Exhibit
10.1


 


U.S.
$20,000,000


 


 


FINANCING
AGREEMENT,


 


 


dated
as of December 22, 2009,


 


 


between


 


 


U.S.
BANK NATIONAL ASSOCIATION,


 


 


as
Bank


 


 


and


 


 


OVERSTOCK.COM,
INC.,


 


 


as
Borrower


 

















 


Table of Contents


 


	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  I

  	
  DEFINITIONS

  	
  1

  
	
  Section 1.1

  	
  Defined Terms

  	
  1

  
	
  Section 1.2

  	
  Environmental Definitions

  	
  17

  
	
  Section 1.3

  	
  Other Definitional Provisions; Construction

  	
  18

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  II

  	
  LOANS AND OTHER FINANCIAL ACCOMMODATIONS

  	
  20

  
	
  Section 2.1

  	
  Total Facility

  	
  20

  
	
  Section 2.2

  	
  Regular Advances

  	
  20

  
	
  Section 2.3

  	
  Cash Secured Advances

  	
  20

  
	
  Section 2.4

  	
  [Intentionally omitted.]

  	
  20

  
	
  Section 2.5

  	
  Letters of Credit

  	
  20

  
	
  Section 2.6

  	
  No Deficiency

  	
  21

  
	
  Section 2.7

  	
  Disbursement of Advances

  	
  21

  
	
  Section 2.8

  	
  Notes; Records of Advances of Credit

  	
  22

  
	
  Section 2.9

  	
  No Limitation on Liens

  	
  23

  
	
  Section 2.10

  	
  Advance Rates and Sublimits

  	
  23

  
	
  Section 2.11

  	
  General Conditions

  	
  23

  
	
  Section 2.12

  	
  One General Obligation; Cross-Collateralized

  	
  24

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  III

  	
  INTEREST CHARGES; FEES

  	
  24

  
	
  Section 3.1

  	
  Interest

  	
  24

  
	
  Section 3.2

  	
  Increased Costs

  	
  25

  
	
  Section 3.3

  	
  Closing Fee

  	
  25

  
	
  Section 3.4

  	
  Unused Commitment Fee

  	
  26

  
	
  Section 3.5

  	
  Letter of Credit Fees

  	
  26

  
	
  Section 3.6

  	
  Payments; Charging Loan Account

  	
  26

  
	
  Section 3.7

  	
  Maximum Rate

  	
  26

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  IV

  	
  MONTHLY LOAN ACTIVITY ACCOUNTINGS

  	
  27

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  V

  	
  SECURITY

  	
  27

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VI

  	
  CONDITIONS PRECEDENT; FURTHER ASSURANCES

  	
  27

  
	
  Section 6.1

  	
  Initial Loan

  	
  27

  
	
  Section 6.2

  	
  General Conditions

  	
  30

  
	
  Section 6.3

  	
  Further Assurances

  	
  30

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VII

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

  	
  31

  
	
  Section 7.1

  	
  Agreements Regarding Receivables

  	
  31

  
	
  Section 7.2

  	
  Agreements Regarding Inventory

  	
  31

  
	
  Section 7.3

  	
  Locked Box

  	
  31

  
	
  Section 7.4

  	
  Collection of Remittances

  	
  32

  
	
  Section 7.5

  	
  Crediting of Remittances

  	
  32

  
	
  Section 7.6

  	
  Cost of Collection

  	
  33

  
	
  Section 7.7

  	
  On-Line Banking

  	
  33

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VIII

  	
  EXAMINATION OF LOAN COLLATERAL; REPORTING

  	
  33

  
	
  Section 8.1

  	
  Maintenance of Books and Records

  	
  33

  
				



 


i

















 


Table of Contents


(continued)


 


	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  Section 8.2

  	
  Access and Inspection

  	
  33

  
	
  Section 8.3

  	
  Reporting Regarding Receivables

  	
  33

  
	
  Section 8.4

  	
  Reporting Regarding Inventory; Inventory Appraisal

  	
  34

  
	
  Section 8.5

  	
  Interim Financial Statements; Payable Information

  	
  34

  
	
  Section 8.6

  	
  Annual Projections

  	
  34

  
	
  Section 8.7

  	
  Annual Financial Statements

  	
  35

  
	
  Section 8.8

  	
  Management Reports

  	
  35

  
	
  Section 8.9

  	
  Comparisons to Financials; Certificates

  	
  35

  
	
