loans.

 

EURODOLLAR RATE.  For any Interest Period with respect to a Eurodollar Rate
Loan, the rate of interest equal to (a) the arithmetic average of the rates per
annum (rounded upwards to the nearest 1/100 of one percent) determined by the
Agent in good faith to be the highest prevailing rate per annum at which Fleet
is offered Dollar deposits two Eurodollar Business Days prior to the beginning
of such Interest Period in the interbank eurodollar market where the eurodollar
and foreign currency and exchange operations of Fleet are customarily conducted,
for delivery on the first day of such Interest Period for the number of days
comprised therein and in an amount comparable to the amount of the Eurodollar
Rate Loan of the Lender to which such Interest Period applies, divided by (b) a
number equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable.

 

EURODOLLAR RATE LOANS.  Revolving Credit Loans bearing interest calculated by
reference to the Eurodollar Rate.

 

EVENT OF DEFAULT.  See Section 13.1.  An “Event of Default” shall be deemed to
have occurred and be continuing unless and until duly waived by the requisite
Lenders or by the Agent, as applicable, in accordance with this Agreement.

 

EXCESS AVAILABILITY.  The result of (a) Availability MINUS (b) all then past due
obligations of the Borrowers including accounts payable which are beyond
customary trade terms and rent obligations which are beyond applicable grace
periods.

 

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FAO.  See preamble.

 

FAO ROYALTY RESERVE.  At any date, with respect to the projected annual
royalties payable under the FAO Trademark License, at least 1/12th of such
annual royalty for each month covered by such annual royalty through such date
until such annual royalty is paid in full.  Such projected annual royalty shall
be reasonably projected by FAO in good faith based upon the projected and actual
financial performance of the Borrowers.

 

FAO TRADEMARK LICENSE.  See Section 7.6.

 

FEES.  Collectively, the Unused Fee, the Letter of Credit Fees, the Agent Fees
and the Tranche B Lender Fees.

 

FINANCIAL AFFILIATE.  A Subsidiary of the bank holding company controlling any
Lender, which Subsidiary is engaging in any of the activities permitted by
Section 4(e) of the Bank Holding Company Act of 1956 (12 U.S.C. Section 1843).

 

FLEET.  Fleet National Bank, a national banking association.

 

FLEET CONCENTRATION ACCOUNT.  See Section 8.14.1.

 

FRFI.  Fleet Retail Finance Inc., a Delaware corporation.

 

GAAP OR GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.  Principles that are (i)
consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, as in effect from time to time
in the United States of America, and (ii) consistently applied with past
financial statements of the Borrowers adopting the same principles, provided
that in each case referred to in this definition of “GAAP” a certified public
accountant would, insofar as the use of such accounting principles is pertinent,
be in a position to deliver an unqualified opinion (other than a qualification
regarding changes in GAAP) as to financial statements in which such principles
have been properly applied.

 

GOVERNING DOCUMENTS.  With respect to any Person, its certificate or articles of
incorporation, its by-laws or other organizational documents and all shareholder
agreements, voting trusts and similar arrangements applicable to any of its
Capital Stock.

 

GOVERNMENTAL AUTHORITY.  Any foreign, federal, state, regional, local, municipal
or other government, or any department, commission, board, bureau, agency,
public authority or instrumentality thereof, or any court or arbitrator.

 

GUARANTEED PENSION PLAN.  Any employee pension benefit plan within the meaning
of Section 3(2) of ERISA maintained or contributed to by the Borrowers or any
ERISA Affiliate the benefits of which are guaranteed on termination in full or
in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer
Plan.

 

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HAZARDOUS SUBSTANCES.  Any hazardous waste, as defined by 42 U.S.C. Section
6903(5), any hazardous substances as defined by 42 U.S.C. Section 9601(14), any
pollutant or contaminant as defined by 42 U.S.C. Section 9601(33) and any toxic
substances, oil or hazardous materials or other chemicals or substances
regulated by any Environmental Laws.

 

HOST STORE.  Saks and any other Person which operates retail stores at which any
Borrower operates retail departments as so-called “licensed departments”.

 

HOST STORE ACKNOWLEDGEMENT.  An agreement which is reasonably satisfactory to
the Agent and the Tranche B Lender which is executed and delivered by a Host
Store and the Borrowers in favor of the Agent and includes reasonable safeguards
and protections concerning the interests of the Agent and the Lenders in the
assets and operations of the Borrowers operating in such Host Store.

 

INDEBTEDNESS.  As to any Person and whether recourse is secured by or is
otherwise available against all or only a portion of the assets of such Person
and whether or not contingent, but without duplication:

 

(a)                                  every obligation of such Person for money
borrowed,

 

(b)                                 every obligation of such Person evidenced by
bonds, debentures, notes or other similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets or
businesses,

 

(c)                                  every reimbursement obligation of such
Person with respect to letters of credit, bankers’ acceptances or similar
facilities issued for the account of such Person,

 

(d)                                 every obligation of such Person issued or
assumed as the deferred purchase price of property or services (including
securities repurchase agreements but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business which are not overdue or
which are being contested in good faith),

 

(e)                                  every obligation of such Person under any
Capitalized Lease,

 

(f)                                    every obligation of such Person under any
Synthetic Lease,

 

(g)                                 all sales by such Person of (i) accounts or
general intangibles for money due or to become due, (ii) chattel paper,
instruments or documents creating or evidencing a right to payment of money or
(iii) other receivables (collectively “RECEIVABLES”),  whether pursuant to a
purchase facility or otherwise, other than in connection with the disposition of
the business operations of such Person relating thereto or a disposition of
defaulted receivables for collection and not as a financing arrangement, and
together with any obligation of such Person to pay any discount, interest, fees,
indemnities, penalties, recourse, expenses or other amounts in connection
therewith,

 

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(h)                                 every obligation of such Person (an “EQUITY
RELATED PURCHASE OBLIGATION”) to purchase, redeem, retire or otherwise acquire
for value,  any shares of Capital Stock issued by such Person or any rights
measured by the value of such Capital Stock,

 

(i)                                     every obligation of such Person under
any forward contract, futures contract, swap, option or other financing
agreement or arrangement (including, without limitation, caps, floors, collars
and similar agreements), in each case the value of which is dependent upon
interest rates, currency exchange rates, commodities or other indices (in each
case, a “DERIVATIVE CONTRACT”),

 

(j)                                     every obligation in respect of
Indebtedness of any other entity (including any partnership in which such Person
is a general partner) to the extent that such Person is liable therefor as a
result of such Person’s ownership interest in or other relationship with such
entity, except to the extent that the terms of such Indebtedness provide that
such Person is not liable therefor and such terms are enforceable under
applicable law,

 

(k)                                  every obligation, contingent or otherwise,
of such Person guaranteeing, or having the economic effect of guarantying or
otherwise acting as surety for, any obligation of a type described in any of
clauses (a) through (j) (the “PRIMARY OBLIGATION”) of another Person (the
“PRIMARY OBLIGOR”), in any manner, whether directly or indirectly, and
including, without limitation, any obligation of such Person (i) to purchase or
pay (or advance or supply funds for the purchase of) any security for the
payment of such primary obligation, (ii) to purchase property, securities or
services for the purpose of assuring the payment of such primary obligation, or
(iii) to maintain working capital, equity capital or other financial statement
condition or liquidity of the Primary Obligor so as to enable the primary
obligor to pay such primary obligation.

 

The “AMOUNT” or “PRINCIPAL AMOUNT” of any Indebtedness at any time of
determination represented by (t) any Indebtedness, issued at a price that is
less than the principal amount at maturity thereof, shall be the amount of the
liability in respect thereof determined in accordance with GAAP, (u) any
Capitalized Lease shall be the principal component of the aggregate of the
rental obligations under such Capitalized Lease payable over the term thereof
that is not subject to termination by the lessee, (v) any sale of receivables
shall be the amount of unrecovered capital or principal investment of the
purchaser (other than the Borrowers or any of their wholly-owned Subsidiaries)
thereof, excluding amounts representative of yield or interest earned on such
investment, (w) any Synthetic Lease shall be the stipulated loss value,
termination value or other equivalent amount, (x) any Derivative Contract shall
be the maximum amount of any net termination or loss payment required to be paid
by such Person if such Derivative Contract were, at the time of determination,
to be terminated by reason of any event of default or early termination event
thereunder, whether or not such event of default or early termination event has
in fact occurred, (y) any Equity Related Purchase Obligation shall be the
maximum fixed redemption or purchase price thereof inclusive of any accrued and
unpaid dividends to be comprised in such redemption or purchase price and (z)
any

 

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guaranty or other contingent liability referred to in clause (k) shall be an
amount equal to the stated or determinable amount of the primary obligation in
respect of which such guaranty or other contingent obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof (assuming such Person is required to perform thereunder) as determined
by such Person in good faith.

 

INELIGIBLE SECURITIES.  Securities which may not be underwritten or dealt in by
member banks of the Federal Reserve System under Section 16 of the Banking Act
of 1933 (12 U.S.C. Section 24, Seventh), as amended.

 

INSTRUMENT.  See Section 1.2(a).

 

INTERCOMPANY NOTES.  See Section 9.1(e).

 

INTEREST PAYMENT DATE.  (a) As to any Base Rate Loan, the last day of the
calendar month with respect to interest accrued during such calendar month,
including, without limitation, the calendar month which includes the Drawdown
Date of such Base Rate Loan; (b) as to any Eurodollar Rate Loan, the last day of
such Interest Period and, if the Interest Period applicable to such Eurodollar
Rate Loan is more than three (3) months, the date which is three (3) months
after the commencement of such Interest Period, and (c) following the occurrence
of any Event of Default, with such frequency as may be determined by the Agent.

 

INTEREST PERIOD.  With respect to each Revolving Credit Loan, (a) initially, the
period commencing on the Drawdown Date of such Loan and ending on the last day
of one of the periods set forth below, as selected by the Borrowers’
Representative in a Loan Request or as otherwise required by the terms of this
Agreement (i) for any Base Rate Loan, the last day of the calendar month; and
(ii) for any Eurodollar Rate Loan, 1, 2, 3 or 6 months; and (b) thereafter, each
period commencing on the last day of the next preceding Interest Period
applicable to such Revolving Credit Loan and ending on the last day of one of
the periods set forth above, as selected by the Borrowers’ Representative in a
Conversion Request; PROVIDED that all of the foregoing provisions relating to
Interest Periods are subject to the following:

 

(A)                              if any Interest Period with respect to a
Eurodollar Rate Loan would otherwise end on a day that is not a Eurodollar
Business Day, that Interest Period shall be extended to the next succeeding
Eurodollar Business Day unless the result of such extension would be to carry
such Interest Period into another calendar month, in which event such Interest
Period shall end on the immediately preceding Eurodollar Business Day;

 

(B)                                if any Interest Period with respect to a Base
Rate Loan would end on a day that is not a Business Day, that Interest Period
shall end on the next succeeding Business Day;

 

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(C)                                if the Borrowers’ Representative shall fail
to give notice as provided in Section 2.10, the Borrowers shall be deemed to
have requested a conversion of the affected Eurodollar Rate Loan to a Base Rate
Loan and the continuance of all Base Rate Loans as Base Rate Loans on the last
day of the then current Interest Period with respect thereto;

 

(D)                               any Interest Period relating to any Eurodollar
Rate Loan that begins on the last Eurodollar Business Day of a calendar month
(or on a day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall end on the last Eurodollar
Business Day of a calendar month; and

 

(E)                                 no Interest Period shall extend beyond the
Maturity Date.

 

INTEREST RATE AGREEMENT.  Any interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate futures contract,
interest rate option agreement or other similar agreement or arrangement to
which the Borrowers and the Agent is a party, designed to protect the Borrowers
against fluctuations in interest rates.

 

INTERIM CONCENTRATION ACCOUNT.  Deposit Accounts (other than Local Accounts and
the Fleet Concentration Account) with financial institutions which have entered
into Blocked Account Agreements.

 

INVENTORY.  With respect to the Borrowers, finished goods, work in progress and
raw materials and component parts inventory owned by the Borrowers.

 

INVENTORY ADVANCE RATE.  For each calendar month, the corresponding percentage
set forth below opposite such month, as such percentage is adjusted from time to
time by the Agent to reflect changes in the nature and quality of Borrowers’
Inventory based upon the most recent appraisal of the Borrower’s Inventory
undertaken at the Agents’ request, using modeling criteria consistent with the
modeling criteria applied by the Agent to set the initial Inventory Advance
Rates hereunder, but not adjusted by the Agent more than 500 basis points above
each of the initial Percentages set forth below without the consent of the
Required Revolving Credit Lenders:

 

Month

 

Percentage

 

February

 

57.0

%

March

 

58.8

%

April

 

57.1

%

May

 

58.1

%

June

 

58.2

%

July

 

58.8

%

August

 

60.9

%

September

 

61.3

%

October

 

64.0

%

November

 

77.0

%

December

 

74.5

%

January

 

55.2

%

 

18

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INVENTORY LANDING COSTS.  Customs, customs broker fees, duties, freight (to the
extent not included in Agent’s applicable Inventory appraisal), and other costs
and expenses which will be expended to release Inventory being imported into the
United States.

 

INVENTORY RESERVES.  Without duplication as to other Reserves, such reserves as
may be established from time to time by the Agent in the Agent’s reasonable
discretion with respect to the determination of shrink, the saleability, at
retail, of the Eligible Inventory or which reflect such other factors as affect
the market value of the Eligible Inventory.

 

INVESTMENTS.  All expenditures made and all liabilities incurred (contingently
or otherwise) for the acquisition of stock or Indebtedness of, or for loans,
advances, capital contributions or transfers of property to, or in respect of
any guaranties (or other commitments as described under Indebtedness), or
obligations of, any Person.  In determining the aggregate amount of Investments
outstanding at any particular time: (a) the amount of any Investment represented
by a guaranty shall be taken at not less than the principal amount of the
obligations guaranteed and still outstanding; (b) there shall be included as an
Investment all interest accrued with respect to Indebtedness constituting an
Investment unless and until such interest is paid; (c) there shall be deducted
in respect of each such Investment any amount received as a return of capital
(but only by repurchase, redemption, retirement, repayment, liquidating dividend
or liquidating distribution); (d) there shall not be deducted in respect of any
Investment any amounts received as earnings on such Investment, whether as
dividends, interest or otherwise, except that accrued interest included as
provided in the foregoing clause (b) may be deducted when paid; and (e) there
shall not be deducted from or added to the aggregate amount of Investments any
decrease or increase in the value thereof.

 

KAYNE CREDIT SUPPORT INDEBTEDNESS.  Indebtedness to the extent permitted
hereunder hereafter incurred and owing by the Borrowers to the Kayne Credit
Support Indebtedness Holders in the aggregate principal amount of up to the face
amount of the Availability Letter of Credit whether contingent as to a draw not
yet made thereunder or evidenced by the New Kayne Availability Notes with
respect to a draw made under the Availability Letter of Credit.

 

KAYNE CREDIT SUPPORT INDEBTEDNESS HOLDERS.  Fred Kayne, Kayne Anderson Capital
Advisors, L.P., Richard Kayne, Hancock Park Capital II, L.P., Woodacres LLC, Les
Biller and Charles Norris, and their respective assigns; PROVIDED they have
assumed pursuant to an agreement in form and substance reasonably satisfactory
to the Agent the intercreditor and subordination agreement in favor of Agent
with respect to the Kayne Credit Support Indebtedness and the Kayne Existing
Lien.

 

19

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KAYNE EXISTING INDEBTEDNESS.  Existing Indebtedness held by the Kayne Existing
Indebtedness Holders under the Plan of Reorganization evidenced by the “New
Kayne Anderson Equipment Notes” of FAO, Schwarz and ZB under and as defined in
the Plan of Reorganization in the original principal amount of $4,000,000.

 

KAYNE EXISTING INDEBTEDNESS HOLDERS.  Arbco Associates, Inc., Richard A. Kayne &
Suzanne L. Kayne, Trustees, Kayne Anderson Capital Income Partners (Q.P.), L.P.,
Kayne Anderson Diversified Capital Partners, L.P., Kayne Anderson Capital Income
Partners, L.P., Kayne Anderson Non-Traditional, and Kayne Anderson Capital
Partners, L.P., and their respective assigns; PROVIDED they have assumed
pursuant to an agreement in form and substance reasonably satisfactory to the
Agent the intercreditor and subordination agreement in favor of the Agent with
respect to the Kayne Existing Indebtedness and the Kayne Existing Lien.

 

KAYNE EXISTING LIEN.  A Lien on the existing and hereafter acquired Equipment of
FAO, Schwarz and ZB in favor of the Kayne Existing Indebtedness Holders to
secure the Kayne Existing Indebtedness and, if hereafter incurred and to the
extent permitted hereunder, the Kayne Credit Support Indebtedness and the
Equipment Financing Indebtedness, superior to the Lien of the Agent as to
Equipment owned by FAO, Schwarz or ZB and existing on the Closing Date and
subordinate to the Lien of the Agent as to all other Equipment.

 

KAYNE GROUP.  Fred Kayne, Richard Kayne, and Affiliates of Kayne Anderson
Capital Advisors, L.P.

 

KBB EXISTING INDEBTEDNESS.  Existing Indebtedness held by the KBB Existing
Indebtedness Holders under the Plan of Reorganization consisting of (a) the “New
KBB Subordinated Note” of Schwarz and guaranteed by FAO under and as defined in
the Plan of Reorganization in the original principal amount of $9,900,000, and
(b) a $500,000 cash payment of Schwarz due and payable pursuant to the Plan of
Reorganization.

 

KBB EXISTING INDEBTEDNESS HOLDERS.  KBB Retail Assets Corp. (f/k/a F.A.O.
Schwarz) a New York corporation, and Quality Fulfillment Services, Inc., a
Virginia corporation, and their respective assigns; PROVIDED they have assumed
pursuant to an agreement in form and substance satisfactory to the Agent the
intercreditor and subordination agreement in favor of the Agent with respect to
the KBB Existing Indebtedness and the KBB Existing Lien.

 

KBB EXISTING LIEN.  A Lien on the existing and future assets of FAO and Schwarz
pursuant to the security agreement of FAO and the Security Agreement of Schwarz
securing the KBB Existing Indebtedness, subordinate to the Lien of the Agent on
all such assets.

 

LEASE.  Any lease or other agreement, no matter how styled or structured,
pursuant to which a Borrower is entitled to the use or occupancy of any space.

 

20

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

 

LENDER AFFILIATE.  (a) With respect to any Lender, (i) an Affiliate of such
Lender or (ii) any entity (whether a corporation, partnership, limited liability
company, trust or legal entity) that is engaged in making, purchasing, holding
or otherwise investing in bank loans and similar extensions of credit in the
ordinary course of its business and is administered or managed by such Lender or
an Affiliate of such Lender and (b) with respect to any Lender that is a fund
which invests in bank loans and similar extensions of credit, any other entity
(whether a corporation, partnership, limited liability company, trust or other
legal entity) that is a fund that invests in bank loans and similar extensions
of credit and is managed by the same investment advisor as such Lender or by an
Affiliate of such investment advisor.

 

LENDERS.  The Revolving Credit Lenders and the Tranche B Lender.

 

LENDERS SPECIAL COUNSEL.  See Section 16.2.

 

LETTER OF CREDIT.  See Section 4.1.1.

 

LETTER OF CREDIT APPLICATION.  See Section 4.1.1.

 

LETTER OF CREDIT FEE.  See Section 4.6.

 

LETTER OF CREDIT ISSUER.  Fleet or such other Person selected by the Agent to
issue Letters of Credit.

 

LETTER OF CREDIT PARTICIPATION.  See Section 4.1.4.

 

LIEN.  Any mortgage, deed of trust, security interest, pledge, hypothecation,
assignment, attachment, deposit arrangement, encumbrance, lien (statutory,
judgment or otherwise), or other security agreement or preferential arrangement
of any kind or nature whatsoever (including any conditional sale or other title
retention agreement, any Capitalized Lease, any Synthetic Lease, any financing
lease involving substantially the same economic effect as any of the foregoing
and the filing of any financing statement under the UCC or comparable law of any
jurisdiction).

 

LIQUIDATION.  See Section 13.1.  Derivations of the word “Liquidation” (such as
“Liquidate”) are used with like meaning in this Agreement.

 

LOAN ACCOUNT.  See Section 2.7.1.

 

LOAN DOCUMENTS.  This Agreement, the Notes, the Agent Fee Letter, the Tranche B
Fee Letter, the Letter of Credit Applications, the Letters of Credit and the
Security Documents.

 

LOAN REQUEST.  See Section 2.9.l.

 

LOANS.  The Revolving Credit Loans and the Tranche B Loan.

 

21

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

 

LOCAL ACCOUNTS.  Deposit Accounts, in each case maintained for the benefit of
four (4) or less retail locations of the Borrowers (excluding the New York City
and Boston stores, respectively) which at no time contain a balance in excess of
$10,000.

 

MATERIAL ADVERSE EFFECT.  With respect to any event or occurrence of whatever
nature (including any adverse determination in any litigation, arbitration or
governmental investigation or proceeding):

 

(a)                                  a material adverse effect on the business,
properties, financial condition, assets or operations of any of the Borrowers or
of the Borrowers and their Subsidiaries, taken as a whole;

 

(b)                                 any material impairment of the ability of
the Borrowers taken as a whole, to perform any of their respective Obligations
under any of the Loan Documents to which it is a party; or

 

(c)                                  any material impairment of the validity,
binding effect or enforceability of this Agreement or any of the other Loan
Documents, any material impairment of the rights, remedies or benefits available
to the Agent or any Lender under any Loan Document, any material impairment of
the ability of the Agent or any Lender to realize upon the Collateral, or any
impairment of the attachment, perfection or priority of any Lien of the Agent
under the Security Documents.

 

MATURITY DATE.  April 22, 2006.

 

MAXIMUM DRAWING AMOUNT.  The maximum aggregate amount that the beneficiaries may
at any time draw under outstanding Letters of Credit, as such aggregate amount
may be reduced from time to time pursuant to the terms of the Letters of Credit.

 

MOODY’S.  Moody’s Investors Services, Inc.

 

MULTIEMPLOYER PLAN.  Any multiemployer plan within the meaning of Section 3(37)
of ERISA maintained or contributed to by the Borrowers or any ERISA Affiliate.

 

NEW KAYNE AVAILABILITY NOTES.  Promissory notes issued after the Closing Date by
FAO, Schwarz and ZB in favor of the Kayne Credit Support Indebtedness Holders,
evidencing draws made under the Availability Letter of Credit, each of which
shall be in form and substance reasonably satisfactory to the Agent.

 

NONCONSENTING LENDER.  See Section 14.22.

 

NOTES.  The Revolving Credit Notes and Tranche B Notes.

 

OBLIGATIONS.  (a) All indebtedness, obligations and liabilities of any of the
Borrowers and their Subsidiaries to any of the Lenders, the Letter of Credit
Issuer, the Agent and any Affiliates of the Agent, individually or collectively,
existing on the date of this Agreement or arising thereafter, direct or
indirect, joint or several, absolute or contingent,

 

22

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

 

matured or unmatured, liquidated or unliquidated, secured or unsecured, arising
by contract, operation of law or otherwise, to the extent arising or incurred
under this Agreement or any of the other Loan Documents or in respect of any of
the Loans made or Reimbursement Obligations incurred or any of the Notes, Letter
of Credit Applications, Letters of Credit or other instruments at any time
evidencing any thereof; and

 

(b)                                 Any and all direct or indirect liabilities,
debts, and obligations of the Borrowers to the Agent or any Affiliate of the
Agent, each of every kind, nature, and description owing on account of any
service or accommodation provided to, or for the account of any of the Borrowers
pursuant to any Interest Rate Agreement or pursuant to this or any other Loan
Document, including cash management services or any other fee based banking
products.

 

OPERATING ACCOUNT.  See Section 2.9.2.

 

OUTSTANDING.  With respect to the Loans, the aggregate unpaid principal balance
thereof as of any date of determination.

 

OVERLOAN.  A Loan, advance, or providing of credit support (such as the issuance
of any Letter of Credit) (a) to the extent that, immediately after its having
been made, Availability is less than $0, or (b) at a time when the Borrowers not
in compliance with Section 10.1 of this Agreement.

 

PARTICIPANT.  Any Person that acquires a direct or indirect participation in a
Lender’s rights and obligations under this Agreement and the other Loan
Documents.

 

PBGC.  The Pension Benefit Guaranty Corporation created by Section 4002 of ERISA
and any successor entity or entities having similar responsibilities.

 

PERFECTION CERTIFICATE.  See Section 7.14.1.

 

PERMITTED HOLDERS.  (a) Any of the Kayne Group, and (b) Permitted Transferees.

 

PERMITTED LIENS.  Liens permitted by Section 9.2.

 

PERMITTED PROTECTIVE ADVANCE.  See Section 14.15(a).

 

PERMITTED PROTEST.  The right of Borrowers to protest any tax (other than
payroll taxes or taxes that are the subject of a federal tax lien or any state
or local tax lien), PROVIDED (a) a reserve with respect to such tax is
established on the books of Borrowers in an amount that is reasonably
satisfactory to the Agent, (b) any such protest is instituted and diligently
prosecuted by Borrowers in good faith, and (c) the Agent is satisfied that,
while any such protest is pending, there will be no impairment of the
enforceability, validity, or priority of any of the Liens of the Agent in and to
the Collateral.

 

23

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

 

PERMITTED TRANSFEREES.  With respect to any Person, (a) any Affiliate of such
Person, (b) the heirs, executors, administrators, testamentary trustees,
legatees or beneficiaries of any such Person or (c) a trust, the beneficiaries
of which, or a corporation, partnership or other entity, the stockholders or
general or limited partners or other owners of which, include only such Person
or his or her spouse or lineal descendants, in each case to whom such Person has
transferred the beneficial ownership of any Capital Stock of FAO.

 

PERMITTED STORE CLOSINGS.  The closing on or after the Closing Date of certain
of the Borrowers’ retail locations on terms approved by the Agent and the
Tranche B Lender and which, in the aggregate, do not affect or involve Inventory
which is more than ten percent (10%) of the Borrowers’ total Inventory as
reflected on the initial Borrowing Base Report.

 

PERSON.  Any individual, corporation, limited liability company, partnership,
limited liability partnership, trust, other unincorporated association,
business, or other legal entity, and any Governmental Authority.

 

PIK ELECTION.  See Section 3.4(b)(i).

 

PLAN CONFIRMATION ORDER.  Orders of the U.S. Bankruptcy Court, District of
Delaware, entered April 7, 2003 and April 21, 2003, in connection with the FAO
Chapter 11 Proceeding, in form and substance reasonably acceptable to the Agent
and the Tranche B Lender, confirming and modifying the Plan of Reorganization of
FAO; unless otherwise agreed to in writing by the Agent and the Tranche B
Lender, the Bankruptcy Court’s retention of jurisdiction under such order shall
not govern the enforcement of the Obligations under this Agreement and the Loan
Documents.

 

PLAN OF REORGANIZATION.  The final plan of reorganization of FAO in the form
confirmed as of April 7, 2003 as modified on April 21, 2003 pursuant to the Plan
Confirmation Orders in the Chapter 11 Proceeding In re: FAO, INC., Case No.
03-10119 (LK) (the “FAO CHAPTER 11 PROCEEDING”) with a copy thereof having been
provided to the Agent and the Tranche B Lender, with changes thereto as agreed
to in writing by the Agent and the Tranche B Lender.  Such plan of
reorganization shall provide among other things for the approval of the
financing and Collateral contemplated under this Agreement, including without
limitation the Agent’s first priority security interest in the Collateral.

 

PLEDGE AGREEMENT.  The Securities Pledge Agreement, dated or to be dated on or
prior to the Closing Date, among certain of the Borrowers and the Agent, in form
and substance satisfactory to the Agent.

 

PNC.  PNC Leasing, LLC.

 

PNC EXISTING INDEBTEDNESS.  The existing Indebtedness of ZB under the Letter
Agreement-Term Loan dated September 5, 2001 between PNC and ZB, as evidenced by

 

24

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

 

the Equipment Loan Promissory Note of ZB dated as of September 5, 2001 in the
principal amount as of the Closing Date of no greater than $1,400,000.

 

PNC EXISTING LIEN.  The security interest of PNC in certain Equipment of ZB
existing as of the Closing Date pursuant to the Security Agreement (Equipment)
dated as of September 5, 2001 between ZB and PNC, securing the PNC Existing
Indebtedness, superior to the Lien of Agent in such Equipment.

 

PROTECTIVE OVERADVANCES.  Revolving Credit Loans which are OverLoans or which
are made at such time as there is a Default, but as to which each of the
following conditions is satisfied: (a) the Total Revolving Commitment is not
exceeded, (b) when aggregated with all other Protective OverAdvances, such
Revolving Credit Loans do not aggregate more than 5% of the aggregate of the
Borrowing Base, (c) Protective OverAdvances may not be outstanding for more than
forty-five (45) consecutive Business Days or more than twice in any twelve month
period without the consent of the SuperMajority Revolving Credit Lenders and the
Tranche B Lender and (d) such Revolving Credit Loans are made or undertaken in
the Agent’s sole discretion to protect and preserve the interests of the
Lenders.

 

RCRA.  See the definition of “ENVIRONMENTAL LAWS”.

 

RECEIPTS.  All cash, Cash Equivalents, money, checks, credit card slips,
receipts and other proceeds from any sale of the Collateral.

 

RECEIVABLES.  See the definition of “INDEBTEDNESS”.

 

RECORD.  The grid attached to a Note, or the continuation of such grid, or any
other similar record, including computer records, maintained by any Lender with
respect to any Loan referred to in such Note.

 

REFINANCING.  Any refinancing, renewal or extension of Indebtedness so long as
(a) the terms and conditions of such refinancing, renewal or extension do not
materially impair the prospects of repayment of the Obligations by the
Borrowers, (b) the net cash proceeds of such refinancing, renewal or extension
does not result in an increase in the aggregate principal amount of the
Indebtedness so refinanced, renewed or extended or add one or more of the
Borrowers as liable with respect thereto if such additional Borrower or
Borrowers were not liable with respect to the original Indebtedness, (c) such
refinancing, renewal, refunding or extension does not result in a shortening of
the average weighted maturity of the Indebtedness so refinanced, renewed or
extended, and (d) to the extent that the Indebtedness that is refinanced was
subordinated in right of payment to the Obligations, then the subordination
terms and conditions of the refinancing must be acceptable to the Agent and the
Tranche B Lender in their reasonable discretion and must include, in any event
without limitation, terms and conditions at least as favorable to the Lenders as
those applicable to the original Indebtedness (PROVIDED if such subordination
terms are the same as those relating to the original Indebtedness such terms
shall be deemed to be acceptable).

 

25

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

 

REGISTER.  See Section 2.7.1.

 

REIMBURSEMENT OBLIGATION.  The Borrowers’ obligation to reimburse the Letter of
Credit Issuer and the Lenders on account of any drawing under any Letter of
Credit as provided in Section 4.2.

 

REQUIRED LENDERS.  As of any date, Lenders (other than Delinquent Lenders)
holding at least fifty-one percent (51%) (the “REQUIRED LENDERS PERCENTAGE”) of
the sum of the Commitments (exclusive of Commitments held by Delinquent
Lenders).

 

REQUIRED REVOLVING CREDIT LENDERS.  As of any date, the Revolving Credit Lenders
(other than Revolving Credit Lenders who are Delinquent Lenders) whose aggregate
Commitments constitute at least fifty-one percent (51%) of the Total Revolving
Commitment (exclusive of Commitments held by Delinquent Lenders); PROVIDED at
any time there are only two Revolving Credit Lenders, Required Revolving Credit
Lenders will mean both such Revolving Credit Lenders.

 

RESERVES.  Availability Reserves and Inventory Reserves.

 

RESTRICTED PAYMENT.  In relation to the Borrowers and their Subsidiaries, any
(a) Distribution, (b) payment or prepayment by the Borrowers or their
Subsidiaries to the Borrowers’ or any Subsidiary’s shareholders (or other equity
holders), in each case, other than to the Borrowers, or to any Affiliate of the
Borrowers or any Subsidiary or any Affiliate of the Borrowers’ or such
Subsidiary’s shareholders (or other equity holders), in each case, other than to
the Borrowers in cash or property or both, but excluding payments for goods or
services rendered which comply with the provisions of Section 9.11, (c)
derivatives or other transactions with any financial institution, commodities or
stock exchange or clearinghouse (a “DERIVATIVES COUNTERPARTY”) obligating the
Borrowers or any Subsidiary to make payments to such Derivatives Counterparty as
a result of any change in market value of any Capital Stock of the Borrowers or
such Subsidiary, or (d) payment or prepayment of principal of, premium, if any,
or interest on, or redemption, purchase, retirement defeasance, sinking fund or
similar payment in cash or property or both (i) with respect to Subordinated
Debt, including without limitation with respect to the KBB Existing
Indebtedness, (ii) with respect to the Kayne Existing Indebtedness, (iii) with
respect to the Kayne Credit Support Indebtedness, (iv) with respect to the
Emergence Vendor Liabilities, or (v) with respect to the Equipment Financing
Indebtedness.

 

REVOLVING COMMITMENT FEE.  As defined and provided for in the Agent Fee Letter,
payable on or before the Closing Date as provided herein.

 

REVOLVING CREDIT EARLY TERMINATION FEE.  See Section 2.4.

 

26

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

 

REVOLVING CREDIT LENDERS.  FRFI and any other Person who becomes an assignee of
any rights and obligations of a Revolving Credit Lender pursuant to Section 15.

 

REVOLVING CREDIT LOANS.  Revolving credit loans made or to be made by the
Revolving Credit Lenders to the Borrowers pursuant to Section 2.

 

REVOLVING CREDIT NOTE RECORD.  A Record with respect to a Revolving Credit Note.

 

REVOLVING CREDIT NOTES.  See Section 2.7.2.

 

RIGHT START.  See preamble.

 

S&P.  Standard & Poor’s Ratings Group.

 

SAKS.  Saks Incorporated, a Tennessee corporation.

 

SARA.  See the definition of “ENVIRONMENTAL LAWS”.

 

SCHWARZ.  See preamble.

 

SECURITIES PURCHASE AGREEMENT.  That certain Securities Purchase Agreement dated
as of April 3, 2003 among FAO and Saks, Fred Kayne, Kayne Anderson Capital
Advisors, L.P., Richard Kayne, Hancock Park Capital II, L.P. and PCG Tagi, LLC
(Series H), as amended by the First Amendment to Securities Purchase Agreement
dated as of April 21, 2003 among FAO, Saks and the Kayne Credit Support
Indebtedness Holders.

 

SECURITY DOCUMENTS.  This Agreement, the Trademark Security Agreement, the
Copyright Security Agreement, the Pledge Agreement, all blocked account
agreements and Blocked Account Agreements in respect to the Borrowers’ deposit
accounts, all Customs Broker Agreements, all common carrier, landlord,
fulfillment servicer and warehouseman’s consents and waivers, and all
intercreditor and subordination agreements required to be delivered in
connection with this Agreement, and all other instruments and documents,
including without limitation Uniform Commercial Code financing statements
authorized or required to be executed or delivered pursuant to any Security
Document.

 

SETTLEMENT.  The making or receiving of payments, in immediately available
funds, by the Revolving Credit Lenders, to the extent necessary to cause each
Revolving Credit Lender’s actual share of the outstanding amount of Revolving
Credit Loans (after giving effect to any Loan Request) to be equal to such
Revolving Credit Lender’s Commitment Percentage of the outstanding amount of
such Revolving Credit Loans (after giving effect to any Loan Request), in any
case where, prior to such event or action, the actual share is not so equal.

 

27

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

 

SETTLEMENT AMOUNT.  See Section 2.13.1.

 

SETTLEMENT DATE.  (a) The Drawdown Date relating to any Loan Request which would
cause the Swing Line Loans to exceed the Swing Line Ceiling, (b) at the option
of the Agent, on any Business Day following a day on which the account officers
of the Agent active upon the Borrowers’ account become aware that a Default
exists, (c) at the option of the Agent, the Business Day following notice to the
Lenders of the Agent’s intent to effect a Settlement, (d) any Business Day on
which the amount of Revolving Credit Loans outstanding from FRFI PLUS FRFI’s
Commitment Percentage of the sum of the Maximum Drawing Amount and any Unpaid
Reimbursement Obligations is equal to or greater than FRFI’s Commitment
Percentage of the Total Revolving Commitment, (e) the Business Day immediately
following any Business Day on which the amount of Swing Line Loans exceeds the
Swing Line Ceiling, (f) if it is a Business Day, Wednesday of each week
(including without limitation with respect to Swing Line Loans) or (g) any
Business Day on which (i) the amount of outstanding Revolving Credit Loans
decreases and (ii) the amount of the FRFI’s Revolving Credit Loans outstanding
equals zero Dollars ($0).

 

SETTLING LENDER.  See Section 2.13.1.

 

SPECIFIED PROVISIONS.  Sections 2.12, 2.15, 2.16, 5.2, 5.3, 5.4, 5.12, 8.4, 8.9,
8.15, all of the Sections of Articles 9, 10 and 13 and Sections 14.9, 14.13,
14.14, 14.15, 14.16, 14.17, 14.18, 14.19, 14.20, 14.21 and 15.1.2 and any
component definition utilized in any of such Sections.

 

STANDSTILL TERMINATION DATE.  Any date

 

(a)                                that an Event of Default under Section
13.1(g), (h), (k) or (q) exists,

 

(b)                                 on which an Event of Default exists under
Section 13.1(a) or (b) in respect of the Obligations owed to the Tranche B
Lender and has existed for at least fifteen (15) consecutive days prior to such
date,

 

(c)                                  on which Availability is less than $0 and
(i) fifteen (15) days prior to such date Availability was less than $0 and
during such fifteen (15) day period there was no period of three (3) consecutive
days in which Availability was equal to or exceeded $0 or (ii) during the
forty-five (45) days prior to such date Availability was less than $0 for
twenty-five (25) or more days during such period,

 

(d)                                 which is thirty (30) days after the
occurrence of any Event of Default under Section 10,

 

(e)                                  which is fifteen (15) days after the
Borrowers’ failure to deliver (i) within thirty (30) days after the date when
due under Section 8.4 (after giving effect to applicable grace periods, if any,
pursuant to Section 13.1(d), any of the financial statements required by any of
Sections 8.4(a), 8.4(b), 8.4(c) or 8.4(d), or (ii) within five

 

28

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(5) days after the date when due under Section 8.4(f), a Borrowing Base Report
required by Section 8.4(f),

 

(f)                                    which is three (3) days after the failure
of the Revolving Credit Lenders to fund all or any portion of two (2)
consecutive Loan Requests, and

 

(g)                                 which is ninety (90) days after the
occurrence of any breach of any of the Specified Provisions.

