Prepared by MerrillDirect





LOAN AND SECURITY AGREEMENT


BETWEEN


WELLS FARGO RETAIL FINANCE LLC


AND


PAPER WAREHOUSE, INC., ET AL


TABLE OF CONTENTS


 


ARTICLE 1 - THE
REVOLVING CREDIT


1-1.       Establishment of
Revolving Credit



1-2.       Availability



1-3.       Risks of Value of Inventory



1-4.       Procedures Under
Revolving Credit



1-5.       The Loan Account



1-6.       The Master Note



1-7.       Payment of Loan Account



1-8.       Interest



1-9.       Fees



1-10.     Lender’s Discretion



1-11.     Fees for L/C’s



1-12.     Concerning L/C’s



ARTICLE 2 - GRANT
OF SECURITY INTEREST


2-1.       Grant of Security Interest



2-2.       Deposit Accounts



2-3.       Collateral in
the Possession of a Bailee



2-4
       Letter of Credit Rights






2-5.
      Commercial Tort Claims



2-6.
      Authorization
to File Financing Statements



2-7.       Extent and
Duration of Security Interest



ARTICLE 3 - DEFINITIONS


ARTICLE 4 - CONDITIONS
PRECEDENT


4-1.       Corporate Due Diligence



4-2.       Opinion



4-3.       Cash
Management, Control Agreements and Additional Documents



4-4.       Key Life Policies



4-5.       Officers’ Certificates



4-6.       Representations and
Warranties



4-7.       Initial Minimum
Excess Availability



4-8.       No Event of Default



4-9.       No
Material Adverse Change



4-10.     Delivery of Warrants



4-11.     Landlord Waivers
and “Access Agreements”



4-12.     Delivery of Documents



ARTICLE
5 - GENERAL REPRESENTATIONS. WARRANTIES AND COVENANTS


5-1.       Payment and
Performance of Liabilities



5-2.       Due
Organization - Authorization - No Conflicts



5-3.       Trade Names



5-4.       Location,
Landlord’s Consents, Waivers



5-5.       Title to Assets



5-6.       Indebtedness



5-7.       Insurance Policies



5-8.       Licenses



5-9.       Leases and Capital Leases



5-10.     Requirements of Law



5-11.     Maintain Properties






5-12.     Pay Taxes



5-13.     No Margin Stock



5-14.     ERISA



5-15.     Hazardous Materials



5-16.     Litigation



5-17.     Dividends or Investments



5-18.     Loans



5-19.     Protection of Assets



5-20.     Line of Business



5-21.     Affiliate Transactions



5-22.     Executive Pay



5-23.     Additional Assurances



5-24.     Adequacy of Disclosure



5-25.     Minimum Excess Availability



5-26.     No Material Adverse Change



5-27.     Other Covenants



5-28.     Covenants
Regarding Franchise Agreements



ARTICLE 6 -
USE AND COLLECTION OF COLLATERAL


6-1.       Use of Inventory Collateral



6-2.       Inventory Quality



6-3.       Adjustments and Allowances



6-4.       Validity of Accounts



6-5.       Notification to Account
Debtors



ARTICLE 7 - CASH MANAGEMENT


7-1.       Depository Accounts



7-2.       Credit Card Receipts



7-3.       The
Concentration Account, the Blocked Account and the Funding Accounts



7-4.       Proceeds and
Collection of Accounts






7-5.       Payment of Liabilities



7-6.       The Funding Account



7-7.       Capital Infusions, Etc.



ARTICLE
8 - LENDER AS BORROWER’S ATTORNEY-IN-FACT


8-1.       Appointment as
Attorney-In-Fact



8-2.       No Obligation to Act



ARTICLE
9 - FINANCIAL AND OTHER REPORTING REQUIREMENTS/FINANCIAL COVENANTS


9-1.       Maintain Records



9-2.       Access to Records



9-3.       Immediate Notice to Lender



9-5.       Weekly Reports



9-6.       Monthly Reports



9-7.       Annual Reports



9-8.       Officers’ Certificates



9-9.       Inventories,
Appraisals, and Audits



9-10.     Additional Financial
Information



9-11.     Financial
Performance and Inventory Covenants



9-12.     Electronic Reporting



ARTICLE 10 - EVENTS OF
DEFAULT


10-1.     Failure
to Pay Revolving Credit (No Grace Period)



10-2.     Failure
To Make Other Payments (No Grace Period)



10-3.     Failure
to Comply with Cash Management and Financial/Inventory Covenants  (No Grace Period)



10-4.     Failure
to Perform Covenant or Liability (Grace Period)



10-5.     Misrepresentation
(No Grace Period)



10-6.     Acceleration
of Other Debt; Breach of Lease



10-7.     Default Under Other
Agreements



10-8.     Casualty
Loss; Non-Ordinary Course Sales (No Grace Period)



10-9.     Judgment;
Restraint of Business  (No Grace Period)






10-10.   Business
Failure (Grace Period if initiated against any Borrower)



10-11.   Bankruptcy (No Grace
Period)



10-12.   Insecurity (No Grace
Period)



10-13.   Default by
Guarantor or Related Entity



10-14.   Indictment -
Forfeiture (Grace Period)



10-15.   Termination of Guaranty



10-16.   Challenge
to Loan Documents (No Grace Period)



10-17.   Executive Management
(Grace Period)



10-18.   Change in Control
(No Grace Period)



10-19.   Material
Adverse Change (No Grace Period)



ARTICLE 11
- RIGHTS AND REMEDIES UPON DEFAULT


11-1.     Rights of Enforcement



11-2.
    Sale of Collateral



11-3.     Occupation of Business
Location



11-4.     Grant of Nonexclusive
License



11-5.
    Assembly of Collateral



11-6.     Rights and Remedies



11-7
     Standards for
Exercising Remedies



ARTICLE 12 - NOTICES


12-1.     Notice Addresses



12-2.     Notice Given



ARTICLE 13 - TERM


13-1.     Termination of Revolving
Credit



13-2.     Effect of Termination



13-3.     Early Termination Premium



ARTICLE 14 - GENERAL


14-1.     Protection of Collateral



14-2.     Successors and Assigns






14-4.     Amendments; Course of
Dealing



14-5.     Power of Attorney



14-6.     Application of Proceeds



14-7.     Lender’s Cost and Expenses



14-8.     Copies and Facsimiles



14-9.     Massachusetts Law



14-10.   Consent to Jurisdiction



14-11.   Indemnification



14-12.   Right of Set-Off



14-13.   Usury Savings Clause



14-14.   Waivers



14-15.   Confidentiality



14-16.   Right to Publish Notice



14-17.   Right of First Refusal



14-18.   Credit Inquiries











EXHIBITS




	1-6	Master Note
	1-8(b)	Eurodollar
  Conversion /Continuation
	2-2(c)	Excluded
  Capital Leases
	3	Definitions
	5-2	Related
  Entities
	5-3	Trade
  Names
	5-4	Locations
	5-5	Encumbrances
	5-6	Indebtedness
	5-7	Insurance
  Policies
	5-9	Leases/Equipment
  Leases
	5-12	Taxes
	5-16	Litigation
	5-22	Executive
  Agreements
	5-28	Franchise
  Agreements
	7-1	DDA’s
	7-2	Credit
  Card Arrangements
	7-6	Disbursement
  Accounts
	9-R	Reporting
  Requirements
	9-4	Borrowing
  Base Certificate
	9-10	Business
  Plan
	9-11	Financial
  Performance Covenants






 











             THIS
AGREEMENT is made between Wells Fargo Retail Finance LLC (hereinafter, “WFRF” or
“Lender”), a Delaware limited liability company with its principal executive
offices at One Boston Place, 18th Floor, Boston, Massachusetts 02108
and Paper Warehouse, Inc. a Minnesota corporation with its principal executive
offices at 7630 Excelsior Boulevard, Minneapolis, Minnesota, 55426-4504
(hereinafter “Paper Warehouse”), jointly and severally withPaper Warehouse Franchising,
Inc. a Minnesota corporation with its principal executive offices at 7630
Excelsior Boulevard, Minneapolis, Minnesota, 55426-4504 (hereinafter “PWFI”),
PartySmart.com, Inc. a Minnesota corporation with its principal executive
offices at 7630 Excelsior Boulevard, Minneapolis, Minnesota, 55426-4504
(“PartySmart”) (hereinafter Paper Warehouse, PWFI and PartySmart may be
collectively referred to as collectively Borrowers and any one of them individually
as “Borrower”),
in consideration of the mutual covenants contained herein and benefits to be
derived herefrom,


WITNESSETH:


ARTICLE 1 - THE
REVOLVING CREDIT


             1-1.       Establishment of
Revolving Credit


                           (a)         The Lender establishes a revolving line
of credit (the “Revolving Credit”) in the Borrowers’ favor pursuant to which
the Lender, subject to, and in accordance with, this Agreement, shall make
loans and advances and otherwise provide financial accommodations to and for
the account of the Borrowers as provided herein. The amount of the Revolving
Credit shall be determined by the Lender by reference to Availability, as
determined by the Lender from time to time hereafter. All loans made by the
Lender under this Agreement, and all of the Borrowers’ other Liabilities to the
Lender under or pursuant to this Agreement, are payable as provided herein.


                           (b)        The Lender agrees, subject to the terms
and conditions of this Agreement, and at all times only to the extent of
Availability, to make loans to the Borrower.


                          (c)         Availability
shall be calculated based upon Borrowing Base Certificates furnished as
provided in Section 9-4, below.


                           (d)        Anything to the contrary in Section
1-1(b) above notwithstanding, Lender, in the exercise of its discretion, may
reduce Advance Rates, maximum Effective Advance Rates or create Reserves
without declaring an Event of Default if it determines that (i) there has
occurred a Material Adverse Change; or (ii) Borrower is not in compliance with
covenants set forth in EXHIBIT 9-11.


                           (e)         The proceeds of loans and advances
under the Revolving Credit shall be used solely in accordance with the Business
Plan for working capital purposes and general corporate purposes of the
Borrowers and for its Capital Expenditures, all solely to the extent permitted
by this Agreement and to pay in full Borrower’s previous credit facility.


             1-2.       Availability. The Lender does
not have any obligation to make any loan or advance, or otherwise to provide
any credit for the benefit of any Borrower in excess of Availability. The
making of loans, advances, and credits and the providing of financial
accommodations in excess of Availability is for the benefit of any Borrower and
does not affect the obligations of the Borrowers hereunder; such loans,
advances, credits, and financial accommodations constitute Liabilities. The
making of any such loans, advances, and credits and the providing of financial
accommodations, on any one occasion in excess of Availability shall not
obligate the Lender to make any such loans, credits, or advances or to provide
any financial accommodation on any other occasion nor to permit such loans,
credits, or advances to remain outstanding.


             1-3.       Risks of Value of Inventory.  The Lender’s reference to a given asset in
connection with the making of loans and advances and the providing of financial
accommodations under the Revolving Credit and/or the monitoring of compliance
with the provisions hereof shall not be deemed a determination by the Lender
relative to the actual value of the asset in question. All risks concerning the
saleability of the Inventory are and remain upon the Borrowers. All Collateral
secures the prompt, punctual, and faithful performance of the Liabilities
whether or not relied upon by the Lender in connection with the making of
loans, credits, and advances and the providing of financial accommodations
under the Revolving Credit.


             1-4.       Procedures Under
Revolving Credit.


                           (a)         Paper Warehouse may request loans and
advances under the Revolving Credit, each in an amount of not less than Ten
Thousand ($10,000) Dollars. Each such request shall be in such manner as may
from time to time be acceptable to the Lender.


                           (b)        The Lender, subject to the terms and
conditions of this Agreement, will provide the Borrowers with the loan or advance
so requested, if such request is received by 2:30P.M., Boston time on a Banking
Day, by the end of business on that Banking Day; otherwise, by the end of the
then next Banking Day.  The Lender may
revise such schedule, from time to time, by giving notice to Paper Warehouse at
least one day in advance.


                           (c)         Provided that Availability will not be
exceeded (but subject, however, to Subsection 1-4(i), below (which deals with
the effect of a Suspension Event)), a loan or advance under the Revolving
Credit so requested by the Borrower shall be made by the transfer of the
proceeds of such loan or advance to the Funding Account.


                           (d)        A loan or advance shall be deemed to
have been made under the Revolving Credit upon:


                                        (i)          The Lender’s initiation of the transfer
of the proceeds of such loan or advance in accordance with any Borrower’s
instructions (if such loan or advance is of funds requested by the Borrower).


                                        (ii)         The charging of the amount of such loan
or advance to the Loan Account (in all other circumstances).


                           (e)
        There shall not be any recourse
to, nor liability of, the Lender on account of any of the following which is
not caused by Lender’s gross negligence or willful misconduct:


                                        (i)          Any delay in the making of any loan or
advance requested under the Revolving Credit.


                                        (ii)         Any delay in the proceeds of any such
loan or advance constituting collected funds.


                                        (iii)        Any delay in the receipt, and/or any
loss, of funds which constitute a loan or advance under the Revolving Credit,
the wire transfer of which was initiated by the Lender in accordance with wire
instructions provided to the Lender by any Borrower.


                           (f)         The Lender may rely on any request for
a loan or advance or financial accommodation which the Lender, in good faith,
believes to have been made by a person duly authorized to act on behalf of any
Borrower and may decline to make any such requested loan or advance or to
provide any such financial accommodation until the Lender is furnished with
such documentation concerning that Person’s authority to act as may be
satisfactory to the Lender.


                           (g)        A request by any Borrower for any loan
or advance or financial accommodation under the Revolving Credit or of the
issuance of an L/C shall be irrevocable and shall constitute certification by
any Borrower that as of the date of such request, each of the following is true
and correct:


                                        (i)          There has been no Material Adverse
Change.


                                        (ii)         Each Borrower is in compliance with,
and has not breached any of, its covenants contained in this Agreement.


                                        (iii)        Each representation which is made herein
or in any of the Loan Documents is then true and complete as of and as if made
on the date of such request.


                                        (iv)       No Suspension Event is then in existence.


                           (h)        The Borrowers shall immediately become indebted
to the Lender for the amount of each loan or advance under or pursuant to this
Agreement when such loan or advance is deemed to have been made.


                           (i)          Upon the occurrence from time to time
of any Suspension Event, the Lender may suspend the Revolving Credit
immediately and shall not be obligated, during such suspension, to make any
loan or advance or to provide any financial accommodation hereunder.


                           (j)          Paper Warehouse may request that the
Lender cause the issuance of L/C’s for the account of the Paper Warehouse.


                                        (i)          Each such request shall be in such
manner as may from time to time be acceptable to the Lender.


                                        (ii)         The Lender will endeavor to cause the
issuance of any L/C so requested by the Paper Warehouse, provided that the
requested L/C is in form satisfactory to the Lender and if so issued:


	 	(A)       The aggregate Stated Amount of all
  L/C’s then outstanding, does not exceed 
             Two Million ($2,000,000)
  Dollars.
	 	 	 	 
	 	(B)        The expiry of the L/C is not later
  than the earlier of thirty (30) days prior to 
             the Maturity Date or the
  following:
	 	 	 	 
	 	 	(I)         L/C’s other than Documentary L/C’s:
  One (1) year from initial 
             issuance.
	 	 	 	 
	 	 	(II)        Documentary L/C’s: one hundred twenty
  (120) days from issuance; and
	 	 	 	 
	 	(C)         Availability would not be exceeded.
	 	 	 	 




                                        (iii)        Paper Warehouse shall execute such
documentation to apply for and support the issuance of an L/C as may be
required by the Issuer.


                                        (iv)       There shall not be any recourse to, nor
liability of, the Lender on account of:


	 	(A)       Any delay or refusal by an Issuer to
  issue an L/C.
	 	 	 	 
	 	(B)        Any action or inaction of an Issuer on
  account of or in respect to, any L/C.




                                        (v)        The Borrowers shall reimburse the
Issuer, immediately upon the drawing under any L/C, for the amount of such
drawing. In the event that the Borrowers fail to so reimburse the Issuer, the
Borrowers immediately shall reimburse the Lender for the amount of such
drawing. To the extent which the Borrowers fail to so reimburse the Issuer or
the Lender, the Lender, without the request of any Borrower, may advance under
the Revolving Credit any amount which the Borrowers are so obligated to pay to
the Lender or the Issuer, or for which any of the Borrowers, the Issuer, or the
Lender becomes obligated on account of, or in respect to, any L/C. Such Advance
shall be made whether or not a Suspension Event is then in existence or such
Advance would result in Availability being exceeded. Such action shall not
constitute a waiver of the Lender’s rights under Section 1-7(b), below.


             1-5.       The Loan Account.


                           (a)         An account (“Loan Account”) shall be
opened on the books of the Lender in which Loan Account a record may be kept of
all Advances  made under or pursuant to
this Agreement and of all payments thereon.


                           (b)        The Lender may also keep a record
(either in the Loan Account or elsewhere, as the Lender may from time to time
elect) of all interest, fees, service charges, costs, expenses, and other
debits owed the Lender on account of the Liabilities and of all credits against
such amounts so owed.


                           (c)         All credits against the Liabilities
shall be conditional upon final payment to the Lender of the items giving rise
to such credits such that, without limitation, the amount of any item credited
against the Liabilities which is charged back against the Lender for any reason
or is not so paid shall be a Liability and shall be added to the Loan Account,
whether or not the item so charged back or not so paid is returned.


                           (d)        Except as otherwise provided herein, all
fees, service charges, costs, and expenses for which the Borrowers are
obligated hereunder are payable on demand. In the determination of
Availability, the Lender may deem fees, service charges, accrued interest, and
other payments or deposits as having been advanced under the Revolving Credit
if such amounts are then due and payable exclusive of deposits for fees whether
incurred at the time of deposit or as duly accounted for in accordance with the
terms set forth herein.


                           (e)         The Lender, without the request of any
Borrower, may advance under the Revolving Credit any interest, fee, service
charge, or other payment to which the Lender is entitled from the Borrowers
pursuant hereto and may charge the same to the Loan Account notwithstanding
that such amount so advanced may result in an Overadvance.  Such action on the part of the Lender shall
not constitute a waiver of the Lender’s rights under Section 1-7(b), below. Any
amount which is added to the principal balance of the Loan Account as provided
in this Section shall bear interest at the interest rate applicable from time
to time to the unpaid principal balance of the Loan Account.


                           (f)         Any statement rendered by the Lender to
the Borrowers in writing concerning the Liabilities shall be considered correct
and accepted by the Borrowers and shall be conclusively binding upon the
Borrowers unless Borrowers provide the Lender with written objection thereto
within twenty (20) days from the mailing of such statement, which written
objection shall indicate, with particularity, the reason for such objection.
The Loan Account and the Lender’s books and records concerning the loan
arrangement contemplated herein and the Liabilities shall be prima facie
evidence and proof of the items described therein.


             1-6.       The Master Note. The
obligation to repay loans and advances under the Revolving Credit, with
interest as provided herein, may be evidenced by a note (the “Master
Note”) in the form of EXHIBIT 1-6, annexed hereto, executed by the
Borrowers. Neither the original nor a copy of the Master Note shall be
required, however, to establish or prove any Liability. In the event that the
Master Note is ever lost, mutilated, or destroyed, the Borrowers shall execute
a replacement thereof and deliver such replacement to the Lender, upon receipt
of reasonable assurances of indemnification with respect to such original
Master Note, if requested by the Borrower, provided however, nothing in this Section
1-6 shall be deemed to require Lender to produce the Master Note as a condition
of enforcement of any of Lender’s rights under this Agreement.


             1-7.       Payment of Loan Account.


                           (a)         The Borrowers may repay all or any
portion of the principal balance of the Loan Account from time to time until
the Termination Date.


                           (b)        The Borrowers, without notice or demand
from the Lender, shall pay the Lender that amount, from time to time, which is
necessary so that Availability is not less than Zero ($0) Dollars.


                           (c)         The Borrowers shall pay the then entire
unpaid balance of the Loan Account and all other Liabilities on the Termination
Date.


             1-8.       Interest.


                           The
unpaid principal balance of the Loan Account shall bear interest, until repaid,
with respect to advances:


                           (a)
        Borrower shall pay interest, at
the following rates:


                                        (i)          with respect to Eurodollar Loans, at
the Eurodollar Rate (which includes the Eurodollar Margin);


                                        (ii)         with respect to Index Rate Loans,  Base plus the Index Rate Margin;


                                        (iii)        with respect to Advances under the
Special Sub-Line, Base plus the Special Sub-Line Margin;


all computations of interest are calculated
on a per annum basis on the basis of a three hundred and sixty (360) day year,
in each case for the actual number of days occurring in the period for which
such interest payable.





The applicable margins will be as
follows:


	Eurodollar
  Margin	250
  Basis Points
	 	 
	Index
  Rate Margin	0
  Basis Points
	 	 
	Special
  Sub-Line Margin	150
  Basis Points




                           (b)        So long as no Suspension Event or Event
of Default which has not been remedied within any grace period expressly
provided herein or otherwise waived in writing by Lender, shall have occurred,
Paper Warehouse shall have the option to (i) request that all or any part of
any Advances under the Standard Line only be made as a Eurodollar Loan, (ii)
convert at any time all or any part of outstanding Advances under Standard Line
from Index Rate Loans to Eurodollar Loans, (iii) convert any Eurodollar Loan to
a Index Rate Loan, subject to payment of Eurodollar breakage costs in
accordance with Section 1.8(c) if such conversion is made prior to the
expiration of the Eurodollar Period applicable thereto, or (iv) continue all or
any portion of any Advances under the Standard Line as a Eurodollar Loan upon
the expiration of the applicable Eurodollar Period and the succeeding
Eurodollar Period of that continued Eurodollar Loan shall commence on the day
after the last day of the Eurodollar Period of the Eurodollar  Loan to be continued.  Under no circumstances shall any Advances
under the Credit Card Receivables or the Special Sub-Line be a Eurodollar
Loan.  Any Advances to be made or
continued as, or converted into, a Eurodollar Loan must be in a minimum amount
of Five Hundred Thousand ($500,000) Dollars and integral multiples of One
Hundred Thousand ($100,000.00) Dollars in excess of such amount.  Any such election must be made by 1:30
P.M.  (Boston time)  on the third (3rd) Banking Day prior to
(1) the date of any proposed Advance which is to bear interest at the
Eurodollar Rate, (2) the end of each Eurodollar Period with respect to any
Eurodollar Loans to be continued as such, or (3) the date on which Paper
Warehouse wishes to convert any Index Rate Loan to a Eurodollar Loan for a
Eurodollar Period designated by Paper Warehouse in such election.  If no election is received with respect to a
Eurodollar Loan by 1:30 P.M.  (Boston
time) on the third (3rd) Business Day prior to the end of the Eurodollar Period
with respect thereto (or if a Default or an Event of Default which has not been
remedied within any grace period expressly provided herein or otherwise waived
in writing by Lender, that Eurodollar Loan shall be converted to an Index Rate
Loan at the end of its Eurodollar Period. 
Paper Warehouse must make such election by notice to Lender in writing,
by telecopy or overnight courier.  In
the case of any conversion or continuation, such election must be made pursuant
to a written notice (a “Notice of Conversion/Continuation”) in the form
of Exhibit 1.8(b).  No loan may
be made as or converted into a Eurodollar Loan which has a Eurodollar Period
greater than one month until ninety (90) days after the Closing Date.