  Section 8.10

  	
  Public Filings

  	
  35

  
	
  Section 8.11

  	
  Delisting Correspondence

  	
  35

  
	
  Section 8.12

  	
  Tax Returns; Additional Information

  	
  35

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  IX

  	
  WARRANTIES,
  REPRESENTATIONS AND COVENANTS

  	
  36

  
	
  Section 9.1

  	
  Corporate Status

  	
  36

  
	
  Section 9.2

  	
  Due Authorization; Validity

  	
  36

  
	
  Section 9.3

  	
  No Violation

  	
  36

  
	
  Section 9.4

  	
  Use of Loan Proceeds

  	
  36

  
	
  Section 9.5

  	
  Ownership of Assets; Licenses; Patents

  	
  37

  
	
  Section 9.6

  	
  Indebtedness

  	
  37

  
	
  Section 9.7

  	
  Title to Property; No Liens

  	
  37

  
	
  Section 9.8

  	
  Restrictions; Labor Disputes; Labor Contracts

  	
  37

  
	
  Section 9.9

  	
  No Violation of Law

  	
  37

  
	
  Section 9.10

  	
  Hazardous Substances

  	
  38

  
	
  Section 9.11

  	
  Absence of Default

  	
  38

  
	
  Section 9.12

  	
  Accuracy of Financials; No Material Changes

  	
  38

  
	
  Section 9.13

  	
  Pension Plans

  	
  38

  
	
  Section 9.14

  	
  Taxes and Other Charges

  	
  39

  
	
  Section 9.15

  	
  No Litigation

  	
  39

  
	
  Section 9.16

  	
  No Brokerage Fee

  	
  39

  
	
  Section 9.17

  	
  Affiliates; Subsidiaries

  	
  39

  
	
  Section 9.18

  	
  Capitalization

  	
  39

  
	
  Section 9.19

  	
  Noncompetition Agreements

  	
  39

  
	
  Section 9.20

  	
  Deposit and Other Accounts

  	
  39

  
	
  Section 9.21

  	
  Solvency

  	
  39

  
	
  Section 9.22

  	
  Full Disclosure

  	
  39

  
	
  Section 9.23

  	
  Casualties

  	
  40

  
	
  Section 9.24

  	
  Leases; Bailments

  	
  40

  
	
  Section 9.25

  	
  Insurance Policies

  	
  40

  
	
  Section 9.26

  	
  Consents

  	
  40

  
	
  Section 9.27

  	
  Tax Shelter Regulations

  	
  40

  
	
  Section 9.28

  	
  Inventory

  	
  40

  
	
  Section 9.29

  	
  Internal Controls

  	
  40

  
	
  Section 9.30

  	
  Updating Representations and Warranties

  	
  41

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  X

  	
  COVENANTS

  	
  41

  
	
  Section 10.1

  	
  Payment of Certain Expenses

  	
  41

  
	
  Section 10.2

  	
  Notice of Litigation; Uninsured Casualty Loss

  	
  41

  
					



 


ii

















 


Table of Contents


(continued)


 


	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  Section 10.3

  	
  Notice of ERISA Events

  	
  42

  
	
  Section 10.4

  	
  Notice of Labor Disputes; Labor Contracts

  	
  42

  
	
  Section 10.5

  	
  Compliance with Laws

  	
  42

  
	
  Section 10.6

  	
  Notice of Violations of Law, Tax Assessments

  	
  42

  
	
  Section 10.7

  	
  [Intentionally omitted.]

  	
  42

  
	
  Section 10.8

  	
  Notice of Customer Defaults

  	
  42

  
	
  Section 10.9

  	
  Taxes and Charges

  	
  42

  
	
  Section 10.10

  	
  Indebtedness; Guaranties

  	
  43

  
	
  Section 10.11

  	
  Restrictions; Labor Disputes

  	
  44

  
	
  Section 10.12

  	
  Pension Plans

  	
  44

  
	
  Section 10.13

  	
  Solvency

  	
  44

  
	
  Section 10.14

  	
  Property Insurance

  	
  44

  
	
  Section 10.15

  	
  Liability Insurance

  	
  44

  
	
  Section 10.16

  	
  Mergers; Acquisitions

  	
  44

  
	
  Section 10.17

  	
  Investments

  	
  45

  
	
  Section 10.18

  	
  Distributions; Loans; Fees

  	
  45

  
	
