Exhibit
10.1


 


AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT


 


by and between


 


IMAGE ENTERTAINMENT, INC.


 


and


 


WELLS FARGO FOOTHILL, INC.


 


Dated as of August 10, 2005


 





















 


TABLE OF
CONTENTS


 


	
  1.

  	
  DEFINITIONS AND CONSTRUCTION

  	
   

  
	
   

  	
  1.1

  	
  Definitions

  	
   

  
	
   

  	
  1.2

  	
  Accounting Terms

  	
   

  
	
   

  	
  1.3

  	
  Code

  	
   

  
	
   

  	
  1.4

  	
  Construction

  	
   

  
	
   

  	
  1.5

  	
  Schedules and Exhibits

  	
   

  
	
  2.

  	
  LOAN AND TERMS OF PAYMENT

  	
   

  
	
   

  	
  2.1

  	
  Revolving Advances

  	
   

  
	
   

  	
  2.2

  	
  Letters of Credit and Letter
  of Credit Guarantees

  	
   

  
	
   

  	
  2.3

  	
  Capital Expenditure Loan

  	
   

  
	
   

  	
  2.4

  	
  Overadvances

  	
   

  
	
   

  	
  2.5

  	
  Interest: Rates, Payments,
  and Calculations

  	
   

  
	
   

  	
  2.6

  	
  Collection of Accounts

  	
   

  
	
   

  	
  2.7

  	
  Crediting Payments;
  Application of Collections

  	
   

  
	
   

  	
  2.8

  	
  Maintenance of Loan Account;
  Statements of Obligations

  	
   

  
	
   

  	
  2.9

  	
  Designated Account

  	
   

  
	
   

  	
  2.10

  	
  Fees

  	
   

  
	
   

  	
  2.11

  	
  Intentionally Omitted

  	
   

  
	
   

  	
  2.12

  	
  LIBOR Option

  	
   

  
	
   

  	
  2.13

  	
  Payments on the Capital
  Expenditure Loan Note

  	
   

  
	
  3.

  	
  CONDITIONS; TERM
  OF AGREEMENT

  	
   

  
	
   

  	
  3.1

  	
  Conditions
  Precedent to Initial Advance, Capital Expenditure Loan, L/C, L/C Guaranty

  	
   

  
	
   

  	
  3.2

  	
  Conditions
  Precedent to All Advances, Capital Expenditure Loans, L/Cs, or L/C Guarantees;
  Conditions Subsequent

  	
   

  
	
   

  	
  3.3

  	
  Term;
  Automatic Renewal

  	
   

  
	
   

  	
  3.4

  	
  Effect of
  Termination

  	
   

  
	
   

  	
  3.5

  	
  Early
  Termination by Borrower

  	
   

  
	
   

  	
  3.6

  	
  Termination
  Upon Event of Default

  	
   

  
	
   

  	
  3.7

  	
   

  	
   

  
	
  4.

  	
  CREATION OF
  SECURITY INTEREST

  	
   

  
	
   

  	
  4.1

  	
  Grant of
  Security Interest

  	
   

  
	
   

  	
  4.2

  	
  Negotiable
  Collateral

  	
   

  
	
   

  	
  4.3

  	
  Collection
  of Accounts, General Intangibles, Negotiable Collateral

  	
   

  
	
   

  	
  4.4

  	
  Commercial
  Tort Claims; Delivery of Additional Documentation Required

  	
   

  
	
   

  	
  4.5

  	
  Power of
  Attorney

  	
   

  
	
   

  	
  4.6

  	
  Right to
  Inspect

  	
   

  
	
   

  	
  4.7

  	
  Filing
  Authorization

  	
   

  
	
   

  	
  4.8

  	
  Control
  Agreements

  	
   

  
	
  5.

  	
  REPRESENTATIONS
  AND WARRANTIES

  	
   

  



 


i





















 


	
   

  	
  5.1

  	
  No Prior
  Encumbrances

  	
   

  
	
   

  	
  5.2

  	
  Eligible
  Accounts

  	
   

  
	
   

  	
  5.3

  	
  Eligible
  Inventory

  	
   

  
	
   

  	
  5.4

  	
  Location of
  Inventory and Equipment

  	
   

  
	
   

  	
  5.5

  	
  Inventory
  Records

  	
   

  
	
   

  	
  5.6

  	
  State of
  Incorporation; Location of Chief Executive Office; Organizational
  Identification Number; Commercial Tort Claims

  	
   

  
	
   

  	
  5.7

  	
  Due
  Organization and Qualification; Subsidiaries

  	
   

  
	
   

  	
  5.8

  	
  Due
  Authorization; No Conflict

  	
   

  
	
   

  	
  5.9

  	
  Litigation

  	
   

  
	
   

  	
  5.10

  	
  No Material
  Adverse Change in Financial Condition

  	
   

  
	
   

  	
  5.11

  	
  Solvency

  	
   

  
	
   

  	
  5.12

  	
  Employee
  Benefits

  	
   

  
	
   

  	
  5.13

  	
  Environmental
  Condition

  	
   

  
	
   

  	
  5.14

  	
  Reliance by
  Foothill; Cumulative

  	
   

  
	
   

  	
  5.15

  	
  Lender’s
  Liens

  	
   

  
	
   

  	
  5.16

  	
  Brokerage
  Fees

  	
   

  
	
   

  	
  5.17

  	
  License
  Agreements

  	
   

  
	
   

  	
  5.18

  	
  Reaffirmation

  	
   

  
	
   

  	
  5.19

  	
  Indebtedness

  	
   

  
	
   

  	
  5.20

  	
  Deposit
  Accounts and Securities Accounts

  	
   

  
	
  6.

  	
  AFFIRMATIVE
  COVENANTS

  	
   

  
	
   

  	
  6.1

  	
  Accounting
  System

  	
   

  
	
   

  	
  6.2

  	
  Collateral
  Reports

  	
   

  
	
   

  	
  6.3

  	
  Schedules of
  Accounts

  	
   

  
	
   

  	
  6.4

  	
  Financial
  Statements, Reports, Certificates

  	
   

  
	
   

  	
  6.5

  	
  Tax Returns

  	
   

  
	
   

  	
  6.6

  	
  Designation
  of Inventory

  	
   

  
	
   

  	
  6.7

  	
  Returns

  	
   

  
	
   

  	
  6.8

  	
  Title to
  Equipment

  	
   

  
	
   

  	
  6.9

  	
  Maintenance
  of Equipment

  	
   

  
	
   

  	
  6.10

  	
  Taxes

  	
   

  
	
   

  	
  6.11

  	
  Insurance

  	
   

  
	
   

  	
  6.12

  	
  Financial
  Covenants

  	
   

  
	
   

  	
  6.13

  	
  No Setoffs
  or Counterclaims

  	
   

  
	
   

  	
  6.14

  	
  Location of
  Inventory and Equipment

  	
   

  
	
   

  	
  6.15

  	
  Compliance
  with Laws

  	
   

  
	
   

  	
  6.16

  	
  Leases

  	
   

  
	
   

  	
  6.17

  	
  License
  Agreements

  	
   

  
	
   

  	
  6.18

  	
  Formation
  of Subsidiaries

  	
   

  
	
  7.

  	
  NEGATIVE COVENANTS

  	
   

  



 


ii





















 


	
   

  	
  7.1

  	
  Indebtedness

  	
   

  
	
   

  	
  7.2

  	
  Liens

  	
   

  
	
   

  	
  7.3

  	
  Restrictions
  on Fundamental Changes

  	
   

  
	
   

  	
  7.4

  	
  Change Name

  	
   

  
	
   

  	
  7.5

  	
  Guarantee

  	
   

  
	
   

  	
  7.6

  	
  Restructure

  	
   

  
	
   

  	
  7.7

  	
  Prepayments

  	
   

  
	
   

  	
  7.8

  	
  Change of
  Control

  	
   

  
	
   

  	
  7.9

  	
  Capital
  Expenditures

  	
   

  
	
   

  	
  7.10

  	
  Consignments

  	
   

  
	
   

  	
  7.11

  	
  Distributions

  	
   

  
	
   

  	
  7.12

  	
  Accounting
  Methods

  	
   

  
	
   

  	
  7.13

  	
  Investments

  	
   

  
	
   

  	
  7.14

  	
  Transactions
  with Affiliates

  	
   

  
	
   

  	
  7.15

  	
  Suspension

  	
   

  
	
   

  	
  7.16

  	
  Use of
  Proceeds

  	
   

  
	
   

  	
  7.17

  	
  Change in
  Location of Chief Executive Office; Inventory and Equipment with Bailees

  	
   

  
	
   

  	
  7.18

  	
  Amendment
  or Termination of License Agreements

  	
   

  
	
   

  	
  7.19

  	
  Securities
  Accounts

  	
   

  
	
  8.

  	
  EVENTS OF DEFAULT

  	
   

  
	
  9.

  	
  FOOTHILL’S
  RIGHTS AND REMEDIES

  	
   

  
	
   

  	
  9.1

  	
  Rights and
  Remedies

  	
   

  
	
   

  	
  9.2

  	
  Remedies
  Cumulative

  	
   

  
	
  10.

  	
  TAXES AND EXPENSES

  	
   

  
	
  11.

  	
  WAIVERS;
  INDEMNIFICATION

  	
   

  
	
   

  	
  11.1

  	
  Demand;
  Protest; etc

  	
   

  
	
   

  	
  11.2

  	
  Foothill’s
  Liability for Collateral

  	
   

  
	
   

  	
  11.3

  	
  Indemnification

  	
   

  
	
  12.

  	
  NOTICES

  	
   

  
	
  13.

  	
  CHOICE OF
  LAW AND VENUE; JURY TRIAL WAIVER

  	
   

  
	
  14.

  	
  DESTRUCTION
  OF BORROWER’S DOCUMENTS

  	
   

  
	
  15.

  	
  GENERAL PROVISIONS

  	
   

  
	
   

  	
  15.1

  	
  Effectiveness

  	
   

  
	
   

  	
  15.2

  	
  Successors
  and Assigns

  	
   

  
	
   

  	
  15.3

  	
  Confidentiality

  	
   

  
	
   

  	
  15.4

  	
  Section Headings

  	
   

  
	
   

  	
  15.5

  	
  Interpretation

  	
   

  



 


iii





















 


	
   

  	
  15.6

  	
  Severability
  of Provisions

  	
   

  
	
   

  	
  15.7

  	
  Amendments
  in Writing

  	
   

  
	
   

  	
  15.8

  	
  Counterparts;
  Telefacsimile Execution

  	
   

  
	
   

  	
  15.9

  	
  Revival and
  Reinstatement of Obligations

  	
   

  
	
   

  	
  15.10

  	
  Integration

  	
   

  
	
   

  	
  15.11

  	
  Borrower
  Acknowledgment of Prior Obligations and Continuation Thereof

  	
   

  
	
   

  	
  15.12

  	
  No
  Novation

  	
   

  



 


iv





















 


SCHEDULES AND EXHIBITS


 


	
  Schedule E-1

  	
  Eligible Inventory Locations

  	
   

  
	
  Schedule P-1

  	
  Permitted Liens

  	
   

  
	
  Schedule 2.6

  	
  Lockbox Banks

  	
   

  
	
  Schedule 5.6

  	
  State of Incorporation; Location of Chief Executive
  Office; Organizational Identification Number; Commercial Tort Claims

  	
   

  
	
  Schedule 5.7

  	
  Subsidiaries

  	
   

  
	
  Schedule 5.9

  	
  Litigation

  	
   

  
	
  Schedule 5.17

  	
  License Agreements

  	
   

  
	
  Schedule 5.19

  	
  Indebtedness

  	
   

  
	
  Schedule 5.20

  	
  Deposit Accounts; Securities Accounts

  	
   

  
	
  Schedule 6.14

  	
  Location of Inventory and Equipment

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit C-1

  	
  Form of Capital Expenditure Note

  	
   

  
	
  Exhibit C-2

  	
  Form of Compliance Certificate

  	
   

  



 


1





















 


AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT


 


This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT,
is entered into as of August 10, 2005, between WELLS FARGO
FOOTHILL, INC., a California corporation formerly known as Foothill
Capital Corporation (“Foothill”), with a place of business located at
2450 Colorado Avenue, Suite 3000 West, Santa Monica, California 90404, and
IMAGE ENTERTAINMENT, INC., a California
corporation (“Borrower”), with its chief executive office located at
20525 Nordhoff St., Suite 200, Chatsworth, California 91311.


 


WHEREAS, Borrower and Foothill are parties to that
certain Loan and Security Agreement, dated as of December 28, 1998 (as
amended, supplemented, and otherwise modified from time to time prior to the
Restatement Effective Date, the “Existing Loan Agreement”);


 


WHEREAS, subject to the terms and conditions set forth
herein, Borrower and Foothill desire to amend and restate the Existing Loan
Agreement in its entirety as provided in this Agreement, it being understood
that except as set forth in Section 3.1(a)(l)(i), no repayment of the
obligations under the Existing Loan Agreement is being effected hereby, but
merely an amendment and restatement in accordance with the terms hereof.


 


The parties agree as
follows:


 


1.                                      DEFINITIONS
AND CONSTRUCTION.


 


1.1                                 Definitions.  As used
in this Agreement, the following terms shall have the following definitions:


 


“Account Debtor” means any Person who is or who
may become obligated under, with respect to, or on account of an Account,
chattel paper or General Intangible.


 


“Accounts” means an account (as that term is
defined in the Code).


 


“Additional Documents” has the meaning set
forth in Section 4.4.


 


“Advances” has the meaning set forth in Section 2.1(a).


 


“Affiliate” means, as applied to any Person,
any other Person directly or indirectly controlling, controlled by, or under
common control with, that Person.  For
purposes of this definition, “control” as applied to any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of that Person, whether through the
ownership of voting securities, by contract, or otherwise.


 


“Agreement” means this Amended and Restated
Loan and Security Agreement and any extensions, riders, supplements, notes,
amendments, or modifications to or in connection with this Amended and Restated
Loan and Security Agreement.


 


“Applicable Margin” means as of any date of
determination, the per annum percentage determined by the matrix set forth
below, based upon the average Excess Availability for the calendar month
immediately preceding such date of determination:


 


1





















 


	
  Average Excess Availability

  	
   

  	
  Applicable Margin

  	
   

  
	
  Greater than
  $15,000,000

  	
   

  	
  0.00

  	
  %

  
	
  Greater than
  $7,500,000 but less than or equal to $15,000,000

  	
   

  	
  0.25

  	
  %

  
	
  Less than or
  equal to $7,500,000

  	
   

  	
  0.50

  	
  %

  



 


“Asset Purchase Agreement” means that certain
Asset Purchase Agreement dated August 20, 1998 between Crane and Image
Newco, Inc.


 


“Authorized Officer” means any officer or
employee of Borrower.


 


“Average Unused Portion of Maximum Revolving Credit
Amount” means (a) the Maximum Revolving Credit Amount; less (b) the
sum of:  (i) the average Daily
Balance of advances made by Foothill under Section 2.1 that were
outstanding during the immediately preceding month, plus (ii) the average
Daily Balance of the undrawn L/Cs and L/C Guarantees issued by Foothill under Section 2.2
that were outstanding during the immediately preceding month.


 


“BA Leasing” means BankAmerica Leasing &
Capital Corporation.


 


“BofA” means Bank of America National Trust and
Savings Association in Nevada.


 


“BofA Mortgagee Waiver” means a collateral
access and personal property subordination agreement entered into between
Foothill and BofA, the terms of which are acceptable to Foothill.


 


“Bankruptcy Code” means the United States
Bankruptcy Code (11  U.S.C. § 101 et seq.), as in effect from
time to time, and any successor statute.


 


“Base LIBOR Rate” means the rate per annum,
determined by Foothill in accordance with its customary procedures, and
utilizing such electronic or other quotation sources as it considers
appropriate (rounded upwards, if necessary, to the next 1/100°/a), to be the
rate at which Dollar deposits (for delivery on the first day of the requested
Interest Period) are offered to major banks in the London interbank market 2
Business Days prior to the commencement of the requested Interest Period, for a
term and in an amount comparable to the Interest Period and the amount of the
LIBOR Rate Loan requested (whether as an initial LIBOR Rate Loan or as a
continuation of a LIBOR Rate Loan or as a conversion of a Reference Rate Loan
to a LIBOR Rate Loan) by Borrower in accordance with this Agreement, which
determination shall be conclusive in the absence of manifest error.


 


2





















 


“Benefit Plan” means a “defined benefit plan”
(as defined in Section  3(35) of ERISA) for which Borrower, any Subsidiary
of Borrower, or any ERISA Affiliate of Borrower, has been an “employer” (as
defined in Section 3(5) of ERISA) within the past six years.


 


“Borrower” has the meaning set forth in the
preamble to this Agreement.


 


“Borrower’s Books” means all of Borrower’s and
its Subsidiaries’ books and records including: 
ledgers; records indicating, summarizing, or evidencing Borrower’s or
its Subsidiaries’ properties or assets (including the Collateral or the Real
Property) or liabilities; all information relating to Borrower’s or its
Subsidiaries’ business operations or financial condition; and all computer
programs, disc or tape files, printouts, runs, or other computer prepared
information.


 


“Borrower Collateral” means all of Borrower’s
now owned or hereafter acquired right, title, and interest in and to each of
the following:


 


(a)                                  all
of its Accounts,


 


(b)                                 all
of its Borrower’s Books,


 


(c)                                  all
of its commercial tort claims described on Schedule 5.6(d),


 


(d)                                 all
of its Deposit Accounts,


 


(e)                                  all
of its Equipment,


 


(f)                                    all
of its General Intangibles,


 


(g)                                 all
of its Inventory,


 


(h)                                 all
of its Investment Property (including all of its securities and Securities
Accounts),


 


(i)                                     all
of its Negotiable Collateral,


 


(j)                                     all
of its Supporting Obligations,


 


(k)                                  money
or other assets of Borrower that now or hereafter come into the possession,
custody, or control of Foothill, and


 


(l)                                     the
proceeds and products, whether tangible or intangible, of any of the foregoing,
including proceeds of insurance covering any or all of the foregoing, and any
and all Accounts, Borrower’s Books, Deposit Accounts, Equipment, General
Intangibles, Inventory, Investment Property, Negotiable Collateral, Real
Property, Supporting Obligations, money, or other tangible or intangible property
resulting from the sale, exchange, collection, or other disposition of any of
the foregoing, or any portion thereof or interest therein, and the proceeds
thereof.


 


“Borrowing Base” has the meaning set forth in Section 2.1.


 


3





















 


“Borrowing Base Parties” means, collectively,
Borrower and, subject to the following terms and conditions, HVE: (i) Foothill
shall have conducted a field audit, and, if necessary, an appraisal, of the
Accounts of HVE, each of which audit or appraisal shall be satisfactory to
Foothill in its sole discretion and (ii) Foothill shall have given written
notice to Borrower confirming Foothill’s approval of HVE as a Borrowing Base
Party.  Each of Borrower and, subject to
the satisfaction of the foregoing conditions, HVE is a “Borrowing Base Party”.


 


“Business Day” means any day that is not a
Saturday, Sunday, or other day on which banks are authorized or required to
close in the State of California, except that, if a determination of a Business
Day shall relate to a LIBOR Rate Loan, the term “Business Day” also shall
exclude any day on which banks are closed for dealings in Dollar deposits in
the London interbank market.


 


“Capital Expenditure Loan” means one or more of
the term loans made, or to be made, by Foothill to Borrower pursuant to the
terms of Section 2.3 hereof.


 


“Capital Expenditure Loan Commitment” has the
meaning set forth in Section 2.3 hereof.


 


“Capital Expenditure Loan Note” has the meaning
set forth in Section 2.3 hereof, which note shall be in the form of
Exhibit C-1 attached hereto.


 


“Cash Equivalents” shall mean, as to any
Person, (a) securities issued or directly and fully guarantied or insured
by the United States or any agency or instrumentality thereof (provided that
the full faith and credit of the United States is pledged in support thereof)
having maturities of not more than one year from the date of acquisition, (b) certificates
of deposit of any commercial bank incorporated under the laws of the United
States or any state thereof, of recognized standing having capital and
unimpaired surplus in excess of $200,000,000 and whose short-term commercial
paper rating at the time of acquisition is at least A-2 or the equivalent
thereof by Standard & Poor’s Corporation (‘S&P’) or at least P-2
or the equivalent thereof by Moody’s Investors Services, Inc. (‘Moody’s’)
(any such bank, an ‘Approved Bank’), with such deposits or certificates having
maturities of not more than one year from the date of acquisition, (c) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (a) and (b) above entered into with
any Approved Bank, (d) commercial paper or finance company paper issued by
any Person incorporated under the laws of the United States or any state
thereof and rated at least A-2 or the equivalent thereof by S&P or at least
P-2 or the equivalent thereof by Moody’s and in each case maturing not more
than one year after the date of acquisition, and (e) investments in money
market funds that are registered under the Investment Company Act of 1940,
which have net assets of at least $200,000,000 and at least eighty-five percent
(85%) of whose assets consist of securities and other obligations of the type
described in clause (a) through (d) above.  All such Cash Equivalents must be denominated
solely for payment in U.S.  Dollars.


 


“CD” means compact disc digital format.