 

STATED AMOUNT.  The maximum amount for which a Letter of Credit may be honored.

 

SUBORDINATED DEBT.  (a) The KBB Existing Indebtedness, and (b) unsecured
Indebtedness hereafter incurred by the Borrowers with the prior written consent
of the Required Revolving Credit Lenders and the Tranche B Lender, on terms and
conditions reasonably acceptable to the Agent and the Tranche B Lender,
including the subordination thereof to the Obligations pursuant to a written
intercreditor and subordination agreement in form and substance reasonably
acceptable to the Agent and the Tranche B Lender.

 

SUBSIDIARY.  Any corporation, association, trust, or other business entity of
which the designated parent shall at any time own directly or indirectly through
a Subsidiary or Subsidiaries at least a majority (by number of votes) of the
outstanding Voting Stock.

 

SUPERMAJORITY LENDERS.  As of any date, Lenders (other than Delinquent Lenders)
holding at least sixty-six and two-thirds percent (66 and 2/3%) of the
Commitments (other than Commitments held by Delinquent Lenders).

 

SUPERMAJORITY REVOLVING CREDIT LENDERS.  As of any date, Revolving Credit
Lenders (other than Delinquent Lenders) holding at least sixty-six and
two-thirds percent (66 and 2/3%) of the Commitments (other than Commitments held
by Revolving Credit Lenders who are Delinquent Lenders).

 

SWING LINE CEILING.  $7,500,000.

 

SWING LINE LOANS.  Revolving Credit Loans made by the Agent to the Borrowers
pursuant to Section 2.9.2.

 

SYNTHETIC LEASE.  Any lease of goods or other property, whether real or
personal, which is treated as an operating lease under GAAP and as a loan or
financing for U.S. income tax purposes.

 

TARGOFF.  See preamble.

 

TOTAL REVOLVING COMMITMENT.  The lesser of (a) $67,000,000, or (b) the sum of
the Commitments of the Revolving Credit Lenders, as in effect from time to time.

 

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TRADEMARK SECURITY AGREEMENT.  The Trademark Security Agreement, dated or to be
dated on the Closing Date, made by the Borrowers and their Subsidiaries in favor
of the Agent, in form and substance satisfactory to the Lenders and the Agent,
and the related Security Agreement-Trademarks relating thereto.

 

TRANCHE B BORROWING BASE.  The aggregate of the following:

 

(a)                                  The face amount of Eligible Credit Card
Receivables MULTIPLIED BY the Credit Card Advance Rate,

 

PLUS

 

(b)                                 The lesser of (i) the Appraised Inventory
Tranche B Percentage MULTIPLIED BY the Appraised Inventory Liquidation Value,
and (ii) the Tranche B Inventory Advance Rate MULTIPLIED BY the Cost of Eligible
Inventory (net of Inventory Reserves).

 

PLUS

 

(c)                                if the Availability Letter of Credit exists,
until fourteen (14) days prior to expiry of Availability Letter of Credit, one
hundred percent (100%) of the undrawn amount of the Availability Letter of
Credit.

 

TRANCHE B COMMITMENT FEE.  As defined and provided for in the Tranche B Fee
Letter, payable on or before the Closing Date as provided therein.

 

TRANCHE B EARLY TERMINATION FEE.  See Section 3.3.

 

TRANCHE B FEE LETTER.  The fee letter dated as of the date hereof, among the
Borrowers and the Tranche B Lender, as amended from time to time.

 

TRANCHE B INVENTORY ADVANCE RATE.  For each calendar month, the corresponding
percentage set forth below opposite such month, as such percentage may be
adjusted from time to time by the Agent taking into account increases in the
Inventory Advance Rate made by the Agent pursuant to the definition thereof, but
not adjusted by the Agent more than 500 basis points above each of the initial
Percentages set forth below without the consent of the Tranche B Lender.

 

Month

 

Percentage

 

February

 

63.7

%

March

 

65.7

%

April

 

63.8

%

May

 

65.0

%

June

 

65.1

%

July

 

65.7

%

August

 

73.5

%

September

 

73.9

%

October

 

77.2

%

November

 

86.1

%

December

 

83.2

%

January

 

61.7

%

 

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TRANCHE B LENDER.  Back Bay Capital Funding LLC and any other Person who becomes
an assignee of any rights and obligations of the Tranche B Lender pursuant to
Section 15.

 

TRANCHE B LENDER FEES.  See Section 5.2.

 

TRANCHE B LOAN.  The Tranche B Loan made or to be made by the Tranche B Lender
to the Borrowers on the Closing Date originally in the aggregate principal
amount of $10,000,000 pursuant to Section 3.1.

 

TRANCHE B LOAN CURRENT PAY INTEREST.  See Section 3.4(a).

 

TRANCHE B LOAN INTEREST PAYMENT DATE.  See Section 3.4(a).

 

TRANCHE B LOAN INTEREST RATE.  See Section 3.4.

 

TRANCHE B LOAN PIK INTEREST.  See Section 3.4(b).

 

TRANCHE B MONITORING FEE.  As defined and provided for in the Tranche B Fee
Letter.

 

TRANCHE B NOTES.  See Section 3.2.

 

TYPE.  As to any Revolving Credit Loan, its nature as a Base Rate Loan or a
Eurodollar Rate Loan.

 

UCC or UNIFORM COMMERCIAL CODE.  Unless otherwise indicated, the Uniform
Commercial Code of the State of New York.

 

UNIFORM CUSTOMS.  See Section 4.1.3.

 

UNPAID REIMBURSEMENT OBLIGATION.  Any Reimbursement Obligation for which the
Borrowers do not reimburse the Agent and the Lenders on the date specified in,
and in accordance with, Section 4.2.

 

UNUSED FEE.  See Section 2.3.

 

VOTING STOCK.  Stock or similar interests, of any class or classes (however
designated), the holders of which are at the time entitled, as such holders, to
vote for the

 

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election of a majority of the directors (or persons performing similar
functions) of the corporation, association, trust or other business entity
involved, whether or not the right so to vote exists by reason of the happening
of a contingency.

 

ZB.  See preamble.

 

1.2.                              RULES OF INTERPRETATION.

 

(a)                                  A reference to any document or agreement
shall include such document or agreement as amended, modified or supplemented
from time to time in accordance with its terms and the terms of this Agreement. 
The singular includes the plural and the plural includes the singular.  A
reference to any law includes any amendment or modification to such law.  A
reference to any Person includes its permitted successors and permitted
assigns.  Accounting terms not otherwise defined herein have the meanings
assigned to them by GAAP applied on a consistent basis by the accounting entity
to which they refer.  The words “include”, “includes” and “including” are not
limiting.  All terms not specifically defined herein or by GAAP, which terms are
defined in the UCC, have the meanings assigned to them therein, with the term
“INSTRUMENT” being that defined under Article 9 of the UCC.  The words “herein”,
“hereof”, “hereunder” and words of like import shall refer to this Agreement as
a whole and not to any particular section or subdivision of this Agreement.  Any
reference to a Person’s “knowledge” (or words of similar import) are to such
Person’s knowledge assuming that such Person has undertaken reasonable and
diligent investigation with respect to the subject of such “knowledge” (whether
or not such investigation has actually been undertaken).

 

(b)                                 This Agreement and the other Loan Documents
are the result of negotiation among, and have been reviewed by counsel to, among
others, the Agent and the Borrowers and are the product of discussions and
negotiations among all parties.  Accordingly, this Agreement and the other Loan
Documents are not intended to be construed against the Agent or any of the
Lenders merely on account of the Agent’s or any Lender’s involvement in the
preparation of such documents.

 

2.                                       THE REVOLVING CREDIT FACILITY.

 

2.1.                              COMMITMENT TO LEND.  Subject to the terms and
conditions set forth in this Agreement, each of the Revolving Credit Lenders
severally agrees to lend to the Borrowers, and the Borrowers on a joint and
several basis may borrow, repay, and reborrow from time to time from the Closing
Date up to but not including the Maturity Date upon notice by the Borrowers’
Representative to the Agent given in accordance with Section 2.9, such sums as
are requested by the Borrowers’ Representative up to a maximum aggregate amount
outstanding (after giving effect to all amounts requested) at any one time equal
to such Revolving Credit Lender’s Commitment MINUS such Revolving Credit
Lender’s Commitment Percentage of the sum of the Maximum Drawing Amount and all
Unpaid Reimbursement Obligations, PROVIDED that the Agent and the Revolving
Credit Lenders shall have no obligation to make any Revolving Credit Loans which
would constitute an OverLoan or which would cause the sum of all outstanding
amounts of Revolving Credit Loans (after giving effect to all amounts requested)
plus the Maximum Drawing Amount and all Unpaid Reimbursement Obligations to be
greater then the

 

32

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Total Revolving Commitment.  Each request for a Revolving Credit Loan hereunder
shall constitute a representation and warranty by the Borrowers that the
conditions set forth in Section 11 and Section 12, in the case of the initial
Revolving Credit Loans to be made on the Closing Date, and Section 12, in the
case of all other Revolving Credit Loans, have been satisfied on the date of
such request.

 

2.2.                              MATURITY.  The Borrowers jointly and severally
promise to pay on the Maturity Date, and there shall become absolutely due and
payable on the Maturity Date, all of the Revolving Credit Loans outstanding on
such date, together with any and all accrued and unpaid interest thereon.

 

2.3.                              UNUSED FEE.  The Borrowers jointly and
severally agree to pay to the Agent for the accounts of the Revolving Credit
Lenders in accordance with their respective Commitment Percentages a commitment
fee (the “UNUSED FEE”) calculated at the rate of three-eighths of one percent
(0.375%) on the average daily amount during each calendar month or portion
thereof from the date hereof to the Maturity Date by which the Total Revolving
Commitment MINUS the sum of the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations exceeds the outstanding amount of Revolving Credit
Loans during such calendar month.  The Unused Fee shall be payable monthly in
arrears on the first day of each month for the immediately preceding month
commencing on the first such date following the date hereof, with a final
payment on the Maturity Date or any earlier date on which the Commitments shall
terminate.

 

2.4.                              REDUCTION OF COMMITMENT.  The Borrowers shall
have the right, at any time and from time to time upon five (5) Business Days
prior written notice to the Agent, to reduce by $5,000,000 or an integral
multiple of $1,000,000 in excess thereof, or terminate entirely the Total
Revolving Commitment, whereupon the Commitments of the Revolving Credit Lenders
shall be reduced PRO RATA in accordance with their respective Commitment
Percentages of the amount specified in such notice, or as the case may be,
terminated.  Promptly after receiving any notice of the Borrowers delivered
pursuant to this Section 2.4, the Agent will notify the Revolving Credit Lenders
of the substance thereof.  If the Borrowers repay or prepay all outstanding
Revolving Credit Loans, or the Total Revolving Commitment is reduced or
terminated, during the period commencing on the Closing Date and ending on the
date which is ninety (90) days prior to the Maturity Date in a single
transaction or series of related transactions, the Borrowers shall pay to the
Agent a premium in an amount equal to the Commitment Reduction Fee MULTIPLIED BY
the amount of the reduction of the Total Revolving Commitment if the Total
Revolving Commitment is not terminated or on the amount of the Total Revolving
Commitment immediately prior to such repayment or prepayment or the first of
such related series of prepayments or repayments, as the case may be (each a
“REVOLVING CREDIT EARLY TERMINATION FEE”); PROVIDED, HOWEVER, no Revolving
Credit Early Termination Fee shall be due if the Total Revolving Commitment is
terminated and Obligations hereunder are paid in connection with the Borrowers
entering into a new credit facility agented by the Agent.  No reduction or
termination of the Total Revolving Commitment may be reinstated.  The
“COMMITMENT REDUCTION FEE” shall be two percent (2%) if such reduction or
termination occurs prior to the first anniversary of the Closing

 

33

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

 

Date, or one percent (1%) if such reduction or termination occurs on or after
the first anniversary of the Closing Date.

 

2.5.                              MANDATORY REPAYMENTS OF REVOLVING CREDIT
LOANS.  If at any time Availability is less than $0 or there is an OverLoan,
then the Borrowers shall immediately pay to the Agent for the respective
accounts of the Revolving Credit Lenders for application amounts necessary so
that Availability is $0 or greater and there are no OverLoans to be applied:
first, to any Unpaid Reimbursement Obligations; second, to the Revolving Credit
Loans; and third, to provide to the Agent cash collateral for Reimbursement
Obligations as contemplated by Section 4.2(b) and (c).  Each payment of any
Unpaid Reimbursement Obligations or prepayment of Revolving Credit Loans shall
be allocated among the Revolving Credit Lenders, in proportion, as nearly as
practicable, to each Reimbursement Obligation or (as the case may be) the
respective unpaid principal amount of each Revolving Credit Lender’s Revolving
Credit Note, with adjustments to the extent practicable to equalize any prior
payments or repayments not exactly in proportion.

 

2.6.                              OPTIONAL REPAYMENTS OF REVOLVING CREDIT
LOANS.  The Borrowers shall have the right, at their election, to repay the
outstanding amount of the Revolving Credit Loans, as a whole or in part, at any
time without penalty or premium, PROVIDED that any full or partial prepayment of
the outstanding amount of any Eurodollar Rate Loans pursuant to this Section 2.6
may be made only on the last day of the Interest Period relating thereto. 
Except for repayments of the Revolving Credit Loans as contemplated by Section
2.14, the Borrowers’ Representative shall give the Agent, no later than 12:00
noon, Boston time, at least one (1) Business Day prior written notice of any
proposed prepayment pursuant to this Section 2.6 of Base Rate Loans, and three
(3) Eurodollar Business Days notice of any proposed prepayment pursuant to this
Section 2.6 of Eurodollar Rate Loans, in each case, specifying the proposed date
of prepayment of Revolving Credit Loans and the principal amount to be prepaid. 
Each such partial prepayment of the Revolving Credit Loans shall be in an amount
equal to $1,000,000 or an integral multiple of $1,000,000 in excess thereof,
shall be accompanied by the payment of accrued interest on the principal prepaid
to the date of prepayment and shall be applied, in the absence of instruction by
the Borrowers’ Representative, first to the principal of Base Rate Loans and
then to the principal of Eurodollar Rate Loans.  Each partial prepayment shall
be allocated among the Revolving Credit Lenders, in proportion, as nearly as
practicable, to the respective unpaid principal amount of each Revolving Credit
Lender’s Revolving Credit Note, with adjustments to the extent practicable to
equalize any prior repayments not exactly in proportion.

 

2.7.                              THE LOAN ACCOUNT AND REVOLVING CREDIT NOTES.

 

2.7.1.                     LOAN ACCOUNT.  An account (the “LOAN ACCOUNT”) shall
be opened on the books of the Agent in which a record shall be kept of all
Revolving Credit Loans.  The Agent shall also keep a record (either in the Loan
Account or elsewhere, as the Agent may from time to time elect) (such record,
the “REGISTER”) of the name and addresses of the Revolving Credit Lenders, the
Commitment Percentage of the Revolving Credit Lenders, all interest, fees,
service charges, costs, expenses, and other debits owed to the Agent and each
Revolving Credit Lender on account of the Obligations and all

 

34

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

 

credits against such amounts so owed.  The Borrowers irrevocably authorize the
Agent to make or cause to be made, at or about the time of the Drawdown Date of
any Revolving Credit Loan or at the time of receipt of any payment of principal
on the Loan Account, an appropriate notation on the Loan Account reflecting the
making of such Revolving Credit Loan or (as the case may be) the receipt of such
payment, but the failure to record, or any error in so recording, any such
amount on the Loan Account shall not limit or otherwise affect the obligations
of the Borrowers hereunder or under any Revolving Credit Loan to make payments
of principal of or interest on any Revolving Credit Loan when due.  The
Borrowers jointly and severally promise to pay all of the Obligations in
accordance with the provisions of this Agreement.  All credits against the
Obligations shall be conditional upon final payment to the Agent for the account
of each Revolving Credit Lender of the items giving rise to such credits.  The
amount of any item credited against the Obligations due to the Revolving Credit
Lenders which is charged back against the Agent or any Revolving Credit Lender
for any reason or is not so paid shall be an Obligation and shall be added to
the Loan Account, whether or not the item so charged back or not so paid is
returned.  Any statement rendered by the Agent to the Borrowers concerning the
Obligations shall be considered correct and accepted (absent manifest error) by
the Borrowers and shall be conclusively binding upon the Borrowers unless the
Borrowers’ Representative provides the Agent with written objection thereto
within thirty (30) days from the mailing of such statement, which written
objection shall indicate, with reasonable particularity, the reason for such
objection.  The Loan Account, the Register and the Agent’s books and records
concerning the loan arrangement contemplated herein and the Obligations shall be
prima facie evidence and proof of the items described therein.  The Loan Account
and Register shall be available for inspection by the Borrowers’ Representative
and the Revolving Credit Lenders at any reasonable time and from time to time
upon reasonable prior notice.

 

2.7.2.                     REVOLVING CREDIT NOTES.  At the request of any
Revolving Credit Lender the Borrowers shall deliver to such Revolving Credit
Lender separate promissory notes of the Borrowers in substantially the form of
EXHIBIT B hereto (each a “REVOLVING CREDIT NOTE”), dated as of the Closing Date
(or such other date on which a Revolving Credit Lender may become a party hereto
in accordance with Section 15 hereof) and completed with appropriate
insertions.  Each Revolving Credit Note shall be payable to the order of such
Revolving Credit Lender in a principal amount equal to such Revolving Credit
Lender’s Commitment or, if less, the outstanding amount of all Revolving Credit
Loans made by such Revolving Credit Lender, plus interest accrued thereon, as
set forth below.  No Revolving Credit Note shall be required to establish or
prove any Obligation.  In the event that any Revolving Credit Note is ever lost,
mutilated, or destroyed, the Borrowers shall execute a replacement thereof and
deliver such replacement to the Agent; PROVIDED, HOWEVER, in the event that a
Revolving Credit Note is to be exchanged following its acceleration or the entry
of an order for relief under the Bankruptcy Code with respect to the Borrowers,
the Agent, in lieu of causing the Borrowers to execute one or more new Revolving
Credit Notes, may issue a certificate of the Agent confirming the resulting
Lender’s Commitment and Percentage Commitments.

 

35

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2.8.                              INTEREST ON REVOLVING CREDIT LOANS.

 

2.8.1.                     ACCRUAL OF INTEREST.  Except as otherwise provided in
Section 5.10,

 

(a)                                  Each Revolving Credit Loan which is a Base
Rate Loan shall bear interest for the period commencing with the Drawdown Date
thereof and ending on the last day of the Interest Period with respect thereto
at the rate per annum equal to the Base Rate PLUS the Applicable Margin with
respect to Base Rate Loans as in effect from time to time.

 

(b)                                 Each Revolving Credit Loan which is a
Eurodollar Rate Loan shall bear interest for the period commencing with the
Drawdown Date thereof and ending on the last day of the Interest Period with
respect thereto at the rate per annum equal to the Eurodollar Rate determined
for such Interest Period PLUS the Applicable Margin with respect to Eurodollar
Rate Loans as in effect from time to time.  The Borrowers jointly and severally
promise to pay interest on each Revolving Credit Loan in arrears on each
Interest Payment Date with respect thereto.

 

2.8.2.                     AUTOMATIC DEBIT OF INTEREST.  The Agent, without the
request of the Borrowers, may make Revolving Credit Loans to pay any interest,
fee, service charge, or other payment to which the Agent or any Lender is
entitled from the Borrowers 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 Agent shall not constitute a waiver of the Agent’s rights and the
Borrowers’ obligations under Section 13.  Any amount which is added to the
principal balance of the Loan Account as provided in this Section 2.8.2 shall
bear interest at the interest rate then and thereafter applicable to Base Rate
Loans.

 

2.9.                              REQUESTS FOR REVOLVING CREDIT LOANS.

 

2.9.1.                     GENERAL.  The Borrowers’ Representative shall give to
the Agent written notice in the form of EXHIBIT C hereto (or telephonic or
electronic mail notice confirmed in a writing in the form of EXHIBIT C hereto)
of each Revolving Credit Loan requested hereunder (a “LOAN REQUEST”) no later
than (a) 12:00 noon (Boston time) on the Business Day of the proposed Drawdown
Date of any Base Rate Loan and (b) 1:00 p.m. (Boston time) three (3) Eurodollar
Business Days prior to the proposed Drawdown Date of any Eurodollar Rate Loan. 
Each such notice shall specify (i) the principal amount of the Revolving Credit
Loan requested, (ii) the proposed Drawdown Date of such Revolving Credit Loan,
(iii) the Interest Period for such Revolving Credit Loan and (iv) the Type of
such Revolving Credit Loan.  Promptly upon receipt of any such notice, the Agent
shall notify each of the Revolving Credit Lenders thereof.  Each Loan Request
shall be irrevocable and binding on the Borrowers and shall obligate the
Borrowers to accept the Revolving Credit Loan requested from the Revolving
Credit Lenders on the proposed Drawdown Date.  Each Loan Request shall be in a
minimum aggregate amount of $1,000,000 or an integral multiple of $100,000 in
excess thereof.

 

36

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

 

2.9.2.                     SWING LINE.  Notwithstanding the notice and minimum
amount requirements set forth in Section 2.9.1 but otherwise in accordance with
the terms and conditions of this Agreement (except with respect to Protective
OverAdvances), the Agent may, in its sole discretion and without conferring with
the Lenders, make Revolving Credit Loans to the Borrowers (a) by entry of
credits to the Borrowers’ operating account or such other account (the
“OPERATING ACCOUNT”) with the Agent to cover checks or other charges which the
Borrowers have drawn or made against such account, (b) in an amount as otherwise
requested by the Borrowers or (c) as Protective OverAdvances.  The Borrowers
hereby request and authorize the Agent to make from time to time such Revolving
Credit Loans by means of appropriate entries of such credits sufficient to cover
checks and other charges then presented for payment from the Operating Account
or as otherwise so requested.  The Borrowers acknowledge and agree that the
making of such Revolving Credit Loans shall, in each case, be subject in all
respects to the provisions of this Agreement as if they were Revolving Credit
Loans covered by a Loan Request including, without limitation, the limitations
set forth in Section 2.1 and the requirements that the applicable provisions of
Section 11 (in the case of Revolving Credit Loans made on the Closing Date) and
Section 12 be satisfied (except in the case of Protective OverAdvances).  All
actions taken by the Agent pursuant to the provisions of this Section 2.9.2
shall be conclusive and binding on the Borrowers and the Revolving Credit
Lenders absent the Agent’s gross negligence or willful misconduct.  Revolving
Credit Loans made pursuant to this Section 2.9.2 shall be Base Rate Loans until
converted in accordance with the provisions of this Agreement and, prior to a
Settlement, such interest shall be for the account of the Agent.

 

2.10.                        CONVERSION OPTIONS.

 

2.10.1.               CONVERSION TO DIFFERENT TYPE OF REVOLVING CREDIT LOAN. 
The Borrowers’ Representative may elect from time to time to convert any
outstanding Revolving Credit Loan to a Revolving Credit Loan of another Type,
PROVIDED that (a) with respect to any such conversion of a Eurodollar Rate Loan
to a Base Rate Loan, the Borrowers’ Representative shall give the Agent at least
one (1) Business Day’s prior written notice of such election; (b) with respect
to any such conversion of a Base Rate Loan to a Eurodollar Rate Loan, the
Borrowers’ Representative shall give the Agent at least three (3) Eurodollar
Business Days’ prior written notice of such election; (c) with respect to any
such conversion of a Eurodollar Rate Loan into a Base Rate Loan, such conversion
shall only be made on the last day of the Interest Period with respect thereto
and (d) no Revolving Credit Loan may be converted into a Eurodollar Rate Loan
when any Default has occurred and is continuing.  On the date on which such
conversion is being made, each Revolving Credit Lender shall take such action as
is necessary to transfer its Commitment Percentage of such Revolving Credit
Loans to its Domestic Lending Office or its Eurodollar Lending Office, as the
case may be.  All or any part of outstanding Revolving Credit Loans of any Type
may be converted into a Revolving Credit Loan of another Type as provided
herein, PROVIDED that any partial conversion shall be in an aggregate principal
amount of $1,000,000 or an integral multiple of $1,000,000 in excess thereof. 
Each Conversion Request relating to the

 

37

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

 

conversion of a Revolving Credit Loan to a Eurodollar Rate Loan shall be
irrevocable by the Borrowers.

 

2.10.2.               CONTINUATION OF TYPE OF REVOLVING CREDIT LOAN.  Any
Revolving Credit Loan of any Type may be continued as a Revolving Credit Loan of
the same Type upon the expiration of an Interest Period with respect thereto by
compliance by the Borrowers with the notice provisions contained in Section
2.10.1; PROVIDED that no Eurodollar Rate Loan may be continued as such when any
Default has occurred and is continuing, but shall be automatically converted to
a Base Rate Loan on the last day of the first Interest Period relating thereto
ending during the continuance of any Default of which officers of the Agent
active upon the Borrowers’ account have actual knowledge.  In the event that the
Borrowers fail to provide any such notice with respect to the continuation of
any Eurodollar Rate Loan as such, then such Eurodollar Rate Loan shall be
automatically converted to a Base Rate Loan on the last day of the first
Interest Period relating thereto.  The Agent shall notify the Revolving Credit
Lenders promptly when any such automatic conversion contemplated by this Section
2.10.2 is scheduled to occur.

 

2.10.3.               EURODOLLAR RATE LOANS.  Any conversion to or from
Eurodollar Rate Loans shall be in such amounts and be made pursuant to such
elections so that, after giving effect thereto, the aggregate principal amount
of all Eurodollar Rate Loans having the same Interest Period shall not be less
than $1,000,000 or an integral multiple of $1,000,000 in excess thereof.  No
more than five (5) Eurodollar Rate Loans having different Interest Periods may
be outstanding at any time.

 

2.11.                        FUNDS FOR REVOLVING CREDIT LOAN.

 

2.11.1.               FUNDING PROCEDURES.  Not later than 3:00 p.m. (Boston
time) on the proposed Drawdown Date of any Revolving Credit Loans, each of the
Revolving Credit Lenders will make available to the Agent, at the Agent’s
Office, in immediately available funds, the amount of such Revolving Credit
Lender’s Commitment Percentage of the amount of the requested Revolving Credit
Loans.  Upon receipt from each Revolving Credit Lender of such amount, and upon
receipt of the documents required by Sections 11 and 12 and the satisfaction of
the other conditions set forth therein, to the extent applicable, the Agent will
make available to the Borrowers’ Representative the aggregate amount of such
Revolving Credit Loans made available to the Agent by the Revolving Credit
Lenders.  The failure or refusal of any Revolving Credit Lender to make
available to the Agent at the aforesaid time and place on any Drawdown Date the
amount of its Commitment Percentage of the requested Revolving Credit Loans
shall not relieve any other Revolving Credit Lender from its several obligation
hereunder to make available to the Agent the amount of such other Revolving
Credit Lender’s Commitment Percentage of any requested Revolving Credit Loans.

 

2.11.2.               ADVANCES BY AGENT.  The Agent may, unless notified to the
contrary by any Revolving Credit Lender prior to a Drawdown Date, assume that
such Revolving Credit Lender has made available to the Agent on such Drawdown
Date the

 

38

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

 

amount of such Revolving Credit Lender’s Commitment Percentage of the Revolving
Credit Loans to be made on such Drawdown Date, and the Agent may (but it shall
not be required to), in reliance upon such assumption, make available to the
Borrowers a corresponding amount.  If any Revolving Credit Lender makes
available to the Agent such amount on a date after such Drawdown Date, such
Revolving Credit Lender shall pay to the Agent on demand all such costs and
expenses as may be incurred by the Agent in the enforcement of the Agent’s
rights against such Revolving Credit Lender plus an amount equal to the greater
of (a) the amount of interest actually paid by the Borrowers on account of such
amounts or (b) the product of (i) the average computed for the period referred
to in clause (iii) below, of the weighted average interest rate paid by the
Agent for federal funds acquired by the Agent during each day included in such
period, MULTIPLIED BY (ii) the amount of such Revolving Credit Lender’s
Commitment Percentage of such Revolving Credit Loans, MULTIPLIED BY (iii) a
fraction, the numerator of which is the number of days that elapse from and
including such Drawdown Date to the date on which the amount of such Revolving
Credit Lender’s Commitment Percentage of such Revolving Credit Loans shall
become immediately available to the Agent, and the denominator of which is 360
with respect to Eurodollar Rate Loans and 365 with respect to Base Rate Loans. 
A statement of the Agent submitted to such Revolving Credit Lender with respect
to any amounts owing under this paragraph shall be PRIMA FACIE evidence of the
amount due and owing to the Revolving Credit Agent by such Revolving Credit
Lender.  If the amount of such Lender’s Commitment Percentage of such Revolving
Credit Loans is not made available to the Agent by such Revolving Credit Lender
within three (3) Business Days following such Drawdown Date, the Agent shall be
entitled to recover such amount from the Borrowers on demand, with interest
thereon at the rate per annum applicable to the Revolving Credit Loans made on
such Drawdown Date.

 

2.11.3.               LIMITATION OF LIABILITY.  There shall not be any recourse
to or liability of the Agent or any Revolving Credit Lender, on account of: (a)
any delay in the making of any Revolving Credit Loan, (b) any delay by any bank
or other depository institution in treating the proceeds of any such Revolving
Credit Loan as collected funds or (c) any delay in the receipt, and/or any loss,
of funds which constitute a Revolving Credit Loan, the wire transfer of which
was properly initiated by the Agent in accordance with wire instructions
provided to the Agent by the Borrowers.

 

2.12.                        BORROWING BASE/REDUCTIONS TO AVAILABILITY.

 

2.12.1.               CHANGE IN BORROWING BASE.  The Borrowing Base and the
Tranche B Borrowing Base shall be determined daily (or at such other interval as
may be specified pursuant to Section 8.4(f)) by the Agent by reference to the
Borrowing Base Report, commercial finance and collateral audit reports, and the
appraisals of Inventory delivered to the Lenders and the Agent pursuant to
Section 8.4(h) and other information obtained by or provided to the Agent. 
Without in any way limiting the Agent’s right to modify them at any time in the
future on the terms set forth in this Agreement, as of the Closing Date the
current Reserves are as set forth on SCHEDULE 2.12 hereto.  In determining
whether to reduce the lending formula(s), the Agent may consider events,

 

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conditions, contingencies or risks which are also considered in determining
Eligible Credit Card Receivables, Eligible Inventory or in establishing the
Reserves; PROVIDED, HOWEVER, that such reduction lending formula shall not be
based upon any event, condition, contingency or risk to the extent that a
Reserve has been established.  The Agent shall give to the Borrowers’
Representative five (5) days written notice of its determination of the actual
Borrowing Base, Tranche B Borrowing Base and Availability, if taking into
account such new Reserves as the Agent may reasonably determine as being
applicable thereto, and the Agent shall have discussed its basis for such
determination with the Borrowers’ Representative if the Borrowers’
Representative shall so request.

 

2.12.2.               RISK OF VALUE OF COLLATERAL.  The Agent’s reference to a
given asset in connection with the making of Loans and advances and the
providing of financial accommodations under this Agreement and/or the monitoring
of compliance with the provisions hereof shall not be deemed a determination by
the Agent or any Lender relative to the actual value of the asset in question. 
All risks concerning the value of the Collateral are and remain upon the
Borrowers.  All Collateral secures the prompt, punctual, and faithful
performance of the Obligations whether or not relied upon by the Agent in
connection with the making of Loans, credits, and advances and the providing of
financial accommodations under this Agreement.

 

2.12.3.               REDUCTIONS TO AVAILABILITY.  In the determination of
Availability, the Agent may deem fees, service charges, accrued interest, and
other payments (excluding prepayment penalties) 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 as Revolving Credit Loans whether or
not such amounts are then due and payable.

 

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2.13.                        SETTLEMENTS.

 

2.13.1.               GENERAL.  On each Settlement Date, the Agent shall, not
later than 12:00 noon (Boston time), give telephonic or facsimile notice (a) to
the Revolving Credit Lenders and the Borrowers of the respective outstanding
amount of Revolving Credit Loans made by the Agent on behalf of the Revolving
Credit Lenders from the immediately preceding Settlement Date through the close
of business on the prior day and the amount of any Eurodollar Rate Loans to be
made (following the giving of notice pursuant to Section 2.9.1) on such date
pursuant to a Loan Request and (b) to the Revolving Credit Lenders of the amount
(a “SETTLEMENT AMOUNT”) that each Revolving Credit Lender (a “SETTLING LENDER”)
shall pay to effect a Settlement of any Revolving Credit Loan.  A statement of
the Agent submitted to the Revolving Credit Lenders and the Borrowers or to the
Revolving Credit Lenders with respect to any amounts owing under this Section
2.13.1 shall be PRIMA FACIE evidence of the amount due and owing (absent
manifest error).  Each Settling Lender shall, not later than 3:00 p.m. (Boston
time) on such Settlement Date, effect a wire transfer of immediately available
funds to the Agent in the amount of the Settlement Amount for such Settling
Lender.  All funds advanced by any Lender as a Settling Lender pursuant to this
Section 2.13.1 shall for all purposes be treated as a Revolving Credit Loan made
by such Settling Lender to the Borrowers and all funds received by any Revolving
Credit Lender pursuant to this Section 2.13.1 shall for all purposes be treated
as repayment of amounts owed with respect to Revolving Credit Loans made by such
Revolving Credit Lender.  In the event that any bankruptcy, reorganization,
liquidation, receivership or similar cases or proceedings in which any Borrower
is a debtor prevent a Settling Lender from making any Revolving Credit Loan to
effect a Settlement as contemplated hereby, such Settling Lender will make such
dispositions and arrangements with the other Revolving Credit Lenders with
respect to such Revolving Credit Loans, either by way of purchase of
participations, distribution, PRO TANTO assignment of claims, subrogation or
otherwise as shall result in each Revolving Credit Lender’s share of the
outstanding Revolving Credit Loans being equal, as nearly as may be, to such
Revolving Credit Lender’s Commitment Percentage of the outstanding amount of the
Revolving Credit Loans.

 

2.13.2.               FAILURE TO MAKE FUNDS AVAILABLE.  The Agent may, unless
notified to the contrary by any Settling Lender prior to a Settlement Date,
assume that such Settling Lender has made or will make available to the Agent on
such Settlement Date the amount of such Settling Lender’s Settlement Amount, and
the Agent may (but it shall not be required to), in reliance upon such
assumption, make available to the Borrowers a corresponding amount.  If any
Settling Lender makes available to the Agent such amount on a date after such
Settlement Date, such Settling Lender shall pay to the Agent on demand an amount
equal to the product of (a) the average computed for the period referred to in
clause (c) below, of the weighted average interest rate paid by the Agent for
federal funds acquired by the Agent during each day included in such period,
times (b) the amount of such Settlement Amount, times (c) a fraction, the
numerator of which is the number of days that elapse from and including such
Settlement Date to the date on which the amount of such Settlement Amount shall
become immediately available to the Agent, and the denominator of which is 360. 
A statement of the Agent submitted to such Settling Lender with respect to any
amounts owing under this Section 2.13.2 shall be prima facie evidence of the
amount due and owing to the Agent by such

 

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Settling Lender (absent manifest error).  If such Settling Lender’s Settlement
Amount is not made available to the Agent by such Settling Lender within three
(3) Business Days following such Settlement Date, the Agent shall be entitled to
recover such amount from the Borrowers on demand, with interest thereon at the
rate per annum applicable to the Revolving Credit Loans as of such Settlement
Date.

 

2.13.3.               NO EFFECT ON OTHER LENDERS.  The failure or refusal of any
Settling Lender to make available to the Agent at the aforesaid time and place
on any Settlement Date the amount of such Settling Lender’s Settlement Amount
shall not (a) relieve any other Settling Lender from its several obligations
hereunder to make available to the Agent the amount of such other Settling
Lender’s Settlement Amount or (b) impose upon any Lender, other than the
Settling Lender so failing or refusing, any liability with respect to such
failure or refusal or otherwise increase the Commitment of such other Lender.

 

2.14.                        REPAYMENTS OF REVOLVING CREDIT LOANS ABSENT AN
EVENT OF DEFAULT.

 

2.14.1.               CREDIT FOR FUNDS RECEIVED IN FLEET CONCENTRATION ACCOUNT. 
(a) All funds and cash proceeds in the form of money, checks and like items
received in the Fleet Concentration Account as contemplated by Section 8.14
shall be credited, on the next Business Day on which the Agent determines that
good collected funds have been received, and, prior to the receipt of good
collected funds, on a provisional basis until final receipt of good collected
funds, and applied as contemplated by Section 2.14.2, or as applicable, Section
13.5, (b) all funds and cash proceeds in the form of a wire transfer received in
the Fleet Concentration Account as contemplated by Section 8.14 shall be
credited on the next Business Day as the Agent’s receipt of such amounts (or up
to such later date as the Agent determines that good collected funds have been
received), and applied as contemplated by Section 2.14.2, or as applicable,
Section 13.5, and (c) all funds and cash proceeds in the form of an ACH transfer
received in the Fleet Concentration Account as contemplated by Section 8.14
shall be credited, on the next Business Day following the Agent’s receipt of
such amounts (or up to such later date as the Agent determines that good
collected funds have been received), and applied as contemplated by Section
2.14.2, or as applicable, Section 13.5.  For purposes of the foregoing
provisions of this Section 2.14.1, the Agent shall not be deemed to have
received any such funds or cash proceeds on any day unless received by the Agent
before 2:00 p.m. (Boston time) on such day.  The Borrowers further acknowledge
and agree that any such provisional credits or credits in respect of wire or
automatic clearing house funds transfers shall be subject to reversal if final
collection in good funds of the related item is not received by, or final
settlement of the funds transfer is not made in favor of, the Agent in
accordance with the Agent’s customary procedures and practices for collecting
provisional items or receiving settlement of funds transfers.  No Revolving
Credit Lender shall have any interest in, or right to receive any part of any
interest which reflects amounts described in the provisions of this Section
2.14.1.

 

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2.14.2.               APPLICATION OF PAYMENTS ABSENT AN EVENT OF DEFAULT.