                           (c)         To induce Lender to provide the
Eurodollar Rate option on the terms provided herein, if (i) any Eurodollar
Loans are repaid in whole or in part prior to the last day of any applicable
Eurodollar Period (whether that repayment is made pursuant to any provision of
this Agreement or any other Loan Document or is the result of acceleration, by
operation of law or otherwise); (ii) Borrowers shall default in payment when
due of the principal amount of or interest on any Eurodollar Loan; (iii)
Borrowers shall default in making any borrowing of, conversion into or
continuation of Eurodollar Loans after a Borrower has given notice requesting
the same in accordance herewith; or (iv) Borrowers shall fail to make any prepayment
of a Eurodollar Loan after any Borrower has given a notice thereof in
accordance herewith, Borrowers shall indemnify and hold harmless Lender from
and against all losses, costs and expenses resulting from or arising from any
of the foregoing.  Such indemnification
shall include any loss (including loss of margin) or expense arising from the
reemployment of funds obtained by it or from fees payable to terminate deposits
from which such funds were obtained. 
This covenant shall survive the termination of this Agreement and the
payment of the Liabilities and all other amounts payable hereunder.  As promptly as practicable under the
circumstances, Lender shall provide Borrowers with its written calculation of
all amounts payable pursuant to this Section 1.8 (c), and such
calculation shall be binding on the parties hereto unless Borrowers shall
object in writing within ten (10) Business Days of receipt thereof, specifying
the basis for such objection in reasonable detail.


                           (d)        Following the occurrence of any Event of
Default which has not been remedied within any grace period expressly provided
herein or otherwise waived in writing by Lender (and whether or not the Lender
exercises any of the Lender’s rights on account of such Event of Default), all
loans and Advances made under the Revolving Credit shall, at Lender’s option,
bear interest, through the End Date, at a rate which is the aggregate of that
provided for in Section 1-8(a), above, plus two (2%) percent per annum.  Lender shall use its best efforts to provide
advance notice to Borrowers of its intention to charge interest at the default
rate, but Lender’s right to charge such default rate is not subject to notice
hereunder.


                           (e)         Accrued interest shall be payable:


                                        (i)          if for Index Rate Loans, monthly in
arrears on the first day of the month next following that during which such
interest accrued; if for Eurodollar Loans upon the maturity of the subject
Eurodollar contract.


                                        (ii)         On the Termination Date.


                                        (iii)        On the End Date.


             1-9.       Fees.    Borrowers
shall pay to the Lender the following fees:


                           (a)         Annual Facility Fee.   On each anniversary of the
Closing Date hereof, an “Annual Facility Fee” in an amount equal to
one quarter of one (0.25%) percent of the Credit Limit (each of which Annual
Facility Fees shall be fully earned upon each respective anniversary of the
Closing Date occurring on or prior to the End Date), shall be due and payable.


                           (b)        Loan Maintenance Fee.  Intentionally deleted.


                           (c)         Unused Line Fee.  On the first day of each month during the
term of this Agreement, an “Unused Line Fee” in an amount equal to one
quarter of one  (0.25%) percent of the
Average Unused Portion of the Credit Limit.


                           (d)        Commitment Fee.  On the Closing Date, a “Commitment Fee” of three
quarters of one (0.75%) percent of the Credit Limit or One Hundred Twelve
Thousand Five Hundred ($112,500) Dollars


                           (e)
        Excess Plan Fee.  Intentionally deleted.


                           (f)         Financial Examination, Legal
Investigation, Documentation, and Appraisal Fees.   Subject to the provisions of Article 9-9, Lender’s actual
charges paid or incurred for each financial analysis and examination (i.e.,
audits) of Borrowers performed by personnel employed by Lender; Lender’s actual
charges paid or incurred for each appraisal of the Collateral performed by
personnel employed by Lender; and, the actual charges paid or incurred by
Lender if it elects to employ the services of one or more third Persons to
perform legal investigation, documentation, financial analysis and examinations
(i.e., audits) of Borrowers or to appraise the Collateral.


                           (g)        In addition to any other right to which
the Lender is then entitled on account thereof, the Lender may assess a
reasonable additional fee payable by the Borrowers on account of the
accommodation of Lender to the Borrowers’ request that the Lender depart or
dispense with one or more of the administrative provisions of this Agreement
and/or the Borrower’s failure to comply with any of such provisions.


                                        (i)          By way of non-exclusive example, the
Lender may assess a fee on account of any of the following:


	(A)	The
  Borrowers’ failure to pay any amounts required under Section 1-7(b), above.
	 	 
	(B)	The
  providing of a loan or advance under the Revolving Credit such that
  Availability would be exceeded.
	 	 
	(C)	The
  providing of a same Banking Day loan requested after the time set forth in
  Section 1-4(b)(i), above.
	 	 
	(D)	The
  Borrowers’ failure to provide a financial statement or report within the
  applicable time-frame provided for such report under Article 9, below.




                                        (ii)         The inclusion of the foregoing right on
the part of the Lender to assess a fee does not constitute an obligation, on
the part of the Lender, to waive any provision of this Agreement under any
circumstances. The assessment of any such fee in any particular circumstance
shall not constitute the Lender’s waiver of any breach of this Agreement on
account of which such fee was assessed nor a course of action on which the
Borrower may rely.


                           (h)        The Borrower shall not be entitled to
any credit, rebate or repayment of any Annual Facility Fee, Commitment Fee,
Unused Line Fee or other fee previously earned by the Lender pursuant to this
Section notwithstanding any termination of this Agreement or suspension or
termination of the Lender’s obligation to make loans and advances hereunder.


             1-10.     Lender’s Discretion.


                           (a)         Each reference in the Loan Documents to
the exercise of discretion or the like by the Lender shall be to the Lender’s
exercise of its judgement, in good faith (which shall be presumed), based upon
the Lender’s consideration of any such factor as the Lender, taking into
account information of which that Lender then has actual knowledge, believes:


                                        (i)          Will or reasonably could be expected
to affect the value of the Collateral, the enforceability of the Lender’s
security and collateral interests therein, or the amount which the Lender would
likely realize therefrom (taking into account delays which may possibly be
encountered in the Lender’s realizing upon the Collateral and likely Costs of
Collection).


                                        (ii)         Indicates that any report or financial
information delivered to the Lender by or on behalf of the Borrowers is
incomplete, inaccurate, or misleading in any material manner or was not
prepared in accordance with the requirements of this Agreement.


                                        (iii)        Suggests an increase in the likelihood
that any of the Borrower will become the subject of a bankruptcy or insolvency
proceeding.


                                        (iv)       Constitutes a Suspension Event.


and Borrower agrees that any exercise of
discretion based upon the foregoing shall be deemed commercially reasonable.


                           (b)        In the exercise of such judgement, the
Lender also may take into account any of the following factors the existence of
which shall be deemed a commercial reasonable basis upon which Lender may
exercise its discretion:


                                        (i)          Those included in, or tested by, the
definitions of “Eligible Credit Card Receivables”, “Eligible Inventory”, “Retail”,  and “Cost”.


                                        (ii)
        The current financial and business
climate of the industry in which any of the Borrowers competes (having regard
for the Borrower’s position in that industry).


                                        (iii)        General economic conditions which have a
material effect on cost structure.


                                        (iv)       Material changes in or to the mix of
Paper Warehouse’s Inventory.


                                        (v)        Seasonality with respect to Paper
Warehouse’s Inventory and pattern of Paper Warehouse’s  retail sales versus that which was
projected, and


                                        (vi)       Material changes in Availability versus
that which was projected.


                                        (vii)
     Such other factors as the Lender
determines as having a material bearing on credit risks associated with the
providing of loans and financial accommodations to the Borrowers.


                           (c)         The burden of establishing the failure
of the Lender to have acted in a commercially reasonable manner in Lender’s
exercise of discretion shall be the Borrowers’.


             1-11.     Fees for L/C’s.


                           (a)         Borrowers shall pay to the Lender a fee
payable monthly in arrears; for each outstanding L/C at the rate of one (1.0%)
percent per anum of the Stated Amount of that L/C.


                           (b)        In addition to the fee to be paid as
provided in Subsection 1-11(a), above, the Borrowers shall pay to the Lender
(or to the Issuer, if so requested by the Lender), on demand, all issuance,
processing, negotiation, amendment, and administrative fees and other amounts
charged by the Issuer on account of, or in respect to, any L/C, provided that
such fee is not duplicative of the fee paid to Lender in accordance with
Section 1-11(a) above.


             1-12.     Concerning L/C’s.


                           (a)         None of the Issuer, the Issuer’s
correspondents, or any advising, negotiating, or paying bank with respect to
any L/C shall be responsible in any way for:


                                        (i)          The performance by any beneficiary
under any L/C of that beneficiary’s obligations to the Borrowers.


                                        (ii)         The form, sufficiency, correctness,
genuineness, authority of any person signing; falsification; or the legal
effect of; any documents called for under any L/C if such documents on their
face appear to be in order.


                           (b)        The Issuer may honor, as complying with
the terms of any L/C and of any drawing thereunder, any drafts or other
documents otherwise in order, but signed or issued by an administrator,
executor, conservator, trustee in bankruptcy, debtor in possession, assignee
for the benefit of creditors, liquidator, receiver, or other legal representative
of the party authorized under such L/C to draw or issue such drafts or other
documents.


                           (c)         Unless otherwise agreed to, in the
particular instance, the Borrowers hereby authorize any Issuer to:


                                        (i)          Select an advising bank, if any.


                                        (ii)         Select a paying bank, if any.


                                        (iii)        Select a negotiating bank.


                           (d)        All directions, correspondence, and
funds transfers relating to any L/C are at the risk of the Borrowers. The
Issuer shall have discharged the Issuer’s obligations under any L/C which, or the
drawing under which, includes payment instructions, by the initiation of the
method of payment called for in, and in accordance with, such instructions (or
by any other commercially reasonable and comparable method). Neither the Lender
(to the extent not caused by Lender’s gross negligence or willful misconduct)
nor the Issuer shall have any responsibility for any inaccuracy, interruption,
error, or delay in transmission or delivery by post, telegraph or cable, or for
any inaccuracy of translation.


                           (e)         The Lender’s and the Issuer’s rights,
powers, privileges and immunities specified in or arising under this Agreement
are in addition to any heretofore or at any time hereafter otherwise created or
arising, whether by statute or rule of law or contract.


                           (f)         Except to the extent otherwise
expressly provided hereunder or agreed to in writing by the Issuer and the
Borrowers, the L/C will be governed by the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce,
Publication No.500, and any subsequent revisions thereof.


                           (g)        If any change in any law, executive
order or regulation, or any directive of any administrative or governmental
authority (whether or not having the force of law), or in the interpretation thereof
by any court or administrative or governmental authority charged with the
administration thereof, shall either:


                                        (i)          Impose, modify or deem applicable any
reserve, special deposit or similar requirements against letters of credit
heretofore or hereafter issued by any Issuer or with respect to which the
Lender or any Issuer has an obligation to lend to fund drawings under any L/C.


                                        (ii)         Impose on any Issuer any other
condition or requirements relating to any such letters of credit; and the
result of any event referred to in Section 1-12(g)(i) above, shall be to
increase the cost to any Issuer of issuing or maintaining any L/C (which
increase in cost shall be the result of such Issuer’s reasonable allocation
among that Issuer’s letter of credit customers of the aggregate of such cost
increases resulting from such events), then, upon demand by the Lender and
delivery by the Lender to the Borrowers of a certificate of an officer of the
subject Issuer describing such change in law, executive order, regulation,
directive, or interpretation thereof, its effect on such Issuer, and the basis
for determining such increased costs and their allocation, the Borrowers shall
immediately pay to the Lender for payment to the Issuer, from time to time as
specified by the Lender, such amounts as shall be sufficient to compensate such
Issuer for such increased cost. Any Issuer’s determination of costs incurred
under Section 1-12(g)(i), above, and the allocation, if any, of such costs
among the Borrowers and other letter of credit customers of such Issuer, if
done in good faith and made on an equitable basis and in accordance with the
officer’s certificate, shall be conclusive and binding on the Borrowers.


                           (h)        The obligations of the Borrowers under
this Agreement with respect to L/C’s are absolute, unconditional, and
irrevocable and shall be performed strictly in accordance with the terms hereof
under all circumstances whatsoever including, without limitation, the
following:


                                        (i)          Any lack of validity or enforceability
or restriction, restraint, or stay in the enforcement of this Agreement, any
L/C, or any other agreement or instrument relating thereto.


                                        (ii)         Any amendment or waiver of, or consent
to the departure from, any L/C.


                                        (iii)        The existence of any claim, set-off,
defense, or other right which the Borrowers may have at any time against the
beneficiary of any L/C.


                                        (iv)       Any honoring of a drawing under any L/C,
which drawing possibly could have been dishonored based upon a strict
construction of the terms of the L/C.


                                        (v)        The Borrowers shall not present to
Lender or cause the amendment of an L/C without satisfactory evidence of one or
more of the following: (a) change in delivery date; (b) Borrowers’ receipt of
partial shipment; or (c) change to original order reflected in OTB (open to
Buy) or other information which may be so reasonably requested by the Lender.


                           (i)          In no event, shall Lender or Issuer
have any obligation to honor any L/C presented for payment after its
expiration.  In the event no payment has
been made, the Stated Amount of such L/C shall continue to be deducted from
Availability for thirty (30) business days beyond expiration of said L/C,
unless such L/C has been previously cancelled or terminated and Lender has
received reasonably satisfactory written evidence of such termination or
cancellation.


ARTICLE 2 - GRANT OF
SECURITY INTEREST


             2-1.       Grant of Security Interest.
To secure the Borrowers prompt, punctual, and faithful performance of all and
each of the Liabilities, the Borrowers hereby grant to the Lender a continuing
security interest in and to, and assigns to the Lender, all assets and
property, including, without limitation, the following, and each item thereof,
whether now owned or now due, or in which any of the Borrowers has an interest,
or hereafter acquired, arising, or to become due, or in which the Borrowers
obtain an interest (all of which, together with any other property in which the
Lender may in the future be granted a security interest, is referred to herein
as the
“Collateral”):


                           (a)         All Inventory.


                           (b)        All Accounts, accounts receivable,
contracts, contract rights, notes, bills, drafts, acceptances, General
Intangibles (excluding only the Richfield Account but such exclusion terminates
upon the termination of the Richfield Account and any obligations owed to
Borrowers thereunder shall be deemed part of the Collateral), Instruments,
including Promissory Notes, Documents, Documents of Title, Chattel Paper,
securities, Security Entitlements, Security Accounts, Investment Property,
Deposit Accounts, Letter of Credit Rights, Supporting Obligations, choses in
action, and all other debts, obligations and liabilities in whatever form,
owing to Borrowers from any Person, firm or corporation or any other legal
entity, whether now existing or hereafter arising, now or hereafter received by
or belonging or owing to Borrowers, for goods sold by it or for services
rendered by it, or however otherwise established or created, all guarantees and
securities therefor, all right, title and interest of Borrowers in the
merchandise or services which gave rise thereto, including the rights of
reclamation and stoppage in transit, all rights to replevy goods, and all
rights of an unpaid seller of merchandise or services.


                           (c)         All machinery, Equipment, Fixtures and
other Goods, whether now owned or hereafter acquired by any Borrower and
wherever located, all replacements and substitutions therefor or accessions
thereto and all proceeds thereof, but excluding motor vehicles and excluding
Equipment subject to any Capital Lease whichexpressly prohibits the granting of
a lien and is identified on EXHIBIT 2-1(c) but such exclusion for Equipment
subject to any such Capital Lease identified on EXHIBIT 2-1(c) shall terminate
if such Capital Lease is not renewed and terminates and such Equipment shall
thereupon be deemed Collateral hereunder.


                           (d)        Leasehold Interests and rights of
occupancy.


                           (e)         Real Estate, except the Real Estate
owned by Paper Warehouse located at Excelsior Boulevard, Minneapolis, Minnesota.


                           (f)         All proceeds, products, substitutions
and accessions of or to any of the foregoing in any form, including, without
limitation, all proceeds, refunds and premium rebates of credit, fire or other
insurance covering the Collateral, and also including, without limitation,
rents and profits resulting from the temporary use of any of the foregoing.


             2-2.       Deposit Accounts.  For each Deposit Account that any Borrower
at any time opens or maintains, Borrower shall, at Lender’s request and option,
pursuant to an agreement in form and substance satisfactory to Lender, either
(a) cause the depositary Lender to agree to comply at any time with
instructions from Lender to such depositary Lender directing the disposition of
funds from time to time credited to such Deposit Account, without further
consent of Borrower, or (b) arrange for Lender to become the customer of the
depositary Lender with respect to the Deposit Account, with Borrower being
permitted, only with the consent of Lender, to exercise rights to withdraw
funds from such deposit account.


             2-3.       Collateral in
the Possession of a Bailee.  If
any goods of any Borrower are at any time in the possession of a bailee,
Borrower shall promptly notify Lender thereof and, if requested by Lender,
shall promptly obtain an acknowledgment from the bailee, in form and substance
satisfactory to Lender, that the bailee holds such Collateral for the benefit
of Lender and shall act upon the instructions of Lender, without the further
consent of Borrower.


             2-4        Letter of Credit Rights.  If any Borrower is at any time a beneficiary
under a letter of credit now or hereafter issued in favor of Borrower, Borrower
shall promptly notify Lender thereof and, at the request and option of Lender,
Borrower shall, pursuant to an agreement in form and substance satisfactory to
Lender, either (a) arrange for the issuer and any confirmer of such letter of
credit to consent to an assignment to Lender of the proceeds of any drawing
under the letter of credit, or (b) arrange for Lender to become the transferee
beneficiary of the letter of credit, with Lender agreeing, in each case, that
the proceeds of any drawing under the letter of credit are to be applied  in the same manner as any other payment on an
Account.


             2-5.       Commercial Tort Claims.
 If any Borrower shall at any time hold
or acquire a commercial tort claim, Borrower shall immediately notify Lender in
a writing signed by Borrower of the brief details thereof and grant to Lender
in such writing a security interest therein, and in the proceeds thereof, all
upon the terms of this Agreement, with such writing to be in form and substance
satisfactory to Lender.


             2-6.       Authorization
to File Financing Statements. 
Borrowers hereby irrevocably authorize Lender at any time and from time
to time to file in any Uniform Commercial Code jurisdiction any initial
financing statements and amendments thereto that (a) indicate the Collateral
(i) as “all assets” of Borrower (subject to the limitations set forth in
Sections 2-1 (b), (c) and (e) above) or words of similar effect, regardless of
whether any particular asset comprised in the Collateral falls within the scope
of Article 9 of the Uniform Commercial Code of such jurisdiction, or (ii) as
being of an equal or lesser scope or with greater detail, and (b) contain any
other information required by the Uniform Commercial Code for the sufficiency
or filing office acceptance of any financing statement or amendment, including
(i) whether any Borrower is an organization, the type of organization and any
organization identification number issued to any Borrower, and (ii) in the case
of a financing statement filed as a fixture filing or indicating Collateral as
as-extracted Collateral or timber to be cut, a sufficient description of real
property to which the Collateral relates. Borrowers agree to furnish any such
information to Lender promptly upon request. 
Borrowers also ratify any authorization for Lender to have filed in any
Uniform Commercial Code jurisdiction any like initial financing statements or
amendments thereto if filed prior to the date hereof.


             2-7.       Extent and
Duration of Security Interest. This grant of a security interest is in
addition to, and supplemental of, any security interest previously granted by
the Borrowers to the Lender and shall continue in full force and effect
applicable to all Liabilities until all Liabilities have been paid and/or
satisfied in full and the security interest granted herein is specifically
terminated in writing by a duly authorized officer of the Lender.


ARTICLE
3 - DEFINITIONS


             All
capitalized terms used in this agreement which are not otherwise defined herein
or in the UCC shall have the meanings assigned to them in EXHIBIT 3, annexed
hereto.


ARTICLE 4 - CONDITIONS
PRECEDENT


             The
effectiveness of this Agreement, the establishment of the Revolving Credit, and
the making of the first loan under the Revolving Credit, is conditioned upon
the delivery to Lender of the documents described below, each in form and
substance satisfactory to the Lender, and the satisfaction of the conditions
described below:


             4-1.       Corporate Due Diligence.


                           (a)         A Certificate of legal existence and
good standing issued by the Secretary of State or other governing authority of
the State where each Borrower is a Registered Organization.


                           (b)        Certificates of due qualification and
good standing, issued by the Secretary(ies) of State or other governing
authority of each state in which the nature of the   business conducted by any 
Borrower or assets owned could require such qualification and the failure
to be so qualified could have a material adverse effect on the business,
operations or rights of any such Borrower.


                           (c)         A Certificate of each Borrower’s
secretary, clerk or otherwise authorized officer or other Person attesting to
the due adoption, continued effectiveness, and setting forth the texts of, each
resolution or authorization adopted in connection with the establishment of the
loan arrangement contemplated by the Loan Documents and attesting to the true
signatures of each Person authorized as a signatory to any of the Loan
Documents.


             4-2.       Opinion. An opinion of counsel to
each of the Borrowers in form and substance satisfactory to Lender and Lender’s
counsel.


             4-3.       Cash
Management, Control Agreements and Additional Documents. Such additional
instruments and documents including, without limitation, an agreement for the
Blocked Account(s) executed by the Borrowers, Lender and the applicable bank,
agreements with each Borrower’s credit card processors and/or other credit
service providers executed by the Borrower, Lender and each such processor or
service provider, and any other notices or agreements required under Article 7
hereof and any other document to provide Lender with control with respect to
collateral consisting of Deposit Accounts, Investment Property, Letter of
Credit Rights and Electronic Chattel Paper as the Lender or its counsel
reasonably may require or request, in each case in form and substance
satisfactory to Lender and its counsel, and all other Loan Documents, including
without limitation, guaranties, pledges and security agreements from all
affiliates and subordination and intercreditor agreements from all holders of
debt not to be paid from proceeds hereunder, all in form and substance
satisfactory to Lender and its counsel.


             4-4.       Key Life Policies.  The Collateral Assignment to the Lender of
policies on the lives of the following for the amounts stated:


                                        Yale
Dolginow:                                        $800,000


             4-5.       Officers’ Certificates.
Certificates executed by the president or chief executive officer and the chief
financial officer of each Borrower and stating that the representations and
warranties made by the Borrowers to the Lender in the Loan Documents are true
and complete as of the date of such Certificate, and that no event has occurred
which is or which, solely with the giving of notice or passage of time (or
both) would be an Event of Default.


             4-6.       Representations and
Warranties.  Each of the
representations made by or on behalf of the Borrowers in this Agreement or in
any of the other Loan Documents or in any other report,  statement, document, or paper provided by
and or on behalf of the Borrowers shall be true and complete as of the date as
of which such representation or warranty was made.


             4-7.       Initial Minimum
Excess Availability.  Availability,
after giving effect to the first loans and advances to be made under the
Revolving Credit; any charges to the Loan Account made in connection with the
establishment of the credit facility contemplated hereby; and L/C’s to be
issued at, or immediately subsequent to, the establishment of such Revolving
Credit, is not less than Two Million 
($2,000,000) Dollars.