 


“Change of Control” shall be deemed to have
occurred at such time as (i) a “person” or “group” (within the meaning of
Sections 13(d) and 14(d)(2) of the Securities


 


4





















 


Exchange Act of 1934, but exclusive of IIC, so long as
it continues to be owned and controlled by Messrs. John W. Kluge and
Stuart Subotnick, or their respective heirs) becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly
or indirectly, of more than 35% of the total voting power of all classes of
stock then outstanding of Borrower normally entitled to vote in the election of
directors, or (ii) Borrower ceases to own 100% of the outstanding Stock of
each of its Subsidiaries.


 


“Code” means the California Uniform Commercial
Code, as in effect from time to time; provided, however, that in
the event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection, priority, or remedies with respect to Lender’s Lien on
any Collateral is governed by the Uniform Commercial Code as enacted and in
effect in a jurisdiction other than the State of California, the term “Code”
shall mean the Uniform Commercial Code as enacted and in effect in such other
jurisdiction solely for purposes of the provisions thereof relating to such
attachment, perfection, priority, or remedies.


 


“Collateral” means all assets and interests in
assets and proceeds thereof now owned or hereafter acquired by Borrower or its
Subsidiaries in or upon which a Lien is granted under any of the Loan
Documents.


 


“Collateral Access Agreement” means a landlord
waiver, mortgagee waiver, bailee letter, or acknowledgement agreement of any
warehouseman, processor, lessor, consignee, or other Person in possession of,
having a lien upon, or having rights or interests in the Borrower’s Books, or
the Equipment or Inventory of Borrower or its Subsidiaries, in each case, in
form and substance satisfactory to Foothill.


 


“Collections” means all cash, checks, notes,
instruments, and other items of payment (including, insurance proceeds,
proceeds of cash sales, rental proceeds, and tax refunds).


 


“Commercial Tort Claim Assignment” has the
meaning set forth in Section 4.4.


 


“Compliance Certificate” means a certificate
substantially in the form of Exhibit C-2 and delivered by the chief
accounting officer of Borrower to Foothill.


 


“Control Agreement” means a control agreement,
in form and substance satisfactory to Foothill, executed and delivered by
Borrower or any of its Subsidiaries, Foothill, and the applicable securities
intermediary with respect to a Securities Account or bank with respect to a
Deposit Account.


 


“Crane” means Ken Crane’s Magnavox City, Inc.
d/b/a Ken Crane’s Home Entertainment, a California corporation.


 


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


 


“Deposit Accounts” means any deposit account
(as that term is defined in the Code).


 


5





















 


“Designated Account” means account number
3030148974 of Borrower maintained with Borrower’s Designated Account Bank, or
such other Deposit Account of Borrower (located within the United States) that
has been designated, in writing and from time to time, by Borrower to Foothill.


 


“Designated Account Bank” means Union Bank of
California, N.A., whose office is located at 5855 Topanga Canyon Boulevard, Suite 200,
Woodland Hills, California, 91367, and whose ABA number is 122-000-496.


 


“Dilution Reserve” means, as of the date of any
determination, an amount equal to (a) the amount of Eligible Accounts,
multiplied by (b) the amount (expressed as a percentage and calculated
based upon the prior twelve month period) of Accounts of the Borrowing Base
Parties which were the subject of credit memoranda and other dilution in excess
of twelve percent (12%); provided, however, that if (i) the
average Excess Availability (for the six calendar month period immediately
preceding such date of determination) is at least $7,500,000 and (ii) no
Event of Default has occurred and is continuing, then the “Dilution Reserve”
shall mean the amount of Eligible Accounts, multiplied by the amount (expressed
as a percentage and calculated based upon the prior twelve month period) of
Accounts of the Borrowing Base Parties which were the subject of credit
memoranda and other dilution in excess of fifteen percent (15%).


 


“Dollars” or “$” means United States
dollars.


 


“DVD” means digital video disc optical format.


 


“Early Termination Premium” has the meaning set
forth in Section 3.5.


 


“EBITDA” means, with respect to any fiscal
period, consolidated earnings of the Borrower and its Subsidiaries before all
interest, taxes, depreciation and amortization expenses (excluding Borrower’s
or its subsidiaries amortized production costs) for such period, determined in
accordance with GAAP.


 


“Eligible Accounts” means those Accounts, net
of finance charges, created by any Borrowing Base Party in the ordinary course
of business that arise out of such Borrowing Base Party sale of goods or
rendition of services, that strictly comply with each and all of the
representations and warranties respecting Accounts made in the Loan Documents,
and that are and at all times continue to be acceptable to Foothill in all
respects; provided, however, that standards of eligibility may be
fixed and revised from time to time by Foothill in Foothill’s reasonable credit
judgment.  Eligible Accounts shall not
include the following:


 


(a)                                  Accounts
that the Account Debtor has failed to pay within sixty (60) to eighty-nine
(89) days of the due date set forth in the invoice to the extent of that amount
by which the total of Accounts in such category of past-due Accounts would
exceed ten percent (10%) of the total of Eligible Accounts as of the date of
the determination thereof, or Accounts that the Account Debtor has failed to
pay within ninety (90) days of the due date set forth in the invoice, or
Accounts with selling terms of more than ninety (90) days, and all
Accounts owed by an Account Debtor that has failed to pay fifty percent (50%)
or more of its Accounts owed to Borrower within ninety (90) days of the
due date set forth in the invoice;


 


6





















 


(b)                                 Accounts
with respect to which the Account Debtor is an officer, employee, Affiliate, or
agent of Borrower;


 


(c)                                  Accounts
with respect to which goods are placed on consignment, guaranteed sale, sale or
return, sale on approval, or bill and hold, are C.O.D. or subject to conditional sale
contracts, or other terms by reason of which the payment by the
Account Debtor may be conditional;


 


(d)                                 Accounts
with respect to which the Account Debtor is not resident of the United States
or Canada, and which are not either (i) covered by credit insurance in
form and amount, and by an insurer, satisfactory to Foothill, or (ii) supported
by one or more letters of credit that are assignable by their terms and have
been delivered to Foothill in an amount, of a tenor, and issued by a financial
institution, acceptable to Foothill;


 


(e)                                  Accounts
with respect to which the Account Debtor is either (i) the United States
or any department, agency, or instrumentality of the United States (exclusive,
however, of Accounts with respect to which Borrower has complied, to the
satisfaction of Foothill, with the Assignment of Claims Act, 31 U.S.C. § 3727),
or (ii) any State of the United States;


 


(f)                                    Accounts
with respect to which Borrower or any of its Subsidiaries is or may become
liable to the Account Debtor for goods sold or services rendered by the Account
Debtor to such Person (exclusive, however, of Accounts with respect to which
Borrower shall have obtained an agreement, in form and substance satisfactory
to Foothill, from the Account Debtor agreeing to waive its rights of offset as
against Foothill);


 


(g)                                 Accounts
with respect to an Account Debtor (including Musicland Group, Inc. (“Musicland”))
whose total obligations owing to the Borrowing Base Parties exceed fifteen
percent (15%) of all Eligible Accounts, to the extent of the obligations owing
by such Account Debtor in excess of such percentage; provided, however,
(i) in the case of Accounts with respect to which Anderson Merchandisers (“Anderson”)
is the Account Debtor, Eligible Accounts shall not include Accounts thereof
owing to Borrowing Base Parties to the extent that the total obligations of
Anderson owing to the Borrower and its Subsidiaries exceed thirty percent (30%)
of all Eligible Accounts, it being understood that such percentage threshold
for Accounts owing by Anderson is subject to downward modification in Foothill’s
sole discretion based on Foothill’s continuing review, from time to time, of
the performance of such Accounts, and (ii) in the case of Accounts with
respect to which Best Buy, Inc. (“Best Buy”) is the Account Debtor,
Eligible Accounts shall not include Accounts thereof owing to the Borrowing
Base Parties to the extent that the total obligations of Best Buy owing to the
Borrower and its Subsidiaries exceed twenty-five percent (25%) of all Eligible
Accounts; provided, however, that in no event shall Eligible
Accounts include Accounts of Musicland or Best Buy to the extent that the
aggregate amount of total obligations of Musicland and Best Buy owing to
Borrower and its Subsidiaries exceed forty percent (40%) of all Eligible
Accounts; and provided further, however, that in no event shall Eligible
Accounts include Accounts of Anderson or Best Buy to the extent that the
aggregate amount of total obligations of Anderson and Best Buy owing to
Borrower and its Subsidiaries exceed forty-five percent (45%) of all Eligible
Accounts;


 


7





















 


(h)                                 Accounts
arising from rebilling or chargebacks with respect to short billing on prior
invoices;


 


(i)                                     Accounts
with respect to which the Account Debtor disputes liability or makes any claim
with respect thereto (to the extent of the amount of the dispute or claim), or
is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;


 


(j)                                     Accounts
the collection of which Foothill, in its reasonable credit judgment, believes
to be doubtful by reason of the Account Debtor’s financial condition;


 


(k)                                  Accounts
that are payable in other than United States Dollars;


 


(1)                                  Accounts
with respect to which the goods giving rise to such Account have not been
shipped and billed to the Account Debtor, the services giving rise to such
Account have not been performed and accepted by the Account Debtor, or the
Account otherwise does not represent a final sale;


 


(m)                               Accounts
that represent progress payments or other advance billings that are due prior
to the completion of performance by Borrower of the subject contract for goods
or services; and


 


(n)                                 Accounts
that are not subject to a valid and perfected first priority security interest
in favor of Foothill.


 


 “Eligible
Inventory” means Inventory consisting of first quality DVD or CD finished
goods held for sale in the ordinary course of any Borrowing Base Party’s
business, net of any variance between the amounts thereof as determined by such
Borrower’s perpetual inventory as compared to the amounts thereof recorded in
such Borrower’s general ledger, that are located at such Borrowing Base Party’s
premises identified on Schedule E-1, are acceptable to Foothill in
the exercise of its reasonable credit judgment, and strictly comply with all
representations and warranties made to Foothill. Eligible Inventory shall not
include Exclusive DVD or CD Inventory, Inventory consisting of laserdiscs or
any other format other than DVD or CD, slow moving or obsolete items,
restrictive or custom items, work-in-process, components, packaging (including
DVD “jewel cases”) and shipping materials, supplies used or consumed in any
Borrowing Base Party’s business, Inventory at any location in the continental
United States other than those set forth on Schedule E-1, Inventory
subject to a security interest or lien in favor of any third Person, bill and
hold goods, Inventory that is not subject to Foothill’s valid and perfected
first priority security interest, defective goods, “seconds,” Inventory
acquired on consignment, and Inventory located on real property leased by
Borrower or any of its Subsidiaries or in a contract warehouse, in each case,
unless it is subject to a Collateral Access Agreement executed by the lessor or
warehouseman, as the case may be, and unless it is segregated or otherwise
separately identifiable from goods of others, if any stored on the premises.
Eligible Inventory shall be valued at the lower of Borrower’s cost (computed on
an average cost basis according to GAAP) or market value; provided, however,
that the value of any and all Eligible Inventory consisting of Inventory
constituting CD’s shall at all times be subject to Foothill’s satisfaction, in
its sole discretion, based on appraisals of such Inventory conducted


 


8





















 


from time to time; provided, further,
that Foothill, in its sole discretion, may exclude the value of such CD
Inventory from Eligible Inventory based on such appraisals of such Inventory.


 


“Equipment” means equipment (as that term is
defined in the Code) and includes machinery, machine tools, motors, equipment,
furniture, furnishings, fixtures, vehicles (including motor vehicles and
trailers), computer hardware, tools, parts, dies, jigs, goods (other than
consumer goods, farm products, or Inventory), wherever located, including, (a) any
assets acquired by Borrower with the proceeds of a Capital Expenditure Loan, (b) any
interest of Borrower or its Subsidiaries in any of the foregoing, and (c) all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing.


 


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


 


“ERISA Affiliate” means (a) any Person
subject to ERISA whose employees are treated as employed by the same employer
as the employees of Borrower or its Subsidiaries under IRC Section 414(b),
(b) any trade or business subject to ERISA whose employees are treated as
employed by the same employer as the employees of Borrower or its Subsidiaries
under IRC Section 414(c), (c) solely for purposes of Section 302
of ERISA and Section 412 of the IRC, any organization subject to ERISA
that is a member of an affiliated service group of which Borrower or any of its
Subsidiaries is a member under IRC Section 414(m), or (d) solely for
purposes of Section 302 of ERISA and Section 412 of the IRC, any
party subject to ERISA that is a party to an arrangement with Borrower or any
of its Subsidiaries and whose employees are aggregated with the employees of
Borrower or its Subsidiaries under IRC Section 414(o).


 


“Event of Default” has the meaning set forth in
Section 8.


 


“Excess Availability” means the amount, as of
the date any determination thereof is to be made, equal to:


 


(a)                                  the
lesser of (i) the aggregate amount of Advances available to Borrower as of
such time (based on the applicable advance rates set forth in Section 2.1
hereof and calculated as if no Advances are outstanding), subject to the
sublimits and availability reserves established by Foothill under the terms of
the Agreement less the Letter of Credit Usage, and (ii) the Maximum
Revolving Credit Amount less the Letter of Credit Usage, minus.


 


(b)                                 the
sum of (i) the amount of all then outstanding Advances, (ii) the
amount (not less than $0) by which Borrower’s and its Subsidiaries’ past due
trade payables has increased during the period from the initial prospect audit
through such date of determination, and (iii) the aggregate amount of
Borrower’s and its Subsidiaries’ book overdrafts.


 


“Exchange Act” means the Securities Exchange
Act of 1934, as in effect from time to time.


 


“Exclusive CD Inventory” means CD Inventory
that Borrower or any of its Subsidiaries has the exclusive right to manufacture
or distribute wholesale.


 


9





















 


“Exclusive DVD Inventory” means DVD Inventory
that Borrower or any of its Subsidiaries has the exclusive right to manufacture
or distribute wholesale.


 


“Existing Loan Agreement” has the meaning set
forth in the recitals to this Agreement.


 


“FEIN” means Federal Employer Identification
Number.


 


“Foothill” has the meaning set forth in the
preamble to this Agreement.


 


“Foothill Account” has the meaning set forth in
Section 2.6.


 


“Foothill Expenses” means all reasonable:  costs or expenses (including taxes,
photocopying, notarization, telecommunication and insurance premiums) required
to be paid by any Obligor under any of the Loan Documents that are paid or
advanced by Foothill; documentation, filing, recording, publication, appraisal
(including periodic Collateral appraisals), and search fees assessed, paid, or incurred
by Foothill in connection with Foothill’s transactions with any of the
Obligors; costs and expenses incurred by Foothill in the disbursement of funds
to Borrower or its Subsidiaries (by wire transfer or otherwise); charges paid
or incurred by Foothill resulting from the dishonor of checks; costs and
expenses paid or incurred by Foothill to correct any default or enforce any
provision of the Loan Documents, or in gaining possession of, maintaining,
handling, preserving, storing, shipping, selling, preparing for sale, or
advertising to sell the Collateral, or any portion thereof, irrespective of
whether a sale is consummated; costs and expenses paid or incurred by Foothill
in examining Borrower’s Books; costs and expenses of third party claims or any
other suit paid or incurred by Foothill in enforcing or defending the Loan
Documents; and attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating, enforcing (including
attorneys fees and expenses incurred in connection with a “workout,” a “restructuring,”
or an Insolvency Proceeding concerning any Obligor), defending, or concerning
the Loan Documents, irrespective of whether suit is brought.


 


“Funding Losses” has the meaning set forth in Section 2.12(b)(ii).


 


“GAAP” means generally accepted accounting
principles as in effect from time to time in the United States, consistently
applied.


 


“General Intangibles” means general intangibles
(as that term is defined in the Code), including payment intangibles, contract
rights, rights to payment, rights arising under common law, statutes, or
regulations, choses or things in action, goodwill, patents, trade names, trade
secrets, trademarks, servicemarks, copyrights, blueprints, drawings, purchase
orders, customer lists, monies due or recoverable from pension funds, route
lists, rights to payment and other rights under any royalty or licensing
agreements, infringement claims, computer programs, information contained on
computer discs or tapes, software, literature, reports, catalogs, insurance
premium rebates, tax refunds, and tax refund claims) and any other personal
property other than goods, Accounts, Deposit Accounts, Investment Property and
Negotiable Collateral.


 


“Guarantors” means, each Subsidiary of Borrower,
excluding Image Entertainment (UK), and “Guarantor” means any one of them.


 


10





















 


“Guarantor Security Agreement” means that
certain Security Agreement dated as of August 1, 2002, by and between the
Guarantors and Foothill previously delivered to Foothill.


 


“Guaranty” means that certain General
Continuing Guaranty dated as of August 1, 2002, by the Guarantors in favor
of Foothill previously delivered to Foothill.


 


“Hazardous Materials” means all or any of the
following:  (a) substances that are
defined or listed in, or otherwise classified pursuant to, any applicable laws
or regulations as “hazardous substances,” “hazardous materials,” “hazardous
wastes,” “toxic substances,” or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity,
or “EP toxicity”; (b) oil, petroleum, or petroleum derived substances,
natural gas, natural gas liquids, synthetic gas, drilling fluids, produced
waters, and other wastes associated with the exploration, development, or
production of crude oil, natural gas, or geothermal resources; (c) any
flammable substances or explosives or any radioactive materials; and (d) asbestos
in any form or electrical equipment which contains any oil or dielectric fluid
containing levels of polychlorinated biphenyls in excess of fifty (50) parts
per million.


 


“HVE” means Home Vision Entertainment, Inc.
(formerly known as Public Media, Inc.), a Delaware corporation and a
Subsidiary of Borrower.


 


“IIC” means Image Investors Co., a Delaware
corporation.


 


“IIC Subordination” means a subordination
agreement entered into among Foothill, Borrower and IIC, the terms of which are
satisfactory to Foothill.


 


“Indebtedness” means:  (a) all obligations for borrowed money; (b) all
obligations evidenced by bonds, debentures, notes, or other similar instruments
and all reimbursement or other obligations of Borrower in respect of letters of
credit, letter of credit guaranties, bankers acceptances, interest rate swaps,
controlled disbursement accounts, or other financial products; (c) all
obligations under capital leases; (d) all obligations or liabilities of
others of like kind and nature to those described in clauses (a) through (c) above
that are secured by a lien or security interest on any property or asset of any
Obligor, irrespective of whether such obligation or liability is assumed; and (e) any
obligation guaranteeing or intended to guarantee (whether guaranteed, endorsed,
co-made, discounted, or sold with recourse to any Obligor) any indebtedness,
lease, dividend, letter of credit, or other obligation of any other Person.


 


“Initial Closing Date” means December 28,
1998.


 


“Insolvency Proceeding” means any proceeding
commenced by or against any Person under any provision of the Bankruptcy Code
or under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other similar relief.


 


“Intercompany Subordination Agreement” means a
subordination agreement executed and delivered by Borrower and each of its
Subsidiaries and Foothill, the form and substance of which is satisfactory to
Foothill.


 


11





















 


“Interest Period” means, with respect to each
LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR
Rate Loan (or the continuation of a LIBOR Rate Loan or the conversion of a
Reference Rate Loan to a LIBOR Rate Loan) and ending 1, 2, or 3 months
thereafter; provided, however, that (a) if any Interest
Period would end on a day that is not a Business Day, such Interest Period
shall be extended (subject to clauses (c)-(e) below) to the next
succeeding Business Day, (b) interest shall accrue at the applicable rate
based upon the LIBOR Rate from and including the first day of each Interest
Period to, but excluding, the day on which any Interest Period expires, (c) any
Interest Period that would end on a day that is not a Business Day shall be
extended to the next succeeding Business Day unless such Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Business Day, (d) with respect to an Interest Period that
begins on the last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end of
such Interest Period), the Interest Period shall end on the last Business Day
of the calendar month that is 1, 2, or 3 months after the date on which the
Interest Period began, as applicable, and (e) Borrower may not elect an
Interest Period which will end after the Renewal Date.


 


“Inventory” means inventory (as that term is
defined in the Code).


 


“Investment Property” means investment property
(as that term is defined in the Code).


 


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


 


“Las Vegas Facility” means that 76,000 square
foot warehouse and automated distribution facility located on approximately
8.4 acres of Borrower’s real property adjacent to McCarren International
Airport in Las Vegas, Nevada, with a street address of 6650 South Spencer
Street, Las Vegas, NV 89119.


 


“L/C” has the meaning set forth in Section 2.2(a).


 


“L/C Guaranty” has the meaning set forth in Section 2.2(a).


 


“Lender’s Liens” means the Liens granted by
Borrower and its Subsidiaries to Foothill under this Agreement or the other
Loan Documents.


 


“Letter of Credit” means an L/C or an L/C
Guaranty, as the context requires.


 


“Letter of Credit Usage” means the sum of (a) the
undrawn amount of Letter of Credit, plus (b) the amount of unreimbursed drawings
under Letters of Credit.


 


“LIBOR Deadline” has the meaning set forth in Section 2.12(b)(i).


 


“LIBOR Notice” means a written notice in the
form of Exhibit L-1 to the Twelfth Amendment.


 


“LIBOR Option” has the meaning set forth in Section 2.12(a).


 


12





















 


“LIBOR Rate” means, for each Interest Period
for each LIBOR Rate Loan, the rate per annum determined by Foothill (rounded
upwards, if necessary, to the next 1/100%) by dividing (a) the
Base LIBOR Rate for such Interest Period, by (b) 100% minus the
Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective
day of any change in the Reserve Percentage.