 

(a)                                  Absent an Event of Default of which the
account officers of the Agent active on the Borrowers’ account have knowledge,
all funds transferred to the Fleet Concentration Account and for which the
Borrowers have received credits shall be applied to the Obligations as follows:

 

(i)                                     first, to pay amounts then due and
payable under this Agreement, the Notes and the other Loan Documents;

 

(ii)                                  second, to reduce Swing Line Loans made by
the Agent and for which Settlement has not then been made;

 

(iii)                               third, to reduce other Revolving Credit
Loans which are Base Rate Loans;

 

(iv)                              fourth, to reduce Revolving Credit Loans which
are Eurodollar Rate Loans; and

 

(v)                                 fifth, except as otherwise required by
Section 2.14.2(b) and (c), to the Operating Account.

 

(b)                                 All prepayments of Eurodollar Rate Loans
prior to the end of an Interest Period shall obligate the Borrowers to pay any
breakage costs associated with such Eurodollar Rate Loans in accordance with
Section 5.9.  Prior to the occurrence of an Event of Default, the Borrowers may
elect to avoid such breakage costs by providing to the Agent cash in an amount
sufficient to cash collateralize such Eurodollar Rate Loans, but in no event
shall the Borrowers be deemed to have paid such Eurodollar Rate Loans until such
cash has been paid to the Agent for application to such Eurodollar Rate Loans. 
The Agent may elect to cause such cash collateral to be deposited into a cash
collateral account pursuant to the terms of a cash collateral agreement executed
by the Borrowers and the Agent and in form and substance satisfactory to the
Agent.  In each such case, the Borrowers agree to execute and deliver to the
Agent such instruments and documents, including Uniform Commercial Code
financing statements and agreements with any third party depository banks, as
the Agent may request.

 

(c)                                  All prepayments of the Revolving Credit
Loans pursuant to this Section 2.14.2 shall be allocated among the Revolving
Credit Lenders making such Revolving Credit Loans, in proportion, as nearly as
practicable, to the respective unpaid principal amount of such Revolving Credit
Loans outstanding, with adjustments to the extent practicable to equalize any
prior payments or repayments not exactly in proportion.  Prior to any Settlement
Date, however, all prepayments of the Revolving Credit Loans shall be applied in
accordance with this Section 2.14.2, first to outstanding Revolving Credit Loans
of the Agent.

 

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2.15.                        REPAYMENTS OF REVOLVING CREDIT LOANS AFTER EVENT OF
DEFAULT.  Following the occurrence and during the continuance of an Event of
Default of which the account officers of the Agent active on the Borrower’s
account have knowledge, all funds transferred to the Fleet Concentration Account
and for which the Borrowers have received credits shall be applied to the
Obligations in accordance with Section 13.5.

 

2.16.                        OVERLOANS AND PROTECTIVE OVERADVANCES.

 

2.16.1.               PROTECTIVE OVERADVANCES.  NOTWITHSTANDING ANY PROVISION
CONTAINED IN THIS AGREEMENT TO THE CONTRARY, THE AGENT MAY (WITHOUT ANY
OBLIGATION TO DO SO) IN ITS SOLE AND ABSOLUTE DISCRETION MAKE PROTECTIVE
OVERADVANCES TO THE BORROWERS WHICH WOULD CONSTITUTE OVERLOANS.  THE AGENT SHALL
NOT MAKE ANY OVERLOAN THAT DOES NOT CONSTITUTE A PROTECTIVE ADVANCE.

 

2.16.2.               OVERLOANS.  Each Revolving Credit Lender recognizes that
subsequent to the making of a Revolving Credit Loan which does not constitute a
Protective OverAdvance, Availability may be less than $0 on account of changed
circumstances beyond the control of the Agent (such as a drop in collateral
value).

 

2.16.3.               NO OBLIGATION TO PROVIDE OVERLOANS.  The Agent’s and the
Revolving Credit Lenders’ providing of an OverLoan or Protective OverAdvance on
any one occasion does not affect the obligations of the Borrowers hereunder
(including the Borrowers’ obligation to immediately repay any amount which
otherwise constitutes an OverLoan) nor obligate the Revolving Credit Lenders or
the Agent to do so on any other occasion.

 

3.                                       THE TRANCHE B FACILITY.

 

3.1.                              COMMITMENT TO LEND.  Subject to the terms and
conditions set forth in this Agreement, the Tranche B Lender agrees to lend to
the Borrowers on the Closing Date the principal amount of $10,000,000.

 

3.2.                              THE TRANCHE B NOTE.  The Tranche B Loan shall
be evidenced by a separate promissory note of the Borrowers in substantially the
form of EXHIBIT D hereto (the “TRANCHE B NOTE”), dated the Closing Date, and
completed with appropriate insertions.  The Borrowers irrevocably authorize the
Tranche B Lender to make or cause to be made a notation on the Tranche B
Lender’s records reflecting the original principal amount of the Tranche B Loan
and, at or about the time of the Tranche B Lender’s receipt of any principal
payment on the Tranche B Note, an appropriate notation on the Tranche B Lender’s
records reflecting such payment.  The aggregate unpaid amount set forth on the
Tranche B Lender’s records shall be PRIMA FACIE evidence of the principal amount
thereof owed and unpaid on the Tranche B Loan, but the failure to record, or any
error in so recording, any such amount on the Tranche B Lender’s records shall
not affect the obligations of the Borrowers hereunder or under the Tranche B
Note to make payments of principal of and interest on the Tranche B Note when
due.

 

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3.3.                              PAYMENTS OF PRINCIPAL OF TRANCHE B LOAN. 
Except as contemplated by Section 13.5, the Borrowers may not make any principal
payments on account of the Tranche B Loan until the Borrowers’ Obligations to
the Revolving Credit Lenders have been indefeasibly paid in full and the
Commitments have been terminated; PROVIDED, HOWEVER, the Borrowers may prepay
the Tranche B Loan in its entirety after the first anniversary of the Closing
Date if at such time (i) a Default does not exist and one would not result from
such prepayment, (ii) after giving effect to such payment, Availability is in
excess of $25,000,000 and (iii) the Borrowers shall have delivered to the Agent
pro forma financial statements for the next twelve (12) months demonstrating, in
form and substance satisfactory to the Agent, that Availability will exceed
$25,000,000 at all times during the next 12 months after giving effect to the
prepayment of the Tranche B Loan.  The Borrowers jointly and severally promise
to pay on the Maturity Date, and there shall become absolutely due and payable
on the Maturity Date, all of the Tranche B Loans outstanding on such date,
together with any and all accrued and unpaid interest thereon.  In the event of
any repayment or prepayment of the Tranche B Loan prior to the Maturity Date for
any reason, including (a) the acceleration of the Obligations after the
occurrence of an Event of Default, (b) foreclosure and sale of Collateral, (c)
sale of the Collateral in any insolvency proceeding, or (d) the restructure,
reorganization or compromise of the Obligations by the confirmation of a plan of
reorganization, or any other plan of compromise, restructure, or arrangement in
any insolvency proceeding, then, in view of the impracticability and extreme
difficulty of ascertaining the actual amount of damages to the Tranche B Lender
or profits lost by the Tranche B Lender as a result of such early termination,
and by mutual agreement of the parties as to a reasonable estimation and
calculation of the lost profits or damages of the Tranche B Lender, and as
compensation for the cost of making the Tranche B Loan available to the
Borrowers, and not as a penalty, the Borrowers shall pay to the Tranche B
Lender, an early termination fee (the “TRANCHE B EARLY TERMINATION FEE”) equal
to one percent (1%) of the amount repaid or prepaid; PROVIDED, HOWEVER that the
event of any such repayment or prepayment prior to the fifteen month anniversary
of the Closing Date, such Tranche B Early Termination Fee shall be equal to the
greater of (i) the product of (x) the result of (A) the sum of all fees payable
to the Tranche B Lenders pursuant to the Tranche B Fee Letter and all interest
on the Tranche B Loan (including any Tranche B Loan PIK Interest that would have
been payable but for such prepayment or repayment payable with respect to the
Tranche B Loan during the period from the Closing Date to the date that is
fifteen (15) months thereafter), MINUS (B) amounts actually paid by the
Borrowers in respect of all such fees and interest through the date of
prepayment, multiplied by (y) a quotient the numerator of which is the amount
repaid or prepaid and the denominator of which is the initial amount of the
Tranche B Loan; and (ii) one percent (1%) of the amount repaid or prepaid. 
Notwithstanding the foregoing, the Tranche B Early Termination Fee shall not be
due if the Tranche B Loans are paid in full in cash during the period from
January 1, 2006 through the Maturity Date.

 

3.4.                              INTEREST ON TRANCHE B LOAN.  Except as
otherwise provided in Section 3.4(c), the outstanding amount of the Tranche B
Loan shall be calculated on the basis of a three hundred sixty (360) day year
and actual days elapsed and shall bear interest until repaid at the rate of
fifteen and one-half percent (15.5%) per annum from the Closing Date through
March 31, 2004, thereafter at a rate per annum equal to the Base Rate in effect
on the first day of each fiscal quarter, beginning April 1, 2004, PLUS 11.25%,
adjusting quarterly on the first day of each subsequent fiscal quarter to
reflect any change in the Base Rate as of each such date (in each

 

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case, the “TRANCHE B LOAN INTEREST RATE”).  The Tranche B Loan Interest Rate,
shall be payable as follows:

 

(a)                                  From the Closing Date through March 31,
2004, accrued interest on the unpaid principal balance of the Tranche B Loan at
the rate of thirteen percent (13%) per annum and, thereafter, at a rate per
annum equal to the Base Rate in effect on the first day of each fiscal quarter,
beginning April 1, 2004, PLUS 8.75%, adjusting quarterly on the first day of
each subsequent fiscal quarter to reflect any change in the Base Rate as of each
such date (in each case, “TRANCHE B LOAN CURRENT PAY INTEREST”) shall be payable
monthly in arrears on the first Business Day of each month (the “TRANCHE B LOAN
INTEREST PAYMENT DATE”), and on the Maturity Date.

 

(b)                                 Accrued interest on the unpaid principal
balance of the Tranche B Loan in excess of Tranche B Loan Current Pay Interest
(which excess is referred to herein as “TRANCHE B LOAN PIK INTEREST”) shall be
payable as follows:

 

(i)                                     Unless the payment would cause an
OverLoan or the Agent and the Tranche B Lender have been given written notice by
the Borrowers’ Representative at least three (3) Business Days prior to the
relevant Tranche B Loan Interest Payment Date that the Borrowers are exercising
their option to pay interest in kind (the “PIK ELECTION”), the Tranche B Loan
PIK Interest will be due on such date in cash.

 

(ii)                                  If the Agent and the Tranche B Lender have
received a PIK Election or the payment would cause an OverLoan, all or any part
of Tranche B Loan PIK Interest shall be paid by adding the same to the principal
balance of the Tranche B Loan Note on that Tranche B Loan Interest Payment Date.

 

(iii)                               At the direction of the Tranche B Lender,
following the occurrence and during the continuance of any Default, all interest
shall be paid in cash on each Tranche B Loan Interest Payment Date.

 

(c)                                  Following the occurrence and during the
continuance of any Event of Default, at the direction of the Tranche B Lender,
interest shall accrue and shall be payable on the unpaid principal balance of
the Tranche B Loan at the aggregate of the Tranche B Loan Interest Rate plus
three percent (3%) per annum.

 

3.5.                              PAYMENTS ON ACCOUNT OF TRANCHE B LOAN.  The
Borrowers authorize the Agent to determine and to pay over directly to the
Tranche B Lender any and all amounts due and payable from time to time under or
on account of the Tranche B Loan as advances under the Revolving Credit Loans,
IT BEING UNDERSTOOD, HOWEVER, that the authorization of the Agent provided in
this Section 3.5 shall not excuse the Borrowers from fulfilling their
obligations to the Tranche B Lender on account of the Tranche B Loan nor place
any obligation on the Agent to do so.  The Agent shall provide prompt advice to
the Borrowers of any amount which is so paid over by the Agent to the Tranche B
Lender pursuant to this Section 3.5.  The Borrowers shall not be entitled to any
credit, rebate or repayment of any fee or

 

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assessment previously earned by the Tranche B Lender pursuant to this Agreement
notwithstanding any termination of this Agreement or suspension or termination
of the Agent’s and any Lender’s respective obligation to make loans and advances
hereunder.

 

3.6.                              BUYOUT OPTION.  At any time during any Buyout
Exercise Period, the Tranche B Lender may (but shall not be obligated to) give
notice to the Agent (the “BUYOUT ACCEPTANCE NOTICE”) of its intent to cause the
assignment to the Tranche B Lender, or its designee, by the Revolving Credit
Lenders, of all right, title and interest in, to, arising under or in respect of
all Obligations of the Revolving Credit Lenders.  Such assignments shall be
effected on the Business Day which is not more than three (3) Business Days
following the Buyout Acceptance Notice by the execution, by the Revolving Credit
Lenders, of an Assignment and Acceptance in exchange for the payment, in
immediately available funds, of the amount of the Obligations in respect of the
Revolving Credit Loans (excluding the Revolving Credit Early Termination Fee)
and cash collateral with respect to the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations in the amount of 105% of the face amount of Letter of
Credit, in each case (and cash collateral) as of the date on which such
assignment is made.  The Tranche B Lender’s buy out right under this Section 3.6
may only be exercised completely with respect to all of the Obligations of the
Revolving Credit Lenders.  Following its exercise of the buy out right under
this Section 3.6, the Tranche B Lender shall, during the first 180 days
following exercise of the buyout right and payment in full therefor, (a) not
waive or alter the Revolving Credit Early Termination Fee or alter the payment
provisions in Section 13.5 to change when the Revolving Credit Early Termination
Fee would be paid and (b) upon receipt during said 180-day period of any amounts
on account of the Revolving Credit Early Termination Fee, pay such amounts to
the Agent for the account of the Revolving Credit Lenders in accordance with
their Commitment Percentages as of the date of the buy out under this Section
3.6.

 

4.                                       LETTERS OF CREDIT.

 

4.1.                              LETTER OF CREDIT COMMITMENTS.

 

4.1.1.                     COMMITMENT TO ISSUE LETTERS OF CREDIT.  Subject to
the terms and conditions hereof and the execution and delivery by the Borrowers’
Representative of a letter of credit application on the Letter of Credit
Issuer’s customary form (a “LETTER OF CREDIT APPLICATION”), the Borrowers’
Representative may request that Agent cause the Letter of Credit Issuer to issue
on behalf of the Revolving Credit Lenders and in reliance upon the agreement of
the Revolving Credit Lenders set forth in Section 4.1.4 and upon the
representations and warranties of the Borrowers contained herein, in its
individual capacity, to issue, extend and renew for the account of the Borrowers
one or more standby or documentary letters of credit (individually, a “LETTER OF
CREDIT”), in such form as may be requested from time to time by the Borrowers’
Representative and agreed to by the Letter of Credit Issuer; PROVIDED, HOWEVER,
that, after giving effect to such request, (a) the sum of the aggregate Maximum
Drawing Amount and all Unpaid Reimbursement Obligations shall not exceed
$15,000,000 at any one time, (b) Availability is greater than $1 and (c) there
are no OverLoans.  In addition to the Letter of Credit Application, the
Borrowers’

 

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Representative shall execute such other documents reasonably required by the
Letter of Credit Issuer to apply for and support the issuance of a Letter of
Credit.  There shall not be any recourse to, nor liability of, the Agent or any
Lender or Letter of Credit Issuer on account of any delay or refusal by any
Letter of Credit Issuer to issue a Letter of Credit.

 

4.1.2.                     LETTER OF CREDIT APPLICATIONS.  Each Letter of Credit
Application shall be completed to the satisfaction of the Agent and the Letter
of Credit Issuer.  In the event that any provision of any Letter of Credit
Application shall be inconsistent with any provision of this Agreement, then the
provisions of this Agreement shall, to the extent of any such inconsistency,
govern.

 

4.1.3.                     TERMS OF LETTERS OF CREDIT.  Each Letter of Credit
issued, extended or renewed hereunder shall, among other things, (a) provide for
the payment of sight drafts for honor thereunder when presented in accordance
with the terms thereof and when accompanied by the documents described therein,
and (b) have an expiry date no later than the earlier of (i) the date which is
fourteen (14) days (or, if the Letter of Credit is confirmed by a confirmer or
otherwise provides for one or more nominated persons, forty-five (45) days)
prior to the Maturity Date and (ii) with respect to (A) standby Letters of
Credit one (1) year after the date of issuance and (B) documentary Letters of
Credit sixty (60) after the date of issuance.  Each Letter of Credit so issued,
extended or renewed shall be subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500 or any successor version thereto adopted by the Letter of
Credit Issuer in the ordinary course of its business as a letter of credit
issuer and in effect at the time of issuance of such Letter of Credit (the
“UNIFORM CUSTOMS”) or, in the case of a standby Letter of Credit, either the
Uniform Customs or the International Standby Practices (ISP98), International
Chamber of Commerce Publication No. 590, or any successor code of standby letter
of credit practices among banks adopted by the Letter of Credit Issuer in the
ordinary course of its business as a standby letter of credit issuer and in
effect at the time of issuance of such Letter of Credit.

 

4.1.4.                     REIMBURSEMENT OBLIGATIONS OF REVOLVING CREDIT
LENDERS.  Each Revolving Credit Lender severally agrees that it shall be
absolutely liable, without regard to whether a Default exists or any other
condition precedent whatsoever, to the extent of such Revolving Credit Lender’s
Commitment Percentage, to reimburse the Letter of Credit Issuer and/or the Agent
on demand for the amount of each draft paid by the Letter of Credit Issuer under
each Letter of Credit to the extent that such amount is not reimbursed by the
Borrowers pursuant to Section 4.2 (such agreement for a Lender being called
herein the “LETTER OF CREDIT PARTICIPATION” of such Revolving Credit Lender).

 

4.1.5.                     PARTICIPATIONS OF REVOLVING CREDIT LENDERS.  Each
such payment made by a Revolving Credit Lender shall be treated as the purchase
by such Revolving Credit Lender of a participating interest in the Borrowers’
Reimbursement Obligation under Section 4.2 in an amount equal to such payment. 
Each Revolving

 

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Credit Lender shall share in accordance with its participating interest in any
interest which accrues pursuant to Section 4.2.

 

4.2.                              REIMBURSEMENT OBLIGATION OF THE BORROWERS.  In
order to induce the Agent to cause the Letter of Credit Issuer to issue, extend
and renew each Letter of Credit and the Revolving Credit Lenders to participate
therein, the Borrowers hereby jointly and severally agree to reimburse or pay to
the Agent and the Letter of Credit Issuer, for the account of the Agent and the
Letter of Credit Issuer or (as the case may be) the Revolving Credit Lenders,
with respect to each Letter of Credit issued, extended or renewed by the Letter
of Credit Issuer hereunder,

 

(a)                                  except as otherwise expressly provided in
Section 4.2(b) and (c), on each date that any draft presented under such Letter
of Credit is honored by the Letter of Credit Issuer, or the Letter of Credit
Issuer otherwise makes a payment with respect thereto, (i) the amount paid by
the Letter of Credit Issuer under or with respect to such Letter of Credit, and
(ii) the amount of any taxes, reasonable fees, charges or other costs and
expenses whatsoever incurred by the Letter of Credit Issuer, the Agent or any
Revolving Credit Lender in connection with any payment made by the Letter of
Credit Issuer, the Agent or any Revolving Credit Lender under, or with respect
to, such Letter of Credit,

 

(b)                                 upon the reduction (but not termination) of
the Total Revolving Commitment to an amount less than the Maximum Drawing
Amount, an amount equal to such difference, which amount shall be held by the
Agent for the benefit of the Letter of Credit Issuer, the Revolving Credit
Lenders and the Agent as cash collateral for all Reimbursement Obligations, and

 

(c)                                  upon the termination of the Total Revolving
Commitment, or the acceleration of the Reimbursement Obligations with respect to
all Letters of Credit in accordance with Section 13, an amount equal to the then
Maximum Drawing Amount on all Letters of Credit, which amount shall be held by
the Agent for the benefit of the Letter of Credit Issuer, the Revolving Credit
Lenders and the Agent as cash collateral for all Reimbursement Obligations.

 

Each such payment shall be made to the Agent at the Agent’s Office in
immediately available funds.  Interest on any and all amounts remaining unpaid
by the Borrowers under this Section 4.2 at any time from the date such amounts
become due and payable (whether as stated in this Section 4.2, by acceleration
or otherwise) until payment in full (whether before or after judgment) shall be
payable to the Agent on demand at the rate specified in Section 5.10 for overdue
principal on the Revolving Credit Loans.  Notwithstanding the foregoing, the
Agent, without the request of the Borrowers, may advance Revolving Credit Loans
in the amount of any honoring of any Letter of Credit and other amount for which
the Borrowers, the Letter of Credit Issuer, the Agent or the Revolving Credit
Lenders become obligated on account of, or in respect to, any Letter of Credit. 
Such advance shall be made whether or not a Default exists or such advance

 

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would result in an OverLoan.  Such action shall not constitute a waiver of the
Agent’s and the Revolving Credit Lenders’ rights under this Section 4.

 

4.3.                              LETTER OF CREDIT PAYMENTS.  If any draft shall
be presented or other demand for payment shall be made under any Letter of
Credit, the Letter of Credit Issuer shall notify the Borrowers’ Representative
of the date and amount of the draft presented or demand for payment and of the
date and time when it expects to pay such draft or honor such demand for
payment.  If the Borrowers’ Representative fails to reimburse the Letter of
Credit Issuer and the Agent as provided in Section 4.2 on or before the date
that such draft is paid or other payment is made by the Letter of Credit Issuer,
the Agent may at any time thereafter notify the Revolving Credit Lenders of the
amount of any such Unpaid Reimbursement Obligation.  No later than 3:00 p.m.
(Boston time) on the Business Day next following the receipt of such notice,
each Revolving Credit Lender shall make available to the Letter of Credit Issuer
in immediately available funds, such Revolving Credit Lender’s Commitment
Percentage of such Unpaid Reimbursement Obligation, together with an amount
equal to the product of (a) the average, computed for the period referred to in
clause (c) below, of the weighted average interest rate paid by the Letter of
Credit Issuer for federal funds acquired by the Letter of Credit Issuer during
each day included in such period, MULTIPLIED BY (b) the amount equal to such
Revolving Credit Lender’s Commitment Percentage of such Unpaid Reimbursement
Obligation, MULTIPLIED BY (c) a fraction, the numerator of which is the number
of days that elapse from and including the date the Letter of Credit Issuer paid
the draft presented for honor or otherwise made payment to the date on which
such Revolving Credit Lender’s Commitment Percentage of such Unpaid
Reimbursement Obligation shall become immediately available to the Letter of
Credit Issuer, and the denominator of which is 360.  The responsibility of the
Agent and the Letter of Credit Issuer to the Borrowers and the Revolving Credit
Lenders shall be only to determine that the documents (including each draft)
delivered under each Letter of Credit in connection with such presentment shall
be in conformity in all material respects with such Letter of Credit.

 

4.4.                              OBLIGATIONS ABSOLUTE.  The Borrowers’
obligations under this Section 4 shall be absolute and unconditional under any
and all circumstances and irrespective of whether a Default exists or any
condition precedent whatsoever or any setoff, counterclaim or defense to payment
which the Borrowers may have or have had against the Letter of Credit Issuer,
the Agent, any Revolving Credit Lender or any beneficiary of a Letter of
Credit.  The Borrowers further agree with the Letter of Credit Issuer, the Agent
and the Revolving Credit Lenders that the Letter of Credit Issuer, the Agent and
the Revolving Credit Lenders shall not be responsible for, and the Borrower’s
Reimbursement Obligations under Section 4.2 shall not be affected by, among
other things, the validity or genuineness of documents or of any endorsements
thereon, even if such documents should in fact prove to be in any or all
respects invalid, fraudulent or forged, or any dispute between or among the
Borrowers, the beneficiary of any Letter of Credit or any financing institution
or other party to which any Letter of Credit may be transferred or any claims or
defenses whatsoever of the Borrowers against the beneficiary of any Letter of
Credit or any such transferee.  The Letter of Credit Issuer, the Agent and the
Revolving Credit Lenders shall not be liable for any error, omission,
interruption or delay in transmission, dispatch or delivery of any message or
advice, however transmitted, in connection with any Letter of Credit.  The
Borrowers agree that any action taken or omitted by the Letter of Credit Issuer,
the Agent or any Revolving Credit Lender under or in connection with each Letter
of Credit and the related

 

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drafts and documents, if done in good faith, shall be binding upon the Borrowers
and shall not result in any liability on the part of the Letter of Credit
Issuer, the Agent or any Revolving Credit Lender to the Borrowers.

 

4.5.                              RELIANCE BY ISSUER.  To the extent not
inconsistent with Section 4.4, the Letter of Credit Issuer and the Agent shall
be entitled to rely, and shall be fully protected in relying upon, any Letter of
Credit, draft, writing, resolution, notice, consent, certificate, affidavit,
letter, cablegram, telegram, telecopy, telex or teletype message, statement,
order or other document believed by it to be genuine and correct and to have
been signed, sent or made by the proper Person or Persons and upon advice and
statements of legal counsel, independent accountants and other experts selected
by the Letter of Credit Issuer or the Agent.  The Letter of Credit Issuer and
the Agent shall be fully justified in failing or refusing to take any action
under this Agreement unless it shall first have received such advice or
concurrence of the Required Lenders as it reasonably deems appropriate or it
shall first be indemnified to its reasonable satisfaction by the Revolving
Credit Lenders against any and all liability and expense which may be incurred
by it by reason of taking or continuing to take any such action.  The Letter of
Credit Issuer and the Agent shall in all cases be fully protected in acting, or
in refraining from acting, under this Agreement in accordance with a request of
the Required Lenders, and such request and any action taken or failure to act
pursuant thereto shall be binding upon the Lenders and all future holders of the
Revolving Credit Notes or of a Letter of Credit Participation.  Unless otherwise
agreed to, in the particular instance, the Borrowers hereby authorize any Letter
of Credit Issuer to select an advising bank, if any, select a paying bank, if
any and select a negotiating bank.

 

4.6.                              LETTER OF CREDIT FEE.  The Borrowers shall,
monthly in arrears on the first day of each month and on the Maturity Date, pay
a fee (in each case, a “LETTER OF CREDIT FEE”) to the Agent (a) in respect of
each standby Letter of Credit an amount equal to the Applicable Margin for
Eurodollar Rate Loans per annum of the face amount of such standby Letter of
Credit for the accounts of the Revolving Credit Lenders in accordance with their
respective Commitment Percentages and (b) in respect of each documentary Letter
of Credit an amount equal to the Applicable Margin for Eurodollar Rate Loans per
annum of the face amount of such documentary Letter of Credit shall be for the
accounts of the Revolving Credit Lenders in accordance with their respective
Commitment Percentages.  Following the occurrence of any Event of Default, the
Letter of Credit Fees shall be increased by 200 basis points per annum.  In
respect of each Letter of Credit, the Borrowers shall also pay to the Letter of
Credit Issuer for the Letter of Credit Issuer’s own account, at such other time
or times as such charges are customarily made by the Letter of Credit Issuer,
the Letter of Credit Issuer’s customary issuance, amendment, negotiation or
document examination and other reasonable and customary administrative fees as
in effect from time to time.

 

5.                                       CERTAIN GENERAL PROVISIONS.

 

5.1.                              AGENT FEES.  The Borrowers jointly and
severally agree to pay to the Agent, for the Agent’s own account, the fees as
set forth in the Agent Fee Letter (the “AGENT FEES”).

 

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5.2.                              TRANCHE B LENDER FEES.  The Borrowers jointly
and severally agree to pay to the Tranche B Lender, for the Tranche B Lender’s
own account, the fees as set forth in the Tranche B Fee Letter (the “TRANCHE B
LENDER FEES”).

 

5.3.                              FUNDS FOR PAYMENTS.

 

5.3.1.                     PAYMENTS TO AGENT.  All payments of principal,
interest, Reimbursement Obligations, Fees and any other amounts due hereunder or
under any of the other Loan Documents shall be made on the due date thereof to
the Agent in Dollars, for the respective accounts of the Lenders and the Agent,
at the Agent’s Office or at such other place that the Agent may from time to
time designate, in each case at or about 12:00 noon (Boston time or other local
time at the place of payment) and in immediately available funds.

 

5.3.2.                     NO OFFSET, ETC.  All payments by the Borrowers
hereunder and under any of the other Loan Documents shall be made without
recoupment, setoff or counterclaim and free and clear of and without deduction
for any taxes, levies, imposts, duties, charges, reasonable fees, deductions,
withholdings, compulsory loans, restrictions or conditions of any nature now or
hereafter imposed or levied by any jurisdiction or any political subdivision
thereof or taxing or other authority therein unless the Borrowers are compelled
by law to make such deduction or withholding.  If any such obligation is imposed
upon the Borrowers with respect to any amount payable by it hereunder or under
any of the other Loan Documents, the Borrowers will pay to the Agent, for the
account of the Lenders or (as the case may be) the Agent, on the date on which
such amount is due and payable hereunder or under such other Loan Document, such
additional amount in Dollars as shall be necessary to enable the Lenders or the
Agent to receive the same net amount which the Lenders or the Agent would have
received on such due date had no such obligation been imposed upon the
Borrowers.  Where taxes, deductions or withholdings are imposed upon the
Borrowers with respect to any amount payable by the Borrowers hereunder or under
any of the other Loan Documents as a result of characteristics of the Agent, a
Lender or a Participant, no payment of additional amounts is required under this
Section 5.3.2, in respect of such taxes, deductions or withholdings to the
extent that such Agent, Lender or Participant (as the case may be) was subject
to such taxes, deductions or withholdings under the law in effect at the time
that it became an Agent, Lender or Participant or subsequently became subject to
such taxes, deductions or withholdings other than as a result of a change in law
or any actions of the Borrowers.  In addition, no payment of additional amounts
is required under this Section 5.3.2 in respect of taxes, deductions or
withholdings to the extent that such taxes, deductions or withholdings are
imposed as a result of a failure by the Agent, a Lender, a Participant or any
person in the chain of payment between the Borrowers and the Agent, Lender or
Participant, as the case may be, to provide, in accordance with applicable
procedures, properly completed and executed tax forms that they are legally
permitted to provide.  The Borrowers will deliver promptly to the Agent
certificates or other valid vouchers reasonably available to them for all taxes
or other charges deducted from or paid with respect to payments made by the
Borrowers hereunder or under such other Loan Document.

 

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5.4.                              COMPUTATIONS.  All computations of interest on
the Loans and of Fees shall be based on a 360-day year (except interest on Base
Rate Loans prior to a Default which will be based on a 365-day year) and paid
for the actual number of days elapsed.  Except as otherwise provided in the
definition of the term “INTEREST PERIOD” with respect to Eurodollar Rate Loans,
whenever a payment hereunder or under any of the other Loan Documents becomes
due on a day that is not a Business Day, the due date for such payment shall be
extended to the next succeeding Business Day, and interest shall accrue during
such extension.  The outstanding amount of the Loans as reflected on the
Revolving Credit Note Records and the Tranche B Lender’s records from time to
time shall be considered correct and binding on the Borrowers unless within five
(5) Business Days after receipt of any notice by the Agent or any of the Lenders
of such outstanding amount, the Agent or such Lender shall notify the Borrowers’
Representative to the contrary.

 

5.5.                              INABILITY TO DETERMINE EURODOLLAR RATE.  In
the event, prior to the commencement of any Interest Period relating to any
Eurodollar Rate Loan, the Agent shall in good faith determine that (a) adequate
and reasonable methods do not exist for ascertaining the Eurodollar Rate that
would otherwise determine the rate of interest to be applicable to any
Eurodollar Rate Loan during any Interest Period or (b) the Eurodollar Rate
determined or to be determined for such Interest Period will not adequately and
fairly reflect the cost to the Revolving Credit Lenders of making or maintaining
their Eurodollar Rate Loans during such period, the Agent shall forthwith give
notice of such determination (which shall be conclusive and binding on the
Borrowers and the Revolving Credit Lenders) to the Borrowers’ Representative and
the Revolving Credit Lenders.  In such event (i) any Loan Request or Conversion
Request with respect to Eurodollar Rate Loans shall be automatically withdrawn
and shall be deemed a request for Base Rate Loans, (ii) each Eurodollar Rate
Loan will automatically, on the last day of the then current Interest Period
relating thereto, become a Base Rate Loan, and (iii) the obligations of the
Revolving Credit Lenders to make Eurodollar Rate Loans shall be suspended until
the Agent determines that the circumstances giving rise to such suspension no
longer exist, whereupon the Agent shall so notify the Borrowers’ Representative
and the Revolving Credit Lenders.

 

5.6.                              ILLEGALITY.  Notwithstanding any other
provisions herein, if any future law, regulation, treaty or directive or the
interpretation or application thereof shall make it unlawful for any Revolving
Credit Lender to make or maintain Eurodollar Rate Loans, such Revolving Credit
Lender shall forthwith give notice of such circumstances to the Borrowers’
Representative and the other Revolving Credit Lenders and thereupon (a) the
commitment of such Revolving Credit Lender to make Eurodollar Rate Loans or
convert Base Rate Loans to Eurodollar Rate Loans shall forthwith be suspended
and (b) such Revolving Credit Lender’s Revolving Credit Loans then outstanding
as Eurodollar Rate Loans, if any, shall be converted automatically to Base Rate
Loans on the last day of each Interest Period applicable to such Eurodollar Rate
Loans or within such earlier period as may be required by law.  The Borrowers
hereby agree promptly to pay the Agent for the account of such Revolving Credit
Lender, upon demand by such Revolving Credit Lender, any additional amounts
reasonably necessary to compensate such Revolving Credit Lender for any costs
incurred by such Revolving Credit Lender in making any conversion in accordance
with this Section 5.6, including any interest or reasonable fees payable

 

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by such Revolving Credit Lender to lenders of funds obtained by it in order to
make or maintain its Eurodollar Rate Loans hereunder.

 

5.7.                              ADDITIONAL COSTS, ETC.  If any future
applicable law, which expression, as used herein, includes statutes, rules and
regulations thereunder and interpretations thereof after the date hereof by any
competent court or by any governmental or other regulatory body or official
charged with the administration or the interpretation thereof and requests,
directives, instructions and notices at any time or from time to time hereafter
made upon or otherwise issued to any Lender or the Agent by any central bank or
other fiscal, monetary or other authority (whether or not having the force of
law), shall:

 

(a)                                  subject any Lender or the Agent to any tax,
levy, impost, duty, charge, fee, deduction or withholding of any nature with
respect to this Agreement, the other Loan Documents, any Letters of Credit, such
Lender’s Commitment or the Loans (other than taxes based upon or measured by the
income or profits of such Lender or the Agent), or

 

(b)                                 materially change the basis of taxation
(except for changes in taxes on income or profits or taxes referred to in the
first sentence of Section 5.3.2, which shall be taken into account in the manner
provided by Section 5.3.2) of payments to any Lender of the principal of or the
interest on any Loans or any other amounts payable to any Lender or the Agent
under this Agreement or any of the other Loan Documents, or

 

(c)                                  impose or increase or render applicable
(other than to the extent specifically provided for elsewhere in this Agreement)
any special deposit, reserve, assessment, liquidity, capital adequacy or other
similar requirements (whether or not having the force of law) against assets
held by, or deposits in or for the account of, or loans by, or letters of credit
issued by, or commitments of an office of any Lender, or

 

(d)                                 impose on any Lender or the Agent any other
conditions or requirements with respect to this Agreement, the other Loan
Documents, any Letters of Credit, the Loans, such Lender’s Commitment, or any
class of loans, letters of credit or commitments of which any of the Loans or
such Lender’s Commitment forms a part, and the result of any of the foregoing
is:

 

(i)                                     to increase the cost to any Lender of
making, funding, issuing, renewing, extending or maintaining any of the Loans or
such Lender’s Commitment or any Letter of Credit, or

 

(ii)                                  to reduce the amount of principal,
interest, Reimbursement Obligation or other amount payable to such Lender or the
Agent hereunder on account of such Lender’s Commitment, any Letter of Credit or
any of the Loans, or

 

(iii)                               to require such Lender or the Agent to make
any payment or to forego any interest or Reimbursement Obligation or other sum
payable hereunder, the amount of which payment or foregone interest or
Reimbursement Obligation

 

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or other sum is calculated by reference to the gross amount of any sum
receivable or deemed received by such Lender or the Agent from the Borrowers
hereunder,

 

then, and in each such case, the Borrowers will, upon demand made by such Lender
or (as the case may be) the Agent at any time and from time to time and as often
as the occasion therefor may arise, pay to such Lender or the Agent such
additional amounts as will be sufficient to compensate such Lender or the Agent
for such additional cost, reduction, payment or foregone interest or
Reimbursement Obligation or other sum.

 

5.8.                              CERTIFICATE.  A certificate setting forth any
additional amounts payable pursuant to Section 5.7 and a brief explanation of
such amounts which are due, submitted by any Lender or the Agent to the
Borrowers’ Representative, shall be conclusive, absent manifest error, that such
amounts are due and owing.

 

5.9.                              INDEMNITY.  The Borrowers agree to indemnify
each Revolving Credit Lender and to hold each Lender harmless from and against
any loss, cost or expense or other “breakage fees” (so-called) (including loss
of anticipated profits) that such Revolving Credit Lender may sustain or incur
as a consequence of (a) default by the Borrowers in payment of the principal
amount of or any interest on any Eurodollar Rate Loans as and when due and
payable, including any such loss or expense arising from interest or reasonable
fees payable by such Revolving Credit Lender to banks of funds obtained by it in
order to maintain its Eurodollar Rate Loans, (b) default by the Borrowers in
making a borrowing or conversion after the Borrowers’ Representative has given
(or is deemed to have given) a Loan Request or a Conversion Request relating
thereto in accordance with Section 2.9 or Section 2.10 or (c) the making of any
payment of a Eurodollar Rate Loan or the making of any conversion of any such
Loan to a Base Rate Loan on a day that is not the last day of the applicable
Interest Period with respect thereto, including interest or reasonable fees
payable by such Lender to lenders of funds obtained by it in order to maintain
any such Loans.

 

5.10.                        INTEREST AFTER DEFAULT.  Following the occurrence
and during the continuance of a Default (and whether or not the Agent exercises
the Agent’s rights on account thereof) the principal of the Revolving Credit
Loans shall, at the option of the Agent or at the instruction of the
SuperMajority Revolving Credit Lenders, until such Default has been cured or
remedied or such Default has been waived by the Required Lenders pursuant to
this Agreement, bear interest at a rate per annum equal to two percent (2%)
above the rate of interest otherwise applicable to such Revolving Credit Loans
pursuant to Section 2.8.