             4-8.       No Event of Default. No
event shall have occurred, or failed to occur, which occurrence or which
failure constitutes, or which, solely with the passage of time or the giving of
notice (or both) would constitute, an Event of Default.


             4-9.       .No Material Adverse Change.  No Material Adverse Change has occurred.


             4-10.     Delivery of Warrants.  Intentionally deleted.


             4-11.     Landlord Waivers
and “Access Agreements’’. 
Such agreements from landlords and warehousemen, bailees and any other
third parties who may control any premises upon which any of the Collateral is
located as Lender may in its discretion require in form and substance
satisfactory to Lender.


             4-12.     Delivery of Documents.   No document shall be deemed delivered to
the Lender until received and accepted by the Lender at its head offices in
Boston, Massachusetts or at the offices of Lender’s counsel. Under no
circumstances will this Agreement take effect until executed and accepted by
the Lender at said head office or at the offices of Lender’s counsel.  In the event that Lender agrees, at
Borrower’s request, to make the initial advance or any subsequent advance
hereunder, prior to Borrowers’ delivery of any documents required under this
Article 4 or otherwise by this Agreement or the date required under any “open
items” letter executed in connection therewith, an additional fee, equal to the
greater of one-tenth of one (0.1%) percent of the then outstanding amount of
the Loan Account or Five Hundred ($500) Dollars shall be payable weekly on the
next Thursday following the date by which such documents are due until such
time as all such documents are provided, subject to pro-ration in the event
that documents are delivered after such due date, but prior to such following
Thursday


ARTICLE
5 - GENERAL REPRESENTATIONS. WARRANTIES AND COVENANTS


             To
induce the Lender to establish the loan arrangement contemplated herein and to
make loans and Advances and to provide financial accommodations under the
Revolving Credit (each of which loans and Advances shall be deemed to have been
made in reliance thereupon) each Borrower, in addition to all other
representations, warranties, and covenants made by the Borrowers in any other
Loan Document, makes those representations, warranties, and covenants included
in this Agreement.


             5-1.       Payment and
Performance of Liabilities. The Borrowers shall pay each Liability due
Lender when due (or when demanded if payable on demand) and shall promptly,
punctually, and faithfully perform each other Liability due Lender and, except
to the extent such other obligations are being contested in good faith,
adequate reserves for same are maintained in accordance with GAAP and Borrower
has provided Lender notice of same in accordance herewith, pay each obligation
due others in accordance with its current custom and practice.  If any Borrower has any dispute with any
Person with respect to any Liability or other material obligation, such
Borrower shall give Lender notice of said dispute.


             5-2.       Due
Organization - Authorization - No Conflicts.


                           (a)         Each Borrower presently is and shall
hereafter remain in good standing as a, Minnesota corporation, a Registered
Organization in the state of Minnesota, which is the state in which it is
legally formed, and Borrower shall not change such state of legal formation and
is and shall hereafter remain duly qualified and in good standing in every
other state in which, by reason of the nature or location of the Borrowers’
assets or operation of the Borrower’s businesses, such qualification may be
necessary and the failure to be so qualified could have a material adverse
effect on the business operations or rights of any such Borrower


                           (b)        Each Borrower’s legal name is as set
forth in the introduction to this agreement and none of the Borrowers shall
change its legal name.


                           (c)         Each Related Entity (other than another
Borrower, Yale Dolginow, or any director of any of the Borrowers) is listed on EXHIBIT
5-2, annexed hereto. Each such Related Entity is and shall hereafter remain in
good standing in the state in which legally formed  and is and shall hereafter remain duly qualified in every other
state in which, by reason of the nature and location of that entity’s assets or
the operation of such entity’s business, such qualification may be necessary
and the failure to be so qualified could have a material adverse effect on the
business operations or rights of any such Borrower. The Borrowers shall provide
the Lender with prior written notice of any such entity’s becoming or ceasing
to be a Related Entity.


                           (d)        Each Borrower has all legal corporate
power and authority to execute and deliver all and each of the Loan Documents
to which each Borrower is a party and has and will hereafter retain all
requisite legal power and authority to perform any and all of the Liabilities.


                           (e)         The execution and delivery by each
Borrower of each Loan Document to which it is a party; each Borrower’s
consummation of the transactions contemplated by such Loan Documents
(including, without limitation, the creation of security interests by the
Borrower as contemplated hereby); each Borrower’s performance under those of
the Loan Documents to which it is a party; the borrowings hereunder; the use of
the proceeds thereof and the exercise of any of Lender’s remedies thereunder:


                                        (i)          Have been duly authorized by all
necessary legal action.


                                        (ii)         Do not, and will not, contravene in any
material respect any provision of any Requirement of Law or obligation of any
Borrower.


                                        (iii)        Will not result in the creation or
imposition of, or the obligation to create or impose, any Encumbrance upon any
assets of any Borrower pursuant to any Requirement of Law or obligation, except
pursuant to the Loan Documents.


                                        (vi)       Will not violate any provisions of any of
the Franchise Agreements


                           (f)         The Loan Documents to which each
Borrower is a party have been duly executed and delivered by each such Borrower
and are the legal, valid and binding, and joint and several obligations of such
Borrower, enforceable against the Borrowers in accordance with their respective
terms.


                           (g)        PWFI and PartySmart are each wholly
owned subsidiaries of Paper Warehouse.


             5-3.       Trade Names.


                           (a)         EXHIBIT 5-3, annexed hereto, is a
listing as of the Closing Date of:


                                        (i)          All names under which each Borrower
ever conducted its business, all trademark and service mark registrations and
applications with respect to any trademark or service mark; and all licenses
pursuant to which each Borrower has the right to use any trademark or service
mark.


                                        (ii)         All entities and/or Persons with whom
any Borrower ever consolidated or merged, or from whom any Borrower ever
acquired in a single transaction or in a series of related transactions
substantially all of Person’s assets.


                           (b)        Except (i) upon not less than twenty-one
(21) days prior written notice given the Lender which notice shall include a
proposed revised Exhibit 5-3, and (ii) in compliance with all other provisions of
this Agreement, none of the Borrowers will undertake or commit to undertake any
action such that the results of that action, if undertaken prior to the date of
this Agreement, would have been reflected on EXHIBIT 5-3.


                           (c)         Each Borrower owns and possesses, or
has the right to use all patents, industrial designs, trademarks, trade names,
trade styles, brand names, service marks, logos, copyrights, trade secrets,
know-how, confidential information, and other intellectual or proprietary
property of any third Person necessary for the Borrower’ conduct of its
business.


                           (d)        The conduct by each Borrower and any
other Persons party to any Franchise Agreement of its business in accordance
with such Franchise Agreement does not infringe on the patents, industrial
designs, trademarks, trade names, trade styles, brand names, service marks,
logos, copyrights, trade secrets, know-how, confidential information, or other
intellectual or proprietary property of any third Person.


             5-4.       Location,
Landlord’s Consents, Waivers.


                           (a)         The Collateral, and the books, records,
and papers of Borrowers pertaining thereto, are kept and maintained solely at
the Borrowers’ chief executive offices as set forth at the beginning of this
Agreement and at those locations which are listed on EXHIBIT 5-4, annexed
hereto, which exhibit includes all service bureaus with which any such records
are maintained and the names and addresses of each of the Borrowers’ landlords.
Except (i) to accomplish sales of Inventory in the ordinary course of business
or (ii) to utilize such of the Collateral as is removed from such locations in
the ordinary course of business, the Borrowers shall not remove any Collateral
from said chief executive offices or those locations listed on EXHIBIT 5-4, provided
however, in the event that any Borrower enters into a new Lease for
executive offices and/or for new store locations in accordance with section 5-4
(e) below, provides Lender with a proposed revised EXHIBIT 5-4 identifying such
new executive offices and/or store locations within the applicable notice
period and there has not occurred any Event of Default which has not been
remedied within any grace period expressly provided herein or otherwise waived
in writing by Lender, Borrower may move Collateral to such new executive
offices and/or store locations.


                           (b)        The Borrower shall obtain and deliver to
the Lender a consent, waiver and subordination agreement executed by the
landlords for all of Borrowers’ warehouse and distribution center locations,
all store locations located in a Landlord Lien State or One-Turn State, upon or
before the Closing Date, and shall use its commercially reasonable efforts to
obtain such consent waiver and subordination agreement for the balance of Paper
Warehouse store locations within sixty
(60) days of the Closing Date with respect to stores listed in
EXHIBIT 5-4 and with respect to any new stores opened in accordance with
Section 5-4(e)(ii) prior to opening such new store, provided however, any
failure of the Borrower to deliver Landlord Waivers  after having used such commercially reasonable efforts, shall not
be deemed an Event of Default hereunder, but shall entitle Lender to establish
Availability Reserves in accordance with Section 5-4(c) below


                           (c)         Lender may at any time after thirty
(30) days after the Closing Date, in its discretion, establish an Availability
Reserve for up to sixty (60) days rent for each of the Borrowers’ locations in
a Landlord Lien State or in a One Turn State for which a satisfactory consent,
waiver and subordination has not been received.  Such Availability Reserve may be reduced or eliminated but only
if no Suspension Event is then in existence or has not theretofore occurred,
upon the furnishing to the Lender of a consent, waiver and subordination
agreement executed by the landlord for the subject location.


                           (d)        Without duplication of any Availability
Reserve described above, the Lender may establish an Availability Reserve for
past due rent.


                           (e)         No Borrower shall:


                                        (i)          Alter, modify, or amend any Lease,
except for such Borrower’s benefit and except for renewals of Leases which
renewals are on terms substantially similar to terms in effect as of the
Closing Date and with at least ten (10) days prior written notice to Lender.


                                        (ii)         Commit to, or open or close any
location at which the Borrower maintains, offers for sale, or stores any of the
Collateral, except (x) Borrower may open up to five (5) locations per year but
only to the extent provided in the Business Plan, approved by Borrower’s Board
of Directors and with at least fifteen (15) days prior written notice to Lender
and (y) Borrower may close up to ten (10) 
locations per year but only to the extent provided for in the Business
Plan, as approved by Borrower’s Board of Directors, with at least thirty (30)
days prior written notice to Lender, and, if Borrower determines to employ an
agent to effect any such closings, whether on a guarantee or fee basis or
otherwise, subject to bidding procedures and an agreement acceptable to the
Lender.


                           (f)         Except as otherwise disclosed on
EXHIBIT 5-4, no tangible personal property of any  Borrower is in the care or custody of any third party or stored
or entrusted with a bailee or other third party and none shall hereafter be
placed under such care, custody, storage, or entrustment.  Borrower shall obtain and deliver a consent,
waiver and subordination (in form reasonably satisfactory to the Lender) from
each bailee disclosed on EXHIBIT 5-4 on or prior to the date of execution
hereof.


             5-5.       Title to Assets.


                           (a)         The Borrowers are, and shall hereafter
remain, the owners of the Collateral free and clear of all Encumbrances with
the exceptions of the following:


                                        (i)          The security interest created herein.


                                        (ii)         Those Encumbrances (if any) listed on
EXHIBIT 5-5, annexed hereto.


                                        (iii)
       Encumbrances in favor of lessors
under future Capital Leases permitted under section 5-6 (c) hereof provided,
that (a) any such Encumbrances attach to such the subject property concurrently
with or within 20 days after the acquisition thereof, (b) such Encumbrances
attach solely to the property so acquired in such transaction, and  (c) the principal amount of the debt secured
thereby does not exceed 100% of the Cost of such property.


                           (b)        The Borrowers do not and shall not have
possession of any property on consignment to any Borrower.


             5-6.       Indebtedness.  The Borrowers do not and shall not hereafter
have any Indebtedness with the exceptions of:


                           (a)         Any Indebtedness to the Lender.


                           (b)        The Indebtedness listed on EXHIBIT 5-6.


                           (c)         Indebtedness of any Borrower under any
future Capital Leases not listed on EXHIBIT 5-6, not to exceed aggregate annual
payments of One Million ($1,000,000) Dollars per year, provided that (i) Lender
is given prompt written notice of any Capital Lease, such notice to include a
proposed revised EXHIBIT 5-6 and a summary of each such proposed Capital Lease
(ii) such Capital Leases permit the Lender to maintain a junior lien on the
subject Equipment and provides for lessor’s consent to Lender’s use of such equipment
in accordance with Section 11 hereof, subject to Lender’s maintenance of lease
payments (such conditions be acknowledged substantially in the form attached
hereto as EXHBIT 5-6(c)); (iii) no lien on the Collateral (other than a lien on
the subject Equipment) arises as a result thereof and (iv) there has not
occurred Event of Default which has not been remedied within any grace period
expressly provided herein or otherwise waived in writing by Lender.





 


             5-7.       Insurance Policies.


                           (a)         EXHIBIT 5-7, annexed hereto, is a
schedule of all insurance policies owned by the Borrowers or under which any
Borrower is the named insured. Each of such policies is in full force and
effect. Neither the issuer of any such policy nor any Borrower is in default or
violation of any such policy.


                           (b)        The Borrowers shall have and maintain at
all times insurance covering such risks, in such amounts, containing such
terms, in such form, for such periods, and written by such companies as may be
reasonably satisfactory to the Lender. 
The coverage reflected on EXHIBIT 5-7 presently satisfies the foregoing
requirements, it being recognized by the Borrowers, however, that such
requirements may change hereafter to reflect changing circumstances. All
insurance carried by the Borrowers shall provide for a minimum of twenty (20)
days’ written notice of cancellation to the Lender and all such insurance which
covers the Collateral shall include an endorsement in favor of the Lender,
which endorsement shall provide that the insurance, to the extent of the
Lender’s interest therein, shall not be impaired or invalidated, in whole or in
part, by reason of any act or neglect of the Borrowers or by the failure of the
Borrowers to comply with any warranty or condition of the policy. In the event
of the failure by the Borrowers to maintain insurance as required herein, the
Lender, at its option, may obtain such insurance, provided, however, the
Lender’s obtaining of such insurance shall not constitute a cure or waiver of
any Event of Default  occasioned by the
Borrowers’ failure to have maintained such insurance.  The Borrowers shall furnish to the Lender certificates or other
evidence satisfactory to the Lender regarding compliance by the Borrowers with
the foregoing insurance provisions.


                           (c)         The Borrowers shall advise the Lender
of each claim in excess of Fifty Thousand ($50,000) Dollars made by any
Borrower under any policy of insurance which covers the Collateral and will
permit the Lender, at the Lender’s option in each instance, to the exclusion of
the Borrowers, to conduct the adjustment of each such claim (and of all claims
following the occurrence of any Suspension Event or Event of Default which has
not been remedied within any grace period expressly provided herein or
otherwise waived in writing by Lender.). The Borrowers hereby appoint the
Lender as each Borrower’s attorney in fact to obtain, adjust, settle, and
cancel any insurance claim described in this section and to endorse in favor of
the Lender any and all drafts and other instruments with respect to such
insurance claim. This appointment, being coupled with an interest, is
irrevocable until this Agreement is terminated by a written instrument executed
by a duly authorized officer of the Lender. The Lender shall not be liable on account
of any exercise pursuant to said power except for any exercise in actual
willful misconduct and bad faith. The Lender may apply any proceeds of such
insurance against the Liabilities, whether or not such have matured, in such
order of application as the Lender may determine.


                           (d)        The Borrowers shall maintain at all
times those policies of insurance obtained by the Borrowers and assigned to the
Lender as required by Section 4-4, above.





 


             5-8.       Licenses.  EXHIBIT 5-8, annexed hereto, is a schedule
of each license, distributorship, franchise (other than Franchise Agreements
subject to Section 5-28 hereof), and/or similar agreement, except for Franchise
Agreements, issued to, or to which any Borrower is a party in effect as of the
Closing Date.   Each such license or
agreement  is and shall remain in full
force and effect until terminated in accordance with its terms. No Borrower is
in default or violation of any such license or agreement and, as of the Closing
Date, to any Borrower’s Knowledge, no other party to any such license or
agreement is in default or violation thereof. Except as described on EXHIBIT
5-8 hereof, no Borrower has received any notice or threat of cancellation of
any such license or agreement and Borrower shall provide Lender with notice of
any future default or violation of any such license or agreement, and of its
receipt of any notice or threat of cancellation  of any such agreements  in
accordance with Section 9-3 hereunder. No Borrower shall enter into any future
license, distributorship, franchise (other than Franchise Agreements subject to
Section 5-28 hereof), and/or similar agreement, except with (a) at least thirty
(30) days advance written notice to Lender, which notice shall include a
proposed revised EXHIBIT 5-8 and a summary of such proposed license or
agreement and (b) Lender’s consent which consent shall not be withheld if (x)
there has not occurred any Event of Default which has not been remedied within
any grace period expressly provided herein or otherwise waived in writing by
Lender, and (y) any such proposed license or agreement is in accordance with
the Business Plan.


             5-9.       Leases and Capital Leases.  EXHIBIT 5-9, annexed hereto, is a schedule
of all Leases in effect as of the Closing Date, and EXHIBIT 5-6 is a schedule
of all Capital Leases Each of the Leases, Capital Leases, Equipment Leases or
other leases of any other personal property is and shall remain in full force
and effect until termination in accordance with its terms. No Borrower is in
default or violation of any Lease, Capital Lease, Equipment Lease or other
lease of any other personal property, and, as of the Closing Date to Borrower’s
Knowledge, no party other than any Borrower to any such Lease, Equipment Lease,
Capital Lease other lease of any other personal property is in default or
violation of any such Lease, Capital Lease, Equipment Lease or other lease of
any other personal property and none of the Borrowers has received any notice
or threat of cancellation of any such Lease, Capital Lease, Equipment Lease or
other lease of any other personal property and Borrower shall provide Lender
with notice of any future default or violation of any such Leases, Capital
Leases, Equipment Leases or other leases, and of any notice or threat of
cancellation  of any such Leases,
Capital Leases, Equipment Leases or other leases of any other personal property
in accordance with Section 9-3. The Borrowers hereby authorize the Lender at
any time and from time to time to contact any of the Borrowers’ landlords in
order to confirm the Borrowers’ continued compliance with the terms and
conditions of the Lease(s) between the Borrowers and that landlord and to
discuss such issues, concerning the Borrowers’ occupancy under such Lease(s),
as the Lender may determine.  Except to
the extent permitted by Section 5-4 and 5-6 hereof, no Borrower shall enter
into any Lease or Capital Lease and no Borrower shall enter into any future
Equipment Lease or other lease of any other personal property (other than
Capital Leases subject to Section 5-6 above) except upon the conditions that:
(i) Lender is given prompt written notice of any such Equipment Lease or other
lease of any other personal property, such notice to include a summary of each
such proposed Equipment Lease or other lease (ii) such Borrower’s entry in to
such Equipment Lease or other lease of any other personal property is
consistent with the Business Plan; (iv) no lien on any Collateral (other than a
lien on the subject Equipment) arises as a result thereof and (v) there has not
occurred Event of Default which has not been remedied within any grace period
expressly provided herein or otherwise waived in writing by Lender.





 


             5-10.     Requirements of Law.  The Borrowers are in compliance with, and
shall hereafter comply with and use its assets in compliance with, all
Requirements of Law. No Borrower has received any notice of any violation of
any Requirement of Law (whether or not such violation is material) which
violation has not been cured or otherwise remedied.


             5-11.     Maintain Properties.  Each Borrower shall:


                           (a)         Keep the Collateral in good order and
repair (ordinary reasonable wear and tear and insured casualty excepted).


                           (b)        Not suffer or cause the waste or
destruction of any material part of the Collateral.


                           (c)         Not use any of the Collateral in
violation of any policy of insurance thereon.


                           (d)        Not sell, lease, or otherwise dispose of
any of the Collateral, other than the following, in each case, subject to the
turning over to the Lender of all Receipts with respect to the same as provided
herein,


                           


	(i)	 	The
  sale of Inventory in compliance with this Agreement.
	 	 	 
	(ii)	 	The
  disposal of Equipment which is obsolete, worn out, or damaged beyond repair,
  which Equipment is replaced to the extent necessary to preserve or improve
  the operating efficiency of such Borrower.
	 	 	 
	(iii)	 	Use
  of Advances in accordance with the terms of this Agreement




             5-12.     Pay Taxes 


                           (a)         As of the Closing Date, the federal
income tax returns of each Borrower have been audited by the Internal Revenue
Service (or closed by applicable statutes) for all fiscal years through and
including the Borrower’s taxable year referenced on EXHIBIT 5-12, annexed
hereto, and all deficiencies, assessments, and other amounts asserted as a
result of such examinations have been fully paid or settled.  As of the Closing Date, no agreement is in
existence which waives or extends any statute of limitations applicable to the
right of the Internal Revenue Service to assert a deficiency or make any other
claim for or in respect to federal income taxes and no Borrower shall enter
into such agreement except with at least ten (10) days prior written notice to
Lender.  As of the Closing Date, no
issue has been raised in any such examination which reasonably could be
expected to result in the assertion of a deficiency for any fiscal year open
for examination, assessment, or claim by the Internal Revenue Service, and each
Borrower shall provide Lender with notice of any such issue in accordance with
Section 9-3 hereunder.





 


                           (b)        As of the Closing Date, all returns of
each Borrower for state and local income, excise, sales, and other taxes have
been audited (or closed by applicable statutes) for all fiscal years through
and including such Borrower’s taxable year referenced on EXHIBIT 5-12, annexed
hereto, and all deficiencies, assessments, and other amounts asserted as a
result of such examinations have been fully paid or settled.  As of the Closing Date, no agreement is in
existence which waives or extends any statute of limitations applicable to the
right of any state taxing authority to assert a deficiency or make any other
claim for or in respect to any such state taxes and no Borrower shall enter
into such agreement except with at least ten (10) days prior written notice to
Lender. As of the Closing Date, no issue has been raised in any such
examination which reasonably could be expected to result in the assertion of a
deficiency for any fiscal year open for examination, assessment, or claim by
any state or local taxing authority and each Borrower shall provide Lender with
notice of any such issue in accordance with Section 9-3 hereunder.


                           (c)         Except as disclosed on said EXHIBIT
5-12, as of the Closing Date there are no examinations of or with respect to
any Borrower presently being conducted by the Internal Revenue Service or any
state taxing authority, and each Borrower shall provide Lender with notice of
any such examination in accordance with Section 9-3 hereunder.


                           (d)        Each Borrower has, and hereafter shall:
pay, as they become due and payable, all taxes and unemployment contributions
and other charges of any kind or nature levied, assessed or claimed against
such Borrower or the Collateral by any Person or entity whose claim could
result in an Encumbrance upon any asset of such Borrower or by any governmental
authority, except if contested in good faith and Borrowers maintain appropriate
reserves in accordance with GAAP and Borrowers have provided Lender with notice
of same in accordance with section 9-3 hereunder; properly exercise any trust
responsibilities imposed upon such Borrower by reason of withholding from
employees’ pay; timely make all contributions and other payments as may be
required pursuant to any Employee Benefit Plan now or hereafter established by
such Borrower; and timely file all tax and other returns and other reports with
each governmental authority to whom such Borrower is obligated to so file.