 


“LIBOR Rate Loan” means each portion of an
Advance that bears interest at a rate determined by reference to the LIBOR
Rate.


 


“LIBOR Rate Margin” means as of any date of
determination, the per annum percentage determined by the matrix set forth
below, based upon the average Excess Availability for the calendar month
immediately preceding such date of determination:


 


	
  Average Excess Availability

  for the preceding month

  	
   

  	
  LIBOR Rate Margin

  	
   

  
	
  Greater than
  $15,000,000

  	
   

  	
  2.50

  	
  %

  
	
  Greater than
  $7,500,000 but less than or equal to $15,000,000

  	
   

  	
  2.75

  	
  %

  
	
  Less than or
  equal to $7,500,000

  	
   

  	
  3.00

  	
  %

  



 


“License Agreements” means, collectively, the
distribution and license agreements, each as amended from time to time,
pursuant to which licensors have granted Borrower the right, whether exclusive
or non-exclusive, to manufacture or distribute wholesale laserdisc, DVD or
other formatted programming.


 


“Lien” means any interest in an asset securing
an obligation owed to, or a claim by, any Person other than the owner of the
asset, irrespective of whether (a) such interest is based on the common
law, statute, or contract, (b) such interest is recorded or perfected, and
(c) such interest is contingent upon the occurrence of some future event
or events or the existence of some future circumstance or circumstances.  Without limiting the generality of the
foregoing, the term “Lien” includes the lien or security interest arising from
a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment,
deposit arrangement, security agreement, conditional sale or trust receipt, or
from a lease, consignment, or bailment for security purposes and also includes
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases, and other title exceptions and encumbrances
affecting Real Property.


 


“Lien Creditor” means any creditor that holds a
lien or other security interest in the Eligible Accounts of any Borrowing Base
Party.


 


13





















 


“Loan Account” has the meaning set forth in Section 2.8.


 


“Loan Documents” means this Agreement, the Lockbox
Agreements, the Capital Expenditure Loan Note, the Disbursement Letter, the
Letters of Credit, the Trademark Security Agreement, the Guaranty, the
Guarantor Security Agreement, the Stock Pledge Agreement, the Intercompany
Subordination Agreement, any Collateral Access Agreements and depository account, blocked account, lockbox
account or similar agreements, or 
note or notes executed by Borrower or its Subsidiaries and payable to
Foothill, any agreement whereby any Person is joined as a party to any Loan
Document or made a continuing guaranty of the Obligations, and any other
agreement entered into, now or in the future, in connection with this
Agreement.


 


“Lockbox Account” shall mean a depositary
account established pursuant to one of the Lockbox Agreements.


 


“Lockbox Agreements” means those certain
Lockbox Operating Procedural Agreements and those certain Depository Account
Agreements, in form and substance satisfactory to Foothill, each of which is
among Borrower, Foothill, and one of the Lockbox Banks.


 


“Lockbox Banks” means, collectively, the
financial institutions set forth in Schedule 2.6.


 


“Lockboxes” has the meaning set forth in Section 2.6.


 


“Material Adverse Effect” means a material
adverse effect upon (a) the business, operations, properties, assets,
prospects, or financial condition of Borrower and its Subsidiaries, taken as a
whole, (b) the value of the Eligible Accounts or Eligible Inventory or the
validity or priority of Foothill’s Lender’s Lien therein, or (c) the
ability of Borrower or its Subsidiaries to perform, or of Foothill to enforce,
the Obligations.


 


“Maximum Amount” means the Maximum Revolving
Credit Amount plus One Million Dollars ($1,000,000).


 


“Maximum Revolving Credit Amount” means
Twenty-One Million Dollars ($21,000,000).


 


“Multiemployer Plan” means a multiemployer plan
as defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414 of
the IRC in which employees of Borrower or an ERISA Affiliate participate or to
which Borrower or any ERISA Affiliate contribute or are required to contribute.


 


“Negotiable Collateral” means letters of
credit, letter-of-credit rights, notes, drafts, instruments, Investment
Property, documents, personal property leases (wherein Borrower is the lessor),
chattel paper (including electronic chattel paper and tangible chattel paper),
and Borrower’s Books relating to any of the foregoing.


 


“Obligations” means all loans, Advances, debts,
principal, interest (including any interest that, but for the provisions of the
Bankruptcy Code, would have accrued), contingent


 


14





















 


reimbursement obligations owing to Foothill under any
outstanding L/Cs or L/C Guarantees, premiums (including Early Termination
Premiums), liabilities (including all amounts charged to Borrower’s Loan
Account pursuant to any agreement authorizing Foothill to charge Borrower’s
Loan Account), obligations, fees, charges, costs or Foothill Expenses
(including any fees or expenses that, but for the provisions of the Bankruptcy
Code, would have accrued), lease payments, guaranties, covenants, and duties
owing any Obligor to Foothill of any kind and description (whether pursuant to
or evidenced by the Loan Documents, by any note or other instrument (including
the Capital Expenditure Loan Note), or pursuant to any other agreement between
Foothill and any Obligor regarding the financing that is the subject hereof),
whether direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter arising, and including any debt, liability, or obligation
owing from any Obligors to others that Foothill may have obtained by assignment
or otherwise, and further including all interest not paid when due and all
Foothill Expenses that any Obligor is required to pay or reimburse by the Loan
Documents, by law, or otherwise.


 


“Obligors” means collectively, Borrower, each
of its Subsidiaries, each Guarantor, and each other Person which guarantees all
or any part of the Obligations, and “Obligor” means any one of them.


 


“Offering” means the primary offering of
2,400,000 shares of the capital stock of Borrower.


 


 “OLV”
shall mean, as of the date of determination thereof, the appraised orderly
liquidation value (expressed as a percentage of the value of the Inventory of
the Borrowing Base Parties (the lower of cost, computed on an average cost
basis according to GAAP, or market value), net of all associated costs and
expenses of such liquidation, as determined from time to time by a qualified
appraisal company selected by Foothill in its discretion, on such basis and
applying such criteria as Foothill shall require, such appraisals to be
conducted with such frequency as determined by Foothill in its reasonable
credit judgment.


 


“Original Loan Documents” has the meaning set
forth in Section 15.11.


 


“Overadvance” has the meaning set forth in Section 2.4.


 


“PBGC” means the Pension Benefit Guaranty
Corporation as defined in Title IV of ERISA, or any successor thereto.


 


“Permitted Investments” means:  (a) cash or Cash Equivalents, (b) interest
bearing demand or time deposits (including certificates of deposit) that are
insured by the Federal Deposit Insurance Corporation or a similar federal
insurance program, and (c) such other investments as Foothill may approve
in its sole discretion.


 


“Permitted Liens” means:  (a) liens for taxes, assessments or
governmental charges or claims the payment of which is not, at the time,
required to paid by this Agreement or the other Loan Documents or does not
constitute an Event of Default hereunder; (b) statutory liens of landlords
and liens of carriers, warehousemen, mechanics, and materialmen and other liens
imposed by law incurred in the ordinary course of business for sums not yet
delinquent or the subject of a Permitted Protest; (c) liens incurred or
deposits made in the ordinary course of


 


15





















 


business in connection with workers’ compensation,
unemployment insurance, and other types of social security, or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids,
leases, government contracts, trade contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the payment
of borrowed money); (d) any attachment or judgment lien not constituting
an Event of Default hereunder; (e) leases or subleases granted to others
not interfering in any material respect with the ordinary conduct of the
business of Borrower and its Subsidiaries; (f) easements, rights-of-way,
restrictions, minor defects, encroachments, or irregularities in title and
other similar charges or encumbrances not interfering in any material respect
with the ordinary conduct of the business of Borrower and its Subsidiaries; (g) any
interest or title of a lessor or sublessor under any lease permitted by this
Agreement; (h) liens arising from UCC financing statements relating solely
to leases permitted by this Agreement; (i) liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties that are not delinquent in connection with the importation of goods;
(j) any interest (exclusive of security interests or other consensual
lien) or title of a licensor under any License Agreement; (k) liens and
security interests held by Foothill; (1) liens and security interests set
forth on Schedule P-1 attached hereto; and (m) purchase money
security interests and liens of lessors under capital leases to the extent that
the acquisition or lease of the underlying asset was permitted under Section 7.9,
and so long as the security interest or lien only secures the purchase price of
the asset.


 


“Permitted Protest” means the right of Borrower
or any of its Subsidiary to protest any lien, tax, rental payment, or other
charge, other than any such lien or charge that secures the Obligations,
provided (i) a reserve with respect to such obligation is established on
the books of Borrower in an amount that is required by GAAP, (ii) any such
protest is instituted and diligently prosecuted by Borrower or its applicable
Subsidiary in good faith, and (iii) Foothill is satisfied that, while any
such protest is pending, there will be no impairment of the enforceability,
validity, or priority of any of the Lender’s Liens.


 


“Person” means and includes natural persons,
corporations, limited liability companies, limited partnerships, general
partnerships, limited liability partnerships, joint ventures, trusts, land
trusts, business trusts, or other organizations, irrespective of whether they
are legal entities, and governments and agencies and political subdivisions
thereof.


 


“Record” means information that is inscribed on
a tangible medium or which is stored in an electronic or other medium and is
retrievable in perceivable form.


 


“Real Property” means any estates or interests
in real property now owned or hereafter acquired by Borrower or any of its
Subsidiaries and the improvements thereto.


 


“Reference Rate” means the variable rate of
interest, per annum, most recently announced by Wells Fargo Bank, National
Association, a national banking association, or any successor thereto, as its “prime
rate,” irrespective of whether such announced rate is the best rate available
from such financial institution.


 


“Renewal Date” has the meaning set forth in Section 3.3.


 


16





















 


“Reserve Percentage” means, on any day, for
Foothill, the maximum percentage prescribed by the Board of Governors of the
Federal Reserve System (or any successor governmental authority) for
determining the reserve requirements (including any basic, supplemental,
marginal, or emergency reserves) that are in effect on such date with respect
to eurocurrency finding (currently referred to as “eurocurrency liabilities”)
of Foothill, but so long as Foothill is not required or directed under applicable
regulations to maintain such reserves, the Reserve Percentage shall be zero.


 


“Restatement Effective Date” means the date
that all of the conditions set forth in Section 3.1 of this Agreement
shall be satisfied (or waived by Foothill in its sole discretion).


 


“SEC” means the United States Securities and
Exchange Commission and any successor thereto.


 


“Securities Account” means a “securities
account” (as that term is defined in the Code).


 


“Solvent” means, with respect to any Person on
a particular date, that on such date (a) at fair valuations, all of the
properties and assets of such Person are greater than the sum of the debts,
including contingent liabilities, of such Person, (b) the present fair
salable value of the properties and assets of such Person is not less than the
amount that will be required to pay the probable liability of such Person on
its debts as they become absolute and matured, (c) such Person is able to
realize upon its properties and assets and pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal
course of business, (d) such Person does not intend to, and does not
believe that it will, incur debts beyond such Person’s ability to pay as such
debts mature, and (e) such Person is not engaged in business or a
transaction, and is not about to engage in business or a transaction, for which
such Person’s properties and assets would constitute unreasonably small capital
after giving due consideration to the prevailing practices in the industry in
which such Person is engaged.  In
computing the amount of contingent liabilities at any time, it is intended that
such liabilities will be computed at the amount that, in light of all the facts
and circumstances existing at such time, represents the amount that reasonably
can be expected to become an actual or matured liability.


 


“Stock” means all shares, options, warrants,
interests, participations, or other equivalents (regardless of how designated)
of or in a Person, 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 General Rules and Regulations promulgated by the SEC under the
Exchange Act).


 


“Stock Pledge Agreement” means a Stock Pledge Agreement
dated as of August 1, 2002, executed and delivered by Borrower to Foothill
with respect to the pledge of the Stock owned by Borrower.


 


“Subsidiary” of a Person means a corporation,
partnership, limited liability company, or other entity in which that Person
directly or indirectly owns or controls the shares of Stock having ordinary
voting power to elect a majority of the board of directors (or appoint other


 


17





















 


comparable managers) of such corporation, partnership,
limited liability company, or other entity.


 


“Supporting Obligation” means a
letter-of-credit right or secondary obligation that supports the payment or
performance of an Account, chattel paper, document, General Intangible,
instrument, or Investment Property.


 


“Tangible Net Worth” means, as of the date any
determination thereof is to be made, the difference of:  (a) Borrower’s total stockholder’s
equity; minus (b) the sum of: (i) all intangible assets of Borrower; (ii) all
of Borrower’s prepaid expenses; and (iii) all amounts due to Borrower from
Affiliates, calculated on a consolidated basis in accordance with GAAP.


 


“Trademark Security Agreement” has the meaning
set forth in Section 3.2(b) of this Agreement.


 


“Voidable Transfer” has the meaning set forth
in Section 15.9.


 


1.2                                 Accounting Terms.  All
accounting terms not specifically defined herein shall be construed in
accordance with GAAP.  When used herein,
the term “financial statements” shall include the notes and schedules
thereto.  Whenever the term “Borrower” is
used in respect of a financial covenant or a related definition, it shall be
understood to mean Borrower and its Subsidiaries on a consolidated basis unless
the context clearly requires otherwise.


 


1.3                                 Code.  Any terms used
in this Agreement that are defined in the Code shall be construed and defined
as set forth in the Code unless otherwise defined herein; provided, however,
that to the extent that the Code is used to define any term herein and such
term is defined differently in different Articles of the Code, the definition
of such term contained in Article 9 shall govern.


 


1.4                                 Construction.  Unless
the context of this Agreement or any other Loan Document clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the term “including” is not limiting, and the term
“or” has, except where otherwise indicated, the inclusive meaning represented
by the phrase “and/or.”  The words “hereof,”
“herein,” “hereby,” “hereunder,” and similar terms in this Agreement or any
other Loan Document refer to this Agreement or such other Loan document, as the
case may be, as a whole and not to any particular provision of this Agreement
or such other Loan Document, as the case may be.  Section, subsection, clause, schedule, and
exhibit references are to this Agreement unless otherwise specified.  Any reference in this Agreement or in the
Loan Documents to this Agreement or any of the Loan Documents shall include all
alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, and supplements thereto and thereof, as applicable
(subject to any restrictions on such alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, and
supplements as set forth herein).  Any
reference herein to any Person shall be construed to include such Person’s
successors and assigns.  Any requirement
of a writing contained herein or in the other Loan Documents shall be satisfied
by the transmission of a Record and any Record transmitted shall constitute a
representation and warranty as to the accuracy and completeness of the
information contained therein.


 


18





















 


1.5                                 Schedules and Exhibits. 
All of the schedules and exhibits attached to this Agreement shall be
deemed incorporated herein by reference.


 


2.                                      LOAN
AND TERMS OF PAYMENT.


 


2.1                                 Revolving Advances.


 


(a)                                  Subject
to the terms and conditions of this Agreement, Foothill agrees to make
revolving advances (“Advances”) to Borrower in an amount at any one time
outstanding not to exceed at any one time the lesser of (i) the Maximum
Revolving Credit Amount less the Letter of Credit Usage, or (ii) the
Borrowing Base less the Letter of Credit Usage. 
For purposes of this Agreement, “Borrowing Base,” as of any date
of determination, shall mean an amount equal to the sum of:


 


(i)                             an
amount equal to the lesser of


 


(v)                                 eighty
percent (80%) of the amount of Eligible Accounts less
the amount, if any, of the Dilution Reserve, and


 


(w)                               an
amount equal to Borrowing Base Parties collections with respect to Accounts for
the immediately preceding ninety (90) day period; plus


 


(ii)                          an
amount equal to the lowest of


 


(x)                                   fifty
percent (50%) of the value of Eligible Inventory to the extent that such amount
does not exceed eighty-five percent (85%) of the OLV of Eligible Inventory,


 


(y)                                 fifty
percent (50%) of the amount of credit availability created by Section 2.1(a)(i) (it
being understood that in calculating the credit availability under this clause,
all Obligations shall be deemed to have been advanced or issued against
Eligible Accounts to the maximum extent of availability against Eligible
Accounts), and


 


(z)                                   Five
Million Dollars ($5,000,000).


 


(b)                                 Anything
to the contrary in Section 2.1(a) above notwithstanding, upon
the occurrence and during the continuance of an Event of Default Foothill may
reduce its advance rates based upon Eligible Accounts or Eligible Inventory
without declaring an Event of Default if it determines, in its reasonable
discretion, that there is a material impairment of the prospect of repayment of
all or any portion of the Obligations or a material impairment of the value or
priority of Foothill’s security interests in the Collateral.


 


(c)                                  Foothill
shall have no obligation to make advances under this Section 2.1 to
the extent they would cause the outstanding Obligations under this Section 2.1
and the Obligations outstanding under Section 2.2 to exceed the
Maximum Revolving Credit Amount. 
Foothill shall have no obligation to make advances under this Section 2.1
to the extent they would cause the outstanding Obligations to exceed the
Maximum Amount.


 


19





















 


(d)                                 Foothill
is authorized to make advances under this Agreement based upon telephonic or
other instructions received from anyone purporting to be an Authorized Officer
of Borrower, or without instructions if pursuant to Section 2.5(d).  Borrower agrees to establish and maintain a
single designated Deposit Account for the purpose of receiving the proceeds of
the advances requested by Borrower and made by Foothill hereunder.  Unless otherwise agreed by Foothill and
Borrower, any advance requested by Borrower and made by Foothill hereunder
shall be made to such designated Deposit Account.  Amounts borrowed pursuant to this Section 2.1
may be repaid and, subject to the terms and conditions of this Agreement,
reborrowed at any time during the term of this Agreement.


 


2.2                                 Letters
of Credit and Letter of Credit Guarantees.


 


(a)                                  Subject
to the terms and conditions of this Agreement, Foothill agrees to issue
commercial or standby letters of credit for the account of Borrower (each, an “L/C”)
or to issue standby letters of credit or guarantees of payment (each such letter
of credit or guaranty, an “L/C Guaranty”) with respect to commercial or
standby letters of credit issued by another Person for the account of Borrower
in an aggregate face amount not to exceed the lesser of:  (i) the Borrowing Base less the amount of
advances outstanding pursuant to Section 2.1, and (ii) Four
Million Dollars ($4,000,000).  Borrower
expressly understands and agrees that Foothill shall have no obligation to
arrange for the issuance by other financial institutions of letters of credit that
are to be the subject of L/C Guarantees. 
Borrower and Foothill acknowledge and agree that certain of the letters
of credit that are to be the subject of L/C Guarantees may be outstanding on
the Restatement Effective Date.  Each L/C
and each letter of credit that is the subject of an L/C Guaranty shall have an
expiry date no later than thirty (30) days prior to the date on which this
Agreement is scheduled to terminate under Section 3.3 (without
regard to any potential renewal term) and all such L/Cs and letters of credit
(and the applicable L/C Guarantees) shall be in form and substance acceptable
to Foothill in its sole discretion. 
Foothill shall not have any obligation to issue L/Cs or L/C Guarantees
to the extent that the face amount of all outstanding L/Cs and L/C Guarantees,
plus the amount of advances outstanding pursuant to Section 2.1,
would exceed the Maximum Revolving Credit Amount.  The L/Cs and the L/C Guarantees issued under
this Section 2.2 shall be used by Borrower, consistent with this Agreement,
for its general working capital purposes or to support its obligations with
respect to workers’ compensation premiums or other similar obligations.  If Foothill is obligated to advance funds
under an L/C or L/C Guaranty, the amount so advanced immediately shall be
deemed to be an advance made by Foothill to Borrower pursuant to Section 2.1
and, thereafter, shall bear interest at the rates then applicable under Section 2.5.


 


(b)                                 Borrower
hereby agrees to indemnify, save, defend, and hold Foothill harmless from any
loss, cost, expense, or liability, including payments made by Foothill,
expenses, and reasonable attorneys fees incurred by Foothill arising out of or
in connection with any L/Cs or L/C Guarantees. 
Borrower agrees to be bound by the issuing bank’s regulations and
interpretations of any letters of credit guarantied by Foothill and opened to
or for Borrower’s account or by Foothill’s interpretations of any L/C issued by
Foothill to or for Borrower’s account, even though this interpretation may be
different from Borrower’s own, and Borrower understands and agrees that
Foothill shall not be liable for any error, negligence, or mistake, whether of
omission or commission (except for gross negligence or willful misconduct), in
following Borrower’s instructions or those contained in the L/Cs or any
modifications,


 


20





















 


amendments, or supplements thereto.  Borrower understands that the L/C Guarantees
may require Foothill to indemnify the issuing bank for certain costs or
liabilities arising out of claims by Borrower against such issuing bank.  Borrower hereby agrees to indemnify, save,
defend, and hold Foothill harmless with respect to any loss, cost, expense
(including attorneys fees), or liability incurred by Foothill under any L/C
Guaranty as a result of Foothill’s indemnification of any such issuing bank
other than as a result of Foothill’s gross negligence or willful misconduct.


 


(c)                                  Borrower
hereby authorizes and directs any bank that issues a letter of credit
guaranteed by Foothill to deliver to Foothill all instruments, documents, and
other writings and property received by the issuing bank pursuant to such
letter of credit, and to accept and rely upon Foothill’s instructions and
agreements with respect to all matters arising in connection with such letter
of credit and the related application. 
Borrower may or may not be the “applicant” or “account party” with
respect to such letter of credit.


