Exhibit 10.1

 

U.S. $20,000,000

 

 

FINANCING AGREEMENT,

 

 

dated as of December 22, 2009,

 

 

between

 

 

U.S. BANK NATIONAL ASSOCIATION,

 

 

as Bank

 

 

and

 

 

OVERSTOCK.COM, INC.,

 

 

as Borrower

 

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Table of Contents

 

 

 

Page

 

 

 

ARTICLE I

DEFINITIONS

1

Section 1.1

Defined Terms

1

Section 1.2

Environmental Definitions

17

Section 1.3

Other Definitional Provisions; Construction

18

 

 

 

ARTICLE II

LOANS AND OTHER FINANCIAL ACCOMMODATIONS

20

Section 2.1

Total Facility

20

Section 2.2

Regular Advances

20

Section 2.3

Cash Secured Advances

20

Section 2.4

[Intentionally omitted.]

20

Section 2.5

Letters of Credit

20

Section 2.6

No Deficiency

21

Section 2.7

Disbursement of Advances

21

Section 2.8

Notes; Records of Advances of Credit

22

Section 2.9

No Limitation on Liens

23

Section 2.10

Advance Rates and Sublimits

23

Section 2.11

General Conditions

23

Section 2.12

One General Obligation; Cross-Collateralized

24

 

 

 

ARTICLE III

INTEREST CHARGES; FEES

24

Section 3.1

Interest

24

Section 3.2

Increased Costs

25

Section 3.3

Closing Fee

25

Section 3.4

Unused Commitment Fee

26

Section 3.5

Letter of Credit Fees

26

Section 3.6

Payments; Charging Loan Account

26

Section 3.7

Maximum Rate

26

 

 

 

ARTICLE IV

MONTHLY LOAN ACTIVITY ACCOUNTINGS

27

 

 

 

ARTICLE V

SECURITY

27

 

 

 

ARTICLE VI

CONDITIONS PRECEDENT; FURTHER ASSURANCES

27

Section 6.1

Initial Loan

27

Section 6.2

General Conditions

30

Section 6.3

Further Assurances

30

 

 

 

ARTICLE VII

RECEIVABLES; INVENTORY; COLLECTION OF RECEIVABLES; DISPUTED RECEIVABLES;
PROCEEDS OF INVENTORY

31

Section 7.1

Agreements Regarding Receivables

31

Section 7.2

Agreements Regarding Inventory

31

Section 7.3

Locked Box

31

Section 7.4

Collection of Remittances

32

Section 7.5

Crediting of Remittances

32

Section 7.6

Cost of Collection

33

Section 7.7

On-Line Banking

33

 

 

 

ARTICLE VIII

EXAMINATION OF LOAN COLLATERAL; REPORTING

33

Section 8.1

Maintenance of Books and Records

33

 

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Table of Contents

(continued)

 

 

 

Page

 

 

 

Section 8.2

Access and Inspection

33

Section 8.3

Reporting Regarding Receivables

33

Section 8.4

Reporting Regarding Inventory; Inventory Appraisal

34

Section 8.5

Interim Financial Statements; Payable Information

34

Section 8.6

Annual Projections

34

Section 8.7

Annual Financial Statements

35

Section 8.8

Management Reports

35

Section 8.9

Comparisons to Financials; Certificates

35

Section 8.10

Public Filings

35

Section 8.11

Delisting Correspondence

35

Section 8.12

Tax Returns; Additional Information

35

 

 

 

ARTICLE IX

WARRANTIES, REPRESENTATIONS AND COVENANTS

36

Section 9.1

Corporate Status

36

Section 9.2

Due Authorization; Validity

36

Section 9.3

No Violation

36

Section 9.4

Use of Loan Proceeds

36

Section 9.5

Ownership of Assets; Licenses; Patents

37

Section 9.6

Indebtedness

37

Section 9.7

Title to Property; No Liens

37

Section 9.8

Restrictions; Labor Disputes; Labor Contracts

37

Section 9.9

No Violation of Law

37

Section 9.10

Hazardous Substances

38

Section 9.11

Absence of Default

38

Section 9.12

Accuracy of Financials; No Material Changes

38

Section 9.13

Pension Plans

38

Section 9.14

Taxes and Other Charges

39

Section 9.15

No Litigation

39

Section 9.16

No Brokerage Fee

39

Section 9.17

Affiliates; Subsidiaries

39

Section 9.18

Capitalization

39

Section 9.19

Noncompetition Agreements

39

Section 9.20

Deposit and Other Accounts

39

Section 9.21

Solvency

39

Section 9.22

Full Disclosure

39

Section 9.23

Casualties

40

Section 9.24

Leases; Bailments

40

Section 9.25

Insurance Policies

40

Section 9.26

Consents

40

Section 9.27

Tax Shelter Regulations

40

Section 9.28

Inventory

40

Section 9.29

Internal Controls

40

Section 9.30

Updating Representations and Warranties

41

 

 

 

ARTICLE X

COVENANTS

41

Section 10.1

Payment of Certain Expenses

41

Section 10.2

Notice of Litigation; Uninsured Casualty Loss

41

 

ii

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Table of Contents

(continued)

 

 

 

Page

 

 

 

Section 10.3

Notice of ERISA Events

42

Section 10.4

Notice of Labor Disputes; Labor Contracts

42

Section 10.5

Compliance with Laws

42

Section 10.6

Notice of Violations of Law, Tax Assessments

42

Section 10.7

[Intentionally omitted.]

42

Section 10.8

Notice of Customer Defaults

42

Section 10.9

Taxes and Charges

42

Section 10.10

Indebtedness; Guaranties

43

Section 10.11

Restrictions; Labor Disputes

44

Section 10.12

Pension Plans

44

Section 10.13

Solvency

44

Section 10.14

Property Insurance

44

Section 10.15

Liability Insurance

44

Section 10.16

Mergers; Acquisitions

44

Section 10.17

Investments

45

Section 10.18

Distributions; Loans; Fees

45

Section 10.19

Redemption of Stock

46

Section 10.20

Stock Rights

46

Section 10.21

Capital Structure; Fiscal Year

46

Section 10.22

Affiliate Transactions

46

Section 10.23

Operating Accounts

47

Section 10.24

Sale of Assets

47

Section 10.25

Intervention by Governmental Authority

47

Section 10.26

Levy Against Loan Collateral

47

Section 10.27

Judgments

47

Section 10.28

Financial Covenants

47

Section 10.29

Payments on and Changes to Convertible Debt

48

Section 10.30

Aggregate Balance of Cash Collateral Account and Investment Account

48

 

 

 

ARTICLE XI

EFFECTIVE DATE; TERMINATION

48

Section 11.1

Effective Date and Termination Date

48

Section 11.2

[Intentionally omitted.]

48

Section 11.3

Voluntary Termination by Borrower

48

Section 11.4

Acceleration Upon Termination

49

Section 11.5

Borrower Remains Liable

49

 

 

 

ARTICLE XII

EVENTS OF DEFAULT

49

Section 12.1

Events of Default

49

Section 12.2

Cure Periods

51

 

 

 

ARTICLE XIII

BANK’S RIGHTS AND REMEDIES

52

Section 13.1

Acceleration

52

Section 13.2

Fees and Expenses

53

Section 13.3

[Intentionally omitted.]

53

 

 

 

ARTICLE XIV

[Intentionally omitted.]

53

 

 

 

ARTICLE XV

GENERAL

53

 

iii

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Table of Contents

(continued)

 

 

 

Page

 

 

 

Section 15.1

Severability

53

Section 15.2

Governing Law

53

Section 15.3

JURISDICTION; VENUE; SERVICE OF PROCESS

53

Section 15.4

Survival and Continuation of Representations and Warranties

54

Section 15.5

Assignment; Bank Affiliates

54

Section 15.6

Bank’s Additional Rights Regarding Loan Collateral

54

Section 15.7

Application of Payments; Revival of Obligations

54

Section 15.8

Fees and Expenses

54

Section 15.9

Notices

55

Section 15.10

Electronic Communication

56

Section 15.11

Indemnification

56

Section 15.12

Additional Waivers by Borrower

57

Section 15.13

Equitable Relief

57

Section 15.14

Entire Agreement

57

Section 15.15

Headings

58

Section 15.16

Cumulative Remedies

58

Section 15.17

Waivers and Amendments in Writing

58

Section 15.18

Recourse to Directors or Officers

58

Section 15.19

WAIVER OF JURY TRIAL

58

Section 15.20

Patriot Act Notice

58

Section 15.21

Advertising

58

Section 15.22

Agreement Jointly Drafted

58

Section 15.23

Advice of Counsel Obtained

59

 

iv

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FINANCING AGREEMENT

 

THIS FINANCING AGREEMENT (this “Agreement”), made and entered into as of
December 22, 2009 by and between U.S. BANK NATIONAL ASSOCIATION, a national
banking association (“Bank”), and OVERSTOCK.COM, INC., a Delaware corporation
(“Borrower”), is as follows:

 

RECITAL:

 

The Borrower has requested that the Bank make certain loans and other financial
accommodations to or for the benefit of the Borrower, as more particularly
described herein, and the Bank is willing to do so upon the terms and subject to
the conditions herein set forth.

 

AGREEMENTS:

 

NOW, THEREFORE, in consideration of the foregoing and the terms and conditions
contained in this Agreement, and of any loans or other financial accommodations
at any time made to or for the benefit of the Borrower by the Bank, the Borrower
and the Bank agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

Section 1.1             Defined Terms.  In addition to the other terms defined
in this Agreement, the following capitalized terms used herein shall have the
meanings indicated:

 

“12 Month Period” has the meaning given on Schedule 10.28.

 

“Acceptable Investments”  means assets deemed acceptable as collateral by the
Bank, as determined in its sole discretion, but in no event includes (i)
less-than investment grade bonds, or (ii) securities not traded on a national
exchange or over-the-counter market, or securities the trading of which has been
suspended or otherwise limited.

 

“Adjusted Net Appraised Liquidation Value of Eligible Inventory” means, as of
any date of determination, eighty-five percent (85%) of the appraised
liquidation value of Eligible Inventory of the Borrower as of the most recent
Inventory Appraisal Date (net of liquidation costs).

 

The net appraised liquidation value of Eligible Inventory of the Borrower shall
be determined by the Bank from time to time in its reasonable discretion based
upon the results of the Bank’s periodic field exams and/or appraisals of the
Inventory of the Borrower.  Such appraisals shall be based upon the assumption
of an orderly liquidation of the Inventory of the Borrower, net of reasonable
costs to achieve such a liquidation.

 

“Advance Rates” means, collectively, the Inventory Advance Rate and the
Receivables Advance Rate.

 

“Advance Request” has the meaning given such term in Section 2.7.

 

“Affiliate” means, as to any Person (the “Subject Person”), any other Person
which, directly or indirectly, is in control of, is controlled by, or is under
common control with, the Subject Person.  For purposes of this definition,
“control” of a Person means the power, direct or indirect, (i) to vote twenty
percent (20%) or more of the Capital Stock having voting power for the election
of directors

 

1

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(or managers in the case of a limited liability company) of the Person or (ii)
otherwise to direct or cause the direction of the management and policies of the
Person, whether by contract or otherwise.  Without limiting the generality of
the foregoing, each officer and director of the Borrower will be deemed to be an
Affiliate of Borrower for purposes of this Agreement.

 

“Applicable Cash Secured Advance Margin”, “Applicable Regular Advance Margin”,
“Applicable LOC Fee” and “Applicable Unused Commitment Fee”  means, as of any
date, the applicable per annum rate shown in the applicable column of the chart
set forth below:

 

Applicable Cash
Secured Advance
Margin

 

Applicable Regular
Advance Margin

 

Applicable LOC
Fee

 

Applicable Unused
Commitment Fee

 

1.00

%

2.50

%

1.00

%

0.375

%

 

“Attorneys’ Fees” means the reasonable fees, costs and expenses of all attorneys
(and all paralegals and other staff employed by such attorneys) retained by Bank
from time to time in connection with, arising out of, or in any way relating to
this Agreement or any borrowing hereunder.

 

“Bank Product Agreements” shall mean those certain agreements entered into from
time to time by the Borrower or any Subsidiary with the Bank or any Affiliate of
the Bank concerning any service or facility extended to the Borrower or any
Subsidiary by the Bank or any Affiliate of the Bank, including:  (a) credit
cards, (b) credit card processing services, (c) debit cards, (d) purchase cards,
(e) ACH transactions, (f) cash management, including controlled disbursement,
accounts or services, or (g) Rate Hedging Agreements.

 

“Borrower’s Facilities” means, collectively, any and all facilities located at
the addresses set forth on Schedule 5.1 to the Security Agreement which are
owned or leased by Borrower.  “Borrower’s Facility” means each of the foregoing
facilities.

 

“Borrower Bankruptcy Event” has the meaning given such term in Section 12.1(g).

 

“Borrowing Base” means, as of any date of determination, an amount in Dollars
equal to:

 

(i)            the Receivables Advance Rate applied to the then Net Amount of
Eligible Receivables of Borrower then outstanding; plus

 

(ii)           the applicable Inventory Advance Rate applied, with respect to
the applicable categories of Eligible Inventory, to the Eligible Inventory of
the Borrower; less

 

(iii)          the Reserve Amount.

 

“Borrowing Base Certificate” has the meaning given in Section 8.3.

 

“Borrowing Base Deficiency” means the failure, as of any time, of the Regular
Advance Availability to be greater than or equal to zero Dollars.

 

“Business Day” means any day, other than a Saturday, Sunday, or legal holiday,
on which commercial banks in Minneapolis, Minnesota are required by law to be
open for business, or a day

 

2

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

 

on which Bank is open for business. Periods of days referred to in this
Agreement will be counted in calendar days unless Business Days are expressly
prescribed.

 

“Capital Expenditures” has the meaning given such term in Schedule 10.28.

 

“Capital Lease Obligations” means, with respect to Borrower, all obligations of
Borrower and its Subsidiaries to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) property to the extent such
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of Borrower or its Subsidiaries (all as determined on a
consolidated basis in accordance with GAAP consistently applied) and, for
purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof.

 

“Capital Stock” means all shares, interests, participations, rights to purchase,
options, warrants, general or limited partnership interests, or limited
liability company interests or other equivalents (regardless of how designated)
of or in a corporation, partnership, limited liability company or equivalent
entity, whether voting or nonvoting, including common stock, preferred stock or
any other “equity security” (as such term is defined in Rule 3a11-1 of the Rules
and Regulations promulgated by the Securities and Exchange Commission (17 C.F.R.
§ 240.3a11-1) under the Securities and Exchange Act of 1934, as amended).

 

“Cash Collateral Account” means that certain account (Account No. 153195058125)
maintained by Borrower with Bank, as the same may be re-named or re-numbered
from time to time.

 

“Cash Secured Advance(s)” has the meaning given in Section 2.3.

 

“Cash Secured Advance Availability” means, as at any time, an amount equal to
(i) the lesser of (a) the then cash balance of the Cash Collateral Account and
(b) the Cash Secured Facility Amount, minus (ii) the then Letter of Credit
Exposure, minus (iii) the then aggregate outstanding principal amount of all
Cash Secured Advances and all due but unpaid interest on the Cash Secured
Advances, and all fees, commissions, expenses and other charges posted to
Borrower’s loan account with Bank.

 

“Cash Secured Deficiency” means the failure, as of any time, of the Cash Secured
Advance Availability to be greater than or equal to zero Dollars.

 

“Cash Secured Facility Amount” means $10,000,000, subject to adjustment in
accordance with the provisions of Section 2.10.

 

“Change in Law” means (i) the adoption of any law, rule or regulation after the
date of this Agreement, (ii) any change in any law, rule or regulation or in the
interpretation or application thereof by any Governmental Authority after the
date of this Agreement or any change in the applicability of such law, rule or
regulation, on the interpretation thereof, with respect to the Bank, or (iii)
compliance by the Bank with any request, guideline or directive (whether or not
having the force of law) of any Governmental Authority made or issued after the
date of this Agreement.

 

“Change of Control” means any of the following (or any combination of the
following) whether arising from any single transaction or event or any series of
transactions or events (whether as the most recent transaction in a series of
transactions) which, individually or in the aggregate, results in:

 

(i)            a change in the ownership of Borrower, such that (a) Patrick M.
Byrne, individually and through his ownership of High Plains Investments LLC,
fails to own

 

3

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

 

legally and beneficially, free and clear of any Liens, at least 10%, on a fully
diluted basis, of the issued and outstanding voting and non-voting securities
of, and other equity interests in, Borrower, or (b) Patrick M. Byrne fails to
have the power to direct or cause the direction of the management and policies
of Borrower;

 

(ii)           the election of a director of Borrower as a result of which at
least a majority of Borrower’s Board of Directors does not consist of Continuing
Directors; or

 

(iii)          Patrick M. Byrne or any Approved Successor ceases, for any
reason, (a) to serve as chief executive officer of Borrower actively involved in
Borrower’s management or (b) to be a Director of Borrower.  For purposes of the
foregoing, an “Approved Successor” is the chief executive officer of Borrower
elected by the Continuing Directors of Borrower not more than 30 days after
Patrick M. Byrne or an Approved Successor ceases to serve as chief executive
officer of Borrower and who is reasonably acceptable to Bank.

 

“Closing Date” means December 22, 2009, or such later date as is mutually
agreeable to Borrower and Bank.

 

“Collateral” means all of the “Collateral” more particularly described in the
Security Agreements.

 

“Continuing Directors” means those directors on the Board of Directors of
Borrower as of the Closing Date (“Current Board”) or those directors who are
recommended or endorsed for election to the Board of Directors of Borrower by a
majority of the Current Board or their successors so recommended or endorsed.

 

“Controlled Disbursement Account” means account number 130111671884 established
at Bank, which will be structured and utilized as a non-interest bearing,
controlled disbursement account in accordance with the controlled disbursement
account policies and procedures of the Bank from time to time in effect.

 

“Controlled Group” means all members of a controlled group of corporations and
other entities and all trades or businesses (whether or not incorporated) under
common control which, together with Borrower, are treated as a single employer
under Section 414(b) or 414(c) of the Internal Revenue Code or Section 4001 of
ERISA.

 

“Convertible Debt” means the Indebtedness under the 3.75% Convertible Senior
Notes issued pursuant to the Convertible Debt Documents.

 

“Convertible Debt Creditor” means a holder of Convertible Debt.  To the extent a
term or provision of this Agreement is applicable to a “Convertible Debt
Creditor”, it is applicable to each of the Convertible Debt Creditors unless the
context expressly indicates otherwise.

 

“Convertible Debt Default” means the occurrence of any of the following (or any
combination of the following): (i) a “Default” or “Event of Default” under and
as defined in the Indenture or (ii) the maturity of the Convertible Debt without
the Convertible Debt being fully paid, performed and satisfied.

 

“Convertible Debt Documents” means, collectively, (i) the Indenture dated as of
November 23, 2004 naming Wells Fargo Bank, N.A. as Trustee authorizing the
issuance of said 3.75%

 

4

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

 

Convertible Senior Notes, together with all exhibits thereto (as the same may be
amended, modified, supplemented, restated, renewed, extended or otherwise
changed from time to time, “Indenture”), and (ii) all other agreements,
instruments, and documents signed or delivered by or on behalf of Borrower in
connection with the Convertible Debt, as any or all of the foregoing documents,
instruments, and agreements are now in effect or, subject to Section 10.29, as
at any time after the date of this Agreement amended, modified, supplemented,
restated, renewed, extended, or otherwise changed and any documents,
instruments, or agreements given, subject to Section 10.29, in substitution of
any of them.

 

“Credit Card Receivables” means all amounts owed by any credit card issuer to
the Borrower resulting from charges by a customer of the Borrower on credit
cards issued by such credit card issuer.

 

“Default” means (a) any event which, with the giving of notice, lapse of time,
or both, would constitute an Event of Default, or (b) any event which requires
neither the giving of notice nor lapse of time to constitute an Event of
Default.

 

“Default Rate” has the meaning given such term in Section 3.1(b).

 

“Deficiency” means, individually or collectively as the context may require, a
Borrowing Base Deficiency and a Cash Secured Deficiency.

 

“DDA” means any checking or other demand deposit account maintained by the
Borrower.

 

“Dollars” and “$” means dollars in lawful currency of the United States of
America unless otherwise indicated.

 

“EBITDAR” has the meaning given such term in Schedule 10.28.

 

“Eligible Inventory” means Borrower’s Inventory which meets the criteria in
clause (i) below of this definition and is not ineligible pursuant to clause
(ii) below.  For purposes of determining the Borrowing Base, Eligible Inventory
will be accounted for using a standard costing system which approximates the
first-in-first-out (“FIFO”) method of accounting and will be valued at the lower
of cost or market value.

 

(i)            Except as otherwise provided in clause (ii) below, Inventory is
eligible if it is, and continues to be, finished goods owned and held by
Borrower at a Borrower’s Facility for sale in the ordinary course of Borrower’s
business as presently conducted by it (“Finished Goods”), which Finished Goods
are subject to a valid and prior, fully perfected security interest of Bank,
free and clear of all Liens of any Person (except to the extent, if any, of the
Permitted Liens).

 

(ii)           Without limiting Bank’s discretion as to other Inventory, the
following Inventory will not, in any event, constitute Eligible Inventory:

 

(A)          Inventory which is (1) not readily saleable in the ordinary course
of Borrower’s business, (2) slow-moving or obsolete as determined by Bank, in
its discretion exercised in a commercially reasonable manner, or (3) is not in
good condition or is otherwise subject to defects which would affect its market
value (including all Inventory for which reserves for obsolescence have been

 

5

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

 

provided for in Borrower’s financial statements or for which obsolescence
reserves are anticipated);

 

(B)           Work in process; supplies and packaging materials; spare parts;
display items; or rack samples;

 

(C)           Inventory that is located outside of the United States;

 

(D)          Inventory which has been consigned to or by Borrower or has been
sold to Borrower in any sale on approval or sale and return transaction;

 

(E)           Inventory that is located on any premises not owned by Borrower or
is in the possession of any Person other than Borrower except (subject to any
additional requirements imposed by Bank, in its reasonable discretion, to
protect Borrower’s title thereto or Bank’s Lien thereon):  (1) Eligible
Inventory in the possession of a warehouseman or other bailee (including an
inventory processor) if Bank has received a bailee waiver letter acceptable to
Bank from such warehouseman or bailee and such warehousemen or bailee has not
issued a negotiable document of title as to any of such Eligible Inventory and
(2) Eligible Inventory located on premises leased by Borrower if Bank has
received a landlord’s waiver acceptable to Bank with respect to such premises;

 

(F)           Inventory that is subject to any trademark, trade name, patent or
licensing arrangement, any contractual arrangement, or any law, rule or
regulation that could, in any instance in Bank’s judgment exercised in a
commercially reasonable manner, limit or impair the ability of Bank to promptly
exercise any of its rights with respect thereto;

 

(G)           Inventory (1) with respect to which insurance proceeds, if any,
are not payable to Bank as mortgagee or loss payee in accordance with the Loan
Documents or (2) which is subject to a negotiable warehouse receipt or other
negotiable instrument;

 

(H)          Inventory that is in transit to or from a Borrower’s Facility;

 

(I)            Inventory which is custom made for a particular customer of
Borrower for which such customer did not issue a purchase order to Borrower;

 

(J)            Inventory consisting of inbound freight that has been capitalized
on the books of the Borrower; or

 

(K)          Inventory as to which Bank, in its discretion exercised in a
commercially reasonable manner, deems to be ineligible because of age, type,
category, or quantity or any other credit or collateral considerations which the
Asset Based Finance division of Bank makes applicable from time to time.

 

“Eligible Receivables” means such of the Receivables owing to Borrower that meet
the criteria in clause (i) below of this definition and are not ineligible
pursuant to clause (ii) below.