 

5.11.                        FEES NON-REFUNDABLE.  The Borrowers shall not be
entitled to any credit, rebate or repayment of any fee earned by the Agent or
any Lender pursuant to this Agreement or any Loan Document notwithstanding any
termination of this Agreement or suspension or termination of the Agent’s and
any Lender’s respective obligations to make loans and advances hereunder.

 

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5.12.                        CONCERNING JOINT AND SEVERAL LIABILITY OF THE
BORROWERS.

 

(a)                                  Each of the Borrowers is accepting joint
and several liability hereunder in consideration of the financial accommodations
to be provided by the Agent, the Letter of Credit Issuer and the Lenders under
this Agreement, for the mutual benefit, directly and indirectly, of each of the
Borrowers and in consideration of the undertakings of each of the Borrowers to
accept joint and several liability for the obligations of each of them.

 

(b)                                 Each of the Borrowers, jointly and
severally, hereby irrevocably and unconditionally accepts, not merely as a
surety but also as a co-debtor, joint and several liability with each other
Borrower, with respect to the payment and performance of all of the Obligations,
it being the intention of the parties hereto that all the Obligations shall be
the joint and several obligations of all of the Borrowers without preferences or
distinction among them.

 

(c)                                  If and to the extent that any of the
Borrowers shall fail to make any payment with respect to any of the Obligations
as and when due or to perform any of such Obligations in accordance with the
terms thereof, then in each such event each other Borrower will make such
payment with respect to, or perform, such Obligation.

 

(d)                                 The obligations of each Borrower under the
provisions of this Section 5.12 constitute the absolute and unconditional
obligations of such Borrower enforceable against it to the full extent permitted
under the terms hereof, irrespective of the validity, regularity or
enforceability of this Agreement or any other circumstance whatsoever.

 

(e)                                  Except as otherwise expressly provided for
herein, each Borrower hereby waives notice of acceptance of its joint and
several liability, notice of the Loans made under this Agreement, notice of the
occurrence of any Default, or of any demand for any payment under this
Agreement, notice of any action at any time taken or omitted by the Agent, the
Letter of Credit Issuer or the Lenders under or in respect of any of the
Obligations, any requirement of diligence or to mitigate damages and, generally,
all demands, notices and other formalities of every kind in connection with this
Agreement.  Each Borrower hereby assents to, and waives notice of, any extension
or postponement of the time for the payment of any of the Obligations, the
acceptance of any partial payment thereon, any waiver, consent or other action
or acquiescence by the Agent, the Letter of Credit Issuer or the Lenders at any
time or times in respect of any default by any Borrowers in the performance or
satisfaction of any term, covenant, condition or provision of this Agreement,
any and all other indulgences whatsoever by the Agent, the Letter of Credit
Issuer or the Lenders in respect of any of the Obligations hereunder, and the
taking, addition, substitution or release, in whole or in part, at any time or
times, of any security for any of such Obligations or the addition, substitution
or release, in whole or in part, of any Borrower.  Without limiting the
generality of the foregoing, each Borrower assents to any other action or delay
in acting or failure to act on the part of the Agent, the Letter of Credit
Issuer or the Lenders including, without limitation, any failure strictly or
diligently to assert any right or to pursue any remedy or to comply fully with
Applicable Laws thereunder, which might, but for the provisions of this Section
5.12, afford grounds for terminating, discharging or relieving such Borrower, in
whole or in part, from any of its Obligations under this Section 5.12, it being
the intention of each

 

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Borrower that, so long as any of the Obligations remain unsatisfied, the
Obligations of such Borrower under this Section 5.12 shall not be discharged
except by performance and then only to the extent of such performance.  Except
as otherwise expressly provided for herein, the joint and several liability of
the Borrowers hereunder shall continue in full force and effect notwithstanding
any absorption, merger, amalgamation or any other change whatsoever in the name,
membership, constitution or place of formation of any Borrower or the Agent, the
Letter of Credit Issuer or the Lenders.  If at any time, any payment, or any
part thereof, made in respect of any of the Obligations, is rescinded or must
otherwise be restored or returned by the Agent, the Letter of Credit Issuer or
the Lenders upon the insolvency, bankruptcy or reorganization of any of the
Borrowers, or otherwise, the provisions of this Section 5.12 will forthwith be
reinstated in effect, as though such payment had not been made.

 

(f)                                    Each Borrower appoints the Borrowers’
Representative as its authorized representative to make loan requests, receive
funds and notice and to take all other actions under this Agreement and the
other Loan Documents on its behalf.

 

6.                                       COLLATERAL SECURITY.

 

6.1.                              GRANT OF SECURITY INTEREST.  The Borrowers
each hereby grant to the Agent, for the benefit of the Lenders, the Letter of
Credit Issuer and the Agent, to secure the payment and performance in full of
all of the Obligations, a security interest in and so pledges and assigns to the
Agent, for the benefit of the Lenders, the Letter of Credit Issuer and the
Agent, the following properties, assets and rights of each of the Borrowers,
wherever located, whether now owned or hereafter acquired or arising, and all
proceeds and products thereof (all of the same along with any other property,
rights and interests of each of the Borrowers that are or are intended to be
subject to the Liens created by the Security Documents being hereinafter called
the “COLLATERAL”): all personal property and fixtures of each of the Borrowers
of every kind and nature, and wherever located, including without limitation all
goods (including inventory, equipment and any accessions thereto), instruments
(including promissory notes), documents, accounts (including
health-care-insurance receivables), chattel paper (whether tangible or
electronic), deposit accounts, drafts, acceptances, certificates of deposit,
deposits, cash, letter-of-credit rights (whether or not the letter of credit is
evidenced by a writing) and supporting obligations, commercial tort claims,
securities and all other investment property, supporting obligations, any other
contract rights or rights to the payment of money, insurance policies,
certificates, claims and proceeds, and all general intangibles (including all
payment intangibles, software, trademarks and applications therefor, patents and
applications therefor, copyrights and applications therefor) and all books,
records and information relating to the foregoing and to the business of each of
the Borrowers and all rights of access to such books, records and information,
and all proceeds and products of all of the foregoing.  The Agent acknowledges
that the attachment of its security interest in any commercial tort claim as
original collateral is subject to the Borrowers’ compliance with Section 6.3.7.

 

6.2.                              AUTHORIZATION TO FILE FINANCING STATEMENTS. 
The Borrowers hereby irrevocably authorize the Agent at any time and from time
to time to file in any filing office in any jurisdiction any initial financing
statements and amendments thereto that

 

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(a) indicate the Collateral (i) as all assets of the Borrowers or words of
similar effect, regardless of whether any particular asset comprised in the
Collateral falls within the scope of Article 9 of the Uniform Commercial Code of
such jurisdiction, or (ii) as being of an equal or lesser scope or with greater
detail, and (b) provide any other information required by part 5 of Article 9 of
the Uniform Commercial Code of such jurisdiction for the sufficiency or filing
office acceptance of any financing statement or amendment, including (i) whether
the Borrowers are an organization, the type of organization and any
organizational identification number issued to the Borrowers and, (ii) in the
case of a financing statement filed as a fixture filing or indicating Collateral
as as-extracted collateral or timber to be cut, a sufficient description of real
property to which the Collateral relates.  The Borrowers agree to furnish any
such information to the Agent promptly upon the Agent’s request.  The Borrowers
also ratify their authorization for the Agent to have filed in any jurisdiction
any like initial financing statements or amendments thereto if filed prior to
the date hereof.

 

6.3.                              OTHER ACTIONS.  Further to insure the
attachment, perfection and first priority of, and the ability of the Agent to
enforce, the Agent’s security interest in the Collateral, the Borrowers agree,
in each case at the Borrowers’ expense, to take the following actions with
respect to the following Collateral and without limitation on the Borrowers’
other obligations contained in this Agreement:

 

6.3.1.                     PROMISSORY NOTES AND TANGIBLE CHATTEL PAPER.  If the
Borrowers shall, now or at any time hereafter, hold or acquire any promissory
notes or tangible chattel paper, the Borrowers shall forthwith endorse, assign
and deliver the same to the Agent, accompanied by such instruments of transfer
or assignment duly executed in blank as the Agent may from time to time specify.

 

6.3.2.                     DEPOSIT ACCOUNTS.  For each deposit account that any
Borrower, now or at any time hereafter, opens or maintains (each a “DEPOSIT
ACCOUNT”), the Borrowers shall (other than with respect to a Local Account)
pursuant to an agreement in form and substance satisfactory to the Agent (each a
“BLOCKED ACCOUNT AGREEMENT”), either (a) cause the depositary bank to agree to
comply, without further consent of the Borrowers, at any time with instructions
from the Agent to such depositary bank directing the disposition of funds from
time to time credited to such Deposit Account, or (b) arrange for the Agent to
become the customer of the depositary bank with respect to the Deposit Account,
with the Borrowers being permitted, only with the consent of the Agent, to
exercise rights to withdraw funds from such Deposit Account.  The provisions of
this paragraph shall not apply to a Deposit Account for which the Agent is the
depositary bank and is in automatic control thereof.  For each Local Account
that any Borrower now or at any time hereafter opens or maintains, the Borrowers
shall deliver to each depository bank with a Local Account, a DDA Notification
(each a “DDA NOTIFICATION”) in the form attached hereto as SCHEDULE 6.3.

 

6.3.3.                     INVESTMENT PROPERTY.  If the Borrowers shall, now or
at any time hereafter, hold or acquire any certificated securities, the
Borrowers shall forthwith endorse, assign and deliver the same to the Agent,
accompanied by such instruments of transfer or assignment duly executed in blank
as the Agent may from time to time

 

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specify.  If any securities now or hereafter acquired by the Borrowers are
uncertificated and are issued to the Borrowers or their nominee directly by the
issuer thereof, the Borrowers shall immediately notify the Agent thereof and, at
the Agent’s request and option, pursuant to an agreement in form and substance
satisfactory to the Agent, either (a) cause the issuer to agree to comply
without further consent of the Borrowers or such nominee, at any time with
instructions from the Agent as to such securities, or (b) arrange for the Agent
to become the registered owner of the securities.  If any securities, whether
certificated or uncertificated, or other investment property now or hereafter
acquired by the Borrowers are held by the Borrowers or their nominee through a
securities intermediary or commodity intermediary, the Borrowers shall
immediately notify the Agent thereof and, at the Agent’s request and option,
pursuant to an agreement in form and substance satisfactory to the Agent, either
(i) cause such securities intermediary or (as the case may be) commodity
intermediary to agree to comply, in each case without further consent of the
Borrowers or such nominee, at any time with entitlement orders or other
instructions from the Agent to such securities intermediary as to such
securities or other investment property, or (as the case may be) to apply any
value distributed on account of any commodity contract as directed by the Agent
to such commodity intermediary, or (ii) in the case of financial assets or other
investment property held through a securities intermediary, arrange for the
Agent to become the entitlement holder with respect to such investment property,
with the Borrowers being permitted, only with the consent of the Agent, to
exercise rights to withdraw or otherwise deal with such investment property. 
The provisions of this paragraph shall not apply to any financial assets
credited to a securities account for which the Agent is the securities
intermediary.

 

6.3.4.                     COLLATERAL IN THE POSSESSION OF A BAILEE.  If any
Collateral is, now or at any time hereafter, in the possession of a bailee, the
Borrowers shall promptly notify the Agent thereof and, at the Agent’s request
and option, shall promptly obtain an acknowledgement from the bailee, in form
and substance reasonably satisfactory to the Agent, that the bailee holds such
Collateral for the benefit of the Agent and such bailee’s agreement to comply,
without further consent of the Borrowers, at any time with instructions of the
Agent as to such Collateral.

 

6.3.5.                     ELECTRONIC CHATTEL PAPER AND TRANSFERABLE RECORDS. 
If the Borrowers, now or at any time hereafter, hold or acquire an interest in
any electronic chattel paper or any “transferable record,” as that term is
defined in Section 201 of the federal Electronic Signatures in Global and
National Commerce Act, or in Section 16 of the Uniform Electronic Transactions
Act as in effect in any relevant jurisdiction, the Borrowers shall promptly
notify the Agent thereof and, at the request and option of the Agent, shall take
such action as the Agent may reasonably request to vest in the Agent control,
under Section 9-105 of the Uniform Commercial Code, of such electronic chattel
paper or control under Section 201 of the federal Electronic Signatures in
Global and National Commerce Act or, as the case may be, Section 16 of the
Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of
such transferable record.

 

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6.3.6.                     LETTER-OF-CREDIT RIGHTS.  If the Borrowers are, now
or at any time hereafter, a beneficiary under a letter of credit now or
hereafter, the Borrowers shall promptly notify the Agent thereof and, at the
request and option of the Agent, the Borrowers shall, pursuant to an agreement
in form and substance reasonably satisfactory to the Agent, either (a) arrange
for the issuer and any confirmer or other nominated person of such letter of
credit to consent to an assignment to the Agent of the proceeds of the letter of
credit or (b) arrange for the Agent to become the transferee beneficiary of the
letter of credit, with the Agent agreeing, in each case, that the proceeds of
the letter of credit are to be applied in accordance with Sections 2.14 and
2.15.

 

6.3.7.                     COMMERCIAL TORT CLAIMS.  If the Borrowers shall, now
or at any time hereafter, hold or acquire a commercial tort claim, the Borrowers
shall immediately notify the Agent in a writing signed by the Borrowers’
Representative of the particulars thereof and grant to the Agent, for the
benefit of the Lenders and the Agent, in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Agreement, with
such writing to be in form and substance reasonably satisfactory to the Agent.

 

6.3.8.                     OTHER ACTIONS AS TO ANY AND ALL COLLATERAL.  The
Borrowers further agrees, upon the request of the Agent and at the Agent’s
option, to take any and all other actions as the Agent may reasonably determine
to be necessary or useful for the attachment, perfection and first priority of,
and the ability of the Agent to enforce, the Agent’s security interest in any
and all of the Collateral, including, without limitation, (a) executing,
delivering and, where appropriate, filing financing statements and amendments
relating thereto under the Uniform Commercial Code, to the extent, if any, that
the Borrowers’ signature thereon is required therefor, (b) causing the Agent’s
name to be noted as secured party on any certificate of title for a titled good
if such notation is a condition to attachment, perfection or priority of, or
ability of the Agent to enforce, the Agent’s security interest in such
Collateral, (c) complying with any provision of any statute, regulation or
treaty of the United States as to any Collateral if compliance with such
provision is a condition to attachment, perfection or priority of, or ability of
the Agent to enforce, the Agent’s security interest in such Collateral, (d)
obtaining governmental and other third party waivers, consents and approvals, in
form and substance satisfactory to the Agent, including, without limitation, any
consent of any licensor, lessor or other person obligated on Collateral, (e)
obtaining waivers from mortgagees and landlords in form and substance reasonably
satisfactory to the Agent and (f) taking all actions under any earlier versions
of the Uniform Commercial Code or under any other law, as reasonably determined
by the Agent to be applicable in any relevant Uniform Commercial Code or other
jurisdiction, including any foreign jurisdiction.

 

6.4.                        RELATION TO OTHER SECURITY DOCUMENTS.  The
provisions of this Agreement supplement the provisions of any Security Document
granted by the Borrowers to the Agent, for the benefit of the Lenders, the
Letter of Credit Issuer and the Agent, and which secures the payment or
performance of any of the Obligations.  Nothing contained in any such Security
Document shall derogate from any of the rights or remedies of the Agent or any
of the

 

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Lenders hereunder.  In addition, to the provisions of this Agreement being so
read and construed with any such Security Document, the provisions of this
Agreement shall be read and construed with the other Security Documents referred
to below in the manner so indicated.

 

6.4.1.         PLEDGE AGREEMENT.  Concurrently herewith certain of the Borrowers
are executing and delivering to the Agent, for the benefit of the Lenders, the
Letter of Credit Issuer and the Agent, the Pledge Agreement pursuant to which
the Borrowers are pledging to the Agent all of the shares of Capital Stock of
the Subsidiaries of each of the Borrowers.  Such pledge(s) shall be governed by
the terms of such pledge agreement(s) and not by the terms of this Agreement.

 

6.4.2.         TRADEMARK SECURITY AGREEMENT.  Concurrently herewith the
Borrowers are executing and delivering to the Agent, for the benefit of the
Lenders, the Letter of Credit Issuer and the Agent, the Trademark Security
Agreement pursuant to which the Borrowers are pledging and granting a security
interest to the Agent, for the benefit of the Lenders, the Letter of Credit
Issuer and the Agent, certain Collateral consisting of trademarks, service marks
and trademark and service mark rights and applications, together with the
goodwill appurtenant thereto.  The provisions of the Trademark Security
Agreement are supplemental to the provisions of this Agreement, and nothing
contained in the Trademark Security Agreement shall derogate from any of the
rights or remedies of the Agent or any of the Lenders hereunder.  Neither the
delivery of, nor anything contained in, the Trademark Security Agreement shall
be deemed to prevent or postpone the time of attachment or perfection of any
security interest in such Collateral created hereby.

 

6.4.3.         COPYRIGHT SECURITY AGREEMENT.  Concurrently herewith the
Borrowers are executing and delivering to the Agent, for the benefit of the
Lenders, the Letter of Credit Issuer and the Agent, the Copyright Security
Agreement pursuant to which the Borrowers are pledging and granting a security
interest to the Agent, for the benefit of the Lenders, the Letter of Credit
Issuer and the Agent, certain Collateral consisting of copyrights and related
rights.  The provisions of the Copyright Security Agreement are supplemental to
the provisions of this Agreement, and nothing contained in the Copyright
Security Agreement shall derogate from any of the rights or remedies of the
Agent or any of the Lenders hereunder.  Neither the delivery of, nor anything
contained in, the Copyright Security Agreement shall be deemed to prevent or
postpone the time of attachment or perfection of any security interest in such
Collateral created hereby.

 

7.                                       REPRESENTATIONS AND WARRANTIES.  The
Borrowers represent and warrant to the Lenders, the Letter of Credit Issuer and
the Agent as follows:

 

7.1.                              CORPORATE AUTHORITY.

 

7.1.1.                     INCORPORATION; GOOD STANDING.  Each of the Borrowers
and their Subsidiaries (a) is a corporation (or similar business entity) duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or

 

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formation, (b) has all requisite corporate (or the equivalent company) power to
own its property and conduct its business as now conducted and as presently
contemplated, and (c) is in good standing as a foreign corporation (or similar
business entity) and is duly authorized to do business in each jurisdiction
where such qualification is necessary except where a failure to be so qualified
would not have a Material Adverse Effect.  The Right Start Subsidiary I, Inc. is
and will remain, unless dissolved by Right Start, a dormant corporation with no
active business, no assets and no Indebtedness or other Liabilities.

 

7.1.2.                     AUTHORIZATION.  The execution, delivery and
performance of this Agreement and the other Loan Documents to which each
Borrower or any of its Subsidiaries is or is to become a party and the
transactions contemplated hereby and thereby (a) are within the corporate (or
the equivalent company) authority of such Person, (b) have been duly authorized
by all necessary proceedings, (c) do not and will not conflict with or result in
any breach or contravention of any provision of law, statute, rule or regulation
to which the Borrowers or any of their Subsidiaries is subject or any judgment,
order, writ, injunction, license or permit applicable to the Borrowers or any of
their Subsidiaries and (d) do not conflict with any provision of the Governing
Documents of, or any material agreement or other material instrument binding
upon, the Borrowers or any of their Subsidiaries.

 

7.1.3.                     ENFORCEABILITY.  The execution and delivery of this
Agreement and the other Loan Documents to which each Borrower or any of its
Subsidiaries is or is to become a party will result in valid and legally binding
obligations of such Person enforceable against it in accordance with the
respective terms and provisions hereof and thereof, except as enforceability is
limited by bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting generally the enforcement of creditors’ rights and
except to the extent that availability of the remedy of specific performance or
injunctive relief is subject to the discretion of the court before which any
proceeding therefor may be brought.

 

7.2.                              GOVERNMENTAL APPROVALS.  The execution,
delivery and performance by each Borrower and each of its Subsidiaries of this
Agreement and the other Loan Documents to which such Borrower or any of its
Subsidiaries is or is to become a party and the transactions contemplated hereby
and thereby do not require the approval or consent of, or filing with, any
governmental agency or authority other than those already obtained.

 

7.3.                              TITLE TO PROPERTIES; LEASES.  Except as
indicated on SCHEDULE 7.3 hereto, each Borrower and its Subsidiaries own all of
the assets reflected in the consolidated balance sheet of FAO and its
Subsidiaries as at the Balance Sheet Date or acquired since that date (except
property and assets sold or otherwise disposed of in the ordinary course of
business since that date), subject to no Liens or other rights of others, except
Permitted Liens.  Except as set forth on SCHEDULE 7.3 hereto, each of such
Leases and Capitalized Leases listed in the Perfection Certificate is in full
force and effect.  No party to any such Lease or Capitalized Lease is in default
or material violation of any such Lease or Capitalized Lease, except for
violations that would not have a Material Adverse Effect.  The Borrowers have
not received any notice or

 

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threat of cancellation of any such Lease or Capitalized Lease.  The Borrowers
hereby authorize the Agent at any time and from time to time to contact any of
the Borrowers’ landlords in order to confirm the Borrowers’ continued compliance
with the terms and conditions of the Lease(s) between the Borrowers and that
landlord and to discuss such issues, concerning the Borrowers’ occupancy under
such Lease(s), as the Agent may determine.

 

7.4.                              FINANCIAL STATEMENTS AND PROJECTIONS.

 

7.4.1.                     FISCAL YEAR.  Each of the Borrowers and each of their
Subsidiaries has a fiscal year which is the twelve months ending on the Saturday
closest to January 31.

 

7.4.2.                     FINANCIAL STATEMENTS.  There has been furnished to
each of the Lenders a consolidated balance sheet of FAO and its Subsidiaries as
at the Balance Sheet Date, and a consolidated statement of income of FAO and its
Subsidiaries for the fiscal year then ended, certified by the chief financial
officer of the Borrowers.  Such balance sheet and statement of income have been
prepared in accordance with GAAP and fairly present the financial condition of
the Borrowers as at the close of business on the date thereof and the results of
operations for the fiscal year then ended.  After giving effect to the Plan of
Reorganization and the Plan Confirmation Order, there are no contingent
liabilities of FAO or any of its Subsidiaries as of such date involving material
amounts known to any Designated Borrower Officer which were not disclosed in
such balance sheet and the notes related thereto.

 

7.4.3.                     PROJECTIONS.  The Business Plan attached as Schedule
1.1(a) and projections of the annual operating budgets of FAO and its
Subsidiaries on a consolidated basis, balance sheets, income statements and cash
flow statements, copies of which have been delivered to each Lender, disclose
all assumptions made with respect to general economic, financial and market
conditions used in formulating such projections.  As of the Closing Date, to the
knowledge of the Borrowers or any of their Subsidiaries, no facts exist that
(individually or in the aggregate) would result in any material change in any of
such projections.  The projections are based upon reasonable estimates and
assumptions, have been prepared on the basis of the assumptions stated therein
and reflect the reasonable estimates of the Borrowers and their Subsidiaries of
the results of operations and other information projected therein.

 

7.5.                              NO MATERIAL ADVERSE CHANGES, ETC.  Except as
set forth on SCHEDULE 7.5 hereto, since the Balance Sheet Date and after giving
effect to the Plan of Reorganization there has been no event or occurrence which
has had a Material Adverse Effect.  Since the Balance Sheet Date, the Borrowers
have not made any Restricted Payment except to the extent permitted under
Section 9.4.

 

7.6.                              FRANCHISES, PATENTS, COPYRIGHTS, ETC.  Each of
the Borrowers possesses all franchises, patents, copyrights, trademarks, trade
names, licenses and permits, and rights in respect of the foregoing, adequate
for the conduct of its business substantially as now conducted without known
material conflict with any rights of others, including without limitation the
license to use the trademark “FAO Schwarz” and related marks set forth in and
pursuant to

 

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the terms of the Amended and Restated Schwarz Trademark Agreement, dated as of
January 7, 2002 among FAO (f/k/a The Right Start, Inc.), FAO Schwarz, Inc.
(f/k/a Toy Soldier, Inc.) and the F.A.O. Schwarz Family Foundation (as in effect
on the Closing Date and as thereafter amended with the prior written consent of
the Agent, the “FAO TRADEMARK LICENSE”), a true and complete copy of which has
been delivered to the Agent.  The FAO Trademark License is a valid and binding
agreement in full force and effect and no default or breach exists thereunder,
after giving effect to the Plan of Reorganization.

 

7.7.                              LITIGATION.  Except as set forth on SCHEDULE
7.7, there are no actions, suits, proceedings or investigations of any kind
pending or threatened against the Borrowers or any of their Subsidiaries before
any Governmental Authority, that, (a) if adversely determined, would, either in
any case or in the aggregate, have a Material Adverse Effect, or (b) which
question the validity of this Agreement or any of the other Loan Documents, or
any action taken or to be taken pursuant hereto or thereto.  The Borrowers do
not reasonably believe that any of the litigation set forth on SCHEDULE 7.7
would be likely to result in a Material Adverse Effect, in any case or in the
aggregate.

 

7.8.                              NO MATERIALLY ADVERSE CONTRACTS, ETC.  Neither
the Borrowers nor any of their Subsidiaries is subject to any Governing Document
or other legal restriction, or any judgment, decree, order, law, statute, rule
or regulation that has or is expected in the future to have a Material Adverse
Effect.  Except as set forth on SCHEDULE 7.8 hereto, neither the Borrowers nor
any of their Subsidiaries is a party to any contract or agreement that has or is
expected, in the judgment of any Designated Borrower Officer, to have any
Material Adverse Effect.

 

7.9.                              COMPLIANCE WITH OTHER INSTRUMENTS, LAWS, ETC. 
Neither the Borrowers nor any of their Subsidiaries is in violation of (a) any
provision of its Governing Documents or its agreement with Saks or any other
Host Store, or (b) any agreement or instrument to which it may be subject or by
which it or any of its properties may be bound or any decree, order, judgment,
statute, license, rule or regulation, in any of the foregoing cases as to (b) in
a manner that could reasonably be expected to result in the imposition of
substantial penalties or could reasonably be expected to have a Material Adverse
Effect.

 

7.10.                        TAX STATUS.  Upon payment of the amounts set forth
on SCHEDULE 7.10 hereto in accordance with the Plan of Reorganization, the
Borrowers and their Subsidiaries (a) have made or filed all federal, state and
foreign income and all other tax returns, reports and declarations required by
any jurisdiction to which any of them is subject, (b) have paid all taxes and
other governmental assessments and charges shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and by appropriate proceedings and (c) have set aside on their books provisions
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply.  There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and none of the officers of the Borrowers knows of any basis
for any such claim.  The Borrowing Base Report most recently delivered to the
Agent sets forth the amount of reserves established by the Borrowers and each of
their Subsidiaries to cover the Borrowers’ or such Subsidiary’s sales or use tax
obligations in each jurisdiction where the

 

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Borrowers or such Subsidiary is required to pay such taxes.  Such reserves are
adequate for the payment of all of such obligations.

 

7.11.                        NO DEFAULT.  No Default exists.

 

7.12.                        HOLDING COMPANY AND INVESTMENT COMPANY ACTS. 
Neither the Borrowers nor any of their Subsidiaries is a “HOLDING COMPANY”, or a
“SUBSIDIARY COMPANY” of a “HOLDING COMPANY”, or an “AFFILIATE” of a “HOLDING
COMPANY”, as such terms are defined in the Public Utility Holding Company Act of
1935; nor is it an “INVESTMENT COMPANY”, or an “AFFILIATED COMPANY” or a
“PRINCIPAL UNDERWRITER” of an “INVESTMENT COMPANY”, as such terms are defined in
the Investment Company Act of 1940.

 

7.13.                        ABSENCE OF FINANCING STATEMENTS, ETC.  Except with
respect to Permitted Liens, there is no financing statement, security agreement,
chattel mortgage, real estate mortgage or other document filed or recorded with
any filing records, registry or other public office, that purports to cover,
affect or give notice of any present or possible future Lien on any assets or
property of the Borrowers or any of their Subsidiaries or any rights relating
thereto.

 

7.14.                        COLLATERAL .

 

7.14.1.               PERFECTION CERTIFICATE.  The Borrowers have previously
delivered to the Agent a certificate signed by the Borrowers and entitled
“Perfection Certificate” (as updated from time to time to the extent permitted
and required hereunder, the “PERFECTION CERTIFICATE”).  The Borrowers represent
and warrant to the Lenders and the Agent as follows: (a) each Borrower’s exact
legal name is that indicated on the Perfection Certificate and on the signature
page hereof, (b) each Borrower is an organization of the type, and is organized
in the jurisdiction, set forth in the Perfection Certificate, (c) the Perfection
Certificate accurately sets forth each Borrower’s organizational identification
number or accurately states that such Borrower has none, (d) the Perfection
Certificate accurately sets forth each Borrower’s place of business or, if more
than one, its chief executive office, as well as each Borrower’s mailing
address, if different, (e) all other information set forth on the Perfection
Certificate pertaining to the Borrowers is accurate and complete in all material
respects and (f) there has been no change in any of such information since the
date on which the Perfection Certificate was signed by the Borrowers.

 

7.14.2.               NATURE OF COLLATERAL.  The Borrowers are the owners of the
Collateral, free from any right or claim of any person or any adverse Lien,
except for the security interest created by this Agreement and Permitted Liens,
(b) none of the Collateral constitutes, or is the proceeds of, “farm products”
as defined in Section 9-102(a)(34) of the Uniform Commercial Code, (c) none of
the account debtors or other persons obligated on any of the Collateral is a
governmental authority covered by the Federal Assignment of Claims Act or like
federal, state or local statute or rule in respect of such Collateral, (d) the
Borrowers hold no material commercial tort claim except as indicated on the
Perfection Certificate, (e) the Borrowers have at all times operated their

 

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business in compliance with all applicable provisions of the federal Fair Labor
Standards Act, as amended, and with all applicable provisions of federal, state
and local statutes and ordinances dealing with the control, shipment, storage or
disposal of hazardous materials or substances, (f) all other information set
forth on the Perfection Certificate pertaining to the Collateral is accurate and
complete in all material respects, and (g) there has been no change in any of
such information since the date on which the Perfection Certificate was signed
by the Borrowers.

 

7.14.3.               PERFECTION OF SECURITY INTEREST.  All filings,
assignments, pledges and deposits of documents or instruments have been made and
all other actions have been taken that are necessary or advisable, under
applicable law, to establish and perfect the Agent’s security interest in the
Collateral.  The Collateral and the Agent’s rights with respect to the
Collateral are not subject to any setoff, claims, withholdings or other
defenses.  The Borrowers are the owners of the Collateral free from any Lien,
except for Permitted Liens.

 

7.14.4.     INVENTORY.  The Inventory of the Borrowers is purchased from third
parties by FAO for the Borrowers and is located at the distribution centers of
FAO located in Swedesboro, New Jersey or Ontario, California (or any other
distribution center within the continental United States for which the Agent has
received an appropriate waiver in form and substance satisfactory to it) until
shipped to retail locations of the Borrowers or is directly drop shipped from
such third parties directly to such retail locations.

 

7.15.                        CERTAIN TRANSACTIONS.  Except as described in
SCHEDULE 7.15, none of the officers, directors, or employees of the Borrowers or
any of their Subsidiaries is presently a party to any transaction with the
Borrowers or any of their Subsidiaries (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Borrowers, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.

 

7.16.                        EMPLOYEE BENEFIT PLANS.

 

7.16.1.               IN GENERAL.  Each Employee Benefit Plan and each
Guaranteed Pension Plan has been maintained and operated in compliance in all
material respects with the provisions of ERISA and all Applicable Pension
Legislation and, to the extent applicable, the Code, including but not limited
to the provisions thereunder respecting prohibited transactions and the bonding
of fiduciaries and other persons handling plan funds as required by Section 412
of ERISA, except where such failure could not reasonably be expected to result
in a Lien on a material portion of the Borrowers’ assets or have any Material
Adverse Effect.  The Borrowers have heretofore delivered to the Agent the most
recently completed annual report, Form 5500, with all required

 

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attachments, and actuarial statement required to be submitted under Section
103(d) of ERISA, with respect to each Guaranteed Pension Plan.

 

7.16.2.               TERMINABILITY OF WELFARE PLANS.  No Employee Benefit Plan,
which is an employee welfare benefit plan within the meaning of Section 3(1) or
Section 3(2)(B) of ERISA, provides benefit coverage subsequent to termination of
employment, except as required by Title I, Part 6 of ERISA or the applicable
state insurance laws.  The Borrowers may terminate each such Employee Benefit
Plan at any time (or at any time subsequent to the expiration of any applicable
bargaining agreement) in the reasonable discretion of the Borrowers without
liability to any Person other than for claims arising prior to termination.

 

7.16.3.               GUARANTEED PENSION PLANS.  Each contribution required to
be made to a Guaranteed Pension Plan, whether required to be made to avoid the
incurrence of an accumulated funding deficiency, the notice or lien provisions
of Section 302(f) of ERISA, or otherwise, has been timely made.  No waiver of an
accumulated funding deficiency or extension of amortization periods has been
received with respect to any Guaranteed Pension Plan, and neither the Borrowers
nor any ERISA Affiliate is obligated to or has posted security in connection
with an amendment to a Guaranteed Pension Plan pursuant to Section 307 of ERISA
or Section 401(a)(29) of the Code.  No liability to the PBGC (other than
required insurance premiums, all of which have been timely paid) has been
incurred by the Borrowers or any ERISA Affiliate with respect to any Guaranteed
Pension Plan and there has not been any ERISA Reportable Event (other than an
ERISA Reportable Event as to which the requirement of 30 days notice has been
waived under PBGC Section 4043), or any other event or condition, in each case,
which presents a material risk of termination of any Guaranteed Pension Plan by
the PBGC.  Based on the latest valuation of each Guaranteed Pension Plan (which
in each case occurred within twelve months of the date of this representation),
and on the actuarial methods and assumptions employed for that valuation, the
aggregate current liabilities of all such Guaranteed Pension Plans within the
meaning of Section 412(1)(7) of the Code did not exceed the aggregate actuarial
value of the assets of all such Guaranteed Pension Plans determined in
accordance with Section 412(c)(2) of the Code, disregarding for this purpose the
benefit liabilities and assets of any Guaranteed Pension Plan with assets in
excess of benefit liabilities, by more than $500,000.

 

7.16.4.               MULTIEMPLOYER PLANS.  Neither the Borrowers nor any ERISA
Affiliate has incurred any material liability (including secondary liability) to
any Multiemployer Plan as a result of a complete or partial withdrawal from such
Multiemployer Plan under Section 4201 of ERISA or as a result of a sale of
assets described in Section 4204 of ERISA.  Neither the Borrowers nor any ERISA
Affiliate has been notified that any Multiemployer Plan is in reorganization or
insolvent under and within the meaning of Section 4241 or Section 4245 of ERISA
or is at risk of entering reorganization or becoming insolvent, or that any
Multiemployer Plan intends to terminate or has been terminated under Section
4041A of ERISA.

 

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7.17.                        USE OF PROCEEDS.

 

7.17.1.               GENERAL.  The proceeds of the Loans shall be used to
finance the Borrowers’ emergence in accordance with their Plan of Reorganization
and for inventory purchase and other working capital purposes of the Borrowers
in accordance with the projections described in Section 7.4.3.  The Borrowers
will obtain Letters of Credit solely in the ordinary course of business.  No
proceeds of the Loans may be used, nor shall any be requested, with a view
towards the accumulation of any general fund or funded reserve of the Borrowers
other than in the ordinary course of the Borrowers’ business and consistent with
the provisions of this Agreement.

 

7.17.2.               REGULATIONS U AND X.  No portion of any Loan is to be
used, and no portion of any Letter of Credit is to be obtained, for the purpose
of purchasing or carrying any “MARGIN SECURITY” or “MARGIN STOCK” as such terms
are used in Regulations U and X of the Board of Governors of the Federal Reserve
System, 12 C.F.R. Parts 221 and 224.

 

7.18.                        ENVIRONMENTAL COMPLIANCE.  None of the Borrowers or
their Subsidiaries is in violation, or alleged violation, of any Environmental
Laws, which violation would have a material adverse effect on the environment or
a Material Adverse Effect; or none of the Borrowers nor any of their
Subsidiaries has received notice from any third party including, without
limitation, any Governmental Authority, that any one of them has been identified
by the United States Environmental Protection Agency (“EPA”) as a potentially
responsible party under CERCLA with respect to a site listed on the National
Priorities List, 40 C.F.R. Part 300 Appendix B.  None of the Borrowers or their
Subsidiaries has been legally responsible for any release or threat of release
of Hazardous Substances or received notification of the incurrence of any
expense in connection with the assessment, containment, or removal of any
Hazardous Substances for which it would be responsible, except where such
release or threat of release or incurrence of such expense would not have a
Material Adverse Effect.  Each of the Borrowers and their Subsidiaries shall
dispose of any Hazardous Substances only in compliance with all Environmental
Laws and have possession of any Hazardous Substances only in the ordinary course
of its business and in compliance with all Environmental Laws, except, in each
case, where the failure to do so would not have a Material Adverse Effect.

 

7.19.                        SUBSIDIARIES, ETC.  FAO has no Subsidiaries other
than the other Borrowers hereunder.  Except as set forth on SCHEDULE 7.19
hereto, none of the Borrowers nor any Subsidiary of the Borrowers is engaged in
any joint venture or partnership with any other Person.  The jurisdiction of
incorporation/formation and principal place of business of each Subsidiary of
FAO is listed on SCHEDULE 7.19 hereto (or with respect to Subsidiaries formed
after the Closing Date, as listed in written notice provided to the Agent and
its counsel).  FAO has caused all of its direct or indirect Subsidiaries to
become Borrowers hereunder and to otherwise comply with the provisions of
Section 8.13.  The Kayne Group owns 41% or more of the combined voting power of
all Capital Stock of FAO (on a fully diluted basis) on the Closing Date.

 

7.20.                        BANK ACCOUNTS; CREDIT CARD ARRANGEMENTS.  SCHEDULE
7.20(a) (as updated with respect to Deposit Accounts opened after the Closing
Date for which the Agent and its counsel have received written notice) sets
forth the account numbers and location

 

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of all Deposit Accounts and classifies such Deposit Accounts as Local Accounts
and Interim Concentration Accounts.  SCHEDULE 7.20(b) (as updated with respect
to arrangements entered into after the Closing Date for which the Agent and its
counsel have received written notice) sets forth all arrangements to which the
Borrowers are a party with respect to the payment to the Borrowers of the
proceeds of credit card charges for sales by the Borrowers.