 


(d)                                 On
the first day of each month, Borrower will pay Foothill a fee equal to (i) one
percent (1.0%) per annum times the average Daily Balance of the L/Cs or L/C
Guarantees that were outstanding during the immediately preceding month, and (ii) the
service charges, commissions, fees, and costs incurred by Foothill relating to
the letters of credit guaranteed by Foothill shall be considered Foothill
Expenses for purposes of this Agreement and immediately shall be reimbursable
by Borrower to Foothill.


 


(e)                                  Immediately
upon the termination of this Agreement, Borrower agrees to either:  (i) provide cash collateral to be held
by Foothill in an amount equal to 105% of the maximum amount of Foothill’s
obligations under L/Cs plus the maximum amount of Foothill’s obligations to any
Person under outstanding L/C Guarantees, or (ii) cause to be delivered to
Foothill releases of all of Foothill’s obligations under its outstanding L/Cs
and L/C Guarantees.  At Foothill’s
discretion, any proceeds of Collateral received by Foothill after the
occurrence and during the continuation of an Event of Default may be held as
the cash collateral required by this Section 2.2(e).


 


(f)                                    If
by reason of (i) any change in any applicable law, treaty, rule, or
regulation or any change in the interpretation or application by any
governmental authority of any such applicable law, treaty, rule, or regulation,
or (ii) compliance by the issuing bank or Foothill with any direction,
request, or requirement (irrespective of whether having the force of law) of
any governmental authority or monetary authority including, without limitation,
Regulation D of the Board of Governors of the Federal Reserve System as from
time to time in effect (and any successor thereto):


 


(A)                              any
reserve, deposit, or similar requirement is or shall be imposed or modified in
respect of any Letters of Credit issued hereunder, or


 


(B)                                there
shall be imposed on the issuing bank or Foothill any other condition regarding
any letter of credit, or Letter of Credit, as applicable, issued pursuant
hereto; and the result of the foregoing is to increase, directly or indirectly,
the cost to the issuing bank or Foothill of issuing, making, guaranteeing, or
maintaining any letter of credit, or Letter of Credit, as applicable, or to
reduce the amount receivable in respect thereof by such issuing bank or
Foothill, then, and in any such case, Foothill may, at any time within a
reasonable period after


 


21





















 


the additional cost is incurred or the amount received
is reduced, notify Borrower, and Borrower shall pay on demand such amounts as
the issuing bank or Foothill may specify to be necessary to compensate the
issuing bank or Foothill for such additional cost or reduced receipt, together
with interest on such amount from the date of such demand until payment in full
thereof at the rate set forth in Section 2.5(a) or (b)(i), as
applicable.  The determination by the
issuing bank or Foothill, as the case may be, of any amount due pursuant to
this Section 2.2(f), as set forth in a certificate setting forth
the calculation thereof in reasonable detail, shall, in the absence of manifest
or demonstrable error, be final and conclusive and binding on all of the
parties hereto.


 


2.3                                 Capital Expenditure Loan. 
Subject to the terms and conditions of this Agreement, Foothill agrees
to make a series of term loans to Borrower in an aggregate amount at any one
time outstanding of up to One Million Dollars ($1,000,000) (the “Capital
Expenditure Loan Commitment”), to be evidenced by and repayable in
accordance with the terms and conditions of a single promissory note (the “Capital
Expenditure Loan Note”), substantially in the form of Exhibit C-1
attached hereto, executed by Borrower in favor of Foothill. Each such term loan
shall be made by Foothill at such times and in such amounts as Borrower may
request in writing, shall be advanced directly to the applicable vendor or
Borrower, as the case may be, and once borrowed may be repaid or prepaid
without penalty and then, subject to the terms and conditions of this
Agreement, reborrowed at any time during the term of this Agreement. The
foregoing notwithstanding: (i) each borrowing of a Capital Expenditure
Loan shall be in a minimum principal amount of One Hundred Thousand Dollars
($100,000), or such lesser amount as is the then unfunded balance of the
Capital Expenditure Loan Commitment; (ii) each borrowing of a term loan
shall be in an amount, as determined by Foothill, up to eighty percent (80%) of
Borrower’s invoice cost (net of installation and other so-called ‘soft costs’)
of new Equipment to be purchased by Borrower, that is acceptable to Foothill in
all respects and that is not to be affixed to real property or become installed
in or affixed to other goods; and (iii) the aggregate amount of Capital
Expenditure Loans shall not exceed the lesser of cost or fair market value, at
the time of acquisition or construction, of the Equipment so acquired or
constructed. All amounts evidenced by the Capital Expenditure Loan Note shall
constitute Obligations.


 


2.4                                 Overadvances.  If, at
any time or for any reason, the amount of Obligations owed by Borrower to
Foothill is greater than either the dollar or percentage limitations set forth
in Sections 2.1 or 2.2 (an “Overadvance”), Borrower immediately shall pay to
Foothill, in cash, the amount of such excess to be used by Foothill first, to
repay noncontingent Obligations and, thereafter, to be held by Foothill as cash
collateral to secure Borrower’s obligation to repay Foothill for all amounts
paid pursuant to L/Cs or L/C Guarantees.


 


2.5                                 Interest:  Rates, Payments, and Calculations.


 


(a)                                  Interest
Rate. All Obligations, except for undrawn L/Cs and L/C Guarantees, shall bear
interest, on the average Daily Balance thereof as follows:  (i) if the relevant Obligation is an
Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate
plus the LIBOR Rate Margin for the Interest Period for such Advance and (ii) otherwise,
at a per annum rate equal to the Reference Rate plus the Applicable Margin.


 


(b)                                 Default
Rate.  (i) All Obligations, except
for undrawn L/Cs and L/C Guarantees, shall bear interest, from and after the
occurrence and during the continuance of


 


22





















 


an Event of Default, at a per annum rate equal to four
(4.0) percentage points above the Reference Rate.  (ii) From and after the occurrence and
during the continuance of an Event of Default, the fee provided in Section 2.2(d) shall
be increased to a fee equal to four percent (4.0%) per annum times the average
Daily Balance of the undrawn L/Cs and L/C Guarantees that were outstanding
during the immediately preceding month.


 


(c)                                  Minimum
Interest. In no event shall the rate of interest chargeable hereunder be less
than five percent (5.0%) per annum.


 


(d)                                 Payments.  Interest and Letter of Credit fees payable
hereunder shall be due and payable, in arrears, on the first day of each month
during the term hereof.  Borrower hereby
authorizes Foothill, at its option, without prior notice to Borrower, to charge
such interest and Letter of Credit fees, all Foothill Expenses (as and when
incurred), and all installments or other payments due under the Capital
Expenditure Loan Note or any other note or other Loan Document to Borrower’s
Loan Account, which amounts thereafter shall accrue interest at the rate then
applicable hereunder.  Any interest not
paid when due shall be compounded by becoming a part of the Obligations, and
such interest shall thereafter accrue interest at the rate then applicable
hereunder.


 


(e)                                  Computation.  In the event the Reference Rate is changed
from time to time hereafter, the applicable rate of interest hereunder
automatically and immediately shall be increased or decreased by an amount
equal to such change in the Reference Rate. 
All interest and fees chargeable under the Loan Documents shall be
computed on the basis of a three hundred sixty (360) day year for the actual
number of days elapsed.


 


(f)                                    Intent
to Limit Charges to Maximum Lawful Rate. 
In no event shall the interest rate or rates payable under this
Agreement or the Capital Expenditure Loan Note, plus any other amounts paid in
connection herewith, exceed the highest rate permissible under any law that a
court of competent jurisdiction shall, in a final determination, deem
applicable.  Borrower and Foothill, in executing
this Agreement and the Capital Expenditure Loan Note, intend legally to agree
upon the rate or rates of interest and manner of payment stated within it;
provided, however, that, anything contained herein or in the Capital
Expenditure Loan Note to the contrary notwithstanding, if said rate or rates of
interest or manner of payment exceeds the maximum allowable under applicable
law, then, ipso facto as of the date of this Agreement and the Capital
Expenditure Loan Note, Borrower is and shall be liable only for the payment of
such maximum as allowed by law, and payment received from Borrower in excess of
such legal maximum, whenever received, shall be applied to reduce the principal
balance of the Obligations to the extent of such excess.


 


2.6                                 Collection of Accounts. 
Borrower shall, and shall cause its Subsidiaries to, at all times
maintain Lockboxes (the “Lockboxes”) and, immediately after the
Restatement Effective Date, shall instruct all Account Debtors with respect to
the Accounts, General Intangibles, and Negotiable Collateral of Borrower and
its Subsidiaries to remit all Collections in respect thereof to such
Lockboxes.  Borrower or its applicable
Subsidiary, Foothill, and the Lockbox Banks shall enter into the Lockbox
Agreements, which among other things shall provide for the opening of a Lockbox
Account for the deposit of Collections at a Lockbox Bank.  Borrower agrees that all Collections and
other amounts received by Borrower or its Subsidiaries


 


23





















 


from any Account Debtor or any other source
immediately upon receipt shall be deposited into a Lockbox Account.  No Lockbox Agreement or arrangement
contemplated thereby shall be modified by Borrower or any Subsidiary without
the prior written consent of Foothill. 
Upon (a) the terms of and subject to the conditions set forth in
the Lockbox Agreements, (b) the occurrence of an Event of Default that is
continuing, or (c) Borrower’s failure to maintain an average Excess
Availability of at least $7,500,000 (for the three calendar month period
immediately preceding such date of determination), all amounts received in each
Lockbox Account shall be wired each Business Day into an account (the “Foothill
Account”) maintained by Foothill at a depositary selected by Foothill.


 


2.7                                 Crediting Payments; Application of Collections.  Should any Collection item not be honored
when presented for payment, then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated accordingly.  Anything to the contrary contained herein
notwithstanding, any Collection item shall be deemed received by Foothill only
if it is received into the Foothill Account on a Business Day on or before
11:00 a.m.  Los Angeles time.  If any Collection item is received into the
Foothill Account on a non-Business Day or after 11:00 a.m.  Los Angeles time it shall be deemed to have
been received by Foothill as of the opening of business on the immediately
following Business Day.


 


2.8                                 Maintenance of Loan Account; Statements of Obligations.  Foothill shall maintain an account on its
books in the name of Borrower (the “Loan Account”) on which Borrower
will be charged with all Advances and all Capital Expenditure Loans made by
Foothill to Borrower or for Borrower’s account, including, accrued interest,
Foothill Expenses, and any other payment Obligations of the Obligors.  In accordance with Section 2.7,
the Loan Account will be credited with all payments received by Foothill from
Borrower or for Borrower’s account, including all amounts received in the
Foothill Account from any Lockbox Bank. 
Foothill shall render statements regarding the Loan Account to Borrower
of the Obligations, including principal, interest, fees, and including an
itemization of all charges and expenses constituting Foothill Expenses owing,
and such statements shall be conclusively presumed (absent manifest error) to
be correct and accurate and constitute an account stated between Borrower and
Foothill unless, within sixty (60) days after receipt thereof by Borrower,
Borrower shall deliver to Foothill by registered or certified mail at its
address specified in Section 12, written objection thereto
describing the error or errors contained in any such statements.


 


2.9                                 Designated Account. 
Foothill is authorized to make the Advances, the Letters of Credit and
the Capital Expenditure Loans under this Agreement based upon telephonic or
other instructions received from anyone purporting to be an Authorized Officer,
or without instructions if pursuant to Section 2.5(d).  Borrower agrees to establish and maintain the
Designated Account with the Designated Account Bank for the purpose of
receiving the proceeds of the Advances and the Capital Expenditure Loans
requested by Borrower and made by Foothill hereunder.  Unless otherwise agreed by Foothill and
Borrower, any Advance and the Capital Expenditure Loans requested by Borrower
and made by Foothill hereunder shall be made to the Designated Account.


 


24





















 


2.10                           Fees.  Borrower shall
pay to Foothill the following fees:


 


(a)                                  Closing
Fee.  A one time closing fee of
Forty-five Thousand Dollars ($45,000) which is earned, in full, on the
Restatement Effective Date;


 


(b)                                 Unused
Line Fee.  On the first day of each month
during the term of this Agreement, a fee in an amount equal to one-eighth of
one percent (0.125%) per annum times the Average Unused Portion of the Maximum
Revolving Credit Amount from and after the Restatement Effective Date;


 


(c)                                  Capital
Expenditure Loan Fee.  On the date of
each funding of a Capital Expenditure Loan, a fee in an amount equal to
one-half of one percent (0.5%) of the amount of such Capital Expenditure Loan;


 


(d)                                 Financial
Examination, Documentation, and Appraisal Fees. 
Foothill’s customary fee of Six Hundred Fifty Dollars ($650) per day per
examiner, plus out-of-pocket expenses for each financial analysis and
examination (i.e., audits) of Borrower performed by Foothill or its agents; the
out-of-pocket expenses for each appraisal of the Collateral performed by
personnel employed by Foothill; and the actual charges paid or incurred by
Foothill if it elects to employ the services of one or more third Persons to
perform such financial analyses and examinations (i.e., audits) of Borrower or
to appraise the Collateral; provided  however, that if the average
Excess Availability (for the six calendar month period ending immediately
preceding such date of determination) is at least $10,000,000, Borrower shall
be obligated to pay such fees and expenses for no more than two financial
audits or examinations, or appraisals, per calendar year; provided, further,
that if the average Excess Availability (for the three calendar month period
ending immediately preceding such date of determination) is at least
$5,000,000, such financial audits and examinations, and appraisals, may be
conducted only as agreed upon by Foothill and Borrower; provided, further,
notwithstanding anything contained in the preceding two provisos, (i) Foothill
may conduct audits, examinations, and appraisals with such frequency as
Foothill shall require and (ii) Borrower shall be required to pay or
otherwise reimburse Foothill the cost of such audits and examinations, and
appraisals if (x) an Event of Default has occurred and is continuing, or (y)
Foothill and Borrower have agreed that an audit or appraisal is appropriate.


 


2.11                           Intentionally
Omitted


 


2.12                           LIBOR
Option.


 


(a)                                  Interest
and Interest Payment Dates. In lieu of having interest charged at the rate
based upon the Reference Rate, Borrower shall have the option (the “LIBOR
Option”) to have interest on all or a portion of the Advances be charged at
a rate of interest based upon the LIBOR Rate. Interest on LIBOR Rate Loans
shall be payable on the earliest of (i) the last day of the Interest
Period applicable thereto (provided, however, that, subject to
the following clauses (ii) and (iii), in the case of any Interest Period
greater than 3 months in duration, interest shall be payable at 3 month
intervals after the commencement of the applicable Interest Period and on the
last day of such Interest Period), (ii) the occurrence of an Event of
Default in consequence of which Foothill has elected to accelerate the maturity
of all or any portion of the Obligations, or (iii) termination of this
Agreement pursuant to the terms hereof. On the last day of each applicable
Interest Period, unless Borrower properly has exercised the


 


25





















 


LIBOR Option with respect thereto, the interest rate
applicable to such LIBOR Rate Loan automatically shall convert to the rate of
interest then applicable to Reference Rate Loans of the same type hereunder. At
any time that an Event of Default has occurred and is continuing, Borrower no
longer shall have the option to request that Advances bear interest at a rate
based upon the LIBOR Rate and Foothill shall have the right to convert the
interest rate on all outstanding LIBOR Rate Loans to the rate then applicable
to Reference Rate Loans hereunder.


 


(b)                                 LIBOR
Election.


 


(i)                                     Borrower
may, at any time and from time to time, so long as no Event of Default has
occurred and is continuing, elect to exercise the LIBOR Option by notifying
Foothill prior to 11:00 a.m. (California time) at least 3 Business Days
prior to the commencement of the proposed Interest Period (the “LIBOR
Deadline”).  Notice of Borrower’s
election of the LIBOR Option for a permitted portion of the Advances and an
Interest Period pursuant to this Section shall be made by delivery to
Foothill of a LIBOR Notice received by Foothill before the LIBOR Deadline, or
by telephonic notice received by Foothill before the LIBOR Deadline (to be
confirmed by delivery to Foothill of a LIBOR Notice received by Foothill prior
to 5:00 p.m. (California time) on the same day.


 


(ii)                                  Each
LIBOR Notice shall be irrevocable and binding on Borrower. In connection with
each LIBOR Rate Loan, Borrower shall indemnify, defend, and hold Foothill
harmless against any loss, cost, or expense incurred by Foothill as a result of
(a) the payment of any principal of any LIBOR Rate Loan other than on the
last day of an Interest Period applicable thereto (including as a result of an
Event of Default), (b) the conversion of any LIBOR Rate Loan other than on
the last day of the Interest Period applicable thereto, or (c) the failure
to borrow, convert, continue or prepay any LIBOR Rate Loan on the date
specified in any LIBOR Notice delivered pursuant hereto (such losses, costs,
and expenses, collectively, “Funding Losses”). Funding Losses shall be
deemed to equal the amount determined by Foothill to be the excess, if any, of (i) the
amount of interest that would have accrued on the principal amount of such
LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have
been applicable thereto, for the period from the date of such event to the last
day of the then current Interest Period therefor (or, in the case of a failure
to borrow, convert, or continue, for the period that would have been the
Interest Period therefor), minus (ii) the amount of interest that would
accrue on such principal amount for such period at the interest rate which
Foothill would be offered were it to be offered, at the commencement of such
period, Dollar deposits of a comparable amount and period in the London
interbank market. A certificate of Foothill delivered to Borrower setting forth
any amount or amounts that Foothill is entitled to receive pursuant to this Section 2.12
shall be conclusive absent manifest error.


 


(iii)                               Borrower
shall have not more than 5 LIBOR Rate Loans in effect at any given time.
Borrower only may exercise the LIBOR Option for LIBOR Rate Loans of at least
$1,000,000 and integral multiples of $500,000 in excess thereof.


 


(c)                                  Prepayments.
Borrower may prepay LIBOR Rate Loans at any time; provided, however,
that in the event that LIBOR Rate Loans are prepaid on any date that is not the
last day of the Interest Period applicable thereto, including as a result of
any automatic prepayment through the required application by Foothill of
proceeds of Borrower’s and its


 


26





















 


Subsidiaries’ Collections under this Agreement or for
any other reason, including early termination of the term of this Agreement or
acceleration of all or any portion of the Obligations pursuant to the terms
hereof, Borrower shall indemnify, defend, and hold Foothill and its
participants harmless against any and all Funding Losses in accordance with
clause (b)(ii) above.


 


(d)                                 Special
Provisions Applicable to LIBOR Rate.


 


(i)                                     The
LIBOR Rate may be adjusted by Foothill on a prospective basis to take into
account any additional or increased costs to Foothill of maintaining or
obtaining any eurodollar deposits or increased costs due to changes in
applicable law occurring subsequent to the commencement of the then applicable
Interest Period, including changes in tax laws (except changes of general
applicability in corporate income tax laws) and changes in the reserve
requirements imposed by the Board of Governors of the Federal Reserve System
(or any successor), excluding the Reserve Percentage, which additional or
increased costs would increase the cost of funding loans bearing interest at
the LIBOR Rate. In any such event, Foothill shall give Borrower notice of such
a determination and adjustment and, upon its receipt of the notice from
Foothill, Borrower may, by notice to Foothill (y) require Foothill to
furnish to Borrower a statement setting forth the basis for adjusting such
LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay
the LIBOR Rate Loans with respect to which such adjustment is made (together
with any amounts due under clause (b)(ii) above).


 


(ii)                                  In
the event that any change in market conditions or any law, regulation, treaty,
or directive, or any change therein or in the interpretation of application
thereof, shall at any time after the date hereof, in the reasonable opinion of
Foothill, make it unlawful or impractical for Foothill to fund or maintain
LIBOR Rate Loans or to continue such funding or maintaining, or to determine or
charge ‘interest rates at the LIBOR Rate, Foothill shall give notice of such
changed circumstances to Borrower and (y) in the case of any LIBOR Rate
Loans that are outstanding, the date specified in Foothill’s notice shall be
deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and
interest upon the LIBOR Rate Loans thereafter shall accrue interest at the rate
then applicable to Reference Rate Loans, and (z) Borrower shall not be
entitled to elect the LIBOR Option until Foothill determines that it would no
longer be unlawful or impractical to do so.


 


(e)                                  No
Requirement of Matched Funding. Anything to the contrary contained herein
notwithstanding, neither Foothill, nor any of its participants, is required
actually to acquire eurodollar deposits to fund or otherwise match fund any
Obligation as to which interest accrues at the LIBOR Rate. The provisions of
this Section shall apply as if Foothill or its participants had match
funded any Obligation as to which interest is accruing at the LIBOR Rate by
acquiring eurodollar deposits for each Interest Period in the amount of the
LIBOR Rate Loans.


 


2.13                           Payments on the Capital Expenditure Loan Note.  Borrower shall pay the principal
of the outstanding Capital Expenditure Loan, and interest accrued from the date
of the Capital Expenditure Loan Note, at such times, and in such amounts, as
set forth in the Capital Expenditure Loan Note.