                           (e)         At its option, the Lender may, but
shall not be obligated to, pay any taxes, unemployment contributions, and any
and all other charges levied or assessed upon any Borrower or the Collateral by
any Person or entity or governmental authority, and make any contributions or
other payments on account of any Borrower’s Employee Benefit Plan as the
Lender, in the Lender’s discretion, may deem necessary or desirable, to
protect, maintain, preserve, collect, or realize upon any or all of the
Collateral or the value thereof or any right or remedy pertaining thereto,
provided, however, the Lender’s making of any such payment shall not constitute
a cure or waiver of any Event of Default occasioned by any Borrower’s failure
to have made such payment.





 


             5-13.     No Margin Stock.  No Borrower is engaged in the business of
extending credit for the purpose of purchasing or carrying any margin stock
(within the meaning of Regulations G, U, T, and X, of the Board of Governors of
the Federal Reserve System of the United States). No part of the proceeds of
any borrowing hereunder will be used at any time to purchase or carry any such
margin stock or to extend credit to others for the purpose of purchasing or
carrying any such margin stock.


             5-14.     ERISA.  None of  the Borrowers nor
any ERISA Affiliate ever has or hereafter shall:


                           (a)         Violate or fail to be in full
compliance with the Borrower’s Employee Benefit Plan.


                           (b)        Fail timely to file all reports and
filings required by ERISA to be filed by the Borrower.


                           (c)         Engage in any “prohibited transactions”
or “reportable events” (respectively as described in ERISA).


                           (d)        Engage in, or commit, any act such that
a tax or penalty could be imposed on account thereof pursuant to ERISA.


                           (e)         Accumulate any material funding
deficiency within the meaning of ERISA.


                           (f)         Terminate any Employee Benefit Plan
such that a lien could be asserted of the Borrower on account thereof pursuant
to ERISA.


                           (g)        Be a member of, contribute to, or have
any obligation under any Employee Benefit Plan which is a multiemployer plan
within the meaning of Section 4001(a) of ERISA.


             5-15.     Hazardous Materials.


                           (a)         No Borrower has ever:


                                        (i)          Been legally responsible for any
release or threat of release of any Hazardous Material.


                                        (ii)         Received notification of any release or
threat of release of any Hazardous Material from any site or vessel occupied or
operated by any Borrower and/or of the incurrence of any expense or loss in
connection with the assessment, containment, or removal of any release or
threat of release of any Hazardous Material from any such site or vessel.


                           (b)        The Borrowers shall:





 


                                        (i)          Dispose of any Hazardous Material only
in compliance with all Environmental Laws.


                                        (ii)         Not store on any site or vessel
occupied or operated by the Borrowers and not transport or arrange for the
transport of any Hazardous Material, except if such storage or transport is in
the ordinary course of the Borrowers’ businesses and is in compliance with all
Environmental Laws.


                           (c)         The Borrowers shall provide the Lender
with written notice upon any Borrower’s obtaining knowledge of any incurrence
of any expense or loss by any governmental authority or other Person in
connection with the assessment, containment, or removal of any Hazardous
Material, for which expense or loss any Borrower may be liable.


             5-16.     Litigation.  As of the Closing Date, there is not
presently pending or threatened by or against any Borrower any suit, action,
proceeding, or investigation which, if determined adversely to such Borrower,
would reasonably forseeably have a material adverse effect upon such Borrower’s
financial condition or ability to conduct its business as such business is
presently conducted or is contemplated to be conducted in the foreseeable
future.


             5-17.     Dividends or Investments.  The Borrowers shall not:


                           (a)         Pay any cash dividend or make any other
distribution in respect of any class of any Paper Warehouse capital stock.


                           (b)        Own, redeem, retire, purchase, or
acquire any of any Paper Warehouse capital stock.


                           (c)         Invest in or purchase any stock or
securities or rights to purchase any stock or securities of any corporation or
other entity other than in a Permitted Acquisition.


                           (d)        Merge or consolidate or be merged or
consolidated with or into any other corporation or other entity, except that
any Borrower may be merged into any other Borrower on reasonable advance
written notice to Lender.


                           (e)         Consolidate any of any Borrower’s
operations with those of any other corporation or other entity, other than
another Borrower.


                           (f)         Organize or create any Related Entity,
other than as permitted under Section 5-17(c).


                           (g)        Subordinate any debts or obligations
owed to the Borrower by any third party to any other debts owed by such third
party to any other Person.





 


             5-18.     Loans.  None of the Borrowers shall make any loans or advances to, nor
acquire the Indebtedness of, any Person, provided, however, the foregoing does
not prohibit any of the following:


                           (a)         Advance payments made to any Borrower’s
suppliers in the ordinary course.


                           (b)        Advances to any Borrower’s officers,
employees, and salespersons with respect to reasonable expenses to be incurred
by such officers, employees, and salespersons for the benefit of such Borrower,
which expenses are properly substantiated by the Person seeking such advance
and properly reimbursable by the Borrower.


                           (c)
        Acts permitted under Section 5-17(c).


             5-19.     Protection of Assets.  The Lender, in the Lender’s discretion, and
from time to time, may discharge any tax or Encumbrance on any of the
Collateral, or take any other action that the Lender may deem necessary or
desirable to repair, insure, maintain, preserve, collect, or realize upon any
of the Collateral. The Lender shall not have any obligation to undertake any of
the foregoing and shall have no liability on account of any action so
undertaken except where there is a specific finding in a judicial proceeding
(in which the Lender has had an opportunity to be heard), from which finding no
further appeal is available, that the Lender had acted in actual bad faith or
in a grossly negligent manner.  The Borrowers
shall pay to the Lender, on demand, or the Lender, in its discretion, may add
to the Loan Account, all amounts paid or incurred by the Lender pursuant to
this section. The obligation of the Borrowers to pay such amounts is a
Liability.


             5-20.     Line of Business.  No Borrower shall engage in any business
other than the business in which it is currently engaged or a business
reasonably related thereto.


             5-21.     Affiliate Transactions.  No Borrower shall make any payment, nor give
any value to any Related Entity (other than Borrower) except for goods and
services actually purchased by the Borrower from, or sold by the Borrower to,
such Related Entity for a price which shall:


                           (a)         Be competitive and fully deductible as
an “ordinary and necessary business expense” and/or fully depreciable under the
Internal Revenue Code of 1986 and the Treasury Regulations, each as amended;
and


                           (b)        Not differ from that which would have
been charged in an arms length transaction.


             5-22.     Executive Pay 


                           (a)         The only Executive Officers of the
Borrowers, at the execution of this Agreement, are those individuals referenced
in the definition of “Executive Officers”.





 


                           (b)        Prior to the execution of this
Agreement, the Borrowers furnished the Lender with copies of (i) all written
Executive Agreements, (ii) outlines of the salient features of all unwritten
Executive Agreements (as amended to date) then in existence, and (iii) outlines
of the status of currently contemplated terms of proposed but not yet executed
Executive Agreements described in EXHIBIT 5-22. There are no unwritten
agreements or understandings between any Borrower and any Executive Officer
which relate to Executive Pay, written disclosure of which has not been made to
the Lender.


                           (c)         The Borrowers will not:


                                        (i)          Enter into any Executive Agreement not
existing as of the date of execution of this Agreement, and not disclosed under
Section 5-22(b).


                                        (ii)         Alter, amend, supplement, or otherwise
change any Executive Agreement.


                                        (iii)        Pay, provide, or facilitate any
Executive Pay other than as provided in an Executive Agreement or, if not
covered by an Executive Agreement, as permitted pursuant to Section 5-21,
above.


             5-23.     Additional Assurances.


                           (a)         No Borrower is the owner of, nor has it
any interest in, any property or asset which, immediately upon the satisfaction
of the conditions precedent to the effectiveness of the credit facility
contemplated hereby (Article 4) will not be subject to a perfected security
interest in favor of the Lender to secure the Liabilities except for the
Richfield Account, motor vehicles and Capital Leases identified on EXHIBITS
2-1(c) and 5-6 and subject only to those Encumbrances (if any) described on
EXHIBIT 5-5, annexed hereto.


                           (b)        The Borrowers will not hereafter acquire
any asset or any interest in property which is not, immediately upon such
acquisition, subject to such a perfected security interest in favor of the
Lender to secure the Liabilities except for the acquisition of equipment
subject to future Capital Lease entered into in accordance with Section 5-6 hereof
subject only to Encumbrances (if any) permitted pursuant to Section 5-5, above.


                           (c)         The Borrowers shall execute and deliver
to the Lender such instruments, documents, and papers, and shall do all such
things from time to time hereafter as the Lender may request to carry into
effect the provisions and intent of this Agreement; to protect and perfect the
Lender’s security interests in the Collateral; and to comply with all
applicable statutes and laws, and facilitate the collection of any Receivables
Collateral. The Borrowers shall execute all such instruments as may be required
by the Lender with respect to the recordation and/or perfection of the security
interests created herein.


                           (d)        A carbon, photographic, or other
reproduction of this Agreement or of any financing statement or other
instrument executed pursuant to this Section 5-23 shall be sufficient for
filing to perfect the security interests granted herein.





 


             5-24.     Adequacy of Disclosure.


                           (a)         All financial statements furnished to
the Lender by the Borrowers have been prepared in accordance with GAAP, except
for the absence of footnotes and year end adjustments with respect to interim
financial statements, consistently applied and present fairly the condition of
the Borrowers at the date(s) thereof and the results of operations and cash
flows for the period(s) covered. There has been no change in the financial
condition, results of operations, or cash flows of the Borrowers since the
date(s) of such financial statements, other than changes in the ordinary course
of business, which changes have not been materially adverse, either singularly
or in the aggregate.


                           (b)        No Borrower has any contingent
obligations or obligation under any Lease or Capital Lease, except to the
extent permitted by Sections 5-4 and 5-5 hereof, which is not noted in the
Borrower’s financial statements furnished to the Lender prior to the execution
of this Agreement.


                           (c)         No document, instrument, agreement, or
paper now or hereafter given the Lender by or on behalf of any Borrower or any
guarantor of the Liabilities in connection with the execution of this Agreement
by the Lender contains or will contain any untrue statement of a material fact
or omits or will omit to state a material fact necessary in order to make the
statements therein not misleading. There is no fact known to any Borrower which
has, or which, in the foreseeable future could have, a material adverse effect
on the financial condition of any Borrower or any such guarantor which has not
been disclosed in writing to the Lender.


             5-25.     Minimum Excess
Availability.  At all times
Paper Warehouse shall maintain Minimum 
Excess Availability as set forth in Exhibit 9-11.


             5-26.     No Material Adverse
Change.  There has not been a
Material Adverse Change.


             5-27.     Other Covenants.  The Borrower shall not indirectly do or
cause to be done any act which, if done directly by the Borrower, would breach
any covenant contained in this Agreement.


             5-28.     Covenants
Regarding Franchise Agreements.


                           (a)         All Franchise Agreement in effect as of
the Closing Date are identified on EXHIBIT 5-28 and Borrower, in connection
with the monthly reporting required under Section 9-6(a)(ii) below shall
identify any anticipated future Franchise Agreements and any newly executed
Franchise Agreements and shall describe the termination of any Franchise
Agreements.


                           (b)        Except at set forth on EXHIBIT 5-28,
Borrowers and as of the Closing Date any other parties to any Franchise
Agreements are in compliance with all provisions of such agreements and all Requirements
of Law relating thereto.





 


                           (c)
        Lender’s exercise of any of it
rights under this Agreement and in accordance Article 11 and the UCC, including
without limitation, the conduct of any going out of business or similar sales
hereof shall not violate any provision of any Franchise Agreement.


                           (d)        All payments made to PWFI or any other
Borrower under the Franchise Agreements shall be deposited into a DDA and wired
to the Blocked Account in accordance with Article 7 hereof.


ARTICLE 6 - USE AND
COLLECTION OF COLLATERAL


             6-1.       Use of Inventory Collateral.


                           (a)
        No Borrower shall not engage in
any sale of the Inventory other than for fair consideration in the conduct of
its business in the ordinary course and shall not engage in sales or other
dispositions to creditors; sales or other dispositions in bulk; and any use of
any of the Inventory in breach of any provision of this Agreement.


                           (b)        No
sale of Inventory shall be on consignment, approval, or under any other
circumstances such that, with the exception of a Borrower’s customary return
policy applicable to the return of Inventory purchased by such Borrower’s
retail customers in the ordinary course, such Inventory may be returned to such
Borrower without the consent of the Lender.


             6-2.       Inventory Quality.  All Inventory now owned or hereafter
acquired by the Borrowers is and will be of good and merchantable quality and
free from defects (other than defects within customary trade tolerances).


             6-3.       Adjustments and
Allowances.  Any Borrower may
grant such allowances or other adjustments to such Borrower’s Account Debtors
(exclusive of extending the time for payment of any Account or Account
Receivable, which shall not be done without first obtaining the Lender’s prior
written consent in each instance except up to forty-five (45) days in the
ordinary course for Accounts other than Accounts of Credit Card Processors) as
such Borrower may reasonably deem to accord with sound business practice,
provided, however, the authority granted the Borrowers pursuant to this Section
6-3 may be limited or terminated by the Lender at any time in the Lender’s
discretion.


             6-4.       Validity of Accounts.


                           (a)         The amount of each Account shown on the
books, records, and invoices of each Borrower represented as owing by each Account
Debtor is and will be the correct amount actually owing by such Account Debtor,
except for minor adjustments in the ordinary course with respect to Accounts
other than Accounts owed by Credit Card Processors, and shall have been fully
earned by performance by such Borrower.





 


                           (b)        No Borrower has any Knowledge of any
impairment of the validity or collectibility of any of any Accounts and shall
notify the Lender of any such fact immediately after any Borrower becomes aware
of any such impairment.


                           (c)         No Borrower shall post any bond to
secure such Borrower’s performance under any agreement to which such Borrower
is a party nor cause any surety, guarantor, or other third party obligee to
become liable to perform any obligation of such Borrower (other than to the
Lender, or under any L/C issued in accordance herewith, and the Richfield
L/C’s) in the event of the Borrower’s failure so to perform.


             6-5.       Notification to
Account Debtors.  The Lender
shall have the right at any time (whether or not an Event of Default has
occurred) to notify any of the Borrower’s Account Debtors to make payment
directly to the Lender and to collect all amounts due on account of the
Collateral.


ARTICLE
7 - CASH MANAGEMENT


             7-1.       Depository Accounts.


                           (a)         Annexed hereto as EXHIBIT 7-1 is a
Schedule of all present DDA’s, which Schedule includes, with respect to each
depository (i) the name and address of that depository; (ii) the account
number(s) of the account(s) maintained with such depository; (iii) a contact
Person at such depository; and (iv) the telephone number of the contact Person.


                           (b)        Each Borrower shall, as a condition to
the effectiveness of this Agreement:


                                        (i)          Establish an account in the name of,
for the benefit of and under the control of, Lender into which all Receipts
shall be deposited in accordance with this Article 7 (the “Blocked Account”);


                                        (ii)         Cause Bank of America to enter in a
control agreement for Lender’s benefit reasonably satisfactory to Lender with
respect to the Bank of America DDA.


                                        (ii)
        Deliver to Lender proof of the
mailing, to each depository institution with which any DDA is maintained (other
than the Funding Account or any Local DDA) of notification (in form
satisfactory to the Lender) of the Lender’s interest in such DDA.  In the event that Agent or any Borrower
shall receive notice that any depository at which a DDA is maintained on the
date hereof, or is subsequently established as contemplated under paragraph (c)
below,  refuses to accept and comply
with the notifications delivered by such Borrower to such depository
institution of the Lender’s interest in such DDA, such Borrower will
immediately close all DDAs maintained with such depository institution and
establish new DDAs with depository institutions which accept and agree to such
notifications.


                                        (iii)        Deliver to Lender an agreement (in form
satisfactory to the Lender) with any depository institution at which a Blocked
Account is maintained.





 


                           (c)         The Borrower will not establish any DDA
hereafter (other than a Local DDA) unless Borrower, contemporaneous with such
establishment, the Borrower delivers to the Lender proof of mailing to any such
institution, a notification (in form satisfactory to the Lender) of the
Lender’s interest in such DDA.


                           (d)        The Borrower will establish and maintain
separate accounts exclusively for purposes of payroll and payroll tax deposits
and payments.


                           (e)         The contents of each DDA constitutes
Collateral and Proceeds of Collateral.


             7-2.       Credit Card Receipts.


                           (a)         Annexed hereto as EXHIBIT 7-2, is a
Schedule which describes all Credit Card Processors, which term shall include
any “instant credit” providers and any other arrangements to which any Borrower
is a party with respect to the payment to such Borrower of the proceeds of all
credit card charges for sales by such Borrower.


                           (b)        The Borrowers shall deliver to the
Lender the written acknowledgment and consent of each of the Credit Card
Processors to a notice in form satisfactory to the Lender, which notice
provides that payment of all credit card charges submitted by each Borrower to
that Credit Card Processor payable to such Borrower by such Credit Card
Processor shall be directed to the Blocked Account.  Each Borrower shall not change such direction or designation
except upon and with the prior written consent of the Lender.


             7-3.       The
Concentration Account, the Blocked Account and the Funding Accounts.


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


                                        (i)          The “Concentration Account”: An
account owned and established by the Lender with The Chase Manhattan Bank, N.A.


                                        (ii)         The “Funding Account”: A Deposit
Account established by the Borrowers with the institution identified on Exhibit
7-6 and into which the sole deposits shall be surpluses in accordance with
Section 7-1(b) hereof or Advances made by Lender hereunder.


                                        (iii)        The Blocked Account established by the
Borrowers with Wells Fargo Bank, NA, which also includes certain sub-accounts,
all of which are subject to a control agreement in favor of Lender.


                           (b)        The contents of all DDA’s, Deposit
Accounts and the Blocked Account constitute Collateral and Proceeds of
Collateral.





 


                           (c)         The Borrowers shall pay all fees and
charges of, and maintain such impressed balances as may be required by the Lender
or by any bank in which any account is opened as required hereby (even if such
account is opened by the Lender).


             7-4.       Proceeds and
Collection of Accounts.


                           (a)         All Receipts constitute Collateral and
proceeds of Collateral and shall be held in trust by the Borrowers for the
Lender; shall not be commingled with any of the Borrowers’ other funds; and
shall be deposited and/or transferred only to the Blocked Account.


                           (b)        The Borrowers shall cause the ACH or
wire transfer to the Blocked Account, of:


                                        (i)          No less frequently than daily (and
whether or not there is then an outstanding balance in the Loan Account), the
then contents of each DDA (other than (A) any Local DDA (B) the Funding Account
and (C) the Bank of America DDA), each such transfer to be net of any minimum
balance, not to exceed (so long as there are no DDA’s other than those listed
on Exhibit 7-1) Three Thousand ($3,000) Dollars in collected  funds, as may be required to be maintained
in the subject DDA by the bank at which such DDA is maintained and the proceeds
of all credit card charges, then payable, not otherwise provided for pursuant
hereto.


                                        (ii)         No less frequently than every Tuesday
and Friday (and whether or not there is then an outstanding balance in the Loan
Account), the then contents of the Bank of America DDA.


Telephone or email advice (and if
requested by Lender confirmed by written notice) shall be provided to the
Lender on each Banking Day on which any such transfer is made.


                           (c)         Whether or not any Liabilities are then
outstanding, the Borrowers shall cause the ACH or wire transfer to the
Concentration Account, no less frequently than daily, of the entire previous
day’s closing collected balance of the Blocked Account.


                           (d)        In the event that, notwithstanding the
provisions of this Section 7-4, any Borrower receives or otherwise has dominion
and control of any Receipts, or any proceeds or collections of any Collateral,
such Receipts, proceeds, and collections shall be held in trust by the Borrower
for the Lender and shall not be commingled with any of any Borrower’s other
funds or deposited in any account of any Borrower other than as instructed by
the Lender.


             7-5.       Payment of Liabilities.


                           (a)         On each Banking Day, upon receipt by
Lender, the Lender shall apply towards the Liabilities, the then collected
balance of the Concentration Account (net of fees charged, and of such
impressed balances as may be required by the bank at which the Concentration
Account is maintained), provided, however, for purposes of the
calculation of interest on the unpaid principal balance of the Loan Account,
such payment shall be deemed to have been made one (1) Banking Days after such
transfer.





 


                           (b)        The Lender shall transfer to the Funding
Account any surplus in excess of the Liabilities in the Concentration Account
(attributable to Borrowers) remaining after the application towards the
Liabilities referred to in Section 7-5(a), above (less those amounts which are
to be netted out, as provided therein) provided, however, in the event that both
(i) a Suspension Event has occurred and (ii) one or more L/C’s are then
outstanding, the Lender may establish a funded reserve of up to one hundred ten
(110%) percent of the aggregate Stated Amounts of such L/C’s.


             7-6.       The Funding Account.  All checks shall be drawn by any Borrowers
upon and any other disbursements made by any Borrower shall be solely from the
Funding Account or any of the disbursement accounts identified on EXHIBIT 7-6
hereto, which accounts shall be funded solely from the Funding Account.


             7-7.       Capital Infusions, Etc.  The proceeds of any investment in any
Borrower from any source, including without limitation, proceeds of the
issuance or sale of any capital stock, debt or debt instruments, shall be
deposited by the purchaser thereof directly into the Blocked Account.  In addition, any funds received by any
Borrower other than from ordinary business operations, including, without
limitation, proceeds or payments under any contracts for liquidation of any
Collateral, tax refunds, insurance or condemnation proceeds or damage awards,
shall be deposited directly into the Blocked Account.





 


ARTICLE
8 - LENDER AS BORROWER’S ATTORNEY-IN-FACT


             8-1.       Appointment as
Attorney-In-Fact.  Each Borrower
hereby irrevocably constitutes and appoints the Lender as such Borrower’s true
and lawful attorney, with full power of substitution, to convert the Collateral
into cash at the sole risk, cost, and expense of the Borrower, but for the sole
benefit of the Lender. The rights and powers granted the Lender by this
appointment include but are not limited to the right and power to:


                           (a)         Prosecute, defend, compromise, or
release any action relating to the Collateral.


                           (b)        Sign change of address forms to change
the address to which the Borrower’s mail is to be sent to such address as the
Lender shall designate; receive and open the Borrower’s mail; remove any
Receivables Collateral and Proceeds of Collateral therefrom and turn over the
balance of such mail either to the Borrower or to any trustee in bankruptcy,
receiver, assignee for the benefit of creditors of any Borrower, or other legal
representative of such Borrower whom the Lender determines to be the
appropriate Person to whom to so turn over such mail.


                           (c)         Endorse the name of any Borrower in
favor of the Lender upon any and all checks, drafts, notes, acceptances, or
other items or instruments; sign and endorse the name of any Borrower on, and
receive as secured party, any of the Collateral, any invoices, schedules of
Collateral, freight or express receipts, or bills of lading, storage receipts,
warehouse receipts, or other documents of title respectively relating to the
Collateral.


                           (d)        Sign the name of any Borrower on any
notice to such Borrower’s Account Debtors or verification of the Receivables
Collateral; sign any Borrower’s name on any Proof of Claim in Bankruptcy
against Account Debtors, and on notices of lien, claims of mechanic’s liens, or
assignments or releases of mechanic’s liens securing the Accounts.