 

7.21.                        LABOR RELATIONS.  The Borrowers have not been and
are not presently a party to any collective bargaining or other labor contract
(except with respect to the FAO Schwarz retail store located in San Francisco,
California and now closed).  No event has occurred or circumstance exists which
is likely to provide the basis for any work stoppage or other labor dispute. 
The Borrowers have complied in all material respects with all applicable laws
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, except where such failures could not in the aggregate reasonably be
expected to result in a Material Adverse Effect.  There is not presently pending
and, to the Borrowers’ knowledge, there is not threatened any of the following:

 

(a)                                  Any strike, slowdown, picketing, work
stoppage, or employee grievance process.

 

(b)                                 Any proceeding against or affecting the
Borrowers 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
Borrowers, which, if determined adversely to the Borrowers would have a Material
Adverse Effect on the Borrowers.

 

(c)                                  Any lockout of any employees by the
Borrowers (and no such action is contemplated by the Borrowers).

 

(d)                                 Any application for the certification of a
collective bargaining agent.

 

7.22.                        DISCLOSURE.  None of this Agreement or any of the
other Loan Documents contains any untrue statement of a material fact or omits
to state a material fact (known to the Borrowers or any of their Subsidiaries in
the case of any document or information not furnished by it or any of their
Subsidiaries) necessary in order to make the statements herein or therein not
misleading.  There is no fact known to the Borrowers or any of their
Subsidiaries which has a Material Adverse Effect, or which is reasonably likely
in the future to have a Material Adverse Effect, exclusive of effects resulting
from changes in general economic conditions, legal standards or regulatory
conditions.

 

8.                                       CERTAIN AFFIRMATIVE COVENANTS.  The
Borrowers covenant and agree that, so long as any Loan, Unpaid Reimbursement
Obligation, Letter of Credit or Note is outstanding or any Lender has any
obligation to make any Loan or the Agent or Letter of Credit Issuer has any
obligation to issue, extend or renew any Letter of Credit:

 

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8.1.                              PUNCTUAL PAYMENT.  The Borrowers will duly and
punctually pay or cause to be paid the principal and interest on the Loans, all
Reimbursement Obligations, the Fees, and all other amounts provided for in this
Agreement and the other Loan Documents to which the Borrowers or any of their
Subsidiaries is a party, all in accordance with the terms of this Agreement and
such other Loan Documents.

 

8.2.                              NOTICE OF CHANGE OF ORGANIZATION/MAINTENANCE
OF OFFICE.  The Borrowers will maintain their chief executive offices in King of
Prussia, Pennsylvania, or at such other place in the United States of America as
the Borrowers’ Representative shall designate upon written notice to the Agent,
where notices, presentations and demands to or upon the Borrowers in respect of
the Loan Documents to which the Borrowers is a party may be given or made.  Each
Borrower will provide the Agent at least thirty (30) days prior written notice
of such Borrower changing its name, its place of business or, if more than one,
chief executive office, or its mailing address or organizational identification
number if it has one.  If any Borrower does not have an organizational
identification number and later obtains one, such Borrower will forthwith notify
the Agent of such organizational identification number.  No Borrower will change
its type of organization, jurisdiction of organization or other legal structure.

 

8.3.                              RECORDS AND ACCOUNTS.  The Borrowers will (a)
keep, and cause each of their Subsidiaries to keep, true and accurate records
and books of account in which full, true and correct entries will be made in
accordance with GAAP, (b) maintain adequate accounts and reserves for all taxes
(including income taxes), depreciation, depletion, obsolescence and amortization
of its properties and the properties of its Subsidiaries, contingencies, and
other reserves, and (c) at all times engage KPMG LLP or other independent
certified public accountants satisfactory to the Agent as the independent
certified public accountants of the Borrowers and their Subsidiaries and will
not permit more than thirty (30) days to elapse between the cessation of such
firm’s (or any successor firm’s) engagement as the independent certified public
accountants of the Borrowers and their Subsidiaries and the appointment in such
capacity of a successor firm as shall be satisfactory to the Agent.

 

8.4.                              FINANCIAL STATEMENTS, CERTIFICATES AND
INFORMATION.  The Borrowers will deliver to each of the Lenders:

(a)                                  as soon as practicable, but in any event
not later than ninety (90) days after the end of each fiscal year of the
Borrowers, the consolidated balance sheets of FAO and its Subsidiaries as at the
end of such year, and the related consolidated statements of income and
consolidated statements of cash flow for such year, each setting forth in
comparative form the figures for the previous fiscal year and all such
consolidated statements to be in reasonable detail, prepared in accordance with
GAAP, and certified, without qualification (except with respect to the fiscal
year ended February 1, 2003, solely by reason of the bankruptcy filing in
January, 2003) and without an expression of uncertainty as to the ability of FAO
or any of its Subsidiaries to continue as going concerns, by KPMG LLP or by
other independent certified public accountants satisfactory to the Agent,
together with a written statement from such accountants to the effect that they
have read a copy of this Agreement, and that, in making the examination
necessary to said certification, they have obtained no knowledge of any Default,
or, if such accountants shall have obtained knowledge of any then existing
Default they shall

 

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disclose in such statement any such Default; PROVIDED that such accountants
shall not be liable to the Lenders for failure to obtain knowledge of any
Default;

 

(b)                                 as soon as practicable, but in any event not
later than forty-five (45) days after the end of each of the fiscal quarters of
the Borrowers, copies of the unaudited consolidated balance sheets of FAO and
its Subsidiaries as at the end of such quarter, and the related consolidated
statements of income and of cash flow for the portion of the Borrowers’ fiscal
year then elapsed, all in reasonable detail and prepared in accordance with
GAAP, together with a certification by the principal financial or accounting
officer of the Borrowers that the information contained in such financial
statements fairly presents the financial position of FAO and its Subsidiaries on
the date thereof (subject to year-end adjustments);

 

(c)                                  as soon as practicable, but in any event
within thirty (30) days after the end of each month in each fiscal year of the
Borrowers, unaudited monthly consolidated balance sheet and statement of cash
flow and consolidated and consolidating income statements of FAO and its
Subsidiaries for such month prepared in accordance with GAAP, together with a
certification by the principal financial or accounting officer of the Borrowers
that the information contained in such financial statements fairly presents the
financial condition of FAO and its Subsidiaries on the date thereof (subject to
year-end adjustments);

 

(d)                                 simultaneously with the delivery of the
financial statements referred to in subsection (c) above, a statement certified
by the principal financial or accounting officer of FAO in substantially the
form of EXHIBIT E hereto (a “COMPLIANCE CERTIFICATE”) and setting forth in
reasonable detail computations evidencing compliance with the covenants
contained in Section 10 and (if applicable) reconciliations to reflect changes
in GAAP since the Balance Sheet Date;

 

(e)                                  promptly after the filing or mailing
thereof, copies of all material of a financial nature filed with the Securities
and Exchange Commission or sent to the stockholders of FAO.  Further, the
Borrowers shall add the Agent as an addressee on all mailing lists maintained by
or for the Borrowers;

 

(f)                                    by 1:00 p.m. (Boston time) daily on each
Business Day a Borrowing Base Report setting forth the Borrowing Base and the
Tranche B Borrowing Base as at the end of the preceding day;

 

(g)                                 from time to time upon request of the Agent,
and not later than January 31 in each year, updated, consolidated projections of
FAO and its Subsidiaries for the succeeding fiscal year and updating those
projections delivered to the Lenders and referred to in Section 7.4.3 in form of
SCHEDULE 1.1(a) or, if applicable, updating any later such projections delivered
in response to a request pursuant to this Section 8.4(g);

 

(h)                                 such other reports listed on SCHEDULE 8.4(h)
hereto;

 

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(i)                                     from time to time such other financial
data, information (including accountants, management letters) and copies of
advertising (including copies of all print advertising and duplicate tapes of
all video and radio advertising) as the Agent or any Lender may reasonably
request.

 

8.5.                              NOTICES.

 

8.5.1.                     DEFAULTS.  The Borrowers will promptly notify the
Agent and each of the Lenders if the Borrowers are in Default, together with a
reasonably detailed description thereof, and the actions the Borrowers propose
to take with respect thereto.  If any Person shall give any notice or take any
other action in respect of a claimed default (whether or not constituting a
Default) under this Agreement or any other note, evidence of indebtedness,
indenture or other material obligation to which or with respect to which the
Borrowers or any of their Subsidiaries is a party or obligor, whether as
principal, guarantor, surety or otherwise, the Borrowers shall forthwith give
written notice thereof to the Agent and each of the Lenders, describing the
notice or action and the nature of the claimed default.

 

8.5.2.                     ENVIRONMENTAL EVENTS.  The Borrowers will promptly
give notice to the Agent and each of the Lenders (a) of any violation of any
Environmental Law that the Borrowers or any of their Subsidiaries reports in
writing or is reportable by such Person in writing (or for which any written
report supplemental to any oral report is made) to any Governmental Authority
and (b) upon any Designated Borrower Officer becoming aware thereof, of any
inquiry, proceeding, investigation, or other action, including a notice from any
agency of potential environmental liability, of any Governmental Authority that
could reasonably have a Material Adverse Effect.

 

8.5.3.                     NOTIFICATION OF CLAIM AGAINST COLLATERAL.  The
Borrowers will, immediately upon any Designated Borrower Officer becoming aware
thereof, notify the Agent and each of the Lenders in writing of any material
setoff, claims (including, with respect to any real estate, environmental
claims), withholdings or other defenses to which any of the Collateral, or the
Agent’s rights with respect to the Collateral, are subject.

 

8.5.4.                     NOTICE OF LITIGATION AND JUDGMENTS.  The Borrowers
will, and will cause each of their Subsidiaries to, give notice to the Agent and
each of the Lenders in writing within fifteen (15) days of any Designated
Borrower Officer becoming aware of any litigation or proceedings threatened in
writing or any pending litigation and proceedings affecting the Borrowers or any
of their Subsidiaries or to which the Borrowers or any of their Subsidiaries is
or becomes a party involving an uninsured claim against the Borrowers or any of
their Subsidiaries that, in each case or in the aggregate, could reasonably be
expected to have a Material Adverse Effect and stating the nature and status of
such litigation or proceedings.  The Borrowers will, and will cause each of
their Subsidiaries to, give notice to the Agent and each of the Lenders, in
writing, in form and detail satisfactory to the Agent, within ten (10) days of
any judgment not covered by

 

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insurance, final or otherwise, against the Borrowers or any of their
Subsidiaries in an amount in excess of $500,000.

 

8.5.5.                     NOTICES CONCERNING INVENTORY COLLATERAL.  The
Borrowers shall provide to the Agent and the Tranche B Lender prompt notice of
(a) any physical count of the Borrowers’ or any of their Subsidiaries’
inventory, together with a copy of the results thereof certified by the
Borrowers or such Subsidiary, (b) any determination by the Borrowers or any of
their Subsidiaries that the inventory levels of the Borrowers or such Subsidiary
are not adequate to meet the sales projections of the Borrowers or such
Subsidiary, (c) initial details of and changes to all credit card processor
agreements to which the Borrowers or any of their Subsidiaries is from time to
time a party, including details from time to time relating to the Borrowers’ or
such Subsidiary’s compliance with the terms of payment to the Fleet
Concentration Account of the proceeds of all credit card charges for sales by
the Borrowers or such Subsidiary, and (d) any failure of the Borrowers or any of
their Subsidiaries to pay rent at any location, which failure continues for more
than three (3) days following the day on which such rent is due and payable by
the Borrowers or such Subsidiary.  If so requested by the Agent or any Lender,
the Borrowers shall provide to the Agent or such Lender copies of all
advertising by the Borrowers or any of their Subsidiaries including copies of
all print advertising and duplicate tapes of all video and radio advertising.

 

8.5.6.                     CHANGE IN OFFICERS OR ACCOUNTANTS.  The Borrowers
shall provide to the Agent prompt notice of any change in the Borrowers’
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) or
any intention on the part of the Borrowers to discharge the Borrowers’ present
independent accountants or any withdrawal or resignation by such independent
accountants from their acting in such capacity.

 

8.6.                              LEGAL EXISTENCE; MAINTENANCE OF PROPERTIES. 
The Borrowers will do or cause to be done all things commercially reasonable to
preserve and keep in full force and effect their legal existence, rights and
franchises and those of their Subsidiaries and will not, and will not cause or
permit any of their Subsidiaries (other than Targoff) to, convert to a limited
liability company or a limited liability partnership.  The Borrowers (i) will
cause all of their properties and those of their Subsidiaries used or useful in
the conduct of their business or the business of their Subsidiaries to be
maintained and kept in good condition, repair and working order and supplied
with all necessary equipment, (ii) will cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof, all as in the
judgment of the Borrowers may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times,
and (iii) will, and will cause each of their Subsidiaries to, continue to engage
primarily in the businesses now conducted by them and in related businesses;
PROVIDED that (x) nothing in this Section 8.6 shall prevent the Borrowers from
discontinuing the operation and maintenance of any of their properties or any of
those of their Subsidiaries if such discontinuance is, in the judgment of the
Borrowers, desirable in the conduct of its or their business and that do not in
the aggregate have a Material Adverse Effect,

 

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and (y) so long as no Default or Event of Default then exists, The Right Start
Subsidiary I, Inc. may be dissolved.

 

8.7.                              INSURANCE.

 

8.7.1.                     MAINTENANCE OF INSURANCE.  SCHEDULE 8.7.1 hereto, is
a schedule of all insurance policies owned by the Borrowers or under which the
Borrowers are the named insured.  Each of such policies is in full force and
effect.  The Borrowers will maintain with financially sound and reputable
insurers insurance with respect to its properties and business against such
casualties and contingencies as shall be in accordance with general practices of
businesses engaged in similar activities in similar geographic areas.  Such
insurance shall be in such minimum amounts that the Borrowers will not be deemed
a co-insurer under applicable insurance laws, regulations and policies and
otherwise shall be in such amounts, contain such terms, be in such forms and be
for such periods as may be reasonably satisfactory to the Agent.  In addition,
all such insurance shall be payable to the Agent as loss payee under a
“standard” or “New York” loss payee clause for the benefit of the Lenders and
the Agent and shall not include any “loss payee” or similar  endorsement in
favor of any other Person, or any endorsement adversely affecting the Agent’s
rights in any of the Collateral or any proceeds thereof.  Without limiting the
foregoing, the Borrowers will (a) keep all of their physical property insured
with casualty or physical hazard insurance on an “all risks” basis, with broad
form flood and earthquake coverages and electronic data processing coverage,
with a full replacement cost endorsement and an “agreed amount” clause in an
amount equal to 100% of the full replacement cost of such property, (b) maintain
all such workers’ compensation or similar insurance as may be required by law
and (c) maintain, in amounts and with deductibles equal to those generally
maintained by businesses engaged in similar activities in similar geographic
areas, general public liability insurance against claims of bodily injury, death
or property damage occurring, on, in or about the properties of the Borrowers;
business interruption insurance; and product liability insurance.

 

8.7.2.                     INSURANCE PROCEEDS.  The proceeds of any casualty
insurance in respect of any casualty loss of any of the Collateral shall,
subject to the rights, if any, of other parties with an interest having priority
in the property covered thereby, (a) so long as no Default exists and to the
extent that the amount of such proceeds is less than $100,000, be disbursed to
the Borrowers for direct application by the Borrowers solely to the repair or
replacement of the Borrowers’ property so damaged or destroyed and (b) in all
other circumstances, be held by the Agent as cash collateral for the
Obligations.  The Agent may, at its sole option, disburse from time to time all
or any part of such proceeds so held as cash collateral, upon such terms and
conditions as the Agent may reasonably prescribe, for direct application by the
Borrowers solely to the repair or replacement of the Borrowers’ property so
damaged or destroyed, or the Agent may apply all or any part of such proceeds to
the Obligations with the Commitment (if not then terminated) being reduced by
the amount so applied to the Obligations.

 

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8.7.3.                     CONTINUATION OF INSURANCE.  All policies of insurance
required hereunder shall provide for at least sixty (60) days prior written
cancellation notice to the Agent.  In the event of failure by the Borrowers to
provide and maintain insurance as herein provided, the Agent may, at its option,
provide such insurance and charge the amount thereof to the Borrowers.  The
Borrowers shall furnish the Agent with certificates of insurance and policies
evidencing compliance with the foregoing insurance provision.

 

8.8.                              TAXES.  The Borrowers will, and will cause
each of their Subsidiaries to, duly pay and discharge, or cause to be paid and
discharged, before the same shall become overdue, all taxes, assessments and
other governmental charges imposed upon it and its real estate, sales and
activities, or any part thereof, or upon the income or profits therefrom, as
well as all claims for labor, materials, or supplies that if unpaid would by law
become a Lien or charge upon any of its property; PROVIDED that any such tax,
assessment, charge, levy or claim need not be paid if the validity or amount
thereof shall currently be contested in good faith by appropriate proceedings
and if the Borrowers or such Subsidiary shall have set aside on its books
adequate reserves with respect thereto; and PROVIDED FURTHER that the Borrowers
and each Subsidiary of the Borrowers will pay all such taxes, assessments,
charges, levies or claims forthwith upon the commencement of proceedings to
foreclose any Lien that may have attached as security therefor.

 

8.9.                              INSPECTION OF PROPERTIES AND BOOKS, ETC.

 

8.9.1.                     GENERAL.  The Borrowers shall permit the Lenders,
through the Agent or any of the Lenders’ other designated representatives, to
visit and inspect any of the properties of the Borrowers or any of their
Subsidiaries, to examine the books of account of the Borrowers and their
Subsidiaries (and to make copies thereof and extracts therefrom, duplicate,
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
Borrowers, or any service bureau, contractor, accountant, or other person), and
to discuss the affairs, finances and accounts of the Borrowers and their
Subsidiaries with, and to be advised as to the same by, its and their officers,
and to conduct examinations and verifications (whether by internal commercial
finance examiners or independent auditors) of all components included in the
Borrowing Base, all at such reasonable times and intervals as the Agent or any
Lender may reasonably request.  The Agent may, at the Borrowers’ expense,
participate in or observe any physical count of inventory included in the
Collateral without unreasonable interference.

 

8.9.2                        COLLATERAL REPORTS; PHYSICAL INVENTORIES.

 

(a)                                  Not less frequent than four (4) times
during each calendar year (or more in the discretion and upon the request of the
Agent), the Borrowers will obtain and deliver to the Agent, or, if the Agent so
elects, will cooperate with the Agent in the Agent’s obtaining, a report of an
independent collateral auditor reasonably satisfactory to the Agent (which may
be affiliated with one of the Lenders) with respect to the Accounts Receivable
and inventory components included in the Borrowing Base, which report shall
indicate whether or not the information set forth in the Borrowing Base Report
most recently delivered is

 

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accurate and complete in all material respects based upon a review by such
auditors of the Accounts Receivable (including verification with respect to the
amount, aging, identity and credit of the respective account debtors and the
billing practices of the Borrowers or their applicable Subsidiary) and inventory
(including verification as to the value, location and respective types).  All
such collateral value reports shall be conducted and made at the expense of the
Borrowers; PROVIDED so long as no Default has occurred and is continuing and the
Borrowers have been cooperative in providing information in a timely manner, the
Borrowers shall only be liable for amounts in respect of up to and including six
(6) such collateral value reports in each calendar year, conducted while no
Default exists, in an aggregate amount not exceeding $48,000 plus all
out-of-pocket expenses in any calendar year.

 

(b)                                 The Borrowers, at their own expense, shall
cause not less than two (2) physical inventories to be undertaken in each twelve
(12) month period during which this Agreement is in effect (the spacing of the
scheduling of which inventories shall be subject to the Agent’s reasonable
discretion) conducted by such inventory takers as are satisfactory to the Agent
and following such methodology as may be reasonably satisfactory to the Agent. 
The Borrowers shall provide the Agent with a copy of the preliminary results of
each such inventory (as well as of any other physical inventory undertaken by
the Borrowers) within ten (10) days following the completion of such inventory. 
The Borrowers, within thirty (30) days following the completion of such
inventory, shall provide the Agent with a reconciliation of the results of each
such inventory (as well as of any other physical inventory undertaken by the
Borrowers) and shall post such results to the Borrowers’ stock ledger and, as
applicable to the Borrowers’ other financial books and records.  The Agent, in
its reasonable discretion, if a Default exists, may cause such additional
inventories to be taken as the Agent determines (each, at the expense of the
Borrowers).

 

8.9.3.                     APPRAISALS.  Not less frequently than four (4) times
during each calendar year, in the discretion and upon the request of the Agent,
the Borrowers will obtain and deliver to the Agent appraisal reports in form and
substance reasonably satisfactory to the Agent stating the then current fair
market orderly liquidation and forced liquidation values of all or any portion
of the Inventory.  Upon the request of the Agent or the Tranche B Lender, the
Borrowers will obtain and deliver to the Agent appraisal reports in form and
substance and from appraisers reasonably satisfactory to the Agent, stating (a)
the then current fair market, orderly liquidation and forced liquidation values
of all or any portion of the Inventory, Accounts Receivable, the equipment or
other assets owned by the Borrowers or any of their Subsidiaries and (b) the
then current business value of each of the Borrowers and their Subsidiaries. 
All such appraisals shall be conducted and made at the expense of the Borrowers;
PROVIDED so long as no Default has occurred and is continuing and the Borrowers
have been cooperative in providing information in a timely manner, the Borrowers
shall only be liable for amounts in respect of up to and including six (6) such
appraisals in each calendar year, conducted

 

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while no Default exists, in an aggregate amount not exceeding $270,000 plus all
out-of-pocket expenses in any calendar year.

 

8.9.4.                     COMMUNICATIONS WITH ACCOUNTANTS AND OTHER PERSONS. 
Upon reasonable prior notice to the Borrowers’ Representative, the Borrowers
authorize the Agent and, if accompanied by the Agent, the Lenders to communicate
directly with the Borrowers’ independent certified public accountants, service
bureau, contractors and other Persons, and authorizes such accountants, service
bureaus, contractors and other Persons to disclose to the Agent and the Lenders
any and all financial statements and other supporting financial documents and
schedules including copies of any management letter with respect to the
business, financial condition and other affairs of the Borrowers or any of their
Subsidiaries, subject to existing obligations of confidentiality.  At the
request of the Agent, the Borrowers shall deliver a letter addressed to such
accountants, service bureaus, contractors and other Persons instructing them to
comply with the provisions of this Section 8.9.5.

 

8.10.                        COMPLIANCE WITH LAWS, CONTRACTS, LICENSES, AND
PERMITS.  Except as set forth on SCHEDULE 8.10 hereto, the Borrowers will, and
will cause each of their Subsidiaries to, comply with (a) the applicable laws
and regulations wherever its business is conducted, including all Environmental
Laws except where the failure to so comply could not reasonably be expected to
have a Material Adverse Effect, (b) the provisions of its Governing Documents or
the FAO Trademark License, (c) any and all agreements and instruments by which
it or any of its properties may be bound, except where the failure to so comply
could not reasonably be expected in the aggregate to have a Material Adverse
Effect, (d) all material terms and conditions of any and all agreements with
Host Stores, except where the failure to do so does not result in the Host Store
asserting monetary claim or asserting the right to terminate such Host Store
agreement, and (e) all applicable decrees, orders, and judgments.  If any
authorization, consent, approval, permit or license from any officer, agency or
instrumentality of any government shall become necessary or required in order
that the Borrowers or any of their Subsidiaries may fulfill any of its
obligations hereunder or any of the other Loan Documents to which the Borrowers
or such Subsidiary is a party, the Borrowers will, or (as the case may be) will
cause such Subsidiary to, immediately take or cause to be taken all reasonable
steps within the power of the Borrowers or such Subsidiary to obtain such
authorization, consent, approval, permit or license and furnish the Agent and
the Lenders with evidence thereof.

 

8.11.                        EMPLOYEE BENEFIT PLANS.  The Borrowers will (a)
promptly upon request of the Agent, furnish to the Agent a copy of the most
recent actuarial statement required to be submitted under Section 103(d) of
ERISA and Annual Report, Form 5500, with all required attachments, and a copy of
the most recent annual report filed with the PBGC under Section 4065 of ERISA,
in respect of each Guaranteed Pension Plan, and (b) promptly upon receipt or
dispatch, furnish to the Agent any notice, report or demand sent or received in
respect of a Guaranteed Pension Plan under Sections 302(f)(4), 4041, 4042, 4043,
4063, 4066 and 4068 of ERISA, or in respect of a Multiemployer Plan under
Section 4041A, 4202, 4219, 4242, or 4245 of ERISA.

 

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8.12.                        USE OF PROCEEDS.  The Borrowers will use the
proceeds of the Loans and obtain Letters of Credit solely for the purposes set
forth in Section 7.17.1.

 

8.13.                        ADDITIONAL SUBSIDIARIES.  If any Subsidiary is
formed or acquired by any of the existing or future Borrowers after the Closing
Date, the Borrower’s Representative will notify the Agent thereof and (a) the
Borrowers will cause such Subsidiary to be wholly-owned by one of the Borrowers
and to become a Borrower hereunder and a party to each applicable Security
Document in the manner provided therein within ten (10) days after such
Subsidiary is formed or acquired and promptly take such actions to create and
perfect Liens on such Subsidiary’s assets to secure the Obligations as the Agent
shall reasonably request and (b) the Borrower will cause all shares of Capital
Stock of such Subsidiary and Indebtedness of such Subsidiary owed to any
Borrower to be pledged within ten (10) days after such Subsidiary is formed or
acquired.

 

8.14.                        BANK ACCOUNTS.

 

8.14.1.               GENERAL.  On or prior to the Closing Date, the Borrowers
will, and will cause each of its Subsidiaries to, (a) establish a depository
account (the “FLEET CONCENTRATION ACCOUNT”) under the control of the Agent for
the benefit of the Lenders and the Agent, in the name of the Borrowers, (b)
cause all Receipts or cash proceeds of Accounts Receivable to be deposited only
into Local Accounts or Interim Concentration Accounts and, if applicable, lock
box agreements or the Fleet Concentration Account; PROVIDED that monies may
continue to be deposited into existing deposit accounts at Bank of America, N.A.
for up to ninety (90) days after the date hereof if all monies therein are swept
and wired each Business Day to the Fleet Concentration Account, and within such
90-day period the Borrowers shall close such deposit accounts and transfer such
depositary relationship (and the monies in such deposit accounts) to an Interim
Concentration Account, (c) direct all depository institutions with Local
Accounts to cause all funds held in each such Local Account to be transferred no
less frequently than two (2) times per week to, and only to, an Interim
Concentration Account or the Fleet Concentration Account pursuant to an
irrevocable DDA Notification, (d) direct all depository institutions with
Interim Concentration Accounts to cause all funds of the Borrowers and their
Subsidiaries held in such Interim Concentration Accounts to be transferred daily
to, and only to, the Fleet Concentration Account, and (e) at all times ensure
that immediately upon the Borrowers’ or any of their Subsidiaries’ receipt of
any funds constituting or cash proceeds of any Collateral, all such amounts
shall have been deposited in a Local Account (subject to the limitations in the
definition thereof), an Interim Concentration Account or the Fleet Concentration
Account.

 

8.14.2.               ACKNOWLEDGMENT OF APPLICATION.  The Borrowers hereby agree
that all amounts received by the Agent in the Fleet Concentration Account will
be the sole and exclusive property of the Agent, for the accounts of the Lenders
and the Agent, to be applied in accordance Section 2.14 or Section 2.15 as
applicable.

 

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8.15.                        COVENANTS CONCERNING COLLATERAL, ETC.  The
Borrowers further covenant with the Lenders and the Agent as follows: (a) the
Collateral, to the extent not delivered to the Agent pursuant to Section 6, will
be kept at those locations listed on the Perfection Certificate and the
Borrowers will not remove the Collateral from such locations, without providing
at least thirty (30) days prior written notice to the Agent, (b) except for the
security interest herein granted and other Permitted Liens, the Borrowers shall
be the owners of the Collateral free from any right or claim of any other person
or any Lien, and the Borrowers shall defend the same against all claims and
demands of all persons at any time claiming the same or any interests therein
adverse to the Agent or any of the Lenders, (c) the Borrowers shall not pledge,
mortgage or create, or suffer to exist any right of any person in or claim by
any person to the Collateral, or any Lien in the Collateral in favor of any
person, other than the Agent and the Permitted Liens, (d) the Borrowers will
keep the Collateral in good order and repair and will not use the same in
violation of law or any policy of insurance thereon, (e) the Borrowers will pay
promptly when due all taxes, assessments, governmental charges and levies upon
the Collateral or incurred in connection with the use or operation of the
Collateral or incurred in connection with this Agreement and (f) the Borrowers
will continue to operate, their business in compliance with all applicable
provisions of the federal Fair Labor Standards Act, as amended, and with all
applicable provisions of federal, state and local statutes and ordinances
dealing with the control, shipment, storage or disposal of hazardous materials
or substances, in each case as to (f) where their failure to do so could
reasonably be expected to result in a Material Adverse Effect.  No sale of
Inventory shall be on consignment, approval, or under any other circumstances
such that, with the exception of the Borrowers’ customary return policy
applicable to the return of inventory purchased by the Borrowers’ retail
customers in the ordinary course, such Inventory may be returned to the
Borrowers without the consent of the Agent.  The Borrowers may grant such
allowances or other adjustments to the Borrowers’ account debtors as the
Borrowers may reasonably deem to accord with sound business practice, PROVIDED,
HOWEVER, the authority granted the Borrowers pursuant to this Section 8.15 may
be limited or terminated by the Agent at any time in the Agent’s reasonable
discretion.

 

8.16.                        FURTHER ASSURANCES.

 

(a)                                  The Borrowers will, and will cause each of
their Subsidiaries to, cooperate with the Lenders and the Agent and execute such
further instruments and documents as the Lenders or the Agent shall reasonably
request to carry out to their reasonable satisfaction the transactions
contemplated by this Agreement and the other Loan Documents.

 

(b)                                 The Borrowers will within sixty (60) days
after the date hereof either (i) obtain a waiver or subordination agreement in
favor of the Agent from Chase Merchant Services LLC with respect to any Lien in
its or any affiliate’s favor relating to its arrangements with the Borrowers in
form and substance reasonably satisfactory to the Agent and the Tranche B
Lender, or (ii) terminate such arrangements and enter into another Visa and
Mastercard merchant services bankcard agreement with another Person in form and
substance reasonably acceptable to the Agent.

 

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(c)                                  The Borrowers will within ninety (90) days
after the date hereof close its deposit accounts at Bank of America, N.A. and
transfer such deposit relationships (and the remaining monies  therein) to
Interim Concentration Accounts.

 

9.                                       CERTAIN NEGATIVE COVENANTS.  The
Borrowers covenant and agree that, so long as any Loan, Unpaid Reimbursement
Obligation, Letter of Credit or Note is outstanding or any Lender has any
obligation to make any Loan or the Agent or Letter of Credit Issuer has any
obligation to issue, extend or renew any Letter of Credit:

 

9.1.                              RESTRICTIONS ON INDEBTEDNESS.  The Borrowers
will not, and will not permit any of their Subsidiaries to, create, incur,
assume, guarantee or be or remain liable, contingently or otherwise, with
respect to any Indebtedness other than:

 

(a)                                  Indebtedness to the Lenders, the Letter of
Credit Issuer and the Agent arising under any of the Loan Documents;

 

(b)                                 endorsements for collection, deposit or
negotiation and warranties of products or services, in each case incurred in the
ordinary course of business;

 

(c)                                  Indebtedness incurred in connection with
the acquisition after the date hereof (or purchase money indebtedness assumed in
connection with an acquisition after the date hereof consented to in writing by
the Required Revolving Credit Lenders and the Tranche B Lender, which consent
shall not be unreasonably withheld) of any personal property (other than
Inventory) by the Borrowers or such Subsidiary or under any Capitalized Lease
entered into after the date hereof and any Refinancing of the foregoing,
PROVIDED that the aggregate principal amount of such Indebtedness of the
Borrowers and their Subsidiaries shall not exceed the aggregate amount of
$2,000,000 at any one time;

 

(d)                                 the KBB Existing Indebtedness and the Kayne
Existing Indebtedness, and any Refinancings thereof, in each case subject to an
intercreditor and subordination agreement acceptable in form and substance to
the Agent and the Tranche B Lender, and the PNC Existing Indebtedness, and any
Refinancing thereof, subject to an intercreditor agreement acceptable in form
and substance to the Agent and the Tranche B Lender;

 

(e)                                  Indebtedness of a Borrower to another
Borrower, evidenced by promissory notes, in form and substance acceptable to the
Agent, pledged and delivered to the Agent pursuant to the Security Documents
(the “INTERCOMPANY NOTES”);

 

(f)                                    the Kayne Credit Support Indebtedness and
the Equipment Financing Indebtedness, and any Refinancings thereof, subject to
an intercreditor and subordination agreement acceptable in form and substance to
the Agent and the Tranche B Lender, PROVIDED the principal amount outstanding of
such Indebtedness, together with the Kayne Existing Indebtedness and the
Indebtedness incurred in connection with sale leasebacks of Equipment permitted
under Section 9.6 hereof, does not exceed $20,000,000 in principal amount
outstanding at any time;

 

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(g)                                 surety bond obligations incurred in the
ordinary course of business and not in connection with the incurrence of
Indebtedness in an aggregate principal amount not exceeding $150,000 at any
time;

 

(h)                                 unsecured Subordinated Debt on terms and
conditions acceptable to the Agent and the Tranche B Lender, in their
discretion, including without limitation subordination terms pursuant to an
intercreditor and subordination agreement acceptable in form and substance to
the Agent and the Tranche B Lender, and Refinancings thereof;

 

(i)                                     guarantees of Leases of other Borrowers
in the ordinary course of business; and

 

(j)                                     obligations relating to the three
existing standby letters of credit issued by Wells Fargo Bank, N.A. with an
aggregate face amount of $1,303,560 and the one existing standby letter of
credit by First Union National Bank, with a face amount of $230,000, all as more
particularly described on SCHEDULE 9.1 hereto.

 

9.2.                              RESTRICTIONS ON LIENS.

 

9.2.1.                     PERMITTED LIENS.  The Borrowers will not, and will
not permit any of their Subsidiaries to, (a) create or incur or suffer to be
created or incurred or to exist any Lien upon any of their property or assets of
any character whether now owned or hereafter acquired, or upon the income or
profits therefrom; (b) transfer any of such property or assets or the income or
profits therefrom for the purpose of subjecting the same to the payment of
Indebtedness or performance of any other obligation in priority to payment of
its general creditors; (c) acquire, or agree or have an option to acquire, any
property or assets upon conditional sale or other title retention or purchase
money security agreement, device or arrangement; (d) suffer to exist for a
period of more than thirty (30) days after the same shall have been incurred any
Indebtedness or claim or demand against it that if unpaid could by law or upon
bankruptcy or insolvency, or otherwise, be given any priority whatsoever over
its general creditors; or (e) sell, assign, pledge or otherwise transfer any
“RECEIVABLES” as defined in clause (g) of the definition of the term
“INDEBTEDNESS,” with or without recourse; PROVIDED that the Borrowers or any of
their Subsidiaries may create or incur or suffer to be created or incurred or to
exist:

 

(i)                                     Liens to secure taxes, assessments and
other government charges in respect of obligations not yet due and payable or
which are the subject of a Permitted Protest;

 

(ii)                                  deposits or pledges made in connection
with, or to secure payment of, workmen’s compensation, unemployment insurance,
old age pensions or other social security obligations;

 

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(iii)                               Liens on properties in respect of judgments
or awards that have been in force for less than the applicable period for taking
an appeal so long as execution is not levied thereunder or in respect of which
the Borrowers or such Subsidiary shall at the time in good faith be prosecuting
an appeal or proceedings for review and in respect of which a stay of execution
shall have been obtained pending such appeal or review;

 

(iv)                              Liens arising by operation of law in favor of
carriers, warehousemen, mechanics and materialmen, and other like Liens on
properties, in existence less than one hundred twenty (120) days from the date
of creation thereof in respect of obligations not overdue incurred in the
ordinary course of business and not in connection with the incurrence of
Indebtedness;

 

(v)                                 Liens arising from deposits made in
connection with obtaining workers compensation or other unemployment insurance
or other social security legislation;

 

(vi)                              Liens or deposits to secure performance of
bids, tenders, utility contracts or Leases (to the extent not prohibited under
this Agreement) incurred in the ordinary course of business of the Borrowers and
not in connection with the incurrence of Indebtedness;

 

(vii)                           A Lien on the existing and hereafter acquired
assets of FAO and Schwarz in favor of the KBB Existing Indebtedness Holders to
secure the KBB Existing Indebtedness, to the extent allowed under and pursuant
to the Plan of Reorganization, in favor of the KBB Existing Indebtedness
Holders, subordinated to the Agent pursuant to an intercreditor and
subordination agreement acceptable to the Agent and the Tranche B Lender;

 

(viii)                        A Lien on the existing Equipment (as of the
Closing Date), other than Equipment subject to the PNC Existing Lien, of FAO,
Schwarz and ZB in favor of the Kayne Existing Indebtedness Holders, securing the
Kayne Existing Indebtedness, to the extent allowed under and pursuant to the
Plan of Reorganization, and securing, if hereafter incurred, the Kayne Credit
Support Indebtedness and the Equipment Financing Indebtedness to the extent
permitted hereunder, superior to the Lien of the Agent in such Equipment, but
subject in each case to an intercreditor and subordination agreement in form and
substance acceptable to the Agent and the Tranche B Lender;

 

(ix)                                The PNC Existing Lien securing the PNC
Existing Indebtedness, to the extent allowed under and pursuant to the Plan of
Reorganization, subject to an intercreditor agreement in form and substance
acceptable to the Agent and the Tranche B Lender;

 

(x)                                   purchase money security interests in
personal property (other than Inventory) acquired after the date hereof to
secure purchase money Indebtedness

 

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of the type and amount permitted by Section 9.1(c) (including without limitation
Capitalized Leases), incurred in connection with the acquisition of such
personal property, which security interests cover only the personal property so
acquired;

 

(xi)                                Liens in favor of the Agent for the benefit
of the Lenders and the Agent under the Loan Documents;

 

(xii)                             Liens of a bank or financial institution with
respect to funds deposited with such institution;

 

(xiii)                          Liens replacing existing Liens pursuant to a
Refinancing permitted hereunder (if such original Lien was permitted hereunder
to secure the Indebtedness refinanced thereby);

 

(xiv)                         Liens on specific assets (and not Inventory,
Accounts or so-called “blanket” Liens) arising by reason of security for the
surety bond obligations permitted under Section 9.1(g);

 

(xv)                            Liens in favor of customs brokers in the
ordinary course of business, provided the Agent has received from such customs
brokers customs broker agreements in favor of the Agent, reasonably satisfactory
in form and substance to the Agent and the Tranche B Lender;

 

(xvi)                         Liens of credit card processors to secure credit
card processing services, provided such Lien is subordinated to the Lien of the
Agent on written terms reasonably satisfactory to the Agent and the Tranche B
Lender; and

 

(xvii)                      cash collateral in the amount of $230,000 in favor
of First Union National Bank, securing its standby letter of credit described in
SCHEDULE 9.1.