  Section 10.19

  	
  Redemption of Stock

  	
  46

  
	
  Section 10.20

  	
  Stock Rights

  	
  46

  
	
  Section 10.21

  	
  Capital Structure; Fiscal Year

  	
  46

  
	
  Section 10.22

  	
  Affiliate Transactions

  	
  46

  
	
  Section 10.23

  	
  Operating Accounts

  	
  47

  
	
  Section 10.24

  	
  Sale of Assets

  	
  47

  
	
  Section 10.25

  	
  Intervention by Governmental Authority

  	
  47

  
	
  Section 10.26

  	
  Levy Against Loan Collateral

  	
  47

  
	
  Section 10.27

  	
  Judgments

  	
  47

  
	
  Section 10.28

  	
  Financial Covenants

  	
  47

  
	
  Section 10.29

  	
  Payments on and Changes to Convertible Debt

  	
  48

  
	
  Section 10.30

  	
  Aggregate Balance of Cash Collateral Account and
  Investment Account

  	
  48

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  XI

  	
  EFFECTIVE
  DATE; TERMINATION

  	
  48

  
	
  Section 11.1

  	
  Effective Date and Termination Date

  	
  48

  
	
  Section 11.2

  	
  [Intentionally omitted.]

  	
  48

  
	
  Section 11.3

  	
  Voluntary Termination by Borrower

  	
  48

  
	
  Section 11.4

  	
  Acceleration Upon Termination

  	
  49

  
	
  Section 11.5

  	
  Borrower Remains Liable

  	
  49

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  XII

  	
  EVENTS
  OF DEFAULT

  	
  49

  
	
  Section 12.1

  	
  Events of Default

  	
  49

  
	
  Section 12.2

  	
  Cure Periods

  	
  51

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  XIII

  	
  BANK’S
  RIGHTS AND REMEDIES

  	
  52

  
	
  Section 13.1

  	
  Acceleration

  	
  52

  
	
  Section 13.2

  	
  Fees and Expenses

  	
  53

  
	
  Section 13.3

  	
  [Intentionally omitted.]

  	
  53

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  XIV

  	
  [Intentionally
  omitted.]

  	
  53

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  XV

  	
  GENERAL

  	
  53

  
					



 


iii

















 


Table of Contents


(continued)


 


	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  Section 15.1

  	
  Severability

  	
  53

  
	
  Section 15.2

  	
  Governing Law

  	
  53

  
	
  Section 15.3

  	
  JURISDICTION; VENUE; SERVICE OF PROCESS

  	
  53

  
	
  Section 15.4

  	
  Survival and Continuation of Representations and
  Warranties

  	
  54

  
	
  Section 15.5

  	
  Assignment; Bank Affiliates

  	
  54

  
	
  Section 15.6

  	
  Bank’s Additional Rights Regarding Loan Collateral

  	
  54

  
	
  Section 15.7

  	
  Application of Payments; Revival of Obligations

  	
  54

  
	
  Section 15.8

  	
  Fees and Expenses

  	
  54

  
	
  Section 15.9

  	
  Notices

  	
  55

  
	
  Section 15.10

  	
  Electronic Communication

  	
  56

  
	
  Section 15.11

  	
  Indemnification

  	
  56

  
	
  Section 15.12

  	
  Additional Waivers by Borrower

  	
  57

  
	
  Section 15.13

  	
  Equitable Relief

  	
  57

  
	
  Section 15.14

  	
  Entire Agreement

  	
  57

  
	
  Section 15.15

  	
  Headings

  	
  58

  
	
  Section 15.16

  	
  Cumulative Remedies

  	
  58

  
	
  Section 15.17

  	
  Waivers and Amendments in Writing

  	
  58

  
	
  Section 15.18

  	
  Recourse to Directors or Officers

  	
  58

  
	
  Section 15.19

  	
  WAIVER OF JURY TRIAL

  	
  58

  
	
  Section 15.20

  	
  Patriot Act Notice

  	
  58

  
	
  Section 15.21

  	
  Advertising

  	
  58

  
	
  Section 15.22

  	
  Agreement Jointly Drafted

  	
  58

  
	
  Section 15.23

  	
  Advice of Counsel Obtained

  	
  59

  



 


iv

















 


FINANCING AGREEMENT


 


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


 


RECITAL:


 


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


 


AGREEMENTS:


 


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


 


ARTICLE I


 


DEFINITIONS


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


1

















 


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


 


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


 


	
  Applicable Cash

  Secured Advance

  Margin

  	
   

  	
  Applicable Regular

  Advance Margin

  	
   

  	
  Applicable LOC

  Fee

  	
   

  	
  Applicable Unused

  Commitment Fee

  	
   

  
	
  1.00

  	
  %

  	
  2.50

  	
  %

  	
  1.00

  	
  %

  	
  0.375

  	
  %

  



 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


(iii)          the Reserve Amount.