                           (e)         Take all such action as may be
necessary to obtain the payment of any letter of credit and/or banker’s
acceptance of which the Borrower is a beneficiary.


                           (f)         Repair, manufacture, assemble,
complete, package, deliver, alter or supply goods, if any, necessary to fulfill
in whole or in part the purchase order of any customer of the Borrower.


                           (g)        Use, license or transfer any or all
General Intangibles of any Borrower.


Notwithstanding anything to the contrary,
Lender agrees not to exercise any such rights unless an Event of Default which
has not been remedied within any grace period expressly provided herein or
otherwise waived in writing by Lender.





 


             8-2.       No Obligation to Act.  The Lender shall not be obligated to do any
of the acts or to exercise any of the powers authorized by Section 8-1 herein,
but if the Lender elects to do any such act or to exercise any of such powers,
it shall not be accountable for more than it actually receives as a result of
such exercise of power, and shall not be responsible to any Borrower for any
act or omission to act except for any act or omission to act as to which there
is a final determination made in a judicial proceeding (in which proceeding the
Lender has had an opportunity to be heard) which determination includes a
specific finding that the subject act or omission to act had been grossly
negligent or in actual bad faith.


ARTICLE
9 - FINANCIAL AND OTHER REPORTING REQUIREMENTS/FINANCIAL COVENANTS


             9-1.       Maintain Records.  The Borrowers shall:


                           (a)         At all times, keep proper books of
account, in which full, true, and accurate entries shall be made of all of any
Borrower’s transactions, all in accordance with GAAP applied consistently with
prior periods to fairly reflect the financial condition of the Borrowers at the
close of, and its results of operations for, the periods in question.


                           (b)        Timely provide the Lender with those
financial reports, statements, and schedules required by this Article 9 or
otherwise, each of which reports, statements and schedules shall be prepared,
to the extent applicable, in accordance with GAAP, except for the absence of
footnotes and year end adjustments with respect to interim financial
statements, applied consistently with prior periods to fairly reflect the
financial condition of any Borrower at the close of, and its results of operations
for, the period(s) covered therein.


                           (c)         At all times, keep accurate current
records of the Collateral including, without limitation, accurate current
stock, cost, and sales records of its Inventory, accurately and sufficiently
itemizing and describing the kinds, types, and quantities of Inventory and the
cost and selling prices thereof.


                           (d)        At all times, retain independent
certified public accountants who are reasonably satisfactory to the Lender and
shall cause Borrower’s audit committee to instruct such accountants to fully
cooperate with, and be available to, the Lender to discuss any Borrower’s
financial performance, financial condition, operating results, controls, and
such other matters, within the scope of the retention of such accountants, as
may be raised by the Lender.


                           (e)         Not change any Borrower’s fiscal year.


                           (f)         Not change any Borrower’s taxpayer
identification number.





 


             9-2.       Access to Records.


                           (a)         The Borrowers shall accord the Lender
and the Lender’s representatives with access from time to time as the Lender
and such representatives may require to all properties owned by or over which
any Borrower has control. The Lender and the Lender’s representatives shall
have the right, and the Borrowers will permit the Lender and such
representatives from time to time as the Lender and such representatives may
request, to examine, inspect, copy, and make extracts from any and all of the
Borrowers’ books, records, electronically stored data, papers, and files. The
Borrowers shall make all of the Borrowers’ copying facilities available to the
Lender.  Lender shall use commercially
reasonable efforts to maintain the confidentiality of any of Borrowers’
confidential information, but shall be free to share any information with its
agents, counsel representatives, successors and assigns in connection with the
administration and monitoring of the of the Revolving Credit and this Agreement
and any exercise of it remedies under this Agreement.


                           (b)        The Borrowers hereby authorize the
Lender and the Lender’s representatives to:


                                        (i)          Inspect, copy, duplicate, review,
cause to be reduced to hard copy, run off, draw off, and otherwise use any and
all computer or electronically stored information or data which relates to the
Borrowers, or any service bureau, contractor, accountant, or other Person, and
directs any such service bureau, contractor, accountant, or other Person fully
to cooperate with the Lender and the Lender’s representatives with respect
thereto.


                                        (ii)         Verify at any time the Collateral or
any portion thereof, including verification with Account Debtors, and/or with
the Borrowers’ computer billing companies, collection agencies, and accountants
and to sign the name of any Borrower on any notice to the Borrowers’ Account
Debtors or verification of the Collateral.


             9-3.       Immediate Notice to
Lender.


                           (a)         The Borrowers shall provide the Lender
with written notice immediately upon the occurrence of any of the following
events, which written notice shall be with reasonable particularity as to the
facts and circumstances in respect of which such notice is being given:


                                        (i)          Any change in the Borrowers’ Executive
Officers and directors.


                                        (ii)         The completion of any physical count of
any Borrower’s Inventory (together with a copy of the certified or such other
results as may then be available thereof).


                                        (iii)        Except in the ordinary course of
business, any ceasing of the any Borrower’s making of payment to any of its
creditors (including the ceasing of the making of such payments on account of a
dispute with the subject creditor).





 


                                        (iv)       Any failure by any Borrower to pay rent
at any of the Borrowers’ locations, which failure continues for more than three
(3) days following the day on which such rent first came due.  If any Borrower has any dispute with any
Landlord with respect to rent payable or other matters, such Borrower shall
give Lender written notice of said dispute.


                                        (v)        Any failure by any Borrower to pay trade
liabilities or other expense liabilities in accordance with their past business
practices.


                                        (vi)       Any material change in the business,
operations, or financial affairs of any Borrower.


                                        (vii)      The occurrence of any Suspension Event or
Event of Default.


                                        (viii)     Any intention on the part of any Borrower
to discharge the Borrowers’ present independent accountants or any withdrawal
or resignation by such independent accountants from their acting in such
capacity (as to which, see Subsection 9-1(d)).


                                        (ix)        Any litigation which, if determined
adversely to any Borrower, might have a material adverse effect on the
financial condition of such Borrower.


                                        (x)         The reduction by any of any Borrower’s
material vendors in the amount of trade credit or terms provided by such vendor
to such Borrower on the date of execution hereof.


                                        (xi)        The engagement or employment by Borrower
of any bankruptcy, restructuring or “turn-around” professionals.


                                        (xii)       Any default by any party to or any
Borrower’s receipt of  any notice or
threat of cancellation of any agreement described on EXHIBITS 5-6, 5-8,
5-9  and 5-28 (as the same may be
revised from time to time in accordance herewith).


                                        (xiii)      Any examination of any Borrower by any
taxing authority and the existence of any issue which reasonably could be
expected to result in the assertion of a deficiency for any fiscal year open
for examination, assessment, or claim by the Internal Revenue Service.


                           (b)        The Borrowers shall:


                                        (i)          Provide the Lender, when so
distributed, with copies of any materials distributed to the shareholders of
the Borrowers (qua such shareholders).


                                        (ii)         Add the Lender as an addressee on all
mailing lists maintained by or for the Borrowers.





 


                                        (iii)        At the request of the Lender, from time
to time, provide the Lender with copies of all advertising (including copies of
all print advertising and duplicate tapes of all video and radio such
advertising).


                                        (iv)       Provide the Lender, when received by the
Borrowers, with a copy of any management letter or similar communications from
any accountant of the Borrowers.


             9-4.       Borrowing Base
Certificate.  Paper Warehouse
shall provide the Lender, daily, with a Borrowing Base Certificate (in the form
of EXHIBIT 9-4 annexed hereto, as such form may be revised from time to time by
the Lender). Such Certificate may be sent to the Lender by facsimile
transmission, provided that the original thereof is forwarded to the Lender on
the date of such transmission at its request. 
No adjustments to the Borrowing Base Certificate may be made without
support documentation and such other documentation as may be requested by
Lender from time to time.


             9-5.       Weekly Reports.  Weekly, not later than Wednesday for the
immediately preceding fiscal week:


                           See
EXHIBIT 9-R.


In the event that Availability equals Two
Hundred Fifty Thousand ($250,000) Dollars or less for seven (7) consecutive
days, then Borrowers shall provide Lender with weekly cash flow reports in form
and content satisfactory to Lender.


             9-6.       Monthly Reports.


                           (a)         Monthly, the Borrowers shall provide
the Lender with original counterparts of (each in such form as the Lender from
time to time may specify):


                                        (i)          Within fifteen (15) days of the end of
the previous month:


                                                     See
EXHIBIT 9-R


                                        (ii)         Within thirty (30) days of the end of
the previous month:


                                                     See
EXHIBIT 9-R


                           (b)        For purposes of Section 9-6(a)(i),
above, the first “previous month” in respect of which the items required by
that Section shall be provided shall be September and for purposes of Section
9-6(a)(ii), above, the first “previous month” in respect of which the items
required by that Section shall be provided shall be September.  For purposes of this section, reports for
the month of August shall be due no later than thirty (30) days after the
execution of this Agreement.





 


             9-7.       Annual Reports.


                           (a)         In addition to the monthly reports
required under Article 9-6, annually, within ninety (90) days following the end
of the Borrowers’ fiscal year, the Borrowers shall furnish the Lender with an
original signed counterpart of the Borrowers’ annual financial statement, which
statement shall have been prepared by, and bearing the unqualified opinion of,
the Borrowers’ independent certified public accountants (i.e. said statement
shall be “certified” by such accountants). Such annual statement shall include,
at a minimum (with comparative information for the then prior fiscal year) a
balance sheet, income statement, statement of changes in shareholders’ equity,
and cash flows.


                           (b)        Each annual statement shall be
accompanied by such accountant’s certificate indicating that to the best knowledge
of such accountant, no event has occurred which is or which, solely with the
passage of time or the giving of notice (or both) would be, an Event of
Default.


                           (c)         Borrowers shall provide interim draft
annual financial statements (inclusive of subsequent periods, until year-end
statements are delivered) within forty-five (45) days of each year end.


             9-8.       Officers’ Certificates.  The Borrower shall cause the Borrower’s
President and Chief Financial Officer respectively to provide such Person’s
Certificate with those monthly, and annual statements to be furnished pursuant
to this Agreement, which Certificate shall:


                           (a)         Indicate that the subject statement was
prepared in accordance with GAAP, except for the absence of footnotes and year
end adjustments with respect to interim financial statements, consistently
applied, and presents fairly the financial condition of the Borrowers at the
close of, and the results of the Borrowers’ operations and cash flows for, the
period(s) covered, subject, however (with the exception of the Certificate
which accompanies such annual statement) to usual year end adjustments.


                           (b)        Indicate either that (i) no Suspension
Event has occurred or (ii) if such an event has occurred, its nature (in
reasonable detail) and the steps (if any) being taken or contemplated by the
Borrower to be taken on account thereof.


                           (c)         Include calculations concerning each
Borrower’s compliance (or failure to comply) at the date of the subject
statement with each of the financial performance covenants included in Section
9-11 (and Exhibit  9-11), below.


                           (d)        Indicate that all taxes) have or have
not been paid, and with respect to taxes not paid, broken down by type and
taxing authority.


                           (e)         Indicate that all rent and additional
rent due pursuant to any store lease have or have not been paid and with
respect to rent and additional rent not paid, broken down by store location.





 


             9-9.       Inventories,
Appraisals, and Audits.


                           (a)         The Lender, at the expense of the
Borrowers, may participate in and/or observe each physical count and/or
inventory of so much of the Collateral as consists of Inventory which is
undertaken on behalf of any  Borrower.


                           (b)        Upon the Lender’s request from time to
time, the Borrowers shall obtain, or shall permit the Lender to obtain (in all
events, at the Borrowers’ expense) financial or SKU based physical counts
and/or inventories of the Collateral, conducted by such inventory takers as are
satisfactory to the Lender and following such methodology as may be required by
the Lender, each of which physical counts and/or financial or SKU based
inventories shall be observed by the Borrowers’ accountants. The Lender will
require the Borrowers to conduct one (1) such count and/or inventory during
each twelve (12) month period during which this Agreement is in effect and to
provided Lender with the results of any SKU, cycle or any other internal counts
or inventories, but after the occurrence of any Event of Default, Lender, in
its discretion, may require Borrowers, at Borrowers’ expense, to undertake
additional such counts or inventories during such period.  The draft or unaudited results of all
inventories or counts shall be furnished to Lender immediately thereafter and
final, reconciled results within as soon as practicable thereafter but in no
event later then than ten (10) Banking Days of the taking of such inventories
or counts.  The Borrowers agree that the
Lender is entitled to request and receive directly from the inventory taker the
unaudited or draft results of any such inventory or audit.


                           (c)         Upon the Lender’s request from time to
time, the Borrowers shall permit the Lender to obtain appraisals conducted by
such appraisers as are satisfactory to the Lender two (2) of which such
appraisals and one “desktop update” thereof during each calendar year of the
term of this Agreement shall be at Borrower’s expense, and any additional
appraisals may be conducted at any time in Lender’s discretion at Lender’s
expense, provided that after the occurrence of any Event of Default, any such
additional appraisals shall also be at Borrowers’ expense.


                           (d)        The Lender contemplates conducting three
(3) commercial finance audits (in each event, at the Borrower’s expense) of the
Borrowers’ books and records during any twelve (12) month period during which
this Agreement is in effect, but after the occurrence of any Event of Default,
Lender in its discretion, may, at Borrowers’ expense, undertake additional such
audits during such period.


                           (e)         The Lender from time to time (in all
events, at the Borrowers’ expense) may undertake “mystery shopping” (so-called)
visits to all or any of the Borrowers’ business premises.  The Lender shall provide the Borrowers with
a copy of any non-company confidential results of such mystery shopping upon a
Borrower’s written request.





 


             9-10.     Additional
Financial Information.


                           (a)         In addition to all other information
required to be provided pursuant to this Article 9, the Borrowers promptly
shall provide the Lender with such other and additional information concerning
the Borrowers, the Collateral, the operation of the Borrowers’ businesses, and
the Borrowers’ financial condition, including original counterparts of
financial reports and statements, as the Lender may from time to time request
from the Borrowers.


                           (b)        The Borrowers have provided the Lender
with their current Business Plan, a copy of which is annexed hereto as EXHIBIT
9-10.  The Borrowers may provide the
Lender, from time to time hereafter, with updated Business Plans. In all
events, the Borrowers, not later than forty five (45) days prior to the end of
each of the Borrowers’ fiscal years, shall furnish the Lender with an updated
and extended Business Plan which shall go out at least through the end of the
then next fiscal year and the final Business Plan within fifteen (15) days
prior to the end of Borrowers’ fiscal year. In each event, such updated and
extended Business Plans shall be prepared pursuant to a methodology and shall
include such assumptions as are satisfactory to the Lender.   Routinely throughout the year, the Lender,
following the receipt of any of such revised forecast which reflects material
adverse business performance, may, but shall not be under any obligation to,
revise the financial performance covenants included on EXHIBIT 9-11, annexed
hereto.


             9-11.     Financial
Performance and Inventory Covenants.. 
The Borrowers shall observe and comply with those financial performance
and inventory covenants set forth on EXHIBIT 9-11 annexed hereto.


             9-12.     Electronic Reporting..  At Lender’s option all information and
reports required to be supplied to Lender by Borrowers shall be transmitted
electronically, to the extent of Borrowers’ ability, pursuant to an electronic
transmitting reporting system and shall be in a record layout format designated
by Lender from time to time.


ARTICLE 10 - EVENTS OF
DEFAULT


             The occurrence of any event
described in this Article 10 respectively, shall constitute an “Event of
Default” herein. Upon the occurrence of any Event of Default
described in Section 10-11, any and all Liabilities shall become due and
payable without any further act on the part of the Lender. Upon the occurrence
of any other Event of Default which has not been remedied within any grace
period expressly provided herein or otherwise waived in writing by Lender, any
and all Liabilities shall become immediately due and payable, at the option of
the Lender and without notice or demand. The occurrence of any Event of Default
which has not been remedied within any grace period expressly provided herein or
otherwise waived in writing by Lender shall also constitute, without notice or
demand, a default under all other agreements between the Lender and the
Borrowers and instruments and papers given the Lender by the Borrowers, whether
such agreements, instruments, or papers now exist or hereafter arise.


             10-1.     Failure to
Pay Revolving Credit (No Grace Period).  The failure by any Borrower to pay any amount when due under the
Revolving Credit.





 


             10-2.     Failure To
Make Other Payments (No Grace Period). 
The failure by any Borrower to pay when due (or upon demand, if payable
on demand) any payment Liability other than under the Revolving Credit.


             10-3.     Failure to
Comply with Cash Management and Financial/Inventory Covenants  (No Grace Period).  The failure by any  Borrower to promptly, punctually, faithfully and timely perform,
discharge, or comply with any covenant included in Article 7 and Section 9-11
hereof.


             10-4.     Failure to
Perform Covenant or Liability (Grace Period).  The failure by the any Borrower to promptly, punctually and
faithfully perform, or observe any term, covenant or agreement on its part to
be performed or observed pursuant to any of the provisions of this Agreement,
other than those described in Sections 10-1, 10-2 or 10-3, and in sections 10-5
through 10-19 below, which is not remedied within the Grace Period described
below which period shall commence on the earlier of (i) notice thereof by
Lender to Borrower, or (ii) the date any Borrower was required to give notice
to Lender pursuant to Section 9-3(a)(vii) hereof:


	5-4	Location
  of Collateral/Leases 	three  (3) Banking Days
	5-5	Title
  to Assets	ten
  (10) Banking Days
	5-6	Indebtedness	ten
  (10) Banking Days
	5-7	Insurance
  Policies	ten
  (10) Banking Days
	5-12
  (d)	Pay
  Taxes	ten
  (10) Banking Days
	9-4
  to 9-8	Financial
  Reporting	Three
  (3) Banking Days
	All
  others	 	ten
  (10) Banking Days




             10-5.     Misrepresentation
(No Grace Period).  The
determination by the Lender that any representation or warranty at any time
made by any Borrower to the Lender was not true or complete in all material
respects when given.


             10-6.     Acceleration
of Other Debt; Breach of Lease. 
The occurrence of any event, subject to any applicable cure or grace
periods, such that any material Indebtedness of any Borrower to any creditor
other than the Lender could be accelerated or, without the consent of any
Borrower, any Lease could be terminated (whether or not the subject creditor or
lessor takes any action on account of such occurrence).


             10-7.     Default Under Other
Agreements.   Subject to any
applicable grace period the occurrence of any breach or default under any
agreement between the Lender and any Borrower or instrument or paper given the
Lender by any Borrower, whether such agreement, instrument, or paper now exists
or hereafter arises (notwithstanding that the Lender may not have exercised its
rights upon default under any such other agreement, instrument or paper).


             10-8.     Casualty
Loss; Non-Ordinary Course Sales (No Grace Period).  The occurrence of any (a) uninsured loss,
theft, damage, or destruction of or to any material portion of the Collateral,
or (b) sale, without Lender’s consent, (other than sales otherwise expressly
permitted hereby) of any material portion of the Collateral.





 


             10-9.     Judgment;
Restraint of Business  (No Grace Period).


                           (a)         The service of process upon the Lender
or any Participant seeking to attach, by trustee, mesne, or other process, any
of any of any Borrower’s funds on deposit with, or assets of any Borrower in
the possession of, the Lender or such Participant.


                           (b)        The entry of any judgment against any
Borrower, which judgment is in excess of $50,000 and is not satisfied (if a
money judgment) or appealed from (with execution or similar process stayed)
within fifteen  (15) days of its entry.


                           (c)         The entry of any order or the
imposition of any other process having the force of law, the effect of which is
which order or process or attachment is not vacated, dismissed or otherwise
terminated within three (3) Business Days.


             10-10.   Business
Failure (Grace Period if initiated against any Borrower).  Any act by, against, or relating to any
Borrower, or its property or assets, which act constitutes the application for,
consent to, or sufferance of the appointment of a receiver, trustee, or other
Person, pursuant to court action or otherwise, over all, or any part of the
Borrower’s property; the granting of any trust mortgage or execution of an
assignment for the benefit of the creditors of any Borrower, or the occurrence
of any other voluntary or involuntary liquidation or extension of debt
agreement for the Borrower; or the offering by or entering into by any Borrower
of any composition, extension, or any other arrangement seeking relief from or
extension of the debts of any Borrower, or the initiation of any other judicial
or non-judicial proceeding or agreement by, against, or including such Borrower
which seeks or intends to accomplish a reorganization or arrangement with
creditors; any which if initiated against (but not by) any Borrower, is not
dismissed within thirty (30) days, provided however, Lender shall have no
obligation to make any Advances hereunder during such thirty (30) day period.


             10-11.   Bankruptcy (No Grace Period).  The failure by any of the Borrowers to
generally pay its debts as they mature; the filing of any complaint,
application, or petition by or against any Borrower initiating any matter in
which such Borrower is or may be granted any relief from the debts of such
Borrower pursuant to the Bankruptcy Code or any other insolvency statute or
procedure.


             10-12.   Insecurity (No Grace Period).  The occurrence of any event or circumstance
with respect to any Borrower such that Lender shall believe in good faith that
the prospect of payment of all or any part of the Liabilities or the performance
by the Borrower under this Agreement or any other agreement between the Lender
and the Borrower is impaired.


             10-13.   Default by
Guarantor or Related Entity. 
The occurrence of any of the foregoing Events of Default (and subject to
any applicable Grace Period) with respect to any guarantor of the Liabilities,
or the occurrence of any of the foregoing Events of Default with respect to any
parent (if the Borrower is a corporation), subsidiary, or Related Entity, as if
such guarantor, parent, or Related Entity were the “Borrower” described
therein.





 


             10-14.   Indictment -
Forfeiture (Grace Period).  The
indictment of, or institution of any legal process or proceeding against, any
of the Borrowers, any Executive Officer or any guarantor of the Liabilities
under any federal, state, municipal, and other civil or criminal statute, rule,
regulation, order, or other requirement having the force of law where the
relief, penalties, or remedies sought or available include the forfeiture of
any property of the Borrowers and/or the imposition of any stay or other order,
the effect of which could be to restrain in any material way the conduct by any
of the Borrower of its business in the ordinary course which order or process
or attachment is not vacated, dismissed or otherwise terminated within three
(3) Business Days.


             10-15.   Termination of Guaranty.  Intentionally deleted.


             10-16.   Challenge to
Loan Documents (No Grace Period).


                           (a)         Any challenge by or on behalf of the
Borrowers or any guarantor of the Liabilities to the validity of any Loan
Document or the applicability or enforceability of any Loan Document strictly
in accordance with the subject Loan Document’s terms or which seeks to void,
avoid, limit, or otherwise adversely affect any security interest created by or
in any Loan Document or any payment made pursuant thereto.


                           (b)        Any determination by any court or any
other judicial or government authority that any Loan Document is not
enforceable strictly in accordance with the subject Loan Document’s terms or
which voids, avoids, limits, or otherwise adversely affects any security
interest created by any Loan Document or any payment made pursuant thereto.


             10-17.   Executive Management
(Grace Period).  The death,
long-term disability, or other failure of any Executive Officer at any time to
exercise that authority and discharge those management responsibilities with
respect to any Borrower as are exercised and discharged by such Person at the
execution of this Agreement, which Executive Officer has not been replaced by another
Person reasonably acceptable to Lender within thirty (30) days of such failure
of any Executive Officer to serve.