 


27





















 


3.                                      CONDITIONS; TERM OF AGREEMENT.


 


3.1                                 Conditions Precedent to Initial Advance, Capital Expenditure Loan, L/C,
L/C Guaranty.  The obligation
of Foothill to make the initial Advance or provide any Capital Expenditure Loan
under this Agreement is subject to the fulfillment, to the satisfaction of
Foothill and its counsel, of each of the following conditions:


 


(a)                                  the
Restatement Effective Date shall occur on or before August     ,
2005;


 


(b)                                 Foothill
shall have received searches reflecting the filing of its financing statements
and fixture filings;


 


(c)                                  Foothill
shall have received each of the following documents, duly executed, and each
such document shall be in full force and effect:


 


i)                                         the
Guarantor Reaffirmation Agreement;


 


ii)                                      the Capital Expenditure Loan Note; and


 


iii)                                   Foothill
shall have received a certificate from the Secretary of Borrower (i) attaching
and attesting to the resolutions of Borrower’s Board of Directors authorizing
its execution, delivery, and performance of this Agreement and the other Loan
Documents to which Borrower is a party, and authorizing specific officers of
Borrower to execute same, and (ii) attesting to the incumbency and
signatures of such specific officers of such Borrower;;


 


(d)                                 Foothill
shall have received copies of Borrower’s By-laws and Articles or Certificate of
Incorporation, as amended, modified, or supplemented to the Restatement
Effective Date, certified by the Secretary of Borrower; or, alternatively, a
certificate from the Secretary of the Borrower certifying that the Borrower’s
By-laws and Articles or Certificate of Incorporation have not been amended,
modified, or supplemented since the Initial Closing Date;


 


(e)                                  Foothill
shall have received a certificate of corporate status with respect to Borrower,
dated within thirty (30) days of the Restatement Effective Date, by the
Secretary of State of the state of incorporation of Borrower, which certificate
shall indicate that Borrower is in good standing in such state;


 


(f)                                    Foothill
shall have received a certificate from the Secretary of  each Guarantor (i) attaching and
attesting to the resolutions of such Guarantor’s Board of Directors authorizing
its execution, delivery, and performance of the Loan Documents to which such
Guarantor is a party, and authorizing specific officers of such Guarantor to
execute the same, and (ii) attesting to the incumbency and signatures of
such specific officers of such Guarantor;


 


(g)                                 Foothill
shall have received copies of each Guarantor’s By-laws and Articles or
Certificate of Incorporation, as amended, modified, or supplemented to the


 


28





















 


Restatement Effective Date, certified by the Secretary
of Guarantor, or, alternatively, a certificate from the Secretary of such
Guarantor certifying that there have been no amendments, modifications, or
supplements to such Guarantor’s By-laws and Articles or Certificate of
Incorporation since the Initial Closing Date;


 


(h)                                 Foothill
shall have received a certificate of status with respect to each Guarantor,
dated within 10 days of the Restatement Effective Date, such certificate to be
issued by the appropriate officer of the jurisdiction of organization of such
Guarantor, which certificate shall indicate that such Guarantor is in good
standing in such jurisdiction;


 


(i)                                     Foothill
shall have received certificates of status with respect to each Guarantor, each
dated within 30 days of the Restatement Effective Date, such certificates to be
issued by the appropriate officer of the jurisdictions (other than the
jurisdiction of organization of such Guarantor) in which its failure to be duly
qualified or licensed would constitute a Material Adverse Effect, which
certificates shall indicate that such Guarantor is in good standing in such
jurisdictions;


 


(j)                                     Foothill
shall have received $45,000 in immediately available funds, constituting the
fee specified in Section 2.10(a).


 


(k)                                  after
giving effect to the payment of fees due to Foothill on or before the
Restatement Effective Date, the sum of Borrower’s Excess Availability plus
Borrower’s unrestricted cash and cash equivalents shall not be less than One
Million Dollars ($1,000,000);


 


(l)                                     Foothill
shall have reviewed the License Agreements, and such License Agreements shall
be acceptable to Foothill in its reasonable credit judgment;


 


(m)                               Foothill
shall have received satisfactory evidence that all tax returns required to be
filed by Borrower and its Subsidiaries have been timely filed and all taxes
upon Borrower and its Subsidiaries or their properties, assets, income and
franchises (including real property taxes and payroll taxes) have been paid
prior to delinquency; and


 


(n)                                 all
other documents and legal matters in connection with the transactions
contemplated by this Agreement shall have been delivered or executed or
recorded and shall be in form and substance satisfactory to Foothill and its
counsel.


 


3.2                                 Conditions Precedent to All Advances, Capital Expenditure Loans, L/Cs,
or L/C Guarantees; Conditions Subsequent.


 


(a)                                  The
following shall be conditions precedent to all Advances, Capital Expenditure
Loans, L/Cs, or L/C Guarantees hereunder:


 


i)                                         the
representations and warranties contained in this Agreement and the other Loan
Documents shall be true and correct in all material respects on and as of the
date of such Advance, Capital Expenditure Loan, L/C, or L/C Guaranty, as though
made on and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);


 


29





















 


ii)                                      no
Event of Default or event which with the giving of notice or passage of time
would constitute an Event of Default shall have occurred and be continuing on
the date of such Advance, Capital Expenditure Loan, L/C, or L/C Guaranty, nor
shall either result from the making thereof; and


 


iii)                                   no
injunction, writ, restraining order, or other order of any nature prohibiting,
directly or indirectly, the making of such Advance or Capital Expenditure Loan
or the issuance of such L/C or L/C Guaranty shall have been issued and remain
in force by any governmental authority against Borrower, Foothill, or any of
their Affiliates.


 


(b)                                 The
obligation of Foothill to make any Advance or provide any Capital Expenditure
Loan under this Agreement is subject to the fulfillment, to the satisfaction of
Foothill and its counsel, of each of the following conditions within the time
period therefore specified below (the failure by Borrower to so perform or
cause to be performed constituting an Event of Default):


 


i)                                         Within
10 days after the date hereof, if requested by Foothill, Foothill shall have
received an opinion of Borrower’s and Guarantors’ counsel in form and substance
satisfactory to Foothill in its sole discretion;


 


ii)                                      Within
60 days after the date hereof, Foothill shall have received a trademark
security agreement entered into by and
among HVE and Foothill to effectuate Foothill’s existing security
interests in the trademarks and other general intangibles described therein
(the “Trademark Security Agreement”), duly executed and in form and substance
satisfactory to Foothill in its sole discretion; and


 


iii)                                   Within
60 days after the date hereof, Foothill shall have received the Intercompany
Subordination Agreement, duly executed and in form and substance satisfactory
to Foothill in its sole discretion.


 


3.3                                 Term; Automatic Renewal. 
This Agreement shall become effective upon the execution and delivery
hereof by Borrower and Foothill and shall continue in full force and effect for
a term ending December 29, 2009 (the “Renewal Date”) and
automatically shall be renewed for successive one (1) year periods
thereafter, unless sooner terminated pursuant to the terms hereof. Either party
may terminate this Agreement effective on the Renewal Date or on any one (1) year
anniversary of the Renewal Date by giving the other party at least one hundred
twenty (120) days prior written notice by registered or certified mail,
return receipt requested. The foregoing notwithstanding, Foothill shall have
the right to terminate its obligations under this Agreement immediately and
without notice upon the occurrence and during the continuation of an Event of
Default.


 


3.4                                 Effect of Termination. 
On the date of termination, all Obligations (including contingent
reimbursement obligations under any outstanding L/Cs or L/C Guarantees)
immediately shall become due and payable without notice or demand.  No termination of this Agreement, however,
shall relieve or discharge Borrower of Borrower’s duties, Obligations, or
covenants hereunder, and Foothill’s continuing security interests in the
Collateral shall remain in


 


30





















 


effect until all Obligations have been fully and
finally discharged and Foothill’s obligation to provide advances hereunder is
terminated.


 


3.5                                 Early Termination by Borrower.  The provisions of Section 3.3
that allow termination of this Agreement by Borrower only on the Renewal Date
and certain anniversaries thereof notwithstanding, Borrower has the option, at
any time upon one hundred twenty (120) days prior written notice to
Foothill, to terminate this Agreement by paying to Foothill, in full in cash,
the Obligations (including an amount equal to 105% of the undrawn amount of the
L/Cs or L/C Guarantees), together with a premium (the “Early Termination
Premium”) equal to:  (a) during
the period of time from and after the Restatement Effective Date up to the
first anniversary of the Restatement Effective Date, the sum of three-quarters
of one percent (0.75%) times the Maximum Revolving Credit Amount plus three-quarters
of one percent (0.75%) times the principal amount of any Capital Expenditure
Loans outstanding as of the effective date of the termination of this
Agreement; (b) during the period of time from and after the first
anniversary of the Restatement Effective Date up to the second anniversary of
the Restatement Effective Date, the sum of one-half of one percent (0.50%)
times the Maximum Revolving Credit Amount plus one-half of one percent (0.50%)
times the principal amount of any Capital Expenditure Loans outstanding as of
the effective date of the termination of this Agreement; (iii) during the
period of time from and after the second anniversary of the Restatement
Effective Date up to the fourth anniversary of the Restatement Effective Date,
the sum of one-quarter of one percent (0.25%) times the Maximum Revolving
Credit Amount plus one-quarter of one percent (0.25%) times the principal
amount of any Capital Expenditure Loans outstanding as of the effective date of
the termination of this Agreement.


 


3.6                                 Termination Upon Event of Default.  If Foothill terminates this Agreement upon
the occurrence of an Event of Default that intentionally is caused by Borrower
for the purpose, in Foothill’s reasonable judgment, of avoiding payment of the
Early Termination Premium provided in Section 3.5, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill’s
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium.  The Early
Termination Premium shall be presumed to be the amount of damages sustained by
Foothill as the result of the early termination and Borrower agrees that it is
reasonable under the circumstances currently existing.  The Early Termination Premium provided for in
this Section 3.6 shall be deemed included in the Obligations.


 


3.7


 


4.                                      CREATION OF SECURITY INTEREST.


 


4.1                                 Grant of Security Interest. 
Borrower hereby grants to Foothill a continuing security interest in all
of its right, title and interest in all currently existing and hereafter
acquired or arising Borrower Collateral in order to secure prompt repayment of
any and all Obligations in accordance with the terms and conditions of the Loan
Documents and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. 
Lender’s Lien in and to the Borrower Collateral shall attach to all
Borrower


 


31





















 


Collateral without further act on the part of Foothill
or Borrower.  Anything contained in this
Agreement or any other Loan Document to the contrary notwithstanding, except
for the sale of Inventory of the Borrower or its Subsidiaries to buyers in the
ordinary course of business, the distribution of promotional Inventory of the
Borrower or its Subsidiaries in the ordinary course of business, or the sale or
other disposition of obsolete or worn-out assets in the ordinary course of
business, neither Borrower nor any of its Subsidiary has any authority, express
or implied, to dispose of any item or portion of the Collateral.


 


4.2                                 Negotiable Collateral. 
In the event that any Borrower Collateral, including proceeds, is
evidenced by or consists of Negotiable Collateral, Borrower shall, immediately
upon the request of Foothill, endorse and assign such Negotiable Collateral to
Foothill and deliver physical possession of such Negotiable Collateral to Foothill.


 


4.3                                 Collection of Accounts, General Intangibles, Negotiable Collateral.  At any time that an Event of Default has
occurred and is continuing, Foothill may: 
(a) notify customers or Account Debtors of Borrower and its
Subsidiaries that the Accounts, General Intangibles, or Negotiable Collateral
of Borrower or such Subsidiaries have been assigned to Foothill or that
Foothill has a security interest therein; and (b) collect the Accounts,
General Intangibles, and Negotiable Collateral of Borrower and its Subsidiaries
directly and charge the collection costs and expenses to Borrower’s Loan
Account.  Borrower agrees that it will,
and Borrower shall cause each of its Subsidiaries to, hold in trust for
Foothill, as Foothill’s trustee, any cash receipts, checks, and other items of
payment (including, insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds) that Borrower or any of its Subsidiaries receives
and immediately will deliver said Collections to Foothill in their original
form as so received.


 


4.4                                 Commercial Tort Claims; Delivery of Additional Documentation Required.  If Borrower or its Subsidiaries acquire any
commercial tort claims after the date hereof, Borrower shall promptly (but in
any event within 3 Business Days after such acquisition) deliver to Foothill a
written description of such commercial tort claim and shall deliver a written
agreement, in form and substance satisfactory to Foothill, pursuant to which
Borrower or its Subsidiary, as applicable, shall grant a perfected security
interest in all of its right, title and interest in and to such commercial tort
claim to Foothill, as security for the Obligations (a “Commercial Tort Claim
Assignment”).  At any time upon the
request of Foothill, Borrower shall execute and deliver, and shall cause its
Subsidiaries to execute and deliver, to Foothill all original financing
statements in lieu of continuation statements, continuation financing
statements, amendments to financing statements, fixture filings, security
agreements, chattel mortgages, pledges, assignments, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
pledgeholder agreements, schedules of accounts, letters of authority, and all
other documents (collectively, the “Additional Documents”) that Foothill
may reasonably request, in form sand substance satisfactory to Foothill, to
create and perfect and continue perfected or to better perfect the Lender’s
Liens in the assets of Borrower and its Subsidiaries (whether now owned or hereafter
arising or acquired, tangible or intangible, real or personal), and in order to
fully consummate all of the transactions contemplated hereby and under the
other Loan Documents.  The foregoing
shall be deemed to include and Borrower hereby agrees that it will execute and
deliver appropriate mortgages, deeds of trust, or collateral assignments with
respect to any real property interests or estates acquired after the
Restatement Effective Date.  To the
maximum extent permitted by applicable law, Borrower authorizes Foothill to
execute any


 


32





















 


such Additional Documents in Borrower’s name and
authorizes Foothill to file such executed Additional Documents in any
appropriate filing office.  In addition,
on such periodic basis as Foothill shall require, Borrower shall (i) provide
Foothill with a report of all new material patentable, copyrightable, or
trademarkable materials acquired or generated by Borrower or its Subsidiaries
during the prior period, (ii) cause all material patents, copyrights, and
trademarks acquired or generated by Borrower or its Subsidiaries that are not
already the subject of a registration with the appropriate filing office (or an
application therefor diligently prosecuted) to be registered with such
appropriate filing office in a manner sufficient to impart constructive notice
of Borrower’s or the applicable Subsidiary’s ownership thereof, and (iii) cause
to be prepared, executed, and delivered to Foothill supplemental schedules to
the applicable Loan Documents to identify such patents, copyrights, and
trademarks as being subject to the security interests created thereunder; provided,
however, that neither Borrower nor any of its Subsidiaries shall
register with the U.S. Copyright Office any unregistered copyrights (whether in
existence on the Restatement Effective Date or thereafter acquired, arising, or
developed) unless (i) the Borrower provides Foothill with written notice
of its intent to register such copyrights not less than 30 days prior to the
date of the proposed registration, and (ii) prior to such registration,
the applicable Person executes and delivers to Foothill a copyright security
agreement in form and substance satisfactory to Foothill, supplemental
schedules to any existing copyright security agreement, or such other
documentation as Foothill reasonably deems necessary in order to perfect and
continue perfected Lender’s Liens on such copyrights following such
registration.


 


4.5                                 Power of Attorney. 
Borrower hereby irrevocably makes, constitutes, and appoints Foothill
(and any of Foothill’s officers, employees, or agents designated by Foothill)
as Borrower’s true and lawful attorney, with power to:  (a) if Borrower refuses to, or fails
timely to execute and deliver any of the documents described in Section 4.4,
sign the name of Borrower on any of the documents described in Section 4.4;
(b) at any time that an Event of Default has occurred and is continuing,
sign Borrower’s name on any invoice or bill of lading relating to the Borrower
Collateral, drafts against Account Debtors, and notices to Account Debtors; (c) send
requests for verification of Borrower’s and its Subsidiaries’ Accounts; (d) endorse
Borrower’s  or any of its Subsidiaries’
name on any checks, notices, acceptances, money orders, drafts, or other item
of payment (including all Collections) or security that may come into Foothill’s
possession; (e) at any time that an Event of Default has occurred and is
continuing, notify the post office authorities to change the address for
delivery of Borrower’s mail to an address designated by Foothill, to receive
and open all mail addressed to Borrower or any of its Subsidiaries, and to
retain all mail relating to payments with respect to the Collateral and forward
all other mail to Borrower; (f) at any time that an Event of Default has
occurred and is continuing, make, settle, and adjust all claims under Borrower’s  or its Subsidiaries’ policies of insurance
and make all determinations and decisions with respect to such policies of
insurance; and (g) at any time that an Event of Default has occurred and
is continuing, settle and adjust disputes and claims respecting the Accounts of
Borrower or its Subsidiaries directly with Account Debtors, for amounts and
upon terms which Foothill determines to be reasonable, and Foothill may cause
to be executed and delivered any documents and releases which Foothill
determines to be necessary.  The
appointment of Foothill as Borrower’s and Borrower’s Subsidiaries’ attorney,
and each and every one of Foothill’s rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully and
finally repaid and performed and Foothill’s obligation to extend credit
hereunder is terminated.


 


33





















 


4.6                                 Right to Inspect. 
Prior to the time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure (in accordance with Section 1208
of the Code), Foothill (through any of its officers, employees, or agents)
shall have the right, from time to time hereafter upon prior reasonable
notification to Borrower and during normal business hours, to inspect Borrower’s
Books and to check, test, and appraise the Collateral in order to verify
Borrower’s and its Subsidiaries’ financial condition or the amount, quality,
value, condition of, or any other matter relating to, the Collateral.  After the time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure (in accordance
with Section 1208 of the Code), Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter without
prior notification to Borrower or any of its Subsidiaries and at any time or
times determined by Foothill, to inspect Borrower’s Books and to check, test,
and appraise the Collateral in order to verify Borrower’s and its Subsidiaries’
financial condition or the amount, quality, value, condition of, or any other
matter relating to, the Collateral.


 


4.7                                 Filing Authorization. 
Borrower hereby authorizes Foothill (or its designee) to file UCC
financing statements in any applicable jurisdiction in order to perfect its
security interests in all or any portion of the assets and other property
constituting Collateral of the Borrower or any Subsidiary (including without
limitation any financing statements that (i) indicate the Collateral (A) as
all assets of the Borrower and/or such Subsidiary or words of similar effect,
regardless of whether any particular asset of the Borrower or such Subsidiary
falls within the scope of Article 9 of the Code or whether any portion of
the assets of the Borrower or such Subsidiary constitute part of the
Collateral, or (B) as being of an equal or lesser scope or with greater
detail, and (ii) contain any other information required by part 5 of Article 9
of the Code for the sufficiency or filing office acceptance of any financing
statement or amendment, including (x) whether the Borrower or such
Subsidiary is an organization, the type of organization and any organization
identification number issued to the Borrower or such Subsidiary, and
(y) in the case of a financing statement filed as a fixture filing or
indicating Collateral as as-extracted collateral or timber to be cut, a
sufficient description of real property to which the Collateral relates).  Should the transactions contemplated by the
Loan Documents not be consummated, the undersigned may terminate each such
financing statement without the need for the signature of Foothill.  Borrower hereby ratifies the filing of any
and all financing statements filed with respect to the Collateral prior to the
date hereof.


 


4.8                                 Control Agreements.  Borrower
agrees that it will and will cause its Subsidiaries to take any or all
reasonable steps in order for Foothill to obtain control in accordance with
Sections 8-106, 9-104, 9-105, 9-106, and 9-107 of the Code with respect to all
of its or their Securities Accounts, Deposit Accounts, electronic chattel
paper, Investment Property, and letter-of-credit rights.  Upon the occurrence and during the
continuance of a Event of Default, or any event or condition which, with the
giving of notice, the passage of time or both, would be an Event of Default,
Foothill may notify any bank or securities intermediary to liquidate the
applicable Deposit Account or Securities Account or any related Investment
Property maintained or held thereby and remit the proceeds thereof to the
Foothill’s Account.


 


34





















 


5.                                      REPRESENTATIONS AND WARRANTIES.


 


Borrower represents and warrants to Foothill as
follows:


 


5.1                                 No Prior Encumbrances. 
Borrower has good and indefeasible title to the Collateral, free and
clear of liens, claims, security interests, or encumbrances, except for
Permitted Liens.


 


5.2                                 Eligible Accounts. 
The Eligible Accounts are, at the time of the creation thereof and as of
each date on which Borrower includes them in a Borrowing Base calculation or
certification, bona fide existing obligations created by the sale and delivery
of Inventory of the Borrowing Base Parties or the rendition of services to
Account Debtors in the ordinary course of the Borrowing Base Parties’ business,
unconditionally owed to the applicable Borrowing Base Party without defenses,
disputes, offsets, counterclaims, or rights of return or cancellation, except
for rights of return in accordance with Borrower’s return policy as it may
exist from time to time.  The property
giving rise to such Eligible Accounts has been delivered to the Account Debtor,
or to the Account Debtor’s agent for immediate shipment to and unconditional
acceptance by the Account Debtor.  At the
time of the creation of an Eligible Account and as of each date on which
Borrower includes an Eligible Account in a Borrowing Base calculation or certification,
no Borrowing Base party has received notice of actual or imminent bankruptcy,
insolvency, or material impairment of the ability of any applicable Account
Debtor to repay such Eligible Account.


 


5.3                                 Eligible Inventory. 
All Eligible Inventory is now and at all times hereafter shall be of
good and merchantable quality, free from defects.


 


5.4                                 Location of Inventory and Equipment.  The Inventory and Equipment of the Borrower
and its Subsidiaries are not stored with a bailee, warehouseman, or similar
party (other than goods that are in transit in the ordinary course of business
or other than with Foothill’s prior written consent) and are located only at
the locations identified on Schedule 6.14 or otherwise permitted by
Section 6.14.


