Document:

Exhibit 10.10
  
 

LOAN AND SECURITY AGREEMENT

by and among

Bidz.com, Inc.,

a Delaware corporation

and

Bidz.com, Inc.,

a California corporation

collectively as

Borrower

 

and

LASALLE RETAIL
FINANCE,

A DIVISION OF LASALLE
BUSINESS CREDIT, LLC,

AS AGENT FOR

LASALLE BANK MIDWEST
NATIONAL ASSOCIATION

 

as Lender

 

 

 

Dated as of July 12,
2006

 

   
 

 

	
  1.

  	
  DEFINITIONS AND CONSTRUCTION

  	
  1

  
	
   

  	
  1.1

  	
  Definitions

  	
  1

  
	
   

  	
  1.2

  	
  Accounting Terms

  	
  24

  
	
   

  	
  1.3

  	
  Code

  	
  25

  
	
   

  	
  1.4

  	
  Construction

  	
  25

  
	
   

  	
  1.5

  	
  Schedules and Exhibits

  	
  25

  
	
  2.

  	
  LOAN AND TERMS OF
  PAYMENT.

  	
  25

  
	
   

  	
  2.1

  	
  Revolver Advances.

  	
  25

  
	
   

  	
  2.2

  	
  Increase of Maximum Revolver Amount.

  	
  26

  
	
   

  	
  2.3

  	
  Borrowing Procedures.

  	
  26

  
	
   

  	
  2.4

  	
  Payments.

  	
  27

  
	
   

  	
  2.5

  	
  Overadvances

  	
  28

  
	
   

  	
  2.6

  	
  Interest Rates and Letter of Credit Fee: Rates,
  Payments, and Calculations.

  	
  28

  
	
   

  	
  2.7

  	
  Cash Management.

  	
  30

  
	
   

  	
  2.8

  	
  Sweep; Crediting Payments; Float Charge.

  	
  32

  
	
   

  	
  2.9

  	
  Designated Account

  	
  32

  
	
   

  	
  2.10

  	
  Maintenance of Loan Account; Statements of
  Obligations

  	
  33

  
	
   

  	
  2.11

  	
  Fees

  	
  33

  
	
   

  	
  2.12

  	
  Letters of Credit.

  	
  33

  
	
   

  	
  2.13

  	
  LIBOR Option.

  	
  35

  
	
   

  	
  2.14

  	
  Capital Requirements

  	
  37

  
	
   

  	
  2.15

  	
  Securitization

  	
  38

  
	
  3.

  	
  CONDITIONS; TERM OF
  AGREEMENT.

  	
  39

  
	
   

  	
  3.1

  	
  Conditions Precedent to
  the Initial Extension of Credit

  	
  39

  
	
   

  	
  3.2

  	
  Conditions Subsequent to the Initial Extension of
  Credit

  	
  41

  
	
   

  	
  3.3

  	
  Conditions Precedent to all Extensions of Credit

  	
  41

  
	
   

  	
  3.4

  	
  Term

  	
  42

  
	
   

  	
  3.5

  	
  Effect of Termination

  	
  42

  
	
   

  	
  3.6

  	
  Early Termination by Borrower

  	
  42

  
	
  4.

  	
  CREATION OF SECURITY
  INTEREST.

  	
  43

  
	
   

  	
  4.1

  	
  Grant of Security
  Interest

  	
  43

  
	
   

  	
  4.2

  	
  Control of Collateral

  	
  43

  
	
   

  	
  4.3

  	
  Negotiable Collateral

  	
  44

  
	
   

  	
  4.4

  	
  Collection of Accounts, General Intangibles, and
  Negotiable Collateral

  	
  44

  
	
   

  	
  4.5

  	
  Delivery of Additional Documentation Required

  	
  44

  
	
   

  	
  4.6

  	
  Power of Attorney

  	
  45

  
	
   

  	
  4.7

  	
  Control Agreements

  	
  45

  
	
   

  	
  4.8

  	
  Right to Inspect; Inventories, Appraisals and Audits

  	
  45

  
	
  5.

  	
  REPRESENTATIONS AND
  WARRANTIES.

  	
  46

  
	
   

  	
  5.1

  	
  No Encumbrances

  	
  46

  
	
   

  	
  5.2

  	
  Eligible Accounts

  	
  46

  
	
   

  	
  5.3

  	
  Inventory; Eligible Inventory

  	
  46

  

 -ii-
 

 

	
  

  	
  5.4

  	
  Equipment

  	
  47

  
	
   

  	
  5.5

  	
  Location of Inventory and Equipment

  	
  47

  
	
   

  	
  5.6

  	
  Inventory Records

  	
  47

  
	
   

  	
  5.7

  	
  Legal Status

  	
  47

  
	
   

  	
  5.8

  	
  Due Organization and Qualification; Subsidiaries.

  	
  47

  
	
   

  	
  5.9

  	
  Due Authorization; No Conflict.

  	
  48

  
	
   

  	
  5.10

  	
  Litigation.

  	
  49

  
	
   

  	
  5.11

  	
  No Material Adverse Change

  	
  49

  
	
   

  	
  5.12

  	
  Fraudulent Transfer.

  	
  49

  
	
   

  	
  5.13

  	
  Employee Benefits

  	
  49

  
	
   

  	
  5.14

  	
  Environmental Condition

  	
  50

  
	
   

  	
  5.15

  	
  Brokerage Fees

  	
  50

  
	
   

  	
  5.16

  	
  Intellectual Property

  	
  50

  
	
   

  	
  5.17

  	
  Leases

  	
  51

  
	
   

  	
  5.18

  	
  DDAs

  	
  51

  
	
   

  	
  5.19

  	
  Credit Card/Payment Processing

  	
  51

  
	
   

  	
  5.20

  	
  Indebtedness

  	
  51

  
	
   

  	
  5.21

  	
  Payment of Taxes

  	
  51

  
	
   

  	
  5.22

  	
  Complete Disclosure

  	
  51

  
	
   

  	
  5.23

  	
  AML Laws and Regulations.

  	
  52

  
	
  6.

  	
  AFFIRMATIVE COVENANTS.

  	
  52

  
	
   

  	
  6.1

  	
  Accounting System

  	
  52

  
	
   

  	
  6.2

  	
  Collateral Reporting

  	
  52

  
	
   

  	
  6.3

  	
  Financial Statements, Reports, Certificates

  	
  52

  
	
   

  	
  6.4

  	
  AML Laws and Regulations.

  	
  55

  
	
   

  	
  6.5

  	
  Return

  	
  55

  
	
   

  	
  6.6

  	
  Maintenance of Properties

  	
  55

  
	
   

  	
  6.7

  	
  Taxes

  	
  55

  
	
   

  	
  6.8

  	
  Insurance.

  	
  55

  
	
   

  	
  6.9

  	
  Location of Inventory and Equipment

  	
  56

  
	
   

  	
  6.10

  	
  Compliance with Laws

  	
  56

  
	
   

  	
  6.11

  	
  Leases

  	
  57

  
	
   

  	
  6.12

  	
  Brokerage Commissions

  	
  57

  
	
   

  	
  6.13

  	
  Existence

  	
  57

  
	
   

  	
  6.14

  	
  Environmental

  	
  57

  
	
   

  	
  6.15

  	
  Investment Proceeds, Etc

  	
  57

  
	
   

  	
  6.16

  	
  Foreign Assets Control Regulations, Etc

  	
  58

  
	
   

  	
  6.17

  	
  Disclosure Updates

  	
  58

  
	
  7.

  	
  NEGATIVE COVENANTS.

  	
  58

  
	
   

  	
  7.1

  	
  Indebtedness

  	
  58

  
	
   

  	
  7.2

  	
  Liens

  	
  59

  
	
   

  	
  7.3

  	
  Restrictions on Fundamental Changes.

  	
  59

  
	
   

  	
  7.4

  	
  Disposal of Assets

  	
  59

  
	
   

  	
  7.5

  	
  Change of Name or Address

  	
  59

  
	
   

  	
  7.6

  	
  Guarantee

  	
  59

  

 -iii-
 

 

	
  

  	
  7.7

  	
  Nature of Business

  	
  60

  
	
   

  	
  7.8

  	
  Prepayments and Amendments.

  	
  60

  
	
   

  	
  7.9

  	
  Change of Control

  	
  60

  
	
   

  	
  7.10

  	
  Consignments

  	
  60

  
	
   

  	
  7.11

  	
  Restricted Payments

  	
  60

  
	
   

  	
  7.12

  	
  Accounting Methods

  	
  60

  
	
   

  	
  7.13

  	
  Investments

  	
  60

  
	
   

  	
  7.14

  	
  Transactions with Affiliates

  	
  61

  
	
   

  	
  7.15

  	
  Location Openings

  	
  61

  
	
   

  	
  7.16

  	
  Suspension.

  	
  61

  
	
   

  	
  7.17

  	
  Compensation

  	
  61

  
	
   

  	
  7.18

  	
  Use of Proceeds

  	
  61

  
	
   

  	
  7.19

  	
  Inventory and Equipment with Bailees

  	
  61

  
	
   

  	
  7.20

  	
  Securities Accounts

  	
  61

  
	
   

  	
  7.21

  	
  Financial Covenants

  	
  62

  
	
   

  	
  7.22

  	
  Authentic Inventory

  	
  62

  
	
  8.

  	
  EVENTS OF DEFAULT.

  	
  62

  
	
   

  	
  8.1

  	
  Payment

  	
  62

  
	
   

  	
  8.2

  	
  Failure to Perform

  	
  62

  
	
   

  	
  8.3

  	
  Seizure of Assets

  	
  62

  
	
   

  	
  8.4

  	
  Insolvency by Borrower

  	
  62

  
	
   

  	
  8.5

  	
  Insolvency Against Borrower

  	
  62

  
	
   

  	
  8.6

  	
  Restraint of Business

  	
  63

  
	
   

  	
  8.7

  	
  Liens

  	
  63

  
	
   

  	
  8.8

  	
  Judgments

  	
  63

  
	
   

  	
  8.9

  	
  Default of Material Agreement

  	
  63

  
	
   

  	
  8.10

  	
  Loss of Business

  	
  63

  
	
   

  	
  8.11

  	
  Payment of Subdebt

  	
  63

  
	
   

  	
  8.12

  	
  Misrepresentation

  	
  63

  
	
   

  	
  8.13

  	
  Rescission

  	
  64

  
	
   

  	
  8.14

  	
  Failure of Lien

  	
  64

  
	
   

  	
  8.15

  	
  Nullification of Loan Documents

  	
  64

  
	
   

  	
  8.16

  	
  Material Adverse Change

  	
  64

  
	
  9.

  	
  THE LENDER’S RIGHTS AND
  REMEDIES.

  	
  64

  
	
   

  	
  9.1

  	
  Rights and Remedies

  	
  64

  
	
   

  	
  9.2

  	
  Remedies Cumulative

  	
  67

  
	
  10.

  	
  TAXES AND EXPENSES.

  	
  67

  
	
  11.

  	
  WAIVERS;
  INDEMNIFICATION.

  	
  67

  
	
   

  	
  11.1

  	
  Demand; Protest;
  Special Damages; etc

  	
  67

  
	
   

  	
  11.2

  	
  The Lender’s Liability for Collateral

  	
  67

  
	
   

  	
  11.3

  	
  Indemnification

  	
  67

  
	
  12.

  	
  NOTICES.

  	
  68

  

 -iv-
 

 

	
  13.

  	
  CHOICE OF LAW AND
  VENUE; JURY TRIAL WAIVER.

  	
  70

  
	
  14.

  	
  ASSIGNMENTS AND
  PARTICIPATIONS; SUCCESSORS.

  	
  70

  
	
   

  	
  14.1

  	
  Assignments and
  Participations.

  	
  70

  
	
   

  	
  14.2

  	
  Successors

  	
  71

  
	
  15.

  	
  AMENDMENTS; WAIVERS.

  	
  72

  
	
   

  	
  15.1

  	
  Amendments and Waivers

  	
  72

  
	
   

  	
  15.2

  	
  No Waivers; Cumulative Remedies

  	
  72

  
	
  16.

  	
  GENERAL PROVISIONS.

  	
  72

  
	
   

  	
  16.1

  	
  Effectiveness

  	
  72

  
	
   

  	
  16.2

  	
  Section Headings

  	
  72

  
	
   

  	
  16.3

  	
  Interpretation

  	
  72

  
	
   

  	
  16.4

  	
  Severability of Provisions

  	
  72

  
	
   

  	
  16.5

  	
  Amendments in Writing

  	
  73

  
	
   

  	
  16.6

  	
  Counterparts; Telefacsimile Execution

  	
  73

  
	
   

  	
  16.7

  	
  Revival and Reinstatement of Obligations

  	
  74

  
	
   

  	
  16.8

  	
  USA Patriot Act

  	
  74

  
	
   

  	
  16.9

  	
  Pledges To Federal Reserve Banks

  	
  74

  
	
   

  	
  16.10

  	
  Confidentiality

  	
  74

  
	
   

  	
  16.11

  	
  Right to Publish Notice

  	
  74

  
	
   

  	
  16.12

  	
  Credit Inquiries

  	
  75

  
	
   

  	
  16.13

  	
  Joint Preparation

  	
  75

  
	
   

  	
  16.14

  	
  Right Of Set-Off

  	
  75

  
	
   

  	
  16.15

  	
  Integration

  	
  75

  

 

 -v-
 

 

EXHIBITS
AND SCHEDULES

Exhibit A                                Form
of Borrowing Base Certificate

Exhibit B                                Form
of Compliance Certificate

Exhibit C                                Business
Plan

Exhibit D                                Form
of LIBOR Notice

Schedule D-1                        Designated
Account

Schedule E-1                         Eligible
Inventory Locations

Schedule P-1                         Permitted
Liens

Schedule R-1                         Real
Property Collateral

Schedule 2.7                          Cash
Management Accounts and Procedures

Schedule 5.5                          Locations
of Inventory and Equipment

Schedule 5.8(b)                     Capitalization
of Borrower

Schedule 5.8(c)                     Subsidiaries

Schedule 5.10(a)                   Litigation

Schedule 5.10(c)                   Commercial
Tort Claims

Schedule 5.14                        Environmental
Matters

Schedule 5.16                        Intellectual
Property

Schedule 5.18                        Demand
Deposit Accounts

Schedule 5.19                        Credit
Card /Payment Processors

Schedule 5.20                        Indebtedness

Schedule 6.2                          Collateral
Reporting

Schedule 7.21                        Covenants

 -vi-

 

LOAN
AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT
(this “Agreement”), is entered
into as of July [    ], 2006, by and among, on the one
hand, LASALLE RETAIL FINANCE, A DIVISION OF LASALLE BUSINESS CREDIT, LLC as
agent for LASALLE BANK MIDWEST NATIONAL ASSOCIATION, together with its  respective successors and assigns (“Lender”), and, on the other hand, Bidz.com,
Inc., a Delaware corporation (“Bidz DE”)
and Bidz.com, Inc., a California corporation (“Bidz CA” and, together with Bidz DE, collectively, “Borrower”).

The parties agree as follows:

1.             DEFINITIONS
AND CONSTRUCTION.

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

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

“Accounts” means all of Borrower’s now owned or
hereafter acquired right, title, and interest with respect to “accounts” (as
such term is defined from time to time in the Code), and any and all supporting
obligations in respect thereof.

“Additional Documents” has the meaning set
forth in Section 4.5.

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

“Advance Rates” means the percentages used to
calculate Availability in accordance with Section 2.1(a).

“Affiliate” means, as applied to any Person,
any other Person who, directly or indirectly, controls, is controlled by, or is
under common control with, such Person. 
For purposes of this definition, “control” means the possession,
directly or indirectly, of the power to direct the management and policies of a
Person, whether through the ownership of Stock, by contract, or otherwise; provided,
however, that, for purposes of the definition of Eligible Accounts and Section
7.14 hereof: (a) any Person which owns directly or indirectly 10% or
more of the securities having ordinary voting power for the election of
directors or other members of the governing body of a Person or 10% or more of
the partnership or other ownership interests of a Person (other than as a
limited partner of such Person) shall be deemed to control such Person;
(b) each director (or comparable manager) of a Person shall be deemed to
be an Affiliate of such Person; and (c) each partnership or joint venture
in which a Person is a partner or joint venturer shall be deemed to be an
Affiliate of such Person.

“Agreement” has the meaning set forth in the
preamble hereto.

“AML Laws and Regulations” means any federal or
state laws or regulations relating to anti-money laundering programs which are
applicable to Borrower or any of Borrower’s 

 -1-
 

 

businesses, including, without limitation, Department
of the Treasury Financial Crimes Enforcement Network and the special provisions
stipulated under USA Patriot Act of 2001 that address requirements for
anti-money laundering programs for deals in precious metals, stones, or jewels,
including under 31 C.F.R. Part 103.

“Applicable
Margin” means the percentages per annum set forth in the following table
for Base Rate Loans and LIBOR Rate Loans based upon Net Excess Availability:

	
  Level

  	
   

  	
  Net Excess Availability

  	
   

  	
  Base Rate

  Margin

  	
   

  	
  LIBOR Rate

  Margin

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  I

  	
   

  	
  Greater than
  $3,500,000

  	
   

  	
  0.00

  	
  %

  	
  1.50

  	
  %

  
	
  II

  	
   

  	
  Greater than
  $2,000,000 and less than or equal to $3,500,000

  	
   

  	
  0.25

  	
  %

  	
  1.75

  	
  %

  
	
  III

  	
   

  	
  Less than or equal to
  $2,000,000

  	
   

  	
  0.50

  	
  %

  	
  2.00

  	
  %

  

 

Any increase or decrease
in the Applicable Margin resulting from a change in Net Excess Availability
shall become effective as of the first Business Day of the calendar quarter for
which a Borrowing Base Certificate is delivered pursuant to Section
6.3(a)(v) (setting forth the average Net Excess Availability for then
immediately preceding calendar quarter); provided, however, that
if a Borrowing Base Certificate is not delivered within one (1) Business Days
after the time periods specified in such Section, then Pricing Level III shall
apply as of such Business Day and thereafter, subject to prospective adjustment
upon actual receipt of such Borrowing Base Certificate.  The Applicable Margin in effect from the
Closing Date through September 30, 2006 shall be Pricing Level II.

 “Applicable
Prepayment Premium” has the meaning set forth in the Fee Letter.

“Assignee” has the meaning set forth in Section
14.1.

“Assignment
of Services Contracts” means an agreement, in form and substance acceptable
to Lender, pursuant to which Borrower shall collaterally assign the Services
Contract to Lender and the Service Providers shall agree to continue to
provide  the subject services to Borrower
and/or Lender in the event of  any
Insolvency Proceeding or Liquidation.

“Authentic”
means merchandise or inventory that is manufactured, distributed, sold, resold,
offered for sale, advertised, and otherwise marketed in compliance with (i) all
applicable laws and regulations of the United States and other national or
local jurisdictions concerning patents, trademarks, trade dress, design rights,
copyrights, trade secrets, and/or other intellectual property rights and
proprietary rights of any kind (collectively, “IP Rights”) and (ii) all licenses, sublicenses, and other
agreements required to be obtained from the owners or licensees of any such IP
Rights so as not to result in any infringement, dilution, or other violation of
such IP Rights.

“Authorized Person” means any officer or other employee
of Borrower designated and authorized by Borrower to undertake any tasks
assigned to Authorized Person under this Agreement and acceptable to Lender in
Lender’s sole discretion.