 

9.2.2.                     RESTRICTIONS ON NEGATIVE PLEDGES AND UPSTREAM
LIMITATIONS.  The Borrowers will not, nor will it permit any of their
Subsidiaries to (a) enter into or permit to exist any arrangement or agreement
(excluding the Agreement and the other Loan Documents) which directly or
indirectly prohibits the Borrowers or any of their Subsidiaries from creating,
assuming or incurring any Lien upon its properties, revenues or assets or those
of any of their Subsidiaries whether now owned or hereafter acquired, or (b)
enter into any agreement, contract or arrangement (excluding the Agreement and
the other Loan Documents) restricting the ability of any Subsidiary of the
Borrowers to pay or make dividends or distributions in cash or kind to the
Borrowers, to make loans, advances or other payments of whatsoever nature to the
Borrowers, or to make transfers or distributions of all or any part of its
assets to the Borrowers; in each case other than (i) restrictions on specific
assets and agreements which assets and agreements are the subject of purchase
money security interests to the extent permitted under Section 9.2.1, and (ii)
customary anti-assignment provisions contained in leases and licensing and
ordinary course agreements entered into by the Borrowers or such Subsidiary in
the ordinary course of its business.

 

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9.3.                              RESTRICTIONS ON INVESTMENTS.  The Borrowers
will not, and will not permit any of their Subsidiaries to, make or permit to
exist or to remain outstanding any Investment except Investments in:

 

(a)                                  Cash Equivalents;

 

(b)                                 Investments existing on the date hereof and
listed on SCHEDULE 9.3 hereto;

 

(c)                                  The existing Investment of Right Start in
its Subsidiary, The Right Start Subsidiary I, Inc. as of the Closing Date;

 

(d)                                 Investments by the Borrowers in each other;

 

(e)                                  Investments consisting of promissory notes
received as proceeds of asset dispositions permitted by Section 9.5.2;

 

(f)                                    Investments with respect to Indebtedness
permitted under Section 9.1(e) provided such Borrowers remain Borrowers and
remain Subsidiaries hereunder;

 

(g)                                 Investments consisting of loans and advances
to employees for moving, entertainment, travel and other similar expenses in the
ordinary course of business not to exceed $500,000 in the aggregate at any time
outstanding; and

 

(h)                                 guarantees permitted under Section 9.1(i).

 

PROVIDED, HOWEVER, that, such Investments will be considered Investments
permitted by this Section 9.3 only if all actions have been taken to the
satisfaction of the Agent to provide to the Agent, for the benefit of the
Lenders and the Agent, a first priority perfected security interest in all of
such Investments free of all Liens other than Permitted Liens.

 

9.4.                              RESTRICTED PAYMENTS; PAYMENTS ON OTHER
INDEBTEDNESS.  (a) The Borrowers will not make any Restricted Payments; PROVIDED
THAT the Borrowers which are wholly-owned Subsidiaries may make Distributions to
their parents who are Borrowers and, so long as no Default or Event of Default
then exists or could reasonably be expected to result therefrom, the Borrowers
may make the following other Restricted Payments:

 

(i)                                     (1) regularly scheduled payments of
interest when due (beginning on January 11, 2005 and quarterly thereafter) on
the KBB Existing Indebtedness evidenced by the “New KBB Subordinated Note”, and
(2) when due pursuant to the Plan of Reorganization, the $500,000 cash payment
to KBB; PROVIDED the Borrowers’ obligations owed with respect to the Emergence
Vendor Liabilities are current as required by the Plan of Reorganization;

 

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(ii)                                  regularly scheduled payments when due in
accordance with and pursuant to the Plan of Reorganization on the Emergence
Vendor Liabilities;

 

(iii)                               when due in accordance with and pursuant to
the Plan of Reorganization, the interest and principal payment due on the Kayne
Existing Indebtedness; PROVIDED the Borrowers’ obligations owed with respect to
the Emergence Vendor Liabilities are current as required by the Plan of
Reorganization.

 

(b)                                 The Borrowers will not prepay the PNC
Existing Indebtedness, without the prior written consent of the Required
Lenders.

 

9.5.                              MERGER, CONSOLIDATION AND DISPOSITION OF
ASSETS.

 

9.5.1.                     MERGERS AND ACQUISITIONS.  The Borrowers will not,
and will not permit any of their Subsidiaries to, become a party to any merger,
amalgamation or consolidation, or agree to or effect any asset acquisition or
stock acquisition (other than the acquisition of assets in the ordinary course
of business consistent with past practices) except the merger or consolidation
of one or more of the Subsidiaries of the Borrowers with and into one of the
Borrowers, or the merger or consolidation of two or more Subsidiaries of the
Borrowers.

 

9.5.2.                     DISPOSITION OF ASSETS.  The Borrowers will not, and
will not permit any of their Subsidiaries to, become a party to or agree to or
effect any disposition of assets, other than (a) the sale of inventory, the
licensing of intellectual property and the disposition of obsolete assets, in
each case in the ordinary course of business consistent with past practices, and
(b) the Borrowers may sell Inventory and other assets outside the ordinary
course of business in connection with Permitted Store Closings so long as the
liquidation is conducted by a liquidator and is otherwise on terms and
conditions acceptable to the Agent.

 

9.6.                              SALE AND LEASEBACK.  The Borrowers will not,
and will not permit any of their Subsidiaries to, enter into any arrangement,
directly or indirectly, whereby the Borrowers or any Subsidiary of the Borrowers
shall sell or transfer any property owned by it in order then or thereafter to
lease such property or lease other property that the Borrowers or any Subsidiary
of the Borrowers intends to use for substantially the same purpose as the
property being sold or transferred; PROVIDED that so long as no Default or Event
of Default then exists hereunder or would reasonably be expected to result
therefrom, the Borrowers may enter into sale-leaseback transactions on terms
reasonably acceptable to the Agent with respect to specific Equipment reasonably
acceptable to the Agent so long as the principal amount of the Indebtedness
incurred in connection therewith, together with the Kayne Existing Indebtedness,
the Equipment Financing Indebtedness and Kayne Credit Support Indebtedness does
not exceed $20,000,000 in principal amount at any time; and PROVIDED further
that there shall be no required payments on such Indebtedness prior to one
hundred twenty (120) days after the Maturity Date.

 

9.7.                              COMPLIANCE WITH ENVIRONMENTAL LAWS.  The
Borrowers will not, and will not permit any of their Subsidiaries to, (a) use
any real estate for the handling,

 

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processing, storage or disposal of Hazardous Substances (except in the ordinary
course of business in accordance with applicable Environmental Laws), (b) cause
or permit to be located on any real estate any underground tank or other
underground storage receptacle for Hazardous Substances, (c) generate any
Hazardous Substances (except the use of cleaning solvents used in the ordinary
course of business in accordance with applicable Environmental Laws), (d)
conduct any activity so as to cause a release (i.e., releasing, spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, disposing or dumping) or threatened release of Hazardous Substances
(except the use of cleaning solvents used in the ordinary course of business in
accordance with applicable Environmental Laws), or (e) otherwise conduct any
activity that would violate any Environmental Law.

 

9.8.                              EMPLOYEE BENEFIT PLANS.  Neither the Borrowers
nor any ERISA Affiliate will:

 

(a)                                  engage in any “PROHIBITED TRANSACTION”
within the meaning of Section 406 of ERISA or Section 4975 of the Code which
could result in a material liability for the Borrower or any of its
Subsidiaries; or

 

(b)                                 permit any Guaranteed Pension Plan to incur
an “ACCUMULATED FUNDING DEFICIENCY”, as such term is defined in Section 302 of
ERISA, whether or not such deficiency is or may be waived; or

 

(c)                                  fail to contribute to any Guaranteed
Pension Plan to an extent which, or terminate any Guaranteed Pension Plan in a
manner which, could result in the imposition of a lien or encumbrance on the
assets of the Borrowers or any of their Subsidiaries pursuant to Section 302(f)
or Section 4068 of ERISA; or

 

(d)                                 amend any Guaranteed Pension Plan in
circumstances requiring the posting of security pursuant to Section 307 of ERISA
or Section 401(a)(29) of the Code;

 

(e)                                  permit or take any action which would
result in the aggregate benefit liabilities (with the meaning of Section 4001 of
ERISA) of all Guaranteed Pension Plans exceeding the value of the aggregate
assets of such Plans, disregarding for this purpose the benefit liabilities and
assets of any such Plan with assets in excess of benefit liabilities, by more
than the amount set forth in Section 7.16.3; or

 

(f)                                    permit or take any action which would
contravene any Applicable Pension Legislation.

 

9.9.                              BUSINESS ACTIVITIES; PERMITTED STORE
CLOSINGS.  The Borrowers will not, and will not permit any of their Subsidiaries
to, (a) engage directly or indirectly (whether through Subsidiaries or
otherwise) in any type of business other than the businesses conducted by them
on the Closing Date and, in connection with their existing businesses, in
related businesses, (b) execute, alter, modify, or amend any real estate Lease
in any material adverse way; PROVIDED, HOWEVER, the Borrowers may terminate the
Leases on the retail locations listed on SCHEDULE 9.9 hereto and in connection
with other Permitted Store Closings, (c) except as provided in part (b) hereof,
commit to, or open or close any location at

 

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which any Borrower maintains, offers for sales, or stores any of the Collateral,
(d) possess inventory on consignment or (e) enter into any host store
arrangements with any Host Store without the prior written consent of the Agent
and, then, only if such Host Store has entered into a Host Store
Acknowledgement.  The Borrowers will not permit The Right Start Subsidiary I,
Inc. to engage in any business or to hold any assets (other than Right Start’s
Investment therein as of the Closing Date) or to incur any Indebtedness or other
Liabilities, including without limitation any trade liabilities.  Without the
Agent’s prior written consent, the Borrowers will not; and will not permit any
Subsidiary to, amend, modify or waive any of its rights under (a) its Governing
Documents, (b) the Kayne Existing Indebtedness, the KBB Existing Indebtedness,
any other Subordinated Debt, the PNC Existing Indebtedness or the Plan of
Reorganization, or (c) any agreement with any Host Store, unless such amendment,
modification or waiver to such Host Store agreement does not materially
adversely affect the Borrowers taken as a whole or materially adversely affect
the interests of the Lenders under the Loan Documents.

 

9.10.                        FISCAL YEAR.  The Borrowers will not, and will not
permit any of their Subsidiaries to, change the date of the end of its fiscal
year from that set forth in Section 7.4.1.

 

9.11.                        TRANSACTIONS WITH AFFILIATES.  As of the Closing
Date, each Affiliate of the Borrowers is listed on SCHEDULE 7.19.  The Borrowers
will not, and will not permit any of their Subsidiaries to, engage in any
transaction with any Affiliate (other than for services as employees, officers
and directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
such Affiliate or, to the knowledge of the Borrowers, any corporation,
partnership, trust or other entity in which any such Affiliate has a substantial
interest or is an officer, director, trustee or partner, on terms more favorable
to such Person than would have been obtainable on an arm’s-length basis in the
ordinary course of business.

 

9.12.                        BANK ACCOUNTS.  The Borrowers will not, and will
not permit any of their Subsidiaries to, (a) establish any bank accounts, credit
card clearinghouse or processors, other than those Deposit Accounts,
clearinghouses and processors and other accounts, all listed on SCHEDULE
7.20(a), without the Agent’s prior written consent, (b) violate directly or
indirectly any Blocked Account Agreement or other bank agency or lock box
agreement in favor of the Agent for the benefit of the Lenders and the Agent
with respect to such account, (c) deposit into any of the payroll accounts
listed on SCHEDULE 7.20(a) any amounts in excess of amounts necessary to pay
current payroll obligations from such accounts or (d) change any direction or
designation relating to any credit card clearinghouse or processor.

 

10.                                 FINANCIAL COVENANTS.  The Borrowers covenant
and agree that, so long as any Loan, Unpaid Reimbursement Obligation, Letter of
Credit or Note is outstanding or any Lender has any obligation to make any Loan
or the Agent or Letter of Credit Issuer has any obligation to issue, extend or
renew any Letter of Credit:

 

10.1                           MINIMUM EXCESS AVAILABILITY.  The Borrowers shall
maintain at all times Excess Availability of not less than $5,000,000.

 

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11.                                 CLOSING CONDITIONS.  The obligations of the
Lenders to make the initial Revolving Credit Loans and the Tranche B Loan and of
the Agent and Letter of Credit Issuer to issue any initial Letter of Credit
shall be subject to the satisfaction of the following conditions precedent on or
prior to the Closing Date:

 

11.1.                        LOAN DOCUMENTS.  Each of the Loan Documents shall
have been duly executed and delivered by the respective parties thereto, shall
be in full force and effect and shall be in form and substance satisfactory to
each of the Lenders.  Each Lender shall have received a fully executed copy of
each such document.

 

11.2.                        CERTIFIED COPIES OF GOVERNING DOCUMENTS.  Each of
the Lenders shall have received from the Borrowers a copy, certified by a duly
authorized officer of such Person to be true and complete on the Closing Date,
of each of its Governing Documents as in effect on such date of certification.

 

11.3.                        CORPORATE OR OTHER ACTION.  All corporate (or
other) action necessary for the valid execution, delivery and performance by
each of the Borrowers and each of their Subsidiaries of this Agreement and the
other Loan Documents to which it is or is to become a party shall have been duly
and effectively taken, and evidence thereof satisfactory to the Lenders shall
have been provided to each of the Lenders.

 

11.4.                        INCUMBENCY CERTIFICATE.  Each of the Lenders shall
have received from each of the Borrowers and each of their Subsidiaries an
incumbency certificate, dated as of the Closing Date, signed by a duly
authorized officer of such Borrower or such Subsidiary, and giving the name and
bearing a specimen signature of each individual who shall be authorized: (a) to
sign, in the name and on behalf of each of the Borrowers and each such
Subsidiary, each of the Loan Documents to which such Borrower or such Subsidiary
is or is to become a party; (b) in the case of the Borrowers’ Representative, to
make Loan Requests and Conversion Requests and to apply for Letters of Credit;
and (c) to give notices and to take other action on its behalf under the Loan
Documents.

 

11.5.                        VALIDITY OF LIENS.  The Security Documents shall be
effective to create in favor of the Agent a legal, valid and enforceable first
priority (except for Permitted Liens entitled to priority hereunder or under
applicable law) perfected security interest in and Lien upon the Collateral. 
All filings, recordings, deliveries of instruments and other actions necessary
or desirable in the opinion of the Agent to perfect, protect and preserve such
security interests shall have been duly effected.  The Agent shall have received
evidence thereof in form and substance satisfactory to the Agent.

 

11.6.                        PERFECTION CERTIFICATES AND UCC SEARCH RESULTS. 
The Agent shall have received from each of the Borrowers a completed and fully
executed Perfection Certificate and the results of UCC searches (and the
equivalent thereof in all applicable foreign jurisdictions) with respect to the
Collateral, indicating no Liens other than Permitted Liens and otherwise in form
and substance satisfactory to the Agent.

 

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11.7.                        TAXES.  The Agent shall have received evidence of
payment of real estate taxes and municipal charges on all real estate not
delinquent on or before the Closing Date.

 

11.8.                        PLAN OF REORGANIZATION.  The Agent shall have
received a copy of the final Plan of Reorganization, which Plan of
Reorganization must be reasonably satisfactory to the Agent and the Tranche B
Lender in form and substance.  All conditions precedent to confirmation of such
Plan of Reorganization shall have been met (or any waiver thereof shall have
been consented to in writing by the Agent and the Tranche B Lender), and a Plan
Confirmation Order, in form and substance reasonably satisfactory to the Agent
and the Tranche B Lender, shall have been issued by the U.S. Bankruptcy Court,
District of Delaware, approving the Plan of Reorganization, which Plan
Confirmation Order shall not have been reversed, modified, amended or stayed and
shall be final, with all appeal periods relating thereto having expired (unless
otherwise consented to in writing by the Agent and the Tranche B Lender), and no
appeals from such Plan Confirmation Order shall be outstanding.

 

11.9.                        CAPITAL STRUCTURE.  After giving effect to the Plan
of Reorganization, the capital structure of FAO shall be reasonably satisfactory
to the Agent and the Tranche B Lender in all respects and the Agent and the
Tranche B Lender shall be reasonably satisfied that FAO has received no less
than $25,000,000 in net cash proceeds pursuant to the Securities Purchase
Agreement available to fund the Plan of Reorganization and for ongoing
operations of the Borrowers from a new issuance of Capital Stock, with the terms
of such Capital Stock and the issuance thereof being reasonably satisfactory to
the Agent and the Tranche B Lender.

 

11.10.                  CERTIFICATES OF INSURANCE.  The Agent shall have
received (a) a certificate of insurance from an independent insurance broker
dated within one (1) week prior to the Closing Date, identifying insurers, types
of insurance, insurance limits, and policy terms, and otherwise describing the
insurance obtained in accordance with this Agreement and (b) certified copies of
all policies evidencing such insurance (or certificates therefore signed by the
insurer or an agent authorized to bind the insurer).

 

11.11.                  BLOCKED ACCOUNT AGREEMENTS; CREDIT CARD CLEARING HOUSE. 
The Borrowers shall have established the Fleet Concentration Account, and the
Agent shall have received a Blocked Account Agreement executed by each
depository institution with an Interim Concentration Account or Local Account. 
The Borrowers shall deliver to the Agent, notification, executed on behalf of
the Borrowers, to each of the Borrowers’ credit card clearinghouses and
processors of notice (in the form attached hereto as EXHIBIT F or such other
form reasonably satisfactory to the Agent and the Tranche B Lender), which
notice provides that payment of all credit card charges submitted by the
Borrowers to that clearinghouse or other processor and any other amount payable
to the Borrowers by such clearinghouse or other processor shall be directed to
the Fleet Concentration Account or as otherwise designated from time to time by
the Agent.

 

11.12.                  BORROWING BASE REPORT.  The Agent shall have received
from the Borrowers the initial Borrowing Base Report dated as of the Closing
Date.

 

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11.13.                  MINIMUM DAY ONE AVAILABILITY, ETC.  After giving effect
to the first funding of the Revolving Credit Loans and the Tranche B Loan; the
payment of all emergence expenses contemplated by the Plan of Reorganization;
all then held checks (if any); accounts payable which are beyond credit terms
then accorded the Borrowers; overdrafts; any charges to the Loan Account made in
connection with the establishment of the credit facility contemplated hereby;
and Letters of Credit to be issued at, or immediately subsequent to, such
establishment, Availability shall not be less than $14,000,000.  All post
petition accounts payable and tax liabilities of the Borrowers shall be current,
excluding liabilities contested in good faith and liabilities subject to
compromise.

 

11.14.                  CREDIT CARD ACCOUNTS RECEIVABLE REPORT.  The Agent shall
have received from the Borrowers the most recent Credit Card Accounts Receivable
report of the Borrowers and their Subsidiaries dated as of a date which shall be
no more than five (5) days prior to the Closing Date and the Borrowers shall
have notified the Agent in writing on the Closing Date of any material deviation
from the Credit Card Accounts Receivable values reflected in such Credit Card
Accounts Receivable report and shall have provided the Agent with such
supplementary documentation as the Agent may reasonably request.

 

11.15.                  INTERCREDITOR/SUBORDINATION AND OTHER AGREEMENTS.  The
Agent shall have entered into (a) an intercreditor agreement in form and
substance satisfactory to the Agent and the Tranche B Lender relating to the PNC
Existing Indebtedness and the PNC Existing Lien, and (b) intercreditor and
subordination agreements relating to (i) the Kayne Existing Indebtedness and the
Kayne Existing Lien, and (ii) KBB Existing Indebtedness and the KBB Existing
Lien.  The agreement between the Borrowers and Saks shall be reasonably
satisfactory to the Agent and the Tranche B Lender and the Agent shall have
entered into a Host Store Acknowledgement with Saks relating thereto, in form
and substance reasonably satisfactory to the Agent and the Tranche B Lender.

 

11.16.                  OPINION OF COUNSEL.  Each of the Lenders and the Agent
shall have received a favorable legal opinion addressed to the Lenders and the
Agent, dated as of the Closing Date, in form and substance satisfactory to the
Lenders and the Agent, from:

 

(a)                                  Fulbright & Jaworski L.L.P., counsel to the
Borrowers;

 

(b)                                 Kendrick F. Royer, Esq., general counsel of
the Borrowers; and

 

(c)                                  Koenig & Associates, special trademark and
copyright counsel to the Borrowers.

 

11.17.                  PAYMENT OF FEES.  The Borrowers shall have paid to the
Lenders or the Agent, as appropriate, the Fees pursuant to Section 5.1 and 5.2.

 

11.18                     COMMITMENTS.  The Agent shall have received Revolving
Commitments from Revolving Credit Lenders other than FRFI totalling in the
aggregate no less than $37,500,000.

 

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11.19.                  OTHER ITEMS.  The Borrowers shall have delivered (or
cause to be delivered) the items set forth on the Closing Agenda attached hereto
as SCHEDULE 11.18 (unless waived in writing by the Agent and the Tranche B
Lender).

 

12.                                 CONDITIONS TO ALL BORROWINGS.  The
obligations of the Lenders to make any Loan, including the Revolving Credit Loan
and the Tranche B Loan, and of the Agent to issue, extend or renew any Letter of
Credit, in each case whether on or after the Closing Date, shall also be subject
to the satisfaction of the following conditions precedent:

 

12.1.                        REPRESENTATIONS TRUE; NOT IN DEFAULT.  Each of the
representations and warranties of any of the Borrowers and their Subsidiaries
contained in this Agreement, the other Loan Documents or in any document or
instrument delivered pursuant to or in connection with this Agreement shall be
true as of the date as of which they were made and shall also be true at and as
of the time of the making of such Loan or the issuance, extension or renewal of
such Letter of Credit, with the same effect as if made at and as of that time
(except to the extent of changes resulting from transactions contemplated or
permitted by this Agreement and the other Loan Documents and changes occurring
in the ordinary course of business that singly or in the aggregate are not
materially adverse, and to the extent that such representations and warranties
relate expressly to an earlier date) and no Default shall exist.

 

12.2.                        NO LEGAL IMPEDIMENT.  No change shall have occurred
in any law or regulations thereunder or interpretations thereof that in the
reasonable opinion of any Lender would make it illegal for such Lender to make
such Loan or to participate in the issuance, extension or renewal of such Letter
of Credit or in the reasonable opinion of the Agent would make it illegal for
the Agent to issue, extend or renew such Letter of Credit.

 

12.3.                        PROCEEDINGS AND DOCUMENTS.  All proceedings in
connection with the transactions contemplated by this Agreement, the other Loan
Documents and all other documents incident thereto shall be satisfactory in
substance and in form to the Lenders and to the Agent and the Agent’s Special
Counsel, and the Lenders, the Agent and such counsel shall have received all
information and such counterpart originals or certified or other copies of such
documents as the Agent may reasonably request.

 

12.4.                        BORROWING BASE REPORT.  The Agent shall have
received the most recent Borrowing Base Report required to be delivered to the
Agent in accordance with Section 8.4(f).

 

12.5.                        MATERIAL ADVERSE CHANGE.  There shall have been no
material adverse change in the Borrowers’ financial condition from the most
recent financial information furnished to the Agent or any Lender pursuant to
this Agreement.

 

12.6.                        SALES TAXES.  If requested by the Agent all or a
portion of any Loan will be set aside by the Borrowers to cover the Borrowers’
obligations for sales tax on account of sales since the then most recent
borrowing.

 

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13.                                 EVENTS OF DEFAULT; ACCELERATION; ETC.

 

13.1.                        EVENTS OF DEFAULT AND ACCELERATION.  Each of the
following events (“EVENTS OF DEFAULT”) shall constitute an Event of Default
hereunder:

 

(a)                                  any of the Borrowers or any of their
Subsidiaries shall fail to pay any principal of the Loans or any Reimbursement
Obligation when the same shall become due and payable, whether at the stated
date of maturity or any accelerated date of maturity or at any other date fixed
for payment;

 

(b)                                 any of the Borrowers or any of their
Subsidiaries shall fail to pay any interest on the Loans, any Fees, or other
sums due hereunder or under any of the other Loan Documents, when the same shall
become due and payable, whether at the stated date of maturity or any
accelerated date of maturity or at any other date fixed for payment;

 

(c)                                  any of the Borrowers or any of their
Subsidiaries shall fail to promptly, punctually, faithfully and timely comply
with any of their covenants or liabilities not otherwise described in
Section 13.1(a) or 13.1(b) or 13.1(r), and included in any of the following
provisions:

 

Section Number

 

Section Title

 

8.2

 

Notice of Change of Organization/Maintenance of Office

 

8.5

 

Notices

 

8.6

 

Legal Existence; Maintenance of Properties

 

8.7

 

Insurance

 

8.9

 

Inspection of Properties and Books

 

8.12

 

Use of Proceeds

 

8.15

 

Covenants Concerning Collateral

 

8.16

 

Further Assurances

 

9.1

 

Restrictions on Indebtedness

 

9.2

 

Restrictions on Liens

 

9.3

 

Restrictions on Investments

 

9.4

 

Restricted Payments

 

9.5

 

Merger, Consolidation and Disposition of Assets

 

9.6

 

Sale and Leaseback

 

9.9

 

Business Activities, Permitted Store Closings

 

9.10

 

Fiscal Year

 

9.11

 

Transactions with Affiliates

 

10.1

 

Minimum Excess Availability Covenant

 

 

(d)                                 any of the Borrowers’ failure to promptly,
punctually, faithfully and timely perform, discharge or comply with the
financial requirements included in Section 8.4, subject, however, to the
following limited number of grace periods applicable to certain of these
requirements:

 

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REPORT/STATEMENT

 

REQUIRED
BY SECTION

 

GRACE PERIOD

 

NUMBER OF GRACE
PERIODS

 

Borrowing Base Report

 

8.4(f)

 

One Business Day

 

Three per Fiscal Quarter

 

Monthly Reports (30 Days)

 

8.4(c) and (d)

 

Three Business Days

 

Three in any 12 months

 

 

(e)                                  any of the Borrowers or any of their
Subsidiaries shall fail to perform any other term, covenant or agreement
contained herein or in any of the other Loan Documents (other than those
specified elsewhere in this Section 13.1) for fifteen (15) days after the
earlier of the date a Designated Borrower Officer acquires knowledge of such
failure or written notice of such failure has been given to the Borrowers’
Representative by the Agent;

 

(f)                                    any representation or warranty of any of
the Borrowers or any of their Subsidiaries in this Agreement or any of the other
Loan Documents or in any other document or instrument delivered pursuant to or
in connection with this Agreement shall prove to have been false in any material
respect upon the date when made or deemed to have been made or repeated;

 

(g)                                 any of the Borrowers or any of their
Subsidiaries shall make an assignment for the benefit of creditors, or admit in
writing its inability to pay or generally fail to pay its debts as they mature
or become due, or shall petition or apply for the appointment of a trustee or
other custodian, liquidator or receiver of any of the Borrowers or any of their
Subsidiaries or of any substantial part of the assets of any of the Borrowers or
any of their Subsidiaries or shall commence any case or other proceeding
relating to any of the Borrowers or any of their Subsidiaries under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation or similar law of any jurisdiction, now or hereafter
in effect, or shall take any action to authorize or in furtherance of any of the
foregoing, or if any such petition or application shall be filed or any such
case or other proceeding shall be commenced against any of the Borrowers or any
of their Subsidiaries and any of the Borrowers or any of their Subsidiaries
shall indicate its approval thereof, consent thereto or acquiescence therein or
such petition or application shall not have been dismissed within forty-five
(45) days following the filing thereof;

(h)                                 a decree or order is entered appointing any
such trustee, custodian, liquidator or receiver or adjudicating any of the
Borrowers or any of their Subsidiaries bankrupt or insolvent, or approving a
petition in any such case or other proceeding, or a decree or order for relief
is entered in respect of any of the Borrowers or any Subsidiary of the Borrowers
in an involuntary case under federal bankruptcy laws as now or hereafter
constituted;

 

(i)                                     any of the Borrowers or any of their
Subsidiaries shall (1) fail to pay when due, or within any applicable period of
grace, any payment due with respect to the KBB Existing Indebtedness, the Kayne
Existing Indebtedness, the Kayne Credit Support Indebtedness, the Emergence
Vendor Liabilities in accordance with the Plan of Reorganization, the Equipment
Financing Indebtedness, or the PNC Existing

 

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Indebtedness or any other Indebtedness in excess of $500,000 or, in respect of
any Capitalized Leases, or (2) fail to observe or perform any material term,
covenant or agreement contained in any agreement by which it is bound,
evidencing or securing the KBB Existing Indebtedness, the Kayne Existing
Indebtedness, the Kayne Credit Support Indebtedness, the Emergence Vendor
Liabilities in accordance with the Plan of Reorganization, the Equipment
Financing Indebtedness or the PNC Existing Indebtedness or any other
Indebtedness in excess of $500,000 or, in respect of any Capitalized Leases, in
each case for such period of time as would permit (assuming the giving of
appropriate notice if required) the holder or holders thereof or of any
obligations issued thereunder to accelerate the maturity thereof, or any such
holder or holders shall rescind or shall have a right to rescind the purchase of
any such obligations;

 

(j)                                     there shall remain in force,
undischarged, unsatisfied and unstayed, for more than thirty (30) days, whether
or not consecutive, any final judgment against any of the Borrowers or any of
their Subsidiaries that, with other outstanding final judgments, undischarged,
against the Borrowers or any of their Subsidiaries exceeds in the aggregate
$500,000;

 

(k)                                  if any of the Loan Documents shall be
cancelled, terminated, revoked or rescinded by any party (other than the Agent
on behalf of the Lenders) or the Agent’s security interests, mortgages or liens
in a substantial portion of the Collateral shall cease to be perfected, or shall
cease to have the priority contemplated by this Agreement and the Security
Documents, in each case otherwise than in accordance with the terms thereof or
with the express prior written agreement, consent or approval of the Lenders, or
any action at law, suit or in equity or other legal proceeding to cancel, revoke
or rescind any of the Loan Documents shall be commenced by or on behalf of the
Borrowers or any of their Subsidiaries party thereto or any of their respective
stockholders, or any court or any other governmental or regulatory authority or
agency of competent jurisdiction shall make a determination that, or issue a
judgment, order, decree or ruling to the effect that, any one or more of the
Loan Documents is illegal, invalid or unenforceable in accordance with the terms
thereof;

 

(l)                                     any of the Borrowers or any ERISA
Affiliate incurs any liability to the PBGC or a Guaranteed Pension Plan pursuant
to Title IV of ERISA in an aggregate amount exceeding $100,000, or any of the
Borrowers or any ERISA Affiliate is assessed withdrawal liability pursuant to
Title IV of ERISA by a Multiemployer Plan requiring aggregate annual payments
exceeding $100,000, or any of the following occurs with respect to a Guaranteed
Pension Plan: (i) an ERISA Reportable Event, or a failure to make a required
installment or other payment (within the meaning of Section 302(f)(1) of ERISA),
PROVIDED that the Agent determines in its reasonable discretion that such event
(A) reasonably could be expected to result in liability of any of the Borrowers
or any of their Subsidiaries to the PBGC or such Guaranteed Pension Plan in an
aggregate amount exceeding $100,000 and (B) could reasonably be expected to
constitute grounds for the termination of such Guaranteed Pension Plan by the
PBGC, for the appointment by the appropriate United States District Court of a
trustee to administer such Guaranteed Pension Plan or for the imposition of a
lien in favor of such Guaranteed Pension Plan; or (ii) the appointment by a
United States District Court of a trustee to administer such

 

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Guaranteed Pension Plan; or (iii) the institution by the PBGC of proceedings to
terminate such Guaranteed Pension Plan;

 

(m)                               any of the Borrowers or any of their
Subsidiaries shall be enjoined, restrained or in any way prevented by the order
of any Governmental Authority from conducting (i) any material part of their
business taken as a whole or (ii) business at more than 10% of all retail
locations of the Borrowers at any time or at their headquarters facility in King
of Prussia, Pennsylvania or at any of their distribution centers (including
without limitation the distribution centers in Swedesboro, New Jersey or
Ontario, California), and such order shall continue in effect for more than
fifteen (15) days; or any of the Borrowers or any of their Subsidiaries shall
fail to observe or perform any material term, covenant or agreement contained in
any Lease or Leases by which it is bound relating to any distribution center,
the headquarters facility in King of Prussia, Pennsylvania, or, as to all of the
Borrowers and their Subsidiaries, three (3) or more retail locations, if such
failure would permit the lessor or lessors thereunder to accelerate payments
thereunder and/or terminate such Lease or Leases;

 

(n)                                 there shall occur any material damage to, or
loss, theft or destruction of, any substantial portion of the Collateral,
whether or not insured, or any strike, lockout, labor dispute, embargo,
condemnation, act of God or public enemy, or other casualty, which in any such
case causes, for more than fifteen (15) consecutive days, the cessation or
substantial curtailment of revenue producing activities at more than five (5)
retail locations not covered by business interruption insurance or at any
distribution center;

 

(o)                                 there shall occur: (i) a default under the
FAO Trademark License, or (ii) the loss, suspension or revocation of, or failure
to renew, the FAO Trademark License, or (iii) the loss, suspension or revocation
of, or failure to renew, any other license or permit now held or hereafter
acquired by any of the Borrowers or any of their Subsidiaries if such loss,
suspension, revocation or failure to renew such other license or permit would
have a Material Adverse Effect;

 

(p)                                 any of the Borrowers or any of their
Subsidiaries shall be indicted for a state or federal crime, or any civil or
criminal action shall otherwise have been brought or threatened against the
Borrowers or any of their Subsidiaries, a punishment for which in any such case
could include the forfeiture of any assets of any of the Borrowers or any such
Subsidiary included in the Borrowing Base or any assets of the Borrowers or such
Subsidiary not included in the Borrowing Base but having an aggregate fair
market value in excess of $500,000 (unless fully covered by insurance);

 

(q)                                 unless subject to the prior written consent
of the Agent, the determination of the Borrowers, whether by vote of the
Borrowers’ board of directors or otherwise, to suspend the operation of any of
the Borrowers’ business in the ordinary course, liquidate all or a material
portion of any Borrower’s assets or stores (other than Permitted Store
Closings), or employ an agent or other third party to conduct any so-called
store closing, store liquidation or “going-out-of-business” sales (other than in
connection with a Permitted Store Closing);

 

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(r)                                    there shall exist any involuntary Lien on
any assets of any of the Borrowers or their Subsidiaries securing Indebtedness
not in excess of $25,000 for more than fifteen (15) days after the earlier of
(a) the date a Designated Borrower Officer acquires knowledge thereof, (b)
written notice thereof from the Agent to the Borrowers’ Representative, or (c)
the commencement of any foreclosure proceeding relating to such involuntary
Lien; or

(s)                                  a Material Adverse Effect or a Change of
Control shall occur.

 

Upon the occurrence of any Event of Default, and so long as the same may be
continuing, the Agent may, and shall (i) on the issuance of Acceleration
Notice(s) requisite to the causing of Acceleration by the SuperMajority Lenders,
or (ii) following the Standstill Termination Date, upon the request of the
Tranche B Lender, by notice in writing to the Borrowers’ Representative declare
all Obligations and amounts owing with respect to this Agreement, the Loan
Account, the Notes and the other Loan Documents and all Reimbursement
Obligations to be, and they shall thereupon forthwith become, immediately due
and payable without presentment, demand, protest or other notice of any kind,
all of which are hereby expressly waived by the Borrowers; PROVIDED that in the
event of any Event of Default specified in Sections 13.1(g) or 13.1(h), all such
amounts shall become immediately due and payable automatically and without any
requirement of notice from the Agent or any Lender.  Following the Standstill
Termination Date, the Agent will exercise those rights accorded to the Agent
under the Loan Documents as a creditor of the Borrowers looking towards
realization on the Collateral (a “LIQUIDATION”).  Notwithstanding the foregoing,
the Agent shall have the sole authority to determine the procedures to effect a
Liquidation.  The occurrence of any Event of Default shall also constitute,
without notice or demand, a default under all other Loan Documents.

 

13.2.                        TERMINATION OF COMMITMENTS.  If any one or more of
the Events of Default specified in Section 13.1(g) or Section 13.1(h) shall
occur, any unused portion of the credit hereunder shall forthwith terminate and
each of the Lenders shall be relieved of all further obligations to make Loans
to the Borrowers and the Agent shall be relieved of all further obligations to
issue, extend or renew Letters of Credit.  If any other Event of Default shall
have occurred and be continuing, or if on any Drawdown Date or other date for
issuing, extending or renewing any Letter of Credit, the conditions precedent to
the making of the Loans to be made on such Drawdown Date or (as the case may be)
to issuing, extending or renewing such Letter of Credit on such other date are
not satisfied, the Agent may and, upon the request of the SuperMajority
Revolving Credit Lenders shall, by notice to the Borrowers’ Representative,
terminate the unused portion of the credit hereunder, and upon such notice being
given such unused portion of the credit hereunder and the Commitments shall
terminate immediately and each of the Lenders shall be relieved of all further
obligations to make Loans and the Agent shall be relieved of all further
obligations to issue, extend or renew Letters of Credit.  No termination of the
credit hereunder shall relieve the Borrowers or any of their Subsidiaries of any
of the Obligations.

 

 

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13.3.                        REMEDIES.

 

13.3.1.  GENERAL

 

(a)                                  In case any one or more of the Events of
Default shall have occurred and be continuing, and whether or not the Lenders
shall have Accelerated the maturity of the Loans pursuant to Section 13.1, each
Lender, if owed any amount with respect to the Loans or the Reimbursement
Obligations, may, with the consent of the SuperMajority Revolving Credit Lenders
or the Agent but not otherwise, proceed to protect and enforce its rights by
suit in equity, action at law or other appropriate proceeding, whether for the
specific performance of any covenant or agreement contained in this Agreement
and the other Loan Documents or any instrument pursuant to which the Obligations
to such Lender are evidenced, including as permitted by applicable law the
obtaining of the EX PARTE appointment of a receiver, and, if such amount shall
have become due, by declaration or otherwise, proceed to enforce the payment
thereof or any other legal or equitable right of such Lender.  No remedy herein
conferred upon any Lender or the Agent or the holder of any Note or purchaser of
any Letter of Credit Participation is intended to be exclusive of any other
remedy and each and every remedy shall be cumulative and shall be in addition to
every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or any other provision of law.