 

6

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

 

 

(i)            Except as provided in clause (ii) below, Receivables which meet,
and continue to meet, all of the following criteria are Eligible Receivables:

 

(A)          Receivables which (1) consist of ordinary trade accounts receivable
owned solely by Borrower, evidenced by Borrower’s standard invoice or order
number therefor, payable in cash in Dollars and which arise out of an outright,
bona fide, lawful and final sale of Finished Goods or the provision of services
in each case in the ordinary course of Borrower’s business as presently
conducted by it and (2) are due and payable absolutely and unconditionally from
an account debtor which is not an Affiliate of Borrower and is not otherwise
controlled by Borrower or by an Affiliate of Borrower;

 

(B)           (1) Credit Card Receivables which are due and payable absolutely
and unconditionally within (5) Business Days from the date of sale, (2)
Receivables which are due and payable absolutely and unconditionally from
Borrower’s business-to-business and liquidation customers within 30 days from
the date of the invoice applicable thereto, or (3) Receivables which are due and
payable absolutely and unconditionally within such extended terms that Bank, in
its discretion exercised in a commercially reasonable manner, approves after
prior notice from Borrower;

 

(C)           Receivables with respect to which (1) the services covered thereby
have been rendered and accepted by the account debtor or its designee or (2) the
Finished Goods covered thereby have been shipped to the account debtor or its
designee; provided that, for the purposes of the foregoing clauses (1) and (2),
with respect to Credit Card Receivables, the customer of the Borrower who has
charged such services or Finished Goods to such credit card shall be deemed to
be a designee of the account debtor; and

 

(D)          With respect to Credit Card Receivables, not more than fifteen (15)
days have elapsed since the date of the original sale; and with respect to all
other Receivables, (1) not more than sixty (60) days have elapsed since the
initial due date of such Receivables and (2) not more that ninety (90) days have
elapsed since the date of sale.

 

(ii)           Without limiting Bank’s discretion as to other Receivables, the
following Receivables will not, in any event, constitute Eligible Receivables:

 

(A)          Receivables with respect to which the account debtor or any
Affiliate of the account debtor has filed or had filed against it a petition in
bankruptcy or for reorganization, made an assignment for the benefit of
creditors, or failed, suspended business operations, become insolvent or in
respect of which a receiver, custodian, or a trustee was appointed for a
significant portion of its assets or affairs, or Receivables with respect to
which the account debtor is incompetent or has died;

 

(B)           Receivables with respect to which (1) the account debtor is not
qualified to do business in one or more States of the United States of America
or one or more Canadian provinces acceptable to Bank in its discretion exercised
in a commercially reasonable manner or (2) the account debtor has its principal
place of business or chief executive office outside of the United States of

 

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America or a Canadian province acceptable to Bank in its discretion unless, in
either or both of such events (1) or (2), the Receivable is supported by an
irrevocable, clean letter of credit or acceptance issued (x) by a financial
institution satisfactory to Bank and (y) on terms acceptable to Bank, and, if so
requested by Bank, delivered to Bank in pledge for negotiation and presentment;

 

(C)           Receivables owing from the same account debtor, either alone or
together with its Affiliates, if 25% or more of such Receivables are ineligible
for any reason;

 

(D)          [Intentionally omitted];

 

(E)           Receivables with respect to which the account debtor is a
Governmental Authority (“Government Receivables”), unless with respect to such
Government Receivables the Assignment of Claims Act of 1940, as amended (31
U.S.C. § 3727 and 41 U.S.C. § 15) or, as applicable, comparable state statute or
regulation has been complied with to Bank’s satisfaction;

 

(F)           Receivables which (1) consist (or to the extent consisting) of
deposits, (2) consist (or to the extent consisting) of vendor warranty claims,
(3) consist (or to the extent consisting) of finance charges, service charges,
or interest on delinquent accounts, (4) are proceeds of consigned Inventory, (5)
are employee, officer, director or other Affiliate Receivables, or (6) are debit
memoranda;

 

(G)           Receivables with respect to which the terms or conditions prohibit
or restrict assignment or collection rights or which are evidenced by a
promissory note, chattel paper or other instrument;

 

(H)          Receivables (1) which are subject to set-off, credit, contras,
allowance or adjustment by the account debtor (except discounts allowed for
prompt payment and except for credits, allowances or discounts arising from
Borrower’s promotional activities or other marketing activities in the normal
course of business as conducted by Borrower on the date hereof) and other
credits or allowances which have been deducted in computing the net amount of
the applicable Receivable as shown in the original schedule of Borrowing Base
Certificate furnished to the Bank identifying or including such Receivable, or
(2) with respect to which the account debtor has returned any of the Inventory
from the sale from which the Receivables arose, provided that in either or both
of such events (1) or (2), the net amount owed by such account debtor to
Borrower in respect of such Receivable, as determined by Bank in its discretion
exercised in a commercially reasonable manner, will, if otherwise eligible, be
an Eligible Receivable;

 

(I)            Receivables which are generated by a sale on approval, a bill and
hold sale, a sale on consignment, or other type of conditional sale, or in
connection with work subject to any payment or performance bond, or which are
subject to progress billing or retainages;

 

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(J)            Receivables which are not subject to the first priority security
interest of Bank or are subject to any Lien of any Person other than the Bank
(except to the extent, if any, of the Permitted Liens);

 

(K)          Receivables with respect to which the account debtor has sold or is
selling substantially all of its assets and has not established adequate
reserves or made provisions for the payment of all amounts owed to such account
debtor’s trade creditors, as determined by Bank in its discretion exercised in a
commercially reasonable manner;

 

(L)           Receivables with respect to which Bank has received a check for
payment of such Receivable which has been returned uncollected, or Receivables
with respect to which Bank, in its reasonable discretion, believes that the
collection of such Receivable is in doubt or impaired or that such Receivable
may not be paid by reason of the account debtor’s financial inability to pay;

 

(M)         Receivables with respect to which the account debtor is located in
any state or provinces requiring the filing by Borrower of an application to
qualify to do business or a fictitious name report in order to permit Borrower
to seek judicial enforcement in such state or provinces of payment of that
Receivable, unless Borrower has qualified to do business in such state or has
filed a fictitious name report;

 

(N)          Receivables with respect to which an invoice or order number for
the agreed-on purchase price has been issued more than two (2) Business Days
after the services covered thereby were rendered, or the Inventory covered
thereby was delivered, to the applicable account debtor or its designee;
provided that, for the purposes of the foregoing, with respect to Credit Card
Receivables, the customer of the Borrower who has charged such services or
Inventory to such credit card shall be deemed to be a designee of the account
debtor;

 

(O)          Receivables with respect to co-op advertising arrangements;

 

(P)           Receivables which were previously classified as payable debits;

 

(Q)          Receivables in respect of gift cards sold by Borrower;

 

(R)           Receivables arising from a pledge with respect to any settlement
with a vendor;

 

(S)           Receivables arising from sublease agreements for Borrower’s
warehouse or office space;

 

(T)           Receivables in respect of credit card rebates;

 

(U)          Receivables with respect to which the account debtor is a shipping
company which holds an account payable due from Borrower;

 

(V)           Receivables in respect of unearned credit card activity for which
Borrower has not yet shipped the merchandise that gave rise to such Receivables;

 

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(W)         Receivables consisting of the payment reserve owed by Paymentech to
the Borrower; or

 

(X)          Receivables which Bank, in its discretion exercised in a
commercially reasonable manner, deems to be ineligible based on those credit or
collateral considerations which the Asset Based Finance division of Bank makes
applicable from time to time.

 

“Equipment” means equipment as defined in the UCC.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

“Event of Default” has the meaning given in Section 12.

 

“Facility Termination Date” has the meaning given in Section 11.4.

 

“Financial Covenants” has the meaning given in Section 10.28.

 

“Financials” means those financial statements referred to in Schedule 1.1(A)

 

“Fiscal Quarter” has the meaning given on Schedule 10.28.

 

“Fiscal Year” has the meaning given on Schedule 10.28.

 

“Fixed Charge Coverage Ratio” has the meaning given on Schedule 10.28.

 

“General Intangibles” means general intangibles as defined in the UCC.

 

“Governmental Authority” means any nation or government, any state or other
political subdivision thereof, and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of, or pertaining to,
government or any agency or instrumentality thereof (including any central
bank).

 

“Indebtedness” means all of a Person’s obligations, indebtedness and liabilities
to any other Person, including all debts, claims and indebtedness, contingent,
fixed or otherwise, heretofore, now and from time to time hereafter owing, due
or payable, however evidenced, created, incurred, acquired or owing and however
arising, whether under written or oral agreement, operation of law or otherwise.
Borrower’s Indebtedness includes: (i) the Obligations, (ii) obligations or
liabilities of any Person secured by a Lien on property owned by Borrower, even
though Borrower has not assumed or become liable for the payment therefor, (iii)
obligations or liabilities created or arising under any lease of real or
personal property, any conditional sales contract or other title retention
agreement with respect to property used or acquired by Borrower, even though the
rights and remedies of the lessor, seller, or lender thereunder are limited to
repossession of such property, and (iv) the net cost (without duplication) to
Borrower under any Rate Hedging Agreement.

 

“Internal Revenue Code” means the Internal Revenue Code of 1986, as amended or
superseded from time to time.  Any reference to a specific provision of the
Internal Revenue Code will be construed to include any comparable provision of
the Internal Revenue Code as amended or superseded after the date of this
Agreement.

 

“Inventory” means inventory as defined in the UCC.

 

10

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“Inventory Advance Rate” means a percentage, subject to change by Bank from time
to time in accordance with Section 2.10, which is applied to Eligible Inventory
for purposes of determining the Borrowing Base.  The Inventory Advance Rate
shall equal, as of any date of determination subject to change by the Bank in
accordance with Section 2.10, the lesser of:

 

(i)            fifty percent (50%), or

 

(ii)           a percentage determined by dividing (A) the Adjusted Net
Appraised Liquidation Value of Eligible Inventory as of such date, by (B)
Eligible Inventory as of the most recent Inventory Appraisal Date at the lower
of market value or cost, determined in accordance with a standard costing system
which approximates the first-in-first-out (“FIFO”) method of accounting.

 

The initial Inventory Advance Rate is 50%.  Bank may establish, in its
discretion exercised in a commercially reasonable manner, one or more additional
Inventory Advance Rates which may be applied severally against specific
categories or types of Eligible Inventory.

 

“Inventory Appraisal Date” means each date on which the Bank establishes the
appraised liquidation value of the Inventory of the Borrower by means of a third
party appraiser acceptable to the Bank in its reasonable discretion.

 

“Investment” means (i) the acquisition, purchase, making or holding of any
Capital Stock or other security, (ii) any loan, advance, contribution to
capital, or extension of credit (except for trade and customer accounts
receivable for Inventory sold or services rendered in the ordinary course of
business and payable in accordance with customary trade terms), (iii) any
acquisitions of real or personal property (other than real and personal property
acquired in the ordinary course of business) (iv) any purchase of, or commitment
or option to purchase, Capital Stock, other debt, equity securities, or any
other interest in another Person, and (v) any purchase of, or commitment or
option to purchase, any integral part of any business or the assets comprising
such business or part thereof.

 

“Investment Account” means that certain account (Account No. 19-506151)
maintained by Borrower with Bank, as the same may be re-named or re-numbered
from time to time.

 

“Letter of Credit” means a Standby Letter of Credit (as defined in Section 2.5)
or a Commercial Letter of Credit (as defined in Section 2.5) issued by Bank
pursuant to Section 2.5.

 

“Letter of Credit Documents” means, with respect to each and every Letter of
Credit, (i) a standby letter of credit application and reimbursement agreements
on Bank’s then customary form (the “Letter of Credit Application”) and (ii) any
other agreements, certificates, documents and information as Bank may reasonably
request relating to a Letter of Credit.

 

“Letter of Credit Exposure” means, as at any time, the sum, without duplication,
of (i) the Letter of Credit Face Amount of all outstanding Letters of Credit and
(ii) all unreimbursed drawings under any Letters of Credit (whether or not
outstanding).

 

“Letter of Credit Face Amount” of any Letter of Credit means, at any time, the
face amount of the Letter of Credit, after giving effect to all drawings paid
thereunder and other reductions of the face amount and to all reinstatements of
the face amount effected, pursuant to the terms of the Letter of Credit, prior
to such time.

 

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“Letter of Credit Obligations” means, at any time, the sum, without duplication,
of (i) the aggregate Letter of Credit Face Amount for all Letters of Credit plus
(ii) the aggregate amount of Borrower’s unpaid obligations in respect of all
Letters of Credit (whether or not outstanding) under this Agreement and the
Letter of Credit Documents, and all other Indebtedness incurred or arising in
connection with any Letters of Credit (including, without limitation, any drafts
or acceptances thereunder, any and all Bank charges, expenses, fees and
commissions, all other amounts charged or chargeable to Borrower or by Bank in
connection therewith, and all duties and taxes and costs of insurance which may
pertain either directly or indirectly to such Letters of Credit).

 

“LIBOR Rate” shall have the meaning given such term in Section 3.1(a).

 

“Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment,
deposit arrangement, charge, security interest, encumbrance, lien (statutory or
other), or any preference, priority or other security agreement or any
preferential arrangement of any kind or nature whatsoever (including any
conditional sale or other title retention agreement, any lease deemed under the
UCC to be intended for security, and the authorized filing by or against a
Person as debtor of any financing statement under the UCC or comparable law of
any jurisdiction).

 

“Loan” means any Regular Advance, Cash Secured Advance or other advance or
extension of credit made by Bank to, or for the benefit of, Borrower pursuant to
Article II of this Agreement (including the Letter of Credit Exposure), and the
total of all such Loans and other advances and extensions of credit (including
the Letter of Credit Exposure) outstanding at any time may be referred to as
“Loans”.

 

“Loan Collateral” means the Collateral and any other security or collateral
provided from time to time by, or on behalf of, Borrower or any other Person for
the Obligations.

 

“Loan Documents” means this Agreement, the Notes, the Security Agreement, the
Letter of Credit Documents and all other agreements, instruments and documents
relating to the Loans, including mortgages, deeds of trust, security agreements,
subordination agreements, intercreditor agreements, pledges, powers of attorney,
consents, collateral assignments, locked box and cash management agreements,
letter agreements, contracts, notices, leases, financing statements and letters
of credit and applications therefor and all other writings, all of which must be
in form and substance satisfactory to Bank, which have been, are as of the date
of this Agreement, or will in the future be signed by, or on behalf of, Borrower
and delivered to Bank.

 

“Locked Box” has the meaning given in Section 7.3.

 

“Material Adverse Effect” means a material adverse effect, as determined by the
Bank in a commercially reasonable manner, on (i) Borrower’s (a) business,
property, assets, operations or condition, financial or otherwise or (b) ability
to perform any of its payment Obligations under this Agreement or any of the
other Loan Documents, (ii) the recoverable value of the Loan Collateral or
Bank’s rights or interests therein, (iii) the enforceability of any of the Loan
Documents, or (iv) the ability of Bank to exercise any of its rights or remedies
under the Loan Documents or by law provided.

 

“Money Markets” shall mean one or more wholesale funding markets available to
and selected by Bank, including negotiable certificates of deposit, commercial
paper, eurodollar deposits, bank notes, federal funds, interest rate swaps or
others.

 

“Net Amount of Eligible Receivables” means, as of any date of determination, the
gross amount of Eligible Receivables of the Borrower on such date less sales,
excise or similar taxes, and less

 

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returns, discounts, claims, credits and allowances of any nature at any time
issued, owing, granted, outstanding, available or claimed.

 

“New York Banking Day” means any day (other than a Saturday or Sunday) on which
commercial banks are open for business in New York, New York.

 

“Notes” means the Notes as defined in Section 2.8.

 

“Obligations” means the Loans, the Letter of Credit Obligations, Rate Hedging
Obligations owing to Bank or any Affiliate of Bank, and all other loans,
advances, debts, liabilities, obligations, indemnities, covenants and duties
owing to Bank or any Affiliate of Bank from Borrower and its Subsidiaries
(individually and collectively) of any kind, present or future, whether
evidenced by or arising out of this Agreement, any of the Bank Product
Agreements or any of the other Loan Documents, and whether for the payment of
money, whether arising out of overdrafts on checking, deposit or other accounts
or electronic funds transfers (whether through automatic clearing houses or
otherwise) or out of Bank’s non-receipt of, or inability to collect, funds or
otherwise not being made whole in connection with depository transfer checks or
other similar arrangements and whether direct or indirect (including acquired by
assignment), related or unrelated, absolute or contingent, due or to become due,
now existing or hereafter arising and however acquired, and including all
interest, charges, expenses, fees and any other sums chargeable to Borrower and
its Subsidiaries (individually and collectively) in connection with any of the
foregoing, and all Attorneys’ Fees.

 

“Payment Date” shall mean the Facility Termination Date, or any other date on
which the credit extended hereunder terminates, and the first day of each month
for each Loan.

 

“Paymentech” means, collectively, Paymentech, LLC, successor in interest to
Paymentech, L.P., Chase Paymentech Solutions, LLC and any of their respective
subsidiaries, affiliates, successors and/or assigns.

 

“Pension Plan” means a “pension plan”, as such term is defined in section 3(2)
of ERISA, as to which Borrower or any corporation or other entity, trade or
business that is, along with Borrower, a member of a Controlled Group may have
any liability, including any liability by reason of having been a substantial
employer within the meaning of section 4063 of ERISA at any time during any
preceding six year period, or by reason of being deemed to be a contributing
sponsor under section 4069 of ERISA.

 

“Permitted Acquisition” has the meaning given in Section 10.16.

 

“Permitted Investment” has the meaning given in Section 10.17.

 

“Permitted Liens” means the Liens and interests in favor of Bank granted or
provided under the Loan Documents and, to the extent not impairing the
operations of Borrower or any performance under, or contemplated by, the Loan
Documents:

 

(i)            Liens arising by operation of law for taxes not yet due and
payable;

 

(ii)           Liens of mechanics, materialmen, shippers and warehousemen for
services or materials for which payment is not yet due;

 

(iii)          Liens incurred or deposits made in the ordinary course of
business in connection with workers’ compensation, unemployment insurance and
other types of social security;

 

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(iv)          Liens, if any, specifically permitted by Bank from time to time in
writing;

 

(v)           Liens on Equipment securing Indebtedness under capitalized leases
or purchase money Indebtedness if the total amount of obligations secured by the
purchase money security interests or the subject of capitalized leases during
any period does not, together with any other capital expenditures made by
Borrower for the applicable period, exceed the maximum amount permitted during
such period for capital expenditures pursuant to Section 1 of Schedule 10.28,
provided that (A) such purchase money Indebtedness or capitalized lease
Indebtedness will not be secured by any of the Loan Collateral other than the
property so acquired and any identifiable proceeds, (B) any Liens relating to
such purchase money Indebtedness or capitalized lease Indebtedness will not
extend to or cover any property of Borrower other than the property so acquired
and any identifiable proceeds, and (C) the principal amount of such capitalized
lease or purchase money Indebtedness will not, at the time of the incurrence
thereof, exceed the value of the property so acquired;

 

(vi)          Liens for taxes, assessments and other similar charges to the
extent payment thereof shall not at the time be required to be made in
accordance with the provisions of Section 10.9;

 

(vii)         those Liens described on Schedule 1.1(B); provided that those
Liens secure only the Indebtedness which the Liens secure on the Closing Date;
and

 

(viii)        Liens arising from the claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords, bailees and other like Persons
(“Third Party Claims”) if each of the following conditions is met: (a) the
validity or amount of the Third Party Claim is being contested in good faith and
by appropriate and lawful proceedings promptly initiated and diligently
conducted, (b) if the amount of the Third Party Claim exceeds $100,000, Borrower
has given prior notice to Bank of the Third Party Claim, (c) Borrower has
established appropriate reserves (in Bank’s reasonable discretion exercised in a
commercially reasonable manner) for the Third Party Claim, (d) levy and
execution on the Third Party Claim have been and continue to be stayed, (e) the
Third Party Claim does not prevent Bank from having a perfected first priority
security interest in, or a first priority mortgage lien on, the Loan Collateral
or with respect to future advances made under this Agreement, (f) Borrower’s
title to, and its right to use, any of the Loan Collateral are not, in Bank’s
judgment exercised in a commercially reasonable manner, materially affected
thereby, and (g) the amount of all Third Party Claims do not exceed, as of any
date, $250,000 in the aggregate; and, provided, further, that Borrower must
promptly pay each such Third Party Claim to the extent the dispute is finally
settled in favor of the claimant thereof.

 

“Person” means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, limited liability company,
corporation, institution, entity, party or Governmental Authority.

 

“Prime Rate” means the prime rate announced by Bank from time to time.  The
Prime Rate hereunder will be adjusted each time that such announced prime rate
changes.  The prime rate announced by Bank is determined solely by Bank pursuant
to market factors and its own operating needs and is not necessarily Bank’s best
or most favorable rate for commercial or other loans.

 

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“Prohibited Transactions” has the meaning given in Section 406 of ERISA.

 

“Rate Hedging Obligations” of a Person means any and all Indebtedness of such
Person, whether absolute or contingent and howsoever and whensoever created,
arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (i) any and all
agreements, devices or arrangements (“Rate Hedging Agreements”) designed to
protect at least one of the parties thereto from the fluctuations of interest
rates, exchange rates or forward rates applicable to such party’s assets,
liabilities or exchange transactions, including dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts and warrants, and (ii) any and all
cancellations, buy backs, reversals, terminations or assignments of any of the
foregoing.

 

“Receivables” means accounts as defined in the UCC.

 

“Receivables Advance Rate” means a percentage, subject to change by Bank from
time to time in accordance with Section 2.10, which is applied to Eligible
Receivables for purposes of determining the Borrowing Base.  The initial
Receivables Advance Rate shall equal 85%.

 

“Regular Advance Availability” means

 

(i) so long as no Triggering Event has occurred and is continuing, an amount, in
Dollars, equal to:

 

(a) the Regular Advance Facility Amount, less

 

(b) the then aggregate outstanding principal amount of all Regular Advances and
all due but unpaid interest on the Regular Advances, and all fees, commissions,
expenses and other charges posted to Borrower’s loan account with Bank.

 

and

 

(ii) so long as a Triggering Event has occurred and is continuing, an amount, in
Dollars equal to:

 

(a) an amount equal to the lesser of: (A) the then Borrowing Base or (B) the
Regular Advance Facility Amount; less

 

(b) the then aggregate outstanding principal amount of all Regular Advances and
all due but unpaid interest on the Regular Advances, and all fees, commissions,
expenses and other charges posted to Borrower’s loan account with Bank.

 

“Regular Advance(s)” has the meaning given in Section 2.2.

 

“Regular Advance Facility Amount” means $10,000,000, subject to adjustment in
accordance with the provisions of Section 2.10.

 

“Remittance” has the meaning given in Section 7.3.

 

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“Reportable Event” means an event described in Section 4043 of ERISA and the
regulations issued thereunder (other than a Reportable Event not subject to the
provision for thirty (30) day notice to the Pension Benefit Guaranty Corporation
under such regulations).

 

“Reserve Amount” means, as at any time, the amounts that Bank, in its discretion
exercised in a commercially reasonable manner (including in the manner described
in this definition) may from time to time establish in determining the Borrowing
Base based on such credit and collateral considerations as the Asset Based
Finance division of Bank deems, in a commercially reasonable manner, appropriate
from time to time, based on market conditions, or to reflect contingencies or
risks which may affect any or all of the Loan Collateral, the business,
operations, financial condition or business prospects of Borrower, or the
security of the Loans.  For purposes of this definition and determining the
Borrowing Base and without limiting Bank’s other discretion as described above,
Bank will be deemed to have acted in a commercially reasonable manner if
reserves are established in respect of any one or more of the following:

 

(i)            the occurrence of a Default or Event of Default;

 

(ii)           the payment of Obligations then due and payable and unpaid;

 

(iii)          for price adjustments, damages, unearned discounts, returned
Inventory, credit memoranda (issued or unissued), credits, contras and other
similar offsets to Borrower’s accounts receivable except to the extent that any
of the foregoing in this item (iii) has been dealt with by Bank by designating a
specific Receivable or Receivables as being ineligible pursuant to the terms of
this Agreement as opposed to the establishment of a reserve general in nature;

 

(iv)          for any claims, interests, or rights (including Liens) of any
Person (“Priming Interests”) which (a) as of the date Bank learns or is notified
of the existence of the applicable Priming Interest, has priority over the Liens
of Bank on any or all of the Loan Collateral or (b) will have priority over the
Liens of Bank on any or all of the Loan Collateral after any required notice or
filing, the passage of time, the satisfaction of any other condition, or
otherwise;

 

(v)           for aged credits maintained by Borrower in respect of its accounts
receivable except to the extent that any of the foregoing in this item (v) has
been dealt with by Bank by designating a specific Receivable or Receivables as
being ineligible pursuant to the terms of this Agreement as opposed to the
establishment of a reserve general in nature;

 

(vi)          for any amounts expended by Bank to protect or preserve any Loan
Collateral or Bank’s rights under the Loan Documents which have not been
reimbursed by Borrower; or

 

(vii)         100% of the aggregate mark-to-market exposure, as determined by
Bank, of all Rate Hedging Obligations then owing by Borrower to Bank or its
Affiliate under a Rate Hedging Agreement.