 -2-
 

 

“Availability” means, as of any date of
determination, if such date is a Business Day, and determined at the close of
business on the immediately preceding Business Day, if such date of
determination is not a Business Day, the amount that Borrower is entitled to
borrow as Advances under Section 2.1, after giving effect to all then
outstanding Obligations and all sublimits and Reserves applicable hereunder.

“Availability Reserves” means such reserves as
Lender from time to time determines in its Permitted Discretion as being
appropriate to reflect the impediments to Lender’s ability to realize upon the
Collateral.  Without limiting the
generality of the foregoing, Availability Reserves may include (but are not
limited to) reserves based on the following: 
(a) a sum equal to 90 days’ rent for the applicable calendar year
under that certain Commercial Multi Tenant Lease-Net dated as of April 15,
2003, as amended from time to time, between PAS Trust (or its successors and/or
assigns) and Borrower; (b) rent for any leased real estate location in a
Landlord Lien State for which an acceptable Collateral Access Agreement has not
been received by Lender (irrespective of whether any rent is currently due);
(c) returns, customer credits, gift certificates and frequent shopper
programs; (d) customer deposits; (e) taxes and other governmental
charges, including tax Liens, ad valorem, personal property, sales, and other
taxes which may have priority over the security interests of the Lender in the
Collateral; (f) held or post-dated checks issued by Borrower; (g) any
judgment lien against Borrower or the Collateral; (h) Borrower’s failure
to pay when due and payable indebtedness owing to any trade creditor;
(i) sums that Borrower is required to pay (such as taxes, assessments,
insurance premiums, or, in the case of leased assets, rents or other amounts
payable under such leases), and has failed, to pay under any Section of this
Agreement or any other Loan Document, (j) as determined by Lender in its
Permitted Discretion, based on noncompliance with the covenants set forth in
Sections 6 and 7, (k) amounts owing by Borrower to any Person to the
extent secured by a Lien on, or trust over, any of the Collateral (other than
any existing Permitted Lien set forth on Schedule P-1); (l) unpaid Bank
Product Obligations; (l) L/C Landing Costs; and (m) any materially adverse
deviation at any time from the Business Plan.

“Bailee Acknowledgment” means a record in form
and substance satisfactory to Lender authenticated by any bailee, warehouseman
or other third party in possession of any Equipment or Inventory acknowledging
that it holds possession of the applicable Inventory and/or Equipment for the
benefit of Lender, on behalf of Lender.

“Bank Product Obligations” means every
obligation of Borrower and its subsidiaries under and in respect of any one or
more of the following types of services or facilities extended to such Person
by Lender or any Affiliate thereof:  (i)
credit and purchase cards, (ii) cash management or related services, and (iii)
agreements for treasury management services, including, without limitation,
intraday credit, Automated Clearing House (ACH) services, foreign exchange
services, daylight overdrafts and zero balance arrangements.

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

“Base LIBOR Rate” means the rate per annum,
determined by Lender (or LaSalle Bank, N.A.) 
in accordance with its customary procedures, and utilizing such
electronic or other quotation sources as it considers appropriate (rounded upwards,
if necessary, to the next 1/16%), 

 -3-
 

 

on the basis of the rates at which Dollar deposits are
offered to major banks in the London interbank market on or about 2:00 p.m.
(eastern prevailing time) 2 Business Days prior to the commencement of the
applicable Interest Period, for a term and in amounts comparable to the
Interest Period and amount of the LIBOR Rate Loan requested by Borrower in
accordance with this Agreement, which determination shall be conclusive in the
absence of manifest error.

“Base Rate” means, the rate of interest
announced within LaSalle Bank N.A. at its principal office in Chicago, Illinois
as its “prime rate”, with the understanding that the “prime rate” is one of
LaSalle Bank N.A.’s base rates (not necessarily the lowest of such rates) and
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto and is evidenced by the recording thereof
after its announcement in such internal publication or publications as LaSalle
Bank may designate.

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

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

“Blocked Account Control Agreement” means a
Control Agreement pursuant to which, as of the date of such Control Agreement,
the applicable depository bank shall take direction only from Lender and is
directed to send all collected balances to the Concentration Account.

“Board of Directors” means the board of
directors (or comparable managers) of Borrower or any committee thereof duly
authorized to act on behalf thereof.

“Books” means all of Borrower’s and its now
owned or hereafter acquired Subsidiaries’ books and records (including all of
its records indicating, summarizing, or evidencing its assets (including the
Collateral) or liabilities, all of Borrower’s or its Subsidiaries’ records
relating to its or their business operations or financial condition, and all of
its or their goods or General Intangibles related to such information).

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

“Borrowing” means a borrowing hereunder
consisting of Advances made on the same day by the Lender.

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

“Borrowing Base Certificate” means a
certificate in the form of Exhibit A, as such form may be revised from
time to time by Lender.

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

 -4-
 

 

“Business Plan” means the set of Projections of
Borrower for the 3-year period following the Closing Date (on a year by year
basis, and for the 2 year period following the Closing Date, on a month by
month basis), in form and substance (including as to scope and underlying
assumptions) satisfactory to Lender and attached hereto as Exhibit C,
together with any amendment, modification or revision thereto approved by
Lender, in writing, in its Permitted Discretion.

“Capital Lease” means a lease that is required
to be capitalized for financial reporting purposes in accordance with GAAP.

“Capitalized Lease Obligation” means any
Indebtedness represented by obligations under Capital Lease.

“Cash Equivalents” means (a) marketable
direct obligations issued or unconditionally guaranteed by the United States or
issued by any agency thereof and backed by the full faith and credit of the
United States, in each case maturing within 1 year from the date of acquisition
thereof, (b) marketable direct obligations issued by any state of the
United States or any political subdivision of any such state or any public
instrumentality thereof maturing within 1 year from the date of acquisition
thereof and, at the time of acquisition, having the highest rating obtainable
from either S&P or Moody’s, (c) commercial paper maturing no more than
270 days from the date of acquisition thereof and, at the time of acquisition,
having a rating of A-1 or P-1, or better, from S&P or Moody’s, and
(d) certificates of deposit or bankers’ acceptances maturing within 1 year
from the date of acquisition thereof either (i) issued by any bank
organized under the laws of the United States or any state thereof which bank
has a rating of A or A2, or better, from S&P or Moody’s, or
(ii) certificates of deposit less than or equal to $100,000 in the
aggregate issued by any other bank insured by the Federal Deposit Insurance
Corporation.

“Cash Management Bank” has the meaning set
forth in Section 2.7(a).

“Cash Management Account” has the meaning set
forth in Section 2.7(a).

“Cash Management Agreement” has the meaning set
forth in Section 2.7(a).

“Change of Control” means (a) any “person”
or “group” (within the meaning of Sections 13(d) and 14(d) of the Exchange
Act), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 10%, or more, of the Stock of Borrower having
the right to vote for the election of members of the Board of Directors,
(b) a majority of the members of the Board of Directors do not constitute
Continuing Directors, or (c)  any Executive Officer shall cease to serve
and shall not have been replaced with a Person acceptable to Lender no later
than sixty (60) days after the date any such Executive Officer ceases to serve.

“Chattel Paper” means all of Borrower’s now
owned or hereafter acquired right, title, and interest with respect to “chattel
paper”, including, without limitation, “tangible chattel paper” and “electronic
chattel paper”, as such terms are defined from time to time in the Code, and
any and all supporting obligations in respect thereof.

 -5-
 

 

“Closing Date” means the date of the making of
the initial Advance (or other extension of credit) hereunder or the date on
which Lender sends Borrower a written notice that each of the conditions
precedent set forth in Section 3.1 either have been satisfied or have
been waived.

“Code” means the Uniform Commercial Code, as in
effect from time to time in the Commonwealth of Massachusetts.

“Collateral” means all of each Borrower’s now
owned or hereafter acquired right, title, and interest in and to “all assets,”
including without limitation, each of the following:

(a)           Accounts,

(b)           Chattel
Paper,

(c)           DDAs,

(d)           Documents,

(e)           General
Intangibles,

(f)            Goods
(including, without limitation, Inventory and Equipment),

(g)           Instruments,

(h)           Investment
Property,

(i)            Letter
of Credit Rights,

(j)            Real
Property Collateral,

(k)           the
Commercial Tort Claims set forth on Schedule 5.10(b),

(l)            money
or other assets of Borrower that now or hereafter come into the possession,
custody, or control of any member of the Lender, and

(m)          any
and all proceeds and products, whether tangible or intangible, of any of the
foregoing, including proceeds of insurance covering any or all of the
foregoing, and any and all Accounts, Books, General Intangibles, (Goods,
including without limitation Equipment and Inventory), Investment Property,
Negotiable Collateral, Real Property, money, DDAs, or other tangible or
intangible property resulting from the sale, exchange, collection, or other
disposition of any of the foregoing, or any portion thereof or interest
therein, and the proceeds thereof.

“Collateral Access Agreement” means a waiver or
consent in form and substance satisfactory to Lender executed by any lessor of
Real Property leased by Borrower or any other Person having a Permitted Lien
upon, or having rights or interests in, the Equipment or Inventory.

 -6-
 

 

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

“Commitment Fee” means the commitment fee set
forth in the Fee Letter.

“Commercial Tort Claim” means any now existing
or hereafter arising “commercial tort claim”, as such term is defined from time
to time in the Code.

“Compliance Certificate”  means a certificate substantially in the form
of Exhibit B delivered by the chief financial officer of Borrower to
Lender.

“Concentration Account” means the deposit
account (as such term is defined in the Code) number 5800916651 maintained at
all times at LaSalle Bank N.A. in Lender’s name and otherwise subject to Lender’s
sole and absolute dominion and control.

“Consent
of Assignor” means an agreement, in form and substance acceptable to
Lender, pursuant to which the Service Provider shall agree to continue to
provide all services under the Service Contracts to Borrower and/or Lender in
the event of  any Insolvency Proceeding
or Liquidation.

“Continuing Director” means (a) any member
of the Board of Directors who was a director (or comparable manager) of
Borrower on the Closing Date, and (b) any individual who becomes a member
of the Board of Directors after the Closing Date if such individual was
appointed or nominated for election to the Board of Directors by a majority of
the Continuing Directors, but excluding any such individual originally proposed
for election in opposition to the Board of Directors in office at the Closing
Date in an actual or threatened election contest relating to the election of
the directors (or comparable managers) of Borrower (as such terms are used in
Rule 14a-11 under the Exchange Act) and whose initial assumption of office
resulted from such contest or the settlement thereof.

“Control Agreement” means an agreement, in form
and substance satisfactory to Lender, executed and delivered by Borrower,
Lender, and the applicable securities intermediary or bank, which agreement is
sufficient to give Lender “control” over the subject Securities Account or DDA
to perfect Lender’s security interest in such Securities Account or DDA as
provided in the Code.

“Cost” means the calculated cost of Inventory,
as determined from invoices received by Borrower, Borrower’s purchase journals
or stock ledgers, based upon Borrower’s accounting practices, known to Lender,
which practices are in effect on the date on which this Agreement was executed.  “Cost” does not include any inventory
capitalization costs inclusive of advertising, but may include other charges
used in Borrower’s determination of cost of goods sold and bringing goods to
market, all within Lender’s Permitted Discretion and in accordance with GAAP.

 -7-
 

 

“Credit Card/Payment Agreements” means those
certain credit card receipts agreements, each in form and substance reasonably
satisfactory to Lender and each of which is among Lender and Borrower’s Credit
Card/Payment Processors.

“Credit Card/Payment Processor” means any
Person that acts as a credit card clearinghouse or processor of credit card
payments accepted by Borrower’s and/or other only payment processors.

“Customs Broker
Agency Agreement” means an agreement between and among Lender,  Borrower and a customs broker or other
carrier, in which the customs broker or other carrier acknowledges and agrees,
among other things that it has control over and holds the Documents evidencing
the subject Inventory for the benefit of the Lender and agrees, upon notice
from Lender, to hold and dispose of the subject Inventory solely as directed by
Lender.

“Daily Balance” means, with respect to each day
during the term of this Agreement, the amount of an Obligation owed at the end
of such day.

“DDA” means any checking, demand deposit or
other “deposit account” (as such term is defined from time to time in the Code)
maintained by Borrower.

“Default” means an event, condition, or default
that, with the giving of notice, the passage of time, or both, would be an
Event of Default.

“Designated Account” means that certain DDA of
Borrower with LaSalle Bank, N.A. identified on Schedule D-1.

“Disbursement Letter” means an instructional
letter executed and delivered by Borrower to Lender regarding the extensions of
credit to be made on the Closing Date, the form and substance of which is
satisfactory to Lender.

“Document” means all of Borrower’s now owned or
hereafter acquired right, title, and interest with respect to any “document” as
such term is defined in the Code, and any and all supporting obligations in
respect thereof.

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

“Due Diligence Letter” means the due diligence
letter sent by Lender’s counsel to Borrower, together with Borrower’s certified
responses to the inquiries set forth therein, the form and substance of such
responses to be satisfactory to Lender.

“EBITDA” means, with respect to any fiscal
period, Borrower’s and its Subsidiaries’ (if any) consolidated net earnings (or
loss), minus extraordinary gains, plus interest expense, income
taxes, and depreciation and amortization for such period, as determined in
accordance with GAAP.

“Eligible Credit Card/Payments Accounts” means
Borrower’s Accounts owed by Credit Card/Payment Processors which include
MasterCard, VISA, American Express, Discover, PayPal and Bill Me Later and
which Accounts are reflected in the most recent Borrowing Base 

 -8-
 

 

Certificate delivered by Borrower to Lender and on
other information known to Lender, Lender shall in its Permitted Discretion
determine are “eligible” and shall not include, without limitation, Accounts
owed by Credit Card/Payment Processors which:

(a)                                  do
not arise from the sale of Inventory by Borrower in the ordinary course of its
business;

(b)                                 upon
which Borrower’s right to receive payment is not absolute or is contingent upon
the fulfillment of any condition whatsoever or as to which Borrower is not able
to bring suit or otherwise enforce its remedies against the through judicial
process;

(c)                                  with
respect to which any Credit Card Processor has not entered into a Credit
Card/Payment Agreement in accordance with Section 2.7(c) hereof;

(d)                                 is
the subject of any defense, counterclaim, setoff or dispute  asserted as to such Account;

(e)                                  that
is not a true and correct statement of bona fide indebtedness incurred in the
amount of the Account for merchandise sold to or services rendered and accepted
by the valid holder of the subject credit card;

(f)                                    that
is in default; provided, that,
without limiting the generality of the foregoing, an Account shall be deemed in
default upon the occurrence of any of the following:

(i)                                     the
Account is not paid within five (5) days past the date payment first becomes
due;

(ii)                                  the
Credit Card/Payment Processor obligated upon such Account suspends business,
makes a general assignment for the benefit of creditors or fails to pay its
debts generally as they come due; or

(iii)                               a
petition is filed by or against any Credit Card/Payment Processor obligated
upon such Account under any bankruptcy law or any other federal, state or
foreign (including any provincial) receivership, insolvency relief or other law
or laws for the relief of debtors.

(g)                                 as
to which Lender’s Lien thereon is not a first priority (except to the extent
provided in a Credit Card/Payment Agreement) perfected Lien;

“Eligible In-Transit Inventory” means Inventory
of Borrower that does not qualify as Eligible Inventory solely because it is
not at a location set forth on Schedule E-1:

 -9-
 

 

(a)           the
Inventory is the subject of a Qualified Import Letter of Credit (or was the
subject of a Qualified Import Letter of Credit that was lawfully drawn) and
which is in transit for a period of no more than 60 days (whether by vessel,
air, or land) from a location outside of the continental United States to a location
set forth on Schedule E-1 that, if required hereunder, is the subject of a
Bailee Acknowledgment or a Collateral Access Agreement,

(b)           title
to such Inventory has passed to Borrower,

(c)           such
Inventory is fully insured against types of loss, damage, hazards, and risks,
naming Lender as the loss payee thereunder and in amounts satisfactory to
Lender in its Permitted Discretion,

(d)           such
Inventory either:

(i)            is the subject of a negotiable bill
of lading or other Document that (x) is consigned to or controlled by
Lender (either directly or by means of endorsements), (y) was issued by a
carrier, consolidator or other party respecting the subject Inventory, and
(z) either is (I) in the possession of Lender, or (II)  is
in-transit by air-courier to Lender, or

(ii)           is the subject of a negotiable bill
of lading or other Documents as to which Lender has control satisfactory to
Lender (such as, by the delivery of a Customs Broker Agency Agreement or a
Freight Forwarder Agency Agreement).

(e)           Borrower
has provided a certificate to Lender that certifies that such Inventory meets
all of Borrower’s representations and warranties contained in the Loan
Documents concerning Eligible Inventory, that Borrower knows of no reason why
such Inventory would not be accepted by Borrower and that the shipment as
evidenced by the documents conforms to the related order documents; and

(f)            such
inventory has been expressly valued in the most recent inventory appraisal.

“Eligible Inventory” means Inventory of
Borrower consisting of Authentic first-quality finished goods held for sale in
the ordinary course of Borrower’s business located at one of Borrower’s
business locations set forth on Schedule E-1 (or in-transit between any
such locations for a period not to exceed two (2) Business Days), that complies
with each of the representations and warranties respecting Eligible Inventory
made by Borrower in the Loan Documents, and that is not excluded as ineligible
by virtue of the one or more of the criteria set forth below, which criteria
may be fixed and revised from time to time by Lender in its Permitted
Discretion after the Closing Date.  In
determining the value of Eligible Inventory, Inventory shall be valued at the
lower of Cost or market on a basis consistent with Borrower’s accounting
practices less the aggregate amount of all Inventory Reserves.

Notwithstanding the foregoing, an item of Inventory
shall not be included in Eligible Inventory if:

 -10-
 

 

(a)           Borrower
does not have good, valid and marketable title thereto (including Inventory
acquired on consignment);

(b)           it
is not located at one of the locations in the United States set forth on
Schedule E-1 or in transit from one such location to another such location for
a period of more than three (3) Business Days;

(c)           it
is located on real property leased (other than a retail store location) by a
Borrower unless it is subject to a Collateral Access Agreement executed by the
applicable lessor;

(d)           it
is located at a retail store location leased by Borrower that is not subject to
a Collateral Access Agreement and for which location Lender has  required hereunder  a Collateral Access Agreement;

(e)           it
is located in a contract warehouse or is otherwise stored with a bailee,
warehouseman or similar third party unless it is subject to a Bailee
Acknowledgment executed by the bailee, warehouseman, or other third party, as
the case may be, and unless it is segregated or otherwise separately
identifiable from goods of others, if any, stored on the premises;

(f)            it
is not subject to a valid and perfected first priority Lender’s Lien, or

(g)           it
consists of goods returned or rejected by Borrower’s customers.

 “Environmental
Actions” means any complaint, summons, citation, notice, directive, order,
claim, litigation, investigation, judicial or administrative proceeding,
judgment, letter, or other communication from any Governmental Authority, or
any third party involving violations of Environmental Laws or releases of
Hazardous Materials from (a) any assets, properties, or businesses of
Borrower or any predecessor in interest, (b) from adjoining properties or
businesses, or (c) from or onto any facilities which received Hazardous
Materials generated by Borrower or any predecessor in interest.