 


5.5                                 Inventory Records. 
Borrower now keeps, and hereafter at all times shall keep, correct and
accurate records itemizing and describing the kind, type, quality, and quantity
of the Inventory of Borrower and its Subsidiaries, and Borrower’s or such
Subsidiaries’ cost therefor.


 


5.6                                 State
of Incorporation; Location of Chief Executive Office; Organizational
Identification Number; Commercial Tort Claims.


 


(a)                                  The
jurisdiction of organization of Borrower and each of its Subsidiaries is set
forth on Schedule 5.6(a).


 


(b)                                 The
chief executive office of Borrower and each of its Subsidiaries is located at
the address indicated on Schedule 5.6(b) (as such Schedule may
be updated pursuant to Section 6.14).


 


(c)                                  Borrower’s
and each of its Subsidiaries’ organizational identification numbers, if any,
are identified on Schedule 5.6(c).


 


(d)                                 As
of the Restatement Effective Date, Borrower and its Subsidiaries do not hold
any commercial tort claims, except as set forth on Schedule 5.6(d).


 


35





















 


5.7                                 Due Organization and Qualification; Subsidiaries.


 


(a)                                  Borrower
is duly organized and existing and in good standing under the laws of the state
of its incorporation and qualified and licensed to do business in, and in good
standing in, any state where the failure to be so licensed or qualified could
reasonably be expected to have a material adverse effect on the business,
operations, condition (financial or otherwise), finances, or prospects of
Borrower or on the value of the Collateral to Foothill.


 


(b)                                 Set
forth on Schedule 5.7(b), is a complete and accurate description of the
authorized capital Stock of Borrower, by class, and, as of the Restatement
Closing Date, a description of the number of shares of each such class that are
issued and outstanding.  Other than as
described on Schedule 5.7(b), there are no subscriptions, options,
warrants, or calls relating to any shares of Borrower’s capital Stock,
including any right of conversion or exchange under any outstanding security or
other instrument.  Borrower is not
subject to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of its capital Stock or any security convertible
into or exchangeable for any of its capital Stock.


 


(c)                                  Set
forth on Schedule 5.7(c), is a complete and accurate list of
Borrower’s direct and indirect Subsidiaries, showing:  (i) the jurisdiction of their
organization, (ii) the number of shares of each class of common and
preferred Stock authorized for each of such Subsidiaries, and (iii) the
number and the percentage of the outstanding shares of each such class owned
directly or indirectly by Borrower.  All
of the outstanding capital Stock of each such Subsidiary has been validly
issued and is fully paid and non-assessable.


 


(d)                                 Except
as set forth on Schedule 5.7(c), there are no subscriptions, options,
warrants, or calls relating to any shares of Borrower’s Subsidiaries’ capital
Stock, including any right of conversion or exchange under any outstanding
security or other instrument.  Neither
Borrower nor any of its Subsidiaries is subject to any obligation (contingent
or otherwise) to repurchase or otherwise acquire or retire any shares of
Borrower’s Subsidiaries’ capital Stock or any security convertible into or
exchangeable for any such capital Stock.


 


5.8                                 Due Authorization; No Conflict.  The execution, delivery, and performance of
the Loan Documents to which it is a party are within Borrower’s corporate
powers, have been duly authorized, and are not in conflict with nor constitute
a breach of any provision contained in (a) Borrower’s Articles or
Certificate of Incorporation or By-laws, or (b) any material agreement to
which Borrower is a party or by which its properties or assets may be bound
where such conflict or breach has not and reasonably could be expected to have
a Material Adverse Effect.  This
Agreement and the other Loan Documents to which Borrower is a party, and all
other documents contemplated hereby and thereby, when executed and delivered by
Borrower will be the legally valid and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms, except
as enforcement may be limited by equitable principles or by bankruptcy,
insolvency, reorganization, moratorium, or similar laws


 


36





















 


relating to or limiting creditors’ rights
generally.  The execution, delivery, and
performance of the Loan Documents to which it is a party are within each other
Obligor’s corporate powers, have been duly authorized, and are not in conflict
with nor constitute a breach of any provision contained in (a) such
Obligor’s Articles or Certificate of Incorporation or By-laws, or (b) any
material agreement to which such Obligor is a party or by which its properties
or assets may be bound where such conflict or breach has not and reasonably
could be expected to have a Material Adverse Effect.  This Agreement and the other Loan Documents
to which such Obligor is a party, and all other documents contemplated hereby
and thereby, when executed and delivered by such Obligor will be the legally
valid and binding obligations of such Obligor, enforceable against such Obligor
in accordance with their respective terms, except as enforcement may be limited
by equitable principles or by bankruptcy, insolvency, reorganization,
moratorium, or similar laws relating to or limiting creditors’ rights
generally.


 


5.9                                 Litigation.  There are
no actions or proceedings pending by or against Borrower or any of its
Subsidiaries before any court or administrative agency and Borrower does not
have knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving Borrower, except for:  (a) ongoing
collection matters in which Borrower is the plaintiff; (b) matters
disclosed on Schedule 5.9; and (c) matters arising after the
date hereof that have not and reasonably could not be expected to have a
Material Adverse Effect.


 


5.10                           No Material Adverse Change in Financial Condition.  All financial statements relating to Borrower
and its Subsidiaries that have been delivered by Borrower to Foothill have been
prepared in accordance with GAAP and fairly present Borrower’s and its
Subsidiaries’ financial condition as of the date thereof and Borrower’s and its
Subsidiaries’ results of operations for the period then ended.  There has not been a material adverse change
in the financial condition of Borrower or its Subsidiaries, taken as a whole,
since the date of the latest financial statements submitted to Foothill on or
before the Restatement Effective Date.


 


5.11                           Solvency.  Borrower
and each of its Subsidiaries are Solvent. 
No transfer of property is being made by Borrower and no obligation is
being incurred by Borrower in connection with the transactions contemplated by
this Agreement or the other Loan Documents with the intent to hinder, delay, or
defraud either present or future creditors of Borrower.


 


5.12                           Employee Benefits. 
None of Borrower, its Subsidiaries, or any of their ERISA Affiliates
maintains or contributes to any Benefit Plan.


 


5.13                           Environmental Condition. 
None of Borrower’s or its Subsidiaries’ properties or assets has ever
been used by Borrower or such Subsidiaries or, to the best of Borrower’s
knowledge, by previous owners or operators in the disposal of, or to produce,
store, handle, treat, release, or transport, any Hazardous Materials other than
in full compliance with all applicable laws, statutes, and regulations
regarding the handling, treatment, and disposal of such Hazardous
Materials.  None of Borrower’s or its
Subsidiaries’ properties or assets has ever been designated or identified in
any manner pursuant to any environmental protection statute as a Hazardous
Materials disposal site, or a candidate for closure pursuant to any
environmental protection statute.  No
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned or operated by Borrower or any
of its


 


37





















 


Subsidiaries. 
Neither Borrower nor any of its Subsidiaries has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal or state governmental agency concerning any action or omission by
Borrower or such Subsidiary involving the release or disposal of Hazardous
Materials into the environment, which such action or omission could be expected
to give rise to a liability on the part of Borrower or such Subsidiary that has
had or reasonably could be expected to have a Material Adverse Effect.


 


5.14                           Reliance by Foothill; Cumulative.  Each warranty and representation contained in
this Agreement and the other Loan Documents automatically shall be deemed
repeated with each advance, Capital Expenditure Loan, or issuance of an L/C or
L/C Guaranty and shall be conclusively presumed to have been relied on by
Foothill regardless of any investigation made or information possessed by
Foothill.  The warranties and
representations set forth in the Loan Documents shall be cumulative and in
addition to any and all other warranties and representations that Borrower or
any other Obligor now or hereafter shall give, or cause to be given, to
Foothill.


 


5.15                           Lender’s Liens.  The
Lender’s Liens are validly created, perfected, and first priority Liens,
subject only to Permitted Liens.


 


5.16                           Brokerage Fees.  No
brokerage commission or finders fees has or shall be incurred or payable in
connection with or as a result of Borrower’s obtaining financing from Foothill
under this Agreement, and Borrower has not utilized the services of any broker
or finder in connection with Borrower’s obtaining financing from Foothill under
this Agreement.


 


5.17                           License Agreements. 
Borrower has delivered to Foothill all License Agreements or other
product, purchase, or acquisition agreements and related agreements,
instruments, and documents that Borrower has executed with each Lien Creditor,
and Schedule 5.17 sets forth a complete and accurate listing of each and
every such License Agreement or other product, purchase, or acquisition
agreement and related agreement, instrument, and document in respect thereof.


 


5.18                           Reaffirmation. 
Borrower hereby represents and warrants to Foothill that the execution,
delivery, and performance of this Agreement are within its corporate powers,
have been duly authorized by all necessary corporate action, and are not in
contravention of any law, rule, or regulation, or any order, judgment, decree,
writ, injunction, or award of any arbitrator, court, or governmental authority,
or of the terms of its charter, bylaws, or other governing documents, or of any
contract or undertaking to which it is a party or by which any of its
properties may be bound or affected.


 


5.19                           Indebtedness.  Set forth on Schedule 5.19 is a
true and complete list of all Indebtedness of Borrower and its Subsidiaries
outstanding immediately prior to the Restatement Effective Date that is to
remain outstanding after the Restatement Effective Date and such Schedule accurately
reflects the aggregate principal amount of such Indebtedness and describes the
principal terms thereof.


 


5.20                           Deposit Accounts and Securities Accounts.  Set forth on Schedule 5.20 is
a listing of all of Borrower’s and its Subsidiaries’ Deposit Accounts and
Securities Accounts,


 


38





















 


including, with respect to each bank or securities
intermediary (a) the name and address of such Person, and (b) the
account numbers of the Deposit Accounts or Securities Accounts maintained with
such Person.


 


6.                                      AFFIRMATIVE COVENANTS.


 


Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until full and final payment of the
Obligations, and unless Foothill shall otherwise consent in writing, Borrower
shall do, and cause its each of its Subsidiaries to do, all of the following:


 


6.1                                 Accounting System. 
Borrower and its Subsidiaries shall maintain a standard and modern
system of accounting in accordance with GAAP with ledger and account cards or
computer tapes, discs, printouts, and records pertaining to the Collateral
which contain information as from time to time reasonably may be requested by
Foothill.  Borrower and its Subsidiaries
also shall keep proper books of account showing all sales, claims, and allowances
on their Inventory.


 


6.2                                 Collateral Reports. 
If the average Excess Availability (measured on a month-end basis for
the immediately preceding calendar month) is at least $7,500,000 and no Event
of Default has occurred and is continuing, Borrower shall deliver to Foothill,
as soon as they are available, but in no event later than the fifteenth (15th)
day of each month during the term of this Agreement, a detailed aging, by
total, of the Accounts of the Borrower and its Subsidiaries and a reconciliation
statement, and, as soon as they are available, but in no event later than the
thirtieth (30th) day of each month during the term of this Agreement, a summary
aging, by vendor, of all accounts payable, (such summary aging to include a
specific itemization of the amount of accounts payable due and owing to Lien
Creditors with respect to which Borrower or any of its Subsidiaries has
obtained letters of credit to secure the repayment of sums due an owing to such
Lien Creditors from time to time), and any book overdraft.  If the average Excess Availability (measured
on a month-end basis for the immediately preceding calendar month) is less than
$7,500,000 or an Event of Default has occurred and is continuing, Borrower shall
deliver such reports, statements, and summaries to Foothill on a weekly basis,
as soon as they are available, but in no event later than 15 Business Days
after the end of each week to which such reports, statements, and summaries
relate, during the term of this Agreement. 
Original sales invoices evidencing daily sales shall be mailed by
Borrower to each Account Debtor with, at Foothill’s request, a copy to
Foothill, and, at Foothill’s direction from and after and during the
continuation of an Event of Default, the invoices shall indicate on their face
that the Account has been assigned to Foothill and that all payments are to be
made directly to Foothill.  Borrower
shall deliver to Foothill, as Foothill reasonably may from time to time
require, collection reports, sales journals, invoices, original delivery
receipts, customer’s purchase orders, shipping instructions, bills of lading,
and other documentation respecting shipment arrangements.  Absent such a request by Foothill, copies of
all such documentation shall be held by Borrower as custodian for
Foothill.  In addition, from time to
time, Borrower shall deliver to Foothill such other and additional information
or documentation as Foothill reasonably may request.


 


39





















 


6.3                                 Schedules of Accounts.  With such regularity as Foothill shall
reasonably require, Borrower shall provide Foothill with schedules describing
all Accounts of Borrower and its Subsidiaries. 
Foothill’s failure to request such schedules or Borrower’s failure to
execute and deliver such schedules shall not affect or limit Foothill’s
security interests or other rights in and to such Accounts.


 


6.4                                 Financial Statements, Reports, Certificates.  Borrower agrees to deliver to Foothill:  (a) as soon as available, but in any
event within thirty (30) days after the end of each month during each of
Borrower’s fiscal years (except for those months that are the end of a fiscal
quarter, in which case Borrower shall deliver such information to Foothill
within forty-five (45) days after the end of such month), a company
prepared balance sheet, income statement, and, in the case of quarter-end
statements, cash flow statement covering Borrower’s and its Subsidiaries’
operations during such period; and (b) as soon as available, but in any
event within ninety (90) days after the end of each of Borrower’s fiscal
years, financial statements of Borrower for each such fiscal year, audited by
independent certified public accountants reasonably acceptable to Foothill and
certified, without any qualifications, by such accountants to have been
prepared in accordance with GAAP.  Such
audited financial statements shall include a balance sheet, profit and loss
statement, and cash flow statement and, if prepared, such accountants’ letter
to management.  Borrower agrees to
deliver financial statements prepared on a consolidating basis so as to present
Borrower and each consolidated entity separately.


 


Together with the above, Borrower also shall deliver
to Foothill Borrower’s Form 10-Q Quarterly Reports, Form 10-K Annual
Reports, and Form 8-K Current Reports, and any other material filings made
by Borrower or its Subsidiaries with the Securities and Exchange Commission, if
any, as soon as the same are filed, or any other information that is provided
by Borrower to its shareholders, and any other report reasonably requested by
Foothill relating to the Collateral, or the financial condition of Borrower and
its Subsidiaries.


 


Each month, together with the financial statements
provided pursuant to Section 6.4(a), Borrower shall deliver to Foothill a
certificate signed by its chief financial officer to the effect that:  (i) all reports, statements, or computer
prepared information of any kind or nature delivered or caused to be delivered
to Foothill hereunder have been prepared in accordance with GAAP and fairly
present the financial condition of Borrower and its Subsidiaries; (ii) Borrower
is in timely compliance with all of its covenants and agreements hereunder; (iii) the
representations and warranties of Borrower and its Subsidiaries contained in
this Agreement and the other Loan Documents are true and correct in all
material respects on and as of the date of such certificate, as though made on
and as of such date (except to the extent that such representations and warranties
relate solely to an earlier date); (iv) for each month that also is the
date on which the financial covenant in Section 6.12 and Section 7.9
are to be tested, a Compliance Certificate demonstrating in reasonable detail
compliance at the end of such period with the financial covenants contained in Section 6.12
and Section 7.9; and (v) on the date of delivery of such
certificate to Foothill there does not exist any condition or event that
constitutes an Event of Default (or, in each case, to the extent of any
noncompliance, describing such non-compliance as to which he or she may have
knowledge and what action Borrower has taken, is taking, or proposes to take
with respect thereto).


 


40





















 


Upon the occurrence of and during the continuation of
an Event of Default, Borrower shall issue written instructions to its
independent certified public accountants authorizing them to communicate with
Foothill and to release to Foothill whatever financial information concerning
Borrower that Foothill reasonably may request. 
Borrower hereby irrevocably authorizes and directs all auditors,
accountants, or other third parties to deliver to Foothill, at Borrower’s
expense, copies of Borrower’s and its Subsidiaries financial statements, papers
related thereto, and other accounting records of any nature in their
possession, and to disclose to Foothill any information they may have regarding
Borrower’s and its Subsidiaries business affairs and financial conditions.


 


6.5                                 Tax Returns.  Borrower
agrees to deliver to Foothill copies of Borrower’s future federal income tax
returns, and any amendments thereto, within thirty (30) days of the filing
thereof with the Internal Revenue Service.


 


6.6                                 Designation of Inventory. 
Borrower shall now and from time to time hereafter, but not less
frequently than monthly, deliver to Foothill a designation of Inventory of
Borrower and its Subsidiaries specifying such Person’s value (at the lower of
cost or market) of such Inventory and further specifying such other information
as Foothill may reasonably request. 
Borrower shall deliver to Foothill from time to time hereafter, but not
less frequently than monthly, a report of the aggregate amount of Inventory of
Borrower and its Subsidiaries that has been returned, which report, unless
otherwise requested by Foothill, need only identify the individual purchaser or
sub-distributor if the amount of Inventory returned by them is equal to or
greater than $100,000.


 


6.7                                 Returns.  Returns and
allowances, if any, as between Borrower and its Subsidiaries, on the one hand,
and its Account Debtors, on the other, shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the execution and delivery of this Agreement.


 


6.8                                 Title to Equipment. 
Upon Foothill’s request, Borrower immediately shall deliver to Foothill,
properly endorsed, any and all evidences of ownership of, certificates of
title, or applications for title to any items of Equipment of Borrower and its
Subsidiaries.


 


6.9                                 Maintenance of Equipment. 
Borrower and its Subsidiaries shall keep and maintain its respective
Equipment in good operating condition and repair (ordinary wear and tear
excepted), and make all necessary replacements thereto so that the value and
operating efficiency thereof shall at all times be maintained and
preserved.  Borrower and its Subsidiaries
shall not permit any item of its Equipment to become a fixture to real estate
or an accession to other property, and such Equipment is now and shall at all
times remain personal property.


 


6.10                           Taxes.  All
assessments and taxes, whether real, personal, or otherwise, due or payable by,
or imposed, levied, or assessed against Borrower, and of its Subsidiaries or
any of their respective property have been paid, and shall hereafter be paid in
full, before delinquency or before the expiration of any extension period.  Borrower and each of its Subsidiaries shall
make due and timely payment or deposit of all federal, state, and local taxes,
assessments, or contributions required of it by law, and will execute and
deliver to Foothill, on demand, appropriate certificates attesting to the
payment thereof or deposit with respect thereto.


 


41





















 


Borrower and each of its Subsidiaries will make timely
payment or deposit of all tax payments and withholding taxes required of it by
applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Foothill with proof satisfactory to Foothill indicating that Borrower
and each of its Subsidiaries have made such payments or deposits.  The foregoing to the contrary
notwithstanding, Borrower and each of its Subsidiaries shall not be required to
pay or discharge any such assessment or tax (other than payroll taxes) so long
as the validity thereof shall be the subject of a Permitted Protest.


 


6.11                           Insurance.


 


(a)                                  Borrower
and each of its Subsidiaries, at their respective expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as are
ordinarily insured against by other owners in similar businesses.  Borrower also shall maintain business
interruption, public liability, product liability, and property damage
insurance relating to Borrower’s and each of its Subsidiaries’ ownership and
use of the Collateral, as well as insurance against larceny, embezzlement, and
criminal misappropriation.


 


(b)                                 All
such policies of insurance shall be in such form, with such companies, and in
such amounts as may be reasonably satisfactory to Foothill.  All such policies of insurance (except those
of public liability and property damage) shall contain a 438BFU lender’s loss
payable endorsement, or an equivalent endorsement in a form satisfactory to
Foothill, showing Foothill as sole loss payee thereof, and shall contain a
waiver of warranties, and shall specify that the insurer must give at least
ten (10) days prior written notice to Foothill before canceling its
policy for any reason.  Borrower shall
deliver to Foothill certified copies of such policies of insurance and evidence
of the payment of all premiums therefor. 
All proceeds payable under any such policy shall be payable to Foothill
to be applied on account of the Obligations.


 


6.12                           Financial
Covenants.


 


(a)                                  EBITDA.  (i) Borrower shall not have two
consecutive fiscal quarters of EBITDA losses (exclusive of the quarter ending June 30,
2005) and (ii) Borrower shall maintain EBITDA, for each fiscal period set
forth below, of not less than the amount indicated below opposite such fiscal
period:


 


	
  for the
  immediately preceding twelve-month period ending 06/30/05

  	
   

  	
  $

  	
  4,250,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 09/30/05

  	
   

  	
  $

  	
  4,250,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 12/31/05

  	
   

  	
  $

  	
  4,250,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 03/31/06

  	
   

  	
  $

  	
  4,250,000

  	
   

  



 


42





















 


	
  for the
  immediately preceding twelve-month period ending 06/30/06

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 09/30/06

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 12/31/06

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 03/31/07

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 06/30/07

  	
   

  	
  $

  	
  5,500,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 09/30/07

  	
   

  	
  $

  	
  5,500,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 12/31/07

  	
   

  	
  $

  	
  5,500,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 03/31/08

  	
   

  	
  $

  	
  5,500,000

  	
   

  
	
  for the
  immediately preceding twelve-month period ending 06/30/08 and for each
  twelve-month period ending at each fiscal quarter end thereafter

  	
   

  	
  $

  	
  6,000,000

  	
   

  



 


6.13                           No Setoffs or Counterclaims. 
All payments hereunder and under the other Loan Documents made by or on
behalf of Borrower or its Subsidiaries shall be made without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.