 

“Responsible Officer” means (a) an executive officer of the Borrower or any
other Person employed by the Borrower who has significant management
responsibilities, or (b) the chief financial officer, treasurer or controller of
the Borrower, in each case as duly authorized by the Board of Directors of the
Borrower.

 

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“Security Agreement” has the meaning given in Article V.

 

“Special Account” has the meaning given in Section 7.4.

 

“Solvent” means, with respect to any Person, that such Person (a) is able to pay
its debts as they mature and (b) does not have an unreasonably small capital
base with which to engage in its anticipated business.  In determining the
foregoing clauses (a) and (b), projections must (i) be based on underlying
assumptions that provide a reasonable basis for such projections and that
reflect such Person’s judgment based on present circumstances as to the likely
course of action for the period projected and (ii) demonstrate that such Person
will have sufficient cash flow to enable it to pay its debts as they mature.

 

“Stated Termination Date” means October 2, 2011.

 

“Subsidiary” means, with respect to a particular Person, any other Person as to
which such first Person owns, directly or indirectly, at least 50% of the
outstanding shares of Capital Stock or other interests having ordinary voting
power for the election of directors, officers, managers, trustees or other
controlling Persons or an equivalent controlling interest in Bank’s judgment.

 

“Total Facility Amount” means an amount equal to the sum of (a) the Regular
Advance Facility Amount and (b) the Cash Secured Facility Amount.

 

“Triggering Event” means either (i) the occurrence and continuance of any Event
of Default or (ii) the failure of Borrower (regardless of whether Bank has
debited or otherwise consented to withdrawals from the Investment Account) to
maintain the balance of (a) the Cash Collateral Account and (b) Acceptable
Investments in the Investment Account in an aggregate amount greater than or
equal to the Total Facility Amount.  For purposes of this Agreement, the
occurrence of a Triggering Event shall be deemed continuing at Bank’s option (1)
so long as such Event of Default has not been waived, and/or (2) if the
Triggering Event arises as a result of Borrower’s failure to maintain the
aggregate balance of the Cash Collateral Account and Acceptable Investments in
the Investment Account as required hereunder, until (A) with respect to the
first Triggering Event to occur hereunder, such aggregate balance has exceeded
the Total Facility Amount for seven (7) consecutive days or (B) with respect
each subsequent Triggering Event, such aggregate balance has exceeded the Total
Facility Amount for sixty (60) consecutive days, in which case under the
foregoing (A) and (B) a Triggering Event shall no longer be deemed to be
continuing for purposes of this Agreement; provided that a Triggering Event
shall be deemed continuing (even if an Event of Default is no longer continuing
and/or such aggregate balance exceeds the Total Facility Amount for sixty (60)
consecutive days) at all times after a Triggering Event has occurred and been
discontinued on three (3) occasions after the Closing Date.

 

“UCC” shall mean the Uniform Commercial Code in effect on the date hereof in the
State of Minnesota; provided, however, that if by reason of mandatory provisions
of law, the perfection or the effect of perfection or non-perfection on the
security interest in any item or portion of the Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than the State of
Minnesota, “UCC” shall mean the Uniform Commercial Code as in effect in such
other jurisdiction for purposes of provisions hereof relating to such perfection
or effect of perfection or non-perfection.

 

Section 1.2             Environmental Definitions.

 

“Environmental Activity” means, as of any date of determination, any actual,
proposed or threatened storage, holding, existence, Release, emission,
discharge, generation, manufacturing, producing, refining, creating, processing,
abatement, removal, disposition, handling, transportation or disposal of any
Hazardous Substance from, under, into or on any of Borrower’s property or
otherwise

 

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relating to any of Borrower’s property or any Use of any of Borrower’s property
which is regulated by or for which standards of conduct or liability are imposed
by any Environmental Requirements or which may or does create a hazard to human
or animal health or the environment.

 

“Environmental Law” means the Comprehensive Environmental Response, Compensation
and Liability Act (“CERCLA”), 42 U.S.C. §9601 et seq., the Resource Conservation
and Recovery Act, 42 U.S.C. §6901 et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. §1802 et seq., the Toxic Substances Control Act,
15 U.S.C. §2601 et seq., the Federal Water Pollution Control Act, 33 U.S.C.
§1251 et seq., the Clean Water Act, 33 U.S.C. §1321 et seq., the Clean Air Act,
42 U.S.C. §7401 et seq., the Occupational Safety and Health Act of 1970, 29
U.S.C. § 651 et seq., regulations promulgated thereunder, and any other federal,
state, county, municipal, local or other statute, law, ordinance or regulation,
or any common law (including common law that may impose strict liability), which
may relate to or deal with human health, the environment, natural resources, or
Hazardous Substances, all as may be from time to time amended or modified.

 

“Environmental Liability” means any Indebtedness, or duty of, any claim or
demand against, any requirement imposed on, or any amount owed by or payable
from, Borrower, which is based on, results from, is in connection with, arises
out of, or otherwise is related to any Environmental Activity, whether the
foregoing described liability now exists or arises in the future, is contingent
or absolute, primary or secondary, liquidated or unliquidated, due or to become
due, and however created, incurred, acquired, owing or arising.

 

“Environmental Requirements” means all present and future laws, including
Environmental Laws, authorizations, approvals, judgments, injunctions, decrees,
concessions, grants, orders, franchises, agreements and other restrictions and
requirements (whether or not arising under statutes or regulations) relating to
any Hazardous Substances or Environmental Activity.

 

“Hazardous Substances” means, at any time, (i) any “hazardous substance” as
defined in §101(14) of CERCLA (42 U.S.C. §9601(14)) or regulations promulgated
thereunder; (ii) any “solid waste,” “hazardous waste,” or “infectious waste,” as
such terms are defined in any Environmental Law at such time; (iii) asbestos,
urea-formaldehyde, polychlorinated biphenyls (“PCBs”), nuclear fuel or material,
chemical waste, radioactive material, explosives, known carcinogens, petroleum
products and by-products and other dangerous, toxic or hazardous pollutants,
contaminants, chemicals, mold, materials or substances which may be hazardous to
human health or animal health or the environment or which are listed or
identified in, or regulated by, any Environmental Law; and (iv) any additional
substances or materials which at such time are classified or considered to be
hazardous or toxic under any Environmental Law.

 

“Release” includes, but is not limited to, spilling, leaking, pumping, paving,
emitting, emptying, discharging, injecting, escaping, contaminating, leaching,
disposing, releasing or dumping into the environment.

 

“Use” includes, but is not limited to, use, ownership, development,
construction, maintenance, management, operation or occupancy.

 

Section 1.3             Other Definitional Provisions; Construction.  Unless
otherwise specified,

 

(i)            All terms defined in this Agreement, whether or not defined in
this Article I, have the defined meanings provided in this Agreement when used
in this Agreement, in any other of the Loan Documents, or any other certificate,
instrument or

 

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other document made or delivered pursuant to this Agreement or any other Loan
Document, unless otherwise defined therein.

 

(ii)           As used in this Agreement, in any other of the Loan Documents, or
in any other certificate, instrument or document made or delivered pursuant
hereto or thereto, accounting terms relating to Borrower not defined in this
Agreement have the respective meanings given to them in accordance with
generally accepted accounting principles in the United States of America as in
effect at the time any determination is made or financial statement or
information is required or furnished under this Agreement (“GAAP”).

 

(iii)          The definition of any agreement, document or instrument includes
all schedules, attachments and exhibits thereto and all renewals, extensions,
supplements, modifications, restatements and amendments thereof but only to the
extent such renewals, extensions, supplements, modifications, restatements or
amendments thereof are not prohibited by the terms of any Loan Document.  All
references to statutes include (a) all regulations promulgated thereunder, (b)
any amendments of such statutes or regulations promulgated thereunder, and (c)
any successor statutes and regulations, including any comparable provision of
the applicable statute, ordinance, code, regulation or other law as amended or
superseded after the date of this Agreement.

 

(iv)          “Hereunder,” “herein,” “hereto,” “this Agreement” and words of
similar import refer to this entire document; “including” is used by way of
illustration and not by way of limitation, unless the context clearly indicates
the contrary; the singular includes the plural and conversely; and any action
required to be taken by a Person is to be taken promptly, unless the context
clearly indicates the contrary.

 

(v)           All of the uncapitalized terms contained in the Loan Documents
which are now or hereafter defined under the UCC will, unless defined in the
Loan Documents or the context indicates otherwise, have the meanings now or
hereafter provided for in the UCC.

 

(vi)          The term “good faith” means honesty in fact in the conduct or
transaction concerned.

 

(vii)         All Exhibits and Schedules attached to this Agreement are
incorporated into, made and form an integral part of, this Agreement for all
purposes.

 

(viii)        The existence of references to Borrower’s Subsidiaries throughout
this Agreement is for a matter of convenience only.  Any references to
Subsidiaries of Borrower set forth herein shall not in any way be construed as
consent by Bank to the establishment, maintenance or acquisition of any
Subsidiary.

 

(ix)           Whenever the sense of this Agreement or any of the other Loan
Documents so require, the masculine or feminine gender will be substituted for,
or be deemed to include, the neuter, the feminine gender will be substituted for
the masculine, or the masculine will be deemed to include the feminine, and the
neuter gender will be substituted for, or be deemed to include, the masculine
or, as applicable, feminine gender.

 

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ARTICLE II

 

LOANS AND OTHER FINANCIAL ACCOMMODATIONS

 

Section 2.1             Total Facility.  Subject to the terms and conditions of
this Agreement, Bank will make an amount up to the Total Facility Amount in
credit available to, or for the benefit of, Borrower in the form of Regular
Advances, Cash Secured Advances and Letters of Credit, each as more particularly
described below.  The total amount of the credit made available under this
Agreement is subject to adjustment upon the terms and subject to the conditions
set forth in Section 2.10 below.

 

Section 2.2             Regular Advances.  Until the termination of this
Agreement pursuant to Article XI and subject to the other terms and conditions
of this Agreement, Bank will make loans (each a “Regular Advance”, collectively,
the “Regular Advances”) to Borrower, which Regular Advances Borrower may
reborrow on or at any time after the repayment thereof, in an aggregate amount
which may not as of any time exceed an amount equal to the Regular Advance
Availability then in effect.  In no event shall the Bank have any obligation to
make any Regular Advance if a Borrowing Base Deficiency would be created
thereby.

 

Section 2.3             Cash Secured Advances.  Until the termination of this
Agreement pursuant to Article XI and subject to the other terms and conditions
of this Agreement, Bank will make loans (each a “Cash Secured Advance”,
collectively, the “Cash Secured Advances”) to Borrower, which Cash Secured
Advances Borrower may reborrow on or at any time after the repayment thereof, in
an aggregate amount which may not as of any time exceed an amount equal to the
Cash Secured Advance Availability then in effect.  In no event shall the Bank
have any obligation to make any Cash Secured Advance if a Cash Secured
Deficiency would be created thereby.

 

Section 2.4             [Intentionally omitted.]

 

Section 2.5             Letters of Credit.

 

(a)           Letter of Credit Subfacility.  Until the termination of this
Agreement pursuant to Article XI and subject to the other terms and conditions
of this Agreement, Borrower may request Bank to issue one or more of its
standard standby letters of credit (“Standby Letter of Credit”) or its standard
commercial letters of credit (“Commercial Letter of Credit”) in favor of such
beneficiary(ies) as are designated by Borrower by delivering to Bank: (i) a
Letter of Credit Application completed to the satisfaction of Bank, together
with the proposed form of the Letter of Credit (which, in all respects, will
comply with the applicable requirements of Section 2.5 (b)), (ii) evidence of
sufficient Cash Secured Advance Availability after giving effect to the proposed
Letter of Credit, and (iii) such other Letter of Credit Documents that Bank then
customarily requires.  Bank, in addition to the other terms of this Agreement,
will have no obligation to issue the proposed Letter of Credit if, after giving
effect to such proposed Letter of Credit, the Cash Secured Advance Availability
will be less than zero Dollars.  The making of each Letter of Credit request by
Borrower will be deemed to be a representation by Borrower that the Letter of
Credit may be issued in accordance with, and will not violate the terms of, this
Section 2.5(a).

 

(b)           Terms of Letter of Credit.  Each Letter of Credit issued under
this Agreement will, among other things, (i) be in such form requested by
Borrower as is acceptable to Bank in its discretion exercised in a commercially
reasonable manner, (ii) be denominated in Dollars, and (iii) be issued to
support Borrower’s obligations that finance its business needs incurred in the
ordinary course of Borrower’s business as presently conducted by it (and, in the
case of Commercial Letters of Credit, solely the purchase of Eligible
Inventory).  In no event will any

 

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Standby Letter of Credit have a term of more than one year, or any Commercial
Letter of Credit have a term of more than 180 days; furthermore, and, in
addition to the foregoing term limitation, Bank will have no obligation to issue
any Letter of Credit with an expiry date later than the earlier of (A) the
Stated Termination Date or (B) such earlier termination date of this Agreement
which has resulted from the delivery to Bank by Borrower of a Termination Notice
as provided in Section 11.3.

 

(c)           Advice of Issuance or Non-Issuance.  Upon receipt of a request
from Borrower to open any Letter of Credit and of all attendant Letter of Credit
Documents satisfactorily completed, Bank, within three (3) Business Days, may
either (i) issue the requested Letter of Credit to the beneficiary thereof and
transmit a copy to Borrower, or (ii) elect, in its discretion exercised in a
commercially reasonable manner, not to issue the proposed Letter of Credit.  If
Bank elects not to issue such Letter of Credit, Bank will communicate in writing
to Borrower the reason(s) why Bank has declined such request.

 

(d)           Payment of Drafts.  All obligations of Borrower under each Letter
of Credit and all Letter of Credit Documents are payable on Bank’s demand or
payable as otherwise set forth in the applicable Letter of Credit Documents. 
Borrower hereby irrevocably instructs Bank, on the same Business Day that Bank
is obligated to fund a drawing or make any expenditure or any other payment
under a Letter of Credit or incurs any cost or expense under any Letter of
Credit, to reimburse Bank for any drawing, expenditure or other payment made, or
cost or expense incurred, by Bank in respect of any Letter of Credit by (i)
debiting the Cash Collateral Account and/or (ii) debiting Borrower’s loan
account with Bank as a Regular Advance pursuant to Section 2.2.  To the extent
that Bank applies amounts on deposit in the Cash Collateral Account as provided
in this Section 2.5(d), and, thereafter, such application (or any portion
thereof) is rescinded or any amount so applied must otherwise be returned by
Bank upon the insolvency, bankruptcy or reorganization of Borrower or otherwise,
then the amount so rescinded or returned shall automatically be converted into a
Regular Advance made on the date of such drawing for all purposes of this
Agreement.  If a Regular Advance to reimburse Bank for any drawing, expenditure
or other payment made, or cost or expense incurred, by Bank in respect of any
Letter of Credit results (or to the extent that it results) in any Deficiency,
then Borrower will immediately eliminate any Deficiency in accordance with the
terms of Section 2.6.

 

(e)           Letter of Credit Obligations.  All Letter of Credit Obligations
will constitute part of the Obligations and be secured by the Loan Collateral.

 

Section 2.6             No Deficiency.  Notwithstanding anything in this
Agreement to the contrary, Bank shall not be obligated to make any Regular
Advance, Cash Secured Advance, any advance of credit or issue any Letter of
Credit if, after giving effect to such Regular Advance, Cash Secured Advance,
other advance or Letter of Credit, a Deficiency would occur.  If, as of any
time, a Deficiency occurs, Borrower shall immediately, without demand or notice,
reduce the then outstanding balance of the Loans so that such Deficiency shall
no longer exist; provided, however, if such Deficiency was caused solely by the
good faith exercise of Bank’s discretion under Section 2.10(a), Borrower shall,
within five (5) Business Days after the occurrence of such Deficiency, reduce
the then outstanding balance of the Loans so that such Deficiency shall no
longer exist.

 

Section 2.7             Disbursement of Advances.  To obtain a Regular Advance
or Cash Secured Advance prior to the termination of this Agreement pursuant to
Article XI and subject to the other terms of this Agreement, Borrower must
deliver to the Asset Based Finance division of Bank a duly completed advance
request in the form of Exhibit B attached (“Advance Request”).  Each Advance
Request: (a) must specify the borrowing date (which shall be a Business Day),
(b) must specify the total

 

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amount of the requested advance, (c) must specify whether the advance is a
Regular Advance or Cash Secured Advance, (d) is irrevocable by Borrower, and (e)
must be signed by a duly authorized Responsible Officer of Borrower; provided,
however, that the Bank may rely on the authority of any officer or employee of
Borrower whom Bank in good faith believes to be authorized to request advances.
Any failure on behalf of Borrower to comply with the provisions of this Section
2.7 shall not in any manner affect the obligation of Borrower to repay such
Regular Advance or Cash Secured Advance in accordance with the terms of this
Agreement.  Borrower must deliver an Advance Request to Bank not later than
12:00 noon, Minneapolis time, on the date of the requested Regular Advance or
Cash Secured Advance.  Borrower irrevocably authorizes Bank to make all
disbursements of Regular Advances and Cash Secured Advances after the Closing
Date into a non-interest bearing, DDA operating account maintained by Borrower
at Bank (account number 153195058034) (the “Operating Account”) that will be
structured and utilized for that purpose in accordance with Bank’s policies and
procedures from time to time in effect.  Unless other arrangements are made
with, and expressly agreed to by, Bank (e.g., disbursements of advances by wire
transfer), all advances of Regular Advances and Cash Secured Advances, if made
by Bank, will be credited to the Operating Account at the end of the applicable
Business Day on which the advance is made.  With respect to advances requested
by Borrower to cover Presentments in the Controlled Disbursement Account,
Borrower hereby irrevocably authorizes Bank, without any further written or oral
request of Borrower, to transfer funds automatically from the Operating Account
to the Controlled Disbursement Account in amounts necessary for the payment of
checks and other items drawn on the Controlled Disbursement Account as such
checks and other items (“Presentments”) are presented to Bank for payment.  If
any Presentments in the Controlled Disbursement Account are paid by Bank in
excess of funds available in the Operating Account for any reason, including the
failure of Borrower to determine the correct amount of Presentments in its
Advance Request, the amounts so paid by Bank will be deemed to be a Regular
Advance for all purposes of this Agreement and are hereby ratified and approved
by Borrower; provided, however, that under no circumstances will Bank have any
obligation to pay any Presentments in the Controlled Disbursement Account in
excess of funds available in the Operating Account.  Notwithstanding anything to
the contrary in this Section 2.7, Bank may, at any time hereafter on oral or
written notice to Borrower, elect to discontinue the automatic sweeping of funds
from the Operating Account to the Controlled Disbursement Account, but Bank
instead may disburse proceeds of Regular Advances and Cash Secured Advances made
by Bank by crediting only the Operating Account.  Each request submitted by
Borrower for a new advance of a Regular Advances or Cash Secured Advances via
wire transfer of funds must be initiated with Bank’s wire transfer department
(or by telephone or on-line functions made available by Bank’s wire transfer
department from time to time) via a duly completed and signed outgoing wire
transfer form (or any replacement form promulgated by Bank).

 

Section 2.8             Notes; Records of Advances of Credit.  Borrower’s
obligation to pay the principal of, and interest on, the Loans (exclusive of the
Letter of Credit Exposure) made by Bank shall be evidenced by two promissory
notes duly executed and delivered by Borrower substantially in the form of
Exhibit A with blanks appropriately completed in conformity herewith (as the
same may be amended, restated, renewed, extended, supplemented or otherwise
modified from time to time, each a “Note” and collectively, the “Notes”).  The
Notes shall (a) be executed by Borrower, (b) be payable to the order of Bank and
be dated the Closing Date, (c) be in a stated principal amount equal to the
Regular Advance Facility Amount and Cash Secured Facility Amount, as applicable,
(d) mature on the date referenced in Section 11.1, (e) bear interest as provided
in Section 3.1 in respect of the Loans evidenced thereby, (f) be subject to
voluntary prepayment and mandatory repayment as provided herein, and (g) be
entitled to the benefits, and be subject to the terms, of this Agreement and the
other Loan Documents.  Bank is hereby authorized to record the date and amount
of each advance of the Loans, and the date and amount of each payment or
prepayment thereof, by any or all of the following: (1) on a schedule
constituting a part of the applicable Note which schedule may be attached
thereto and made a part thereof, (2) by entries made into Bank’s electronic
systems, or (3) on internal memoranda maintained by Bank, and any such
recordation

 

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will be rebuttably presumptive evidence of the accuracy of the information so
recorded absent manifest error; however, the failure of Bank to make any such
recordation will not affect the unconditional obligations of Borrower to repay
the outstanding principal, interest, or other Obligations due under this
Agreement, under the Notes, or the other Loan Documents in accordance with the
terms of this Agreement and the other Loan Documents.

 

Section 2.9             No Limitation on Liens.  The limits on outstanding
advances against the Borrowing Base are not intended and shall not be deemed to
limit in any way Bank’s security interest in, or other Liens on, the
Receivables, Inventory, Equipment, General Intangibles, or any other Loan
Collateral.

 

Section 2.10           Advance Rates and Sublimits.

 

(a)           Changes.  Borrower acknowledges that Bank, from time to time, may
do any one or more of the following in its discretion exercised in a
commercially reasonable manner: (i) decrease the dollar limits on outstanding
advances against the Borrowing Base or applicable to any one or more of the
Inventory or Receivables advance sublimits or (ii) decrease the Advance Rates
if, in either case, one or more of the following events occur or conditions
exist: (a) a Default or Event of Default has occurred; (b) with regard to the
Receivables Advance Rate, (1) the dilution percentage with respect to Borrower’s
Eligible Receivables (i.e., reductions in the amount of accounts receivable
because of returns, discounts, price adjustments, credit memoranda, credits,
contras and other similar offsets) increases by an amount which Bank, has
determined in a commercially reasonable manner, is materially above that which
existed as of the Closing Date, (2) the percentage of accounts receivable which
are 90 days or more past the date of the original invoices applicable thereto
increases, in comparison to the percentage of accounts receivable which are
within 90 days from the date of the original invoices applicable thereto as of
the Closing Date, by an amount which Bank, in a commercially reasonable manner,
determines is material, or (3) any material change occurs, determined by Bank in
a commercially reasonable manner, from the Closing Date in respect of the credit
rating or credit quality of Borrower’s account debtors; or (c) with respect to
the Inventory Advance Rate, there occurs a material change, as determined by
Bank in its commercially reasonable discretion (whether in connection with an
updated Inventory appraisal or otherwise), in the age, type, quantity, or
quality of Borrower’s Eligible Inventory as the same is constituted on the
Closing Date.

 

(b)           Notice.  If, at any time, Bank decreases any of the dollar limits
on outstanding advances against the Borrowing Base or applicable to any one or
more Inventory or Receivables advance sublimits or decreases the Advance Rates
from that which, in any case, is expressly stated in the respective definitions
of Receivables Advance Rate and Inventory Advance Rate (i.e., exclusive of those
changes which result from the effect of applying applicable eligibility criteria
and reserves) (“Stated Advance Rate Change”), Bank will give Borrower 30 days
advance written notice of such Stated Advance Rate Change, unless a Default or
Event of Default then exists, in which case Bank will give Borrower
contemporaneous oral or written notice of such Stated Advance Rate Change.