“Environmental Law” means any applicable
federal, state, provincial, foreign or local statute, law, rule, regulation,
ordinance, code, binding and enforceable guideline, binding and enforceable
written policy or rule of common law now or hereafter in effect and in each
case as amended, or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent decree or judgment
relating to the environment, employee health and safety, or Hazardous
Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33
USC § 1251 et  seq. the Toxic Substances Control Act, 15 USC, §
2601 et  seq. the Clean Air Act, 42 USC § 7401 et  seq.;
the Safe Drinking Water Act, 42 USC. § 3803 et  seq.; the Oil
Pollution Act of 1990, 33 USC. § 2701 et  seq.; the Emergency
Planning and the Community Right-to-Know Act of 1986, 42 USC. § 11001 et
seq.; the Hazardous Material Transportation Act, 49 USC § 1801 et
seq.; and the Occupational Safety and Health Act, 29 USC. §651 et
seq. (to the extent it regulates occupational exposure to Hazardous Materials);
any state and local or foreign counterparts or equivalents, in each case as
amended from time to time.

“Environmental Liabilities and Costs” means all
liabilities, monetary obligations, Remedial Actions, losses, damages, punitive
damages, consequential damages, treble damages, costs and expenses (including
all reasonable fees, disbursements and expenses of counsel, 

 -11-
 

 

experts, or consultants, and costs of investigation
and feasibility studies), fines, penalties, sanctions, and interest incurred as
a result of any claim or demand by any Governmental Authority or any third
party, and which relate to any Environmental Action.

“Environmental Lien” means any Lien in favor of
any Governmental Authority for Environmental Liabilities and Costs.

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

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

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

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

“Excess Availability” means the amount, as of
the date any determination thereof is to be made, equal to Availability minus
the aggregate amount, if any, of all trade payables of Borrower aged in excess
of their historical levels with respect thereto and all book overdrafts in
excess of their historical practices with respect thereto, in each case as
determined by Lender in its Permitted Discretion.

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

“Executive Officer” means David Zinberg or
Lawrence Kong.

“Family Member” means, with respect to any
individual, any other individual having a relationship by blood (to the second
degree of consanguinity), marriage, or adoption to such individual.

“Family Trusts” means, with respect to any
individual, trusts or other estate planning vehicles established for the
benefit of Family Members of such individual and in respect of which such
individual serves as trustee or in a similar capacity.

“Fee Letter” means that certain fee letter,
dated as of even date herewith, between Borrower and Lender, in form and
substance satisfactory to Lender.

 -12-
 

 

“FEIN” means Federal Employer Identification
Number.

“Freight Forwarder Agency Agreement” means an
agreement between Lender, Borrower and a freight forwarder or other carrier, in
which the freight forwarder or other carrier acknowledges and agrees, among
other things that it has control over and holds the Documents evidencing the
subject Inventory for the benefit of the Lender and agrees, upon notice from
the Lender, to hold and dispose of the subject Inventory solely as directed by
the Lender.

“Funding Date” means the date on which a
Borrowing occurs.

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

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

“General Intangibles” means all of Borrower’s
now owned or hereafter acquired right, title, and interest with respect to “general
intangibles” (as such term is defined from time to time in the Code), and any
and all supporting obligations in respect thereof.

“Goods” means all of Borrower’s now owned or
hereafter acquired right, title, and interest with respect to “goods”, as that
term is defined from time to time in the Code, including, without limitation,
any and all Inventory and Equipment.

“Governing Documents” means, with respect to
any Person, the certificate or articles of incorporation, by-laws, or other
organizational documents of such Person.

“Governmental Authority” means any federal,
state, local, or other governmental or administrative body, instrumentality,
department, or agency or any court, tribunal, administrative hearing body,
arbitration panel, commission, or other similar dispute-resolving panel or
body.

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

“Hedge Agreement” means any and all
transactions, agreements, or documents now existing or hereafter entered into
between Borrower or its Subsidiaries and LaSalle Bank N.A. or its Affiliates,
which provide for an interest rate, credit, commodity or equity swap, cap,
floor, collar, forward foreign exchange transaction, currency swap, cross
currency rate swap, currency option, or any combination of, or option with
respect to, these or similar transactions, for the 

 -13-
 

 

purpose of hedging Borrower’s or its Subsidiaries’
exposure to fluctuations in interest or exchange rates, loan, credit exchange,
security or currency valuations or commodity prices.

“Indebtedness” means (a) all obligations
for borrowed money, (b) all obligations evidenced by bonds, debentures,
notes, or other similar instruments and all reimbursement or other obligations
in respect of letters of credit, bankers acceptances, interest rate swaps, or
other financial products, (c) all obligations under Capital Leases,
(d) all obligations or liabilities of others secured by a Lien on any
asset of Borrower or its Subsidiaries, irrespective of whether such obligation
or liability is assumed, (e) all obligations for the deferred purchase
price of assets (other than trade debt incurred in the ordinary course of business
and repayable in accordance with customary trade practices), and (f) any
obligation guaranteeing or intended to guarantee (whether directly or
indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse)
any obligation of any other Person.

“Indemnified Liabilities” has the meaning set
forth in Section 11.3.

“Indemnified Person” has the meaning set forth
in Section 11.3.

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

“Intangible Assets” means, with respect to any
Person, that portion of the book value of all of such Person’s assets that
would be treated as intangibles under GAAP.

“Intellectual Property   Security Agreement” means an intellectual
property security agreement executed and delivered by Borrower and Lender, the
form and substance of which is satisfactory to Lender.

“Instruments” means all of Borrower’s now owned
or hereafter acquired right, title, and interest with respect to “instruments”,
including, without limitation, any “promissory notes”, as such terms are
defined from time to time in the Code, and any and all supporting obligations
in respect thereof.

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

 -14-

 

 

calendar month that is 1, 2, or 3 months after the
date on which the Interest Period began, as applicable, and (e) Borrower
may not elect an Interest Period which will end after the Maturity Date.

“Inventory” means all Borrower’s now owned or
hereafter acquired right, title, and interest with respect to inventory,
including goods held for sale or lease or to be furnished under a contract of
service, goods that are leased by Borrower as lessor, goods that are furnished
by Borrower under a contract of service, and raw materials, work in process, or
materials used or consumed in Borrower’s business.

“Inventory Reserves” means such reserves as
Lender determines from time to time in its Permitted Discretion as being
appropriate to reflect the impediments to Lender’s ability to realize upon the
Collateral.  Without limiting the
generality of the foregoing, Inventory Reserves may include (but are not
limited to) reserves based on the following: 
(a) the extent to which Inventory consists of goods that
(i) are obsolete, slow-moving, restrictive or custom items, bill and hold
goods, defective, damaged, prepared for return to vendor, not first quality
goods, work-in-process or raw materials or (ii) constitute spare parts,
packaging and shipping materials or supplies; (b) seasonality;
(c) shrinkage; (d) imbalance or change in Inventory character,
composition or mix; (e) markdowns; (f) the estimated costs relating
to unpaid freight charges, warehousing or storage charges, taxes, duties, and
other similar unpaid costs associated with the acquisition of Eligible
In-Transit Inventory by Borrower; (g) mark-ons or mark-ups inconsistent
with prior practice, performance, the Business Plan or advertising calendar and
planned events; (h) the estimated reclamation claims of unpaid sellers of
Inventory sold to Borrower for the 45-day period prior to any date of
determination; (i) Inventory under repair; (j) Inventory paid for by customers
but not yet shipped; (k) Inventory consisting of art and collectibles; (l)
Inventory subject to pending litigation against Borrower relating to the “Cartier”
tradename and trademark; and (m) Inventory received by Borrower from
third-party vendors which has not been completely inspected, processed and
entered into Borrower’s perpetual inventory system.

“Investment” means, with respect to any Person,
any investment by such Person in any other Person (including Affiliates) in the
form of indebtedness, guarantees, advances, or capital contributions (excluding
(a) commission, travel, and similar advances to officers and employees of
such Person made in the ordinary course of business, and (b) bona fide
Accounts arising in the ordinary course of business consistent with past
practices), purchases or other acquisitions for consideration of Indebtedness or
Stock, and any other items that are or would be classified as investments on a
balance sheet prepared in accordance with GAAP.

“Investment Property” means all of Borrower’s
now owned or hereafter acquired right, title, and interest with respect to “investment
property”, as such term is defined from time to time in the Code, and any and
all supporting obligations in respect thereof.

“IRC” means the Internal Revenue Code of 1986,
as in effect from time to time.

“Issuing Lender” means LaSalle Bank for the
purpose of issuing L/Cs or L/C Undertakings pursuant to Section 2.12.

 -15-
 

 

 

“LaSalle” means LaSalle Retail Finance, a
division of LaSalle Business Credit, LLC, as agent for LaSalle Bank Midwest
National Association.

“L/C Disbursement” means a payment made by the
Issuing Lender pursuant to a Letter of Credit.

“L/C Landing Costs” means, to the extent not
included in the stated amount of a Letter of Credit relating to the purchase of
Inventory, customs, duty, freight, and other out-of-pocket costs and expenses
(including, without limitation, taxes) which will be expected to “land” the
Inventory, the purchase of which is supported by such Letter of Credit.

“Leasehold Interests” means Borrower’s
leasehold estate or interest in each of the properties at or upon which
Borrower conducts business or maintains any of the Collateral, together with
Borrower’s interest in any of the improvements and fixtures located upon or
appurtenant to each leasehold interest, including without limitation, any
rights of Borrower to payments, proceeds of value of any kind or nature
realized upon the sale or transfer of such estate or interest.

“Lender” and “Lenders” have the
respective meanings set forth in the preamble to this Agreement, and shall
include any other Person made a party to this Agreement in accordance with the
provisions of Section 14.1.

 “Lender
Expenses” means all (a) costs or expenses (including taxes, and
insurance premiums) required to be paid by Borrower under any of the Loan
Documents that are paid or incurred by Lender, (b) fees or charges paid or
incurred by Lender in connection with Lender’s transactions with Borrower,
including, fees or charges for photocopying, notarization, couriers and
messengers, telecommunication, public record searches (including tax lien,
litigation, and UCC searches and including searches with the patent and
trademark office, the copyright office, or the department of motor vehicles),
filing, recording, publication, appraisal (including periodic Collateral
appraisals or business valuations to the extent of the fees and charges
contained in this Agreement, real estate surveys, real estate title policies
and endorsements, and environmental audits, (c) costs and expenses
incurred by Lender in the disbursement of funds to or for the account of Borrower
(by wire transfer or otherwise), (d) charges paid or incurred by Lender
resulting from the dishonor of checks, (e) reasonable costs and expenses
paid or incurred by Lender to correct any default or enforce any provision of
the Loan Documents, or in gaining possession of, maintaining, handling,
preserving, storing, shipping, selling, preparing for sale, or advertising to
sell the Collateral, or any portion thereof, irrespective of whether a sale is
consummated, (f) audit fees and expenses of Lender related to audit
examinations of the Books to the extent of the fees and charges contained in
this Agreement, (g) reasonable costs and expenses of third party claims or
any other suit paid or incurred by Lender in enforcing or defending the Loan
Documents or in connection with the transactions contemplated by the Loan
Documents or Lender’s relationship with any Borrower or any guarantor of the
Obligations, (h)  Lender’s reasonable fees and expenses (including
attorneys fees) incurred in advising, structuring, drafting, reviewing,
administering, or amending the Loan Documents, (i)  Lender’s reasonable
fees and expenses (including attorneys fees and expenses) incurred in
terminating, enforcing (including attorneys fees and expenses incurred in
connection with a “workout,” a “restructuring,” or in connection with any
Insolvency Proceeding (including, without limitation, 

 -16-
 

 

 

in connection with defense of any avoidance action or
action for subordination of any of the obligations), or in exercising rights or
remedies under the Loan Documents), or defending the Loan Documents,
irrespective of whether suit is brought, or in taking any Remedial Action
concerning the Collateral and (j) costs and expenses of appraisals with respect
to any of the Collateral (whether tangible or intangible).

“Lender’s Liens” means the Liens granted by
Borrower to Lender for the benefit of the Lender under this Agreement or the
other Loan Documents.

“Lender-Related Person” means such Lender,
together with its Lender’s Affiliates, and the officers, directors, employees,
and agents of Lender.

“Letter of Credit” has the meaning set forth in
Section 2.12.

“Letter of Credit Rights” means all of Borrower’s
now owned or hereafter acquired right, title, and interest with respect to “letter
of credit rights”, as that term is defined from time to time in the Code, and
any and all supporting obligations in respect thereof.

“Letter of Credit Usage” means, as of any date
of determination, the aggregate undrawn amount of all outstanding Letters of
Credit.

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

“LIBOR Notice” means a written notice in the
form of Exhibit D.

“LIBOR Rate” means, for each Interest Period
for each LIBOR Rate Loan, the rate per annum determined by Lender (rounded
upwards, if necessary, to the next 1/16%) by dividing
(a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve
Percentage.  The LIBOR Rate shall be
adjusted on and as of the effective day of any change in the Reserve
Percentage.

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

“Lien” means any interest in an asset securing
an obligation owed to, or a claim by, any Person other than the owner of the
asset, whether such interest shall be based on the common law, statute, or
contract, whether such interest shall be recorded or perfected, and whether
such interest shall be contingent upon the occurrence of some future event or
events or the existence of some future circumstance or circumstances, including
the lien or security interest arising from a mortgage, deed of trust,
encumbrance, pledge, hypothecation, assignment, deposit arrangement, security
agreement, conditional sale or trust receipt, or from a lease, consignment, or
bailment for security purposes and also including reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases, and other title exceptions and encumbrances affecting Real Property.

“Liquidation”
means: (a) exercise by the Lender of those rights and remedies accorded to the
Lender under the Loan Documents and applicable law as a creditor of the
Borrower following and on account of the occurrence of an Event of Default
looking towards the 

 -17-
 

 

 

realization on the Collateral or (b) any sale of all
or substantially all of Borrower’s assets whether or not in connection with any
Insolvency Proceeding.  Derivations of
the word “Liquidation” (such as “Liquidate”) are used with like meaning in this
Agreement.

“Loan Account” has the meaning set forth in Section
2.10.

“Loan Documents” means this Agreement, the Cash
Management Agreements, the Credit Card Agreements, all Control Agreements, the
Service Contracts, the Intellectual Property Security Agreement, the
Disbursement Letter, the Certification of Officers, the Fee Letter, any Letters
of Credit, the Perfection Certificate, the Due Diligence Letter, any
certificates (including without limitation, the Borrowing Base Certificate and
the Compliance Certificate) from time to time delivered by a Borrower pursuant
to this Agreement or any other Loan Document, any note or notes executed by a
Borrower in connection with this Agreement and payable to a member of the
Lender, and any other agreement entered into, now or in the future, by Borrower
and the Lender in connection with this Agreement.

“Material Adverse Change” means (a) a
material adverse change in the business, prospects, operations, results of
operations, assets, liabilities or condition (financial or otherwise) of
Borrower taken as a whole, of the business, prospects, operations, results of
operations, assets, liabilities or condition (financial or otherwise)
including, without limitation, any material adverse deviation at any time from
the Business Plan, (b) a material impairment of Borrower’s ability to
perform its obligations under the Loan Documents to which it is a party or of
Lender’s ability to enforce the Obligations or realize upon the Collateral, or
(c) a material impairment of the enforceability or priority of Lender’s Liens
with respect to the Collateral as a result of an action or failure to act on
the part of a Borrower.

“Maturity Date” has the meaning set forth in Section
3.4.

“Maximum Revolver Exposure” means the lesser,
on any day, of the following, in each instance determined net of the unpaid
principal balance of the Loan Account on that day: (a) the Borrowing Base,
less the Letter of Credit Usage, less the Aggregate amount of the
Availability Reserves or (b) the Maximum Revolver Amount less the Letter of Credit Usage.

“Maximum Revolver Amount” means, at any time,
$10,000,000, unless increased in accordance with Section 2.2 hereof,
provided it shall at no time exceed $15,000,000.

“Net Excess Availability” means average daily
Availability for the previous calendar quarter, net of (x) the outstanding
amount of Advances and (y) the Letter of Credit Usage measured on the first
Business Day of the immediately following calendar quarter.

“Net Liquidation Percentage” means, at any date
of determination, the percentage of the Cost value of Eligible Inventory that
is estimated to be recoverable in an orderly liquidation of such Eligible
Inventory, net of liquidation expenses, such percentage to be as determined
from time to time by Lender in its Permitted Discretion or by a qualified
appraisal company selected by Lender.

 -18-
 

 

 

“Net Retail Liquidation Value” means, at any
date of determination, the result (expressed in Dollars) of the Net Liquidation
Percentage times the Cost value
of Eligible Inventory as of such date.

“Obligations” means

(a)           all
Advances, debts, principal, interest (including any interest that, but for the
provisions of the Bankruptcy Code, would have accrued), contingent
reimbursement obligations with respect to outstanding Letters of Credit,
premiums, liabilities (including all amounts charged to Borrower’s Loan Account
pursuant hereto), obligations, fees (including the fees provided for in the Fee
Letter), charges, costs, Lender Expenses (including any fees or expenses that,
but for the provisions of the Bankruptcy Code, would have accrued), Funding
Losses, lease payments, guaranties, covenants, indemnified liabilities and
duties of any kind and description owing by Borrower to Lender pursuant to or
evidenced by the Loan Documents and irrespective of whether for the payment of
money, whether direct or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising, and including all interest not paid
when due and all Lender Expenses that Borrower is required to pay or reimburse
by the Loan Documents, by law, or otherwise. 
Any reference in this Agreement or in the Loan Documents to the
Obligations shall include all amendments, changes, extensions, modifications,
renewals replacements, substitutions, and supplements, thereto and thereof, as
applicable, both prior and subsequent to any Insolvency Proceeding.

(b)           All
present and future indebtedness and obligations, of any nature whatsoever,
direct or indirect, absolute or contingent, matured or not, at any time owing
or to become owing by Borrower to Lender arising from any contract, agreement,
dealings, occurrence, non-occurrence, event and/or operation of law whereby
Borrower becomes indebted and/or obligated to Lender.

(c)           All
and future indebtedness, obligations and liabilities of Borrower to Lender or
to Lender’s Affiliates in respect of any Bank Product Obligations.

“Overadvance” has the meaning set forth in Section
2.5.

“Participant” has the meaning set forth in Section
14.1(c).

“Perfection Certificate” means the
certification of officers forms submitted by Lender to Borrower, together with
Borrower’s completed responses to the inquiries set forth therein, the form and
substance of such responses to be satisfactory to Lender.

“Permitted Discretion” means a determination
made in good faith and in the exercise of reasonable (from the perspective of a
an asset-based lender) business judgment, including without limitation, any
such factors as Lender, taking into account information of which Lender then
has knowledge, reasonably believes:

(i)            Will or reasonably could be expected
to materially and adversely affect the value of the Collateral, the priority or
enforceability of the Lender’s security and collateral interests therein, or
the amount which the Lender would likely realize 

 -19-
 

 

therefrom (taking into account delays which
may reasonably be encountered in Lender realizing upon the Collateral and
likely Lender Expenses).

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

(iii)          Suggests the likelihood that Borrower
will become the subject of an Insolvency Proceeding.

(iv)          Constitutes a Suspension Event.

(d)           In
the exercise of such judgment, the Lender also may take into account any of the
following factors:

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

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

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

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

(v)           Seasonality with respect to the
Borrower’s Inventory and pattern of the Borrower’s retail sales versus that
which was projected.

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

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

The burden of establishing the failure of the Lender
to have acted within such Permitted Discretion shall be the Borrower’s.

“Permitted Dispositions” means (a) sales
or other dispositions by Borrower or its Subsidiaries of Equipment that is
substantially worn, damaged, or obsolete in the ordinary course of business,
(b) sales by Borrower or its Subsidiaries of Inventory to buyers in the
ordinary course of business, (c) the use or transfer of money or Cash
Equivalents by Borrower or its Subsidiaries in a manner that is not prohibited
by the terms of this Agreement or the other Loan Documents, and (d) the
licensing by Borrower or its Subsidiaries, on a non-exclusive basis, of
patents, trademarks, copyrights, and other intellectual property rights in the
ordinary course of 

 -20-
 

 

 

business.  “Permitted
Dispositions” shall not include any liquidation, extra ordinary value,
strategic or going out of business sale.