 


6.14                           Location of Inventory and Equipment.  Borrower and each of its Subsidiaries shall
keep their respective Inventory and Equipment (other than goods that are in
transit in the ordinary course of business) only at the locations identified on
Schedule 6.14; provided, however, that Borrower may
amend Schedule 6.14 so long as such amendment occurs by written
notice to Foothill not less than thirty (30) days prior to the date on
which the applicable Inventory or Equipment is moved to such new location, so
long as such new location is within the continental United States, and so long
as, at the time of such written notification Borrower provides any financing
statements or fixture filings necessary to perfect and continue perfected
Foothill’s security interests in such assets and also provides to Foothill
Collateral Access Agreements in form and substance satisfactory to Foothill;
provided further, however,


 


43





















 


that such notice need only be given contemporaneously
in the event of an earthquake or other emergency.


 


6.15                           Compliance with Laws. 
Borrower and each of its Subsidiaries shall comply with the requirements
of all applicable laws, rules, regulations, and orders of any governmental
authority, including the Fair Labor Standards Act and the Americans With
Disabilities Act, other than laws, rules, regulations, and orders the
non-compliance with which, individually or in the aggregate, have not and
reasonably could not be expected to have a Material Adverse Effect.


 


6.16                           Leases.  Borrower and
each of its Subsidiaries shall pay when due all rents and other material
amounts payable under any leases to which Borrower or such Subsidiary is a
party or by which Borrower’s or such Subsidiary’s properties and assets are
bound, unless such payments are the subject of a Permitted Protest.  To the extent that Borrower or such
Subsidiary fails timely to make payment of such rents and other material
amounts payable when due under its leases (other than those rents or other
amounts payable that are the subject of a Permitted Protest), Foothill shall be
entitled, in its discretion, and without the necessity of declaring an Event of
Default, to reserve an amount equal to such unpaid amounts from the loan
availability created under Section 2.1 hereof.


 


6.17                           License Agreements. 
Borrower and each of its Subsidiaries shall comply with all the material
terms and conditions of all License Agreements, whether now or hereafter
existing, and promptly notify Foothill of the occurrence of any event which
constitutes a default thereunder if such default reasonably could be expected
to have a Material Adverse Effect. 
Foothill may, from time to time, review and make copies of Borrower’s or
such Subsidiary’s then current License Agreements and Borrower and each of its
Subsidiaries agree to make such License Agreements available to Foothill and,
if requested by Foothill, will certify them as being true, correct, and
complete.


 


6.18                           Formation of Subsidiaries.  At the time that Borrower, any of its
Subsidiaries or any Guarantor forms any direct or indirect Subsidiary or
acquires any direct or indirect Subsidiary after the Restatement Effective
Date, Borrower, such Subsidiary or such Guarantor shall (a) cause such new
Subsidiary to provide to Foothill a joinder to this Agreement or the Guaranty,
the Stock Pledge Agreement and the Guarantor Security Agreement, together with
such other security documents (including mortgages with respect to any Real
Property of such new Subsidiary), as well as appropriate financing statements
(and with respect to all property subject to a mortgage, fixture filings), all
in form and substance satisfactory to Foothill (including being sufficient to
grant Foothill a first priority Lien (subject to Permitted Liens) in and to the
assets of such newly formed or acquired Subsidiary), (b) provide to
Foothill a pledge agreement and appropriate certificates and powers or
financing statements, hypothecating all of the direct or beneficial ownership
interest in such new Subsidiary, in form and substance satisfactory to
Foothill, and (c) provide to Foothill all other documentation, including
one or more opinions of counsel satisfactory to Foothill, which in its opinion
is appropriate with respect to the execution and delivery of the applicable
documentation referred to above (including policies of title insurance or other
documentation with respect to all property subject to a mortgage).  Any document, agreement, or instrument
executed or issued pursuant to this Section 6.18 shall be a Loan
Document.


 


44





















 


7.                                      NEGATIVE COVENANTS.


 


Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until full and final payment of the
Obligations, Borrower will not, and will not permit any of its Subsidiaries to
do, any of the following without Foothill’s prior written consent:


 


7.1                                 Indebtedness.  Create,
incur, assume, permit, guarantee, or otherwise become or remain, directly or
indirectly, liable with respect to any Indebtedness, except:


 


(a)                                  Indebtedness
evidenced by this Agreement or the Capital Expenditure Loan Note together with
Indebtedness to issuers of letters of credit that are the subject of L/C
Guarantees;


 


(b)                                 Indebtedness
set forth in the latest financial statements of Borrower submitted to Foothill
on or prior to the Initial Closing Date;


 


(c)                                  Indebtedness
secured by Permitted Liens; and


 


(d)                                 refinancings,
renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of
this Section 7.1 (and continuance or renewal of any Permitted Liens
associated therewith) so long as:  (i) the
terms and conditions of such refinancings, renewals, or extensions do not
materially impair the prospects of repayment of the Obligations by Borrower, (ii) the
net cash proceeds of such refinancings, renewals, or extensions do not result
in an increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of
the Indebtedness so refinanced, renewed, or extended, and (iv) to the
extent that Indebtedness that is refinanced was subordinated in right of
payment to the Obligations, then the subordination terms and conditions of the
refinancing Indebtedness must be at least as favorable to Foothill as those
applicable to the refinanced Indebtedness.


 


7.2                                 Liens.  Create, incur,
assume, or permit to exist, directly or indirectly, any lien on or with respect
to any of its property or assets, of any kind, whether now owned or hereafter
acquired, or any income or profits therefrom, except for Permitted Liens
(including liens that are replacements of Permitted Liens to the extent that
the original Indebtedness is refinanced under Section 7.1(d) and
so long as the replacement liens secure only those assets or property that
secured the original Indebtedness).


 


7.3                                 Restrictions on Fundamental Changes.  Except as otherwise permitted under Section 7.11,
enter into any acquisition, merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate, wind up, or
dissolve itself (or suffer any liquidation or dissolution), or enter into any
transaction not in the ordinary and usual course of Borrower’s business
including the conveyance, sale, assignment, lease, transfer, or other
disposition of, in one transaction or a series of transactions, all or any
substantial part of its business, property, or assets, whether now owned or
hereafter acquired, or acquire by purchase or otherwise all or substantially
all of the properties, assets, stock, or other evidence of beneficial ownership
of any Person.  Nothing in this Section 7.3
shall be read to otherwise limit or restrict Borrower’s ability to issue its
equity securities for value except in relation to the prohibited transactions
specified above.


 


45





















 


7.4                                 Change Name.  Change
Borrower’s  or any of its Subsidiaries’
name, FEIN, corporate structure (within the meaning of Section 9402(7) of
the Code), or identity, or add any new fictitious name; provided, however, that
Borrower or any of its Subsidiaries may change its name or FEIN or add new
fictitious names so long as such changes or addition occurs by written notice
to Foothill not less than thirty (30) days prior to the effectiveness
thereof and so long as at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary to perfect and
continue perfected, as a first priority security interest, the Lender’s Liens.


 


7.5                                 Guarantee.  Guarantee
or otherwise become in any way liable with respect to the obligations of any
third Person except by endorsement of instruments or items of payment for
deposit to the account of Borrower or which are transmitted or turned over to
Foothill; provided, however, notwithstanding the foregoing, Borrower may, in
support of the acquisition of Crane pursuant to the Asset Purchase Agreement,
guarantee or otherwise become in any way liable with respect to the obligations
of Crane in an aggregate amount not to exceed One Million Dollars ($1,000,000)
outstanding at any one time.


 


7.6                                 Restructure.  Make any
change in the principal nature of Borrower’s or any of its Subsidiaries’
business operations or the date of its fiscal year.


 


7.7                                 Prepayments.


 


(a)                                  Except
in connection with a refinancing permitted by Section 7.1(d),
prepay, redeem, retire, defease, purchase, or otherwise acquire any
Indebtedness owing to any third Person, other than the Obligations in
accordance with this Agreement,


 


(b)                                 Directly
or indirectly, amend, modify, alter, increase, or change any of the terms or
conditions of any agreement, instrument, document, indenture, or other writing
evidencing or concerning Indebtedness permitted under

Sections 7.1(b), (c), or (d), and


 


(c)                                  Make
any payments on any Indebtedness owing to any third person that has been
subordinated to the Obligations; provided, however, that Borrower or its
Subsidiaries may make payments on such Indebtedness if Foothill has agreed
thereto pursuant to the terms and conditions of the agreement evidencing such
subordination.


 


The foregoing notwithstanding, and provided that no
Event of Default shall have occurred and is continuing and no Advances under Section 2.1(a) or
Capital Expenditure Loans are then outstanding or would be outstanding after
giving effect to any such prepayment, Borrower may from time to time (i) prepay
amounts then outstanding to BofA with respect to the secured purchase money
financing obtained by Borrower from BofA to finance the acquisition of the Las
Vegas Facility, or (ii) prepay amounts then outstanding to Pioneer
Citizens Bank with respect to the secured purchase money financing obtained by
Borrower from Pioneer Citizens Bank to finance the acquisition of that certain
8.8 acre parcel of real property adjacent to the Las Vegas Facility.


 


7.8                                 Change of Control. 
Cause, permit, or suffer, directly or indirectly, any Change of Control.


 


46





















 


7.9                                 Capital Expenditures. 
Make any capital expenditure, or any commitment therefor, (a) with
respect to individual transactions, in excess of Eight Hundred Thousand Dollars
($800,000); (b) with respect to aggregate capital expenditures made or
committed during Borrower’s fiscal year ended March 31, 2005, in an
aggregate amount in excess of Three Million Two Hundred Fifty Thousand Dollars
($3,250,000); or (c) with respect to aggregate capital expenditures made
or committed in any other fiscal year, in an aggregate amount in excess of Two
Million Five Hundred Thousand Dollars ($2,500,000); provided, however, that if
the amount available under this covenant is not expended in any particular
year, one hundred percent (100%) thereof, and in all cases in an amount not to
exceed $2,500,000, shall be available to be expended in the following fiscal
year, but only in such subsequent fiscal year, with the amount so carried over
being deemed to have been expended last in such subsequent year.


 


7.10                           Consignments.  Without
Foothill’s prior written consent, consign any Inventory of Borrower or its
Subsidiaries or sell any such Inventory on bill and hold, sale or return, sale
on approval, or other conditional terms of sale.  The foregoing to the contrary
notwithstanding, Borrower and any of its Subsidiaries shall be entitled to
consign their respective Inventory to Third Persons so long as no Event of
Default exists or would result therefrom and so long as prior thereto such
Person (a) notifies Foothill to exclude such Inventory from Eligible
Inventory, and (b) completes such documentation with the proposed
consignee (including the execution and delivery of a consignment agreement and
the filing of a UCC-1 with respect to the consigned Inventory), as Foothill
reasonably may require.


 


7.11                           Distributions.  Make
any distribution or declare or pay any dividends (in cash or property, other
than stock, warrants, or other equity interests) on, or purchase, acquire,
redeem, or retire any of Borrower’s capital stock, of any class, (or rights,
options, or warrants in respect thereof) whether now or hereafter
outstanding.  The foregoing to the
contrary notwithstanding, Borrower shall be entitled to repurchase, acquire,
redeem, or acquire any equity interests in Borrower, or rights, options, or
warrants in respect thereof, so long as no Event of Default exists or would
result therefrom and so long as after giving effect thereto Borrower has Excess
Availability equal to or greater than Two Million Dollars ($2,000,000).


 


7.12                           Accounting Methods. 
Except to the extent required by GAAP, modify or change its method of
accounting or enter into, modify, or terminate any agreement currently existing,
or at any time hereafter entered into with any third party accounting firm or
service bureau for the preparation or storage of Borrower’s accounting records
without said accounting firm or service bureau agreeing to provide Foothill
information regarding the Collateral or Borrower’s and its Subsidiaries’
financial condition.  Borrower waives the
right to assert a confidential relationship, if any, it may have with any
accounting firm or service bureau in connection with any information requested
by Foothill pursuant to or in accordance with this Agreement, and agrees that
Foothill may contact directly any such accounting firm or service bureau in
order to obtain such information.


 


7.13                           Investments.  Directly
or indirectly make, acquire, or incur any liabilities (including contingent
obligations) for or in connection with (a) the acquisition of the
securities (whether debt or equity) of, or other interests in, a Person, (b) loans,
advances, capital contributions, or transfers of property to a Person, (c) the
acquisition of all or substantially all of


 


47





















 


the properties or assets of a Person, other than (i) advances
or loans made to employees for travel or other similar expenses incurred in the
ordinary course of business, (ii) additional advances or loans made to
employees in the ordinary course of business in an aggregate amount not to
exceed Six Hundred Thousand Dollars ($600,000) at any one time, (iii) Permitted
Investments, (d) investments in Third Persons engaged in the same or
related lines of business, the aggregate amount of all such investments not to
exceed, as of the date of the making of any such investment, ten percent (10%)
of Borrower’s then extant Tangible Net Worth, so long as no Event of Default
exists or would result therefore, (e) provided that Foothill shall
have approved the Asset Purchase Agreement and the schedules and exhibits
thereto, and provided, further, that Borrower shall have received
net issuance proceeds of the Offering of at least Ten Million Dollars
($10,000,000), Borrower may downstream to its wholly owned subsidiary, Image
Newco, Inc., a California corporation (“Newco”), cash in an amount not to
exceed Six Million Dollars ($6,000,000) to finance the acquisition of the
assets of Crane pursuant to the Asset Purchase Agreement and to pay certain
signing bonuses and consulting fees to affiliates of Crane related to such
acquisition, provided, that after giving effect to the downstreaming to
Newco, Borrower shall have retained a minimum of Two Million Dollars
($2,000,000) of the net issuance proceeds from the Offering; or (f) so
long as no Event of Default exists or would result therefrom, investments in
Crane, following the acquisition thereof by Borrower, in the amount not to
exceed (i) One Million Dollars ($1,000,000) during the first twelve months
following the acquisition, provided that the net issuance proceeds received by
Borrower from the Offering exceeds Two Million Dollars ($2,000,000), and (ii) One
Million Five Hundred Thousand Dollars ($1,500,000) in the aggregate during any
fiscal year (in addition to (i) above), such investments solely to be used
for operating needs; provided, however, that after giving effect
to any investment permitted by clauses (d) and (e), (x) Borrower
shall have Excess Availability equal to or greater than Two Million Dollars
($2,000,000), and (y) any Accounts acquired by Borrower from a Third
Person or any Inventory acquired by Borrower from a Third Person outside of the
ordinary course of business, regardless if any such acquisition is otherwise
permitted by the terms of this Agreement, shall not be deemed Eligible Accounts
or Eligible Inventory, as the case may be, until categorized as such by
Foothill as a result of a field audit or appraisal, as determined appropriate
by Foothill in its reasonable credit judgment.


 


7.14                           Transactions with Affiliates.  Directly or indirectly enter into or permit
to exist any material transaction with any Affiliate of Borrower or any of its
Subsidiaries except as permitted by Section 7.13, and except for
transactions that are in the ordinary course of Borrower’s or its Subsidiaries’
business, upon fair and reasonable terms, that are fully disclosed to Foothill,
and that are no less favorable to Borrower or such Subsidiary than would be
obtained in arm’s length transaction with a non-Affiliate.


 


7.15                           Suspension.  Suspend
or go out of a substantial portion of its business.


 


7.16                           Use of Proceeds.  Use
the proceeds of the advances made hereunder for any purpose other than:  (a) to pay transactional costs and
expenses incurred in connection with this Agreement, and (b) thereafter,
consistent with the terms and conditions hereof, for its lawful and permitted
corporate purposes.


 


7.17                           Change in Location of Chief Executive Office; Inventory and Equipment
with Bailees.  Without
thirty (30) days prior written notification to Foothill, relocate


 


48





















 


its chief executive office to a new location and so
long as, at the time of such written notification, Borrower or any applicable
Subsidiary of Borrower provides any financing statements or fixture filings
necessary to perfect and continue perfected Foothill’s security interests and
also provides to Foothill a landlord’s waiver in form and substance
satisfactory to Foothill.  The Inventory
and Equipment of Borrower or any of its Subsidiaries’ shall not at any time now
or hereafter be stored with a bailee, warehouseman, or similar party without
Foothill’s prior written consent.


 


7.18                           Amendment or Termination of License Agreements.  Amend in any material respect or voluntarily
terminate any License Agreement if such amendment or termination reasonably
could be expected to have a Material Adverse Effect.


 


7.19                           Securities Accounts. 
Establish or maintain any Securities Account, or any Deposit Accounts
with Investments in excess of $250,000 in the aggregate outstanding at any one
time, unless Foothill shall have received a Control Agreement in respect of
such Securities Account or such Deposit Account. Neither Borrower nor any of
its Subsidiaries shall transfer assets out of any Securities Account; provided,
however, that, so long as no Event of Default has occurred and is
continuing or would result therefrom, such Person may use such assets (and the
proceeds thereof) to the extent not prohibited by this Agreement.


 


8.                                      EVENTS OF DEFAULT.


 


Any one or more of the following events shall
constitute an event of default (each, an “Event of Default”) under this
Agreement:


 


8.1                                 If
Borrower fails to pay when due and payable or when declared due and payable,
any portion of the Obligations (whether of principal, interest (including any
interest which, but for the provisions of the Bankruptcy Code, would have
accrued on such amounts), fees and charges due Foothill, reimbursement of
Foothill Expenses, or other amounts constituting Obligations);


 


8.2                                 (a) If
Borrower fails or neglects to perform, keep, or observe, in any material
respect, any term, provision, condition, covenant, or agreement contained in Section 6.2
of this Agreement and such failure continues for a period of five (5) days
from the date of such failure or neglect; (b) If Borrower fails or
neglects to perform, keep, or observe, in any material respect, any term,
provision, condition, covenant, or agreement contained in Sections 6.3,
6.4, 6.5, 6.8, 6.15, 6.16, or 6.17 of this Agreement and such failure
continues for a period of fifteen (15) days from the date of such failure
or neglect; (c) If Borrower fails or neglects to perform, keep, or
observe, in any material respect, any term, provision, condition, covenant, or
agreement contained in Sections 6.1 and 6.9 of this Agreement and
such failure continues for a period of fifteen (15) days from the date
Foothill sends Borrower written notice of such failure or neglect; and (d) If
Borrower or any other Obligor fails or neglects to perform, keep, or observe,
in any material respect, any other term, provision, condition, covenant, or
agreement contained in this Agreement, in any of the other Loan Documents, or
in any other present or future agreement between Borrower or such other
Obligor, on the one hand, and Foothill, on the other (other than any such term,
provision, condition, covenant, or agreement contained in Section 5 hereof
or that is the subject of another provision of this Section 8);


 


49





















 


8.3                                 If
there is a material impairment of the prospect of repayment of any portion of
the Obligations owing to Foothill or a material impairment of the value or
priority of Foothill’s security interests in the Collateral and such material
impairment is not cured within five (5) days of the date on which
Foothill sends Borrower written notice thereof; provided, however,
that Foothill need not give any such notice in cases involving fraud,
intentional misrepresentation, or conversion of the Collateral;


 


8.4                                 If
any material portion of any Obligor’s properties or assets is attached, seized,
subjected to a writ or distress warrant, or is levied upon, or comes into the
possession of any third Person in connection with a claim of $250,000, or more,
and such attachment, seizure, writ, warrant, or levy is not released,
discharged, or bonded against within fifteen (15) days of the date it
first arises;


 


8.5                                 If
an Insolvency Proceeding is commenced by any Obligor;


 


8.6                                 If
an Insolvency Proceeding is commenced against any Obligor and any of the
following events occur:  (a) any
Obligor consents to the institution of the Insolvency Proceeding against it; (b) the
petition commencing the Insolvency Proceeding is not timely controverted; (c) the
petition commencing the Insolvency Proceeding is not dismissed within
sixty (60) calendar days of the date of the filing thereof; provided,
however, that, during the pendency of such period, Foothill shall be relieved
of its obligation to make additional advances, Capital Expenditure Loans, or
issue additional L/Cs or L/C Guarantees hereunder; (d) an interim trustee
is appointed to take possession of all or a substantial portion of the
properties or assets of, or to operate all or any substantial portion of the
business of, any Obligor and such interim trustee is not removed within
sixty (60) calendar days of the date of the appointment thereof; provided,
however, that, during the pendency of such period, Foothill shall be relieved
of its obligation to make additional advances, Capital Expenditure Loans, or
issue additional L/Cs or L/C Guarantees hereunder; or (e) an order for
relief shall have been issued or entered therein;


 


8.7                                 If
any Obligor is enjoined, restrained, or in any way prevented by court order
from continuing to conduct all or any material part of its business affairs and
such injunction, restraint, or other prevention has continued for twenty (20)
consecutive days;


 


8.8                                 (a) If
a notice of lien, levy, or assessment is filed of record with respect to any
properties of any Obligor or assets by the United States Government, or any
department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien, whether choate or
otherwise, upon any properties of any Obligor or assets and, in any such case,
the aggregate amount of such taxes or debts is in excess of Twenty Five
Thousand Dollars ($25,000) and less than Two Hundred Fifty Thousand Dollars
($250,000) and within five (5) days of the filing or attachment of
same, Borrower does not instruct Foothill to reserve the entire amount thereof
(together with interest and penalties projected to be added thereto) from the
Borrowing Base; or (b) If a notice of lien, levy, or assessment is filed
of record with respect to any properties of any Obligor or assets by the United
States Government, or any department, agency, or instrumentality thereof, or by
any state, county, municipal, or governmental agency, or if any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any of Borrower’s properties or


 


50





















 


assets and, in any such case, the aggregate amount of
such taxes or debts is in equal to or in excess of Two Hundred Fifty Thousand
Dollars ($250,000);


 


8.9                                 If
a judgment or other claim becomes a lien or encumbrance upon any material
portion of any Obligor’s properties or assets and such liens or encumbrances
are not released, discharged, or bonded against within twenty (20) days of the
date they first arise;


 


8.10                           (a) If
there is a default in any material agreement respecting Indebtedness of any
Obligor resulting in a right by the third Person to such agreement,
irrespective of whether exercised, to accelerate the maturity of such Obligor’s
Indebtedness thereunder, or (b) If there is a termination of a material
License Agreement by the licensor thereunder as a result of an alleged breach
thereof by Borrower or any of its Subsidiaries, if the termination of such
License Agreement reasonably could be expected to have a Material Adverse
Effect.