 


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


 


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


 


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


 


2

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


3

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


4

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


5

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


6






 












 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


7

















 


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


 


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


 


(D)          [Intentionally omitted];


 


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


 


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


 


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


 


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


 


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


 


8

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


(T)           Receivables in respect of credit card
rebates;


 


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


 


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


 


9

















 


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


 


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


 


“Equipment” means
equipment as defined in the UCC.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


“Inventory” means
inventory as defined in the UCC.


 


10

















 


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


 


(i)            fifty percent (50%), or


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


11

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


12

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


13

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


14

















 


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


 


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


 


“Receivables” means
accounts as defined in the UCC.


 


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


 


“Regular Advance
Availability” means


 


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


 


(a) the Regular Advance
Facility Amount, less


 


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


 


and


 


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


 


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


 


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


 


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


 


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


 


“Remittance” has the
meaning given in Section 7.3.


 


15






 












 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


16

















 


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


 


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


 


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


 


“Stated Termination Date”
means October 2, 2011.


 


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


 


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


 


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


 


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


 


Section 1.2             Environmental Definitions.


 


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


 


17

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


18

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


19

















 


ARTICLE II


 


LOANS
AND OTHER FINANCIAL ACCOMMODATIONS


 


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


 


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


 


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


 


Section 2.4             [Intentionally omitted.]


 


Section 2.5             Letters of Credit.


 


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


 


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


 


20

















 


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


 


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


 


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


 


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


 


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


 


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


 


21

















 


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


 


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


 


22

















 


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


 


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


 


Section 2.10           Advance Rates and Sublimits.


 


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


 


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


 


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


 


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


 


23

















 


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


 


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


 


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


 


ARTICLE III


 


INTEREST
CHARGES; FEES


 


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


 


(a)           Interest on Advances.


 


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


 


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


 


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


 


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


 


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


 


(e)           [Intentionally omitted.]


 


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


 


(g)           [Intentionally omitted.]


 


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


 


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


 


25






 












 


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


 


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


 


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


 


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


 


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ARTICLE IV


 


MONTHLY
LOAN ACTIVITY ACCOUNTINGS


 


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


 


ARTICLE V


 


SECURITY


 


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


 


ARTICLE VI


 


CONDITIONS
PRECEDENT; FURTHER ASSURANCES


 


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


 


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


 


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


 


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


 


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


 


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


 


27

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


29

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


30

















 


ARTICLE VII


 


RECEIVABLES;
INVENTORY; COLLECTION OF RECEIVABLES;

DISPUTED RECEIVABLES; PROCEEDS OF INVENTORY.


 


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


 


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


 


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


 


31

















 


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


 


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


 


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


 


32

















 


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


 


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


 


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


 


ARTICLE VIII


 


EXAMINATION
OF LOAN COLLATERAL; REPORTING


 


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


 


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


 


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


 


33

















 


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


 


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


 


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


 


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


 


34

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


35






 












 


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


 


ARTICLE IX


 


WARRANTIES,
REPRESENTATIONS AND COVENANTS


 


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


 


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


 


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


 


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


 


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


 


36

















 


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


 


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


 


Section 9.6             Indebtedness.


 


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


 


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


 


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


 


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


 


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


 


37

















 


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


 


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


 


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


 


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


 


38

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


39

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Section 9.29           Internal Controls.


 


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


 


40

















 


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


 


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


 


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


 


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


 


ARTICLE X


 


COVENANTS


 


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


 


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


 


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


 


41

















 


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


 


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


 


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


 


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


 


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


 


Section 10.7           [Intentionally omitted.]


 


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


 


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


 


42

















 


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


 


Section 10.10         Indebtedness; Guaranties.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


43

















 


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


 


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


 


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


 


Section 10.13         Solvency.  Borrower will continue to be Solvent.