 

Section 2.11           General Conditions.  In addition to any other provisions
contained in this Agreement, the making of any advances or extensions of credit
under this Agreement after the acceptance of this Agreement by Bank will be
subject to the satisfaction of Bank of each of the following conditions
throughout the term of this Agreement:

 

(i)            No Default or Event of Default has occurred and is continuing;

 

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(ii)           No law or regulation prohibits, and no order, judgment or decree
of any arbitrator or Governmental Authority enjoins or restrains Bank, from
making the requested advance; and

 

(iii)          Borrower’s representations and warranties contained in this
Agreement are true and correct in all material respects as of the date of the
making of such advance or extension of credit.

 

Section 2.12           One General Obligation; Cross-Collateralized.  All
advances of credit by Bank to, or for the benefit of, Borrower under this
Agreement and under any other Loan Document constitute one loan, and all of the
Obligations constitute one obligation.  The Loans and all other advances or
extensions of credit to, or for the benefit of, Borrower under this Agreement or
the other Loan Documents are made on the security of all of the Loan Collateral.

 

ARTICLE III

 

INTEREST CHARGES; FEES

 

Section 3.1             Interest.  Borrower will pay Bank interest on the
Obligations as follows:

 

(a)           Interest on Advances.

 

(i)            Interest on Regular Advances.  Except as set forth in Section
3.1(b) below, interest on each Regular Advance hereunder shall accrue at an
annual rate equal to the Applicable Regular Advance Margin plus the one-month
LIBOR rate quoted by Bank from Reuters Screen LIBOR01 Page or any successor
thereto, which shall be that one-month LIBOR rate in effect and reset each New
York Banking Day, adjusted for any reserve requirement and any subsequent costs
arising from a change in government regulation, such rate rounded up to the
nearest one-sixteenth percent (the “LIBOR Rate”).  The term “New York Banking
Day” means any day (other than a Saturday or Sunday) on which commercial banks
are open for business in New York, New York.  Bank’s internal records of
applicable interest rates shall be determinative in the absence of manifest
error.  Notwithstanding the LIBOR Rate specified above, when calculating
interest on Regular Advances, the LIBOR Rate prior to the Facility Termination
Date or the occurrence of an Event of Default will not be less than 0.50%.

 

(ii)           Interest on Cash Secured Advances.  Except as set forth in
Section 3.1(b) below, interest on each Cash Secured Advance hereunder shall
accrue at an annual rate equal to the Applicable Cash Secured Advance Margin
plus the LIBOR Rate.  Bank’s internal records of applicable interest rates shall
be determinative in the absence of manifest error.  Notwithstanding the interest
rate specified above, when calculating interest on Cash Secured Advances, the
applicable interest rate on each Cash Secured Advance prior to the Facility
Termination Date or the occurrence of an Event of Default will not exceed the
Prime Rate minus 1.00%.  Notwithstanding the foregoing, in no event will the
applicable interest rate on any Cash Secured Advance be less than 1.00%.

 

(b)           Default Rate.  At any time during which an Event of Default has
occurred and is continuing, all Loans, all past due interest and all fees shall
bear interest at a per annum rate equal to the rate otherwise applicable under
Section 3.1(a), plus 2.00% (the “Default Rate”).

 

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(c)           General Provisions.  Interest as aforesaid shall be charged for
the actual number of days elapsed over a year consisting of 360 days on the
actual daily balance of such Loan.  Interest on the unpaid principal of any Loan
shall accrue from the date such Loan is made to the date such Loan is paid in
full.

 

(d)           Interest Payment Dates.  Interest on all Loans shall be paid on
the Payment Dates for the applicable Loans; provided, however, that any interest
accrued or accruing at the Default Rate, or accrued or accruing on or after the
Facility Termination Date, shall be payable on the earlier of the applicable
Payment Date or demand by Bank.

 

(e)           [Intentionally omitted.]

 

(f)            Interest Rate Adjustments.  Any adjustment in the rate of
interest resulting from a change in the Prime Rate will become effective on the
date of such change in the Prime Rate made by Bank.  Any adjustment in the rate
of interest resulting from a change in the LIBOR Rate will become effective on
the first Business Day of each month.  Bank’s internal records of applicable
interest rates shall be determinative in the absence of manifest error.

 

(g)           [Intentionally omitted.]

 

Section 3.2             Increased Costs.  If (i) there occurs any change in law
or any rules, regulations, guidelines or orders (or any interpretation or
application thereof) of a Governmental Authority or any new laws, regulations or
guidelines are promulgated, enacted, issued, or made or any request, requirement
or directive (whether having the force of law) from any central bank or other
Governmental Authority is imposed or made effective (including a requirement
which affects the manner in which Bank allocates capital resources to any of its
credit facilities, including its credit facility hereunder) and (ii) as a result
of such change, enactment, or issuance Bank, in its discretion exercised in a
commercially reasonable manner, determines that (a) the rate of return on Bank’s
capital as a consequence of the Loans is reduced to a level below that which
Bank could have achieved but for such circumstances (taking into consideration
Bank’s policies with respect to capital adequacy and capital maintenance) by an
amount deemed by Bank to be material or (b) Bank is subjected to any tax of any
kind whatsoever with respect to this Agreement or any loan or other credit
advanced under this Agreement or the basis of taxation of payments to Bank of
principal, fees, interest or other amounts payable under this Agreement is
changed (except a tax on the overall net income or capital of Bank, including
“doing business”, franchise and other similar taxes), then, and in each such
case, Bank may charge Borrower an additional fee which will compensate Bank for
such reduction in the rate of return caused by such requirements or for such tax
(“Additional Fee”) so long as additional fees (with respect to capital adequacy,
capital maintenance and such taxes) are being charged by Bank to its other
similarly situated borrowers to the extent Bank is legally empowered to do so. 
In the event any Additional Fee is charged to Borrower by Bank under this
Section 3.2, Borrower may prepay the Loans in full without payment of the
termination fee under Section 11.3 so long as such prepayment in full is
tendered to Bank within 90 days following the date Bank either first imposed the
Additional Fee or subsequently increased such Additional Fee for a reason other
than a change in the balance of the Loans or the interest rates under Section
3.1; however, should Borrower elect to terminate this Agreement pursuant to this
Section 3.2, Borrower will be liable for the aggregate Additional Fee which has
accrued through the date of termination.  A certificate as to such Additional
Fee incurred by Bank, submitted by Bank to Borrower, shall be conclusive, absent
manifest error, as to the amount thereof.

 

Section 3.3             Closing Fee.  Borrower will pay to Bank a
non-refundable, fully-earned closing fee in the total amount of $37,500 on the
Closing Date.

 

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Section 3.4             Unused Commitment Fee.  Commencing on the first day of
the first calendar month immediately following the Closing Date and continuing
on the first Business Day of each and every calendar month thereafter until the
Obligations are fully paid and satisfied (and, as applicable, on the date this
Agreement is terminated as provided in Article XI),  Borrower will pay to Bank a
fee (“Unused Commitment Fee”) in an amount equal to the result obtained by
multiplying (i) the difference between (a) the Regular Advance Facility Amount
and (b) the average daily Regular Advances advanced to Borrower during the
preceding calendar month (or portion thereof during which any portion of the
Regular Advances was outstanding or during which this Agreement was in full
force and effect) for which the Unused Commitment Fee is being determined by
(ii) the result obtained (expressed as a percentage) by multiplying the
Applicable Unused Commitment Fee by a fraction, the numerator of which is the
sum of days in such calendar month during which this Agreement was in full force
and effect (or during which any portion of the Regular Advances was outstanding)
and the denominator of which is 360.

 

Section 3.5             Letter of Credit Fees.  Borrower will pay to Bank, with
respect to each Letter of Credit, a fee (“LOC Fee”) equal to the Applicable LOC
Fee on the amount available to be drawn under each Letter of Credit from, and
including, the issuance date of the Letter of Credit to and including the expiry
date thereof (or, if earlier, the date on which the Letter of Credit is returned
to Bank and is canceled).  In addition, Borrower will pay to Bank, on its demand
for payment, Bank’s then current issuance, opening, closing, transfer,
amendment, draw, renewal, negotiation and other letter of credit administration
fees, charges and out of pocket expenses with respect to each Letter of Credit. 
The LOC Fee is fully earned by Bank when paid and will be due and payable in
advance on the issuance of each Letter of Credit.  The LOC Fee will be
calculated on the basis of the actual number of days elapsed in a 360-day year. 
Notwithstanding anything to the contrary in this Section 3.5 or any Letter of
Credit Document, if any Letter of Credit is cancelled for any reason before the
stated expiry date thereof, any LOC Fee paid in advance will not be refunded and
will be retained by Bank solely for its account.

 

Section 3.6             Payments; Charging Loan Account.  Borrower promises to
pay and to perform, observe and comply with when due all of the Obligations. 
All payments to be made by Borrower on account of the Obligations will be made
by Borrower without setoff, deduction, offset, recoupment or counterclaim in
immediately available funds. Borrower hereby authorizes Bank, at Bank’s option,
to charge any account of Borrower at Bank or charge or increase the Loans for
the payment or repayment of any interest or principal of the Loans, any fees,
charges or other amounts due to Bank under the Loan Documents, or any of the
other Obligations.

 

Section 3.7             Maximum Rate.  If, at any time, the rate of interest
contracted for, and computed in the manner provided, in this Article III
(“Applicable Rate”), together with all fees and charges as provided for herein
or in any other Loan Document (collectively, the “Charges”), which are treated
as interest under applicable law, exceeds the maximum lawful rate (the “Maximum
Rate”) allowed under applicable law, it is agreed that such contracting for,
charging or receiving of such excess amount was an accidental and bona fide
error and the provisions of this Section 3.7 will govern and control.  The rate
of interest payable hereunder, together with all Charges, shall be limited to
the Maximum Rate; provided, however, that any subsequent reduction in the Prime
Rate or the LIBOR Rate shall not reduce the Applicable Rate below the Maximum
Rate until the total amount of interest earned hereunder, together with all
Charges, equals the total amount of interest which would have accrued at the
Applicable Rate if the Applicable Rate had at all times been in effect.  If any
payment hereunder, for any reason, results in Borrower having paid interest in
excess of that permitted by applicable law, then all excess amounts theretofore
collected by Bank shall be credited on the principal balance of the Obligations
(or, if all sums owing hereunder have been paid in full, refunded to Borrower),
and the amounts thereafter collectible hereunder shall immediately be deemed
reduced, without the necessity of the execution of any new document, so as to
comply with applicable law and permit the recovery of the fullest amount
otherwise called for hereunder.

 

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ARTICLE IV

 

MONTHLY LOAN ACTIVITY ACCOUNTINGS

 

Bank will provide Borrower monthly with a statement of advances, charges and
payments made pursuant to this Agreement, and such account rendered by Bank
shall be conclusive evidence of the amount of the Obligations owing and unpaid
by Borrower and shall be deemed to be an account stated and binding as against
Borrower unless a written statement of Borrower’s or Bank’s exceptions is
received by the other within 30 days after the statement is mailed to Borrower;
however, Bank will have no obligation to correct any error or errors specified
by Borrower unless Bank, in its discretion exercised in a commercially
reasonable manner, believes that an error was made.  If any error is a manifest
error, Borrower or Bank shall have one year to raise the exception.

 

ARTICLE V

 

SECURITY

 

The Obligations shall be secured (in such order as may be determined by Bank in
its discretion) by a first priority perfected Lien on all Loan Collateral,
including a first priority, perfected security interest in all of the Collateral
pursuant to the Security Agreement dated as of the date of this Agreement
between Borrower and Bank (as the same may be amended, restated, replaced,
supplemented or otherwise modified from time to time, the “Security Agreement”)
and accompanying financing statements.

 

ARTICLE VI

 

CONDITIONS PRECEDENT; FURTHER ASSURANCES

 

Section 6.1             Initial Loan.  The obligation of the Bank to make the
initial Loans hereunder shall be subject to satisfaction of the following
conditions precedent, in addition to the applicable conditions precedent set
forth in Section 6.2:

 

(a)           No Change in Condition.  No change in the condition or operations,
financial or otherwise of the Borrower shall have occurred which change, in the
sole credit judgment of the Bank, may have a Material Adverse Effect.

 

(b)           Examination.  The Bank shall have completed its updated survey and
field examination of the Loan Collateral and Borrower’s financial condition, and
such survey and field examination shall have provided the Bank with results and
information which, in the opinion of the Bank, are satisfactory to the Bank.

 

(c)           No Material Transaction.  The Borrower shall not have entered into
any commitment or transaction which, in the opinion of the Bank, could cause a
Material Adverse Effect or is not entered into in the ordinary course of
Borrower’s businesses.

 

(d)           Litigation.  Except for litigation disclosed on Schedule 9.15, no
litigation shall be outstanding or have been instituted, or, to Borrower’s
knowledge threatened, against Borrower which the Bank determines to be material.

 

(e)           Delivery of Documents.  The Borrower shall have delivered or
caused to be delivered to the Bank each of the following, in form and substance
satisfactory to the Bank in all

 

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respects and duly executed and dated as of the Closing Date or such earlier date
as may be acceptable to the Bank:

 

(i)            This Agreement.  This Agreement, duly executed by Borrower and
the Bank.

 

(ii)           Notes.  The Notes, duly completed and executed by Borrower in
favor of the Bank.

 

(iii)          Security Agreement.  The Security Agreement duly executed by
Borrower.

 

(iv)          Convertible Debt Documents.  True and correct copies of the
Convertible Debt Documents.

 

(v)           Landlord Waivers; Bailee Letters.  From each Person identified in
Schedule 9.24 as the owner of the lessor’s interest under any real property
lease or sublease to which any Borrower is a party, a landlord waiver or similar
document in form and substance acceptable to Bank.  From each Person identified
on Schedule 9.24 as third party in possession of Inventory of the Borrower, a
bailee letter in form and substance acceptable to the Bank.

 

(vi)          Deposit Account Control Agreement.  From each financial
institution identified on Schedule 9.20, a deposit account control agreement in
form and substance acceptable to the Bank.

 

(vii)         Other Loan Documents.  The Loan Documents other than this
Agreement, the Notes and the Security Agreement, each duly executed and
delivered by Borrower, and, if applicable, each other Person intended to be a
party thereto.  In addition, Borrower shall have taken such other action as the
Bank shall have requested in order to perfect the security interests created
pursuant to the Security Agreement.

 

(viii)        Borrower Resolutions.  A copy, duly certified by the secretary or
an assistant secretary of the Borrower, of (A) the resolutions of the Board of
Directors of the Borrower authorizing the borrowings by the Borrower hereunder,
the execution, delivery and performance by the Borrower of the Loan Documents to
which the Borrower is a party or by which it is bound, and the conveyance of a
lien on assets of the Borrower to the Bank; (B) all documents evidencing other
necessary corporate action; and (C) all approvals or consents, if any, with
respect to the Loan Documents.

 

(ix)           Borrower Incumbency Certificate.  A certificate of the secretary
or an assistant secretary of the Borrower, certifying the names of the officers
of the Borrower authorized to sign the Loan Documents to which it is a party,
together with the true signatures of such officers.

 

(x)            Borrower Bylaws.  A copy, duly certified by the secretary or an
assistant secretary of the Borrower, of the Bylaws of the Borrower.

 

(xi)           Borrower Articles of Incorporation.  A copy, duly certified by
the Secretary of State of the Borrower’s state of incorporation, of the Articles
of Incorporation of such Borrower.

 

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(xii)          Borrower Good Standing Certificates.  Certificates of good
standing (or the equivalent in any state) and/or foreign qualification as to the
Borrower issued by the Secretary of State of the state in which the Borrower is
organized and each other state in which the failure of the Borrower to qualify
to or to be in good standing would have a Material Adverse Effect.

 

(xiii)         Officer’s Certificate.  A certificate of the chief financial
officer of Borrower, dated the Closing Date, to the effect set forth in clauses
(a), (b) and (c) of Section 6.2.

 

(xiv)        Opinions.  A favorable opinion, dated the Closing Date, of
Bracewell & Giuliani LLP, counsel to Borrower, covering such matters as the Bank
may reasonably request (and Borrower hereby instructs such counsel to deliver
such opinion to the Bank).

 

(xv)         Insurance.  Certificates of insurance evidencing the existence of
all insurance required to be maintained by Borrower pursuant to Sections 10.14
and 10.15 and the designation of the Bank as the loss payee or additional named
insured, as the case may be, thereunder to the extent required thereby, such
certificates to be in such form and contain such information as is specified in
Sections 10.14 and 10.15.  In addition, Borrower shall have delivered a
certificate of the chief financial officer of the Borrower setting forth the
insurance obtained by it in accordance with the requirements of Sections 10.14
and 10.15 and stating that such insurance is in full force and effect and that
all premiums then due and payable thereon have been paid.

 

(xvi)        Financial Matters.  The Financials described in Schedule 1.1(A).

 

(xvii)       Borrowing Base Certificate.  A current Borrowing Base Certificate.

 

(xviii)      Repayment of Existing Indebtedness.  Evidence that the principal of
and interest on, and all other amounts owing in respect of, Indebtedness (i) of
Borrower or its Affiliates to Wells Fargo (including, without limitation, any
contingent or other amounts payable in respect of letters of credit), and (ii)
which is secured by any Liens on any portion of the Loan Collateral shall have
been (or shall be simultaneously) paid in full, that any commitments to extend
credit under the agreements or instruments relating to such Indebtedness shall
have been canceled or terminated and that all guarantees in respect of, and all
Liens securing, any such Indebtedness shall have been released (or arrangements
for such release satisfactory to the Bank shall have been made).

 

(f)            Lien Searches.  The Bank shall have received a written search
report from a search service acceptable to the Bank listing all effective
financing statements that name Borrower as debtor or assignor, together with
copies of such financing statements (none of which shall cover any Loan
Collateral or interests therein or proceeds of any thereof), and tax and
judgment lien search reports (showing no evidence of any such lien filed against
Borrower), in each case in such jurisdictions and from such Persons, as the Bank
may request.

 

(g)           Financing Statements.  Such financing statements, mortgages,
notices and other documents relating to the Collateral as may be necessary or,
in the opinion of the Bank, desirable to perfect the Bank’s Liens in the Loan
Collateral shall have been filed on or prior to the date of the initial Loan.

 

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(h)           Closing Costs.  Evidence that the out-of-pocket costs, expenses
and fees (including attorneys’ fees) paid or incurred by the Bank in connection
with the preparation, negotiation and closing of this Agreement and the other
Loan Documents have been (or shall be simultaneously) paid in full.

 

(i)            Bank Accounts.  The Borrower and the Bank shall have entered into
such restricted access lockbox, special account, disbursement account and
controlled disbursement account agreements as the Bank may require in form and
substance acceptable to the Bank which provide for, among other things, the
collection and remittance to the Bank of cash proceeds of the Loan Collateral.

 

(j)            Exhibits; Schedules.  All Exhibits and Schedules to the Loan
Documents shall have been completed in form and substance satisfactory to the
Bank and shall contain no material facts or information which the Bank, in its
sole judgment, determines to be unacceptable.

 

(k)           Minimum Loan Availability.  The Borrower shall have delivered to
the Bank evidence in form and substance acceptable to Bank that aggregate Cash
Secured Advance Availability and Regular Advance Availability as of the Closing
Date is at least $4,000,000.

 

(l)            Other Documents.  The Borrower shall have delivered, or caused
the delivery of, such other documents as the Bank or counsel to the Bank may
reasonably request.

 

Section 6.2             General Conditions.  In addition to any other provisions
contained in this Agreement, the making of any advances or extensions of credit
under this Agreement after the acceptance of this Agreement by Bank will be
subject to the continued existence or fulfillment to the satisfaction of Bank of
each of the following conditions throughout the term of this Agreement:

 

(a)           No Default or Event of Default has occurred and is continuing;

 

(b)           No law or regulation prohibits, and no order, judgment or decree
of any arbitrator or Governmental Authority enjoins or restrains Bank, from
making the requested advance; and

 

(c)           Borrower’s representations and warranties contained in this
Agreement are complete and correct as of the date of this Agreement and, except
for any representation made as of a specific date, continue to be true and
correct in all material respects on the date of such advance or extension of
credit hereunder with the same effect as though such representations and
warranties had been made again on and as of such date subject to such changes as
are not prohibited hereby or do not constitute Defaults or Events of Default
under this Agreement.

 

The delivery of an Advance Request by Borrower to Bank shall be deemed to
constitute a representation and warranty by Borrower on the date thereof as to
the matters specified in Sections 6.2(a), 6.2(b) and 6.2(c) above.

 

Section 6.3             Further Assurances.  Borrower agrees to execute and
deliver or cause to be executed and delivered any and all further documents and
instruments and to take any and all further actions as may be determined by Bank
to be necessary or appropriate to the transactions contemplated herein or in the
other Loan Documents.

 

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ARTICLE VII

 

RECEIVABLES; INVENTORY; COLLECTION OF RECEIVABLES;
DISPUTED RECEIVABLES; PROCEEDS OF INVENTORY.

 

Section 7.1             Agreements Regarding Receivables.  Borrower may not
backdate, postdate or redate any of its invoices or other records relating to
the sale of goods or services.  Borrower may not make any sales on extended
dating or credit terms beyond that customary in Borrower’s industry.  In
addition to the Borrowing Base Certificate to be delivered in accordance with
Section 8.3, Borrower shall notify Bank promptly upon Borrower’s learning
thereof, in the event any Eligible Receivable becomes ineligible for any reason,
other than the aging of such Receivable, and of the reasons for such
ineligibility.  Borrower shall also notify Bank promptly of each dispute or
claim in excess of $50,000 with respect to any individual Receivable, and
Borrower will settle or adjust such disputes and claims at no expense to Bank;
provided, however, Borrower may not, without Bank’s consent, grant (a) any
discount, credit or allowance in respect of its Receivables, which discount,
credit or allowance exceeds an amount equal to $50,000 in the aggregate with
respect to any individual Receivable or (b) any extension, compromise or
settlement to any customer or account debtor with respect to any then Eligible
Receivable which is materially adverse to Borrower.  Nothing permitted by this
Section 7.1 or Section 7.2, however, may be construed to alter in any way the
criteria for Eligible Receivables or Eligible Inventory provided in Section 1.1.

 

Section 7.2             Agreements Regarding Inventory.  In addition to the
Borrowing Base Certificate to be delivered in accordance with Section 8.3,
following the occurrence and during the continuance of a Triggering Event,
Borrower shall notify Bank promptly of all material returns and recoveries of
Inventory. Without obtaining Bank’s prior consent and in compliance with the
applicable terms of the Security Agreement, Borrower will not (a) accept any
returns of Inventory outside the ordinary course of business, (b) enter into any
agreement, practice, arrangement, or transaction under which title to, or
ownership of, any Inventory which is being sold by Borrower is, or purports to
be, transferred to, or held by, a Person other than Borrower before such
Inventory is delivered to such Person by Borrower, (c) make a sale of Inventory
to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on
approval or any other repurchase or return basis, other than pursuant to
Borrower’s customary return policy, or (d) store any Inventory with, or place
any Inventory in the possession or control of, any bailee, processor,
warehouseman, consignee or any other Person, not a party to a bailee,
warehouseman or similar agreement with Bank, under any arrangement, practice or
agreement (oral or written).