“Permitted Investments” means
(a) investments in Cash Equivalents, or (b) advances made in
connection with purchases of goods or services in the ordinary course of
business.

“Permitted Liens” means (a) Liens held by
Lender (including, without limitation, the Lender’s Lien), (b) Liens for
unpaid taxes that either (i) are not yet delinquent, or (ii) do not
constitute an Event of Default hereunder and are the subject of Permitted
Protests, (c) Liens set forth on Schedule P-1, (d) the
interests of lessors under operating leases, (e) purchase money Liens or
the interests of lessors under Capital Leases to the extent that such Liens or
interests secure Permitted Purchase Money Indebtedness and so long as such Lien
attaches only to the asset purchased or acquired and the proceeds thereof,
(f) Liens arising by operation of law in favor of warehousemen, landlords,
carriers, mechanics, materialmen, laborers, or suppliers, incurred in the
ordinary course of business and not in connection with the borrowing of money,
and which Liens either (i) are for sums not yet delinquent, or
(ii) are the subject of Permitted Protests, (g) Liens arising from
deposits made in connection with obtaining worker’s compensation or other
unemployment insurance, (h) Liens or deposits to secure performance of
bids, tenders, or leases incurred in the ordinary course of business and not in
connection with the borrowing of money, (i) Liens granted as security for
surety or appeal bonds in connection with obtaining such bonds in the ordinary
course of business, and (j) Liens resulting from any judgment or award
that is not an Event of Default hereunder.

“Permitted Protest” means the right of Borrower
or any of its Subsidiaries, as applicable, to protest any Lien (other than any
such Lien that secures the Obligations), taxes (other than payroll taxes or
taxes that are the subject of a United States federal tax lien), or rental
payment, provided that (a) a reserve with respect to such obligation is
established on the Books in such amount as is required under GAAP, (b) any
such protest is instituted promptly and prosecuted diligently by Borrower or
any of its Subsidiaries, as applicable, in good faith, and (c) Lender is
satisfied that, while any such protest is pending, there will be no impairment
of the enforceability, validity, or priority of any of the Lender’s Liens.

“Permitted Purchase Money Indebtedness” means,
as of any date of determination, Purchase Money Indebtedness incurred after the
Closing Date in an aggregate amount outstanding at any one time not in excess
of $1,000,000, and only to the extent reflected in the Business Plan.  In no event shall Permitted Purchase Money
Indebtedness include Indebtedness incurred for the purpose of financing all or
any part of the acquisition cost of any Inventory.

“Permitted Rescission Offer Payments” means
payments relating to the rescission offer to certain stockholders of Borrower
to repurchase back Borrower’s stock subject to such offer, which offer shall be
on terms and conditions acceptable to Lender in its discretion and otherwise in
compliance with all applicable laws and regulations.

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

 -21-
 

 

 

“Personal Property Collateral” means all
Collateral other than Real Property.

“Projections” means Borrower’s forecasted
(a) balance sheets, (b) profit and loss statements, and (c) cash
flow statements, all prepared on a consistent basis with Borrower’s historical
financial statements, together with appropriate supporting details and a
statement of underlying assumptions.

“Purchase Money Indebtedness” means
Indebtedness (other than the Obligations, but including Capitalized Lease
Obligations) incurred at the time of, or within 20 days after, the acquisition
of any fixed assets (but not Inventory) for the purpose of financing all or any
part of the acquisition cost thereof.

“Qualified Import Letter of Credit” means a
documentary Letter of Credit that is (a) issued to facilitate the purchase
by Borrower of Eligible Inventory, (b) in form and substance acceptable to
Lender, and (c)  is drawable by the beneficiary thereof by the
presentation of, among other documents, either (i) a negotiable bill of
lading that is consigned to or otherwise controlled by Lender (either directly
or by means of endorsements) and that was issued by the carrier respecting the
subject Eligible Inventory, or (ii) a negotiable cargo receipt that is
consigned to or otherwise controlled by Lender (either directly or by means of
endorsements) and that was issued by a consolidator respecting the subject
Eligible Inventory; provided, however, that, in the latter case,
no bill of lading shall have been issued by the carrier (other than a bill of
lading consigned to the consolidator or to Lender).

“Rating Agencies” has the meaning provided in Section
2.15.

“Real Property” means any fee, leasehold or
other estate or interest in real property now or hereafter owned or leased
hereafter acquired by Borrower and the improvements thereto.

“Real Property Collateral” means any parcel or
parcels of Real Property identified on Schedule R-1 and any Real
Property hereafter acquired by Borrower.

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

“Remedial Action” means all actions taken to
(a) clean up, remove, remediate, contain, treat, monitor, assess,
evaluate, or in any way address Hazardous Materials in the indoor or outdoor
environment, (b) prevent or minimize a release or threatened release of
Hazardous Materials so they do not migrate or endanger or threaten to endanger
public health or welfare or the indoor or outdoor environment, (c) perform
any pre-remedial studies, investigations, or post-remedial operation and
maintenance activities, or (d) conduct any other actions authorized by 42
USC § 9601.

“Reserve Percentage” means, on any day, for
Lender (or Lender’s parent bank), the maximum percentage prescribed by the
Board of Governors of the Federal Reserve System (or any successor Governmental
Authority) for determining the reserve requirements (including any basic,
supplemental, marginal, or emergency reserves) that are in effect on such date
with respect to eurocurrency funding (currently referred to as “eurocurrency
liabilities”) of Lender, but so 

 -22-
 

 

 

long as Lender is not required or directed under
applicable regulations to maintain such reserves, the Reserve Percentage shall
be zero.

“Reserves” means collectively, all Inventory
Reserves, Availability Reserves, and any other reserve created by Lender
hereunder.

“Restricted Payment” means (i) any cash
dividend or other cash distribution or payment, direct or indirect, on or on
account of any shares of any class of Stock of Borrower now or hereafter
outstanding (other than a Permitted Rescission Offer Payment, provided
that a Permitted Rescission Offer Payment shall be a Restricted Payment on and
after the occurrence and during the continuance of a Default or Event of
Default or if the making of such payment would result in a Default or Event of
Default); (ii) any dividend or other distribution in respect of, or
redemption, purchase or other acquisition, direct or indirect, of any shares of
any class of Stock of Borrower now or hereafter outstanding or of any warrants,
options or rights to purchase any such Stock (including, without limitation,
the repurchase of any such Stock, warrant, option or right or any refund of the
purchase price thereof in connection with the exercise by the holder thereof of
any right of rescission or similar remedies with respect thereto);
(iii) any direct salary, non-salary managerial fees, fee (consulting,
management or other), fringe benefit, allowance or other expense directly or
indirectly paid or payable by Borrower (as compensation or otherwise) to any
shareholder or Affiliate of Borrower (other  than to an employee,
to the extent of such employee’s ordinary compensation; provided that
the terms of such compensation are approved by the applicable board of
directors or the compensation committee thereof) or any partner, shareholder or
Affiliate thereof; and (iv) payment on any Indebtedness except the
extent  of Permitted Indebtedness, and
then only to extent permitted under any applicable subordination agreement.

“Revolver Usage” means, as of any date of
determination, the sum of (a) the then extant amount of outstanding
Advances, plus (b) the then extant amount of the Letter of Credit Usage.

“Risk Participation Liability” means, as to
each Letter of Credit, all reimbursement obligations of Borrower to the Issuing
Lender, consisting of (a) the amount available to be drawn or which may
become available to be drawn, (b) all amounts that have been paid by the
Issuing Lender to the extent not reimbursed by Borrower, whether by the making
of an Advance or otherwise, and (c) all accrued and unpaid interest, fees,
and expenses payable with respect thereto.

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

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

“Securitization” has the meaning provided in Section
2.15.

“Securitization Liabilities” has the meaning
provided in Section 2.15.

“Securitization Parties” has the meaning
provided in Section 2.15.

 -23-
 

 

 

“Service
Contracts” means those Contracts between Borrower and any Service Providers
for the provision to Borrower of certain financial, reporting, merchandising
and other central services.

“Service Providers” means Alchemy
Communications and any of its Affiliates, agents or subcontractors, pursuant to
which any one of them provides to Borrower website hosting, backup
communication and related services.

“Signature Authorization” mean written
authorization by the chief executive officer of the Borrower authorizing the
Lender a to accept the signatures of certain employees as authorized for
purposes of requesting Advances and other financial accommodations hereunder.

“Solvent” means, with respect to any Person on
a particular date, that such Person is not insolvent (as such term is defined
in the Uniform Fraudulent Transfer Act).

“Stock” means all shares, options, warrants,
interests, participations, membership interests, or other equivalents
(regardless of how designated) of or in a Person, whether voting or nonvoting,
including common stock, preferred stock, or any other “equity security” (as
such term is defined in Rule 3a11-1 of the General Rules and Regulations
promulgated by the SEC under the Exchange Act).

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

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

“Unused Line Fee” has the meaning set forth in
the Fee Letter.

“Voidable Transfer” has the meaning set forth
in Section 16.7.

“Waiver Letter” means a written waiver of
certain liabilities of LaSalle Bank, N.A. in form and substance acceptable to
LaSalle Bank N.A.

“Wells Fargo Permitted DDA” means that certain
DDA of Borrower with Wells Fargo Bank, N.A., account No.                             ,
which shall subject to a Blocked Account Control Agreement satisfactory to
Lender, maintained by Borrower solely for the purpose of physically depositing
checks and money orders received from customers of Borrower.

1.2           Accounting Terms.  All accounting terms not specifically defined
herein shall be construed in accordance with GAAP.  When used herein, the term “financial
statements” shall include the notes and schedules thereto.  Whenever the term “Borrower” is used in
respect of a 

 -24-
 

 

 

financial covenant or a related definition, it shall
be understood to mean Parent and its Subsidiaries (if any) on a consolidated
basis unless the context clearly requires otherwise.

1.3           Code. 
Any terms used in this Agreement that are defined in the Code shall be
construed and defined as set forth from time to time in the Code unless
otherwise defined herein.

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

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

2.             LOAN AND TERMS OF PAYMENT.

2.1           Revolver
Advances.

(a)           Subject
to the terms and conditions of this Agreement, and during the term of this
Agreement, Lender agrees to make loan advances (“Advances”) to Borrower in an amount at any one time
outstanding not to exceed the lesser of
the (i) the Maximum Revolver Amount less the Letter of Credit Usage, or
(ii) the Borrowing Base minus the sum of (x) Letter of Credit Usage and
(y) the aggregate amount of the Availability Reserves.  For purposes of this Agreement, “Borrowing Base,” as of any date of determination, shall mean
an amount equal to the result of:

(A)                              85%
of the amount of Eligible Credit Card/Payment Accounts;

plus

(B)                                85%
of the then extant Net Liquidation Percentage times the Cost of Eligible
Inventory;

 -25-
 

 

 

plus

(C)                                85%
of the then extant Net Liquidation Percentage times the Cost of Eligible
In-Transit Inventory.

(b)           The
Lenders shall have no obligation to make additional Advances hereunder to the
extent such additional Advances would cause the Revolver Usage to exceed the
Maximum Revolver Amount.

(c)           Amounts
borrowed pursuant to this Section may be repaid and, subject to the terms and
conditions of this Agreement, reborrowed at any time during the term of this
Agreement.

2.2           Increase of Maximum Revolver
Amount.  Provided there exists no
Default or Event of Default, upon notice to Lender and subject to the
provisions of this Section 2.2, the Borrower may request an increase in the
Maximum Revolver Amount in the amount of Five Million Dollars
($5,000,000).  Upon a request by Borrower
of an increase in the Maximum Revolver Amount in accordance with this Section,
Lender and Borrower shall determine the effective date of such increase (any
such date, the “Increase Closing Date”) which, in no event, shall be no earlier
than three (3) Business Days after such request is made by Borrower.  As a condition precedent to such increase in
the Maximum Revolver Amount, Borrower shall deliver to Lender a certificate
dated as of the Increase Closing Date signed by an Authorized Person certifying
that, before and after giving effect to such increase, the applicable
conditions set forth in Section 3.3 will be satisfied.  In addition, the Borrower shall pay to Lender
on the Increase Closing Date in cash an increase fee in the amount of $12,500,
which increase fee shall be deemed fully earned by Lender as of such date.

2.3           Borrowing Procedures.  Each Borrowing shall be made by an
irrevocable written request by an Authorized Person delivered to Lender, which
notice must be received by Lender no later than (i) with respect to any
Advances having interest charged based upon the Base Rate, 1:00 p.m. (Boston
time) on the Business Day that is the requested Funding  Date and (ii) with respect to any Advance
having interested charged based upon the LIBOR Rate, 3 Business Days prior to
the Business Day that is the requested Funding Date, in each case, specifying
the amount of such Borrowing (and, with respect to LIBOR Rate Loans, any other
information required pursuant to Section 2.13).

2.4           Payments.

(a)           Payments by Borrower.

(i)            Borrower
hereby promises to pay the Obligations (including principal, interest, fees,
costs, and expenses) in Dollars in full to the Lender as and when due and
payable under the terms of this Agreement and the other Loan Documents.

(ii)          
Except as otherwise expressly provided herein, all payments by Borrower shall
be made to the Concentration Account for the account of the Lender and shall be
made in immediately available funds, no later than 2:00 p.m. (Boston time) on
the date specified herein.  Any payment
received by Lender later than 2:00 p.m. (Boston 

 -26-
 

 

time), shall be deemed to have been received
on the following Business Day and any applicable interest or fee shall continue
to accrue until such following Business Day.

(b)           Application of Payments.

(i)            All payments and all proceeds of
Accounts or other Collateral received by Lender, shall be applied as follows:

(A)                              first, to pay
Lender Expenses then due to Lender under the Loan Documents, until paid in
full,

(B)                                second, to pay
any fees (including without limitation any Applicable Prepayment Premium) then
due to Lender under the Loan Documents until paid in full,

(C)                                third, to pay
interest due in respect of all Advances, until paid in full,

(D)                               fourth, so long
as no Event of Default has occurred and is continuing, to pay the principal of
all Advances and other Obligations until paid in full,

(E)                                 fifth, if an
Event of Default has occurred and is continuing, to Lender, to be held by
Lender, for the benefit of Issuing Lender and Lender, as cash collateral in an
amount up to 105% of the then extant Letter of Credit Usage until paid in full,

(F)                                 sixth, if an
Event of Default has occurred and is continuing, to the Lender to be held by
Lender as cash collateral an amount equal to accrued and estimated Lender
Expenses,

(G)                                seventh, if an
Event of Default has occurred and is continuing to pay the principal of all
Advances and other Obligations until paid in full, and

(H)                               eighth, to
Borrower (to be wired to the Designated Account) or such other Person entitled
thereto under applicable law.

(i)            For
purposes of the foregoing, “paid in full” means payment of all amounts owing
under the Loan Documents according to the terms thereof, including, without
limitation, principal, interest, loan fees, service fees, professional fees,
interest (and specifically including interest accrued after the commencement of
any Insolvency Proceeding), default interest, interest on interest, expense
reimbursements, whether or not the same would be or is allowed or disallowed in
whole or in part in any Insolvency Proceeding.

 -27-
 

 

 

(ii)           In
the event of a direct conflict between the priority provisions of this Section
2.4 and other provisions contained in any other Loan Document, it is the
intention of the parties hereto that such priority provisions in such documents
shall be read together and construed, to the fullest extent possible, to be in
concert with each other.

2.5           Overadvances.  If, at any time or for any reason, the amount
of Obligations owed by Borrower to the Lender pursuant to Sections 2.1 and
2.12 is greater than either the Dollar or percentage limitations set forth
in Sections 2.1 or 2.12, (an “Overadvance”),
Borrower immediately shall pay to Lender, in cash, the amount of such excess,
which amount shall be used by Lender to reduce the Obligations in accordance
with the priorities set forth in Section 2.4(b).

2.6           Interest Rates and Letter of Credit Fee:  Rates, Payments, and Calculations.

(a)           Interest Rates.  Except as provided in clause (c) below, all
Obligations (except for undrawn Letters of Credit and except for Bank Product
Obligations) that have been charged to the Loan Account pursuant to the terms
hereof shall bear interest on the Daily Balance if the relevant Obligation is
an Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR
Rate plus the Applicable Margin for LIBOR Rate Loans and otherwise, at a per
annum rate equal to the Base Rate plus the Applicable Margin for Base Rate
Loans.

(b)           Letter of Credit Fee.  Borrower shall pay Lender a Letter of Credit
fee (in addition to the charges, commissions, fees, and costs set forth in Section
2.12(e)) at the per annum rate set forth in the following chart based on
Net Excess Availability times the Daily Balance of the undrawn amount of all
outstanding standby and documentary Letters of Credit:

 -28-
 

 

 

	
  Level

  	
   

  	
  Net Excess Availability

  	
   

  	
  Standby/Documentary

  LC Fees

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  I

  	
   

  	
  Greater than
  $3,500,000

  	
   

  	
  1.50

  	
  %

  
	
  II

  	
   

  	
  Greater than
  $2,000,000 and less than or equal to $3,500,000

  	
   

  	
  1.75

  	
  %

  
	
  III

  	
   

  	
  Less than or equal to
  $2,000,000

  	
   

  	
  2.00

  	
  %

  

 

Any increase or decrease
in the Letter of Credit Fee resulting from a change in Net Excess Availability
shall become effective as of the first Business Day of the calendar quarter for
which a Borrowing Base Certificate is delivered pursuant to Section
6.3(a)(v) (setting forth the average Net Excess Availability for then
immediately preceding calendar quarter); provided, however, that
if a Borrowing Base Certificate is not delivered within one (1) Business Days
after the time period specified in such Section, then Pricing Level III shall
apply as of such Business Day and thereafter, subject to prospective adjustment
upon actual receipt of such Borrowing Base Certificate.  The Letter of Credit Fee in effect from the
Closing Date through September 30, 2006 shall be Pricing Level II.

(c)           Default Rate.  Upon the occurrence and during the
continuation of an Event of Default (and at the election of Lender),

(i)            all
Obligations that have been charged to the Loan Account pursuant to the terms
hereof shall bear interest on the Daily Balance thereof at a per annum rate
equal to two (2) percentage points above the per annum rate otherwise
applicable hereunder, and

(ii)           the
Letter of Credit fee provided for above shall be increased to two (2)
percentage points above the per annum rate otherwise applicable hereunder.

(d)           Payment.  Interest, Letter of Credit fees, and all
other fees payable hereunder shall be due and payable, in arrears, on the first
day of each month at any time that Obligations are outstanding.  Borrower hereby authorizes Lender, from time
to time, without prior notice to Borrower, to charge such interest and fees,
all Lender Expenses (as and when incurred), the charges, commissions, fees, and
costs provided for in Section 2.12(e) (as and when accrued or incurred),
the fees and costs provided for in Section 2.11 (as and when accrued or
incurred), and all other payments as and when due and payable under any Loan
Document to Borrower’s Loan Account, which amounts thereafter shall constitute
Advances hereunder and shall accrue interest at the rate then applicable to
Advances hereunder applicable to Base Rate Loans.  Any interest not paid when due shall be
compounded by being charged to Borrower’s Loan Account and shall thereafter
constitute Advances hereunder and shall accrue interest at the rate then
applicable to Advances that are Base Rate Loans hereunder.