 

(b)                                 If a Default has occurred, the Agent,
without any other notice to or demand upon the Borrowers, shall have in any
jurisdiction in which enforcement hereof is sought, in addition to all other
rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code of the State and any additional rights and remedies as
may be provided to a secured party in any jurisdiction in which Collateral is
located, including, without limitation, the right to take possession of the
Collateral, and for that purpose the Agent may, so far as the Borrowers can give
authority therefor, enter upon any premises on which the Collateral may be
situated and remove the same therefrom.  The Agent may in its reasonable
discretion require the Borrowers to assemble all or any part of the Collateral
at such location or locations within the jurisdiction(s) of FAO’s principal
office(s) or at such other locations as the Agent may reasonably designate. 
Unless the Collateral is perishable or threatens to decline speedily in value or
is of a type customarily sold on a recognized market, the Agent shall give to
the Borrowers at least five (5) Business Days prior written notice of the time
and place of any public sale of Collateral or of the time after which any
private sale or any other intended disposition is to be made.  The Borrowers
hereby acknowledge that five (5) Business Days prior written notice of such sale
or sales shall be reasonable notice.  In addition, the Borrowers waive any and
all rights that they may have to a judicial hearing in advance of the
enforcement of any of the Agent’s rights and remedies hereunder, including,
without limitation, its right if a Default exists to take immediate possession
of the Collateral and to exercise its rights and remedies with respect thereto. 
Each Borrower hereby grants to the Agent a royalty free nonexclusive irrevocable
license to use, apply and affix any trademark, trade name, logo or the like in
which any Borrower now or hereafter has rights, such license being with respect
to the Agent’s exercise of the rights hereunder after a Default has occurred
including, without limitation, in connection

 

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with any completion of the manufacture, sale, Liquidation or other disposition
of Inventory.

 

13.3.2.               SECURITIES AND DEPOSITS.  The Agent may at any time, at
its option, transfer to itself or any nominee any securities constituting
Collateral, receive any income thereon and hold such income as additional
Collateral or apply it to the Obligations.  Whether or not any Obligations are
due, the Agent, after and during the continuance of any Event of Default, may
demand, sue for, collect, or make any settlement or compromise which it deems
reasonably desirable or necessary with respect to the Collateral.  Regardless of
the adequacy of Collateral or any other security for the Obligations, any
deposits or other sums at any time credited by or due from the Agent or any
Lender to the Borrowers may at any time be applied to or set off against any of
the Obligations.

 

13.3.3.               NOTIFICATION TO ACCOUNT DEBTORS AND OTHER PERSONS
OBLIGATED ON COLLATERAL.  The Borrowers shall, at the request and option of the
Agent, notify account debtors and other persons obligated on any of the
Collateral of the security interest of the Agent in any account, chattel paper,
general intangible, instrument or other Collateral and that payment thereof is
to be made directly to the Agent or to any financial institution designated by
the Agent as the Agent’s agent therefor, and the Agent may itself, without
notice to or demand upon the Borrowers, so notify account debtors and other
persons obligated on Collateral.  After the making of such a request or the
giving of any such notification, the Borrowers shall hold any proceeds of
collection of accounts, chattel paper, general intangibles, instruments and
other Collateral received by the Borrowers as trustee for the Agent, for the
benefit of the Lenders and the Agent, without commingling the same with other
funds of the Borrowers and shall turn the same over to the Agent in the
identical form received, together with any necessary endorsements or
assignments.  The Agent shall apply the proceeds of collection of accounts,
chattel paper, general intangibles, instruments and other Collateral received by
the Agent to the Obligations, such proceeds to be immediately credited after
final payment in cash or other immediately available funds of the items giving
rise to them.

 

13.3.4.               STANDARDS FOR EXERCISING RIGHTS AND REMEDIES.  To the
extent that applicable law imposes duties on the Agent to exercise remedies in a
commercially reasonable manner, the Borrowers acknowledge and agree that it is
not commercially unreasonable for the Agent (a) to fail to incur expenses
reasonably deemed significant by the Agent to prepare Collateral for disposition
or otherwise to fail to complete raw material or work in process into finished
goods or other finished products for disposition, (b) to fail to obtain third
party consents for access to Collateral to be disposed of, or to obtain or, if
not required by other law, to fail to obtain governmental or third party
consents for the collection or disposition of Collateral to be collected or
disposed of, (c) to fail to exercise collection remedies against account debtors
or other persons obligated on Collateral or to fail to remove Liens on or any
adverse claims against Collateral, (d) to exercise collection remedies against
account debtors and other persons obligated on Collateral directly or through
the use of collection agencies and

 

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other collection specialists, (e) to advertise dispositions of Collateral
through publications or media of general circulation, whether or not the
Collateral is of a specialized nature, (f) to contact other persons, whether or
not in the same business as the Borrowers, for expressions of interest in
acquiring all or any portion of the Collateral, (g) to hire one or more
professional auctioneers to assist in the disposition of Collateral, whether or
not the collateral is of a specialized nature, (h) to dispose of Collateral by
utilizing internet sites that provide for the auction of assets of the types
included in the Collateral or that have the reasonable capability of doing so,
or that match buyers and sellers of assets, (i) to dispose of assets in
wholesale rather than retail markets, (j) to disclaim disposition warranties,
(k) to purchase insurance or credit enhancements to insure the Agent against
risks of loss, collection or disposition of Collateral or to provide to the
Agent a guaranteed return from the collection or disposition of Collateral, or
(l) to the extent deemed appropriate by the Agent, to obtain the services of
brokers, investment bankers, consultants and other professionals to assist the
Agent in the collection or disposition of any of the Collateral, or (m) conduct
going out of business sales and otherwise liquidate the inventory.  The
Borrowers acknowledge that the purpose of this Section 13.3.4 is to provide
non-exhaustive indications of what actions or omissions by the Agent would
fulfill the Agent’s duties under the Uniform Commercial Code of the State of New
York or any other relevant jurisdiction in the Agent’s exercise of remedies
against the Collateral and that other actions or omissions by the Agent shall
not be deemed to fail to fulfill such duties solely on account of not being
indicated in this Section 13.3.4.  Without limitation upon the foregoing,
nothing contained in this Section 13.3.4. shall be construed to grant any rights
to the Borrowers or to impose any duties on the Agent that would not have been
granted or imposed by this Agreement or by applicable law in the absence of this
Section 13.3.4.

 

13.4                           ACCELERATION NOTICES.

 

13.4.1                  AGENT.  The Agent may give the Lenders an Acceleration
Notice at any time following and during the occurrence and continuation of an
Event of Default.

 

13.4.2                  SUPERMAJORITY REVOLVING CREDIT LENDERS.  The
SuperMajority Revolving Credit Lenders may give the Agent an Acceleration Notice
at any time following the occurrence of an Event of Default.  Such notice may be
by multiple counterparts, provided that counterparts executed by the requisite
Lenders are received by the Agent within a period of five (5) consecutive
Business Days.

 

13.4.3                  ACCELERATION.  Unless stayed by judicial or statutory
process, the Agent shall Accelerate the Revolving Credit Loans and the Tranche B
Loan within a commercially reasonable time following:

 

(a)                                  The Agent’s giving of an Acceleration
Notice to the Lenders as provided in Section 13.4.1.

 

(b)                                 The Agent’s receipt of an Acceleration
Notice from the SuperMajority Revolving Credit Lenders, in compliance with
Section 13.4.2.

 

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(c)                                  The Agent’s receipt of a request from the
Tranche B Lender following the Standstill Termination Date.

 

13.4.4                  INITIATION OF LIQUIDATION.  Unless stayed by judicial or
statutory process, the Agent shall initiate Liquidation remedies accorded to the
Agent under the Loan Documents and applicable law, within a commercially
reasonable time following Acceleration of the Revolving Credit Loans and the
Tranche B Loan.

 

13.4.5                  ACTIONS AT AND FOLLOWING INITIATION OF LIQUIDATION.

 

(a)                                  At the initiation of a Liquidation:

 

(i)                                     The unpaid principal balance of the
Swing Line Loan (if any) shall be converted to a Revolving Credit Loan in which
all Revolving Credit Lenders participate.

 

(ii)                                  The Agent and the Revolving Credit Lenders
shall “net out” each Revolving Credit Lender’s respective contributions towards
the Revolving Credit Loans, so that each Revolving Credit Lender holds that
Revolving Credit Lender’s Commitment Percentage of the Revolving Credit Loans
and advances.

 

(b)                                 Following the initiation of a Liquidation,
each Revolving Credit Lender shall contribute towards any Letter of Credit
thereafter honored and not immediately reimbursed by the Borrowers, that
Revolving Credit Lender’s Commitment Percentage of such honoring.

 

13.5.                        DISTRIBUTION OF COLLATERAL PROCEEDS.  In the event
that, an Event of Default exists and the Agent or any Lender, as the case may
be, receives any monies in connection with a Liquidation or the enforcement of
this Agreement or any the Security Documents, or otherwise with respect to the
realization upon, or disposition of, any of the Collateral, such monies shall be
distributed for application as follows:

 

(a)                                  First, to the payment of, or (as the case
may be) the reimbursement of the Agent for or in respect of, or to establish and
fund reasonable reserve accounts in anticipation of, all reasonable costs,
expenses, disbursements and losses which shall have been incurred or sustained
by, or which reasonably shall be anticipated to be incurred, the Agent in
connection with the collection of such monies by the Agent or the Agent’s
Special Counsel or Lenders’ Special Counsel for the exercise, protection or
enforcement by the Agent, the Agent’s Special Counsel or Lenders’ Special
Counsel of all or any of the rights, remedies, powers and privileges of the
Agent, the Agent’s Special Counsel or Lenders’ Special Counsel under this
Agreement or any of the other Loan Documents or in respect of the Collateral or
in support of any provision of adequate indemnity to the Agent against any taxes
or liens which by law shall have, or may have, priority over the rights of the
Agent to such monies;

 

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(b)                                 Second, to all Obligations owing to the
Revolving Credit Lenders and the Agent (including the making allowance to take
into account for any Obligations not then due and payable (i.e., to cash
collateralize up to 105% of the Maximum Drawing Amount) and excluding the
Revolving Credit Early Termination Fee, Obligations under Interest Rate
Agreements and Obligations pursuant to subsection (b) of the definition of
Obligations to the extent that they do not relate to cash management or similar
services) in such order or preference as the Required Revolving Credit Lenders
may determine; PROVIDED, HOWEVER, that (i) distributions shall be made (A) PARI
PASSU among Obligations with respect to the Agent Fees and all other Obligations
owed to the Revolving Credit Lenders and (B) with respect to each type of
Obligation owing to the Revolving Credit Lenders, such as interest, principal,
reasonable fees and expenses, among the Revolving Credit Lenders PRO RATA, and
(ii) the Agent may in its reasonable discretion make proper allowance to take
into account any Obligations not then due and payable;

 

(c)                                  Third, to all Obligations owing to the
Tranche B Lender (excluding the Tranche B Early Termination Fee);

 

(d)                                 Fourth, to the Agent and the Revolving
Credit Lenders on account of Obligations relating to the Revolving Credit Early
Termination Fee;

 

(e)                                  Fifth, to the Tranche B Lender on account
of all other Obligations owing to the Tranche B Lender;

 

(f)                                    Sixth, to all other Obligations owing to
any of the Agent, any Affiliate thereof or any of the Revolving Credit Lenders;
and

 

(g)                                 Seventh, upon payment and satisfaction in
full or other provisions for payment in full satisfactory to the Lenders and the
Agent of all of the Obligations, to the payment of any obligations required to
be paid pursuant to Section 9-608(a)(1)(C) or 9-615(a)(3) of the Uniform
Commercial Code of the State of New York; and

 

(h)                                 Eighth, the excess, if any, shall be
returned to the Borrowers or to such other Persons as are entitled thereto.

 

14.                                 THE AGENT; CONSENTS, AMENDMENTS AND WAIVERS.

 

14.1.                        AUTHORIZATION.

 

(a)                                  The Agent is authorized to take such action
on behalf of each of the Lenders and to exercise all such powers as are
hereunder and under any of the other Loan Documents and any related documents
delegated to the Agent, together with such powers as are reasonably incident
thereto, including the authority, without the necessity of any notice to or
further consent of the Lenders, from time to time to take any action with
respect to any Collateral or the Security Documents which may be necessary to
perfect, maintain perfected or insure the priority of the security interest in
and liens upon the Collateral granted pursuant to the Security Documents,
PROVIDED that no duties or

 

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responsibilities not expressly assumed herein or therein shall be implied to
have been assumed by the Agent, and the Agent is not under any affirmative
obligation to take any action which is not required by this Agreement or the
Loan Documents specifically to so take.

 

(b)                                 The relationship between the Agent and each
of the Lenders is that of an independent contractor.  The use of the term
“Agent” is for convenience only and is used to describe, as a form of
convention, the independent contractual relationship between the Agent and each
of the Lenders.  Nothing contained in this Agreement nor the other Loan
Documents shall be construed to create an agency, trust or other fiduciary
relationship between the Agent and any of the Lenders.

 

(c)                                  As an independent contractor empowered by
the Lenders to exercise certain rights and perform certain duties and
responsibilities hereunder and under the other Loan Documents, the Agent is
nevertheless a “REPRESENTATIVE” of the Lenders, as that term is defined in
Article 1 of the Uniform Commercial Code, for purposes of actions for the
benefit of the Lenders and the Agent with respect to all collateral security and
guaranties contemplated by the Loan Documents.  Such actions include the
designation of the Agent as “SECURED PARTY” or the like on all financing
statements and other documents and instruments, whether recorded or otherwise,
relating to the attachment, perfection, priority or enforcement of any security
interests, mortgages or deeds of trust in collateral security intended to secure
the payment or performance of any of the Obligations, all for the benefit of the
Lenders and the Agent.

 

14.2.                        EMPLOYEES AND AGENT.  The Agent may exercise its
powers and execute its duties by or through employees or agents and shall be
entitled to take, and to rely on, advice of counsel concerning all matters
pertaining to its rights and duties under this Agreement and the other Loan
Documents.  The Agent may utilize the services of such Persons as the Agent in
its sole discretion may reasonably determine, and all reasonable fees and
expenses of any such Persons shall be paid by the Borrowers.

 

14.3.                        NO LIABILITY.  Neither the Agent nor any of its
shareholders, directors, officers or employees nor any other Person assisting
them in their duties nor any agent or employee thereof, shall be liable for any
waiver, consent or approval given or any action taken, or omitted to be taken,
in good faith by it or them hereunder or under any of the other Loan Documents,
or in connection herewith or therewith, or be responsible for the consequences
of any oversight or error of judgment whatsoever, except that the Agent or such
other Person, as the case may be, may be liable for losses due to its willful
misconduct or gross negligence.  The burden of establishing that the Agent has
at any time failed to act in a reasonable manner in the exercise of its
discretion shall be on the Borrowers and may only be made on clear and
convincing evidence.

 

14.4.                        NO REPRESENTATIONS.

 

14.4.1.               GENERAL.  The Agent shall not be responsible for the
execution or validity or enforceability of this Agreement, the Notes, the
Letters of Credit, any of the other Loan Documents or any instrument at any time
constituting, or intended to constitute, collateral security for the Notes, or
for the value of any such collateral security

 

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or for the validity, enforceability or collectibility of any such amounts owing
with respect to the Notes, or for any recitals or statements, warranties or
representations made herein or in any of the other Loan Documents or in any
certificate or instrument hereafter furnished to it by or on behalf of the
Borrowers or any of their Subsidiaries, or be bound to ascertain or inquire as
to the performance or observance of any of the terms, conditions, covenants or
agreements herein or in any instrument at any time constituting, or intended to
constitute, collateral security for the Notes or to inspect any of the
properties, books or records of the Borrowers or any of their Subsidiaries.  The
Agent shall not be bound to ascertain whether any notice, consent, waiver or
request delivered to it by the Borrowers or any holder of any of the Notes shall
have been duly authorized or is true, accurate and complete.  The Agent has not
made nor does it now make any representations or warranties, express or implied,
nor does it assume any liability to the Lenders, with respect to the credit
worthiness or financial conditions of the Borrowers or any of their
Subsidiaries.  Each Lender acknowledges that it has, independently and without
reliance upon the Agent or any other Lender, and based upon such information and
documents as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement.

 

14.4.2.  CLOSING DOCUMENTATION, ETC.  For purposes of determining compliance
with the conditions set forth in Section 11, each Lender that has executed this
Agreement shall be deemed to have consented to, approved or accepted, or to be
satisfied with, each document and matter either sent, or made available, by the
Agent to such Lender for consent, approval, acceptance or satisfaction, or
required thereunder to be to be consent to or approved by or acceptable or
satisfactory to such Lender, unless an officer of the Agent active upon the
Borrowers’ account shall have received notice from such Lender not less than two
days prior to the Closing Date specifying such Lender’s objection thereto and
such objection shall not have been withdrawn by notice to the Agent to such
effect on or prior to the Closing Date.

 

14.5.                        PAYMENTS.

 

14.5.1.               PAYMENTS TO AGENT.  A payment by the Borrowers to the
Agent hereunder or any of the other Loan Documents for the account of any Lender
shall constitute a payment to such Lender.  The Agent agrees promptly to
distribute to each Lender such Lender’s PRO RATA share of payments received by
the Agent for the account of the Lenders except as otherwise expressly provided
herein or in any of the other Loan Documents.

 

14.5.2.               DISTRIBUTION BY AGENT.  If in the reasonable opinion of
the Agent the distribution of any amount received by it in such capacity
hereunder, under the Notes or under any of the other Loan Documents might
involve it in liability, it may refrain from making distribution until its right
to make distribution shall have been adjudicated by a court of competent
jurisdiction.  If a court of competent jurisdiction shall adjudge that any
amount received and distributed by the Agent is to be repaid, each Person to
whom any such distribution shall have been made shall either repay to the Agent
its

 

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proportionate share of the amount so adjudged to be repaid or shall pay over the
same in such manner and to such Persons as shall be determined by such court.

 

14.5.3.               DELINQUENT LENDERS.  (a)  Notwithstanding anything to the
contrary contained in this Agreement or any of the other Loan Documents, any
Revolving Credit Lender that fails (a) to make available to the Agent its PRO
RATA share of any Revolving Credit Loan or to purchase any Letter of Credit
Participation or (b) to comply with the provisions of Section 16.1 with respect
to making dispositions and arrangements with the other Revolving Credit Lenders,
where such Revolving Credit Lender’s share of any payment received, whether by
setoff or otherwise, is in excess of its PRO RATA share of such payments due and
payable to all of the Revolving Credit Lenders, in each case as, when and to the
full extent required by the provisions of this Agreement, shall be deemed
delinquent (a “DELINQUENT LENDER”) and shall be deemed a Delinquent Lender until
such time as such delinquency is satisfied.  A Delinquent Lender shall be deemed
to have assigned any and all payments due to it from the Borrowers, whether on
account of outstanding Loans, Unpaid Reimbursement Obligations, interest,
reasonable fees or otherwise, to the remaining nondelinquent Revolving Credit
Lenders for application to, and reduction of, their respective PRO RATA shares
of all outstanding Loans and Unpaid Reimbursement Obligations.  The Delinquent
Lender hereby authorizes the Agent to distribute such payments to the
nondelinquent Revolving Credit Lenders in proportion to their respective PRO
RATA shares of all outstanding Revolving Credit Loans and Unpaid Reimbursement
Obligations.  A Delinquent Lender shall be deemed to have satisfied in full a
delinquency when and if, as a result of application of the assigned payments to
all outstanding Loans and Unpaid Reimbursement Obligations of the nondelinquent
Lenders, the Revolving Credit Lenders’ respective PRO RATA shares of all
outstanding Revolving Credit Loans and Unpaid Reimbursement Obligations have
returned to those in effect immediately prior to such delinquency and without
giving effect to the nonpayment causing such delinquency.

 

(b)                                 If any Delinquent Lender defaults in its
obligation to fund Loans hereunder which it is objected to fund, then the
Borrowers may, at their sole expense and effort, upon notice to the Lenders and
the Agent, require such Delinquent Lender to assign and delegate, without
recourse (in accordance with and subject to the restrictions contained in
Article 15), all its interests, rights and obligations under this Agreement to
an Assignee that shall assume such obligations (which Assignee may be another
Lender, if a Lender accepts such assignment), provided that (i) the Borrowers
shall have received  the prior written consent of the Agent to such assignee,
and (ii) such Delinquent Lender shall have received payment of an amount equal
to the outstanding principal of its Loans, accrued interest thereon, accrued
fees and all other amounts payable to it hereunder, from the Assignee (to the
extent of such outstanding principal and accrued interest and fees) or the
Borrowers (in the case of all other amounts), subject in each case to
adjustments by reason of the operation of Section 14.5.3(a) above.  A Delinquent
Lender shall not be required to make any such assignment and delegation, if,
prior thereto, all of the circumstances entitling the Borrowers to require such
assignment and delegation cease to apply.

 

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14.6.                  HOLDERS OF NOTES.  The Agent may deem and treat the payee
of any Note or the purchaser of any Letter of Credit Participation as the
absolute owner or purchaser thereof for all purposes hereof until it shall have
been furnished in writing with a different name by such payee or by a subsequent
holder, assignee or transferee.

 

14.7.                  INDEMNITY.  The Lenders ratably agree hereby to indemnify
and hold harmless the Agent and its affiliates from and against any and all
claims, actions and suits (whether groundless or otherwise), losses, damages,
costs, expenses (including any expenses for which the Agent or such affiliate
has not been reimbursed by the Borrowers as required by Section 16.2), and
liabilities of every nature and character arising out of or related to this
Agreement, the Notes, or any of the other Loan Documents or the transactions
contemplated or evidenced hereby or thereby, or the Agent’s actions taken
hereunder or thereunder, except to the extent that any of the same shall be
directly caused by the Agent’s willful misconduct or gross negligence.

 

14.8.                        AGENT AS LENDER.  In its individual capacity, Agent
shall have the same obligations and the same rights, powers and privileges in
respect to its Commitment and the Loans made by it, and as the holder of any of
the Notes and as the purchaser of any Letter of Credit Participations, as it
would have were it not also the Agent.

 

14.9.                        RESIGNATION.  The Agent may resign at any time by
giving sixty (60) days prior written notice thereof to the Lenders and the
Borrowers’ Representative.  Upon any such resignation, the Required Lenders and
the Tranche B Lender shall have the right to appoint a successor Agent.  Unless
a Default or Event of Default shall have occurred and be continuing, such
successor Agent shall be reasonably acceptable to the Borrowers.  If no
successor Agent shall have been so appointed by the Required Lenders and the
Tranche B Lender and shall have accepted such appointment within thirty (30)
days after the retiring Agent’s giving of notice of resignation, then the
retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which
shall be (a) a financial institution having a rating of not less than A or its
equivalent by S&P or (b) following the exercise of the buyout option set forth
in Section 3.6, the Tranche B Lender or any other Person appointed by the
Tranche B Lender.  Upon the acceptance of any appointment as Agent hereunder by
a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder.  After any retiring Agent’s resignation, the provisions of this
Agreement and the other Loan Documents shall continue in effect for its benefit
in respect of any actions taken or omitted to be taken by it while it was acting
as Agent.

 

14.10.                  NOTIFICATION IF DEFAULT EXISTS.  Each Lender hereby
agrees that, upon learning of the existence of a Default or an Event of Default,
it shall promptly notify the Agent thereof.  The Agent hereby agrees that upon
receipt of any notice under this Section 14.10 it shall promptly notify the
other Lenders that the a Default exist.

 

14.11.                  DUTIES IN THE CASE OF ENFORCEMENT.  In case one of more
Events of Default have occurred and shall be continuing, and whether or not
acceleration of the Obligations shall have occurred, the Agent shall, if (a) so
requested by the SuperMajority Revolving Credit Lenders or, following any
Standstill Termination Date, the Tranche B Lender,

 

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and (b) the Lenders have provided to the Agent such additional indemnities and
assurances against expenses and liabilities as the Agent may reasonably request,
proceed to enforce the provisions of this Agreement and the other Security
Documents authorizing the sale or other disposition of all or any part of the
Collateral and exercise all or any such other legal and equitable and other
rights or remedies as it may have in respect of such Collateral.  The
SuperMajority Revolving Credit Lenders or, following any Standstill Termination
Date if the SuperMajority Revolving Credit Lenders have not already done so, the
Tranche B Lender, may direct the Agent in writing as to the method and the
extent of any such sale or other disposition, the Lenders hereby agreeing to
indemnify and hold the Agent, harmless from all liabilities incurred in respect
of all actions taken or omitted in accordance with such directions, PROVIDED
that the Agent need not comply with any such direction to the extent that the
Agent reasonably believes the Agent’s compliance with such direction to be
unlawful or commercially unreasonable in any applicable jurisdiction.

 

14.12.                  AGENT’S OBLIGATIONS AND DUTIES WITH REGARD TO
COLLATERAL.  Anything herein to the contrary notwithstanding, the Borrowers
shall remain obligated and liable under each contract or agreement comprised in
the Collateral to be observed or performed by the Borrowers thereunder.  Neither
the Agent nor any Lender shall have any obligation or liability under any such
contract or agreement by reason of or arising out of this Agreement or the
receipt by the Agent or any Lender of any payment relating to any of the
Collateral, nor shall the Agent or any Lender be obligated in any manner to
perform any of the obligations of the Borrowers under or pursuant to any such
contract or agreement, to make inquiry as to the nature or sufficiency of any
payment received by the Agent or any Lender in respect of the Collateral or as
to the sufficiency of any performance by any party under any such contract or
agreement, to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to the Agent or to which the Agent or any Lender may be entitled at any
time or times.  The Agent’s sole duty with respect to the custody, safe keeping
and physical preservation of the Collateral in its possession, under Section
9-207 of the Uniform Commercial Code of the State of New York or otherwise,
shall be to deal with such Collateral in the same manner as the Agent deals with
similar property for its own account.  In connection with any sale of assets
permitted by this Agreement, the Agent is authorized to release the liens
granted by the Borrowers to the Agent.

 

14.13.                  CONSENT OF LENDERS.  Except as specifically provided in
the following Sections of this Agreement, whenever a Loan Document or this
Agreement provides that action may be taken or omitted to be taken in the
Agent’s discretion or reasonable discretion, the Agent shall have the sole right
to take, or refrain from taking, such action without, and notwithstanding, any
vote of the Lender:

 

Actions Described in Section

 

Type of Consent Required

 

14.14

 

Required Lenders

 

14.15

 

SuperMajority Revolving Credit Lenders

 

14.16

 

Certain Consent

 

14.17

 

Unanimous Consent

 

14.18

 

Consent of Swing Line Lender

 

14.19

 

Consent of Tranche B Lender

 

 

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The rights granted to the Lenders in the above-referenced Sections shall not
otherwise limit or impair the Agent’s exercise of its discretion under the Loan
Documents.

 

14.14.                  ACTIONS REQUIRING OR ON DIRECTION OF REQUIRED LENDERS. 
Except as otherwise provided in this Agreement, the consent or direction of the
Required Lenders is required for any amendment, waiver, or modification of any
Loan Document.

 

14.15.                  ACTIONS REQUIRING OR ON DIRECTION OF SUPERMAJORITY
REVOLVING CREDIT LENDERS.  The consent or direction of the SuperMajority
Revolving Credit Lenders is required as follows:

 

(a)                                  The Lenders agree that any loan or advance
under the Revolving Credit Loan which results in a Protective OverAdvance may be
made by the Agent in its discretion without the consent of the Lenders and that
each Lender shall be bound thereby; PROVIDED, however, the consent or direction
of the SuperMajority Revolving Credit Lenders is required to permit a Protective
OverAdvance to be outstanding for more than 45 consecutive Business Days or more
than twice in any twelve month period.  (Any Protective OverAdvance which is
permitted by this Section 14.15 is referred to as a “PERMITTED PROTECTIVE
OVERADVANCE”).

 

(b)                                 If any Default has occurred and is
continuing, the SuperMajority Revolving Credit Lenders may direct the Agent to
suspend the Revolving Credit Loan facility, whereupon, as long as a Default
shall have occurred and be continuing, the only Revolving Credit Loans which may
be made are the following:

 

(i)                                     Revolving Credit Loans made to “cover”
the honoring of Letters of Credit.

 

(ii)                                  Permitted Protective OverAdvances.

 

(iii)                               Revolving Credit Loans made with consent of
the SuperMajority Revolving Credit Lenders.

 

(c)                                  If an Event of Default has occurred and not
been duly waived, the SuperMajority Revolving Credit Lenders may:

 

(i)                                     Give the Agent an Acceleration Notice in
accordance with Section 13.4.3(b).

 

(ii)                                  Direct the Agent to increase the rate of
interest to the default rate of interest as provided in, and to the extent
permitted by, this Agreement.

 

14.16.                  ACTIONS REQUIRING CERTAIN CONSENT.  The following
consent shall be required for the following actions:

 

ACTION

 

REQUIRED CONSENT

(a)                                  Any change to the dates on which any

 

SuperMajority Revolving Credit

 

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payment of principal of the Tranche B Loan shall be due and payable or the
amount of any such payment

 

Lenders and the Tranche B Lender

 

 

 

(b)                                 Waiver or amendment of financial performance
covenants in Section 10

 

SuperMajority Revolving Credit Lenders and Tranche B Lender

 

 

 

(c)                                  Increase in the Swing Line Ceiling

 

Swing Line Lender and the Required Revolving Credit Lenders

 

 

 

(d)                                 Any increase in any Revolving Credit
Lender’s Revolving Commitment or Revolving Lender’s Commitment Percentage (other
than by reason of the application of Section 14.22 (which deals with
NonConsenting Lenders) or Article 15 (which deals with assignments and
participations)), it being understood that this Section 14.16(d) addresses
changes to commitments inter se and not any increase in the overall size of the
Total Revolving Commitment

 

All Revolving Credit Lenders affected thereby other than any Delinquent Lender

 

 

 

(e)                                  Any forgiveness of all or any portion of
any payment Obligation

 

All Lenders whose payment Obligation is being so forgiven (other than any
Delinquent Lender, if otherwise applicable)

 

 

 

(f)                                    Any decrease in any interest rate, fee or
assessment payable under any of the Loan Documents (other than any fees due to
the Agent (for which the consent of the Agent shall also be required)) and any
decrease in any fee provided for by the Agent Fee Letter (which may be amended
by written agreement between the Borrowers’ Representative and the Agent) and
the Tranche B Fee Letter (which may be amended by written agreement between the
Borrowers’ Representative and the Tranche B Lender)

 

All Lenders adversely affected thereby (other than any Delinquent Lender, if
otherwise applicable)

 

 

 

(g)                                 Any increase in the overall size of the
Total Revolving Commitment

 

Required Revolving Credit Lenders and Tranche B Lender

 

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14.17.                  ACTIONS REQUIRING OR DIRECTED BY UNANIMOUS CONSENT. 
None of the following may take place except with consent of all Lenders:

 

(a)                                  Any extension of the Maturity Date.

 

(b)                                 Any release of all or substantially all of
the Collateral not otherwise required or provided for in the Loan Documents or
to facilitate a Liquidation.

 

(c)                                  Any amendment of the definition of the
terms “Borrowing Base”, “Tranche B Borrowing Base”, or “Availability” or
“Availability Block” or of any definition of any component thereof, such that
more credit would be available to the Borrowers, based on the same assets, as
would have been available to the Borrowers immediately prior to such amendment,
it being understood, however, that:

 

(i)                                     The foregoing shall not limit the
adjustment by the Agent of any Reserve otherwise permitted by this Agreement.

 

(ii)                                  The foregoing shall not prevent the Agent
from restoring any component of Borrowing Base which had been lowered by the
Agent back to the value of such component, as stated in this Agreement or to an
intermediate value.

 

(d)                                 Any release of any Person obligated on
account of the Obligations (except in connection with a sale of such Person
approved by the SuperMajority Revolving Credit Lenders and Tranche B Lender in
accordance with the terms of this Agreement, even though only the approval of
the Required Lenders would be required hereunder for such sale) of such Person.

 

(e)                                  The making of any Revolving Credit Loan
which, when made, exceeds Availability and is not a Permitted OverAdvance,
provided, however,

 

(i)                                     no consent shall be required in
connection with the making of any Revolving Credit Loan to “cover” any honoring
of a drawing under any Letter of Credit; and

 

(ii)                                  each Lender recognizes that subsequent to
the making of a Revolving Credit Loan which does not constitute a Permitted
Protective OverAdvance, the unpaid principal balance of the Loan Account may
exceed the Borrowing Base on account of changed circumstances beyond the control
of the Agent (such as a drop in Collateral value).

 

(f)                                    The waiver of the obligation of the
Borrowers to reduce the unpaid principal balance of Revolving Credit Loans to an
amount which does not exceed a Permitted Protective OverAdvance within the time
limits included in Section 14.15(a) (which places time and frequency limits on
Permitted Protective OverAdvances).

 

(g)                                 Any amendment of Sections 13.5, 14.13,
14.14, 14.15, 14.16, 14.17, 14.18, 14.19, 14.20 or 14.21.

 

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(h)                                 Amendment of any of the following
Definitions:

 

“Appraised Inventory Liquidation Value”

 

“Permitted Protective OverAdvance”

 

“Required Lenders”

 

“Required Revolving Credit Lenders”

 

“Standstill Termination Date”

 

“SuperMajority Lenders”

 

“SuperMajority Revolving Credit Lenders”

 

14.18.                  ACTIONS REQUIRING SWING LINE LENDER CONSENT.  No action,
amendment, or waiver of compliance with, any provision of the Loan Documents or
of this Agreement which affects the Swing Line Lender may be undertaken without
the consent of the Swing Line Lender.

 

14.19.                  ACTIONS REQUIRING TRANCHE B LENDER CONSENT.  None of the
following may be made without the consent of the Tranche B Lender:

 

(a)                                  Any increase in any interest rate or fee
payable to the Revolving Credit Lenders on account of the Revolving Credit Loans
in excess of 150 basis points per annum in the aggregate from that already
provided herein.

 

(b)                                 Any increase in any interest rate or any
additional fee payable to the Revolving Credit Lenders on account of the
Revolving Credit Loans in connection with an amendment, modification or waiver
which did not require the consent of the Tranche B Lender, unless in connection
with such amendment, modification or waiver, the Borrowers agree to increase
such interest rate payable to the Tranche B Lender contemporaneously therewith
by a like amount or agree to pay to the Tranche B Lender additional fees based
on the amount of its Commitment contemporaneously therewith by an amount equal
to one and one half (1 and ½) times the proportional amount such additional fees
being paid to the Revolving Credit Lenders bear to the Total Revolving
Commitment.

 

(c)                                  Any amendment, modification, or waiver of
any Specified Provision , or any amendment, modification or waiver of any
component definition impacting the manner in which it is utilized in such
Specified Provision.

 

(d)                                 Amendment of any of the following
Definitions:

 

“Change in Control”

 

“Equipment”

 

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“OverLoan”

 

“Protective OverAdvances”

 

“Standstill Termination Date”

 

“Total Revolving Commitment.”

 

(e)                                  Any release of Collateral comprised of
Equipment except as otherwise required or provided for in the Loan Documents
(including, without limitation, under Section 9.5.2) and except to facilitate a
Liquidation.

 

14.20.                  ACTIONS REQUIRING AGENT’S CONSENT.

 

(a)                                  No action, amendment, or waiver of
compliance with, any provision of the Loan Documents or of this Agreement which
affects the Agent in its capacity as the Agent may be undertaken without the
written consent of the Agent.

 

(b)                                 No action referenced herein which affects
the rights, duties, obligations, or liabilities of the Agent shall be effective
without the written consent of the Agent.

 

14.21.                  MISCELLANEOUS ACTIONS.

 

(a)                                  Notwithstanding any other provision of this
Agreement, no single Lender independently may exercise any right of action or
enforcement against or with respect to any Borrower.

 

(b)                                 The Agent shall be fully justified in
failing or refusing to take action under this Agreement or any Loan Document on
behalf of any Lender unless the Agent shall first:

 

(i)                                     receive such clear, unambiguous, written
instructions as the Agent deems appropriate; and

 

(ii)                                  be indemnified to the Agent’s satisfaction
by the Lenders against any and all liability and expense which may be incurred
by the Agent by reason of taking or continuing to take any such action, unless
such action had been grossly negligent, in willful misconduct, or in bad faith.

 

(c)                                  The Agent may establish reasonable
procedures for the providing of direction and instructions from the Lenders to
the Agent, including its reliance on multiple counterparts, facsimile
transmissions, and time limits within which such direction and instructions must
be received in order to be included in a determination of whether the requisite
Lender provided direction, consent, or instructions.

 

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14.22                     NONCONSENTING REVOLVING CREDIT LENDER.

 

(a)                                  In the event that a Revolving Credit Lender
(in this Section 14.22, a “NONCONSENTING LENDER”) does not provide its consent
to a proposal by the Agent to take action which requires consent under this
Article 14, then one or more Revolving Credit Lenders who provided consent to
such action may require the assignment, without recourse and in accordance with
the procedures outlined in Article 15 below, of the NonConsenting Lender’s
commitment hereunder on five (5) days written notice to the Agent and to the
NonConsenting Lender.

 

(b)                                 At the end of such five (5) days, and
PROVIDED the NonConsenting Lender delivers the Note held by the NonConsenting
Lender to the Agent, the Revolving Credit Lenders who have given such written
notice shall transfer the following to the NonConsenting Lender:

 

(i)                                     Such NonConsenting Lender’s Pro-Rata
share of the principal and interest of the Loans to the date of such assignment.

 

(ii)                                  All fees distributable hereunder to the
NonConsenting Lender to the date of such assignment.

 

(iii)                               Any out-of-pocket costs and expenses for
which the NonConsenting Lender is entitled to reimbursement from the Borrowers.

 

(c)                                  In the event that the NonConsenting Lender
fails to deliver to the Agent the Note held by the NonConsenting Lender as
provided in Article 14, then:

 

(i)                                     The amount otherwise to be transferred
to the NonConsenting Lender shall be transferred to the Agent and held by the
Agent, without interest, to be turned over to the NonConsenting Lender upon
delivery of the Note held by that NonConsenting Lender.