 

Section 7.3             Locked Box.  Following the occurrence of a Triggering
Event, upon the request of the Bank, Borrower will obtain, and shall continue to
maintain during the term of this Agreement, a post office box at the U.S. Post
Office (the “Locked Box”).  Following the establishment of the Locked Box,
Borrower shall notify all of its customers and account debtors to forward all
remittances of every kind due Borrower (“Remittances”) to the Locked Box (such
notices to be in such form and substance as Bank may require from time to
time).  Immediately upon receipt thereof, Borrower shall deposit all other
proceeds of Receivables or other Loan Collateral into the Locked Box (or into
the Special Account, as defined below).  Bank shall have sole access to the
Locked Box at all times, and Borrower shall take all action necessary to grant
Bank such sole access.  At no time shall Borrower remove any item from the
Locked Box without Bank’s prior written consent, and Borrower shall not notify
any customer or account debtor to pay any Remittance to any other place or
address without Bank’s prior written consent.  Following the establishment of
the Locked Box, if Borrower should neglect or refuse to notify any customer or
account debtor to pay any Remittance to the Locked Box, Bank shall be entitled
to make such notification.  Upon the establishment of the Locked Box, Borrower
will hereby be deemed to have granted to Bank an irrevocable power of attorney,
coupled with an interest, to take in

 

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Borrower’s name all action necessary (a) to grant Bank sole access to the Locked
Box, (b) to contact account debtors to pay any Remittance to the Locked Box in
the event that any such account debtor is not paying any such Remittance to the
Locked Box, (c) to contact account debtors for any reason upon the occurrence of
an Event of Default, and (d) to endorse each Remittance delivered to the Locked
Box for deposit to the Special Account.

 

Section 7.4             Collection of Remittances.  Upon collection of
Remittances and other proceeds of Receivables and other Loan Collateral,
Borrower shall, and following the establishment of a Locked Box the Bank will,
deposit the same in a non-interest bearing account at Bank in Borrower’s name
pledged to U.S. Bank National Association, Account No. 153195063125 (the
“Special Account”).  Any Remittance or other proceeds of Receivables or other
Loan Collateral received by Borrower shall be deemed held by Borrower in trust
and as fiduciary for Bank, and following the establishment of the Locked Box,
Borrower immediately shall deliver the same, in its original form, to Bank into
the Locked Box by overnight delivery carrier.  Pending such deposit, Borrower
agrees that it will not commingle any such Remittance or other proceeds of
Receivables or other Loan Collateral with any of Borrower’s other funds or
property, but will hold it separate and apart therefrom in trust for Bank until
deposit is made into the Locked Box established pursuant to Section 7.3 or the
Special Account or until delivery is made to Bank by overnight delivery carrier
as described above.  All deposits to the Special Account and the Locked Box
shall be Bank’s property and shall be subject only to the signing authority
designated from time to time by Bank, and Borrower shall have no interest
therein or control over such deposits or funds.  Bank shall have sole access to
the Special Account and the Locked Box, and Borrower shall have no access
thereto.  Bank shall have, and Borrower hereby grants to Bank, a Lien on and
security interest in all funds held in the Operating Account, the Special
Account and the Locked Box established pursuant to Section 7.3 as security for
the Obligations.  The Special Account shall not be subject to any deduction,
set-off, banker’s lien or any other right in favor of any Person other than
Bank.  Deposits to the Special Account will be credited to the Operating
Account, provided, however, following the occurrence of a Triggering Event, Bank
may, in it sole discretion, apply deposits in the Special Account to the
Obligations in such order and method of application as may be elected by Bank in
its discretion exercised in a commercially reasonable manner (“Special Account
Sweep”).  Any funds in the Special Account remaining after such funds have been
applied to the Obligations (“Available Funds”) will be paid over by Bank to
Borrower; provided, however, at any time on and after the occurrence of a
Triggering Event, all Available Funds may, at Bank’s option, be retained in the
Special Account as continuing security for the Obligations.  If any Remittance
deposited in the Special Account is dishonored or returned unpaid for any
reason, Bank, in its discretion, may charge the amount of such dishonored or
returned Remittance directly against Borrower and any account maintained by
Borrower with Bank and such amount shall be deemed part of the Obligations. 
Bank shall not be liable for any loss or damage resulting from any error,
omission, failure or negligence on the part of Bank with respect to the
operation of the Special Account, the Locked Box, or the services to be provided
by Bank under this Agreement, except to the extent, but only to the extent, of
any direct, as opposed to any consequential, special or lost profit damages
suffered by Borrower from Bank’s gross negligence or willful misconduct.  Until
a payment is received by Bank for Bank’s account in finally collected funds, all
risks associated with such payment will be borne solely by Borrower.  From time
to time, Bank may adopt such regulations and procedures as it may deem
reasonable and appropriate with respect to the operation of the Special Account,
the Locked Box, and the services to be provided by Bank under this Agreement so
long as the adoption of such regulations and procedures will not change the
material terms of this Agreement and are applied to similarly situated
borrowers.

 

Section 7.5             Crediting of Remittances.  Upon implementation of the
Special Account Sweep, (a) for the purpose of calculating interest, all
Remittances and other proceeds of Receivables and other Loan Collateral
deposited in the Special Account shall be credited (conditional on final
collection) against the unpaid Loan balance on the second Business Day after the
Business Day that Bank received

 

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the same into the Special Account in Salt Lake City, Utah, and (b) for the
purpose of determining Cash Secured Advance Availability and Regular Advance
Availability, all Remittances and other proceeds of Receivables and other Loan
Collateral deposited in the Special Account shall be credited (conditional on
final collection) against the amount of Borrower’s Eligible Receivables and the
unpaid Loan balance on the Business Day immediately after the Business Day that
Bank received the same into the Special Account in Salt Lake City, Utah. 
Notwithstanding anything to the contrary in this Section 7.5, Borrower
acknowledges and agrees that deposits made and other items credited to the
Special Account are subject to applicable laws and regulations governing
availability of funds and Bank’s funds availability polices and may not be
immediately available for application to the Loans or the other Obligations.

 

Section 7.6             Cost of Collection.  All reasonable costs of collection
of Borrower’s Receivables, including Attorneys’ Fees, out-of-pocket expenses,
administrative and recordkeeping costs, and all service charges and costs
related to the establishment and maintenance of the Locked Box and the Special
Account shall be the sole responsibility of Borrower, whether the same are
incurred by Bank or Borrower, and Bank, at its discretion, may charge the same
against Borrower and any account maintained by Borrower with Bank and the same
shall be deemed part of the Obligations.

 

Section 7.7             On-Line Banking.  During the term of this Agreement,
Borrower will contract with Bank to obtain Bank’s then current automated balance
and information reporting system in connection with the operation of various
cash management systems contemplated by this Agreement.

 

ARTICLE VIII

 

EXAMINATION OF LOAN COLLATERAL; REPORTING

 

Section 8.1             Maintenance of Books and Records.  Borrower shall keep
and maintain complete books of account, records and files with respect to its
business in accordance with GAAP consistently applied and shall accurately and
completely record all transactions therein.  Borrower will maintain a perpetual
inventory system in respect of its Inventory.

 

Section 8.2             Access and Inspection.  Bank may at all times during
normal business hours have (a) access to, and the right to examine and inspect,
all of Borrower’s real and personal property and (b) access to, and the right to
inspect, audit and make extracts from, all of Borrower’s records, files and
books of account, and Borrower shall execute and deliver at the request of Bank
such instruments as may be necessary for Bank to obtain such information
concerning the business of Borrower as Bank may require from any Person;
provided, however, unless an Event of Default has occurred or exists, Bank will
give Borrower reasonable notice before it makes the inspections and examinations
at any office or place of business of Borrower.  Borrower shall furnish Bank at
reasonable intervals with such statements and reports regarding Borrower’s
financial condition and the results of Borrower’s operations, in addition to
those hereinafter required, and such other information as Bank may reasonably
request from time to time.

 

Section 8.3             Reporting Regarding Receivables.  So long as no
Triggering Event has occurred and is continuing, by no later than the 15th day
after the end of each calendar month, or sooner if available Borrower shall
deliver to Bank (a) a borrowing base certificate in the form of Exhibit C (a
“Borrowing Base Certificate”) (which is based on values as of the immediately
preceding calendar month end) and (b) reports of Borrower’s sales, credits to
sales or credit memoranda applicable to sales, billings against prepaid
Inventory, collections and non-cash charges (from whatever source, including
sales and noncash journals or other credits to Receivables) for the applicable
period, and acceptable supporting documentation thereto (including, a report
indicating the Dollar value of Borrower’s Eligible Receivables, and all other
information deemed necessary by Bank to determine levels of that which is and is
not

 

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Eligible Receivables).  Notwithstanding the foregoing, upon the occurrence and
during the continuance of a Triggering Event, the Borrower shall deliver, not
less frequently than weekly, and more frequently if Bank shall require or
Borrower shall so elect, the Borrowing Base Certificate by no later than Monday
of each week (based on values as of the immediately preceding Friday).  By no
later than the 15th day after the end of each calendar month, or sooner if
available, Borrower shall deliver to Bank monthly agings, broken down by due
date, of Receivables listed by invoice date, in each case reconciled to the
Borrowing Base Certificate for the end of such month and Borrower’s general
ledger, and setting forth any changes in the reserves made for bad accounts or
any extensions of the maturity of, any refinancing of, or any other material
changes in the terms of any Receivables in such format as is specified by Bank
from time to time, together with such further information with respect thereto
in such format as Bank may then reasonably require.

 

Section 8.4             Reporting Regarding Inventory; Inventory Appraisal. 
Borrower will undertake a physical count of its Inventory at least once each
calendar year in accordance with procedures approved by Borrower’s independent
certified public accountants and Bank.  By no later than the 15th day after the
end of each calendar month, or sooner if available, Borrower shall submit to
Bank a perpetual inventory report reconciled to (a) the Borrowing Base
Certificate for the end of such month, (b) Borrower’s inventory records, and (c)
Borrower’s general ledger, broken down into such detail and with such categories
as Bank shall reasonably require (including a report indicating the type,
location, age and dollar value of Borrower’s Inventory, and all other
information deemed necessary by Bank to determine levels of that which is and is
not Eligible Inventory).  Values shown on reports of Inventory shall be
accounted for using a standard costing system which approximates the
first-in-first-out (“FIFO”) method of accounting and will be valued at the lower
of cost or market value.  Not less frequently than weekly, and more frequently
if Bank shall require or Borrower shall so elect, Borrower shall deliver to Bank
a Borrowing Base Certificate, and acceptable supporting documentation thereto,
by no later than Monday of each week, reporting the value of Borrower’s
Inventory as of the immediately preceding Friday.  In addition, if required by
Bank, Borrower agrees to pay all costs, expenses and fees relating to an annual
appraisal of the net liquidation value of Borrower’s Inventory, which appraisal
shall be conducted by a third party appraiser acceptable to Bank; provided,
however, that Bank will not require such appraisal so long as a Triggering Event
has not occurred.  Notwithstanding the foregoing, nothing herein shall prohibit
the Bank from obtaining an appraisal, as described herein, at its own expense in
the absence of a Triggering Event.

 

Section 8.5             Interim Financial Statements; Payable Information. 
Promptly when available and in any event not later than thirty (30) days after
the end of each calendar month (and 45 days for financial statements relating to
any Fiscal Quarter) occurring after the Closing Date, Borrower shall furnish to
Bank a monthly (and, as applicable, quarterly) income statement, balance sheet
and changes in its cash flows (a) showing Borrower’s financial condition and the
results of Borrower’s operations for the periods covered by such statements in
such detail as Bank may from time to time require, (b) prepared in accordance
with GAAP consistently applied (except as otherwise disclosed to Bank to the
extent such exceptions are acceptable to Bank), and (c) if applicable,
containing all disclosures required to fully and accurately present the
financial position and results of operations of Borrower (subject to normal
year-end adjustments and the omission of footnotes) and to make such statements
not misleading under the circumstances.  By no later than the 15th day after the
end of each fiscal month end, or sooner if available, Borrower shall deliver to
Bank monthly agings of accounts payable, in each case reconciled to Borrower’s
general ledger for the end of such month, in such format as is specified by Bank
from time to time.

 

Section 8.6             Annual Projections.  Promptly when available and in any
event not later than thirty (30) days after the end of each Fiscal Year,
Borrower shall furnish to Bank detailed projections for the next Fiscal Year
setting forth projected income and cash flow for each month, the monthly

 

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operating budget, the monthly balance sheet, and the monthly borrowing
availability of Borrower, in each case accompanied by a certificate of
Borrower’s chief financial officer stating (a) the assumptions on which the
projections were prepared, (b) that the assumptions, except as otherwise noted,
were prepared on a consistent basis with the operation of Borrower’s business
during the immediately preceding Fiscal Year and with factors known to exist as
of the date of the certificate or reasonably anticipated to exist during the
periods covered by the projections, and (c) that the officers signing the
certificate have no reason to believe that the projections are incorrect or
misleading in any material respect.

 

Section 8.7             Annual Financial Statements.  Promptly when available
and in any event not later than ninety (90) days after the end of each Fiscal
Year, Borrower shall submit to Bank financial statements showing its financial
condition, the results of its operations, a balance sheet and related statements
of income, stockholders’ equity, and changes in its cash flows and financial
position for the year then ended.  All of the foregoing annual financial
statements must be audited in accordance with generally accepted auditing
standards by an independent certified public accounting firm acceptable to Bank
and shall be prepared and presented in accordance with GAAP consistently
applied, and shall be accompanied by an unqualified audit report of Borrower’s
independent certified public accountants.

 

Section 8.8             Management Reports.  Borrower shall furnish to Bank
promptly on receipt copies of all management letters and any other material
reports provided by Borrower’s independent accountants.  Borrower hereby
authorizes Bank to communicate directly with Borrower’s independent accountants
to discuss Borrower’s affairs, finances, accounts and such other matters as Bank
deems necessary.

 

Section 8.9             Comparisons to Financials; Certificates.  With each
monthly or annual financial statement submitted by Borrower to Bank under
Sections 8.5 and 8.7, Borrower will deliver to Bank: (a) a comparison prepared
by Borrower of the projected financial position and results of operations of
Borrower provided for in Section 8.6 with the actual financial position and
results of operations of Borrower for the applicable period and an explanation
of any material variations between them; and (b) a comparison prepared by
Borrower between actual calculated results for the applicable period and the
covenanted results for each of the Financial Covenants (as defined in Section
10.28); and (c) a comparison prepared by Borrower between actual calculated
results for the applicable period and the actual calculated results for the
corresponding period in each of the two immediately preceding Fiscal Years.
 Borrower shall also furnish Bank together with all materials required pursuant
to Sections 8.5, 8.6, and 8.7, a certificate signed by the chief financial
officer of Borrower in the form of Exhibit D.

 

Section 8.10           Public Filings.  Promptly after the same become publicly
available, Borrower will deliver to Bank copies of all periodic and other
reports, proxy statements and other materials filed by Borrower or any
Subsidiary with the Securities and Exchange Commission, or any Governmental
Authority succeeding to any or all of the functions of said Commission, or with
any national securities exchange, or distributed by the Borrower to its
shareholders generally, as the case may be.

 

Section 8.11           Delisting Correspondence.  Within two (2) days after
receipt of the same, Borrower will deliver to Bank a copy of any and all
correspondence from NASDAQ relating to any potential delisting of Borrower’s
Capital Stock.

 

Section 8.12           Tax Returns; Additional Information.  Promptly upon
Bank’s request after Borrower has filed its tax returns with each applicable
Governmental Authority, Borrower shall deliver to Bank a copy of all federal
(and at Bank’s request all state and local) income tax returns and schedules,
and any related extensions, filed by Borrower in respect of each taxable year
ending on or after

 

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December 31, 2009.  Borrower shall furnish all other tax and financial
information as Bank may reasonably request from time to time.

 

ARTICLE IX

 

WARRANTIES, REPRESENTATIONS AND COVENANTS

 

In order to induce Bank to enter into this Agreement and to make Loans
hereunder, Borrower warrants, represents and covenants that, as of the date
hereof, and except for any representation made as of a specific date, as of any
date upon which a Loan is made hereunder, and until the Obligations are fully
paid, performed and satisfied, the representations, warranties and covenants set
forth in this Section 9 are and shall remain true.

 

Section 9.1             Corporate Status.  Borrower (a) is a corporation duly
organized, and is and shall remain validly existing and in good standing, under
the laws of the state identified in the preamble to this Agreement as the
Borrower’s state of organization, and is and shall remain qualified to do
business as a foreign corporation under the laws of the jurisdictions listed on
Schedule 9.1 and under the laws of each other jurisdiction in which the failure
to be so qualified and in good standing would have a Material Adverse Effect,
and (b) has and shall maintain all requisite power and authority, corporate or
otherwise, to conduct its business, to own its property, to execute, deliver and
perform all of its obligations under this Agreement and each of the other Loan
Documents, and to grant the Liens on the Loan Collateral.  Borrower is not an
“investment company”, an “investment adviser”, or a company “controlled” by an
“investment company” as such terms are defined in the Investment Company Act of
1940, as amended.

 

Section 9.2             Due Authorization; Validity.  The signing and delivery
of the Loan Documents, the performance by Borrower of its Obligations under the
Loan Documents, and the grant of the Liens on or security interests in, the Loan
Collateral to Bank have been duly authorized by all requisite corporate or other
action of Borrower.  This Agreement and each of the other Loan Documents have
been duly executed and delivered by Borrower, and each will constitute, upon the
due execution and delivery thereof, the legal, valid, and binding obligations of
Borrower enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors’ rights generally.

 

Section 9.3             No Violation.  The execution, delivery and performance
by Borrower of this Agreement and the other Loan Documents and the grant of the
Liens on or security interests in the Loan Collateral to Bank, do not and will
not (a) constitute a violation of any applicable law, (b) constitute a breach of
any provision contained in Borrower’s Articles of Incorporation or Bylaws or any
governing or other organization documents of Borrower or contained in any order
of any court or other Governmental Authority, or (c) result in the creation or
imposition of any Lien on any of Borrower’s properties (other than in favor of
Bank hereunder).

 

Section 9.4             Use of Loan Proceeds.  Borrower’s uses of the proceeds
of the Loans made by Bank to Borrower pursuant to this Agreement are, and will
continue to be, legal and proper corporate uses.  Such uses do not and shall not
violate any applicable laws or statutes as in effect as of the date hereof or
hereafter.  The Loans are not and shall not be secured, directly or indirectly,
by any stock for the purpose of purchasing or carrying any margin stock or for
any purpose which would violate either Regulation U, 12 C.F.R. Part 221, or
Regulation X, 12 C.F.R. Part 224, promulgated by the Board of Governors of the
Federal Reserve System, it being expressly understood and agreed that to the
extent any Loan proceeds are used to repay or repurchase any Convertible Debt or
Capital Stock of Borrower, (a) the stated capital of the corporation will be
reduced by the par value of such repaid or repurchased

 

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Convertible Debt or Capital Stock and it will be marked “cancelled and retired”,
and (b) Borrower will retire such repaid or repurchased Convertible Debt or
Capital Stock and will not keep it as treasury stock.

 

Section 9.5             Ownership of Assets; Licenses; Patents.  Borrower has,
and will continue to have, adequate employees, assets, governmental approvals,
licenses, permits, patents, copyrights, trademarks and trade names to continue
to conduct its business as heretofore and hereafter conducted by it, and all of
Borrower’s patents, copyrights, trademarks and trade names owned or claimed by
Borrower as of the Closing Date, and all licenses of any patents, trademarks,
and copyrights to Borrower existing as of the Closing Date are described in
Schedule 9.5.

 

Section 9.6             Indebtedness.

 

(a)           The Borrower has no Indebtedness except for: (i) Indebtedness
disclosed in the Financials delivered on or before the Closing Date, (ii) the
Obligations, (iii) Indebtedness (A) which is unsecured, (B) which is not for
borrowed money, (C) which has been incurred in the ordinary course of business,
(D) which is not otherwise prohibited under any provision of this Agreement, and
(E) the nonpayment of or other default under which would not have a Material
Adverse Effect, and (iv) other Indebtedness permitted to be incurred or paid by
Borrower pursuant to Section 10.10.

 

(b)           Except as otherwise set forth or reflected in the Financials or on
Schedule 9.6(b), Borrower has not guaranteed the obligations of any Person
(except by indorsement of negotiable instruments payable at sight for deposit or
collection or similar banking transactions in the usual course of Borrower’s
business).

 

Section 9.7             Title to Property; No Liens.  Borrower has (a) good and
indefeasible title to, and ownership of, all of its personal property (other
than leases of personal property by Borrower in the ordinary course of its
business), including the Collateral and (b) good and marketable fee simple title
to all of its real property (other than leases of real property by Borrower in
the ordinary course of its business), in each case free and clear of all Liens
except to the extent of Permitted Liens.

 

Section 9.8             Restrictions; Labor Disputes; Labor Contracts.  Except
as described in Schedule 9.8, on the Closing Date, Borrower is not a party or
subject to, any charge, corporate restriction, judgment, decree or order, for
which Borrower’s compliance or non-compliance could reasonably be expected to
have a Material Adverse Effect.  Except as described on Schedule 9.8, Borrower
is not (a) a party to any written employment contract or labor contract or (b)
the subject of any labor dispute.  No collective bargaining agreement or other
labor contract identified on Schedule 9.8 is scheduled to expire during the term
of this Agreement except as described on Schedule 9.8.  To Borrower’s knowledge,
no union or other labor organization is seeking to organize, or to be recognized
as, a collective bargaining unit of employees of Borrower or any of its
Subsidiaries or for any similar purpose.  To Borrower’s knowledge, after due
inquiry, no key employee of Borrower is subject to any agreement in favor of
anyone other than Borrower which restricts or limits that individual’s right to
engage in the type of business activity conducted by Borrower in any manner
which could materially impair the ability of such individual to carry out his or
her duties with Borrower or to use any property or confidential information or
which grants to any Person, other than Borrower, any rights to inventions or
other ideas susceptible to legal protection developed or conceived by any such
key employee of Borrower.

 

Section 9.9             No Violation of Law.  Except as described on Schedule
9.9, Borrower is not in violation of any applicable statute, regulation or
ordinance of any Governmental Authority (including any such statute, regulation
or ordinance relating to ecology, human health or the environment), which
violation could reasonably be expected to have a Material Adverse Effect.

 

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Section 9.10           Hazardous Substances.  Except as described on Schedule
9.10, (a) no investigations, inquiries, orders, hearings, actions or other
proceedings by or before any Governmental Authority are pending or, to the
knowledge of Borrower, threatened in connection with any Environmental Activity
or alleged Environmental Activity; (b) no Hazardous Substances have been
integrated into any of Borrower’s property, or any component thereof in such
manner or quantity as may reasonably be expected to or in fact does (i) violate
any applicable Environmental Law or (ii) materially and adversely affect the
value of any Borrower’s Facility; (c) the Use of Borrower’s property does not
result in any Environmental Activity in violation of any applicable
Environmental Requirements; (d) to Borrower’s knowledge, no occurrence or
condition on any real property adjoining or in the vicinity of any Borrower’s
Facility exists which could cause Borrower’s Facility to be subject to any
restrictions on ownership, occupancy, transferability or operation under any
Environmental Requirements; (e) to Borrower’s knowledge, none of Borrower’s
Facilities prior to when Borrower has owned or leased them has been used for the
disposal of Hazardous Substances or was the site of any Release of Hazardous
Substances in violation of any Environmental Laws; (f) none of Borrower’s
business operations have contaminated the lands, waters or other property of
others with Hazardous Substances; (g) no underground or above ground storage
tank (regardless of contents) has been in the past, or is now, located on, at or
beneath any Borrower’s Facility; and (h) none of Borrower’s Facilities since
Borrower has owned or leased them has been used by Borrower for the production,
treatment, storage, generation, disposal or Release of any Hazardous Substance
other than in accordance with applicable Environmental Laws.

 

Section 9.11           Absence of Default.  Borrower is not in default, and has
not received any notice of breach, termination or acceleration or demand for
adequate assurances, under any agreement, the non-performance of which could
reasonably be expected to have a Material Adverse Effect.

 

Section 9.12           Accuracy of Financials; No Material Changes.  The
Financials (a) have been prepared in accordance with GAAP consistently applied
and are true, correct and complete in all material respects and (b) fairly
present Borrower’s assets, liabilities and financial condition and results of
operations and those of such other Persons described therein as of the date
thereof (subject to normal year-end adjustments and the lack of footnotes in the
case of monthly or pro forma Financials).  Except as described on Schedule 9.12,
(i) there are no omissions from the Financials or other facts or circumstances
not reflected in the Financials which are or may be material, (ii) there has
been no material and adverse change in Borrower’s assets, liabilities or
financial condition since the date of the Financials and (iii) there has been no
material damage to nor loss of any of Borrower’s assets or properties since such
date.  Borrower’s outstanding advances to any Person do not constitute any
equity or long term investment in any Person which is not reflected in the
Financials.  Borrower’s fiscal year is from January 1 to December 31.