             10-18.   Change in Control (No
Grace Period).  The occurrence
of any Change in Control.


             10-19.   Material Adverse
Change (No Grace Period).  If
there is a Material Adverse Change.


ARTICLE
11 - RIGHTS AND REMEDIES UPON DEFAULT


             In
addition to all of the rights, remedies, powers, privileges, and discretions
which the Lender is provided prior to the occurrence of an Event of Default,
the Lender shall have the following rights and remedies upon the occurrence of
any Event of Default which has not been remedied within any grace period
expressly provided herein or otherwise waived in writing by Lender and at any
time thereafter. No stay which otherwise might be imposed pursuant to the
Bankruptcy Code or otherwise shall stay, limit, prevent, hinder, delay,
restrict, or otherwise prevent the Lender’s exercise of any of such rights and
remedies.





 


             11-1.     Rights of Enforcement.
The Lender shall have all of the rights and remedies of a secured party upon
default under the UCC, in addition to which the Lender shall have all and each
of the following rights and remedies:


                           (a)         To collect the Receivables Collateral
with or without the taking of possession of any of the Collateral.


                           (b)        To take possession of all or any portion
of the Collateral.


                           (c)         To sell, lease, or otherwise dispose of
any or all of the Collateral, in its then condition or following such
preparation or processing as the Lender deems advisable and with or without the
taking of possession of any of the Collateral.


                           (d)        To conduct one or more going out of
business sales, strategic sales or other sales which include the sale or other
disposition of the Collateral.


                           (e)         To apply the Receivables Collateral or
the proceeds of the Collateral towards the Liabilities, but not necessarily in
complete satisfaction thereof, unless and until the Liabilities would thereby
be irrevocably paid.


                           (f)         To exercise all or any of the rights,
remedies, powers, privileges, and discretions under all or any of the Loan
Documents.


             11-2.     Sale of Collateral.


                           (a)         Any sale or other disposition of the
Collateral may be at public or private sale upon such terms and in such manner
as the Lender deems advisable, having due regard to compliance with any statute
or regulation which might affect, limit, or apply to the Lender’s disposition
of the Collateral.


                           (b)        The Lender, in the exercise of the
Lender’s rights and remedies upon default, may conduct one or more going out of
business sales, in the Lender’s own right or by one or more agents and
contractors. Such sale(s) may be conducted upon any premises owned, leased, or
occupied by the Borrowers. To the extent permitted by law, the Lender and any
such agent or contractor, in conjunction with any such sale, may augment the
Inventory with other goods (all of which other goods shall remain the sole
property of the Lender or such agent or contractor). Any amounts realized from
the sale of such goods which constitute augmentations to the Inventory (net of
an allocable share of the costs and expenses incurred in their disposition)
shall be the sole property of the Lender or such agent or contractor and
neither the Borrowers nor any Person(s) claiming under or in right of the Borrowers
shall have any interest therein.





 


                           (c)         Unless the Collateral is perishable or
threatens to decline speedily in value, or is of a type customarily sold on a
recognized market (in which event the Lender shall provide the Borrowers with
such notice as may be practicable under the circumstances), the Lender shall
give the Borrowers at least five (5) days prior written notice of the date,
time, and place of any proposed public sale, and of the date after which any
private sale or other disposition of the Collateral may be made. The Borrowers
agree that such written notice shall satisfy all requirements for notice to the
Borrowers which are imposed under the UCC or other applicable law with respect
to the exercise of the Lender’s rights and remedies upon default.


                           (d)        The Lender may purchase the Collateral,
or any portion of it at any sale held under this Article.


                           (e)         The Lender shall apply the proceeds of
any exercise of the Lender’s Rights and Remedies under this Article 11 towards
the Liabilities in such manner.


             11-3.     Occupation of
Business Location.  In
connection with the Lender’s exercise of the Lender’s rights under this Article
11, the Lender may enter upon, occupy, and use any premises owned or occupied
by any Borrower, and may exclude any Borrower from such premises or portion
thereof as may have been so entered upon, occupied, or used by the Lender . The
Lender shall not be required to remove any of the Collateral from any such
premises upon the Lender’s taking possession thereof, and may render any
Collateral unusable to the Borrowers. In no event shall the Lender be liable to
the Borrowers for use or occupancy by the Lender of any premises pursuant to
this Article 11, nor for any charge (such as wages for the Borrowers’ employees
and utilities) incurred in connection with the Lender’s exercise of the
Lender’s Rights and Remedies.


             11-4.     Grant of Nonexclusive
License.  Each Borrower hereby
grants to the Lender a royalty free nonexclusive irrevocable license to use,
apply, and affix any trademark, tradename, logo, or the like in which the
Borrower now or hereafter has rights, such license being with respect to the
Lender’s exercise of the rights hereunder including, without limitation, in
connection with any completion of the manufacture of Inventory or sale or other
disposition of Inventory.


             11-5.     Assembly of Collateral.  The Lender may require the Borrowers to
assemble the Collateral and make it available to the Lender at the Borrowers’
sole risk and expense at a place or places which are reasonably convenient to
both the Lender and Borrowers.


             11-6.     Rights and Remedies.  The rights, remedies, powers, privileges,
and discretions of the Lender hereunder (herein, the “Lender’s Rights and Remedies”)
shall be cumulative and not exclusive of any rights or remedies which it would
otherwise have. No delay or omission by the Lender in exercising or enforcing
any of the Lender’s Rights and Remedies shall operate as, or constitute, a
waiver thereof. No waiver by the Lender of any Event of Default or of any
default under any other agreement shall operate as a waiver of any other
default hereunder or under any other agreement. No single or partial exercise
of any of the Lender’s Rights or Remedies, and no express or implied agreement
or transaction of whatever nature entered into between the Lender and any
Person, at any time, shall preclude the other or further exercise of the
Lender’s Rights and Remedies. No waiver by the Lender of any of the Lender’s
Rights and Remedies on any one occasion shall be deemed a waiver on any
subsequent occasion, nor shall it be deemed a continuing waiver. All of the
Lender’s Rights and Remedies and all of the Lender’s rights, remedies, powers,
privileges, and discretions under any other agreement or transaction are
cumulative, and not alternative or exclusive, and may be exercised by the
Lender at such time or times and in such order of preference as the Lender in
its sole discretion may determine. The Lender’s Rights and Remedies may be
exercised without resort or regard to any other source of satisfaction of the
Liabilities.





 


             11-7      Standards for
Exercising Remedies.  To the
extent that applicable law imposes duties on Lender to exercise remedies in a
commercially reasonable manner, Borrowers acknowledge and agrees that it is not
commercially unreasonable for Lender (a) to fail to incur expenses reasonably
deemed significant by Lender to prepare Collateral for disposition or otherwise
to complete raw material or work in process into finished goods or other
finished products for disposition, (b) to fail to obtain third party consents
for access to Collateral to be disposed of, or to obtain or, if not required by
other law, to fail to obtain governmental or third party consents for the
collection or disposition of Collateral to be collected or disposed of, (c) to
fail to exercise collection remedies against account debtors or other persons
obligated on Collateral or to remove liens or encumbrances on or any adverse
claims against Collateral, (d) to exercise collection remedies against account
debtors and other persons obligated on Collateral directly or through the use
of collection agencies and other collection specialists, (e) to advertise
dispositions of Collateral through publications or media of general
circulation, whether or not the Collateral is of a specialized nature, (f) to
contact other persons, whether or not in the same businesses as Borrowers, for
expressions of interest in acquiring 
all or any portion of the Collateral, (g) to hire one or more
professional auctioneers to assist in the disposition of Collateral, whether or
not the Collateral is of a specialized nature, (h) to dispose of the Collateral
by utilizing Internet sites that provide for the auction of assets of the types
included in the Collateral or that have the reasonable capability of doing so,
or that match buyers and sellers of assets, (i) to dispose of assets in
wholesale rather than retail markets, (j) to disclaim disposition warranties,
(k) to purchase insurance or credit enhancements to insure Lender against risks
of loss, collection or disposition of Collateral or to provide to Lender a
guaranteed return from the collection or disposition of Collateral, or (l) to
the extent deemed appropriate by Lender, to obtain the services of other
brokers, investment Lenders, consultants and other professionals to assist
Lender in the collection or disposition of any of the Collateral. Borrowers
acknowledge that the purpose of this section is to provide non-exhaustive
indications of what actions or omissions by Lender would not be commercially
unreasonable in Lender’s exercise of remedies against the Collateral and that
other actions or omissions by Lender shall not be deemed commercially
unreasonable solely on account of not being indicated in this section.  Without limitation upon the foregoing,
nothing contained in this section shall be construed to grant any rights to
Borrowers or to impose any duties on Lender that would not have been granted or
imposed by this Agreement or by applicable law in the absence of this section.





 


ARTICLE
12 - NOTICES


             12-1.     Notice Addresses.  All notices, demands, and other
communications made in respect of this Agreement (other than a request for a
loan or advance or other financial accommodation under the Revolving Credit)
shall be made to the following addresses, each of which may be changed upon
seven (7) days written notice to all others given by certified mail, return
receipt requested:


	If
  to the Lender:	Wells
  Fargo Retail Finance LLC
	 	One
  Boston Place, 18th Floor
	 	Boston,
  MA  02108
	 	Attention:	Andrew
  H. Moser, Senior Managing
	 	 	Director
  and Co-Chief Operating Officer
	 	Tel.:
  (617) 854-7225
	 	Fax:
  (617) 523-4032
	 	 
	With
  a copy to:	Ruberto,
  Israel & Weiner, P.C.
	 	100
  North Washington Street
	 	Boston,
  Massachusetts 02114
	 	Attention:	Mary
  Ellen Welch Rogers, Esq.
	 	Tel.:
  (617) 742-4200
	 	Fax:
  (617) 742-2355
	 	 
	If
  to the Borrowers:	Paper
  Warehouse, Inc.
	 	Paper
  Warehouse Franchise, Inc.
	 	PartySmart.com,
  Inc.
	 	7630
  Excelsior Boulevard
	 	Minneapolis,
  MN  55426-4504
	 	Attention:	Cheryl
  W. Newell,
	 	 	Chief
  Financial Officer
	 	Tel.:
  (952) 936-1000
	 	Fax:
  (952) 936-9800
	 	 
	With
  a copy to:	Oppenheimer,
  Wolff & Donnelly LLP
	 	45
  South 7th Street, Suite 3300
	 	Minneapolis,
  MN   55402
	 	Tel.:
  (612) 607-7396
	 	Fax:  (612) 607-7100
	 	Attention:	Christopher
  M. Scotti, Esq.
				




             12-2.     Notice Given.


                           (a)         Except as otherwise specifically
provided herein, notices shall be deemed made and correspondence received, as
follows (all times being local to the place of delivery or receipt):


                                        (i)          By mail: the sooner of when actually
received or three (3) days following deposit in the United States mail, postage
prepaid.





 


                                        (ii)         By recognized overnight express
delivery: the Banking Day following the day when sent.


                                        (iii)        By hand: If delivered on a Banking Day
after 9:00 A.M. at the location of the recipient and no later than three (3)
hours prior to the close of customary business hours of the recipient, when
delivered. Otherwise, at the opening of the then next Banking Day.


                                        (iv)       By facsimile transmission (which must
include a header indicating the party sending such transmission): If sent on a
Banking Day after 9:00 A.M. (at the location of the recipient) and no later
than Three (3) hours prior to the close of customary business hours of the recipient,
one (1) hour after being sent. Otherwise, at the opening of the then next
Banking Day.


                           (b)        Rejection or refusal to accept delivery
and inability to deliver because of a changed address or facsimile number for
which no due notice was given shall each be deemed receipt of the notice sent.





 


ARTICLE
13 - TERM


             13-1.     Termination of
Revolving Credit.  This
Agreement is, and is intended to be, a continuing agreement and shall remain in
full force and effect for an initial term ending on the Maturity Date, and
thereafter, at Lender’s discretion, for successive twelve-month periods, each
beginning on the 8th day of September (commencing 2004) of each year and ending
on September 8th of the following year (each such twelve-month
period is hereinafter referred to as a “renewal term”); provided, however, that
either party may terminate this Agreement as of the end of the initial term or
any subsequent renewal term by giving the other party notice to terminate in
writing at least ninety (90) days prior to the end of any such period whereupon
at the end of such period all Liabilities shall be due and payable in full
without presentation, demand, or further notice of any kind, whether or not all
or any part of the Liabilities is otherwise due and payable pursuant to the
agreement or instrument evidencing same. 
Subject to Section 13-2 below, Borrower may pay the Liabilities in full
at any time prior to the Maturity Date. 
Lender may terminate this Agreement immediately and without notice upon
the occurrence of an Event of Default which has not been remedied within any
grace period expressly provided herein or otherwise waived in writing by
Lender.  Notwithstanding the foregoing
or anything in this Agreement or elsewhere to the contrary, the security
interest, Lender’s rights and remedies hereunder and Borrower’s obligations and
liabilities hereunder shall survive any termination of this Agreement and shall
remain in full force and effect until all of the Liabilities outstanding, or
contracted or committed for (whether or not outstanding), before the receipt of
such notice by Lender, and any extensions or renewals thereof (whether made
before or after receipt of such notice), together with interest accruing
thereon after such notice, shall be finally and irrevocably paid in full.  No Collateral shall be released or financing
statement terminated until such final and irrevocable payment in full of the
Liabilities, as described in the preceding sentence.


             13-2.     Effect of Termination.  Upon the termination of Revolving Credit,
the Borrowers shall pay the Lender (whether or not then due), in immediately
available funds, all then Liabilities including, without limitation: the entire
balance of the Loan Account; any then remaining balances of the Annual Facility
Fee and Loan Maintenance Fee; any accrued and unpaid Unused Line Fee; any Early
Termination Premium and all unreimbursed costs and expenses of the Lender for
which the Borrower is responsible, and shall make such arrangements concerning
any L/C’s then outstanding are  reasonably
satisfactory to the Lender. Until such payment, all provisions of this
Agreement, other than those contained in Article 1 which place an obligation on
the Lender to make any loans or advances or to provide financial accommodations
under the Revolving Credit or otherwise, shall remain in full force and effect
until all Liabilities shall have been paid in full.


             13-3.     Early Termination Premium.  If Borrowers pays in full all or
substantially all of the Liabilities prior to the end of the initial term of
this Agreement (or any renewal term), other than temporarily from funds
internally generated in the ordinary course of business, at the time of such
payment, Borrower shall also pay to Lender an early termination premium in an
amount equal to two (2%) percent ofthe Credit Limit if termination occurs
less than one (1) year from the Closing Date and one (1%) percent of the Credit
Limit if termination occurs more than one (1) year, but less than two (2) years
after the Closing Date, and no Early Termination Premium shall be due if
termination occurs more than two (2) years after the Closing Date (the “Early
Termination Premium”).  Such
Early Termination Premium shall be paid to Lender as liquidated damages for the
loss of the bargain by Lender and not as a penalty. 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 the Lender’s
lost profits as a result thereof, the Early Termination Premium shall be presumed
to be the amount of damages sustained by the Lender 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 shall be deemed included in
the Liabilities.





 


Notwithstanding the foregoing, the Early
Termination Premium shall be waived in the event that Borrower refinances with
Wells Fargo Bank, N.A., or any of its successors or affiliates,


ARTICLE
14 - GENERAL


             14-1.     Protection of Collateral.  The Lender has no duty as to the collection
or protection of the Collateral beyond the safe custody of such of the
Collateral as may come into the possession of the Lender and shall have no duty
as to the preservation of rights against prior parties or any other rights
pertaining thereto. The Lender may include reference to any Borrower (and may
utilize any logo or other distinctive symbol associated with any Borrower) in
connection with any advertising, promotion, or marketing undertaken by the
Lender.


             14-2.     Successors and Assigns.  This Agreement shall be binding upon the
Borrowers and the Borrowers’ representatives, successors, and assigns and shall
enure to the benefit of the Lender and the Lender’s successors and assigns
provided, however, no trustee or other fiduciary appointed with respect to any
Borrower shall have any rights hereunder. In the event that the Lender assigns
or transfers its rights under this Agreement, the assignee shall thereupon
succeed to and become vested with all rights, powers, privileges, and duties of
the Lender hereunder and the Lender shall thereupon be discharged and relieved
from its duties and obligations hereunder.


             14-3.     Severability.  Any determination that any provision of this
Agreement or any application thereof is invalid, illegal, or unenforceable in
any respect in any instance shall not affect the validity, legality, or
enforceability of such provision in any other instance, or the validity,
legality, or enforceability of any other provision of this Agreement.


             14-4.     Amendments; Course of
Dealing.


                           (a)         This Agreement and the other Loan
Documents incorporate all discussions and negotiations between the Borrower and
the Lender, either express or implied, concerning the matters included herein
and in such other instruments, any custom, usage, or course of dealings to the
contrary notwithstanding. No such discussions, negotiations, custom, usage, or
course of dealings shall limit, modify, or otherwise affect the provisions
thereof. No failure by the Lender to give notice to any Borrower of such
Borrower’s having failed to observe and comply with any warranty or covenant
included in any Loan Document shall constitute a waiver of such warranty or
covenant or the amendment of the subject Loan Document. No change made by the
Lender in the manner by which Availability is determined shall obligate the
Lender to continue to determine Availability in that manner.





 


                           (b)        Any Borrower may undertake any action
otherwise prohibited hereby, and may omit to take any action otherwise required
hereby, upon and with the express prior written consent of the Lender. No
consent, modification, amendment, or waiver of any provision of any Loan
Document shall be effective unless executed in writing by or on behalf of the
party to be charged with such modification, amendment, or waiver (and if such
party is the Lender, then by a duly authorized officer thereof). Any
modification, amendment, or waiver provided by the Lender shall be in reliance
upon all representations and warranties theretofore made to the Lender by or on
behalf of any Borrower (and any guarantor, endorser, or surety of the
Liabilities) and consequently may be rescinded in the event that any of such
representations or warranties was not true and complete in all material
respects when given.


             14-5.     Power of Attorney.  In connection with all powers of attorney
included in this Agreement, each Borrower hereby grants unto the Lender full
power to do any and all things necessary or appropriate in connection with the
exercise of such powers as fully and effectually as such Borrower might or
could do, hereby ratifying all that said attorney shall do or cause to be done
by virtue of this Agreement. No power of attorney set forth in this Agreement
shall be affected by any disability or incapacity suffered by any Borrower and
each shall survive the same. All powers conferred upon the Lender by this
Agreement, being coupled with an interest, shall be irrevocable until this
Agreement is terminated in accordance with Section 13-1 hereof and Lender’s
interest in the Collateral is terminated in accordance with Section 2-7 hereof.


             14-6.     Application of Proceeds.  The proceeds of any collection, sale, or
disposition of the Collateral, or of any other payments received hereunder, shall
be applied towards the Liabilities in such order and manner as the Lender
determines in its sole discretion. The Borrowers shall remain liable for any
deficiency remaining following such application.


             14-7.     Lender’s Cost and Expenses.  The Borrowers shall pay on demand all Costs
of Collection and all reasonable expenses of the Lender in connection with the
preparation, execution, and delivery of this Agreement and of any other Loan
Documents, provided however, the Lender’s legal fees payable by Borrower hereunder
for preparation of this agreement and any related closing documents, exclusive
of fees incurred in connection with the negotiations related thereto, shall be
limited to $25,000.00, whether now existing or hereafter arising, and all other
reasonable expenses which may be incurred by the Lender in monitoring
compliance with this Agreement and in preparing or amending this Agreement and
all other agreements, instruments, and documents related thereto, or otherwise
incurred with respect to the Liabilities, including, without limiting the
generality of the foregoing, any counsel fees or expenses incurred in any
bankruptcy or insolvency proceedings. 
The Borrower specifically authorizes the Lender to pay all such fees and
expenses and in the Lender’s discretion, to add such fees and expenses to the
Loan Account.  Borrower shall be
obligated, from time to time, to pay Lender’s fees, including reasonable
attorneys’ fees and expenses for the preparation, negotiation, amendment and
interpretation of this Agreement and related documents.





 


             14-8.     Copies and Facsimiles.  This Agreement and all documents which
relate thereto, which have been or may be hereinafter furnished the Lender may
be reproduced by the Lender by any photographic, microfilm, xerographic, digital
imaging, or other process, and the Lender may destroy any document so
reproduced. Any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not
the original is in existence and whether or not such reproduction was made in
the regular course of business). Any facsimile which bears proof of
transmission shall be binding on the party which or on whose behalf such
transmission was initiated and likewise shall be so admissible in evidence as
if the original of such facsimile had been delivered to the party which or on
whose behalf such transmission was received.


             14-9.     Massachusetts Law.  This Agreement and all rights and
obligations hereunder, including matters of construction, validity, and
performance, shall be governed by the laws of The Commonwealth of
Massachusetts.


             14-10.   Consent to Jurisdiction.


                           (a)         Each Borrower agrees that any legal
action, proceeding, case, or controversy against the Borrower with respect to
any Loan Document may be brought in the Superior Court of Middlesex County,
Massachusetts or in the United States District Court, District of
Massachusetts, sitting in Boston, Massachusetts, as the Lender may elect in the
Lender’s sole discretion. By execution and delivery of this Agreement, each
Borrower, for itself and in respect of its property, accepts, submits, and
consents generally and unconditionally, to the jurisdiction of the aforesaid
courts.


                           (b)        Nothing herein shall affect the right of
the Lender to bring legal actions or proceedings in any other competent
jurisdiction.


                           (c)         Each Borrower agrees that any action
commenced by such Borrower asserting any claim or counterclaim arising under or
in connection with this Agreement or any other Loan Document shall be brought
solely in the Superior Court of Middlesex County, Massachusetts or in the
United States District Court, District of Massachusetts, sitting in Boston,
Massachusetts, and that such Courts shall have exclusive jurisdiction with
respect to any such action.


             14-11.   Indemnification.  Each Borrower shall indemnify, defend, and
hold the Lender and any employee, officer, or agent of the Lender (each, an “Indemnified
Person”) harmless of and from any damages, losses, obligations,
liabilities, claims, actions or causes of action, including without limitation,
with respect to taxes and interest and penalties with respect thereto, brought
or threatened against any Indemnified Person by any Borrower, any guarantor or
endorser of the Liabilities, or any other Person (as well as from attorneys’
reasonable fees and expenses in connection therewith) on account of the
relationship of such Borrower or of any guarantor or endorser of the
Liabilities with the Lender or any other Indemnified Person (each of which claims  may be defended, compromised, settled, or
pursued by the Indemnified Person with counsel of the Lender’s selection, but
at the expense of the Borrower) other than any claim as to which a final
determination is made in a judicial proceeding (in which the Lender and any
other Indemnified Person has had an opportunity to be heard), which
determination includes a specific finding that the Indemnified Person seeking
indemnification had acted in a grossly negligent manner or in actual bad faith.
This indemnification shall survive payment of the Liabilities and/or any
termination, release, or discharge executed by the Lender in favor of the
Borrower.