 -29-
 

 

 

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

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

2.7           Cash Management.

(a)           Borrower shall (i) establish and/or maintain deposit
accounts (each, a “Cash Management Account”)
and cash management services of a type and on terms satisfactory to Lender at
one or more of the banks and in accordance with procedures set forth on Schedule
2.7 (each a “Cash Management Bank”), and shall
request in writing and otherwise take such reasonable steps to ensure that all
of its Account Debtors forward payment of the amounts owed by them directly to
the Concentration Account, and (ii) deposit or cause to be deposited
promptly, and in any event no later than the first Business Day after the date
of receipt thereof, all Collections (including those sent directly by Account
Debtors to a Cash Management Bank) into the Concentration Account.  If, notwithstanding the provisions of this Section
2.7, Borrower receives or otherwise has dominion over or control of any
Collections, Borrower shall hold such Collections in trust for Lender and shall
not commingle such Collections with any of Borrower’s other funds or deposit
such Collections in any account of Borrower except as instructed by Lender.

(b)           Borrower shall establish and maintain Cash Management
Agreements with Lender and each Cash Management Bank each, a “Cash Management Agreement”. 
Each such Cash Management Agreement shall be a Control Agreement and
provide, among other things, that (i)  the Cash Management Bank will
comply with instructions of Lender directing the disposition of funds in the
Cash Management Account without further consent by Borrower, (ii) the Cash
Management Bank has no rights of setoff or recoupment or any other claim against
the applicable Cash Management Account, other than for payment of its service
fees and other charges directly related to the administration of such Cash
Management Account and for returned checks or other items of payment which have
been received by the Lender, and (iii) it immediately will forward by
daily sweep all amounts in the applicable Cash Management Account to the
Concentration Account, or as otherwise directed by Lender.

 -30-
 

 

 

(c)           Borrower shall establish and maintain Credit Card/Payment
Agreements with Lender and each Credit Card Processor.  Each such Credit Card/Payment Agreement shall
provide, among other things, that each such Credit Card/Payment Processor shall
transfer all proceeds of credit card charges for sales by Borrower received by
it (or other amounts payable by such Credit Card/Payment Processor) directly
into the Concentration Account on a daily basis.  Borrower shall not change or attempt to
change any direction or designation set forth in the Credit Card Agreements
regarding payment of charges without the prior written consent of Lender.

(d)           So long as no Default or Event of Default has occurred and
is continuing, Borrower may amend Schedule 2.7 to add or replace a Cash
Management Account Bank or Cash Management Account  (other than the Concentration Account and the
Designated Account); provided, however, that (i) such
prospective Cash Management Bank shall be satisfactory to Lender and Lender
shall have consented in writing in advance to the opening of such Cash
Management Account with the prospective Cash Management Bank, and
(ii) prior to the time of the opening of such Cash Management Account,
Borrower and such prospective Cash Management Bank shall have executed and
delivered to Lender a Control Agreement. 
Borrower shall close any of its Cash Management Accounts (and establish
replacement cash management accounts in accordance with the foregoing sentence)
promptly and in any event within 15 days of notice from Lender that the
creditworthiness of any Cash Management Bank is no longer acceptable in Lender’s
reasonable judgment, or as promptly as practicable and in any event within 30
days of notice from Lender that the operating performance, funds transfer, or
availability procedures or performance of the Cash Management Bank with respect
to Cash Management Accounts or Lender’s liability under any Cash Management
Agreement with such Cash Management Bank is no longer acceptable in Lender’s
reasonable judgment.

(e)           The
Cash Management Accounts shall be cash collateral accounts, with all cash,
checks and similar items of payment in such accounts securing payment of the
Obligations, and in which Borrower is hereby deemed to have granted a Lien on
each Cash Management Account.

2.8           Sweep;
Crediting Payments; Float Charge.

(a)           Whether
or not any Obligations are then outstanding, Borrower shall cause not less than
once every week wire transfer of  the
collected balance of each Cash Management Account in excess of any minimum
balance, such minimum balance not to exceed Two Thousand Dollars ($2,000), to
be made to the Concentration Account. 
Telephone or electronic mail advice shall be provided to Lender on each
Business Day on which any such transfer is made and, if requested by Lender,
confirmed by written notice, including detail of all remittances and a copy of
each deposit slip.

(b)           Whether
or not any Obligations are then outstanding, Borrower shall not have the right
or ability to draw upon, withdraw from or otherwise access any funds in the
Concentration Account.  Any cash in the
Concentration Account in excess of the Loan Account balance shall be
transferred by Lender to the Designated Account and, provided no Default or
Event of Default has occurred and is continuing, such surplus may be applied in
Borrower’s 

 -31-
 

 

 

discretion to payment of any subsequently accrued
Obligations or other purposes not inconsistent with the terms of this
Agreement.

(c)           The
receipt of any payment item by Lender (whether from transfers to Lender by the
Cash Management Banks pursuant to the Cash Management Agreements, the Credit
Card/Payment Processors pursuant to the Credit Card/Payment Agreements  or otherwise) shall not be considered a
payment on account of any Obligations unless such payment item is a wire
transfer of immediately available federal funds made to the Concentration
Account or unless and until such payment item is honored when presented for
payment.  Should any payment item not be
honored when presented for payment, then Borrower shall be deemed not to have
made such payment and interest shall be calculated accordingly.  Anything to the contrary contained herein
notwithstanding, any payment item shall be deemed received by Lender only if it
is received into the Concentration Account on a Business Day on or before 2:00 p.m.
(Boston time).  If any payment item is
received into the Concentration Account on a non-Business Day or after 2:00
p.m. (Boston time) on a Business Day, it shall be deemed to have been received
by Lender as of the opening of business on the immediately following Business
Day.  From and after the Closing Date,
Lender shall be entitled to charge Borrower for two (2) Business Days of ‘clearance’
or ‘float’ at the rate applicable to Base Rate Loans under Section 2.6 on all
Collections that are received by Borrower (regardless of whether forwarded by
the Cash Management Banks to Lender). 
This across-the-board two (2) Business Days clearance or float charge on
all Collections is acknowledged by the parties to constitute an integral aspect
of the pricing of the financing of Borrower; the effect of such clearance or
float charge being the equivalent of charging two (2) Business Days of interest
on such Collections.  The parties
acknowledge and agree that the economic benefit of the foregoing provisions of
this Section 2.8 shall be for the exclusive benefit of Lender.

2.9           Designated Account.  Lender is authorized to make the Advances,
and Issuing Lender is authorized to issue the Letters of Credit, under this
Agreement based upon telephonic or other instructions received from anyone
purporting to be an Authorized Person, or without instructions if pursuant to Section
2.6(d).  Borrower agrees to establish
and maintain the Designated Account for the purpose of receiving the proceeds
of the Advances requested by Borrower and made by Lender hereunder and which
shall be subject to a Control Agreement.

2.10         Maintenance of Loan Account;
Statements of Obligations.  Lender
shall maintain an account on its books in the name of Borrower (the “Loan Account”) on which Borrower will be
charged with all Advances made by Lender to Borrower or for Borrower’s account,
the Letters of Credit issued by Issuing Lender for Borrower’s account, and with
all other payment Obligations hereunder or under the other Loan Documents,
including, accrued interest, fees and expenses, and Lender Expenses.  In accordance with Section 2.8, the
Loan Account will be credited with all payments received by Lender from
Borrower or for Borrower’s account, including all amounts received in the
Concentration Account from any Cash Management Bank.  Lender shall render statements regarding the
Loan Account to Borrower, including principal, interest, fees, and including an
itemization of all charges and expenses constituting Lender Expenses owing, and
such statements shall be conclusively presumed to be correct and accurate and
constitute an account stated between Borrower and the Lender unless, within 30
days after receipt thereof by Borrower, Borrower shall deliver to Lender
written objection thereto describing the error or errors contained in any such
statements.

 -32-
 

 

 

2.11         Fees.  In addition to any other fees payable under
this Agreement, Borrower shall pay to Lender the following fees and charges,
which fees and charges shall be non-refundable when paid:

(a)           Fee Letter Fees.  As and when due and payable under the terms
of the Fee Letter, Borrower shall pay to Lender the fees set forth in the Fee
Letter, including, without limitation, the Commitment Fee, the Unused Line Fee
and the Applicable Prepayment Premium, and

(b)           Audit, Appraisal, and Valuation
Charges.  For the separate account of
Lender, audit, appraisal, and valuation fees and charges including, without
limitation, charges paid or incurred by Lender if it elects to employ the
services of one or more third Persons to perform financial audits of Borrower,
to appraise the Collateral, or any portion thereof, or to assess Borrower’s
business valuation.

2.12         Letters
of Credit.

(a)           Subject
to the terms and conditions of this Agreement, the Issuing Lender agrees to
issue letters of credit for the account of Borrower (each, a “Letter of Credit”).  To request the issuance of a Letter of Credit
(or the amendment, renewal, or extension of an outstanding Letter of Credit),
Borrower shall hand deliver or telecopy (or transmit by electronic
communication, if arrangements for doing so have been approved by the Issuing
Lender) to the Issuing Lender and Lender at least three (3) Business Days in
advance of the requested date of issuance, amendment, renewal, or extension a
notice requesting the issuance of a Letter of Credit or identifying the Letter
of Credit to be amended, renewed, or extended, the date of issuance, amendment,
renewal, or extension, the date on which such Letter of Credit is to expire,
the amount of such Letter of Credit, the name and address of the beneficiary
thereof, and such other information as shall be necessary to prepare, amend,
renew, or extend such Letter of Credit. 
The Issuing Lender shall have no obligation to issue a Letter of Credit
if any of the following would result after giving effect to the requested
Letter of Credit:

(i)            the Letter of Credit Usage would
exceed $2,000,000, or

(ii)           the Letter of Credit Usage would
exceed the Borrowing Base less the Availability Reserves less the then extant
amount of outstanding Advances, or

(iii)          the Letter of Credit Usage would
exceed the Maximum Revolver Amount less the then extant amount of outstanding
Advances, and

(iv)          the expiration of any

(A)                              standby
Letter of Credit would be later than the earlier
of (x) thirty (30) days prior to the Maturity Date, or (y) one (1)
year from date of its original issue; and

(B)                                Qualified
Import Letter of Credit, would be later than the earlier of (x) thirty (30) days prior to the Maturity Date,
or (y) sixty (60) days after its original issue.

 -33-
 

 

 

Each Letter of Credit shall be in form and substance
acceptable to the Issuing Lender (in the exercise of its Permitted Discretion),
including the requirement that the amounts payable thereunder must be payable
in Dollars.  If Issuing Lender is
obligated to advance funds under a Letter of Credit, Borrower immediately shall
reimburse such L/C Disbursement to Issuing Lender by paying to Lender an amount
equal to such L/C Disbursement not later than 2:00 p.m., Boston time, on the
date that such L/C Disbursement is made, if Borrower shall have received
written or telephonic notice of such L/C Disbursement prior to 1:00 p.m.
(Boston time) on such date, or, if such notice has not been received by
Borrower prior to such time on such date, then not later than 2:00 p.m. (Boston
time) on (i) the Business Day that Borrower receives such notice, if such
notice is received prior to 1:00 p.m. (Boston time) on the date of receipt,
and, in the absence of such reimbursement, the L/C Disbursement immediately and
automatically shall be deemed to be an Advance hereunder and, thereafter, shall
bear interest at the rate then applicable to Advances that are Base Rate Loans
under Section 2.6.  To the extent
an L/C Disbursement is deemed to be an Advance hereunder, Borrower’s obligation
to reimburse such L/C Disbursement shall be discharged and replaced by the
resulting Advance.  Promptly following
receipt by Lender of any payment from Borrower pursuant to this paragraph,
Lender shall distribute such payment to the Issuing Lender.

(b)           Each
Borrower hereby agrees to indemnify, save, defend, and hold Lender and Issuing
Lender harmless from any loss, cost, expense, or liability, and reasonable
attorneys fees incurred by Lender and Issuing Lender arising out of or in
connection with any Letter of Credit; provided, however, that
Borrower shall not be obligated hereunder to indemnify for any loss, cost,
expense, or liability that is caused by the gross negligence or willful
misconduct of Lender or the Issuing Lender. 
Borrower agrees to be bound by Issuing Lender’s interpretations of any
Letter of Credit issued by Issuing Lender to or for Borrower’s account, even
though this interpretation may be different from Borrower’s own, and Borrower
understands and agrees that Issuing Lender shall not be liable for any error,
negligence, or mistake, whether of omission or commission, in following
Borrower’s instructions or those contained in the Letter of Credit or any
modifications, amendments, or supplements thereto.

(c)           If
by reason of (i) any change in any applicable law, treaty, rule, or
regulation or any change in the interpretation or application thereof by any
Governmental Authority, or (ii) compliance by the Issuing Issuer or Lender
with any direction, request, or requirement (irrespective of whether having the
force of law) of any Governmental Authority or monetary authority including,
Regulation D of the Federal Reserve Board as from time to time in effect (and
any successor thereto):

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

(ii)           there shall be imposed on the Issuing
Lender or the Lender any other condition regarding any Letter of Credit issued
pursuant hereto;

and the result of the foregoing is to increase,
directly or indirectly, the cost to the Issuing Lender of issuing, making or
maintaining any Letter of Credit or to reduce the amount receivable in respect
thereof by the Issuing Lender, then, and in any such case, Issuing Lender may,
at any time within a reasonable period after the additional cost is incurred or
the amount received is

 -34-

 

 

reduced, notify Borrower, and Borrower shall pay on
demand such amounts as Issuing Lender may specify to be necessary to compensate
Issuing Lender for such additional cost or reduced receipt, together with
interest on such amount from the date of such demand until payment in full
thereof at the rate then applicable to Base Rate Loans hereunder.  The determination by Issuing Lender of any
amount due pursuant to this Section, as set forth in a certificate setting
forth the calculation thereof in reasonable detail, shall, in the absence of
manifest or demonstrable error, be final and conclusive and binding on all of
the parties hereto.

2.13         LIBOR
Option.

(a)           Interest and Interest Payment
Dates.  In lieu of having interest
charged at the rate based upon the Base Rate, Borrower shall have the option
(the “LIBOR Option”) to have
interest on all or a portion of the Advances be charged at a rate of interest
based upon the LIBOR Rate.  Interest on
LIBOR Rate Loans shall be payable on the earliest of (i) the last day of
the Interest Period applicable thereto, (ii) the occurrence of an Event of
Default in consequence of which Lender elects to accelerate the maturity of all
or any portion of the Obligations, or (iii) termination of this Agreement
pursuant to the terms hereof.  On the
last day of each applicable Interest Period, unless Borrower properly has
exercised the LIBOR Option with respect thereto, the interest rate applicable
to such LIBOR Rate Loan automatically shall convert to the rate of interest
then applicable to Base Rate Loans of the same type hereunder.  At any time that Default has occurred and is
continuing, Borrower no longer shall have the option to request that Advances
bear interest at the LIBOR Rate and Lender shall have the right, at its option,
to convert the interest rate on all outstanding LIBOR Rate Loans to the rate
then applicable to Base Rate Loans hereunder and Borrower shall be responsible
for all Funding Losses arising in connection thereof.  Any LIBOR Rate Loan which matures while a
Default or Event of Default has occurred and is continuing shall be converted,
at the option of Lender, to a Base Rate Loan notwithstanding Borrower’s
exercise of LIBOR Rate Option in connection thereto that such Loan be continued
as a LIBOR Rate Loan.

(b)           LIBOR
Election.

(i)            Borrower may, at any time and from
time to time and in addition to any Borrowing made initially as an Advance
having interest charged based upon the LIBOR Rate, so long as no Default has
occurred and is continuing, elect to exercise the LIBOR Option by notifying
Lender prior to 2:00 p.m. (Boston time) at least 3 Business Days prior to the
commencement of the proposed Interest Period (the “LIBOR Deadline”). 
Notice of Borrower’s election of the LIBOR Option for a permitted
portion of the Advances and an Interest Period pursuant to this Section shall
be made by delivery to Lender of a LIBOR Notice received by Lender before the
LIBOR Deadline, or by telephonic notice received by Lender before the LIBOR
Deadline (to be confirmed by delivery to Lender of a LIBOR Notice received by
Lender prior to 5:00 p.m. (Boston time) on the same day).

(ii)           Each LIBOR Notice shall be
irrevocable and binding on Borrower.  In
connection with each LIBOR Rate Loan, Borrower shall indemnify, defend, and
hold Lender harmless against any loss, cost, or expense incurred by Lender as a
result of (a) the payment of any principal of any LIBOR Rate Loan other
than on the last day of an 

 -35-
 

 

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

(iii)          Borrower shall have not more than four
(4)  LIBOR Rate Loans in effect at any
given time.  Borrower only may exercise
the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples
of $100,000 in excess thereof.

(c)           Prepayments.  Borrower may prepay LIBOR Rate Loans at any
time; provided, however, that in the event that LIBOR Rate Loans are
prepaid on any date that is not the last day of the Interest Period applicable
thereto, including as a result of any automatic prepayment through the required
application by Lender of proceeds of Collections in accordance with Section
2.4(b) or for any other reason, including early termination of the term of
this Agreement or acceleration of all or any portion of the Obligations
pursuant to the terms hereof, Borrower shall indemnify, defend, and hold Lender
harmless against any and all Funding Losses in accordance with clause (b)
above.

(d)           Special
Provisions Applicable to LIBOR Rate.

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

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

(e)           No
Requirement of Matched Funding. 
Anything to the contrary contained herein notwithstanding, Lender is not
required actually to acquire Eurodollar deposits to fund or otherwise match
fund any Obligation as to which interest accrues at the LIBOR Rate.  The provisions of this Section shall apply as
if Lender had match funded any Obligation as to which interest is accruing at
the LIBOR Rate by acquiring Eurodollar deposits for each Interest Period in the
amount of the LIBOR Rate Loans.

2.14         Capital Requirements.  If, after the date hereof, Lender determines
that (i) the adoption of or change in any law, rule, regulation or
guideline regarding capital requirements for banks or bank holding companies,
or any change in the interpretation or application thereof by any Governmental
Authority charged with the administration thereof, or (ii) compliance by
Lender or its parent bank holding company with any guideline, request or
directive of any such entity regarding capital adequacy (whether or not having
the force of law), will have the effect of reducing the return on Lender’s or
such holding company’s capital as a consequence of Lender’s commitment
hereunder to a level below that which Lender or such holding company could have
achieved but for such adoption, change, or compliance (taking into
consideration Lender’s or such holding company’s then existing policies with
respect to capital adequacy and assuming the full utilization of such entity’s
capital) by any amount deemed by Lender to be material, then Lender may notify
Borrower.  Following receipt of such
notice, Borrower agrees to pay Lender on demand the amount of such reduction of
return of capital as and when such reduction is determined, payable within 60
days after presentation by Lender of a statement in the amount and setting
forth in reasonable detail Lender’s calculation thereof and the assumptions
upon which such calculation was based (which statement shall be deemed true and
correct absent manifest error).  In
determining such amount, Lender may use any reasonable averaging and
attribution methods.