 

Section 9.13           Pension Plans.  Except as described on Schedule 9.13,
neither Borrower nor any Controlled Group member has ever sponsored, maintained,
or contributed (or become obligated to sponsor, maintain, or contribute) to a
Pension Plan subject to Title IV of ERISA.  Neither Borrower nor any Controlled
Group member has ever sponsored, maintained, or contributed (or become obligated
to sponsor, maintain, or contribute) to any “multiemployer plan” (as defined in
ERISA). No “prohibited transaction,” or “reportable event”, as those terms are
defined by ERISA, has occurred or is continuing as to any Pension Plan of
Borrower or any Controlled Group member, which poses a threat of the imposition
of taxes or penalties against such Pension Plans (or trusts related thereto),
Borrower or any Controlled Group member, the imposition or payment of which
could have a Material Adverse Effect.  Each Pension Plan that is intended to
meet the requirements of qualified pension benefit plans under Sections 401(a)
and 501(a) of the Internal Revenue Code has received a current favorable
determination letter to that effect under the Internal Revenue Code, and neither
Borrower nor, to Borrower’s knowledge (after

 

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making due inquiries), any Controlled Group member has violated such
requirements with respect to any Pension Plan.

 

Section 9.14           Taxes and Other Charges.  Borrower has filed all federal,
state and local tax returns and other reports which it is required by law to
file.  All of such tax returns and reports accurately and properly reflect the
taxes due for the periods covered thereby.  Borrower has paid all taxes,
assessments and other similar charges that are due and payable except for any
such taxes, assessments or charges which are being contested in good faith in
accordance with the terms of Section 10.9.  Borrower has withheld all employee
and similar taxes which it is required by law to withhold and has maintained
adequate reserves for the payment of all taxes and similar charges.  No tax
Liens have been filed with respect to Borrower and, to the best knowledge of
Borrower (after due inquiry), no claims are being asserted with respect to any
such taxes, assessments or charges (and, to the knowledge of Borrower, no basis
exists for any such claims). There are not in effect any waivers of applicable
statutes of limitations for federal, foreign, state or local taxes for any
period.  Borrower is not a party to any tax-sharing agreement or arrangement.

 

Section 9.15           No Litigation.  Except as described on Schedule 9.15,
there is not, as of the Closing Date, any litigation, action or proceeding
pending or, to Borrower’s knowledge (after due inquiry), threatened, against
Borrower.

 

Section 9.16           No Brokerage Fee.  No brokerage, finder’s or similar fee
or commission is due to any Person, as a result of any commitment made by
Borrower, by reason of Borrower entering into this Agreement or by reason of any
of the transactions contemplated hereby, and Borrower shall indemnify and hold
Bank harmless from all such fees and commissions.

 

Section 9.17           Affiliates; Subsidiaries.  All Persons who are Borrower’s
Affiliates and/or Subsidiaries are identified in Schedule 9.17.    Except as set
forth on Schedule 9.17, no Affiliate or Subsidiary of Borrower (i) sells or
leases any goods or real property to Borrower, (ii) sells any services to
Borrower, (iii) purchases or leases any goods or real property, or purchases any
services from, Borrower, or (iv) is a party to any contract or commitment with
Borrower.

 

Section 9.18           Capitalization.  Schedule 9.18 sets forth the number of
shares of Capital Stock of Borrower which are authorized.  Each outstanding
share of Capital Stock is a common share and is duly authorized, validly issued,
fully paid and nonassessable.

 

Section 9.19           Noncompetition Agreements.  Borrower is not subject to
any contract or agreement containing a covenant not to compete in any line of
business with any Person.

 

Section 9.20           Deposit and Other Accounts.  All of the accounts
maintained by Borrower with any bank, brokerage house or other financial
institution are set forth in Schedule 9.20, and following the occurrence and
during the continuance of a Triggering Event none of such other accounts (other
than accounts designated as “Payroll Accounts” or “Disbursement Accounts”) is
subject to withdrawal other than by transfers of amounts therein to the Locked
Box or the Special Account.

 

Section 9.21           Solvency.  Borrower will be Solvent immediately after (a)
receipt and application of the Loans in accordance with the terms of this
Agreement, (b) the execution and delivery of this Agreement and the other Loan
Documents to which Borrower is a party, and (c) the filing of any financing
statements or other perfecting notices or actions in connection with this
Agreement.

 

Section 9.22           Full Disclosure.  No representation or warranty made by
Borrower in this Agreement, any other Loan Document to which Borrower is a
party, or in any other document furnished

 

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from time to time in connection with this Agreement contains or will contain at
the time such representation is made or such document furnished, any untrue
statement of a material fact or omits or will omit to state any material fact
necessary to make the statements herein or therein not misleading.

 

Section 9.23           Casualties.  Neither the business nor the properties of
Borrower are affected by any fire, explosion, accident, drought, storm, hail,
earthquake, embargo, act of God or of the public enemy or other casualty loss
(whether or not covered by insurance) which could reasonably be expected to have
a Material Adverse Effect.

 

Section 9.24           Leases; Bailments.  Except as listed on Schedule 9.24,
Borrower is not a party to any lease, assignment, sublease, or other agreement
relating to any real property or leasehold interest in real property, or any
material equipment or other material personal property.  Schedule 9.24 correctly
sets forth each lease, assignment, sublease and other agreement, existing as of
the Closing Date, to which Borrower is a party relating to (i) any real property
or leasehold interest in real property or (ii) any material equipment or other
material personal property, together with the legal name of the Person that owns
the lessor’s or assignor’s interest under each such lease, assignment, sublease
or other agreement.  Schedule 9.24 also correctly sets forth each warehouse and
other location (including street address, city and state) at which Inventory of
the Borrower is held, stored, maintained or controlled by any Person other than
the Borrower, together with the legal name of the Person that holds, stores,
maintains or controls Inventory of the Borrower at each such location.

 

Section 9.25           Insurance Policies.  Schedule 9.25 correctly describes
all of the insurance policies maintained by Borrower, including the carriers
thereof, and the types of coverage and insured amounts covered thereby.

 

Section 9.26           Consents.  No authorization or approval or other action
by, and no notice to or filing with, any Governmental Authority or any other
Person is required for the due execution, delivery and performance by Borrower
of any Loan Document to which it is or will be a party.

 

Section 9.27           Tax Shelter Regulations.  Borrower does not intend to
treat the Loans and/or Letters of Credit and related transactions as being a
“reportable transaction” (within the meaning of Treasury Regulation Section
1.6011-4).  If Borrower determines to take any action inconsistent with such
intention, it will promptly notify Bank thereof and deliver to Bank a duly
completed IRS Form 8886 or any successor form.  If Borrower so notifies Bank,
Borrower acknowledges that (i) Bank may treat the Loans and/or Letters of Credit
as part of a transaction that is subject to Treasury Regulation Section
301.6112-1, and Bank, will maintain the lists and other records required by such
Treasury Regulation and (ii) Bank may disclose without limitation of any kind,
any information with respect to the “tax treatment” and “tax structure” (in each
case, within the meaning of Treasury Regulation Section 1.6011-4) of the
transactions contemplated hereby and all materials of any kind (including
opinions or other tax analyses) that are provided to Bank relating to such tax
treatment and tax structure.

 

Section 9.28           Inventory.  Except for Liens arising in connection with
repacking by warehousemen party to a warehouse or bailee letter in favor of the
Bank, no processing, packaging or other work is performed by any Person with
respect to Inventory of the Borrower giving rise to a Lien in favor of such
Person for amounts due for the processing, packaging or other work performed.

 

Section 9.29           Internal Controls.

 

(a)           The Borrower has established and maintains disclosure controls and
procedures (as such term is defined in Rule 13a-14 under the U.S. Securities
Exchange Act or 1934, as amended (the “Exchange Act”)), which (i) are designed
to ensure that material information

 

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relating to the Borrower is made known to the Borrower’s chief executive officer
and its chief financial officer or persons performing similar functions by other
officers of the Borrower, particularly during the periods in which the periodic
reports required under the Exchange Act are being prepared; (ii) have been
evaluated for effectiveness as of a date within ninety (90) days prior to the
filing of the Borrower’s most recent annual or quarterly report filed with the
Securities Exchange Commission; and (iii) are effective in all material respects
to perform the functions for which they were established.

 

(b)           Based on the evaluation of its disclosure controls and procedures,
the Borrower is not aware of (i) any significant deficiency in the design or
operation of internal controls which could adversely affect the Borrower’s
ability to record, process, summarize and report financial data or any material
weaknesses in internal controls or (ii) any fraud, whether or not material, that
involves management or other employees who have a significant role in the
Borrower’s internal controls.

 

(c)           Since the date of the most recent evaluation of such disclosure
controls and procedures, except as otherwise disclosed to the Bank in writing,
there have been no significant changes in internal controls or in other factors
that could significantly affect internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.

 

Section 9.30           Updating Representations and Warranties.  To the extent
necessary to cause the representations and warranties set forth in Article IX or
in the Security Agreement to remain true, complete and accurate as of the date
hereof and as of each day on which an additional advance or extension of credit
is made hereunder, Borrower shall update in writing any Schedules provided for
in Article IX or in the Security Agreement promptly upon learning of any
circumstance which may have the effect of making any such representation or
warranty contained in Article IX or in the Security Agreement untrue or
misleading.  The requirement of Borrower to update any Schedule provided for
herein is not, and may not be construed to be, a cure of any Default or Event of
Default occurring prior to any such update or existing at the time of any such
update without the written waiver of such Default or Event of Default by Bank.

 

ARTICLE X

 

COVENANTS

 

Until the Obligations are fully paid, performed and satisfied and this Agreement
is terminated, Borrower will observe, perform, and comply with each of the
covenants set forth below in this Article X.

 

Section 10.1           Payment of Certain Expenses.  Borrower will pay to Bank
immediately on Bank’s demand any and all fees, costs and expenses which Bank
pays to a bank or other similar institution arising out of or in connection with
(a) the forwarding to Borrower, or any other Person on Borrower’s behalf, by
Bank of proceeds of Loans made by Bank to Borrower pursuant to this Agreement,
and (b) the depositing for collection by Bank of any check or item of payment
received or delivered to Bank on account of the Obligations. Borrower will
reimburse Bank, immediately, for any claims asserted by any bank at which a
blocked account is established for the deposit of proceeds of the Loan
Collateral in connection with such blocked account or any returned or
uncollected checks received by such bank as proceeds of the Loan Collateral.

 

Section 10.2           Notice of Litigation; Uninsured Casualty Loss.  Borrower
will notify Bank in writing, promptly on Borrower’s learning thereof, of (a) any
litigation, suit or administrative

 

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proceeding which may have a Material Adverse Effect, whether or not the claim is
considered by Borrower to be covered by insurance, and (b) any uninsured
casualty loss with respect to any of the Loan Collateral having an aggregate
fair market value of greater than $250,000.

 

Section 10.3           Notice of ERISA Events.  Borrower will notify Bank in
writing (a) at least 10 days prior to the adoption by Borrower or any Controlled
Group member of any Pension Plan subject to Title IV of ERISA; (b) promptly on
the occurrence of any Reportable Event, and (c) 90 days prior to any
termination, partial termination or merger of a Pension Plan or a transfer of a
Pension Plan’s assets.

 

Section 10.4           Notice of Labor Disputes; Labor Contracts.  Borrower will
notify Bank in writing (a), promptly upon Borrower’s learning thereof, of (i)
any labor dispute to which Borrower may become a party and which may have a
Material Adverse Effect or (ii) any strikes, walkouts, or lockouts relating to
any of its plants or other facilities, and (b) the entering into of any labor
contract relating to any of its plants or other facilities.

 

Section 10.5           Compliance with Laws.  Borrower will comply with the
requirements of all applicable laws, statutes, regulations, rules or ordinances
of any Governmental Authority, the noncompliance with which could reasonably be
expected to have a Material Adverse Effect.

 

Section 10.6           Notice of Violations of Law, Tax Assessments.  Borrower
will notify Bank in writing, promptly upon Borrower’s learning thereof, of any
violation of any law, statute, regulation, rule or ordinance of any Governmental
Authority, and of the imposition of any federal, state or local tax withholding
or assessment, applicable to Borrower, the violation or imposition of which
could reasonably be expected to have a Material Adverse Effect.  Borrower will
(a) provide Bank with copies of all communications between Borrower and any
Governmental Authorities which relate to Environmental Activities, Environmental
Requirements, or Hazardous Substances affecting Borrower; and (b) notify Bank
immediately after obtaining knowledge of the Release or alleged Release in a
reportable quantity (as defined under applicable Environmental Law) of any
Hazardous Substances on, in, under or affecting Borrower’s property or any
surrounding area, and any noncompliance with any Environmental Requirement.

 

Section 10.7           [Intentionally omitted.]

 

Section 10.8           Notice of Customer Defaults.  Borrower will notify Bank
in writing, promptly upon a Responsible Officer of the Borrower’s learning
thereof, of any default by any obligor under any material note or other evidence
of debt payable to Borrower or of anything which might have a material adverse
effect on the ability of any obligor of Borrower to pay any Indebtedness owing
to Borrower.

 

Section 10.9           Taxes and Charges.  Borrower will (a) file all federal,
state and local tax returns and other reports which it is required by law to
file, (b) pay all taxes, assessments and other similar charges that are due and
payable, (c) withhold all employee and similar taxes which it is required by law
to withhold, and (d) maintain adequate reserves for the payment of all taxes and
similar charges; provided, however, that no such taxes, assessments or charges
need be paid during such period as they are being contested in good faith by
Borrower, in appropriate proceedings promptly commenced and diligently
prosecuted, if adequate reserves in accordance with GAAP have been set aside on
Borrower’s books, and the continuance of any such contest does not (i) result in
any part of the Loan Collateral or any other property of Borrower being made the
subject of (A) any proceeding in foreclosure, (B) any levy or execution (which
shall not have been stayed or dismissed), or (C) any seizure or other loss and
(ii) prevent Bank from having a perfected first priority security interest in,
or as applicable, mortgage Lien

 

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on, the Loan Collateral or with respect to future advances made hereunder; and
provided, further, that Borrower will promptly pay such tax, assessment or
charge when the dispute is finally settled.

 

Section 10.10         Indebtedness; Guaranties.

 

(a)           Borrower will not incur any Indebtedness other than the
Obligations and:

 

(i)            Indebtedness reflected in the Financials delivered on or before
the Closing Date, so long as such Indebtedness is not secured by any of the Loan
Collateral;

 

(ii)           Indebtedness (A) which is unsecured unless secured with a
Permitted Lien, (B) which is not for borrowed money, or the issuance of any
letter of credit, acceptance transaction, or similar credit instrument or
facility, (C) which is incurred in the ordinary course of business, (D) which is
not otherwise prohibited under any provision of this Agreement, and (E) the
incurrence of which would not have a Material Adverse Effect;

 

(iii)          Indebtedness in respect of taxes, assessments or governmental
charges to the extent that payment thereof shall not at the time be required to
be made in accordance with the provisions of Section 10.9;

 

(iv)          Indebtedness in respect of judgments or awards which (A) have been
vacated, discharged or stayed within 10 days of the entry thereof or have been
in force for less than the applicable appeal period so long as execution is not
levied thereunder (or in respect of which (1) Borrower shall at the time in a
commercially reasonable manner be prosecuting an appeal or proceedings for
review and (2) a stay of execution shall have been obtained pending such appeal
or review), and (B) (1) are not, in the aggregate, in an amount in excess of
$250,000 (and individually in excess of $100,000) of any available insurance
coverage, as determined by Bank in its discretion exercised in a commercially
reasonable manner, in effect to satisfy such judgments or award for which the
insurer has admitted in writing its liability for the full amount thereof and
(2) do not have a Material Adverse Effect (regardless of monetary amount or
insurance coverage); and

 

(v)           Indebtedness under capitalized leases or purchase money financing
if (A) such Indebtedness is not secured by any of the Loan Collateral other than
the property so acquired and any identifiable proceeds, (B) any Liens relating
to such Indebtedness do not extend to or cover any property of Borrower other
than the property so acquired and any identifiable proceeds therefrom, and (C)
the principal amount of such capitalized lease or purchase money Indebtedness
will not, at the time of the incurrence thereof, exceed the value of the
property so acquired; and (D) the total amount of such Indebtedness during any
period does not exceed the maximum amount permitted during such period for
capital expenditures pursuant to Section 1 of Schedule 10.28;

 

provided, that no Indebtedness otherwise permitted under this Section 10.10 to
be incurred shall be permitted to be incurred if, after giving effect to the
incurrence thereof, any Default or Event of Default shall have occurred and be
continuing.

 

(b)           Borrower will not (i) guaranty the Indebtedness of any Person
(except those guaranties which are in favor of Bank and by indorsement of
negotiable instruments payable at sight for deposit or collection or similar
banking transactions in the usual course of Borrower’s business) or (ii) enter
into any agreement whereby Borrower agrees to indemnify any Person with

 

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respect to the actions or Indebtedness of any other Person (other than
indemnification obligations of Borrower in favor of officers and directors of
Borrower in accordance with Borrower’s organizational documents or customary
indemnification agreements).

 

Section 10.11         Restrictions; Labor Disputes.  Borrower will not (a)
become a party or subject to any corporate restriction or labor dispute, or (b)
enter into or become subject to any collective bargaining agreement or similar
labor contract which is scheduled to expire during the term of this Agreement,
or which could reasonably be expected to have a Material Adverse Effect.

 

Section 10.12         Pension Plans.  Borrower will not, and will not allow any
Controlled Group member to, permit any Reportable Event or “prohibited
transaction” (as defined by ERISA) for which no statutory or class exemption
exists under Sections 407 or 408 of ERISA or Sections 4975(c)(2) or 4975(d) of
the Internal Revenue Code to occur or to continue as to any Pension Plan of
Borrower or any Controlled Group member, which poses a threat of (a) termination
of such Pension Plans (or trusts related thereto), which termination could have
a Material Adverse Effect or (b) the imposition of taxes or penalties against
such Pension Plans (or trusts related thereto), Borrower, or any Controlled
Group member, the imposition or payment of which could have a Material Adverse
Effect.  With respect to each Pension Plan that is intended to meet the
requirements of qualified pension benefit plans under Sections 401(a) and 501(a)
of the Internal Revenue Code, Borrower and the applicable Controlled Group
members shall continue to maintain the qualified status of such Pension Plans,
and all contributions to Pension Plans which Borrower or any member of the
Controlled Group is obligated to make shall be timely made when due, unless the
failure to do so would not have a Material Adverse Effect.  Borrower may not,
and Borrower will not permit any Controlled Group member to, incur any liability
to the Pension Benefit Guaranty Corporation, the incurrence of which could
reasonably be expected to have a Material Adverse Effect.

 

Section 10.13         Solvency.  Borrower will continue to be Solvent.

 

Section 10.14         Property Insurance.  Borrower will insure all of its real
and personal property, including the Loan Collateral, against loss or damage by
fire, theft, burglary, pilferage, loss in transit and such other extended
coverage hazards in such amounts as are customary in Borrower’s industry and
under policies by insurers reasonably acceptable to Bank.  The policies or a
certificate thereof signed by the insurer evidencing that such insurance
coverage is in effect for periods of not less than one year (as measured from
the date of renewal)  shall be delivered to Bank within five (5) Business Days
after the issuance of the policies to Borrower and after each renewal thereof. 
All premiums thereon shall be paid by Borrower when due so as to keep such
insurance in full force and effect at all times.  Each such policy shall name
Bank as loss payee and, as appropriate, mortgagee under a New York standard
mortgagee clause or other similar clause acceptable to Bank and shall provide
that such policy may not be amended or canceled without thirty (30) days prior
written notice to Bank.  If Borrower fails to do so, Bank may (but shall not be
required to) procure such insurance and charge the cost to Borrower’s loan
account as part of the Obligations payable on demand and secured by the Loan
Collateral.

 

Section 10.15         Liability Insurance.  Borrower will, at all times,
maintain in full force and effect such liability insurance with respect to its
activities and business interruption, product liability and other insurance as
is customary in Borrower’s industry, such insurance to be provided by insurer(s)
reasonably acceptable to Bank.  Such insurance shall name Bank as an additional
insured containing a severability of interest/cross-liability endorsement
acceptable to Bank.

 

Section 10.16         Mergers; Acquisitions.  Borrower will not merge or
consolidate or be merged or consolidated with or into any other Person, or
otherwise reorganize, liquidate or wind-up or

 

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dissolve itself; provided, however, that any wholly-owned Subsidiary of Borrower
may be merged with or liquidated into Borrower (if Borrower is the surviving
company) or any other wholly-owned Subsidiary of Borrower.  Except for Permitted
Acquisitions (defined below), Borrower will not (a) purchase or otherwise
acquire (i) all or substantially all of the assets of any Person or the assets
comprising any line of business or business unit or division or (ii) any
partnership, joint venture or limited liability company interest in or with any
Person or (b) purchase the securities of, create, invest in, or form any Person
(including a Subsidiary).  For purposes hereof, “Permitted Acquisition” means
any proposed acquisition by Borrower of any Capital Stock or other equity
interests in another business entity, or of any substantial amount of the assets
of another business entity; provided, that:

 

(a)           such business entity must be a domestic corporation, limited
liability company or partnership, and following such acquisition Borrower
remains in substantially the same line of business as conducted by it as of the
Closing Date;

 

(b)           prior to and after giving effect to such acquisition and the
incurrence of any Indebtedness in connection therewith, (i) no Triggering Event
will have occurred and be continuing and (ii) the Borrower will be in compliance
with all other terms and conditions contained in this Agreement;

 

(c)           for any acquisition through the purchase of the Capital Stock or
other equity interests of a Person whereby such Person is an Affiliate of the
Borrower after giving effect to such acquisition, the Borrower causes such
Person to become a guarantor hereunder by executing and delivering a guaranty, a
security agreement and such other documents required by the Bank, each in form
and substance acceptable to the Bank;

 

(d)           all Indebtedness (other than to the Bank) incurred in connection
with such proposed acquisition is on terms acceptable to the Bank and is
subordinated, in both right of payment and collateral security, to the Loans and
other Obligations hereunder on terms acceptable to the Bank in its sole and
absolute discretion; and

 

(e)           any assets acquired in connection with a Permitted Acquisition
will not be included within the Borrowing Base unless and until all of the
conditions and requirements contained within the definition of Eligible
Receivables and Eligible Inventory (as applicable) have been fully satisfied
and, if required by the Bank, a collateral audit of such assets satisfactory to
the Bank shall have been completed.

 

Section 10.17         Investments.  Borrower will not, and will not permit any
Subsidiary to, make any Investment in any Person (other than in Borrower’s
ordinary course of business pursuant to Borrower’s deferred compensation plan),
whether payment therefor is made in cash or Capital Stock of Borrower or any
Subsidiary, or deposit with a financial institution except Investments held in
the Investment Account; provided, however, the foregoing restrictions on
Investments shall not apply so long as no Triggering Event has occurred and is
continuing or would be caused by such Investments.

 

Section 10.18         Distributions; Loans; Fees.  Borrower will not (a),
following the occurrence and during the continuance of a Triggering Event, (i)
declare or pay cash or stock distributions (including any return of capital) or
dividends upon any of Borrower’s Capital Stock (including any preferred stock
now or hereafter issued by Borrower) or (ii) make any distributions of
Borrower’s assets; or (b) incur, permit, or make any loans, advances or
extensions of credit to any Person, including any of Borrower’s Affiliates,
officers, employees, or directors, or pay any consulting, management or
directors’ fees to or for the account of any stockholder, director, officer, or
other Affiliate of Borrower; except that Borrower may (x) make advances to its
officers and employees with respect to expenses incurred by those

 

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officers and employees, which expenses (i) are ordinary and necessary business
expenses, (ii) are reimbursable by Borrower and (iii) do not exceed, in the
aggregate, $500,000 outstanding at any one time, and (y) pay cash fees to its
directors which do not exceed $500,000 in the aggregate in any Fiscal Year, and
(z) make equity grants to its directors under its equity compensation plans to
the extent that such equity grants are consistent with Borrower’s past practice.