 

(ii)                                  The Note held by the NonConsenting Lender
shall have no force or effect whatsoever.

 

(iii)                               The NonConsenting Lender shall cease to be a
“Lender”.

 

(iv)                              The Revolving Credit Lender(s) which have
transferred the amount to the Agent as described above shall have succeeded to
all rights and become subject to all of the obligations of the NonConsenting
Lender as a “Revolving Credit Lender”.

 

(d)                                 In the event that more than one (1)
Revolving Credit Lender wishes to require such assignment, the NonConsenting
Lender’s Commitment hereunder shall be divided among such Revolving Credit
Lenders, pro-rata based upon their respective Loan Commitments, with the Agent
coordinating such transaction.

 

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(e)                                  The Agent shall coordinate the retirement
of the Note held by the NonConsenting Lender and the issuance of Notes to those
Lenders which “take-out” such NonConsenting Lender, PROVIDED, no processing fee
otherwise to be paid as provided in Article 14 shall be due under such
circumstances.

 

15.                                 ASSIGNMENT AND PARTICIPATION.

 

15.1.                        CONDITIONS TO ASSIGNMENT.

 

15.1.1                  CONDITIONS TO ASSIGNMENT BY REVOLVING CREDIT LENDERS. 
Except as provided herein, each Revolving Credit Lender may assign to one or
more commercial banks, other financial institutions or other Persons, all or a
portion of its interests, rights and obligations under this Agreement (including
all or a portion of its Commitment Percentage and Commitment and the same
portion of the Revolving Credit Loans at the time owing to it, the Notes held by
it and its participating interest in the risk relating to any Letters of
Credit); PROVIDED that (a) the Agent and, so long as no Default exists, the
Borrowers’ Representative, shall have given their prior written consent to such
assignment, such consent not to be unreasonably withheld; except that the
consent of the Agent or the Borrowers’ Representative shall not be required in
connection with any assignment by a Lender to (i) an existing Lender or (ii) a
Lender Affiliate of such Lender, (b) each such assignment shall be of a
constant, and not a varying, percentage of all the assigning Revolving Credit
Lender’s rights and obligations under this Agreement, it being understood that
non-PRO RATA assignments of the Commitments and the Revolving Credit Loans are
not permitted, (c) each assignment (or, in the case of assignments by a
Revolving Credit Lender to its Lender Affiliates, the aggregate holdings of such
Revolving Credit Lender and its Lender Affiliates after giving effect to such
assignments), shall be in an amount that is not less than $10,000,000 or a whole
multiple of $1,000,000 in excess thereof (or such lesser amount as shall
constitute the aggregate holdings of such Lender and (d) the parties to such
assignment shall execute and deliver to the Agent, for recording in the Register
(as hereinafter defined), an Assignment and Acceptance, substantially in the
form of EXHIBIT G(i) hereto (an “ASSIGNMENT AND ACCEPTANCE”), together with any
Notes subject to such assignment.  Upon such execution, delivery, acceptance and
recording, from and after the effective date specified in each Assignment and
Acceptance, which effective date shall be at least five (5) Business Days after
the execution thereof, (y) the assignee thereunder shall be a party hereto and,
to the extent provided in such Assignment and Acceptance, have the rights and
obligations of a Revolving Credit Lender hereunder, and (z) the assigning
Revolving Credit Lender shall, to the extent provided in such assignment and
upon payment to the Agent of the registration fee referred to in this Section
15.1.1, be released from its obligations under this Agreement.  In connection
with each assignment the Assigning Lender agrees to pay to the Agent a
registration fee in the sum of $3,500.

 

15.1.2.               CONDITIONS TO ASSIGNMENT BY TRANCHE B LENDER.  The Tranche
B Lender may assign to one or more commercial banks, other financial
institutions or other Persons, all or a portion of its interests, rights and
obligations under this Agreement; PROVIDED that (a) the Agent shall have given
its prior written consent to such assignment, such consent not to be
unreasonably withheld; except that the consent

 

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of the Agent shall not be required in connection with any assignment by the
Tranche B Lender (i) if an Event of Default exists, (ii) to an existing Lender
or (iii) to a Lender Affiliate of such Tranche B Lender and (b) the parties to
such assignment shall execute and deliver to the Agent for recording in the
Register an Assignment and Acceptance substantially in the form of EXHIBIT
G(ii).

 

15.2.                        CERTAIN REPRESENTATIONS AND WARRANTIES;
LIMITATIONS; COVENANTS.  By executing and delivering an Assignment and
Acceptance, the parties to the assignment thereunder confirm to and agree with
each other and the other parties hereto as follows:

 

(a)                                  other than the representation and warranty
that it is the legal and beneficial owner of the interest being assigned thereby
free and clear of any adverse claim, the assigning Lender makes no
representation or warranty, express or implied, and assumes no responsibility
with respect to any statements, warranties or representations made in or in
connection with this Agreement or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement, the other
Loan Documents or any other instrument or document furnished pursuant hereto or
the attachment, perfection or priority of any security interest or mortgage,

 

(b)                                 the assigning Lender makes no representation
or warranty and assumes no responsibility with respect to the financial
condition of the Borrowers and their Subsidiaries or any other Person primarily
or secondarily liable in respect of any of the Obligations, or the performance
or observance by the Borrowers and their Subsidiaries or any other Person
primarily or secondarily liable in respect of any of the Obligations of any of
their obligations under this Agreement or any of the other Loan Documents or any
other instrument or document furnished pursuant hereto or thereto;

 

(c)                                  such assignee confirms that it has received
a copy of this Agreement, together with copies of the most recent financial
statements referred to in Section 7.4 and Section 8.4 and such other documents
and information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance;

 

(d)                                 such assignee will, independently and
without reliance upon the assigning Lender, the Agent or any other Lender and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement;

 

(e)                                  such assignee appoints and authorizes the
Agent to take such action as agent on its behalf and to exercise such powers
under this Agreement and the other Loan Documents as are delegated to the Agent
by the terms hereof or thereof, together with such powers as are reasonably
incidental thereto;

 

(f)                                    such assignee agrees that it will perform
in accordance with their terms all of the obligations that by the terms of this
Agreement are required to be performed by it as a Lender;

 

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(g)                                 such assignee represents and warrants that
it is legally authorized to enter into such Assignment and Acceptance; and

 

(h)                                 such assignee acknowledges that it has made
arrangements with the assigning Revolving Credit Lender satisfactory to such
assignee with respect to its PRO RATA share of Letter of Credit Fees in respect
of outstanding Letters of Credit.

 

15.3.                        NEW NOTES.  Upon its receipt of an Assignment and
Acceptance executed by the parties to such assignment, together with each Note
subject to such assignment, the Agent shall (a) record the information contained
therein in the Loan Account and the Register, and (b) give prompt notice thereof
to the Borrowers and the Lenders (other than the assigning Lender).  Within five
(5) Business Days after receipt of such notice from the Assignee, the Borrowers,
at their own expense, shall execute and deliver to the Agent, in exchange for
each surrendered Note, a new Note to the order of such Assignee in an amount
equal to the amount assumed by such Assignee pursuant to such Assignment and
Acceptance and, if the assigning Revolving Credit Lender has retained some
portion of its obligations hereunder, a new Note to the order of the assigning
Revolving Credit Lender in an amount equal to the amount retained by it
hereunder.  Such new Notes shall provide that they are replacements for the
surrendered Notes, shall be in an aggregate principal amount equal to the
aggregate principal amount of the surrendered Notes, shall be dated the
effective date of such Assignment and Acceptance and shall otherwise be in
substantially the form of the assigned Notes.  Within five (5) days of issuance
of any new Notes pursuant to this Section 15.3, the Borrowers shall deliver upon
the request of the Lender an opinion of counsel, addressed to the Lenders and
the Agent, relating to the due authorization, execution and delivery of such new
Notes and the legality, validity and binding effect thereof, in form and
substance satisfactory to the Lenders.  The surrendered Notes shall be cancelled
and returned to the Borrowers.

 

15.4.                        PARTICIPATIONS.  Each Lender may sell
participations to one or more Lenders or other entities in all or a portion of
such Lender’s rights and obligations under this Agreement and the other Loan
Documents; PROVIDED that (a) (i) with respect to Revolving Credit Lenders, each
such participation shall be in an amount of not less than $5,000,000 and (ii)
with respect to the Tranche B Lender, each such participation shall be in an
amount of not less than $1,000,000, (b) any such sale or participation shall not
affect the rights and duties of the selling Lender hereunder to the Borrowers,
and (c) the only rights granted to the participant pursuant to such
participation arrangements with respect to waivers, amendments or modifications
of the Loan Documents shall be the rights to approve waivers, amendments or
modifications that (i) with respect to the Revolving Credit Lenders, would
reduce the principal of or the interest rate on any Loans, extend the term or
increase the amount of the Commitment of such Lender as it relates to such
participant, reduce the amount of any Unused Fee or Letter of Credit Fees to
which such participant is entitled or extend any regularly scheduled payment
date for principal or interest and (ii) with respect to the Tranche B Lender,
would reduce the principal, interest or fees payable on the Tranche B Loan,
postpone any scheduled payment of any principal, interest or fees on account of
the Tranche B Loan or release Collateral which would cause an OverLoan.

 

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15.5.                        ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE
BORROWERS.  If any assignee Lender is an Affiliate of the Borrowers, then any
such assignee Lender shall have no right to vote as a Lender hereunder or under
any of the other Loan Documents for purposes of granting consents or waivers or
for purposes of agreeing to amendments or other modifications to any of the Loan
Documents or for purposes of making requests to the Agent pursuant to Section
13.1 or Section 13.2, and the determination of the Required Lenders, Required
Revolving Credit Lenders, SuperMajority Lenders and SuperMajority Revolving
Credit Lenders shall for all purposes of this Agreement and the other Loan
Documents be made without regard to such assignee Lender’s interest in any of
the Loans or Reimbursement Obligations.  If any Lender sells a participating
interest in any of the Loans or Reimbursement Obligations to a participant, and
such participant is a Borrower or an Affiliate of a Borrower, then such
transferor Lender shall promptly notify the Agent of the sale of such
participation.  A transferor Lender shall have no right to vote as a Lender
hereunder or under any of the other Loan Documents for purposes of granting
consents or waivers or for purposes of agreeing to amendments or modifications
to any of the Loan Documents or for purposes of making requests to the Agent
pursuant to Section 13.1 or Section 13.2 to the extent that such participation
is beneficially owned by the Borrowers or any Affiliate of the Borrowers, and
the determination of the Required Lenders, Required Revolving Credit Lenders,
SuperMajority Lenders and SuperMajority Revolving Credit Lenders shall for all
purposes of this Agreement and the other Loan Documents be made without regard
to the interest of such transferor Lender in the Loans or Reimbursement
Obligations to the extent of such participation.

 

15.6.                        MISCELLANEOUS ASSIGNMENT PROVISIONS.  Any assigning
Lender shall retain its rights to be indemnified pursuant to Section 16.3 with
respect to any claims or actions arising prior to the date of such assignment. 
Anything contained in this Section 15 to the contrary notwithstanding, any
Lender may at any time pledge or assign a security interest in all or any
portion of its interest and rights under this Agreement (including all or any
portion of its Notes) to secure obligations of such Lender, including any pledge
or assignment to secure obligations to (a) any of the twelve Federal Reserve
Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section
341 and (b) with respect to any Lender that is a fund that invests in bank
loans, to any lender or any trustee for, or any other representative of, holders
of obligations owed or securities issued by such fund as security for such
obligations or securities or any institutional custodian for such fund or for
such lender.  Any foreclosure or similar action by any Person in respect of such
pledge or assignment shall be subject to the other provisions of this Section
15.  No such pledge or the enforcement thereof shall release the pledgor Lender
from its obligations hereunder or under any of the other Loan Documents, provide
any voting rights hereunder to the pledgee thereof, or affect any rights or
obligations of the Borrowers or Agent hereunder.

 

15.7.                        ASSIGNMENT BY BORROWERS.  The Borrowers shall not
assign or transfer any of their rights or obligations under any of the Loan
Documents without the prior written consent of each of the Lenders.

 

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16.                                 PROVISIONS OF GENERAL APPLICATION.

 

16.1.                        SETOFF.  The Borrowers hereby grant to the Agent
and each of the Lenders a continuing lien, security interest and right of setoff
as security for all liabilities and obligations to the Agent and each Lender,
whether now existing or hereafter arising, upon and against all deposits,
credits, collateral and property, now or hereafter in the possession, custody,
safekeeping or control of the Agent or such Lender or any Lender Affiliate and
their successors and assigns or in transit to any of them.  Regardless of the
adequacy of any collateral, if any of the Obligations are due and payable and
have not been paid or any Event of Default shall have occurred, any deposits or
other sums credited by or due from any of the Lenders to the Borrowers and any
securities or other property of the Borrowers in the possession of such Lender
may be applied to or set off by such Lender against the payment of Obligations
and any and all other liabilities, direct, or indirect, absolute or contingent,
due or to become due, now existing or hereafter arising, of the Borrowers to
such Lender.  ANY AND ALL RIGHTS TO REQUIRE ANY LENDER TO EXERCISE ITS RIGHTS OR
REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS,
PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS
OR OTHER PROPERTY OF THE BORROWERS ARE HEREBY KNOWINGLY, VOLUNTARILY AND
IRREVOCABLY WAIVED.  Each of the Lenders agree with each other Lender that (a)
if an amount to be set off is to be applied to Indebtedness of the Borrowers to
such Lender, other than Indebtedness constituting Obligations owed to such
Lender, such amount shall be applied ratably to such other Indebtedness and to
the Obligations owed to such Lender, and (b) if such Lender shall receive from
the Borrowers, whether by voluntary payment, exercise of the right of setoff,
counterclaim, cross action, enforcement of the claim constituting the Obligation
owed to such Lender by proceedings against the Borrowers at law or in equity or
by proof thereof in bankruptcy, reorganization, liquidation, receivership or
similar proceedings, or otherwise, and shall retain and apply to the payment of
Obligations owed to such Lender any amount in excess of its “ratable portion” of
the payments received by all of the Lenders with respect to the Obligations owed
to all of the Lenders, such Lender will make such disposition and arrangements
with the other Lenders with respect to such excess, either by way of
distribution, PRO TANTO assignment of claims, subrogation or otherwise as shall
result in each Lender receiving in respect of the Obligations owed it its
“ratable portion” as contemplated by this Agreement; PROVIDED that if all or any
part of such excess payment is thereafter recovered from such Lender, such
disposition and arrangements shall be rescinded and the amount restored to the
extent of such recovery, but without interest.  As used here in “ratable
portion” shall mean the amounts such Lender would have received if the amounts
had been applied in accordance with Section 13.5.

 

16.2.                        EXPENSES.  The Borrowers jointly and severally
agree to pay (a) the reasonable costs of producing and reproducing this
Agreement, the other Loan Documents and the other agreements and instruments
mentioned herein, (b) any taxes (including any interest and penalties in respect
thereto) payable by the Agent or any of the Lenders (other than taxes based upon
the Agent’s or any Lender’s or any interestholder in a Lender’s net income or
profits and other than any taxes referred to in the first sentence of Section
5.3.2, which shall be taken into account in the manner provided by Section
5.3.2) on or with respect to the transactions contemplated by this Agreement
(the Borrowers hereby agreeing to indemnify the Agent and each Lender with
respect thereto), (c) the reasonable fees, expenses and disbursements of the
Agent’s Special Counsel, counsel to the Tranche B Lender or any local counsel to
the Agent incurred in connection with

 

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the preparation, syndication, administration or interpretation of the Loan
Documents and other instruments mentioned herein, each closing hereunder, any
amendments, modifications, approvals, consents or waivers hereto or hereunder,
or the cancellation of any Loan Document upon payment in full in cash of all of
the Obligations or pursuant to any terms of such Loan Document for providing for
such cancellation, (d) the reasonable fees, expenses and disbursements of the
Agent, the Tranche B Lender or any of their affiliates incurred by the Agent,
the Tranche B Lender or any such affiliate in connection with the preparation,
syndication, administration or interpretation of the Loan Documents and other
instruments mentioned herein, including all title insurance premiums and
surveyor, engineering, appraisal and examination charges, (e) any reasonable
fees, costs, expenses and bank charges, including bank charges for returned
checks, incurred by the Agent in establishing, maintaining or handling agency
accounts, lock box accounts and other accounts for the collection of any of the
Collateral, (f) all reasonable out-of-pocket expenses (including without
limitation the Agent’s and the Tranche B Lender’s travel costs and reasonable
attorneys’ fees and costs, which attorneys may be employees of the Agent or the
Tranche B Lender, and reasonable consulting, accounting, appraisal, investment
bankruptcy and similar professional fees and charges) incurred by the Agent, the
Tranche B Lender, the Agent’s Special Counsel, counsel to the Tranche B Lender
or Lenders’ Special Counsel in connection with (i) the enforcement of or
preservation of rights under any of the Loan Documents against the Borrowers or
any of their Subsidiaries or the administration thereof after a Default exists
and (ii) any litigation, proceeding or dispute whether arising hereunder or
otherwise, in any way related to any Lender’s or the Agent’s relationship with
the Borrowers or any of their Subsidiaries and (g) all reasonable fees, expenses
and disbursements of the Agent incurred in connection with UCC searches, UCC
filings, intellectual property searches, intellectual property filings or
mortgage recordings.  In the Agent’s reasonable discretion, if the Borrowers
fail to do so, the Agent may discharge taxes and other encumbrances at any time
levied or placed on any of the Collateral, maintain any of the Collateral, make
repairs thereto and pay any necessary filing fees or insurance premiums.  The
Borrowers agree to reimburse the Agent on demand for all expenditures so made. 
The Agent shall have no obligation to the Borrowers to make any such
expenditures, nor shall the making thereof be construed as a waiver or cure if a
Default exist.  The covenants contained in this Section 16.2 shall survive
payment or satisfaction in full of all other obligations.  As used herein,
“LENDERS’ SPECIAL COUNSEL” shall mean a single counsel, selected by the Required
Revolving Credit Lenders following the occurrence of an Event of Default, to
represent the interests of the Lenders in connection with the enforcement,
attempted enforcement, or preservation of any rights and remedies under this, or
any other Loan Document, as well as in connection with any “workout”,
forbearance, or restructuring of the credit facility contemplated hereby.

 

16.3.                        INDEMNIFICATION.  The Borrowers agree to indemnify
and hold harmless the Agent, its affiliates and the Lenders from and against any
and all claims, actions and suits whether groundless or otherwise, and from and
against any and all liabilities, losses, damages and reasonable expenses of
every nature and character arising out of this Agreement or any of the other
Loan Documents or the transactions contemplated hereby including, without
limitation, (a) any actual or proposed use by the Borrowers or any of their
Subsidiaries of the proceeds of any of the Loans or Letters of Credit, (b) the
reversal or withdrawal of any provisional credits granted by the Agent upon the
transfer of funds from lock box, bank agency, concentration accounts or
otherwise under any cash management arrangements with the Borrowers or any

 

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Subsidiary or in connection with the provisional honoring of funds transfers,
checks or other items, (c) any actual or alleged infringement of any trademark,
service mark or similar right of the Borrowers or any of their Subsidiaries
comprised in the Collateral, (d) the Borrowers or any of their Subsidiaries
entering into or performing this Agreement or any of the other Loan Documents or
(e) with respect to the Borrowers and their Subsidiaries and their respective
properties and assets, the violation of any Environmental Law, the presence,
disposal, escape, seepage, leakage, spillage, discharge, emission, release or
threatened release of any Hazardous Substances or any action, suit, proceeding
or investigation brought or threatened with respect to any Hazardous Substances
(including, but not limited to, claims with respect to wrongful death, personal
injury or damage to property), in each case including, without limitation, the
reasonable fees and disbursements of counsel and allocated costs of internal
counsel incurred in connection with any such investigation, litigation or other
proceeding.  In litigation, or the preparation therefor, the Lenders, the
Tranche B Lender and the Agent and its affiliates shall be entitled to select
their own counsel and, in addition to the foregoing indemnity, the Borrowers
agree to pay promptly the reasonable fees and expenses of such counsel.  If, and
to the extent that the obligations of the Borrowers under this Section 16.3 are
unenforceable for any reason, the Borrowers hereby agrees to make the maximum
contribution to the payment in satisfaction of such obligations which is
permissible under applicable law.  The covenants contained in this Section 16.3
shall survive payment or satisfaction in full of all other Obligations.

 

16.4.                        TREATMENT OF CERTAIN CONFIDENTIAL INFORMATION.

 

16.4.1.               CONFIDENTIALITY.  Each of the Lenders and the Agent
agrees, on behalf of itself and each of its affiliates, directors, officers,
employees and representatives, to use reasonable precautions to keep
confidential, in accordance with their customary procedures for handling
confidential information of the same nature and in accordance with safe and
sound banking practices, any non-public information supplied to it by the
Borrowers or any of their Subsidiaries pursuant to this Agreement.  The
Borrowers and each Lender will maintain, as confidential, all of the
following:(i) proprietary approaches, techniques, and methods of analysis which
are applied by the Agent in the administration of the credit facility
contemplated by this Agreement, (ii) proprietary forms and formats utilized by
the Agent in providing reports to the Lenders pursuant hereto, which forms or
formats are not of general currency.  Notwithstanding the foregoing, nothing
herein shall limit the disclosure of any such information (a) after such
information shall have become public other than through a violation of this
Section 16.4, or becomes available to any of the Lenders or the Agent on a
nonconfidential basis from a source other than the Borrowers, (b) to the extent
required by statute, rule, regulation or judicial process, (c) to counsel for
any of the Lenders or the Agent, (d) to bank examiners or any other regulatory
authority having jurisdiction over any Lender or the Agent, or to auditors or
accountants, (e) to the Agent, any Lender or any Financial Affiliate, (f) in
connection with any litigation to which any one or more of the Lenders, the
Agent or any Financial Affiliate is a party, or in connection with the
enforcement of rights or remedies hereunder or under any other Loan Document,
(g) to a Lender Affiliate or a Subsidiary or affiliate of the Agent, (h) to any
actual or prospective assignee or participant or any actual or prospective
counterparty (or its advisors) to any swap or derivative transactions referenced
to credit or other risks or events arising under this

 

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Agreement or any other Loan Document so long as such assignee, participant or
counterparty, as the case may be, agrees to be bound by the provisions of
Section 16.4 or (i) with the consent of the Borrowers’ Representative. 
Moreover, each of the Agent, the Lenders and any Financial Affiliate is hereby
expressly permitted by the Borrowers to refer to any of the Borrowers and their
Subsidiaries in connection with any advertising, promotion or marketing
undertaken by the Agent, such Lender or such Financial Affiliate and, for such
purpose, the Agent, such Lender or such Financial Affiliate may utilize any
trade name, trademark, logo or other distinctive symbol associated with the
Borrowers or any of their Subsidiaries or any of their businesses.

 

16.4.2.               PRIOR NOTIFICATION.  Unless specifically prohibited by
applicable law or court order, each of the Lenders and the Agent shall, prior to
disclosure thereof, notify the Borrowers’ Representative of any request for
disclosure of any such non-public information by any governmental agency or
representative thereof (other than any such request in connection with an
examination of the financial condition of such Lender by such governmental
agency) or pursuant to legal process.

 

16.4.3.               OTHER.  In no event shall any Lender or the Agent be
obligated or required to return any materials furnished to it or any Financial
Affiliate by the Borrowers or any of their Subsidiaries.  The obligations of
each Lender under this Section 16.4 shall supersede and replace the obligations
of such Lender under any confidentiality letter in respect of this financing
signed and delivered by such Lender to the Borrowers prior to the date hereof
and shall be binding upon any assignee of, or purchaser of any participation in,
any interest in any of the Loans or Reimbursement Obligations from any Lender. 
All appraisals, inventories, analysis, financial information, and other
materials which the Agent and the Lenders may obtain, develop, or receive with
respect to the Borrowers are confidential to the Agent and the Lenders and that,
except as otherwise provided herein, the Borrowers are not entitled to receipt
of any of such appraisals, inventories, analysis, financial information, and
other materials, nor copies or extracts thereof or therefrom.

 

16.5.                        SURVIVAL OF COVENANTS, ETC.  All covenants,
agreements, representations and warranties made herein, in the Notes, in any of
the other Loan Documents or in any documents or other papers delivered by or on
behalf of the Borrowers or any of their Subsidiaries pursuant hereto shall be
deemed to have been relied upon by the Lenders and the Agent, notwithstanding
any investigation heretofore or hereafter made by any of them, and shall survive
the making by the Lenders of any of the Loans and the issuance, extension or
renewal of any Letters of Credit, as herein contemplated, and shall continue in
full force and effect so long as any Letter of Credit or any amount due under
this Agreement or the Notes or any of the other Loan Documents remains
outstanding or any Lender has any obligation to make any Loans or the Agent has
any obligation to issue, extend or renew any Letter of Credit, and for such
further time as may be otherwise expressly specified in this Agreement.  All
statements contained in any certificate or other paper delivered to any Lender
or the Agent at any time by or on behalf of the Borrowers or any of their
Subsidiaries pursuant hereto or in connection with the transactions contemplated
hereby shall constitute representations and warranties by the Borrowers or such
Subsidiary hereunder.

 

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16.6.                        NOTICES.  Except as otherwise expressly provided in
this Agreement, all notices and other communications made or required to be
given pursuant to this Agreement or the Notes or any Letter of Credit
Applications shall be in writing and shall be delivered in hand, mailed by
United States registered or certified first class mail, postage prepaid, sent by
overnight courier, or sent by telegraph, telecopy, facsimile or telex and
confirmed by delivery via courier or postal service, addressed as follows:

 

(a)                                  if to the Borrowers, to the Borrowers’
Representative at 2520 Renaissance Boulevard, King of Prussia, Pennsylvania
19406, Attention: Mr. Raymond Springer, Chief Financial Officer, or at such
other address for notice as the Borrowers’ Representative shall last have
furnished in writing to the Person giving the notice;

 

(b)                                 if to the Agent, at 40 Broad Street, Boston,
Massachusetts 02109, USA, Attention: James Dore, Managing Director, or such
other address for notice as the Agent shall last have furnished in writing to
the Person giving the notice with a copy to Susan E. Siebert, Edwards & Angell,
LLP, 101 Federal Street, Boston, Massachusetts 02110; and

 

(c)                                  if to the Tranche B Lender, at 40 Broad
Street, Boston, Massachusetts 02109, USA, Attention: Michael Pizette, Managing
Director, or such other address for notice as the Agent shall last have
furnished in writing to the Person giving the notice with a copy to Robert A.J.
Barry, Bingham McCutchen LLP, 150 Federal Street, Boston, Massachusetts 02110;
and

 

(d)                                 if to any Lender, at such Lender’s address
set forth on SCHEDULE 1.1(b) hereto, or such other address for notice as such
Lender shall have last furnished in writing to the Person giving the notice.

 

Any such notice or demand shall be deemed to have been duly given or made and to
have become effective (i) if delivered by hand, overnight courier or facsimile
to a responsible officer of the party to which it is directed, at the time of
the receipt thereof by such officer or the sending of such facsimile and (ii) if
sent by registered or certified first-class mail, postage prepaid, on the third
Business Day following the mailing thereof.  Any notice or other communication
to be made hereunder or under the Notes or any Letter of Credit Applications,
even if otherwise required to be in writing under other provisions of this
Agreement, the Notes or any Letter of Credit Applications, may alternatively be
made in an electronic record transmitted electronically under such
authentication and other procedures as the parties hereto may from time to time
agree in writing (but not an electronic record), and such electronic
transmission shall be effective at the time set forth in such procedures. 
Unless otherwise expressly provided in such procedures, such an electronic
record shall be equivalent to a writing under the other provisions of this
Agreement, the Notes or any Letter of Credit Applications, and such
authentication, if made in compliance with the procedures so agreed by the
parties hereto in writing (but not an electronic record), shall be equivalent to
a signature under the other provisions of this Agreement, the Notes or any
Letter of Credit Applications.

 

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16.7.                     GOVERNING LAW.  THIS AGREEMENT AND, EXCEPT AS
OTHERWISE SPECIFICALLY PROVIDED THEREIN, EACH OF THE OTHER LOAN DOCUMENTS ARE
CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL, PURSUANT TO NEW
YORK GENERAL OBLIGATIONS LAW SECTION 5-1401 FOR ALL PURPOSES BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID STATE OF NEW YORK.  THE
BORROWERS AGREE THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF
THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK
OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE
JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE
UPON THE BORROWERS BY MAIL AT THE ADDRESS SPECIFIED IN SECTION 16.6.  THE
BORROWERS HEREBY WAIVE ANY OBJECTION THAT THEY MAY NOW OR HEREAFTER HAVE TO THE
VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN
INCONVENIENT COURT.

 

16.8.                        HEADINGS.  The captions in this Agreement are for
convenience of reference only and shall not define or limit the provisions
hereof.

 

16.9.                        COUNTERPARTS.  This Agreement and any amendment
hereof may be executed in several counterparts and by each party on a separate
counterpart, each of which when executed and delivered shall be an original, and
all of which together shall constitute one instrument.  In proving this
Agreement it shall not be necessary to produce or account for more than one such
counterpart signed by the party against whom enforcement is sought.  Delivery by
facsimile by any of the parties hereto of an executed counterpart hereof or of
any amendment or waiver hereto shall be as effective as an original executed
counterpart hereof or of such amendment or waiver and shall be considered a
representation that an original executed counterpart hereof or such amendment or
waiver, as the case may be, will be delivered.

 

16.10.                  ENTIRE AGREEMENT, ETC.  The Loan Documents and any other
documents executed in connection herewith or therewith express the entire
understanding of the parties with respect to the transactions contemplated
hereby.  Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated, except as provided in Section 14.

 

16.11.              WAIVER OF JURY TRIAL.  THE BORROWERS HEREBY WAIVE THEIR
RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY
DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN
DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE
OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING ANY
COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE AGENT OR ANY
LENDER RELATING TO THE ADMINISTRATION OF THE LOANS OR ENFORCEMENT OF THE LOAN
DOCUMENTS AND AGREES THAT IT WILL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH
ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT

 

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BE OR HAS NOT BEEN WAIVED.  Except as prohibited by law, the Borrowers hereby
waive any right they may have to claim or recover in any litigation referred to
in the preceding sentence any special, exemplary, punitive or consequential
damages or any damages other than, or in addition to, actual damages.  The
Borrowers (a) certify that no representative, agent or attorney of any Lender or
the Agent has represented, expressly or otherwise, that such Lender or the Agent
would not, in the event of litigation, seek to enforce the foregoing waivers and
(b) acknowledges that the Agent and the Lenders have been induced to enter into
this Agreement and the other Loan Documents to which it is a party by, among
other things, the waivers and certifications contained herein.

 

16.12.                  POWER OF ATTORNEY.

 

16.12.1.         APPOINTMENT AND POWERS OF AGENT.  Each of the Borrowers hereby
irrevocably constitutes and appoints the Agent and any officer or agent thereof,
with full power of substitution, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead of the Borrowers or
in the Agent’s own name, for the purpose of carrying out the terms of this
Agreement, to take any and all appropriate action and to execute any and all
documents and instruments that may be necessary or useful to accomplish the
purposes of this Agreement and, without limiting the generality of the
foregoing, hereby gives said attorneys the power and right, on behalf of the
Borrowers, without notice to or assent by the Borrowers, to do the following:

 

(a)                                  if a Default exist, generally to sell,
transfer, pledge, make any agreement with respect to or otherwise dispose of or
deal with any of the Collateral in such manner as is consistent with the Uniform
Commercial Code of the State and as fully and completely as though the Agent
were the absolute owner thereof for all purposes, and to do, at the Borrowers’
expense, at any time, or from time to time, all acts and things which the Agent
deems necessary or useful to protect, preserve or realize upon the Collateral
and the Agent’s security interest therein, in order to effect the intent of this
Agreement, all no less fully and effectively as the Borrowers might do,
including, without limitation, (i) the filing and prosecuting of registration
and transfer applications with the appropriate federal, state or local agencies
or authorities with respect to trademarks, copyrights and patentable inventions
and processes, (ii) upon written notice to the Borrower’s Representative, the
exercise of voting rights with respect to voting securities, which rights may be
exercised, if the Agent so elects, with a view to causing the liquidation of
assets of the issuer of any such securities and (iii) the execution, delivery
and recording, in connection with any sale or other disposition of any
Collateral, of the endorsements, assignments or other instruments of conveyance
or transfer with respect to such Collateral; and

 

(b)                                 to the extent that the Borrowers’
authorization given in Section 6.2 is not sufficient, to file such financing
statements with respect hereto, with or without the Borrowers’ signature, or a
photocopy of this Agreement in substitution for a financing statement, as the
Agent may deem appropriate and to

 

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execute in the Borrowers’ name such financing statements and amendments thereto
and continuation statements which may require the Borrowers’ signature.

 

16.12.2.         RATIFICATION BY BORROWERS.  To the extent permitted by law, the
Borrowers hereby ratify all that said attorneys shall lawfully do or cause to be
done by virtue hereof.  This power of attorney is a power coupled with an
interest and is irrevocable.

 

16.12.3.         NO DUTY ON AGENT.  The powers conferred on the Agent hereunder
are solely to protect the interests of the Agent and the Lenders in the
Collateral and shall not impose any duty upon the Agent to exercise any such
powers.  The Agent shall be accountable only for the amounts that it actually
receives as a result of the exercise of such powers, and neither it nor any of
its officers, directors, employees or agents shall be responsible to the
Borrowers for any act or failure to act, except for the Agent’s own gross
negligence or willful misconduct.

 

16.13.                  SURETYSHIP WAIVERS BY THE BORROWERS.  The Borrowers
waive demand, notice, protest, notice of acceptance of this Agreement, notice of
loans made, credit extended, Collateral received or delivered or other action
taken in reliance hereon and all other demands and notices of any description. 
With respect to both the Obligations and the Collateral, the Borrowers assent to
any extension or postponement of the time of payment or any other indulgence, to
any substitution, exchange or release of or failure to perfect any security
interest in any Collateral, to the addition or release of any party or person
primarily or secondarily liable, to the acceptance of partial payment thereon
and the settlement, compromising or adjusting of any thereof, all in such manner
and at such time or times as the Agent may deem advisable.  The Agent shall have
no duty as to the collection or protection of the Collateral or any income
therefrom, the preservation of rights against prior parties, or the preservation
of any rights pertaining thereto beyond the safe custody thereof as set forth in
Section 14.12.  The Borrowers further waive any and all other suretyship
defenses.

 

16.14.                  MARSHALLING.  Neither the Agent nor any Lender shall be
required to marshal any present or future collateral security (including but not
limited to the Collateral) for, or other assurances of payment of, the
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of the rights and
remedies of the Agent or any Lender hereunder and of the Agent or any Lender in
respect of such collateral security and other assurances of payment shall be
cumulative and in addition to all other rights and remedies, however existing or
arising.  To the extent that it lawfully may, the Borrowers hereby agree that
they will not invoke any law relating to the marshalling of collateral which
might cause delay in or impede the enforcement of the Agent’s rights and
remedies under this Agreement or under any other instrument creating or
evidencing any of the Obligations or under which any of the Obligations is
outstanding or by which any of the Obligations is secured or payment thereof is
otherwise assured, and, to the extent that it lawfully may, the Borrowers hereby
irrevocably waive the benefits of all such laws.

 

16.15.                  SEVERABILITY.  The provisions of this Agreement are
severable and if any one clause or provision hereof shall be held invalid or
unenforceable in whole or in part in any

 

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jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such clause or provision in any other jurisdiction, or any other
clause or provision of this Agreement in any jurisdiction.

 

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IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as a
sealed instrument as of the date first set forth above.

 

 

“BORROWERS”

 

 

 

FAO, INC.

 

 

 

By:

/s/ Jerry R. Welch

 

 

 

Name: Jerry R. Welch

 

 

 

Title: Chief Executive Officer and President

 

 

 

FAO SCHWARZ, INC.

 

 

 

By:

/s/ Jerry R. Welch

 

 

 

Name: Jerry R. Welch

 

 

 

Title: Chief Executive Officer and President

 

 

 

 

 

 

 

ZB COMPANY, INC.

 

 

 

By:

/s/ Jerry R. Welch

 

 

 

Name: Jerry R. Welch

 

 

 

Title: Chief Executive Officer and President

 

 

 

THE RIGHT START, INC.

 

 

 

By:

/s/ Jerry R. Welch

 

 

 

Name: Jerry R. Welch

 

 

 

Title: Chief Executive Officer and President

 

 

 

TARGOFF-RS, LLC, a New York limited liability
company

 

 

 

By: FAO, Inc., its sole member

 

 

 

By:

/s/ Jerry R. Welch

 

 

 

Name: Jerry R. Welch

 

 

 

Title: Chief Executive Officer and President

 

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“ADMINISTRATIVE AGENT, COLLATERAL AGENT AND SYNDICATION AGENT”

 

 

 

FLEET RETAIL FINANCE INC.

 

 

 

 

 

By:

/s/ Christine M. Scott

 

 

 

Name: Christine M. Scott

 

 

 

Title: Vice President

 

 

 

 

“CO-DOCUMENTATION AGENTS”

 

 

 

CONGRESS FINANCIAL CORPORATION (CENTRAL)

 

 

 

 

 

By:

/s/ Steven Linderman

 

 

 

Name: Steven Linderman

 

 

 

Title: Senior Vice President

 

 

 

 

WELLS FARGO RETAIL FINANCE II, LLC

 

 

 

 

 

By:

/s/ David Molinario

 

 

 

Name: David Molinario

 

 

 

Title: Vice President

 

 

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“REVOLVING CREDIT LENDERS”

 

 

 

FLEET RETAIL FINANCE INC.

 

 

 

 

 

By:

/s/ Christine M. Scott

 

 

 

Name: Christine M. Scott

 

 

 

Title: Vice President

 

 

 

 

CONGRESS FINANCIAL CORPORATION (CENTRAL)

 

 

 

 

 

By:

/s/ Steve Linderman

 

 

 

Name: Steve Linderman

 

 

 

Title: Senior Vice President

 

 

 

 

WELLS FARGO RETAIL FINANCE II, LLC

 

 

 

 

 

By:

/s/ David Molinario

 

 

 

Name: David Molinario

 

 

 

Title: Vice President

 

 

 

 

“TRANCHE B LENDER”

 

 

 

BACK BAY CAPITAL FUNDING LLC

 

 

 

 

 

By:

/s/ Kristan M. O'Connor

 

 

 

Name: Kristan M. O'Connor

 

 

 

Title: Director

 

 

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