2.15         Securitization.  Borrower hereby acknowledges that Lender and
its Affiliates may sell or securitize the Loans (a “Securitization”) through the pledge of the Loans as collateral
security for loans to Lender or its Affiliates or through the sale of the Loans
or the issuance of direct or indirect interests in the Loans, which loans to
Lenders or its Affiliates or direct or indirect interests will be rated by
Moody’s, Standard & Poor’s or one or more other rating agencies (the “Rating Agencies”).  Borrower shall cooperate with Lender and its
Affiliates to effect the Securitization including, without limitation, by
(a) amending this Agreement and the other Loan Documents, and executing
such additional documents, as reasonably requested by 

 -37-
 

 

 

such Lenders in connection with the Securitization,
provided that (i) any such amendment or additional documentation does not
impose material additional costs on the Borrower, and (ii) any such
amendment or additional documentation does not materially adversely affect the
rights, or materially increase the obligations, of Borrower under the Loan
Documents or change or affect in a manner adverse to Borrower the financial
terms of the Loans, (b) providing such information as may be reasonably
requested by Lender in connection with the rating of the Loans or the
Securitization, and (c) providing in connection with any rating of the
Loans a certificate (i) agreeing to indemnify Lender and any of its
Affiliates, any of the Rating Agencies, or any party providing credit support
or otherwise participating in the Securitization (collectively, the “Securitization Parties”) for any losses,
claims, damages or liabilities (the “Securitization
Liabilities”) to which Lender, its Affiliates or such Securitization
Parties may become subject insofar as the Securitization Liabilities arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any Loan Document or in any writing delivered by or
on behalf of the Borrower or any Affiliates to Lender in connection with any
Loan Document or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary in order to make the statements therein, in light of the
circumstances under which they were made not misleading, and such indemnity
shall survive any transfer by Lender or its successors or assigns of the Loans,
and (ii) agreeing to reimburse Lenders and any of its Affiliates for any
legal or other expenses reasonably incurred by such Persons in connection with
defending the Securitization Liabilities.

3.             CONDITIONS; TERM OF AGREEMENT.

3.1           Conditions Precedent to the
Initial Extension of Credit.  The
obligation of Lender to make the initial Advance (or otherwise to extend any
credit provided for hereunder), is subject to the fulfillment, to the
satisfaction of Lender, of each of the conditions precedent set forth below:

(a)           All
financing statements required by Lender, shall have been filed;

(b)           Lender
shall have received each of the following documents, in form and substance
satisfactory to Lender, duly executed, and each such document shall be in full
force and effect:

(i)            the Intellectual Property Security
Agreement;

(ii)           All Control Agreements and/or Cash
Management Agreements;

(iii)          the Credit Card/Payment Agreement with
TransFirst, Inc.;

(iv)          the Fee Letter;

(v)           the Disbursement Letter,

(vi)          the Perfection Certificate of each
Borrower;

(vii)         the Certificate of Officers of each
Borrower;

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(viii)        Signature Authorization;

(ix)           Waiver Letter; and

(x)            Assignment of Services Contracts and
Consent of Assignor.

(c)           Lender
shall have received evidence of delivery of all required transfer forms and/or
notices to American Express, Chase Paymentech, Discover Network and PayPal
relating to payment of proceeds of Inventory sales directly to the
Concentration Account;

(d)           Lender
shall have received evidence that any and all of Borrower’s deposit accounts with
Bank of the West have been closed and terminated;

(e)           Lender
shall have received Collateral Access Agreements with respect to any of the
leased Borrower’s distribution center locations;

(f)            Lender
shall have received Bailee Acknowledgments with respect to any of the Borrower’s
third party warehouse locations;

(g)           Lender
shall have received a certificate from the Secretary of Borrower attesting to
the resolutions of Borrower’s board of directors authorizing its execution,
delivery, and performance of this Agreement and the other Loan Documents to
which Borrower is a party and authorizing specific officers of such Borrower to
execute the same;

(h)           Lender
shall have received copies of Borrower’s Governing Documents, as amended,
modified, or supplemented to the Closing Date, certified by the Secretary of
Borrower;

(i)            Lender
shall have received a certificate of status with respect to Borrower, dated
within 10 days of the Closing Date, such certificate to be issued by the
appropriate officer of the jurisdiction of organization of Borrower, which
certificate shall indicate that Borrower is in good standing in such
jurisdiction;

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

(k)           Lender
shall have received certificates of insurance, as are required by Section
6.8, the form and substance of which shall be satisfactory to Lender;

(l)            Lender
shall have received opinions of Borrower’s counsel in form and substance
satisfactory to Lender;

(m)          Lender
shall have received satisfactory evidence (including a certificate of the chief
financial officer of Parent) that all tax returns required to be filed by
Borrower have been timely filed and all taxes upon Borrower or its properties,
assets, income, and franchises 

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(including Real Property taxes and payroll taxes) have
been paid prior to delinquency, except such taxes that are the subject of
Permitted Protests;

(n)           Lender
shall have completed its business, legal, and collateral due diligence,
including (i) a collateral audit and review of Borrower’s books and
records and verification of Borrower’s representations and warranties to the
Lender, the results of which shall be satisfactory to Lender, and (ii) an
inspection of each of the locations where Inventory is located, the results of
which shall be satisfactory to Lender;

(o)           Lender
shall have received completed reference checks with respect to Borrower’s
management and the holders of any Stock of the Borrower, the results of which
are satisfactory to Lender in its sole discretion;

(p)           Lender
shall have received an appraisal of the Net Retail Liquidation Value and Net
Liquidation Percentage applicable to Borrower’s Inventory, the results of which
shall be satisfactory to Lender;

(q)           Lender
shall have received the Closing Date Business Plan;

(r)            Borrower
shall have paid all Lender Expenses incurred in connection with the
transactions evidenced by this Agreement;

(s)           Lender
shall have received copies of each of the Service Contracts, together with a
certificate of the Secretary of the applicable Borrower certifying each such
document as being a true, correct, and complete copy thereof;

(t)            Borrower
shall have received all licenses, approvals or evidence of other actions
required by any Governmental Authority in connection with the execution and
delivery by Borrower of this Agreement or any other Loan Document or with the
consummation of the transactions contemplated hereby and thereby;

(u)           all
other documents and legal matters in connection with the transactions
contemplated by this Agreement shall have been delivered, executed, or recorded
and shall be in form and substance satisfactory to Lender; and

(v)           Lender
shall have received, reviewed and approved Borrower’s plan to resolve pending
litigation regarding the authenticity of Inventory bearing the “Cartier” trade
name and trademark.

3.2           Conditions Subsequent to the
Initial Extension of Credit.  The
obligation of Lender (or any member thereof) to continue to make Advances (or
otherwise extend credit hereunder) is subject to the fulfillment, on or before
the date applicable thereto, of each of the conditions subsequent set forth
below (the failure by Borrower to so perform or cause to be performed
constituting an Event of Default):

(a)           On
or before 60 days after the Closing Date, (i) any and all proceeds of sales
(other than payments made with written checks or money orders which are
delivered directly to Borrower) shall be directly deposited by the applicable
Credit Card/Payment 

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Processor into the Concentration Account, (ii) any and
all cash management operations with Wells Fargo (other than with respect to the
Wells Fargo Permitted DDA), shall have been closed and terminated (and moved to
LaSalle Bank, N.A.); and (iii) the Control Agreement relating to the Wells
Fargo Permitted DDA shall have been amended to provide for automatic sweeps of
any balances thereof in excess of $2,000 to be deposited into the Concentration
Account no less than once weekly;

(b)           On
or before 30 days after the Closing Date, Lender shall have received the Credit
Card/Payment Agreement with Discover Network and I4 Commerce, Inc. in form and
substance reasonably satisfactory to Lender; and

(c)           On
or before 30 days after the Closing Date, Lender shall have received an
executed loss payee endorsement from Borrower’s insurer in form and substance
reasonably acceptable to Lender.

3.3           Conditions Precedent to all
Extensions of Credit.  The obligation
of the Lender to make any Advances (or to extend any other credit hereunder)
shall be subject to the following conditions precedent:

(a)           the
representations and warranties contained in this Agreement and the other Loan
Documents shall be true and correct in all material respects on and as of the
date of such extension of credit, as though made on and as of such date (except
to the extent that such representations and warranties expressly relate solely
to an earlier date);

(b)           no
Default or Event of Default shall have occurred and be continuing on the date
of such extension of credit, nor shall either result from the making thereof;

(c)           no
injunction, writ, restraining order, or other order of any nature prohibiting,
directly or indirectly, the extending of such credit shall have been issued and
remain in force by any Governmental Authority against Borrower, Lender, or any
of its Affiliates; and

(d)           no
Material Adverse Change shall have occurred.

3.4           Term.  This Agreement shall become effective upon
the execution and delivery hereof by Borrower and the Lender and shall continue
in full force and effect for a term ending on [July     ,
2010] (the “Maturity Date”).  The foregoing notwithstanding, the Lender
shall have the right to terminate its obligations under this Agreement immediately
and without notice upon the occurrence and during the continuation of an Event
of Default.

3.5           Effect of Termination.  On the date of termination of this Agreement,
all Obligations (including any Applicable Prepayment Premium and any contingent
reimbursement obligations of Borrower with respect to any outstanding Letters
of Credit) immediately shall become due and payable without notice or demand
(including (a) either (i) providing cash collateral to be held by
Lender in an amount equal to 105% of the then extant Letter of Credit Usage, or
(ii) causing the original Letters of Credit to be returned to the Issuing
Lender, and (b) providing cash collateral for Bank Product Obligations and
Lender Expenses.  No termination of this
Agreement, however, shall relieve or discharge Borrower of its duties,
Obligations, or covenants hereunder and the Lender’s Liens in the Collateral
shall remain in effect until all

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Obligations have been fully and finally discharged and
the Lender’s obligations to provide additional credit hereunder have been
terminated and Lender shall have affirmatively released such liens.  When this Agreement has been terminated and
all of the Obligations have been fully and finally discharged and the Lender’s
obligations to provide additional credit under the Loan Documents have been
terminated irrevocably, Lender will, at Borrower’s sole expense, execute and
deliver any UCC termination statements, lien releases, mortgage releases,
re-assignments of trademarks, discharges of security interests, and other
similar discharge or release documents (and, if applicable, in recordable form)
as are reasonably necessary to release, as of record, the Lender’s Liens and
all notices of security interests and liens previously filed by Lender with
respect to the Obligations.

3.6           Early
Termination by Borrower.  Borrower has
the option, at any time upon 90 days prior written notice by Borrower to
Lender, to terminate this Agreement by paying to Lender in cash, the
Obligations in full (including either (i) providing cash collateral to be
held by Lender in an amount equal to 105% of the then extant Letter of Credit
Usage, or (ii) causing the original Letters of Credit to be returned to
the Issuing Lender), together with the Applicable Prepayment Premium.  If Borrower has sent a notice of termination
pursuant to the provisions of this Section, then Lender’s commitment hereunder
shall immediately terminate and Borrower shall be obligated to repay the
Obligations, including (a) either (i) providing cash collateral to be
held by Lender in an amount equal to 105% of the then extant Letter of Credit
Usage, or (ii) causing the original Letters of Credit to be returned to
the Issuing Lender, and (b) providing cash collateral for Bank Product
Obligations and Lender Expenses together with the Applicable Prepayment
Premium, on the date set forth as the date of termination of this Agreement in
such notice.  In the event of the
termination of this Agreement at any time prior to the Maturity Date, for any
other reason, including (a) termination upon the election of the Lender to
terminate after the occurrence of an Event of Default, (b) foreclosure and
sale of Collateral, (c) sale of the Collateral in any Insolvency
Proceeding, or (d) restructure, reorganization or compromise of the
Obligations by the confirmation of a plan of reorganization, or any other plan
of compromise, restructure, or arrangement in any Insolvency Proceeding, then,
in view of the impracticability and extreme difficulty of ascertaining the
actual amount of damages to the Lender or profits lost by the Lender as a
result of such early termination, and by mutual agreement of the parties as to
a reasonable estimation and calculation of the lost profits or damages of the
Lender, Borrower shall pay and the Obligations shall include the Applicable
Prepayment Premium.

4.             CREATION OF SECURITY INTEREST.

4.1           Grant of Security Interest.  Borrower hereby grants to Lender and any
other holder of Obligations, a continuing security interest in any and all of
its personal property including, without limitation, all of its right, title,
and interest in all currently existing and hereafter acquired or arising
Personal Property Collateral and all proceeds and products thereof in order to
secure prompt repayment of any and all of the Obligations in accordance with
the terms and conditions of the Loan Documents and in order to secure prompt
performance by Borrower of its covenants and duties under the Loan Documents,
including without limitation the Obligations and the Indemnified Liabilities.  The Lender’s Liens granted herein in and to
the Personal Property Collateral shall attach to all Personal Property
Collateral without further act on the part of Lender or Borrower.  Anything contained in this Agreement or any other
Loan Document to the contrary notwithstanding, except for Permitted
Dispositions, Borrower has no 

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authority, express or implied, to dispose of any item
or portion of the Collateral.  Borrower
hereby agrees, upon the request of Lender, to deliver, as promptly as practicable,
but in any event within sixty (60) days, titles to motor vehicles and mortgages
with respect to Real Property Collateral and take such other steps as may be
reasonably requested (including, without limitation, the delivery of legal
opinions, consulting engineer’s reports and title insurance) so as to provide
Lender a perfected first-priority security interest in such assets.

4.2           Control of Collateral.  If from time to time any Collateral,
including any proceeds or supporting obligations, consists of property or
rights of Borrower in which the perfection or priority of Lender’s security
interest is dependent upon or enhanced by Lender’s gaining control of such
Collateral, Borrower shall immediately notify Lender and, at Lender’s request,
deliver the appropriate Control Agreements or take such actions as may be
necessary to give Lender control over such Collateral as provided in the Code.

4.3           Negotiable Collateral.  If from time to time any Collateral,
including any proceeds thereof, is evidenced by or consists of letters of
credit, Instruments, Documents, Goods covered by Documents, Investment Property
or Chattel Paper, and if perfection or priority of Lender’s security interest
in such Collateral is dependent on or enhanced by possession, immediately upon
the request of Lender, shall endorse and deliver physical possession of such
Collateral to Lender.

4.4           Collection of Accounts, General
Intangibles, and Negotiable Collateral. 
At any time after the occurrence and during the continuation of an Event
of Default, Lender or Lender’s designee may (a) notify Account Debtors of
Borrower that the Accounts, Chattel Paper, or General Intangibles have been
assigned to Lender or that Lender has a security interest therein, or
(b) collect the Accounts, Chattel Paper, or General Intangibles directly
and charge the collection costs and expenses to the Loan Account.  Borrower shall hold in trust for the Lender,
as the Lender’s trustee, any Collections that it receives and immediately will
deliver said Collections to Lender or a Cash Management Bank in their original
form as received by Borrower.

4.5           Delivery of Additional
Documentation Required.  At any time
upon the request of Lender, Borrower shall execute and deliver to Lender, any
and all security agreements, pledges, assignments, endorsements of certificates
of title, bailee acknowledgments and all other instruments or documents (the “Additional Documents”) that Lender may
request in its Permitted Discretion, each in form and substance satisfactory to
Lender, to perfect and continue perfected or to better perfect the Lender’s
Liens in the Collateral (whether now owned or hereafter arising or acquired),
in order to fully consummate all of the transactions contemplated hereby and
under the other Loan Documents.  To the maximum
extent permitted by applicable law, Borrower authorizes Lender to execute any
such Additional Documents in Borrower’s name and authorizes Lender to file such
executed Additional Documents in any appropriate filing office, including,
without limitation, financing statements designating collateral as “all assets.”  Without limiting the foregoing, Borrower
shall (a) give the Lender prompt written notice of any Commercial Tort
Claim of Borrower not specifically identified herein and any Letter of Credit Right
of Borrower.  Borrower shall grant to the
Lender, for the benefit of the Lender, a security interest in any such
Commercial Tort Claim or Letter of Credit Right and the proceeds thereof, and
(b) on such periodic basis as Lender shall require, (i) provide
Lender with a report of all new patentable, copyrightable or trademarkable
materials acquired or generated by Borrower during 

 -43-
 

 

 

the prior period, (ii) cause all patents,
copyrights, and trademarks acquired or generated by Borrower that are not
already the subject of a registration with the appropriate filing office (or an
application therefor diligently prosecuted) to be registered with such
appropriate filing office in a manner sufficient to impart constructive notice
of Borrower’s ownership thereof, (iii) cause to be prepared, executed, and
delivered to Lender supplemental schedules to the applicable Loan Documents to
identify such patents, copyrights and trademarks as being subject to the
security interests created thereunder, and (iv) execute and deliver to
Lender at Lender’s request Patent, Trademark or Copyright Security Agreements
with respect to such patents, trademarks or copyrights for filing with the
appropriate filing office.

4.6           Power of Attorney.  Borrower hereby irrevocably makes, constitutes,
and appoints Lender (and any of Lender’s officers, employees, or agents
designated by Lender) as Borrower’s true and lawful attorney, with power to
(a) if Borrower refuses to, or fails timely to execute and deliver any of
the documents described in Section 4.4 or 4.5, sign the name of Borrower
on any of the documents described in Section 4.4 or 4.5, (b) at any
time that an Event of Default has occurred and is continuing, sign Borrower’s
name on any invoice or bill of lading relating to the Collateral, drafts
against Account Debtors, or notices to Account Debtors, (c) send requests
for verification of Accounts, (d) endorse Borrower’s name on any
Collection item that may come into the Lender’s possession, (e) at any
time that an Event of Default has occurred and is continuing, make, settle, and
adjust all claims under Borrower’s policies of insurance and make all
determinations and decisions with respect to such policies of insurance, and
(f) at any time that an Event of Default has occurred and is continuing,
settle and adjust disputes and claims respecting the Accounts, Chattel Paper,
or General Intangibles directly with Account Debtors, for amounts and upon
terms that Lender determines to be reasonable, and Lender may cause to be
executed and delivered any documents and releases that Lender determines to be
necessary.  The appointment of Lender as
Borrower’s attorney, and each and every one of its rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully and finally repaid and performed and the Lender’s obligations to extend
credit hereunder are terminated.

4.7           Control Agreements.  No arrangement contemplated hereby or by any
Control Agreement in respect of any DDA or any Securities Accounts or other Investment
Property shall be modified by Borrower without the prior written consent of
Lender.

4.8           Right to Inspect; Inventories,
Appraisals and Audits.  Lender
(through any of their respective officers, employees, or agents) shall have the
right, from time to time hereafter to inspect the Books and to check, test, and
appraise the Collateral in order to verify Borrower’s financial condition or
the amount, quality, value, condition of, or any other matter relating to, the
Collateral.  Without limiting the generality
of the foregoing:

(a)           At
Borrower’s expense, third parties acceptable to Lender shall conduct physical
inventories at all of Borrower’s locations at least 2 times per fiscal
year.  Lender, at the expense of
Borrower, may participate in and/or observe each physical count and/or
inventory of so much of the Collateral as consists of Inventory which is
undertaken on behalf of Borrower. 
Without limiting any provision of this Agreement, Lender may establish
or amend Availability Reserves and Inventory Reserves based on the results of
such physical inventories.

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(b)           Lender,
from time to time, may obtain or conduct appraisals conducted by such
appraisers as are satisfactory to Lender, the first such appraisal and all
related reports to be completed prior to the Closing Date and, thereafter,
Lender anticipates conducting two (2) appraisals per twelve-month period,  but (ii) 
if an Event of Default has occurred and is continuing, at Borrower’s
expense, Lender may obtain or conduct appraisals more frequently.  In addition to the foregoing, the Lender may
from time to time obtain desktop appraisals at Borrower’s expense.

(c)           Lender,
from time to time, may obtain or conduct commercial finance audits of the
Borrower’s operations, provided, however: absent the existence of
any Event of Default, Borrower shall not be required to pay for more than two
(2) commercial finance audits per calendar year, but, if an Event of Default
has occurred and is continuing, at Borrower’s expense, Lender may obtain or
conduct commercial finance audits more frequently, and shall not be subject
to  the limit set forth above on the
amount payable by Borrower in connection with the same.