 

Section 10.19         Redemption of Stock.  Following the occurrence and during
the continuance of a Triggering Event, Borrower will not voluntarily or pursuant
to any contractual or other obligations, redeem, retire, purchase, repurchase or
otherwise acquire, directly or indirectly, or exercise any call rights relating
to, any of Borrower’s Capital Stock or any other securities now or hereafter
issued by Borrower (including any warrants or options for any Capital Stock of
Borrower); provided, however, that the foregoing restriction shall not prevent
Borrower from (a) reacquiring Capital Stock or interests therein upon the
forfeiture or other lapse or termination of stock options, restricted stock unit
grants or other equity incentives granted to employees or others under its
incentive plans; (b) withholding shares of Capital Stock otherwise deliverable
to an incentive plan participant in connection with tax withholding; (c) taking
any action in connection with the normal operation of Borrower’s 401(k) plan, or
(d) repurchasing any shares of its Capital Stock pursuant to any rescission
offer Borrower may ultimately make as contemplated by footnote 10 to Borrower’s
Form 10-Q for the quarter ended June 30, 2009, it being expressly understood and
agreed that to the extent any Loan proceeds are used to repay or repurchase any
Convertible Debt or Capital Stock of Borrower, (a) the stated capital of the
corporation will be reduced by the par value of such repaid or repurchased
Convertible Debt or Capital Stock and it will be marked “cancelled and retired”,
and (b) Borrower will retire such repaid or repurchased Convertible Debt or
Capital Stock and will not keep it as treasury stock.

 

Section 10.20         Stock Rights.  Borrower will not (a) change the rights or
obligations associated with, or the terms of, any class of Capital Stock now
issued by Borrower or (b) issue any new class of Capital Stock of Borrower, in
each case without the prior written consent of the Bank; which consent shall not
unreasonably be withheld if such change or issuance would not result in a Change
in Control.

 

Section 10.21         Capital Structure; Fiscal Year.  Borrower will not make
any change in (a) Borrower’s capital structure (except as permitted by Sections
10.19 and 10.29) or (b) any of Borrower’s business objectives, purposes and
operations which could reasonably be expected to have a Material Adverse
Effect.  Borrower will not change its Fiscal Year.

 

Section 10.22         Affiliate Transactions.  Borrower will not enter into, or
be a party to, any transaction with any of Borrower’s Affiliates, except
transactions (a) in the ordinary course of business pursuant to the reasonable
requirements of Borrower’s business and (b) upon terms which are no less
favorable to Borrower than Borrower could obtain in a comparable arm’s length
transaction with a Person who is not Borrower’s Affiliate; provided, however,
Borrower may not (i) extend credit to, or have amounts owing from, its
Affiliates or (ii) pay in whole or in part any Indebtedness of Borrower to any
Affiliate other than (A) payments in respect of Convertible Debt due to
Affiliates to the extent expressly permitted by the Convertible Debt Documents
and Section 10.29; (B) trade payables due to Affiliates incurred in accordance
with the requirements of this Section 10.22l; (C) payments of regular cash and
equity compensation and grants relating thereto to officers and directors of
Borrower; (D) payments and advances pursuant to Borrower’s governing documents
and indemnity or similar contracts or agreements with officers and directors and
former officers and directors of Borrower; and (E) reimbursements payable to
Haverford Valley, L.C. and its affiliates for reimbursement of travel
arrangements incurred by Borrower’s executives on Borrower business.

 

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Section 10.23         Operating Accounts.  At all times until the Obligations
are fully paid and satisfied, Borrower will maintain its primary operating
accounts with Bank.

 

Section 10.24         Sale of Assets.  Borrower will not sell, lease or
otherwise dispose of or transfer, whether by sale, merger, consolidation,
liquidation, dissolution, or otherwise (including by a sale-leaseback
transaction), any of its assets, including the Loan Collateral except: (a) the
sale of Inventory in the ordinary course of business; provided, however, a sale
in the ordinary course of business will not include a transfer in total or
partial satisfaction of Indebtedness in excess of $10,000, and (b) the sale of
any item of Equipment for cash in an arm’s-length transaction having a fair
market value of less than $500,000 provided that in any 12 month period the
total amount of Equipment sold by Borrower may not exceed an aggregate fair
market value equal to $1,000,000.  Following the occurrence and during the
continuance of a Triggering Event, all of the proceeds from any disposition of
any Equipment will be delivered to Bank to be applied by Bank to the repayment
of the then outstanding Obligations in any order that Bank may elect in its
discretion exercised in a commercially reasonable manner.

 

Section 10.25         Intervention by Governmental Authority.  Borrower will not
permit to occur any seizure by, or the vesting of or intervention by or under
the jurisdiction of, any Governmental Authority by which Borrower’s management
is displaced or its authority in the conduct of its business is materially
curtailed.

 

Section 10.26         Levy Against Loan Collateral.  Borrower will not permit
(a) any attachment or distraint of any of the Loan Collateral to occur, or (b)
any of the Loan Collateral to become subject, at any time, to any mandatory
court order or other legal process, in either of clause (a) or (b) in excess of
$25,000.

 

Section 10.27         Judgments.

 

(a)           Outside of a Triggering Event.  Borrower will not permit any
judgment or award to be rendered against it (i) (1) which if all such judgments
in the aggregate (in excess of any available insurance coverage, as determined
by Bank in its discretion exercised in a commercially reasonable manner, in
effect to satisfy such judgments or awards for which the insurer has admitted in
writing its liability for the full amount thereof) were paid in full by Borrower
would cause a Triggering Event or (2) which has a Material Adverse Effect
(regardless of monetary amount or insurance coverage), and (ii) which has not
been vacated, discharged or stayed within 10 days of the entry thereof.

 

(b)           During a Triggering Event.  Following the occurrence and during
the continuance of a Triggering Event, Borrower will not permit any judgment or
award to be rendered against it (i) (1) in excess of $100,000 (or any number of
judgments or awards in excess of $250,000 in the aggregate) of any available
insurance coverage, as determined by Bank in its discretion exercised in a
commercially reasonable manner, in effect to satisfy such judgments or awards
for which the insurer has admitted in writing its liability for the full amount
thereof or (2) which has a Material Adverse Effect (regardless of monetary
amount or insurance coverage), and (ii) which has not been vacated, discharged
or stayed within 10 days of the entry thereof.

 

Section 10.28         Financial Covenants.  Borrower will observe, perform and
comply with all of the financial covenants contained in Schedule 10.28
(collectively, the “Financial Covenants”).

 

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Section 10.29         Payments on and Changes to Convertible Debt.

 

(a)           Payments on Convertible Debt.  Borrower will not (i) make any
payment (including any principal, premium, interest, fee or charge) with respect
to any Convertible Debt except regularly scheduled interest payments to the
extent, and in the manner, expressly permitted by the Convertible Debt Documents
or (ii) repurchase, redeem, defease, acquire or reacquire for value any of the
Convertible Debt except, so long as no Triggering Event has occurred and is
continuing or would be caused thereby, Borrower may repurchase Convertible Debt
so long as that to the extent any Loan proceeds are used to repay or repurchase
any Convertible Debt or Capital Stock of Borrower, (a) the stated capital of the
corporation will be reduced by the par value of such repaid or repurchased
Convertible Debt or Capital Stock and it will be marked “cancelled and retired”,
and (b) Borrower will retire such repaid or repurchased Convertible Debt or
Capital Stock and will not keep it as treasury stock.

 

(b)           Changes to Convertible Debt Terms or Documents.  Borrower will not
seek, agree to or permit, directly or indirectly, the amendment, waiver or other
change to (i) any of the pricing or payment terms (including, principal,
interest or premium provisions) of or applicable to, or the provisions governing
the priority of or security for the payment and performance of the obligations
under or applicable to, or acceleration, termination, or default provisions of
or applicable to, the Convertible Debt or any of the Convertible Debt Documents
or (ii) any other material term of or applicable to any of the Convertible Debt
Documents.  For purposes of this Section 10.29, “material” means any
modification, waiver, or amendment of the Convertible Debt or any of the
Convertible Debt Documents, which, in the judgment of Bank exercised in a
commercially reasonable manner, could (a) adversely affect any of Bank’s rights
or remedies under the Loan Documents, the value of the Loan Collateral, or
Bank’s security interest in or other Lien on the Loan Collateral (including the
priority of Bank’s interests) or (b) create or result in a Default or Event of
Default.

 

Section 10.30         Aggregate Balance of Cash Collateral Account and
Investment Account.  Borrower will at all times maintain the balance of (a) the
Cash Collateral Account and (b) Acceptable Investments in the Investment Account
in an aggregate amount not less than the Total Facility Amount.  The Investment
Account shall be subject to the Loan Documents, including without limitation a
control agreement or similar arrangement under which Bank will have the sole
right of withdrawal with respect to any withdrawal that would reduce the balance
of Acceptable Investments in the Investment Account to an amount less than the
Total Facility Amount.

 

ARTICLE XI

 

EFFECTIVE DATE; TERMINATION

 

Section 11.1           Effective Date and Termination Date.  This Agreement,
after it is executed by Borrower, shall be effective upon the date upon which it
is signed by Bank.  Unless this Agreement is terminated earlier under Sections
11.3 or 11.4, this Agreement shall terminate on the Stated Termination Date.

 

Section 11.2           [Intentionally omitted.]

 

Section 11.3           Voluntary Termination by Borrower.  Borrower may
terminate this Agreement (a) by giving Bank written notice (“Termination
Notice”) of the date on which this Agreement is to terminate (“Voluntary
Termination Date”) at least thirty (30) days before the Voluntary Termination
Date, and (b) by paying on any such Voluntary Termination Date (i) all of the
Obligations and (ii) as

 

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compensation to Bank for loss of bargain with respect to the credit advanced
hereunder, and not as a penalty, a termination fee in amounts as set forth
below:

 

Voluntary Termination Date

 

Termination Fee

 

 

 

On or Before October 2, 2010

 

1.00% of the Regular Advance Facility Amount

 

 

 

After October 2, 2010 but on or before

 

 

October 2, 2011

 

0.75% of the Regular Advance Facility Amount

 

provided, however, that no termination fee shall be due if:

 

(A)          the Voluntary Termination Date occurs during the period of thirty
(30) calendar days prior to the Stated Termination Date;

 

(B)           the Borrower pays Obligations during the period of fifteen (15)
calendar days after Borrower’s receipt of Bank’s notice of intent to assign the
Loan Documents pursuant to Section 15.5 of this Agreement; or

 

(C)           the revolving loan facility evidenced hereby is refinanced by the
Bank or an Affiliate of the Bank, or by a syndicate of lenders with respect to
which the Bank or an Affiliate of the Bank is the lead agent.

 

Section 11.4           Acceleration Upon Termination.  Upon the effective date
of termination under Sections 11.1, 11.3, or 13.1 (the “Facility Termination
Date”), (a) all Loans and all other Obligations will automatically and
immediately become due and payable, and (b) Bank’s obligations under this
Agreement and the other Loan Documents arising on and after that effective date
of termination will automatically terminate immediately, without notice or
demand, which Borrower hereby expressly waives.

 

Section 11.5           Borrower Remains Liable.  Notwithstanding any termination
of this Agreement, until all of the Obligations have been fully performed, paid
and satisfied, Borrower shall remain liable for the full and prompt performance
and payment of the Obligations and the indemnification set forth in Sections
15.8 and 15.11, and Bank shall retain all of its rights and privileges under the
Loan Documents, including the retention of its Liens on and interest in and to
all of the Loan Collateral until all of the Obligations have been fully
performed, paid and satisfied.

 

ARTICLE XII

 

EVENTS OF DEFAULT

 

Section 12.1           Events of Default.  Each of the following events, whether
or not caused by or within the control of Borrower, will constitute an “Event of
Default” under this Agreement:

 

(a)           Borrower does not pay (i) any principal of the Obligations owing
from Borrower to Bank when due in accordance with the terms hereof or (ii) any
interest, charge, expense, fee or any other Obligations hereunder owing from
Borrower to Bank within 3 Business Days after such amount becomes due and
payable in accordance with the terms hereof, including any amounts required to
be paid to Bank under Section 2.6;

 

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(b)           (i) Borrower does not observe, perform, or comply with any of the
Financial Covenants, (ii) any of the Loan Documents cease, for any reason, to be
in full force and effect, or Borrower or any other Person which is a party to
any of the Loan Documents so asserts in writing, (iii) any of the Liens created
by any of the Loan Documents ceases to be enforceable in accordance with its
terms, or (iv) any Loan Document ceases to be effective to grant perfected Liens
on the collateral described therein with the priority purported or warranted to
be created thereby;

 

(c)           Borrower does not observe, perform, or comply in all material
respects with any term or provision of this Agreement or of any of the other
Loan Documents (exclusive of those defaults covered by the other clauses of this
Section 12.1), subject to Section 12.2, if applicable;

 

(d)           (i) all or any of Borrower’s Capital Stock is delisted from the
NASDAQ stock exchange or (ii) at any time after the date hereof, Borrower fails
to timely file with the Securities and Exchange Commission periodic and current
reports (other than Securities and Exchange Commission Form 10-Q filed by
Borrower for the Fiscal Quarter ended September 30, 2009) that are in material
compliance with the requirements of the Exchange Act; provided, however, that
the failure to timely file any current report shall not constitute a violation
of this Section 12.1(d) if (A) the report is one for which a failure to timely
file does not affect eligibility for the use of Securities and Exchange
Commission Form S-3, and (B) the information required to be reported in the
current report is reported within the time permitted by the safe harbor
provision for such filing;

 

(e)           Any representation, warranty or statement made by, or on behalf of
Borrower, (i) in this Agreement, in connection with this Agreement, in
connection with any transaction relating to this Agreement or in any of the
other Loan Documents was false in any material respect, in the good faith
judgment of Bank, when made or furnished or when deemed to have been made or
furnished, or (ii) to induce Bank to make any Loan was false in any material
respect, in the good faith judgment of Bank, when made or furnished or when
deemed to have been made or furnished;

 

(f)            Borrower: (i) is, as of any date, not Solvent, (ii) becomes
generally unable to pay its debts as they become due, (iii) makes a general
assignment for the benefit of creditors, or (iv) calls a meeting of creditors
for the composition of debts; or the Board of Directors of Borrower (or any
committee thereof) adopts a resolution authorizing or has otherwise authorized
the actions described in subitems (iii) or (iv) of this clause (f);

 

(g)           (i) There is filed by Borrower any case, petition, proceeding or
other action (“Bankruptcy Case”) under any existing or future bankruptcy,
insolvency, reorganization, liquidation or arrangement or readjustment of debt
law or any similar existing or future law of any applicable jurisdiction
(“Insolvency Law”), (ii) an involuntary Bankruptcy Case (“Involuntary
Proceeding”) is commenced against Borrower under any Insolvency Law and the
Involuntary Proceeding is not controverted within 10 days, or is not dismissed
within 60 days, after the commencement of the Bankruptcy Case, or (iii) a
custodian, receiver, trustee, sequestrator, or agent is appointed or authorized
to take charge of any of Borrower’s properties; (the occurrence of any event
described in the foregoing subparagraphs (i), (ii), or (iii), a “Borrower
Bankruptcy Event”);

 

(h)           Bank determines that a Material Adverse Effect has occurred,
subject to Section 12.2, if applicable;

 

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(i)            There is enacted any legislation (federal, state or local) which
allows any Person to obtain a Lien on any material part of the Loan Collateral
which is superior to the Liens and interests of Bank on and in such part of the
Loan Collateral;

 

(j)            Following the occurrence and during the continuance of a
Triggering Event, there occurs an uninsured casualty loss with respect to any of
the Loan Collateral having an aggregate fair market value of greater than
$250,000;

 

(k)           Any default occurs under the terms applicable to any Indebtedness
of Borrower in an aggregate amount exceeding $1,000,000 which represents any
borrowing or financing from, by or with any Person;

 

(l)            A contribution failure occurs with respect to any Pension Plan
sufficient to give rise to a Lien under Section 303(k) of ERISA and such
contribution failure continues without remedy for a period of 15 Business Days
after the Borrower learns of such contribution failure;

 

(m)          There is instituted against Borrower any criminal proceeding for
which forfeiture of any asset is a potential penalty, or Borrower is enjoined,
restrained or in any way prevented by order of any Governmental Authority from
conducting any material part of its business affairs and such order is not
completely stayed, to the satisfaction of Bank, or dissolved within five (5)
Business Days from the effective date of such order;

 

(n)           Borrower shall voluntarily dissolve or cease to exist, or any
final and nonappealable order or judgment shall be entered against Borrower
decreeing its involuntary dissolution;

 

(o)           There occurs a Change of Control;

 

(p)           The audit report required pursuant to Section 8.7 is not an
unqualified audit report;

 

(q)           Borrower or any of its Subsidiaries discovers, identifies, is
given notice by any Person, or otherwise has knowledge of (i) the existence of
any Environmental Liability or (ii) any one or more Releases of Hazardous
Substances on, about or affecting a Borrower’s Facility or Borrower’s business
operations, which, by itself or in the aggregate, will or could reasonably be
estimated to subject Borrower to indebtedness, liability, or obligations in
excess of $250,000 during the term of this Agreement;

 

(r)            There occurs a default or event of default (however denominated)
by Borrower under the terms of the Borrower’s agreement(s) with Paymentech; or

 

(s)           There occurs a Convertible Debt Default.

 

Each Event of Default will be deemed continuing until it is waived in writing
by, or cured to the written satisfaction of, Bank.

 

Section 12.2           Cure Periods.

 

(a)           Subject to the provisions of Section 12.2(b),

 

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(i)            an event or condition of the type described in clause (c) of
Section 12.1 (exclusive of a default arising solely by virtue of noncompliance
with Sections 8.2, 8.3, 8.4 or, insofar as insurance coverage is no longer in
effect, Sections 10.14 or 10.15) will be considered an Event of Default for
purposes of this Agreement only if Borrower fails to cure the default within
fifteen (15) days after the earlier of (x) the date on which a Responsible
Officer of the Borrower has knowledge of the existence of such event or
condition or (y) the date on which Bank notifies Borrower of the existence of
such event or condition; provided, however, if a period of cure is provided for
in any of the other Loan Documents with respect to a default under such other
Loan Documents, the period of cure set forth in this Section 12.2(a)(i) will not
be applicable to such default; and

 

(ii)           an event or condition of the type described in Section 12.1(h)
will be considered an Event of Default for purposes of this Agreement only if
(A) Bank shall have first given written notice thereof to Borrower, and (B)
either (x) Borrower shall fail, within fifteen (15) days after the delivery of
such notice from Bank, to deliver a business plan to Bank which, to Bank’s sole
satisfaction, shall provide an acceptable means to cure such default or (y)
Borrower fails to cure such default to Bank’s sole satisfaction within fifteen
(15) days after Bank gives Borrower written approval of such business plan. 
Nothing in this Section 12.2(a)(ii), however, obligates Bank under any
circumstances to support any business plan proposed by Borrower, consider any
more than the original business plan proposed by Borrower, or consider any
business plan proposed by Borrower if any other Default or Event of Default has
occurred or then exists.

 

(b)           Section 12.2(a) will not be applicable with regard to (i) any
Event of Default which by its nature is not susceptible of cure (including,
without limitation, any violation of the Financial Covenants), (ii) an Event of
Default if, within the 12 calendar months immediately preceding the occurrence
of such default, Borrower has previously breached the same provision of this
Agreement, or (iii) any Event of Default, as a result of which, Bank believes,
in good faith, that there exists an immediate and material risk, threat, or
danger to the value of the Loan Collateral, Bank’s interests in the Loan
Collateral, or the collectibility of the Obligations.

 

ARTICLE XIII

 

BANK’S RIGHTS AND REMEDIES

 

Section 13.1           Acceleration.  Upon the occurrence of any Event of
Default, in addition to all other rights and remedies provided in the Loan
Documents or available at law or in equity, Bank, without further notice or
demand but subject to Section 12.2 and as provided in clause (a) of this Section
13.1:

 

(a)           may declare the Loans and all other Obligations to be immediately
due and payable (except that with respect to any Event of Default under Section
12.1(f) or (g), such acceleration of the Loans shall be automatic),

 

(b)           to the extent that the maximum amount of the Loans has not yet
been used or fully drawn on by Borrower, may terminate the undrawn amount
thereof,

 

(c)           may terminate this Agreement, and

 

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(d)           will have all rights to realize upon, and exercise its rights with
respect to, the Loan Collateral pursuant to this Agreement and the other Loan
Documents, and as otherwise provided by applicable law.

 

Bank’s rights and remedies under this Agreement shall be cumulative and not
exclusive of any other right or remedy which Bank may have.

 

Section 13.2           Fees and Expenses.  Borrower shall pay to Bank,
immediately and as part of the Obligations, all reasonable costs and expenses,
including court costs, Attorneys’ Fees and costs of sale, incurred by Bank in
exercising any of its rights or remedies under the Loan Documents.

 

Section 13.3           [Intentionally omitted.]

 

ARTICLE XIV

 

[INTENTIONALLY OMITTED.]

 

ARTICLE XV

 

GENERAL

 

Section 15.1           Severability.  If any term of this Agreement is found
invalid under Minnesota law or laws of mandatory application by a court of
competent jurisdiction, the invalid term will be considered excluded from this
Agreement and will not invalidate the remaining terms of this Agreement.

 

Section 15.2           Governing Law.  THIS AGREEMENT HAS BEEN DELIVERED AND
ACCEPTED AT AND SHALL BE DEEMED TO HAVE BEEN MADE AT MINNEAPOLIS, MINNESOTA. 
THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF MINNESOTA (WITHOUT REFERENCE TO MINNESOTA
CONFLICTS OF LAW PRINCIPLES).

 

Section 15.3           JURISDICTION; VENUE; SERVICE OF PROCESS.  AS A
SPECIFICALLY BARGAINED INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT AND
EXTEND CREDIT TO BORROWER, BORROWER AND BANK AGREE THAT ANY ACTION, SUIT OR
PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT, OR ANY OTHER LOAN
DOCUMENT, THE VALIDITY OR PERFORMANCE OF ANY LOAN DOCUMENT, ANY BORROWING
HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN BORROWER AND BANK, AND WITHOUT
LIMITATION ON THE ABILITY OF BANK, ITS SUCCESSORS AND ASSIGNS, TO EXERCISE ALL
RIGHTS AS TO THE LOAN COLLATERAL AND TO INITIATE AND PROSECUTE IN ANY APPLICABLE
JURISDICTION ACTIONS RELATED TO REPAYMENT OF THE OBLIGATIONS, SHALL BE INITIATED
AND PROSECUTED AS TO ALL PARTIES AND THEIR SUCCESSORS AND ASSIGNS AT
MINNEAPOLIS, MINNESOTA.  BANK AND BORROWER EACH CONSENTS TO AND SUBMITS TO THE
EXERCISE OF JURISDICTION OVER ITS PERSON BY ANY COURT SITUATED AT MINNEAPOLIS,
MINNESOTA HAVING JURISDICTION OVER THE SUBJECT MATTER (AGREES THAT SUCH COURT
SHALL HAVE EXCLUSIVE JURISDICTION AND VENUE OVER THE APPLICABLE ACTION, SUIT OR
PROCEEDING, AND CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY CERTIFIED MAIL
DIRECTED TO BORROWER AND BANK AT THEIR RESPECTIVE ADDRESSES SET FORTH IN SECTION
15.9 OR AS OTHERWISE PROVIDED UNDER THE LAWS OF THE STATE OF MINNESOTA. 
BORROWER WAIVES ANY OBJECTION

 

53

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BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION
INSTITUTED HEREUNDER, AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY THE COURT.