 


             14-12.   Right of Set-Off.  Any and all deposits or other sums at any
time credited by or due to the undersigned from the Lender, Issuer or from any
participant (a “Participant”) with the Lender in the credit facility
contemplated hereby and any cash, securities, instruments or other property of
the undersigned in the possession of the Lender, Issuer or any Participant,
whether for safekeeping or otherwise (regardless of the reason such Person had
received the same) shall at all times constitute security for all Liabilities
and for any and all obligations of the undersigned to the Lender, Issuer and
any Participant, and may be applied or set off against the Liabilities and
against such obligations at any time, whether or not such are then due and
whether or not other collateral is then available to the Lender, Issuer or any
Participant provided
however, so long as no Event of Default which has not been remedied
within any grace period expressly provided herein or otherwise waived in
writing by Lender has occurred, neither 
Lender nor any Participant shall set off against the Funding Account or
any disbursement account identified on EXHIBIT 7-6.


             14-13.   Usury Savings Clause.  It is the intention of the parties hereto to
comply strictly with applicable usury laws, if any; accordingly,
notwithstanding any provisions to the contrary in this Agreement or any other
Loan Documents, in no event shall this Agreement or such Loan Document require
or permit the payment, taking, reserving, receiving, collecting or charging of
any sums constituting interest under applicable laws which exceed the maximum
amount permitted by such laws.  If any
such excess interest is called for, contracted for, charged, paid, taken,
reserved, collected or received in connection with the Liabilities or in any
communication by Lender or any other Person to the Borrowers or any other
Person, or in the event all or part of the principal of the Liabilities or
interest thereon shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of interest
contracted for, charged, taken, collected, reserved, or received on the amount
of principal actually outstanding from time to time under this Agreement shall
exceed the maximum amount of interest permitted by applicable usury laws, if
any, then in any such event it is agreed as follows: (i) the provisions of this
paragraph shall govern and control, (ii) neither the Borrowers nor any other
Person or entity now or hereafter liable for the payment of the Liabilities
shall be obligated to pay the amount of such interest to the extent such
interest is in excess of the maximum amount of interest permitted by applicable
usury laws, if any, (iii) any such excess which is or has been received
notwithstanding this paragraph shall be credited against the then unpaid
principal balance hereof or, if the Liabilities have been or would be paid in
full by such credit, refunded to the Borrowers, and (iv) the provisions of this
Agreement and the other Loan Documents, and any communication to the Borrowers,
shall immediately be deemed reformed and such excess interest reduced, without
the necessity of executing any other document, to the maximum lawful rate
allowed under applicable laws as now or hereafter construed by courts having
jurisdiction hereof or thereof.  Without
limiting the foregoing, all calculations of the rate of interest contracted
for, charged, taken, collected, reserved, or received in connection herewith
which are made for the purpose of determining whether such rate exceeds the
maximum lawful rate shall be made to the extent permitted by applicable laws by
amortizing, prorating, allocating and spreading during the period of the full
term of the Liabilities, including all prior and subsequent renewals and
extensions, all interest at any time contracted for, charged, taken, collected,
reserved or received. The terms of this paragraph shall be deemed to be
incorporated in every Loan Document and communication relating to the
Liabilities.


             14-14.   Waivers.


                           (a)         Each Borrower and each and every
guarantor, endorser, and surety of the Liabilities) makes each of the waivers
included in Section 14-14(b), below, knowingly, voluntarily, and intentionally,
and understands that the Lender, in entering into the financial arrangements
contemplated hereby and in providing loans and other financial accommodations
to or for the account of the Borrowers as provided herein, whether not or in
the future, is relying on such waivers.


                           (b)        EACH BORROWER, AND EACH SUCH GUARANTOR,
ENDORSER, AND SURETY RESPECTIVELY WAIVES THE FOLLOWING.


                                        (i)          Except as otherwise specifically
required in this Agreement, notice of non-payment, demand, presentment, protest
and all forms of demand and notice, both with respect to the Liabilities and
the Collateral.


                                        (ii)         Except as otherwise specifically
required in this Agreement, the right to notice and/or hearing prior to the
Lender’s exercising of the Lender’s rights upon default.


                                        (iii)        THE RIGHT TO A JURY IN ANY TRIAL OF ANY
CASE OR CONTROVERSY IN WHICH THE LENDER IS OR BECOMES A PARTY (WHETHER SUCH
CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE LENDER OR IN WHICH THE
LENDER IS JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF
OR IS IN RESPECT OF, ANY RELATIONSHIP AMONGST OR BETWEEN ANY BORROWER OR ANY
OTHER PERSON AND THE LENDER (AND THE LENDER LIKEWISE WAIVES THE RIGHT TO A JURY
IN ANY TRIAL OF ANY SUCH CASE OR CONTROVERSY).


                                        (iv)        Intentionally deleted.


                                        (v)        Any defense, counterclaim, set-off,
recoupment, or other basis on which the amount of any Liability, as stated on
the books and records of the Lender, could be reduced or claimed to be paid
otherwise than in accordance with the tenor of and written terms of such
Liability.


                                        (vi)       Any claim to consequential, special, or
punitive damages.





 


             14-15.   Confidentiality.  Except as required to be filed by any
Borrower in connection with its securities law filings, this Agreement and the
terms hereof are confidential, and neither the contents of this Agreement or
the details of this Agreement may be shown or disclosed by the Borrowers to any
bank, finance company or other lender without the prior written consent of the
Lender.


             14-16.   Right to Publish Notice.  Lender may, at Lender’s discretion and
expense, publicize or otherwise advertise by so-called “tombstone” advertising
or otherwise Lender’s and any Participant’s financing transaction with the
Borrowers.


             14-17.   Right of First Refusal.  During the period commencing on the Closing
Date and ending on the second anniversary of the Closing Date, Borrowers hereby
grant to Lender an irrevocable right of first refusal to provide any financing
to Borrowers.  Borrowers shall not
obtain any loans, advances or other financial accommodation from any person or
entity other than Lender unless (a) Borrowers shall have obtained a commitment
in writing from such person or entity; (b) Borrowers shall have delivered such
commitment to the Lender; and (c) the Lender has not, within thirty (30) days
after receipt of the commitment, given the Borrower notice that Lender will
extend financing to the Borrowers on substantially the same terms and conditions
set forth in the commitment.  In the
event that the Lender does not give the Borrowers notice of its desire to
extend financing to the Borrowers on the terms and conditions set forth in the
commitment within the time specified above, the Borrowers is free to accept the
financing from such person or entity on the terms and conditions set forth in
the commitment.


             14-18.   Credit Inquiries.  Borrowers authorize Lender to (provided,
however, Lender shall incur no liability for the failure to) respond to credit
inquiries concerning any Borrower in accordance with Lender’s normal and
customary practices.  Borrowers hereby
indemnify and hold Lender harmless for any action taken by Lender in reliance
upon the foregoing authorization.





 


             Executed
as a sealed instrument this 7th day of September, 2001.


	PAPER
  WAREHOUSE, INC.
	(BORROWER)
	 	 
	 	 
	By:	


	 	Yale
  T. Dolginow, President and CEO
	 	 
	 	 
	By:	


	 	 Cheryl W. Newell, Vice President and CFO
	 	 
	PAPER
  WAREHOUSE FRANCHISING, INC.
	(BORROWER)
	 	 
	 	 
	By:	


	 	Yale
  T. Dolginow, President and CEO
	 	 
	 	 
	By:	


	 	 Cheryl W. Newell, Vice President and CFO
	 	 
	PARTYSMART.COM,
  INC.
	(BORROWER)
	 	 
	 	 
	By:	


	 	Yale
  T. Dolginow, President and CEO
	 	 
	 	 
	By:	


	 	Cheryl
  W. Newell, Vice President and CFO
	 	 
	WELLS
  FARGO RETAIL FINANCE LLC
	(LENDER)
	 	 
	 	 
	By:	


	 	Robert
  C. Chakarian, Vice President




 










 


EXHIBIT
1-6 TO LOAN AND SECURITY AGREEMENT


MASTER
NOTE

(REVOLVING)




	$	Boston, Massachusetts
	 	_____________, 2001






             For
value received, each of the undersigned,                      ., each a              corporation (the “Borrower”), hereby jointly and severally,
promise to pay on                            
to the order of Wells Fargo Retail Finance LLC, a Delaware limited
liability company (the “Lender”), at its main office in Boston,
Massachusetts, or at any other place designated at any time by the holder
hereof, in lawful money of the United States of America and in immediately
available funds, the principal sum of                        ($                      ) Dollars or, if less, the aggregate unpaid
principal amount of all advances made by the Lender to the Borrower hereunder,
together with interest on the principal amount hereunder remaining unpaid from
time to time, computed on the basis of the actual number of days elapsed and a
360-day year, from the date hereof until this Note is fully paid at the rate
from time to time in effect under the Loan and Security Agreement of even date
herewith (the “Loan Agreement”) by and between the Lender and the
Borrower.  The principal hereof and
interest accruing thereon shall be due and payable as provided in the Loan
Agreement.  This Note may be prepaid
only in accordance with the Loan Agreement.


             This
Note is issued pursuant, and is subject, to the Loan Agreement, which provides,
among other things, for acceleration hereof. 
This Note is the Master Note referred to in the Loan Agreement.


             This
Note is secured, among other things, pursuant to the Loan Agreement and may now
or hereafter be secured by one or more other security agreements, mortgages,
deeds of trust, assignments or other instruments or agreements.


             The
Borrower hereby agrees to pay all costs of collection, including attorneys’
fees and legal expenses in the event this Note is not paid when due, whether or
not legal proceedings are commenced.


             Presentment
or other demand for payment, notice of dishonor and protest are expressly
waived.


             This
Note shall be deemed to be under seal.




	By	











 


EXHIBIT 3


             “Account
Debtor”: Has the meaning given that term in the UCC.


             “Account(s)
Receivable” include, without limitation, “accounts” as defined in the UCC.


             “ACH”:
Automated clearing house.


             “Advances”:  Means funds advanced to Borrower or
otherwise in accordance with this Agreement.


             “Advance
Rate(s)”: Means the percentage(s) of the Cost of Eligible Inventory or Net
Retail Liquidation Value used to calculate the Borrowing Base.


             “Affiliate”:
With respect to any two Persons, a relationship in which (a) one holds,
directly or indirectly, not less than twenty-five (25%) percent of the capital
stock, beneficial interests, partnership interests, or other equity interests
of the other; or (b) one has, directly or indirectly, Control of the other; or
(c) not less than twenty-five (25%) percent of their respective ownership is
directly or indirectly held by the same third Person.


             “Annual
Facility Fee”: Is defined in Section 1-9(a).


             “Availability”:
Means at any time of determination an amount equal to the lesser of the
Borrowing Base or the Credit Limit in either case, minus: (i) the then unpaid
principal balance of the Loan Account, minus (ii) the then aggregate of such
Reserves (other than Inventory Reserves) as may have been established by
Lender, minus
(iii) one hundred (100%) percent of the then outstanding Stated Amount of all
L/C’s.


             “Availability
Reserves”: Such reserves as the Lender from time to time determines in the
Lender’s discretion as being appropriate to reflect the impediments to the
Lender’s ability to realize upon the Collateral. Lender shall use commercially
reasonable efforts to provide Borrower with advance notice of any changes in
Availability Reserves, but such notice shall not be a condition of Lender’s
right to determine such reserves. 
Without limiting the generality of the foregoing, Availability Reserves
may include (but are not limited to) reserves based on the following:


                           (a)         Rent or Leases (based upon past due
rent and/or whether or not Landlord’s Waiver, acceptable to the Lender,     has been received by the Lender).


                           (b)        In store customer credits and gift
certificates.


                           (c)         Payables (based upon payables which are
past due normal trade terms).


                           (d)        Frequent Shopper Programs.





 


                           (e)         Layaway and Customer Deposits.


                           (f)         Taxes and other governmental charges,
including, ad valorem, personal property, and other taxes which may         have priority over the security
interests of the Lender in the Collateral.


                           (g)        Held or post-dated checks.


             “Average
Unused Portion of the Credit Limit”: Means, as of any date of determination,
(a) the Credit Limit, minus (b) the sum of (i) the average daily balance of
advances that were outstanding during the immediately preceding month, plus,
(ii) the average daily balance of the undrawn L/C’s outstanding during the
immediately preceding month.


             “Bank
of America DDA”: The DDA established by Paper Warehouse with Bank of America
and into which daily receipts for the Paper Warehouse locations identified on
Exhibit 7-1 hereto are deposited.


             “Banking
Day”: Any day other than (a) a Saturday, Sunday; (b) any day on which banks in
Boston, Massachusetts are not open to the general public for the purpose of
conducting commercial banking business; or (c) a day on which the Lender is not
open to the general public to conduct business.


             “Bankruptcy
Code”: Title 11, U.S.C., as amended from time to time.


             “Base”:
The Base Rate announced from time to time by Wells Fargo Bank, N.A. (or any
successor in interest to Wells Fargo Bank, N.A). In the event that said bank
(or any such successor) ceases to announce such a rate, “Base” shall refer to
that rate or index announced or published from time to time as the Lender, in
good faith, designates as the functional equivalent to said Base Rate. Any
change in “Base” shall be effective, for purposes of the calculation of
interest due hereunder, when such change is made effective generally by the
bank on whose rate or index “Base” is being set.


             “Basis
Point(s)”: An amount which is equal to 1/100th of one (1%) percent.  For example, one and one-half (1.5%) percent
equals 150 basis points.


             “Blocked
Account”: Is defined in Article 7-1(b)(i).


             “Borrower”:
Is defined in the Preamble.


             “Borrowing
Base”: Means amounts up to:


the
lesser
of:



(i)          the aggregate of the Standard Line
plus the Special Sub-Line plus the Credit Card Receivables Line



or






 



(ii)          (ii) ninety (90%) percent of the Net
Retail Liquidation Value,



in
either case, plus  amounts equal
to the Advance Rate then applicable to Standard Line Advances  times the Stated Amount of Eligible
Documentary L/C’s (less any freight and duty included therein),



minus the aggregate of such
Reserves (other than Inventory Reserves) as may have been established by
Lender.


             “Borrowing
Base Certificate”: Means the certificate in the same form attached as EXHIBIT
9-4, provided to Lender in connection with any request for advances and/or
L/C’s, setting forth, among other things, Availability.


             “Business
Plan”: The Borrowers’ business plan annexed hereto as EXHIBIT 9-10 and any
revision, amendment, or update of such business plan to which the Lender has
provided its written sign-off.


             “Capital
Expenditures”: The expenditure of funds or the incurrence of liabilities which
may be capitalized in accordance with GAAP.


             “Capital
Lease”: Any lease which may be capitalized in accordance with GAAP.


             “Change
In Control”:   The occurrence of any of
the following:


             (a)         The acquisition, by any group of
persons (within the meaning of the Securities Exchange Act of 1934, as amended)
or by any Person (in either case other than such a group or Person that
includes the current chief executive officer of the Borrowers) of beneficial
ownership (within the meaning of Rule 13d-3 of the Securities and Exchange
Commission) of 20% or more of the issued and outstanding capital stock of the
Borrowers having the right, under ordinary circumstances, to vote for the
election of directors of the Borrower, unless the current chief executive
officer of the Borrowers owns or controls directly or through voting trusts or
agreements (in the case of such capital stock owned by his family members or by
trusts or by other entities established for their benefit) at least 7% more of
the issued and outstanding capital stock of the Borrowers than the issued and
outstanding capital stock of the Borrowers acquired by such group or Person.


             (b)        Any Executive Officer (including the
current chief executive officer) who were directors of Paper Warehouse on the
first day of any period consisting of Twelve (12) consecutive calendar months
(the first of which Twelve (12) month periods commencing with the first day of
the month during which this Agreement was executed), cease, for any reason
other than death or disability, to be directors of the Borrower.


             “Chattel
Paper”: Has the meaning given that term in the UCC.





 


             “Closing
Date”: means the date of the first to occur of the making of the initial
Advance or  the issuance of the initial
L/C.


             “Collateral”:
Is defined in Section 2-1.


             “Concentration
Account”: Is defined in Section 7-3.


             “Control”:
The direct or indirect power to direct or cause the direction of the management
and policies of another Person, whether through ownership of voting securities,
by contract, or otherwise. Included among such powers, with respect to a
corporation, are power to cause any of following: (a) the election of a
majority of its Board of Directors; (b) the issuance of additional shares of
its common stock; (c) the issuance and designation of rights and shares of its
preferred stock (if any); (d) the distribution and timing of dividends; (e) the
award of performance bonuses to its management; (f) the termination or
severance of officers or key employees; and (g) all or any similar matters.


             “Cost”:
The calculated cost of purchases, as determined from invoices received by the
Paper Warehouse, the Paper Warehouse’s Purchase Journal or Stock Ledger, based
upon the Paper Warehouse’s accounting practices, known to the Lender, which
practices are in effect on the date on which this Agreement was executed.
“Cost” does not include any inventory capitalization costs inclusive of
advertising, but may include other charges used in the Paper Warehouse’s
determination of cost of goods sold and bringing goods to market, all within
Lender’s sole discretion and in accordance with GAAP.


             “Cost
Factor”: The result of 1 minus the Paper Warehouse’s then cumulative markup
percent derived from the Paper Warehouse’s purchase journal on a rolling twelve
(12) month basis.


             “Costs
of Collection”: includes, without limitation, all attorneys’ reasonable fees
and reasonable out-of-pocket expenses incurred by the Lender’s attorneys, and
all reasonable costs incurred by the Lender in the administration of the
Liabilities and/or the Loan Documents, including, without limitation,
reasonable costs and expenses associated with travel on behalf of the Lender,
which costs and expenses are directly or indirectly related to or in respect of
the Lender’s: administration and management of the Liabilities; negotiation,
documentation, and amendment of any Loan Document; or efforts to preserve,
protect, collect, or enforce the Collateral, the Liabilities, and/or the
Lender’s Rights and Remedies and/or any of the Lender’s rights and remedies
against or in respect of any guarantor or other Lender liable in respect of the
Liabilities (whether or not suit is instituted in connection with such
efforts). The Costs of Collection are Liabilities, and at the Lender’s option
may bear interest at the highest post-default rate which the Lender may charge
the Borrowers hereunder as if such had been lent, advanced, and credited by the
Lender to, or for the benefit of, the Borrowers.


             “Credit
Card Processor”: Means any Person which acts as a credit card clearinghouse or
processor of credit card payments accepted by any Borrower.





 


             Credit
Card Receivables Line”:  Means amounts
up to the lesser
of: (x) Eighty (80%) percent of Eligible Credit Card Receivables, or
(y) One Million ($1,000,000) Dollars.


             “Credit
Limit”: Means  Fifteen Million
($15,000,000) Dollars.


             “DDA”:
Any checking or other demand daily depository account maintained by the
Borrower.


             “Deposit
Account”  Has the meaning given that
term in the  UCC.


             “Documentary
L/C”: Means a documentary L/C issued to support the purchase by Paper Warehouse
of Inventory prior to its transport to a location set forth on EXHIBIT 5-4 that
provides that all draws thereunder must require presentation of customary
documentation including, if applicable, commercial invoices, packing lists,
certificate of origin, bill of lading, an airway bill, customs clearance
documents, quota statement, certificate, beneficiaries statement and bill of
exchange, bills of lading, dock warrants, dock receipts, warehouse receipts or
other documents of title, in form and substance satisfactory to Lender and
reflecting passage to Paper Warehouse of title to first quality Inventory
conforming to Paper Warehouse’s contract with the seller thereof.


             “Duly
Authorized Person”: Means any individual authorized by the Borrower to request
loans or financial accommodations and/or sign reports to Lender.


             “Early
Termination Premium”: Is defined in Section 13-3.


             “EBITDA”:
Means the Borrower’s earnings from continuing operations (excluding
extraordinary items), before interest, taxes, depreciation and amortization,
each as determined in accordance with GAAP.


             “Effective
Advance Rate”:  Means the percentage
obtained by dividing the sum of the then existing balance of the Loan Account
plus the Stated Amount of outstanding L/C’s by the then Cost value of Eligible
Inventory.


             “Eligible
Credit Card Receivables”:  Means Paper
Warehouse’s Accounts owed by Credit Card Processors which Accounts are reflected
in the most recent Borrowing Base Certificate delivered by Paper Warehouse to
Lender and on other information available to Lender, Lender shall in its
reasonable discretion determine are “eligible” and shall not include, without
limitation, Accounts owed by Credit Card Processors which:


	 	(a)	do
  not arise from the sale of goods or the performance of services by Paper
  Warehouse in the ordinary course of its business;
	 	 	 
	 	(b)	upon
  which Paper Warehouse’s right to receive payment is not absolute or is
  contingent upon the fulfillment of any condition whatsoever or as to which
  Paper Warehouse is not able to bring suit or otherwise enforce its remedies
  against the through judicial process;






 



	 	(c)	with
  respect to which any Credit Card Processor has not signed a written
  acknowledgment and consent in accordance with Section 7-2(b) hereof;
	 	 	 
	 	(d)	is
  the subject of any defense, counterclaim, setoff or dispute is asserted as to
  such Account;
	 	 	 
	 	(e)	that
  is not a true and correct statement of bona fide indebtedness incurred in the
  amount of the Account for merchandise sold to or services rendered and
  accepted by the valid holder of the subject credit card;
	 	 	 
	 	(f)	that
  is in default; provided, that, without limiting the generality of the
  foregoing, an Account shall be deemed in default upon the occurrence of any
  of the following:
	 	 	 
	 	 	i.	 	the
  Account is not paid within three (3) days past the date payment first becomes
  due;
	 	 	 	 	 
	 	 	ii.	 	the
  Credit Card Processor obligated upon such Account suspends business, makes a
  general assignment for the benefit of creditors or fails to pay its debts
  generally as they come due; or
	 	 	 	 	 
	 	 	iii.	 	a
  petition is filed by or against any Credit Card Processor obligated upon such
  Account under any bankruptcy law or any other federal, state or foreign
  (including any provincial) receivership, insolvency relief or other law or
  laws for the relief of debtors;
	 	 	 	 	 
	 	(g)	as
  to which Lender’s Encumbrance thereon is not a first priority perfected lien;
	 	 	 
	 	(h)	as
  to which any of the representations or warranties in the Loan Documents is
  untrue;
	 	 	 
	 	(i)	to
  the extent such Account exceeds any credit limit established by Lender, in
  its discretion
	 	 	 
	 	(j)	that
  is payable in any currency other than Dollars; or
	 	 	 
	 	(n)	that
  is otherwise unacceptable to Lender in its discretion.



             “Eligible
Documentary L/C”:  Documentary L/C’s for
which finished goods have been delivered for shipment to Borrowers and which
have an expiry of sixty  (60) days or
less and which are otherwise determined to be “eligible” in Lender’s
discretion.


             ”Eligible
Inventory”: Such of the Paper Warehouse’s Inventory, at such locations, and of
such types, character, qualities and quantities, (net of Inventory Reserves) as
the Lender in its sole discretion from time to time determines to be acceptable
for borrowing, as to which Inventory, the Lender has a perfected security
interest which is prior and superior to all security interests, claims, and
Encumbrances.





 


             “Employee
Benefit Plan”: As defined in ERISA.