5.             REPRESENTATIONS AND WARRANTIES.

In order to induce Lender to enter into this
Agreement, Borrower makes the following representations and warranties to
Lender which shall be true, correct, and complete, in all material respects, as
of the date hereof, and shall be true, correct, and complete, in all material
respects, as of the Closing Date, and at and as of the date of the making of
each Advance (or other extension of credit) made thereafter, as though made on
and as of the date of such Advance (or other extension of credit) (except to
the extent that such representations and warranties relate solely to an earlier
date) and such representations and warranties shall survive the execution and
delivery of this Agreement:

5.1           No Encumbrances.  Borrower has good and indefeasible title to
its Collateral and its Real Property, free and clear of Liens except for Permitted
Liens.

5.2           Eligible Accounts.  The Eligible Accounts are bona fide existing
payment obligations of Account Debtors created by the sale and delivery of
Inventory or the rendition of services to such Account Debtors in the ordinary
course of Borrower’s business, owed to Borrower without defenses, disputes,
offsets, counterclaims, or rights of return or cancellation.  As to each Account that is identified by
Borrower as an Eligible Account in a borrowing base report submitted to Lender,
such Account is not excluded as ineligible by virtue of one or more of the
excluding criteria set forth in the definition of eligible Accounts.

5.3           Inventory; Eligible Inventory.  All Inventory is Authentic and all Eligible
Inventory is of good and merchantable quality, free from defects.  As to each item of Inventory that is
identified by Borrower as Eligible Inventory in a borrowing base report
submitted to Lender, such inventory is located at one of the locations set
forth on Schedule E-1 or is in transit from one such location to another
such location and is not otherwise excluded as ineligible by virtue of one or
more of the excluding criteria set forth in the definition of Eligible
Inventory.

5.4           Equipment.  All of the Equipment is used or held for use
in Borrower’s business and is fit for such purposes.

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5.5           Location of Inventory and
Equipment.  Except as set forth on Schedule
5.5, the Inventory and Equipment are not stored with a bailee,
warehouseman, or similar party.  The
Inventory and Equipment are located only at the locations identified on Schedule
5.5.

5.6           Inventory Records.  Borrower keeps correct and accurate records
itemizing and describing the type, quality, and quantity of its Inventory and
the book value thereof.

5.7           Legal Status.  Borrower represents and warrants that
(a)  Borrower’s exact legal name is that indicated on the Perfection
Certificate and on the signature page hereof; (b)  Borrower is an
organization of the type, and is organized in the jurisdiction, set forth in
the applicable Perfection Certificate; (c) the applicable Perfection
Certificate accurately sets forth Borrower’s organizational identification
number or accurately states that Borrower has none; (d) the applicable
Perfection Certificate accurately sets forth Borrower’s place of business or,
if more than one, its chief executive office, as well as Borrower’s mailing
address, if different; (e) all other information set forth on the
applicable Perfection Certificate pertaining to Borrower is accurate and
complete as of the date hereof and (f) there has been no change in any of
such information since the date on which the applicable Perfection Certificate
was signed by Borrower.

5.8           Due
Organization and Qualification; Subsidiaries.

(a)           Borrower
is duly organized and existing and in good standing under the laws of the
jurisdiction of its organization and qualified to do business in any state
where the failure to be so qualified reasonably could be expected to have a
Material Adverse Change.

(b)           Set
forth on Schedule 5.8(b), is a complete and accurate description of the
authorized capital Stock of Borrower, by class, and, as of the Closing Date, a
description of the number of shares of each such class that are issued and
outstanding.  Other than as described on Schedule
5.8(b), there are no subscriptions, options, warrants, or calls relating to
any shares of Borrower’s capital Stock, including any right of conversion or
exchange under any outstanding security or other instrument.  Except as set forth on Schedule 5.8(b),
Borrower is not subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of its capital Stock or
any security convertible into or exchangeable for any of its capital Stock.

(c)           Set
forth on Schedule 5.8(c), is a complete and accurate list of each
Borrower’s direct and indirect Subsidiaries, showing: (i) the jurisdiction
of their organization; (ii) the number of shares of each class of common
and preferred Stock authorized for each of such Subsidiaries; and
(iii) the number and the percentage of the outstanding shares of each such
class owned directly or indirectly by Borrower. 
All of the outstanding capital Stock of each such Subsidiary has been
validly issued and is fully paid and non-assessable.

(d)           Except
as set forth on Schedule 5.8(c), there are no subscriptions, options,
warrants, or calls relating to any shares of any Borrower’s Subsidiaries’
capital Stock, including any right of conversion or exchange under any
outstanding security or other instrument. 
Neither Borrower nor any of its Subsidiaries is subject to any
obligation (contingent or otherwise) to repurchase or otherwise  acquire or retire any shares of Borrower’s
Subsidiaries’ capital Stock or any security convertible into or exchangeable
for any such capital Stock.

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5.9           Due
Authorization; No Conflict.

(a)           The
execution, delivery, and performance by Borrower of this Agreement and the Loan
Documents to which it is a party have been duly authorized by all necessary
action on the part of Borrower.

(b)           The
execution, delivery, and performance by Borrower of this Agreement and the Loan
Documents to which it is a party do not and will not (i) violate any
provision of federal, state, or local law or regulation applicable to Borrower,
the Governing Documents of Borrower, or any order, judgment, or decree of any
court or other Governmental Authority binding on Borrower, (ii) conflict
with, result in a breach of, or constitute (with due notice or lapse of time or
both) a default under any material contractual obligation of Borrower,
(iii) result in or require the creation or imposition of any Lien of any
nature whatsoever upon any properties or assets of Borrower, other than
Permitted Liens, or (iv) require any approval of Borrower’s interest
holders or any approval or consent of any Person under any material contractual
obligation of Borrower.

(c)           Other
than the filing of financing statements, the execution, delivery, and
performance by Borrower of this Agreement and the Loan Documents to which such
Borrower is a party do not and will not require any registration with, consent,
or approval of, or notice to, or other action with or by, any Governmental
Authority or other Person.

(d)           This
Agreement and the other Loan Documents to which Borrower is a party, and all
other documents contemplated hereby and thereby, when executed and delivered by
Borrower will be the legally valid and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms, except
as enforcement may be limited by equitable principles or by bankruptcy,
insolvency, reorganization, moratorium, or similar laws relating to or limiting
creditors’ rights generally.

(e)           The
Lender’s Liens are validly created, perfected, and first priority Liens,
subject only to Permitted Liens

5.10         Litigation.

(a)           Other
than those matters disclosed on Schedule 5.10(a) and immaterial matters
where the amount in controversy is less than $10,000, there are no actions,
suits, or proceedings pending or, to the best knowledge of Borrower, threatened
against Borrower.  Schedule 5.10(a)
includes, as applicable, for each matter set forth thereon (i) the name,
docket number and jurisdiction for such matter, (ii) the status of such
proceeding, and (iii) whether such matter is covered by an insurance
policy and, if so, the insurance carrier, the policy number and the deductible
amount associated with such insurance policy.

(b)           There
are no actions, suits or proceedings pending or, to the best knowledge of
Borrower, threatened against Borrower that question the validity or
enforceability of this Agreement or any other Loan Document or any action taken
by Borrower in connection therewith.

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(c)           Schedule
5.10(c) lists all Borrower’s Commercial Tort Claims existing as of the date
hereof.

5.11         No Material Adverse Change.  All financial statements relating to Borrower
that have been delivered by Borrower to the Lender have been prepared in
accordance with GAAP (except, in the case of unaudited financial statements,
for the lack of footnotes and being subject to year-end audit adjustments) and
present fairly in all material respects, Borrower’s financial condition as of
the date thereof and results of operations for the period then ended.  There has not been a Material Adverse Change
with respect to Borrower since the date of the latest financial statements
submitted to the Lender on or before the Closing Date.

5.12         Fraudulent
Transfer.

(a)           Borrower
is Solvent before and after taking into account the transactions contemplated
by this Agreement and the other Loan Documents.

(b)           No
transfer of property is being made by Borrower and no obligation is being
incurred by Borrower in connection with the transactions contemplated by this
Agreement or the other Loan Documents with the intent to hinder, delay, or
defraud either present or future creditors of Borrower.

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

(a)           Neither
Borrower nor any ERISA Affiliate has ever taken any of the following actions
that would have a material adverse effect on the business or assets of the
Borrower taken as a whole:

(i)            Violated or failed to be in
compliance with any Borrower’s Benefit Plan.

(ii)           Failed timely to file all reports and
filings required by ERISA to be filed by Borrower.

(iii)          Engaged in any nonexempt “prohibited
transactions” or “reportable events” (respectively as described in ERISA).

(iv)          Engaged in, or committed, any act such
that a tax or penalty reasonably could be imposed upon Borrower on account
thereof pursuant to ERISA.

(v)           Accumulated any material cumulative
funding deficiency within the meaning of ERISA.

(vi)          Terminated any Benefit Plan such that
a lien could be asserted against any assets of Borrower on account thereof
pursuant to ERISA.

(vii)         Have any obligation under any Benefit
Plan which is a multi-employer plan within the meaning of Section 4001(a) of
ERISA for withdrawal liability.

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(b)           Neither
any Borrower nor any ERISA Affiliate shall ever engage in any action of the
type described in Section 5.13(a) to the extent that any of the foregoing would
have a material adverse effect on the Borrower taken as a whole.

5.14         Environmental Condition.  Except as set forth on Schedule 5.14,
(a) none of Borrower’s properties or assets have ever been used by
Borrower or by previous owners or operators in the disposal of, or to produce,
store, handle, treat, release, or transport, any Hazardous Materials, where
such production, storage, handling, treatment, release or transport was in violation,
in any material respect, of applicable Environmental Law, (b)  none of
Borrower’s properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a Hazardous
Materials disposal site, (c)  Borrower has not received notice that a Lien
arising under any Environmental Law has attached to any revenues or to any Real
Property owned or operated by Borrower, and (d)  Borrower has not received
a summons, citation, notice, or directive from the Environmental Protection
Agency or any other federal or state governmental agency concerning any action
or omission by Borrower resulting in the releasing or disposing of Hazardous
Materials into the environment.

5.15         Brokerage Fees.  Borrower has not utilized the services of any
broker or finder in connection with Borrower’s obtaining financing from Lender
under this Agreement and no brokerage commission or finders fee is payable by
Borrower in connection herewith.

5.16         Intellectual Property.  Borrower owns, or holds licenses in, all
trademarks, trade names, copyrights, patents, patent rights, and licenses that
are necessary to the conduct of its business as currently conducted.  Attached hereto as Schedule 5.16 is a
true, correct, and complete listing of all material patents, patent
applications, trademarks, trademark applications, copyrights, and copyright
registrations as to which Borrower is the owner or is an exclusive licensee.

5.17         Leases.  Borrower enjoys peaceful and undisturbed
possession under all leases material to the business of Borrower and to which
Borrower is a party or under which Borrower is operating.  All of such leases are valid and subsisting
and no material default by Borrower exists under any of them.

5.18         DDAs.  Set forth on Schedule 5.18 are all of
the DDAs of Borrower, including, with respect to each depositary (i) the
name and address of that depositary, and (ii) the account numbers of the
accounts maintained with such depositary.

5.19         Credit Card/Payment Processing.  Set forth on Schedule 5.19 are all of
Borrower’s Credit Card/Payment Processors and all arrangements to which
Borrower is a party with respect to the payment to Borrower of the proceeds of
all credit card charges for sales by Borrower, and including with respect to
each such Credit Card Processor (i) the name and address of that processor
and (ii) the account number assigned to Borrower by such Processor.

5.20         Indebtedness.  Set forth on Schedule 5.20 is a true
and complete list of all Indebtedness of Borrower outstanding immediately prior
to the Closing Date that is to remain outstanding after the Closing Date.  Such Schedule accurately reflects the
aggregate principal amount of such Indebtedness and the principal terms
thereof.

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5.21         Payment of Taxes.  (a) all tax returns required to be filed
by Borrower have been timely filed and (b) all taxes upon Borrower or its
properties, assets, income and franchises (including real property taxes and
payroll taxes) but not subject of a Permitted Protest have been paid prior to
delinquency.

5.22         Complete Disclosure.  All factual information (taken as a whole)
furnished by or on behalf of Borrower in writing to Lender (including all
information contained in the Schedules hereto or in the other Loan Documents)
for purposes of or in connection with this Agreement, the other Loan Documents
or any transaction contemplated herein or therein is, and all other such
factual information (taken as a whole) hereafter furnished by or on behalf of
Borrower in writing to the Lender or Lender will be, true and accurate in all
material respects on the date as of which such information is dated or
certified and not incomplete by omitting to state any fact necessary to make
such information (taken as a whole) not misleading in any material respect at
such time in light of the circumstances under which such information was
provided.  On the Closing Date, the
Business Plan represents, and as of the date on which any other Business Plan
is delivered to Lender, such additional Business Plans represent Borrower’s
good faith best estimate of its future performance for the periods covered
thereby.

5.23         AML Laws and Regulations.  The Borrower has implemented polices,
procedures and controls that are reasonably designed to comply with AML Laws
and Regulations.

6.             AFFIRMATIVE COVENANTS.

Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until full and final payment of the
Obligations, Borrower shall do all of the following:

6.1           Accounting System.  Maintain a system of accounting that enables
Borrower to produce financial statements in accordance with GAAP and maintain
records pertaining to the Collateral that contain information as from time to
time reasonably may be requested by Lender. 
Borrower also shall keep an inventory reporting system that shows all
additions, sales, claims, returns, and allowances with respect to the
Inventory.

6.2           Collateral Reporting.  Provide Lender with the documents set forth
on Schedule 6.2 in accordance with the delivery schedule set forth
thereon, by electronic transmission in a format to be designated by Lender.

6.3           Financial Statements, Reports,
Certificates.  Deliver to Lender:

(a)           as
soon as available, but in any event within 30 days (unless otherwise noted )
after the end of each month during each of Borrower’s fiscal years,

(i)            a company prepared consolidated
balance sheet, income statement, and statement of cash flow covering Borrower’s
operations during such period,

(ii)           on a monthly basis and no later than
fifteen (15) days after the end of the applicable month, the Borrower’s stock
ledger and accounts payable aging and a stock ledger to general ledger
reconciliation of inventory and any related documentation requested by Lender.

 

(iii)          a certificate signed by the chief
financial officer of Borrower to the effect that:

(A)                              the
financial statements delivered hereunder have been prepared in accordance with
GAAP (except for the lack of footnotes and being subject to year-end audit
adjustments) and fairly present in all material respects the financial
condition of Borrower,

(B)                                the
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents are true and correct in all material respects on and as of
the date of such certificate, as though made on and as of such date (except to
the extent that such representations and warranties relate solely to an earlier
date), and

(C)                                there
does not exist any condition or event that constitutes a Default or Event of
Default (or, to the extent of any non-compliance, describing such
non-compliance and what action Borrower has taken, are taking, or propose to
take with respect thereto), and

(iv)          for each month that is the date on
which a financial covenant in Section 7.21 is to be tested, a Compliance
Certificate demonstrating, in reasonable detail, compliance at the end of such
period with the applicable financial covenants contained in Section 7.21,
and

(v)           by 1:00 p.m. on the date of each
proposed Borrowing and updated on a weekly basis every Thursday, a Borrowing
Base Certificate accompanied by a schedule evidencing Net Excess Availability
on a rolling 90-day basis (or such lesser number of days as this Agreement has
been in effect), which schedule shall be used to determine Net Excess
Availability and such other information and backup as requested by Lender.  Such Borrowing Base Certificate may be sent
to Lender by facsimile or electronic mail means but the original thereof must
be forwarded to Lender on the date of such transmission.

(b)           as
soon as available, but in any event within 90 days after the end of each of
Borrower’s fiscal years,

(i)            financial statements of Borrower for
each such fiscal year, audited by independent certified public accountants
reasonably acceptable to Lender and certified, without any qualifications, by
such accountants to have been prepared in accordance with GAAP (such audited
financial statements to include a balance sheet, income statement, and
statement of cash flow and, if prepared, such accountants’ letter to
management), and

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(ii)           a certificate of such accountants
addressed to Lender and the Lenders stating that such accountants do not have
knowledge of the existence of any Default or Event of Default under Section
7.21,

(c)           as
soon as available, but in any event no later than 30 days prior to the start of
each of Borrower’s fiscal years, a proposed revised Business Plan for the
forthcoming three (3) years, year by year, and for the two (2) forthcoming
fiscal years, month by month, which proposed 
revised Business Plan shall be acceptable to Lender and certified by the
chief financial officer of Borrower as being such officer’s good faith best
estimate of the financial performance of Borrower during the period covered
thereby.  Lender may in its Permitted
Discretion accept or reject such revised proposed Business Plan in substitution
for Exhibit C hereto.  As a result of its
review of such proposed revised Business Plan, Lender may, but shall not be
under any obligation to amend, modify or expand Reserves and/or any of the
covenants set forth in Section 7.21. 
In the event that an acceptable proposed revised Business Plan is not
timely delivered as required under this section, in addition to, and not in
limitation of, Lender’s rights hereunder, then, in Lender’s Permitted
Discretion, existing Reserves and covenants may continue to apply and be
binding hereunder, or such Reserves and covenants may be amended, modified or
expanded.

(d)           if
and when filed by Borrower,

(i)            10-Q quarterly reports, Form 10-K
annual reports, and Form 8-K current reports,

(ii)           any other filings made by Borrower
with the SEC,

(iii)          copies of Borrower’s federal income
tax returns, and any amendments thereto, filed with the Internal Revenue
Service, and

(iv)          any other information that is provided
by Borrower to its shareholders generally,

(e)           if
and when filed by Borrower and as requested by Lender, satisfactory evidence of
payment of applicable excise taxes in each jurisdiction in which (i) 
Borrower conducts business or is required to pay any such excise tax, and
(ii) where any Borrower’s failure to pay any such applicable excise tax
would result in a Lien on the properties or assets of such Borrower,

(f)            as
soon as Borrower has knowledge of any event or condition that constitutes a
Default or an Event of Default, notice thereof and a statement of the curative
action that Borrower proposes to take with respect thereto, and

(g)           upon
the request of Lender, any other report reasonably requested relating to the
financial condition of Borrower.

In addition to the financial statements referred to
above, Borrower agrees to deliver financial statements prepared on both a
consolidated and consolidating basis and Borrower agrees that its independent
certified public accountants are authorized to communicate with 

 -51-
 

 

 

Lender and to release to Lender whatever financial
information concerning Borrower that Lender reasonably may request.  Borrower waives the right to assert a
confidential relationship, if any, it may have with any accounting firm or
service bureau in connection with any information requested by Lender pursuant
to or in accordance with this Agreement, and agrees that Lender may contact
directly any such accounting firm or service bureau in order to obtain such
information.

6.4           AML Laws and Regulations.  Comply with all applicable AML Laws and
Regulations.

6.5           Return.  Cause returns and allowances as between
Borrower and their Account Debtors, to be on the same basis and in accordance
with the usual customary practices of Borrower, as they exist at the time of
the execution and delivery of this Agreement. 
If, at a time when no Event of Default has occurred and is continuing,
any Account Debtor returns any Inventory to Borrower, Borrower promptly shall
determine the reason for such return and, if Borrower accepts such return,
issue a credit memorandum (with a copy to be sent to Lender) in the appropriate
amount to such Account Debtor.  If, at a
time when an Event of Default has occurred and is continuing, any Account
Debtor returns any Inventory to Borrower, Borrower promptly shall determine the
reason for such return and, if Lender consents (which consent shall not be
unreasonably withheld), issue a credit memorandum (with a copy to be sent to
Lender) in the appropriate amount to such Account Debtor.