 

Section 15.4           Survival and Continuation of Representations and
Warranties.  All of Borrower’s representations and warranties contained in this
Agreement shall (a) survive the execution, delivery and acceptance hereof by the
parties hereto and the closing of the transactions described herein or related
hereto, (b) be deemed to be made as of each and every day of the term of this
Agreement, and (c) remain true until the Obligations are fully performed, paid
and satisfied, subject to such changes as may not be prohibited hereby, do not
constitute Defaults or Events of Default hereunder, and have been consented to
by Bank in writing.

 

Section 15.5           Assignment; Bank Affiliates.  Bank shall have the right,
upon 15 calendar days prior written notice to the Borrower, to assign this
Agreement and the other Loan Documents to any Person, other than the Persons
listed on Schedule 15.5 and any Affiliates of such Persons.  Borrower may not
assign, transfer or otherwise dispose of any of its rights or obligations
hereunder, by operation of law or otherwise, and any such assignment, transfer
or other disposition without Bank’s written consent shall be void.  All of the
rights, privileges, remedies and options given to Bank under the Loan Documents
shall inure to the benefit of Bank’s successors and assigns, and all the terms,
conditions, covenants, provisions and warranties herein shall inure to the
benefit of and bind the permitted successors and assigns of Borrower and Bank,
respectively.  Bank may from time to time provide any information Bank may have
about Borrower or about any matter relating to this Agreement or the other Loan
Documents to U.S. Bancorp or any of its Affiliates or their successors.

 

Section 15.6           Bank’s Additional Rights Regarding Loan Collateral.  In
addition to its other rights and remedies under the Loan Documents, Bank may, in
its discretion exercised in a commercially reasonable manner, following the
occurrence of any Event of Default: (a) exchange, enforce, waive or release any
Loan Collateral or portion thereof, (b) apply the proceeds of the Loan
Collateral against the Obligations and direct the order or manner of the
liquidation thereof (including any sale or other disposition) as Bank may, from
time to time, in each instance determine, and (c) settle, compromise, collect or
otherwise liquidate any such security in any manner without affecting or
impairing its right to take any other further action with respect to any
security or any part thereof.

 

Section 15.7           Application of Payments; Revival of Obligations.  Bank
shall have the continuing right to apply or reverse and reapply any payments to
any portion of the Obligations then due.  To the extent Borrower makes a payment
or payments to Bank or Bank receives any payment or proceeds of the Loan
Collateral or any other security for Borrower’s benefit, which payment(s) or
proceeds or any part thereof are subsequently voided, invalidated, declared to
be fraudulent or preferential, set aside or required to be repaid to a trustee,
receiver or any other party under any bankruptcy act, state or federal law,
common law or equitable cause, then, to the extent of such payment or proceeds
received, the Obligations or part thereof intended to be satisfied shall be
revived and shall continue in full force and effect, as if such payment or
proceeds had not been received by Bank.

 

Section 15.8           Fees and Expenses.  (i)  Borrower shall reimburse Bank
for all reasonable costs, fees, expenses and obligations incurred by Bank or for
which Bank becomes obligated (“Expenses”) in connection with, arising out of, or
related to:

 

(a)           the entering into, negotiation, preparation, closing,
administration, and enforcement of this Agreement or any of the other Loan
Documents and any of Bank’s rights hereunder and thereunder;

 

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(b)                                 any Loans or advances made by Bank
hereunder;

 

(c)                                  any transaction contemplated by this
Agreement or the other Loan Documents;

 

(d)                                 any inspection, audit, appraisal, or
verification of the Loan Collateral or Borrower (Bank currently charges, in
addition to any field examination fee that may be provided pursuant to the terms
of this Agreement, $850 per diem based on an 8 hour day plus reasonable
out-of-pocket expenses per auditor or field examiner for the services of its
auditors and field examiners and a potentially greater amount if the auditor is
not a Bank employee); provided, however, Bank shall not seek reimbursement from
Borrower for more than one periodic, repeat audit (i.e., exclusive of any new
business audit) per calendar year undertaken (including of the Loan Collateral)
so long as a Triggering Event has not occurred; provided further that the
foregoing limitation on annual audits shall not limit Borrower’s obligation to
pay for annual Inventory appraisals under Section 8.4 above (regardless of
whether a Triggering Event has occurred or is existing);

 

(e)                                  any liability under Section 3505 of the
Internal Revenue Code and all other local, state and federal statutes of similar
import; and

 

(f)                                    with respect to any or all of
(i) administrating the Loans during the continuance of any Event of Default,
(ii) enforcing any Obligation or in foreclosing against any of the Loan
Collateral or exercising or enforcing any other right or remedy available by
reason of any Event of Default, (iii) any refinancing or restructuring of the
credit arrangements provided under this Agreement in the nature of a “work-out”
or in any insolvency or bankruptcy proceeding, (iv) commencing, defending or
intervening in any litigation or in filing a petition, complaint, answer, motion
or other pleadings in any legal proceeding relating to Borrower and related to
or arising out of the transactions contemplated hereby or by any of the Loan
Documents, (v) taking any other action in or with respect to any suit or
proceeding (whether in bankruptcy or otherwise), (vi) protecting, preserving,
collecting, leasing, selling, taking possession of, or liquidating any of the
Loan Collateral, or (vii) attempting to enforce or enforcing any Lien on or
security interest in any of the Loan Collateral or any other rights under the
Loan Documents.

 

(i)                                     The Expenses (i) will include Attorneys’
Fees and fees of other professionals, all lien search and title search fees, all
filing and recording fees and all reasonable travel expenses and (ii) are part
of the Obligations, payable upon Bank’s demand, and will be secured by the Loan
Collateral.

 

(ii)                                  The Obligations described under this
Section 15.8 shall survive any termination of this Agreement.

 

Section 15.9                                Notices.  Any notice required,
permitted or contemplated hereunder shall be in writing and addressed to the
party to be notified at the address set forth below or at such other address as
each party may designate for itself from time to time by notice hereunder, and
shall be deemed validly given (i) three days following deposit in the U.S.
certified mails (return receipt requested), with proper postage prepaid, or
(ii) the next Business Day after such notice was delivered to a regularly
scheduled overnight delivery carrier with delivery fees either prepaid or an
arrangement satisfactory with such carrier, made for the payment thereof, or
(iii) upon receipt of notice given by telecopy (fax), mailgram, telegram, telex
or personal delivery:

 

To Bank:

 

U.S. Bank National Association

 

 

Asset Based Finance

 

55

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Mail Code EP-MN-H04B

 

 

800 Nicollet Mall

 

 

Minneapolis, MN 55402-7020

 

 

Attention: Ron Giblin

 

 

Telecopy No.: (612) 303-3514

 

 

 

To Borrower:

 

Overstock.com, Inc.

 

 

6350 South 3000 East

 

 

Salt Lake City, UT 84121

 

 

Attention: Senior Vice President, Finance

 

 

Telecopy No.: (801) 453-7798

 

 

 

with a copy to:

 

Overstock.com, Inc.

 

 

6350 South 3000 East

 

 

Salt Lake City, UT 84121

 

 

Attention: General Counsel

 

 

Telecopy No.: (801) 947-3114

 

Section 15.10                          Electronic Communication.  Bank may, in
its discretion, elect, from time to time, to receive certain information,
including reports, otherwise required by the terms of this Agreement or the
other Loan Documents (“Reports”) from Borrower via electronic mail transmission
(“e-mail”).  Bank will designate from time to time its e-mail address to
Borrower (the “Bank E-mail Address”).  All e-mail transmissions of Reports from
Borrower shall contain the information as specified in this Agreement, shall be
formatted or displayed in a manner and order substantially similar to that shown
in this Agreement or otherwise required by Bank and shall conform to the
specifications described in this Agreement.  Borrower will be solely responsible
for the confidentiality of the contents of e-mail transmissions during
transmission to the Bank E-mail Address.  Borrower will be responsible for the
accuracy of all information provided to Bank via e-mail transmission to the Bank
E-mail Address, and any information so received by Bank will be deemed to have
been submitted by and received from Borrower.  In the event of a failure of the
transmission of the Reports, it is the responsibility of Borrower to transmit
the contents of any pending transmission to Bank using an alternative method
which is timely and in accordance with this Agreement.  Borrower agrees that, by
sending Bank the Reports via e-mail transmission, Borrower is certifying the
truthfulness and accuracy in all material respects of the Reports submitted each
and every time Borrower sends Bank the Reports.  Borrower further agrees that,
on each occasion when Borrower sends Bank e-mail transmissions containing
Reports, Borrower is warranting and representing to Bank the truthfulness and
accuracy in all material respects of the representations and warranties relevant
to that Report set forth in the relevant Loan Document.  Borrower consents to
and represents that it is Borrower’s intent that by Borrower’s insertion of
Borrower’s name in the subject line of the transmitting e-mail, or on the
Reports (including the header and/or the certification line), Borrower intends
such to constitute a legally binding and enforceable signature of Borrower, and
in all aspects the legal equivalent of the manual handwritten signature of an
authorized officer of the Borrower.

 

Section 15.11                          Indemnification.  In consideration of the
execution and delivery of this Agreement by Bank and the making of any Loan
hereunder, Borrower hereby indemnifies, exonerates and holds Bank and each of
its officers, directors, employees, Affiliates, and agents (collectively the
“Indemnified Parties” and, individually, as “Indemnified Party”) free and
harmless from and against any and all actions, causes of action, suits, demands,
investigations, obligations, judgments, losses, costs, liabilities, damages, and
expenses (irrespective of whether such Indemnified Party is a party to the
action for which indemnification hereunder is sought), including Attorneys’ Fees
and disbursements (the “Indemnified Liabilities”), which are incurred by,
accrued, asserted, made or brought against, charged to,

 

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or recoverable from the Indemnified Parties or any of them as a result of, or
arising out of, or relating to, or as a direct or indirect result of:

 

(a)                                  any transaction financed or to be financed
in whole or in part or directly or indirectly with the proceeds of any Loan;

 

(b)                                 the entering into and performance of this
Agreement and the other Loan Documents by any of the Indemnified Parties;

 

(c)                                  any breach by Borrower of any term,
provision, representation, warranty or covenant of this Agreement or the other
Loan Documents;

 

(d)                                 any Environmental Law, regardless of whether
or not caused by, or within the control of, Borrower; or

 

(e)                                  any Remittance deposited in the Special
Account which is dishonored or returned unpaid for any reason;

 

except to the extent that the Indemnified Liability is caused by or results from
the gross negligence or willful misconduct of the Indemnified Party, as
determined by a court of competent jurisdiction in a final non-appealable
judgment or order.  If and to the extent that the foregoing undertaking may be
unenforceable for any reason, Borrower hereby agrees to make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law, except to the extent that
such Indemnified Liabilities have arisen by reason of an Indemnified Party’s
gross negligence or willful misconduct, as determined by a court of competent
jurisdiction in a final non-appealable judgment or order.  The Obligations
described under this Section 15.11 will survive any termination of this
Agreement and shall be due and payable on demand.

 

Section 15.12                          Additional Waivers by Borrower.  Borrower
waives presentment and protest of any instrument and notice thereof, and, except
as expressly provided in the Loan Documents, demand, notice of default and all
other notices to which Borrower might otherwise be entitled.  Borrower shall
also disclaims and agrees not to assert any claim against Bank on any theory of
liability for consequential, special, indirect or punitive damages.

 

Section 15.13                          Equitable Relief.  Borrower recognizes
that, in the event Borrower fails to perform, observe or discharge any of its
obligations or liabilities under this Agreement, any remedy at law may prove to
be inadequate relief to Bank; therefore, Borrower agrees that Bank, if Bank so
requests, shall be entitled to temporary and permanent injunctive relief in any
such case without the necessity of proving actual damages.

 

Section 15.14                          Entire Agreement.  This Agreement and the
other Loan Documents set forth the entire agreement of the parties with respect
to its subject matter and supersede all previous understandings, written or
oral, in respect thereof.  Any request from time to time by Borrower for Bank’s
consent under any provision in the Loan Documents must be in writing, and any
consent to be provided by Bank under the Loan Documents from time to time must
be in writing in order to be binding on Bank; provided, however, Bank will have
no obligation to provide any consent requested by Borrower, and Bank may, for
any reason in its discretion exercised in a commercially reasonable manner,
elect to withhold the requested consent.  Two or more duplicate originals of
this Agreement may be signed by the parties, each of which shall be an original
but all of which together shall constitute one and the same instrument.  Any
documents delivered by, or on behalf of,  Borrower by fax transmission (a) may
be

 

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relied on by Bank as if the document were a manually signed original and
(b) will be binding on Borrower for all purposes of the Loan Documents.

 

Section 15.15                          Headings.  Section headings in this
Agreement are included for convenience of reference only and shall not relate to
the interpretation or construction of this Agreement.

 

Section 15.16                          Cumulative Remedies.  The remedies
provided in this Agreement and the other Loan Documents are cumulative and not
exclusive of any remedies provided by law.  Exercise of one or more remedy(ies)
by Bank does not require that all or any other remedy(ies) be exercised and does
not preclude later exercise of the same remedy.  If there is any conflict,
ambiguity, or inconsistency, in Bank’s judgment, between the terms of this
Agreement or any of the other Loan Documents, then the applicable terms and
provisions, in Bank’s judgment, providing Bank with greater rights, remedies,
powers, privileges, or benefits will control.

 

Section 15.17                          Waivers and Amendments in Writing. 
Failure by Bank to exercise any right, remedy or option under this Agreement or
in any Loan Document or delay by Bank in exercising the same shall not operate
as a waiver by Bank of its right to exercise any such right, remedy or option. 
No waiver by Bank shall be effective unless it is in writing and then only to
the extent specifically stated.  This Agreement cannot be amended, modified,
changed or terminated orally.

 

Section 15.18                          Recourse to Directors or Officers.  The
obligations of Bank under this Agreement are solely the corporate obligations of
Bank.  No recourse shall be had for the payment of any amount owing in respect
to this Agreement or for the payment of any fee hereunder or for any other
obligation or claim arising out of or based upon this Agreement against any
stockholder, employee, officer, or director of Bank.

 

Section 15.19                          WAIVER OF JURY TRIAL.  AS A SPECIFICALLY
BARGAINED INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT AND EXTEND CREDIT TO
BORROWER, BORROWER AND BANK EACH WAIVES TRIAL BY JURY WITH RESPECT TO ANY
ACTION, CLAIM, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT
OR ANY LOAN DOCUMENT, ANY BORROWING HEREUNDER OR THE RELATIONSHIP BETWEEN
BORROWER AND BANK.

 

Section 15.20                          Patriot Act Notice.  To help the
government fight the funding of terrorism and money laundering activities,
federal law requires all financial institutions to obtain, verify, and record
information that identifies each party who opens an account.  Bank will ask each
party to a financial transaction their name, address and other information that
will allow bank to identify such party.  Bank may also ask to see other
documents that substantiate a party’s identity.

 

Section 15.21                          Advertising.  With Borrower’s consent
(which consent will not be unreasonably withheld, conditioned or delayed), Bank
is authorized and permitted to use Borrower’s name and logo, and to disclose
Borrower’s transaction with Bank, in connection with any advertising program to
be conducted by Bank (which program may include so-called “tombstone”
advertisements, in various formats, in one or more publications selected by
Bank).  Borrower agrees that Bank, its affiliates and advertising agent, and
their respective employees, shall have no liability to Borrower in connection
with any use or disclosure contemplated by the preceding sentence.

 

Section 15.22                          Agreement Jointly Drafted.  The parties
agree that this Agreement shall not be construed against any party to the
Agreement on the grounds that such party drafted this Agreement, but shall be
construed as if all parties jointly prepared this Agreement, and any uncertainty
or ambiguity shall not on such grounds be interpreted against any one party.

 

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Section 15.23                          Advice of Counsel Obtained.  Each of the
parties acknowledges and represents that it has had the opportunity to consult
with legal, financial, and other professional advisors as it deems appropriate
in connection with its consideration and execution of this Agreement.  Each
undersigned party further represents and declares that in executing this
Agreement, it has relied solely upon its own judgment, belief and knowledge, and
the advice and recommendation of its own professional advisors, concerning the
nature, extent and duration of its rights, obligations and claims; that it has
reviewed its records, evaluated its position and conducted due diligence with
regard to all rights, claims or causes of action whatsoever with respect to any
and all other parties; and that it has not been influenced to any extent
whatsoever in executing this Agreement by any representations or statements made
by the other party or its representatives, except those expressly contained
herein.

 

[Remainder of page intentionally left blank; signature page follows]

 

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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto
as of the date first above written.

 

 

 

BORROWER:

 

 

 

 

OVERSTOCK.COM, INC.,

 

a Delaware corporation

 

 

 

 

 

 

 

By:

/s/ Jonathan E. Johnson III

 

Name:

Jonathan E. Johnson III

 

Title:

President

 

 

 

 

 

 

 

BANK:

 

 

 

U.S. BANK NATIONAL ASSOCIATION,

 

a national banking association

 

 

 

 

 

 

 

By:

/s/ Ronald Giblin

 

Name:

Ronald Giblin

 

Title:

Vice President

 

[Signature page to Financing Agreement]

 

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SCHEDULE 10.28

 

Financial Covenants

 

Section 1.                                            Capital Expenditures. 
Following the occurrence of a Triggering Event, Borrower will not make capital
expenditures (including expenditures for fixed assets, leases, maintenance, or
repairs capitalized or required, in accordance with GAAP consistently applied,
to be capitalized on Borrower’s books by purchase, lease-purchase agreement,
option or otherwise) in a total amount that exceeds $20,000,000 in the aggregate
during any Fiscal Year in which such Triggering Event has occurred or is
continuing, commencing with the Fiscal Year ending on December 31, 2009.  For
avoidance of doubt, it is understood and agreed that, immediately upon the
occurrence of a Triggering Event and at any time during the continuance thereof,
Bank may test Borrower’s compliance with this Section 1 for the Fiscal Year in
which such Triggering Event occurred or is continuing based on the most recent
financial statements delivered by Borrower to Bank pursuant to Sections 8.5 and
8.7 of this Agreement.

 

Section 2.                                            Minimum Fixed Charge
Coverage Ratio.  Following the occurrence  and during the continuance of a
Triggering Event, Borrower will not permit the ratio (“Fixed Charge Coverage
Ratio”) resulting from dividing Borrower’s 12 Month EBITDAR by Borrower’s Fixed
Charges (as defined below) for the applicable 12 Month Period to be less than
1.10 to 1.00 as of the end of any Fiscal Quarter ending on or after December 31,
2009 (or as of the last day of the most recent 12 Month Period ended prior to
the occurrence of a Triggering Event, as applicable).  For avoidance of doubt,
it is understood and agreed that, immediately upon the occurrence of a
Triggering Event and at any time during the continuance thereof, Bank may test
Borrower’s compliance with this Section 2 for the most recent 12 Month Period
ended prior to the occurrence of such Triggering Event, and for each 12 Month
Period ending thereafter, based on the most recent financial statements
delivered by Borrower to Bank pursuant to Sections 8.5 and 8.7 of this
Agreement.

 

Section 3.                                            [Intentionally omitted.]

 

Section 4.                                            Definitions.  Capitalized
terms used, but not defined, in this Schedule 10.28 have the meanings given to
them in the Agreement.  For purposes of this Schedule 10.28:

 

“12 Month Period” means, in respect of a date as of which the applicable
Financial Covenant is being calculated, the four consecutive Fiscal Quarters
immediately preceding the date as of which the Financial Covenant is being
calculated (i.e., a rolling four Fiscal Quarter (or 12 month) period).

 

“Adjusted EBITDAR” means, for the applicable 12 Month Period, the total (without
duplication), in Dollars, of (all as determined in accordance with GAAP
consistently applied): (a) Borrower’s EBITDAR for the applicable 12 Month
Period, minus (b) the aggregate cash amount of Borrower’s income and franchise
taxes paid during the applicable 12 Month Period, minus (c) Borrower’s capital
expenditures made (i) within the last Fiscal Quarter of the applicable 12 Month
Period and (ii) within the first three Fiscal Quarters of the applicable 12
Month Period to the extent such capital expenditures were made in a Fiscal
Quarter in which a Triggering Event had occurred or was continuing, in each case
exclusive of those capital expenditures made from funds borrowed by Borrower or
pursuant to any capitalized lease (for purposes of this clause (c) “funds
borrowed” will not include funds borrowed from Bank as a Loan), minus (d) all
dividends and distributions paid in cash, and all cash paid in connection with
redemptions or repurchases of any Capital Stock, by Borrower on a consolidated
basis during the applicable 12 Month Period.

 

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“EBITDAR” means, for the applicable 12 Month Period, the total (without
duplication), in Dollars (all as determined in accordance with GAAP consistently
applied) of Borrower’s net income before interest expense, income taxes,
depreciation, amortization and rent expense for the applicable 12 Month Period. 
EBITDAR, for purposes of this Schedule 10.28 and the Agreement, will (a) be
calculated utilizing standard costing that approximates first-in-first-out
method of cost accounting for Inventory (“FIFO”), and (b) not include any
(i) gain arising from the sale of capital assets, (ii) gain arising from any
write-up of assets, (iii) gain arising from the acquisition of debt securities
or Capital Stock of Borrower or from cancellation or forgiveness of
Indebtedness, (iv) gain or income arising from accretion of any negative
goodwill, or (v) gain recognized by Borrower as earnings which relate to any
extraordinary accounting adjustments or non-recurring items of income or include
any amounts attributable to extraordinary gains or extraordinary items of income
or any other non-operating, non-recurring gain from time to time occurring.

 

“Fixed Charges” means, for the applicable 12 Month Period, the total (without
duplication), in Dollars, of (all as determined in accordance with GAAP
consistently applied): (a) the principal amount of Borrower’s long-term debt and
obligations, in each case, paid or which were scheduled to be paid during the
applicable 12 Month Period (other than any principal amounts paid to Convertible
Debt Creditors for the retirement of Convertible Debt to the extent such
payments meet each of the following conditions: (i) such payment was made within
the first three Fiscal Quarters of the applicable 12 Month Period and (ii) such
payment was made in a Fiscal Quarter in which no Triggering Event had occurred
or was continuing), (b) scheduled capital lease payments paid or which were
scheduled to be paid during the applicable 12 Month Period, (c) Borrower’s
aggregate interest expense for the applicable 12 Month Period, including
interest paid on the Obligations, the Convertible Debt, Capital Lease
Obligations and any other Indebtedness for the applicable 12 Month Period
(including amortization of original issue discount and non-cash interest
payments), and (d) aggregate rent expense of Borrower for the applicable 12
Month Period.

 

“12 Month EBITDAR” means Adjusted EBITDAR for the 12 Month Period for which the
applicable Fixed Charge Coverage Ratio is then being determined.  “12 Month
EBITDAR” will be calculated for each 12 Month Period ending as of the end of
each Fiscal Quarter or Fiscal Year.

 

“Fiscal Quarter” means, in respect of a date as of which the applicable
Financial Covenant is being calculated, any quarter of a Fiscal Year, the first
Fiscal Quarter beginning on January 1 and ending on March 31, the second Fiscal
Quarter beginning on April 1 and ending on June 30, the third Fiscal Quarter
beginning on July 1 and ending on September 30, and the fourth Fiscal Quarter
beginning on October 1 and ending on December 31.

 

“Fiscal Year” means Borrower’s fiscal year for financial accounting purposes,
beginning on January 1 and ending on December 31.

 

Section 5.                                            Calculation of Financial
Covenants.

 

(a)                                  Bank, in addition to the information
contained on the financial statements submitted to Bank pursuant to Sections 8.5
and 8.7 of the Agreement, may calculate Borrower’s EBITDAR and the other
specified amounts under this Schedule 10.28 (and under the other Financial
Covenants contained in the Agreement) on the basis of information then available
to Bank, which calculation(s) will be binding on Borrower; however, Bank will
give notice to Borrower of Bank’s computations made pursuant to this Section 5
and an opportunity to provide

 

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Bank with any additional or contrary information. Borrower must provide any
additional (or contrary) information within fifteen (15) Business Days after
Bank gives notice to Borrower of Bank’s computations.

 

(b)                                 The Financial Covenants will be based on
Borrower’s financial performance unconsolidated with any other Person.

 

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