             “Encumbrance”:
Each of the following:


                           (a)         security interest, mortgage, pledge,
hypothecation, lien, attachment, or charge of any kind (including any agreement
to give any of the foregoing); the interest of a lessor under a Capital Lease;
conditional sale or other title retention agreement; sale of accounts
receivable or chattel paper; or other arrangement pursuant to which any Person
is entitled to any preference or priority with respect to the property or
assets of another Person or the income or profits of such other Person or which
constitutes an interest in property to secure an obligation; each of the
foregoing whether consensual or nonconsensual and whether arising by way of
agreement, operation of law, legal process or otherwise.



                           (b)        The filing of any financing statement
under the UCC or comparable law of any jurisdiction.



             “End
Date”:     The date upon which both (a)
all Liabilities have been paid in full and (b) all obligations of the Lender to
make loans and advances and to provide other financial accommodations to the
Borrowers hereunder shall have been irrevocably terminated.


             “Environmental
Laws”: (a) Any and all federal, state, local or municipal laws, rules, orders,
regulations, statutes, ordinances, codes, decrees or requirements which
regulates or relates to, or imposes any standard of conduct or liability on
account of or in respect to environmental protection matters, including,
without limitation, Hazardous Materials, as is now or hereafter in effect; and
(b) the common law relating to damage to Persons or property from Hazardous
Materials.


             “Equipment”:  Shall have the meaning given such term under
the UCC.


             “Equipment
Lease”:  Shall mean any Capital Lease or
other contract pursuant to which any Borrower purchases or leases Equipment for
use in the ordinary course of any of Borrower’s business.


             “ERISA”:
The Employee Retirement Security Act of 1974, as amended.


             “ERISA
Affiliate”: Any Person which is under common control with any Borrower within
the meaning of Section 4001 of ERISA or is part of a group which includes any
Borrower and which would be treated as a single employer under Section 414 of
the Internal Revenue Code of 1986, as amended.





 


             “Eurodollar
Business Day”:  Shall mean a Banking Day
on which dealings are carried on and banks are open for business in the
relevant interbank market.


             “Eurodollar
Loan”:  Shall mean Advances under the
Standard Line or any portion of Advances under the Standard Line bearing
interest by reference to the Eurodollar Rate.


             “Eurodollar
Period”:  Shall mean, with respect to
any Eurodollar Loan, each period commencing on a Eurodollar Business Day
selected by Paper Warehouse pursuant to the Agreement and ending one, two or
three months thereafter, as selected by Paper Warehouse’s irrevocable notice to
Lender as set forth in Section 1.8(b); provided
that the foregoing provision relating to Eurodollar Periods is subject to the
following:


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



                           (b)        any Eurodollar Period that would
otherwise extend beyond the Termination Date shall end two (2) Eurodollar
Business Days prior to such date;



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



                           (d)         Paper Warehouse shall select Eurodollar
Periods so as not to require a payment or prepayment of any Eurodollar Loan
during a Eurodollar Period for such Loan; and



                           (e)         Paper Warehouse shall select Eurodollar
Periods so that there shall be no more than four (4) separate Eurodollar Loans
in existence at any one time.



             “Eurodollar
Margin”:  250 Basis Points


             “Eurodollar
Offer Rate”:  That rate of interest
(rounded upwards, if necessary, to the next 1/100 of 1%) determined by the
Lender in good faith (which shall be presumed) to be the average prevailing
rate per annum at which deposits on U.S. Dollars are offered to Wells Fargo
Bank, N.A., by first class banks in the Eurodollar market in which Wells Fargo
Bank, N.A. participates at or about 10:00 A.M. (Boston time) Two (2) Eurodollar
Business Days before the first day of the Eurodollar Period for the subject
Eurodollar Loan, for a deposit approximately in the amount of the subject loan
for a period of time approximately equal to such Eurodollar Period.





 


             “Eurodollar
Rate”:  That per annum rate which is the
aggregate of the Eurodollar Offer Rate plus the Eurodollar Margin except that,
in the event that the Lender determines in good faith (which shall be presumed)
that the Lender is subject to the Reserve Percentage, the “Eurodollar Rate” shall
mean, with respect to any Eurodollar Loans then outstanding (from the date on
which that Reserve Percentage first became applicable to such loans), and with
respect to all Eurodollar Loans thereafter made (but only so long as the
Reserve Percentage’s applying to such Eurodollar Loans), an interest rate per
annum equal the sum of (a) plus (b) where 
(a) is the decimal equivalent of the following fraction:


Eurodollar
Offer Rate

1 minus Reserve Percentage; and



             (b)
is the applicable Eurodollar Margin.


             “Event
of Default”: Is defined in Article 10.


             “Executive
Agreement”: Any agreement or understanding (whether or not written) to which
the Paper Warehouse is a party or by which the Paper Warehouse may be bound,
which agreement or understanding relates to Executive Pay.


             “Executive
Officer”: Each of Yale T. Dolginow and 
Cheryl W. Newell and any other Person who (without regard to title)
exercises a substantial portion of the authority being exercised, at the
execution of this Agreement, by any of the foregoing or a combination of the
such authority of more than one of the foregoing or who otherwise has Control
of the Borrower.


             “Executive
Pay”: All salary, bonuses, and other value directly or indirectly provided by
or on behalf of the Borrower to or for the benefit of any Executive Officer or
any Affiliate, spouse, parent, or child of any Executive Officer.


             “Franchise
Agreements:”  means the present and
future franchise agreements between (i) PWFI and any other Borrower and (ii)
Persons who are franchisees or otherwise operating retail locations owned by
such Persons under license of Borrowers’ trademarks Paper Warehouse, Party Universe
and Party
Smart or other trademarks.


             “Funding
Account”: Is defined in Section 7-3.


             “GAAP”:
Principles which are consistent with those promulgated or adopted by the
Financial Accounting Standards Board and its predecessors (or successors) in
effect and applicable to that accounting period in respect of which reference
to GAAP is being made.





 


             “General
Intangibles”: Includes, without limitation, “general intangibles” as defined in
the UCC; and also all: rights to payment for credit extended; deposits; deposit
accounts; amounts due to the Borrowers; credit memoranda in favor of the
Borrowers; warranty claims; tax refunds and abatements; insurance refunds and
premium rebates; all Investment Property and all means and vehicles of
investment or hedging, including, without limitation, options, warrants, and
futures contracts; records; customer lists; mailing lists; telephone numbers; goodwill;
causes of action; judgments; payments under any settlement or other agreement;
literary rights; rights to performance; royalties; license and/or franchise
fees; rights of admission; licenses; franchises; license agreements, including
all rights of the Borrowers to enforce same; permits, certificates of
convenience and necessity, and similar rights granted by any governmental
authority; patents, patent applications, patents pending, and other
intellectual property; Internet addresses and domain names; developmental ideas
and concepts; proprietary processes; blueprints, drawings, designs, diagrams,
plans, reports, and charts; catalogs; manuals; technical data; computer
software programs (including the source and object codes therefor), computer
records, computer software, rights of access to computer record service
bureaus, service bureau computer contracts, and computer data; tapes, disks,
semiconductors chips and printouts; trade secrets rights, copyrights, mask work
rights and interests, and derivative works and interests; user, technical
reference, and other manuals and materials; trade names, trademarks, service
marks, and all good will relating thereto; applications for registration of the
foregoing; and all other general intangible property of the Borrowers in the
nature of intellectual property; proposals; cost estimates, and reproductions
on paper, or otherwise, of any and all concepts or ideas, and any matter
related to, or connected with, the design, development, manufacture, sale,
marketing, leasing, or use of any or all property produced, sold, or leased, by
the Borrowers or credit extended or services performed, by the Borrowers,
whether intended for an individual customer or the general business of the
Borrowers, or used or useful in connection with research by the Borrowers.


             “Gross
Margin”: With respect to the subject accounting period for which being
calculated, the following (determined in accordance with the cost method of
accounting):




	Sales (Minus) Cost of
  Goods Sold
	


	Sales






             “Hazardous
Materials”: Any (a) hazardous materials, hazardous waste, hazardous or toxic
substances, petroleum products, which (as to any of the foregoing) are defined
or regulated as a hazardous material in or under any Environmental Law and (b)
oil in any physical state.


             “Indebtedness”:
All indebtedness and obligations of or assumed by any Person on account of or
in respect to any of the following:


                           (a)         In respect of money borrowed (including
any indebtedness which is non-recourse to the credit of such Person but which
is secured by an Encumbrance on any asset of such Person) whether or not
evidenced by a promissory note, bond, debenture or other written obligation to
pay money.



                           (b)        For the payment of the purchase price of
goods or services deferred for more than thirty (30) days beyond then current
trade terms provided to such Person by the supplier of such goods or services.



                           (c)         In connection with any letter of credit
or acceptance transaction (including, without limitation, the face amount of
all letters of credit and acceptances issued for the account of such Person or
reimbursement on account of which such Person would be obligated).






 



                           (d)        In connection with the sale or discount
of accounts receivable or chattel paper of such Person.



                           (e)         On account of deposits or advances.



                           (f)         As lessee under Capital Leases.



             “Indebtedness”
of any Person shall also include:


                           (a)         Indebtedness of others secured by an
Encumbrance on any asset of such Person, whether or not such Indebtedness is
assumed by such Person.



                           (b)        Any guaranty, endorsement, suretyship or
other undertaking pursuant to which that Person may be liable on account of any
obligation of any third party.



                           (c)         The Indebtedness of a partnership or
joint venture in which such Person is a general partner or joint venturer.



             “Indemnified
Person”: Is defined in Section 14-11.


             “Index
Rate Loan:” Shall mean any Advances under the Credit Card Receivable Line and
Advances under the Standard Line or portion of Advances under the Standard
Line  bearing interest by reference to
the Index Rate Margin.


             “Index
Rate Margin:”  Is defined in Section
1-8(a).


             “Inventory”:
Includes, without limitation, “inventory” as defined in the Uniform Commercial
Code and including all goods, merchandise, raw materials, goods and work in
process, finished goods, and other tangible personal property now owned or
hereafter acquired and held for sale or lease or furnished or to be furnished
under contracts of service or used or consumed in any of Borrower’s business.


             “Inventory
Reserves”: Such reserves as may be established from time to time by the Lender
in the Lender’s discretion with respect to the determination of the
saleability, at retail, of the Eligible Inventory or which reflect such other
factors as affect the current Retail or market value of the Eligible Inventory.
Without limiting the generality of the foregoing, Inventory Reserves may
include (but are not limited to) reserves based on the following:


                           (a)         Obsolescence (determined based upon
Inventory on hand beyond a given number of days).


                           (b)        Seasonality.


                           (c)         Shrinkage.





 


                           (d)        Imbalance.


                           (e)         Change in Inventory character,
composition or mix.


                           (f)         Markdowns (both permanent and point of
sale).


                           (g)        Retail markons or markups inconsistent
with prior period practice and performance; current business plans; or
advertising calendar and planned advertising events.


                           (h)        The relationship between the amount
expended for Inventory purchases and the cost of goods sold.


Notwithstanding the foregoing, so long as
the Business Plan attached on the Closing Date as EXHIBIT9-10 is in effect and
Borrower performs in substantial compliance therewith, Lender shall not
establish Reserves for obsolescent and aged Inventory which are consistent with
Borrower’s ordinary course of business.


             “Investment
Property”: Has the meaning given that term in the Uniform Commercial Code.


             “Issuer”:
The issuer of any L/C.


             “Knowledge”:
Means actual knowledge of any of Borrower’s Executive Officer(s) and management
level employees after diligent investigation.


             “L/C”:
Any letter of credit, the issuance of which is procured by the Lender for the
account of the Borrower and any acceptance made on account of such letter.


             “Landlord
Lien State”: Any state or other jurisdiction under whose statutory or common
law the rights of a landlord in assets of that landlord’s tenant, for unpaid
rent, may be senior to a perfected security interest in such assets.


             “Lease”:
Any lease or other agreement, no matter how styled or structured, which the
Borrower is entitled to the use or occupancy of any space.


             “Leasehold
Interests”: Shall mean any Borrower’s leasehold estate or interest in each of
the properties at or upon which such Borrower conducts business, offers any
Inventory for sale, or maintains any of the Collateral, whether or not for
retail sale, together with such Borrower’s interest in any of the improvements
and fixtures located upon or appurtenant to each such estate or interest,
including without limitation, any rights of any Borrower to payment, proceeds
or value of any kind or nature realized upon the sale or transfer of any such
estate or interest.


             “Lender’s
Rights and Remedies”: Is defined in Section 11-6.


             “Letter
of Credit Rights”  Has the meaning given
that term in the  UCC.





 


             “Liabilities”
(in the singular, “Liability”): Includes, without limitation, all and each of
the following, whether now existing or hereafter arising:


                           (a)         Any and all direct and indirect
liabilities, debts, and obligations of any Borrower to the Lender, each of
every kind, nature, and description.



                           (b)        Each obligation to repay any loan,
advance, indebtedness, note, obligation, overdraft, or amount now or hereafter
owing by the Borrowers to the Lender (including all future advances whether or
not made pursuant to a commitment by the Lender), whether or not any of such
are liquidated, unliquidated, primary, secondary, secured, unsecured, direct,
indirect, absolute, contingent, or of any other type, nature, or description,
or by reason of any cause of action which the Lender may hold against any
Borrower.



                           (c)         All notes and other obligations of the
Borrowers now or hereafter assigned to or held by the Lender, each of every
kind, nature, and description.



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



                           (e)         All costs and expenses incurred or paid
by the Lender in respect of any agreement between the Borrowers and the Lender
or instrument furnished by the Borrowers to the Lender (including, without
limitation, Costs of Collection, attorneys’ reasonable fees, and all court and
litigation costs and expenses).



                           (f)         Any and all covenants of the Borrowers
to or with the Lender and any and all obligations of the Borrowers to act or to
refrain from acting in accordance with any agreement between the Borrowers and
the Lender or instrument furnished by the Borrowers to the Lender.



             “Loan
Account”: Is defined in Section 1-5.


             “Loan
Documents”: This Agreement, each instrument and document executed and/or
delivered as contemplated by Article 4, and each other instrument or document
from time to time executed and/or delivered in connection with the arrangements
contemplated hereby, as each may be amended from time to time.


             “Local
DDA”: A depository account maintained by any Borrower, the only contents of
which may be transfers from the Funding Account (i) and actually used solely
for petty cash purposes; or (ii) which is a disbursement account identified on
Exhibit 7-6 hereto .


             “Loan
Maintenance Fee”: Intentionally deleted.


             “Master
Note”: Is defined in Section 1-6.





 


             “Material
Adverse Change”: Means (a) a material adverse change in the business,
prospects, operations, results of operations, assets, liabilities or condition
(financial or otherwise) of Borrowers (as a whole), including, without
limitation, a material adverse change in the business, prospects, operations,
results or operations, assets, liabilities or condition since the date of the
latest financial information submitted to Lender on or before the Closing Date,
and since the date of the latest financial information supplied hereunder or at
any time as compared to the Business Plan attached hereto on the date of
execution hereof as EXHIBIT 9-10; (b) the material impairment of Borrowers’
ability to perform its obligations under the Loan Documents to which it is a
party or of Lender to enforce the Liabilities or realize upon the Collateral,
(c) a material adverse effect on the value of the Collateral or the amount that
Lender would be likely to receive (after giving consideration to delays in
payment and costs of enforcement) in the liquidation of such Collateral, or (d)
a material impairment of the priority of Lender’s liens with respect to the
Collateral.


             “Maturity
Date”:  Means September 07, 2004


             “Net
Retail Liquidation Value”: Means the appraised liquidation value of Eligible
Inventory less liquidation expenses as determined by Lender or its agents from
time to time.


             “One
Turn State”: Any state or other jurisdiction under whose statutory or common
law the relative priority of the rights of a landlord in assets of that
landlord’s tenant, for unpaid rent, vis a vis the rights of the holder of a
perfected security interest therein is dependent upon whether such security
interest arose prior or subsequent to the subject assets coming onto the
demised premises.


             “Overadvance”:
Any amounts advanced hereunder which exceed Availability.


             “Participant”:
Is defined in Section 14-12.


             “Percentage
Points”: The number of whole (and, if indicated, fractions (or decimal
equivalents) of) integers of a percentage referred to in a financial
performance covenant. For example, if a projected percentage were fifty (50%)
percent and the actual percentage turned out to be fifty-five and 6/10 (55.6%)
percent, the variance would be 5.6 Percentage Points.


             “Permitted
Acquisition”:    Means a transaction
where the Borrower is a party to a merger, consolidation or exchange of stock,
or purchase or otherwise acquires all or substantially all of the assets or
stock of, or any partnership or joint venture interest in, any other Person,
and where such transaction meets the following criteria:


                           (a)  no Event of Default which has not been
remedied within any  grace period
expressly provided herein or otherwise waived in writing by Lender has occurred
and the proposed transaction will not otherwise create an Event of Default
hereunder;



                           (b)  the business to be acquired is consistent
with Borrower’s current line of business and with the Business Plan;






 



                           (c)  the business to be acquired operates in the
United States of America;



                           (d)  in the case of an asset acquisition, all of
the assets to be acquired shall be owned by the Borrower or a newly created
Subsidiary of the Borrower, 100% of the stock of which has been or will be
pledged to the Lender or which is or will become a Borrower or a guarantor, in
the case of a stock acquisition or an acquisition by merger, the acquired
company shall become a wholly owned subsidiary of the Borrower or shall be merged
with the Borrower or any wholly-owned Subsidiary of the Borrower;



                           (e)  the aggregate cash consideration to be paid
by the Borrower in connection with any such transaction or
transactions(including the aggregate amount of all Indebtedness assumed) shall
be primarily for inventory purchases and shall not exceed $250,000 in the
aggregate in any fiscal year without the consent of the Lender, which consent
shall not be unreasonably withheld;



                           (f)  the transaction shall be preceded by the
standard due diligence practices of the Borrower;



                           (g)  the board of directors and (if required by
applicable law) the stockholders, or the equivalent thereof, of the business to
be acquired has approved such acquisition; and



                           (h)  in the case of transactions where the cash
consideration (including assumed Indebtedness) exceeds $250,000 but is not more
than $1,000,000 to which the Lender has consented and the Lender shall have
been provided with (i) a certificate demonstrating that the Borrowers are in
current compliance with and, giving effect to the proposed Acquisition
(including any borrowings made or to be made in connection therewith), will
continue to be in compliance with, all of the covenants set forth on Exhibit
9-11 hereto, (ii)  a copy of the
purchase agreement, together with audited (if available, or otherwise
unaudited) financial statements for any business to be acquired for the
preceding two (2) fiscal years, and (iii) a summary of the results of the
Borrower’s due diligence investigations.



             “Person”:
Any natural person, and any corporation, limited liability company, trust,
partnership, joint venture, or other enterprise or entity.


             “Promissory
Note: ”  Has the meaning given that term
in the  UCC.


             “Real
Estate”: Means any estates or interests in real property now owned or hereafter
acquired by Borrower.


             “Receipts”:
All cash, cash equivalents, checks, and credit card slips and receipts as arise
out of the sale of the Collateral and any other cash, cash equivalents or
checks otherwise received by Borrower, whether as a result of any loan,
investment by the Borrower, investment in the Borrower or otherwise.





 


             “Receivables
Collateral”: That portion of the Collateral which consists of the Borrowers’
Accounts, Accounts Receivable, Contract Rights, General Intangibles, Chattel
Paper, Instruments, Investment Property, Documents of Title, Documents,
Securities, letters of credit for the benefit of the Borrower, and bankers’
acceptances held by the Borrower, and any rights to payment.


             “Registered
Organization”  Has the meaning given
that term in the  UCC.


             “Related
Entity”:


                           (a)         Any corporation, limited liability
company, trust, partnership, joint venture, or other enterprise which: is a
parent, brother, sister or  subsidiary,
of the Borrower; could have such enterprise’s tax returns or financial
statements consolidated with the Borrower’s; could be a member of the same
controlled group of corporations (within the meaning of Section 1563(a)(1), (2)
and (3) of the Internal Revenue Code of 1986, as amended from time to time) of
which the Borrower is a member; Controls or is Controlled by the Borrower or by
any Affiliate of the Borrower.



                           (b)        Any Affiliate.



             “Requirement
of Law”:  As to any Person:


                           (a) (i)  All statutes, rules, regulations, orders, or
other requirements having the force of law and (ii) all court orders and
injunctions, arbitrator’s decisions, and/or similar rulings, in each instance
((i) and (ii)) of or by any federal, state, municipal, and other governmental
authority, or court, tribunal, panel, or other body which has or claims
jurisdiction over such Person, or any property of such Person, or of any other
Person for whose conduct such Person would be responsible.



                           (b)        That Person’s charter, certificate of
incorporation, articles of organization, and/or other organizational documents,
as applicable; and



                            (c) that Person’s by-laws and/or other
instruments which deal with corporate or similar governance, as applicable.



             “Reserve
Percentage”  AReserve Percentage:” The
decimal equivalent of that rate applicable to the Lender under regulations
issued from time to time by the Board of Governors of the Federal Reserve
System for determining the maximum reserve requirement of the Lender with
respect to AEurocurrency Liabilities@ as defined in such regulations.  The Reserve Percentage applicable to a
particular Eurodollar Loan shall be based upon that in effect during the
subject interest period, with changes in the Reserve Percentage which take
effect during such interest period to take effect (and to consequently change
any interest rate determined with reference to the Reserve Percentage) if and
when such change is applicable to such loans.





 


             “Reserves”:
All (if any) Availability Reserves, Inventory Reserves, and any other reserves
which may be established under the Loan Agreement.


             “Retail”:  The Cost of Inventory divided by the Cost
Factor.


             “Revolving
Credit”: Is defined in Section 1-1.


             “Richfield
Account”: Means  that Deposit Account of
Paper Warehouse maintained at Richfield Bank and Trust under account #30815138
solely for the purpose of holding $60,000 as cash collateral for the Richfield
L/C’s


             “Richfield
L/C’s”:  Means those L/C’s issued by
Richfield Bank and Trust for the benefit of the landlords identified on EXHIBIT
5-6 (Guaranties).


             “Special
Sub-Line”:  Means, Available during the
months of July though November only, amounts of up to the lesser of:  (a) five (5%) percent of the Cost value of
Eligible Inventory or (b) together with the Standard Line, ninety (90%) percent
of the Net Retail Liquidation Value.


             “Standard
Line”:  Means amounts of up to the lesser
of: (a) sixty-six (66%) percent of the Cost value of Eligible Inventory or (b)
eighty-five  (85%) percent of the Net
Retail Liquidation Value.


             “Stated
Amount”: The maximum amount for which an L/C may be honored.


             “Supporting
Obligations”  Has the meaning given that
term in the  UCC.


             “Suspension
Event”: Any occurrence, circumstance, or state of facts which (a) is an Event
of Default; or (b) would become an Event of Default if any requisite notice
were given and/or any requisite period of time were to run and such occurrence,
circumstance, or state of facts were not absolutely cured within any applicable
grace period.


             “Termination
Date”: The earliest of (a) the Maturity Date; or (b) the occurrence of any
event described in Section 10-11; or (c) the date set forth in Lender’s notice
to the Borrower setting the Termination Date on account of the occurrence of
any Event of Default other than as described in Section 10-11.


             “UCC”:  The Uniform Commercial Code as presently in
effect in Massachusetts (Mass. Gen. Laws, Ch. 106).