 


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


 


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


 


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


 


44

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


45

















 


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


 


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


 


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


 


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


 


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


 


46






 












 


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


 


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


 


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


 


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


 


Section 10.27         Judgments.


 


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


 


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


 


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


 


47

















 


Section 10.29         Payments on and Changes to
Convertible Debt.


 


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


 


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


 


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


 


ARTICLE XI


 


EFFECTIVE
DATE; TERMINATION


 


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


 


Section 11.2           [Intentionally omitted.]


 


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


 


48

















 


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


 




	
  Voluntary Termination Date

  	
   

  	
  Termination
  Fee

  
	
   

  	
   

  	
   

  
	
  On or Before October 2, 2010

  	
   

  	
  1.00% of the Regular Advance Facility Amount

  
	
   

  	
   

  	
   

  
	
  After October 2, 2010 but on or before 

  	
   

  	
   

  
	
  October 2, 2011

  	
   

  	
  0.75% of the Regular Advance Facility Amount

  






 


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


 


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


 


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


 


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


 


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


 


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


 


ARTICLE XII


 


EVENTS
OF DEFAULT


 


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


 


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


 


49

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


50

















 


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


 


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


 


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


 


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


 


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


 


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


 


(o)           There occurs a Change of Control;


 


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


 


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


 


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


 


(s)           There occurs a Convertible Debt
Default.


 


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


 


Section 12.2           Cure Periods.


 


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


 


51

















 


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


 


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


 


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


 


ARTICLE XIII


 


BANK’S
RIGHTS AND REMEDIES


 


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


 


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


 


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


 


(c)           may terminate this Agreement, and


 


52

















 


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


 


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


 


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


 


Section 13.3           [Intentionally omitted.]


 


ARTICLE XIV


 


[INTENTIONALLY OMITTED.]


 


ARTICLE XV


 


GENERAL


 


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


 


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


 


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



 


53

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


54






 












 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


	
  To Bank:

  	
   

  	
  U.S.
  Bank National Association

  
	
   

  	
   

  	
  Asset
  Based Finance

  



 


55

















 


	
   

  	
   

  	
  Mail
  Code EP-MN-H04B

  
	
   

  	
   

  	
  800
  Nicollet Mall

  
	
   

  	
   

  	
  Minneapolis,
  MN 55402-7020

  
	
   

  	
   

  	
  Attention:
  Ron Giblin

  
	
   

  	
   

  	
  Telecopy
  No.: (612) 303-3514

  
	
   

  	
   

  	
   

  
	
  To Borrower:

  	
   

  	
  Overstock.com, Inc.

  
	
   

  	
   

  	
  6350
  South 3000 East

  
	
   

  	
   

  	
  Salt
  Lake City, UT 84121

  
	
   

  	
   

  	
  Attention:
  Senior Vice President, Finance

  
	
   

  	
   

  	
  Telecopy
  No.: (801) 453-7798

  
	
   

  	
   

  	
   

  
	
  with a copy to:

  	
   

  	
  Overstock.com, Inc.

  
	
   

  	
   

  	
  6350
  South 3000 East

  
	
   

  	
   

  	
  Salt
  Lake City, UT 84121

  
	
   

  	
   

  	
  Attention:
  General Counsel

  
	
   

  	
   

  	
  Telecopy
  No.: (801) 947-3114

  



 


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


 


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


 


56

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


57

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


58

















 


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


 


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


 


59

















 


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


 


 


	
   

  	
  BORROWER:

  
	
   

  	
   

  	
   

  
	
   

  	
  OVERSTOCK.COM,
  INC.,

  
	
   

  	
  a
  Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Jonathan E. Johnson III

  
	
   

  	
  Name:

  	
  Jonathan
  E. Johnson III

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  BANK:

  
	
   

  	
   

  
	
   

  	
  U.S.
  BANK NATIONAL ASSOCIATION,

  
	
   

  	
  a
  national banking association

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Ronald Giblin

  
	
   

  	
  Name:
  

  	
  Ronald
  Giblin

  
	
   

  	
  Title:

  	
  Vice
  President

  



 


[Signature page to Financing Agreement]


 

















 


SCHEDULE
10.28


 


Financial Covenants


 


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


 


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


 


Section 3.                                            [Intentionally omitted.]


 


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


 


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


 


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


 

















 


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


 


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


 


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


 


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


 


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


 


Section 5.                                            Calculation of Financial Covenants.


 


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


 

















 


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


 


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