 


8.11                           If
any Obligor makes any payment on account of Indebtedness that has been
contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;


 


8.12                           If
any material misstatement or misrepresentation exists now or hereafter in any
warranty, representation, statement, or report made to Foothill by Borrower or
any other Obligor or any officer, employee, agent, or director of Borrower or
such Obligor, or if any such material warranty or representation is withdrawn;
or


 


8.13                           If
the obligation of any third Person under any Loan Document is limited or
terminated by operation of law or by the third Person thereunder, or any such
third Person becomes the subject of an Insolvency Proceeding.


 


9.                                      FOOTHILL’S RIGHTS AND REMEDIES.


 


9.1                                 Rights and Remedies. 
Upon the occurrence, and during the continuation, of an Event of Default
Foothill may, at its election, without notice of its election and without
demand, do any one or more of the following, all of which are authorized by
Borrower:


 


(a)                                  Declare
all Obligations, whether evidenced by this Agreement, by any of the other Loan
Documents, or otherwise, immediately due and payable;


 


(b)                                 Cease
advancing money or extending credit to or for the benefit of Borrower under
this Agreement, under any of the Loan Documents, or under any other agreement
between Borrower and Foothill;


 


(c)                                  Terminate
this Agreement and any of the other Loan Documents as to any future liability
or obligation of Foothill, but without affecting Foothill’s rights and security
interests in the Collateral and without affecting the Obligations;


 


(d)                                 Settle
or adjust disputes and claims directly with Account Debtors for amounts and upon
terms which Foothill considers advisable, and in such cases, Foothill will
credit Borrower’s Loan Account with only the net amounts received by Foothill
in payment of


 


51





















 


such disputed Accounts after deducting all Foothill
Expenses incurred or expended in connection therewith;


 


(e)                                  Cause
Borrower or any its Subsidiaries to hold all returned Inventory in trust for
Foothill, segregate all returned Inventory from all other property of Borrower
or such Subsidiary or in Borrower’s or such Subsidiary’s possession and
conspicuously label said returned Inventory as the property of Foothill;


 


(f)                                    Without
notice to or demand upon Borrower, make such payments and do such acts as
Foothill considers necessary or reasonable to protect its security interests in
the Collateral.  Borrower agrees to
assemble the Collateral if Foothill so requires, and to make the Collateral
available to Foothill as Foothill may designate.  Borrower, for itself and each of its
Subsidiaries, authorizes Foothill to enter the premises where the Collateral is
located, to take and maintain possession of the Collateral, or any part of it,
and to pay, purchase, contest, or compromise any encumbrance, charge, or lien
that in Foothill’s determination appears to conflict with its security
interests and to pay all expenses incurred in connection therewith.  With respect to any of Borrower’s or its
Subsidiaries’ owned premises, Borrower, for itself and each of its
Subsidiaries, hereby grants Foothill a license to enter into possession of such
premises and to occupy the same, without charge, for up to one hundred
twenty (120) days in order to exercise any of Foothill’s rights or
remedies provided herein, at law, in equity, or otherwise;


 


(g)                                 Without
notice to Borrower (such notice being expressly waived), and without
constituting a retention of any collateral in satisfaction of an obligation
(within the meaning of Section 9620 of the Code), set off and apply to the
Obligations any and all (i) balances and deposits of Borrower or its
Subsidiaries held by Foothill (including any amounts received in the Blocked
Account), or (ii) indebtedness at any time owing to or for the credit or
the account of Borrower or any of its Subsidiaries held by Foothill;


 


(h)                                 Hold,
as cash collateral, any and all balances and deposits of Borrower or any of its
Subsidiaries held by Foothill, and any amounts received in the Lockbox
Accounts, to secure the full and final repayment of all of the Obligations;


 


(i)                                     Ship,
reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise
for sale, and sell (in the manner provided for herein) the Collateral, but only
to the extent that Borrower or any of its Subsidiaries has rights therein.  To the maximum extent permitted by law, Foothill
is hereby granted a license or other right to use, without charge, Borrower’s
and its Subsidiaries’ labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral and
Borrower’s and its Subsidiaries’ rights under all licenses and all franchise
agreements shall inure to Foothill’s benefit;


 


(j)                                     Sell
the Collateral at either a public or private sale, or both, by way of one or
more contracts or transactions, for cash or on terms, in such manner and at
such places (including Borrower’s premises) as Foothill determines is
commercially reasonable.  It is not
necessary that the Collateral be present at any such sale;


 


52





















 


(k)                                  Foothill
shall give notice of the disposition of the Collateral as follows:


 


(A)                              Foothill
shall give Borrower or any of its applicable Subsidiaries and each holder of a
security interest in the Collateral who has filed with Foothill a written
request for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than a public
sale is to be made of the Collateral, then the time on or after which the
private sale or other disposition is to be made;


 


(B)                                The
notice shall be personally delivered or mailed, postage prepaid, to Borrower or
such Subsidiary as provided in Section 12, at least ten (10) days
before the date fixed for the sale, or at least ten (10) days before
the date on or after which the private sale or other disposition is to be made;
no notice needs to be given prior to the disposition of any portion of the
Collateral that is perishable or threatens to decline speedily in value or that
is of a type customarily sold on a recognized market.  Notice to Persons other than Borrower or such
Subsidiary claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Foothill; and


 


(C)                                If
the sale is to be a public sale, Foothill also shall give notice of the time
and place by publishing a notice one time at least ten (10) days
before the date of the sale in a newspaper of general circulation in the county
in which the sale is to be held;


 


(l)                                     Foothill
may credit bid and purchase at any public sale; and


 


(m)                               Any
deficiency that exists after disposition of the Collateral as provided above
will be paid immediately by Borrower. 
Any excess will be returned, without interest and subject to the rights
of third Persons, by Foothill to Borrower.


 


9.2                                 Remedies Cumulative. 
Foothill’s rights and remedies under this Agreement, the other Loan
Documents, and all other agreements shall be cumulative.  Foothill shall have all other rights and
remedies not inconsistent herewith as provided under the Code, by law, or in
equity.  No exercise by Foothill of one
right or remedy shall be deemed an election, and no waiver by Foothill of any
Event of Default shall be deemed a continuing waiver.  No delay by Foothill shall constitute a
waiver, election, or acquiescence by it.


 


10.                               TAXES AND EXPENSES.


 


If Borrower or any of its Subsidiaries fails to pay
any monies (whether taxes, rents, assessments, insurance premiums, or, in the
case of leased properties or assets, rents or other amounts payable under such
leases) due to third Persons, or fails to make any deposits or furnish any
required proof of payment or deposit, all as required under the terms of this
Agreement, then, to the extent that Foothill determines that such failure by
Borrower or such Subsidiary reasonably could be expected to have a material
adverse effect on Foothill’s interests in the Collateral, in its discretion,
Foothill may do any or all of the following: 
(a) make payment of the same or any part thereof; (b) set up
such reserves in Borrower’s Loan Account as Foothill deems necessary to protect
Foothill from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in Section 6.11,
and take any action with respect to such policies as Foothill deems
prudent.  Any such amounts paid by
Foothill shall


 


53





















 


constitute Foothill Expenses.  Foothill agrees to provide Borrower with
concurrent notice of any action taken by it under clauses (a), (b), or (c) above.  Any such payments made by Foothill shall not
constitute an agreement by Foothill to make similar payments in the future or a
waiver by Foothill of any Event of Default under this Agreement.  Foothill need not inquire as to, or contest
the validity of, any such expense, tax, security interest, encumbrance, or lien
and the receipt of the usual official notice for the payment thereof shall be
conclusive evidence that the same was validly due and owing.


 


11.                               WAIVERS; INDEMNIFICATION.


 


11.1                           Demand; Protest; etc. 
Borrower waives demand, protest, notice of protest, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment
at maturity, release, compromise, settlement, extension, or renewal of
accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which Borrower may in any way be liable.


 


11.2                           Foothill’s Liability for Collateral.  So long as Foothill complies with its
obligations, if any, under Section 9207 of the Code, Foothill shall not in
any way or manner be liable or responsible for: 
(a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other Person.  All risk of loss, damage, or destruction of
the Collateral shall be borne by Borrower.


 


11.3                           Indemnification. 
Borrower agrees to defend, indemnify, save, and hold Foothill and its
officers, employees, and agents harmless against:  (a) all obligations, demands, claims,
and liabilities claimed or asserted by any other Person arising out of or
relating to the transactions contemplated by this Agreement or any other Loan
Document, and (b) all losses (including attorneys fees and disbursements)
in any way suffered, incurred, or paid by Foothill as a result of or in any way
arising out of, following, or consequential to the transactions contemplated by
this Agreement or any other Loan Document, except, in any such case, to the
extent that the same arises from the gross negligence or willful misconduct of
the indemnified Person.  This provision
shall survive the termination of this Agreement.


 


12.                               NOTICES.


 


Unless otherwise provided in this Agreement, all
notices or demands by any party relating to this Agreement or any other Loan
Document shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by registered or certified mail (postage
prepaid, return receipt requested), overnight courier, or telefacsimile to
Borrower or to Foothill, as the case may be, at its address set forth below:


 


54





















 


If to Borrower:                                                                   IMAGE ENTERTAINMENT, INC.

20525 Nordhoff Street, Suite 200

Chatsworth, California  91311 

Attn.:  Jeffrey M. Framer 

Telefacsimile No. (818) 407-9331


 


with a copy to:                                                                 IMAGE ENTERTAINMENT, INC.

20525 Nordhoff Street, Suite 200 

Chatsworth, California  91311 

Attn.:  Dennis Hohn Cho, Esq.  

Telefacsimile No. (818) 407-9331


 


If to Foothill                                                                              WELLS FARGO FOOTHILL, INC.

2450 Colorado Avenue

Suite 3000 West

Santa Monica, California 90404

Attn: Business Finance Division Manager

Fax No: (310) 453-7442


 


with a copy to:                                                                 PAUL HASTINGS JANOFSKY & WALKER LLP  

515 South Flower Street , 25th Floor

Los Angeles, California  90071 

Attn:  John Francis Hilson, Esq.  

Telefacsimile No. (213) 683-6300


 


The parties hereto may change the address at which
they are to receive notices hereunder, by notice in writing in the foregoing
manner given to the other.  All notices
or demands sent in accordance with this Section 12, other than notices by
Foothill in connection with enforcement rights against the Borrower or its
Subsidiaries under the provisions of the Code, shall be deemed received on the
earlier of the date of actual receipt or three (3) days after the
deposit thereof in the mail.  Borrower
acknowledges and agrees that notices sent by Foothill in connection with the
exercise of enforcement rights against Borrower Collateral under the provisions
of the Code shall be deemed sent when deposited in the mail or transmitted by
telefacsimile or other similar method set forth above.


 


13.                               CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.


 


THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND
THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL
MATTERS ARISING HEREUNDER AND THEREUNDER OR RELATED HERETO OR THERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS
PRINCIPLES.  THE PARTIES AGREE THAT ALL
ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE


 


55





















 


STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF
LOS ANGELES, STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING
ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT
FOOTHILL’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR
OTHER PROPERTY MAY BE FOUND.  EACH
OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW,
ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR
TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH
THIS SECTION 13.  BORROWER AND
FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY
OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY
CLAIMS.  BORROWER AND FOOTHILL REPRESENT
THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS
JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.  IN THE EVENT OF LITIGATION, A COPY OF THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.


 


14.                               DESTRUCTION OF BORROWER’S DOCUMENTS.


 


All documents, schedules, invoices, agings, or other
papers delivered to Foothill may be destroyed or otherwise disposed of by
Foothill four (4) months after they are delivered to or received by
Foothill, unless Borrower requests, in writing, the return of said documents,
schedules, or other papers and makes arrangements, at Borrower’s expense, for
their return.


 


15.                               GENERAL PROVISIONS.


 


15.1                           Effectiveness.  This
Agreement shall be binding and deemed effective when executed by Borrower and
Foothill.


 


15.2                           Successors and Assigns. 
This Agreement shall bind and inure to the benefit of the respective
successors and assigns of each of the parties; provided, however, that Borrower
may not assign this Agreement or any rights or duties hereunder without
Foothill’s prior written consent and any prohibited assignment shall be
absolutely void.  No consent to an
assignment by Foothill shall release Borrower from its Obligations.  Foothill may assign this Agreement and its
rights and duties hereunder and no consent or approval by Borrower is required
in connection with any such assignment. 
Foothill reserves the right to sell, assign, transfer, negotiate, or
grant participations in all or any part of, or any interest in Foothill’s
rights and benefits hereunder.  In
connection with any such assignment or participation, Foothill may disclose all
documents and information which Foothill now or hereafter may have relating to
Borrower or Borrower’s business.  To the
extent that Foothill assigns its rights and obligations hereunder to a third
Person, Foothill thereafter shall be released from such assigned obligations


 


56





















 


to Borrower and such assignment shall effect a
novation between Borrower and such third Person.  Anything to the contrary contained herein
notwithstanding, Foothill agrees that so long as no Event of Default has
occurred and is continuing, Foothill will not assign any of its rights and
obligations hereunder without the prior written consent of Borrower which
consent shall not be unreasonably withheld; provided, however, that Borrower’s
consent shall not be required in connection with the assignment of Foothill’s
rights hereunder made in connection with the sale of all or a substantial
portion of Foothill’s commercial loan portfolio.  No such consent of Borrower shall be required
in connection with the grant by Foothill of any participation interest in its
rights and benefits hereunder.


 


15.3                           Confidentiality. 
Foothill agrees to hold all material information obtained by it pursuant
to the requirements of this Agreement in accordance with its customary
procedures for handling confidential information; it being understood and
agreed by Borrower that in any event Foothill may make disclosures (a) reasonably
required by any bona fide potential or actual assignee, transferee, or
participant in connection with any contemplated or actual assignment or
transfer by Foothill of an interest herein or any participation interest in
Foothill’s rights hereunder, (b) of information that has become public by
disclosures made by Persons other than Foothill, its Affiliates, assignees,
transferees, or participants, or (c) as required or requested by any
court, governmental or administrative agency, pursuant to any subpoena or other
legal process, or by any law, statute, regulation, or court order; provided,
however, that, unless prohibited by applicable law, statute, regulation, or
court order, Foothill shall notify Borrower of any request by any court,
governmental or administrative agency, or pursuant to any subpoena or other
legal process for disclosure of any such non-public material information
concurrent with, or where practicable, prior to the disclosure thereof.


 


15.4                           Section Headings. 
Headings and numbers have been set forth herein for convenience
only.  Unless the contrary is compelled
by the context, everything contained in each section applies equally to
this entire Agreement.


 


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


 


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


 


15.7                           Amendments in Writing. 
This Agreement can only be amended by a writing signed by both Foothill
and Borrower.


 


15.8                           Counterparts; Telefacsimile Execution.  This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same
Agreement.  Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of a


 


57





















 


manually executed counterpart of this Agreement.  Any party delivering an executed counterpart
of this Agreement by telefacsimile also shall deliver a manually executed
counterpart of this Agreement but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect
of this Agreement.


 


15.9                           Revival and Reinstatement of Obligations.  If the incurrence or payment of the
Obligations by Borrower or the transfer by Borrower to Foothill of any property
of Borrower should for any reason subsequently be declared to be void or
voidable under any state or federal law relating to creditors’ rights,
including provisions of the Bankruptcy Code relating to fraudulent conveyances,
preferences, and other voidable or recoverable payments of money or transfers
of property (collectively, a “Voidable Transfer”), and if Foothill is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of Foothill related thereto, the liability of Borrower
automatically shall be revived, reinstated, and restored and shall exist as
though such Voidable Transfer had never been made.


 


15.10                     Integration.  This
Agreement, together with the other Loan Documents, reflects the entire
understanding of the parties with respect to the transactions contemplated
hereby and shall not be contradicted or qualified by any other agreement, oral
or written, before the date hereof.


 


15.11                     Borrower Acknowledgment of Prior Obligations and Continuation Thereof.  Borrower (a) consents to the
amendment and restatement of the Existing Loan Agreement by this Agreement; (b) acknowledges
and agrees that (i) its obligations owing to Foothill, and (ii) the
prior grant or grants (if any) of security interests in favor of Foothill in
its properties and assets, under each “Loan Document” (as defined in the
Existing Loan Agreement; hereinafter referred to as the “Original Loan
Documents”) and each Loan Document to which it is a party shall be in
respect of the obligations of Borrower under this Agreement and the other Loan
Documents; (c) reaffirms (i) all of its obligations owing to
Foothill, and (ii) all prior grants (if any) of security interests in
favor of Foothill under each Original Loan Document and each Loan Document; and
(d) agrees that, except as expressly amended hereby, each of the Original
Loan Documents to which it is a party is and shall remain in full force and
effect.  Borrower acknowledges that, as
of the Restatement Effective Date, under the Existing Loan Agreement: (i) the
aggregate outstanding principal amount of the Advances is $11,643,335.41, (ii) the
accrued but unpaid interest on such Advances and accrued fees is $22,615.36, (iii) the
aggregate outstanding principal amount of the Capital Expenditure Loan is
$0.00, (iv) the accrued but unpaid interest on such Capital Expenditure
Loan is $0.00, (v) the accrued but unpaid fee pursuant to Section 2.2(d) is
$0.00 and (vi) the accrued but unpaid fee pursuant to Section 2.10(c) of
the Existing Loan Agreement is $0.00. 
Borrower hereby confirms and agrees that all outstanding principal,
interest and fees (including such accrued and unpaid principal, interest and
fees set forth in the immediately preceding sentence) and other obligations
under the Existing Loan Agreement immediately prior to the Restatement
Effective Date shall, to the extent not paid on the Restatement Effective Date,
from and after the Restatement Effective Date, be, without duplication, Obligations
owing and payable pursuant to this Agreement (with respect to all such amounts,
payable on the first day of calendar month occurring following the Restatement
Effective Date as part of all other amounts payable on such date) and the other
Loan


 


58





















 


Documents as in effect from time to time, shall accrue
interest thereon as specified in this Agreement, and shall be secured by this
Agreement and the other Loan Documents. 
Although Borrower has been informed of the matters set forth herein and
has acknowledged and agreed to same, it understands that Foothill shall have no
obligation to inform it of such matters in the future or to seek its
acknowledgement or agreement to future amendments or modifications, and nothing
herein shall create such a duty.


 


15.12                     No Novation.  This Agreement does not extinguish the
obligations for the payment of money outstanding under the Existing Loan
Agreement or discharge or release the obligations or the liens or priority of
any mortgage, pledge, security agreement or any other security therefor.  Nothing herein contained shall be construed
as a substitution or novation of the obligations outstanding under the Existing
Loan Agreement, the other Original Loan Documents or instruments securing the
same, which shall remain in full force and effect, except as modified hereby or
by instruments executed concurrently herewith. 
Nothing expressed or implied in this Agreement shall be construed as a
release or other discharge of the Borrower from any of its obligations or
liabilities under the Existing Financing Agreement or any of the security
agreements, pledge agreements, mortgages, guaranties or other loan documents
executed in connection therewith. 
Borrower hereby (a) confirms and agrees that each Original Loan
Document to which it is a party that is not being amended and restated
concurrently herewith is, and shall continue to be, in full force and effect
and is hereby ratified and confirmed in all respects except that on and after the
Restatement Effective Date, all references in any such Original Loan Document
to “the Loan and Security Agreement,” “the Loan Agreement,” “thereto,” “thereof,”
“thereunder” or words of like import referring to the Existing Loan Agreement
shall mean the Existing Loan Agreement as amended and restated by this
Agreement; and (b) confirms and agrees that to the extent that any such
Original Loan Document purports to assign or pledge to Foothill or to grant to
Foothill a security interest in or lien on, any collateral as security for the
obligations of the Borrower from time to time existing in respect of the
Existing Loan Agreement, such pledge or assignment or grant of the security
interest or lien is hereby ratified and confirmed in all respects.


 


59





















 


IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed in Los Angeles, California.


 


	
   

  	
  WELLS FARGO FOOTHILL, INC.,

  
	
   

  	
  a California corporation

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  IMAGE ENTERTAINMENT, INC.,

  
	
   

  	
  a California corporation

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Title:

  	
   

  
				



 


60