6.6           Maintenance of Properties.  Maintain and preserve all of its properties
which are necessary or useful in the proper conduct of its business in good
working order and condition, ordinary wear and tear excepted, and comply at all
times with the provisions of all leases to which it is a party as lessee, so as
to prevent any loss or forfeiture thereof or thereunder.

6.7           Taxes.  Cause all assessments and taxes, whether
real, personal, or otherwise, due or payable by, or imposed, levied, or
assessed against Borrower or any of its assets to be paid in full, before
delinquency or before the expiration of any extension period, except to the
extent that the validity of such assessment or tax shall be the subject of a
Permitted Protest.  Borrower will make
timely payment or deposit of all tax payments and withholding taxes required of
it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A.,
state disability, and local, state, and federal income taxes, and will, upon
request, furnish Lender with proof satisfactory to Lender indicating that
Borrower has made such payments or deposits. 
Borrower shall deliver satisfactory evidence of payment of applicable
excise taxes in each jurisdictions in which Borrower is required to pay any
such excise tax.

6.8           Insurance.

(a)           At
Borrower’s expense, maintain insurance respecting its property and assets
wherever located, covering loss or damage by fire, theft, explosion, and all
other hazards and risks as ordinarily are insured against by other Persons
engaged in the same or similar businesses. 
Borrower also shall maintain business interruption, public liability,
and product liability insurance, as well as insurance against larceny,
embezzlement, and criminal misappropriation. 
All such policies of insurance shall be in such amounts and with such
insurance companies as are reasonably satisfactory to Lender.  Borrower shall deliver copies of 

 -52-
 

 

 

all such policies to Lender with a satisfactory lender’s
loss payable endorsement naming Lender as sole loss payee or additional
insured, as appropriate.  Each policy of
insurance or endorsement shall contain a clause requiring the insurer to give
not less than 30 days prior written notice to Lender in the event of
cancellation of the policy for any reason whatsoever.

(b)           Borrower
shall give Lender prompt notice of any loss covered by such insurance.  Lender shall have the exclusive right to
adjust any losses payable under any such insurance policies in excess of
$50,000, without any liability to Borrower whatsoever in respect of such
adjustments.  Any monies received as
payment for any loss under any insurance policy mentioned above (other than
liability insurance policies) or as payment of any award or compensation for
condemnation or taking by eminent domain, shall be paid over to Lender to be
applied at the option of Lender either to the prepayment of the Obligations or
shall be disbursed to Borrower under staged payment terms reasonably
satisfactory to Lender for application to the cost of repairs, replacements, or
restorations. Any such repairs, replacements, or restorations shall be effected
with reasonable promptness and shall be of a value at least equal to the value
of the items or property destroyed prior to such damage or destruction.

(c)           Borrower
shall not take out separate insurance concurrent in form or contributing in the
event of loss with that required to be maintained under this Section 6.8,
unless Lender is included thereon as named insured with the loss payable to
Lender under a lender’s loss payable endorsement or its equivalent.  Borrower immediately shall notify Lender
whenever such separate insurance is taken out, specifying the insurer
thereunder and full particulars as to the policies evidencing the same, and
copies of such policies promptly shall be provided to Lender.

6.9           Location of Inventory and
Equipment.  Keep the Inventory and
Equipment only at the locations identified on Schedule 5.5; provided,
however, that Borrower may amend Schedule 5.5 so long as such
amendment occurs by written notice to Lender not less than 30 days prior to the
date on which the Inventory or Equipment is moved to such new location, so long
as such new location is within the continental United States, and so long as,
at the time of such written notification, Borrower provides any financing
statements, fixture filings or other documents necessary to perfect and
continue perfected the Lender’s Liens on such assets and also provides to
Lender a Bailee Acknowledgment or Collateral Access Agreement, if and as
applicable.

6.10         Compliance with Laws.  Comply with the requirements of all
applicable laws, rules, regulations, and orders of any Governmental Authority,
including, without limitation, the Fair Labor Standards Act and the Americans
With Disabilities Act, and all laws pertaining to the authenticity of
Inventory.

6.11         Leases.  Pay when due all rents and other amounts
payable under any leases to which Borrower is a party or by which Borrower’s
properties and assets are bound, unless such payments are the subject of a
Permitted Protest.

6.12         Brokerage Commissions.  Pay any and all brokerage commission or
finders fees incurred in connection with or as a result of Borrower’s obtaining
financing from the Lender under this Agreement. 
Borrower agrees and acknowledges that payment of all such brokerage
commissions or finders fees shall be the sole responsibility of Borrower, and
Borrower agrees to

 

 -53-

 

 

indemnify, defend, and hold the Lender harmless from
and against any claim of any broker or finder arising out of Borrower’s
obtaining financing from the Lender under this Agreement.

6.13         Existence.  At all times preserve and keep in full force
and effect Borrower’s valid existence and good standing and any rights and
franchises material to Borrower’s businesses.

6.14         Environmental.  Keep any property either owned or operated by
Borrower free of any Environmental Liens or post bonds or other financial assurances
sufficient to satisfy the obligations or liability evidenced by such
Environmental Liens, (b) comply, in all material respects, with
Environmental Laws and provide to Lender documentation of such compliance which
Lender reasonably requests, (c) promptly notify Lender of any release of a
Hazardous Material of any reportable quantity from or onto property owned or
operated by Borrower and take any Remedial Actions required to abate said
release or otherwise to come into compliance with applicable Environmental Law,
and (d) promptly provide Lender with written notice within 10 days of the
receipt of any of the following: 
(i) notice that an Environmental Lien has been filed against any of
the real or personal property of Borrower, (ii) commencement of any
Environmental Action or notice that an Environmental Action will be filed
against Borrower, and (iii) notice of a violation, citation, or other
administrative order.

6.15         Investment Proceeds, Etc.  The proceeds of any Investment from any
source in Borrower or any Subsidiary of Borrower and any other funds received
by Borrower other than from ordinary course business operations (including,
without limitation, proceeds of loans, issuance of debt, capital contributions,
sale of stock, tax refunds, damage awards, or insurance or condemnation
proceeds) shall be deposited directly into the Concentration Account to be
applied on account of the Obligations in accordance with Section 2.4(b).

6.16         Foreign Assets Control Regulations,
Etc.  None of the requesting or borrowing
of the Loans or the requesting or issuance, extension or renewal of any Letter
of Credit or the use of the proceeds of any thereof will violate the Trading
With the Enemy Act (50 US §1 et seq., as amended) (the “Trading With the Enemy
Act”) or any of the foreign assets control regulations of the United States
Treasury Department (31 I.E., Subtitle B, Chapter V, as amended) (the “Foreign
Assets Control Regulations”) or any enabling legislation or executive order
relating thereto (including, but not limited to (a) Executive order 13224
of September 21, 2001 Blocking Property and Prohibiting Transactions With
Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg.
49079 (2001)) (the “Executive Order”) and (b) the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (Public Law 107-56). 
No Borrower nor any of their Affiliates is or will become a “blocked
person” as described in the Executive Order, the Trading with the Enemy Act or
the Foreign Assets Control Regulations or engages or will engage in any
dealings or transactions, or be otherwise associated, with any such “blocked
person”.

6.17         Disclosure Updates.  Promptly and in no event later than 3
Business Days after obtaining knowledge thereof, (a) notify Lender if any
written information, exhibit, or report furnished to the Lender contained any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements contained therein not misleading in light of
the 

 -55-
 

 

 

circumstances in which made, and (b) correct any
defect or error that may be discovered therein or in any Loan Document or in
the execution, acknowledgement, filing, or recordation thereof.

7.             NEGATIVE COVENANTS.

Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until full and final payment of the
Obligations, Borrower shall not do any of the following:

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

(a)           Indebtedness
evidenced by this Agreement and the other Loan Documents;

(b)           Indebtedness
set forth on Schedule 5.20;

(c)           Permitted
Purchase Money Indebtedness; and

(d)           refinancings,
renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of
this Section 7.1 (and continuance or renewal of any Permitted Liens
associated therewith) so long as: (i) the terms and conditions of such
refinancings, renewals, or extensions do not, in Lender’s reasonable judgment,
materially impair the prospects of repayment of the Obligations by Borrower or
materially impair Borrower’s creditworthiness, (ii) such refinancings,
renewals, or extensions do not result in an increase in the principal amount of
the Indebtedness so refinanced, renewed, or extended, (iii) such
refinancings, renewals, or extensions do not result in a shortening of the
average weighted maturity of the Indebtedness so refinanced, renewed, or extended,
nor are they on terms or conditions, that, taken as a whole, are materially
more burdensome or restrictive to Borrower, and (iv) if the Indebtedness
that is refinanced, renewed, or extended was subordinated in right of payment
to the Obligations, then the terms and conditions of the refinancing, renewal,
or extension Indebtedness must be include subordination terms and conditions
that are at least as favorable to the Lender as those that were applicable to
the refinanced, renewed, or extended Indebtedness.

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

7.3           Restrictions
on Fundamental Changes.

(a)           Enter
into any merger, consolidation, reorganization, or recapitalization, or
reclassify its Stock or otherwise change Borrower’s type of organization,
jurisdiction of organization or other legal or corporate structure, except with
the prior written consent of Lender.

(b)           Liquidate,
wind up, or dissolve itself (or suffer any liquidation or dissolution).

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(c)           Convey,
sell, lease, license, assign, transfer, or otherwise dispose of, in one transaction
or a series of transactions, all or any substantial part of its assets.

7.4           Disposal of Assets.  Other than Permitted Dispositions, convey,
sell, lease, license, assign, transfer, or otherwise dispose of its of the
assets.

7.5           Change of Name or Address.  Change Borrower’s name or organizational
identification number or relocate its chief executive office to a new location;
provided, however, that Borrower may change its name or chief
executive office location upon at least 30 days prior written notice by
Borrower to Lender of such change and so long as, at the time of such written
notification, Borrower provides (i) any financing statements, fixture
filings or other agreements or documents necessary to perfect and continue
perfected Lender’s Liens and (ii) in the case of such a relocation, if the
new chief executive office location is leased by Borrower, a Collateral Access
Agreement with respect thereto.

7.6           Guarantee.  Guarantee or otherwise become in any way
liable with respect to the obligations of any third Person except by
endorsement of instruments or items of payment for deposit to the account of
Borrower or which are transmitted or turned over to Lender.

7.7           Nature of Business.  Make any change in the principal nature of
Borrower’s business.

7.8           Prepayments and Amendments.  Except in connection with a refinancing
permitted by Section 7.1(d), directly or indirectly, amend, modify, alter,
increase, or change any of the terms or conditions of any agreement,
instrument, document, indenture, or other writing evidencing or concerning
Indebtedness permitted under Sections 7.1(b) or (c).

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

7.10         Consignments.  Consign any Inventory or sell any Inventory
on bill and hold, sale or return, sale on approval, or other conditional terms
of sale.

7.11         Restricted Payments.  Declare, order, pay or make any Restricted
Payment or set aside any sum or property therefor or exercise any set-off or
similar rights of Borrower, if any, with respect to any indebtedness that is
the subject of an intercreditor and subordination agreement.

7.12         Accounting Methods.  Modify or change its method of accounting
(other than as may be required to conform to GAAP) or enter into, modify, or terminate
any agreement currently existing, or at any time hereafter entered into with
any third party accounting firm or service bureau for the preparation or
storage of Borrower’s accounting records without said accounting firm or
service bureau agreeing to provide Lender information regarding the Collateral
or Borrower’s financial condition.

7.13         Investments.  Except for Permitted Investments, directly or
indirectly, make or acquire any Investment, or incur any liabilities (including
contingent obligations) for or in connection with any Investment; provided,
however, that Borrower shall not have Permitted 

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Investments in Cash Equivalents, deposit accounts or
Securities Accounts outstanding at any one time unless Borrower, and the
applicable securities intermediary, bank or other entity have entered into a
Control Agreement or similar arrangements governing such Permitted Investments,
as Lender shall determine in its Permitted Discretion, to perfect (and further
establish) the Lender’s Liens in such Permitted Investments.

7.14         Transactions with Affiliates.  Directly or indirectly enter into or permit
to exist any transaction with any Affiliate of Borrower except for the Service
Contracts on transactions that are in the ordinary course of Borrower’s
business, upon fair and reasonable terms, that are fully disclosed to Lender,
and that are no less favorable to Borrower than would be obtained in an arm’s
length transaction with a non-Affiliate.

7.15         Location Openings.  Commit to open any location at which Borrower
would maintain, offer for sale or store any Personal Property Collateral or
intend to offer for sale or store any Personal Property of the Collateral
without Lender’s prior written consent.

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

7.17         Compensation.  Increase the annual fee or per-meeting fees
paid to the members of its Board of Directors during any year by more than 15%
over the prior year; pay or accrue total cash compensation, during any year, to
its officers and senior management employees in an aggregate amount in excess
of 115% of that paid or accrued in the prior year.

7.18         Use of Proceeds.  Use the proceeds of the Advances for any
purpose other than (a) on the Closing Date, (i) to repay in full the
outstanding principal, accrued interest, and accrued fees and expenses owing to
any existing lender, and (ii) to pay transactional fees, costs, and
expenses incurred in connection with this Agreement, the other Loan Documents,
and the transactions contemplated hereby and thereby, and (b) thereafter,
consistent with the terms and conditions hereof, for its lawful and permitted
purposes.

7.19         Inventory and Equipment with Bailees.  The Inventory and Equipment shall not at any
time now or hereafter be stored with a bailee, warehouseman, or similar party
unless Lender has granted its prior written consent and Borrower has delivered
to Lender a Bailee Acknowledgment with respect to the applicable Inventory
and/or Equipment.

7.20         Securities Accounts .  Establish or maintain any Securities Account
unless Lender shall have received a Control Agreement in respect of such
Securities Account.  Borrower shall not
transfer assets out of any Securities Account.

7.21         Financial Covenants.  Fail to maintain, observe or comply any of
the covenants set forth on Schedule 7.21.

7.22         Authentic Inventory.  Sell or offer to sell any Inventory or other
goods which are not Authentic.

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8.             EVENTS OF DEFAULT.

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

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

8.2           Failure to Perform.  If Borrower fails to perform, keep, or
observe any term, provision, condition, covenant, or agreement contained in
this Agreement or in any of the other Loan Documents;

8.3           Seizure of Assets.  If any material portion of Borrower’s assets
is attached, seized, subjected to a writ or distress warrant, levied upon, or
comes into the possession of any third Person;

8.4           Insolvency by  Borrower.  If (a) in Lender’s reasonable judgment,
Borrower becomes insolvent, or (b) an Insolvency Proceeding is commenced by
Borrower;

8.5           Insolvency Against Borrower.  If an Insolvency Proceeding is commenced
against Borrower, and any of the following events occur:  (a) Borrower consents to the institution
of the Insolvency Proceeding against it, (b) the petition commencing the
Insolvency Proceeding is not timely controverted, (c) the petition
commencing the Insolvency Proceeding is not dismissed within 45 calendar days
of the date of the filing thereof; provided, however, that,
during the pendency of such period, Lender (including any successor agent) and
each other member of the Lender shall be relieved of any obligation to extend
credit or make any other financial accommodation hereunder, (d) an interim
trustee is appointed to take possession of all or any substantial portion of
the properties or assets of, or to operate all or any substantial portion of
the business of, Borrower, (e) an order for relief shall have been entered
therein;

8.6           Restraint of Business.  If Borrower is enjoined, restrained, or in
any way prevented by court order from continuing to conduct all or any material
part of its business affairs;

8.7           Liens.  If a notice of Lien, levy, or assessment is
filed of record with respect to Borrower’s assets by the United States, or any
department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a Lien, whether choate or
otherwise, upon Borrower’s assets and the same is not paid on the payment date
thereof;

8.8           Judgments.  If a judgment or other claim becomes a Lien
or encumbrance upon any material portion of Borrower’s properties or assets;

8.9           Default of Material Agreement.  If there is a default in any material
agreement to which Borrower is a party and such default (a) occurs at the
final maturity of the obligations 

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thereunder or (b) results in a right by the other
party thereto, irrespective of whether exercised, to accelerate the maturity of
Borrower’s obligations thereunder, to terminate such agreement, or to refuse to
renew such agreement pursuant to an automatic renewal right therein;

8.10         Loss of Business.  Any event occurs, whether or not insured or
insurable, as a result of which revenue-producing activities cease or are
substantially curtailed at any facility of Borrower generating more than 10% of
Borrowers consolidated revenues for Borrowers fiscal year preceding such event
and such cessation or curtailment continues for more than 20 days.

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

8.12         Misrepresentation.  If any material misstatement or
misrepresentation exists now or hereafter in any warranty, representation,
statement, or Record made to the Lender by Borrower, or any officer, employee,
agent, or director of Borrower;

8.13         Rescission Offer. If the
Borrower is required by any Governmental Authority to make or otherwise makes
or is required to make any rescission offer payment or any other Restricted
Payment (other than a Permitted Rescission Offer Payment) or is subject to any
material penalty for failure to make such rescission offer payment or other
Restricted Payment;

8.14         Failure of Lien.  If this Agreement or any other Loan Document
that purports to create a Lien, shall, for any reason, fail or cease to create
a valid and perfected and, except to the extent permitted by the terms hereof
or thereof, first priority Lien on or security interest in the Collateral
covered hereby or thereby;

8.15         Nullification of Loan Documents.  Any provision of any Loan Document shall at
any time for any reason be declared to be null and void, or the validity or
enforceability thereof shall be contested by Borrower, or a proceeding shall be
commenced by Borrower, or by any Governmental Authority having jurisdiction
over Borrower, seeking to establish the invalidity or unenforceability thereof,
or  Borrower shall deny that Borrower has
any liability or obligation purported to be created under any Loan Document.

8.16         Material Adverse Change.  If there shall occur a Material Adverse
Change.

9.             THE LENDER’S RIGHTS AND
REMEDIES.

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

(a)           Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable provided, however, in the event of the occurrence of
an Event of Default pursuant to Sections 8.4 or 8.5, all of the
obligations shall be immediately due and payable;

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

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

(d)           Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Lender considers advisable, and in
such cases, Lender will credit the Loan Account with only the net amounts
received by Lender in payment of such disputed Accounts after deducting all
Lender Expenses incurred or expended in connection therewith;

(e)           Cause Borrower to hold all returned Inventory in trust for
the Lender, segregate all returned Inventory from all other assets of Borrower
or in Borrowers possession and conspicuously label said returned Inventory as
the property of the Lender;

(f)            Without notice to or demand upon Borrower, make such
payments and do such acts as Lender considers necessary or reasonable to
protect its security interests in the Collateral.  Borrower agrees to assemble the Personal
Property Collateral if Lender so requires, and to make the Personal Property
Collateral available to Lender at a place that Lender may designate which is
reasonably convenient to both parties. 
Borrower authorizes Lender to enter the premises where the Personal
Property Collateral is located, to take and maintain possession of the Personal
Property Collateral, or any part of it, and to pay, purchase, contest, or
compromise any Lien that in Lender’s determination appears to conflict with the
Lender’s Liens and to pay all expenses incurred in connection therewith and to
charge Borrowers Loan Account therefor. 
With respect Borrower’s owned or leased premises, Borrower hereby grants
Lender a license to enter into possession of such premises and to occupy the
same, without charge, in order to exercise any of the Lender’s rights or
remedies provided herein, at law, in equity, or otherwise;

(g)           Without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of the Code), set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by the
Lender (including any amounts received in the Cash Management Accounts), or
(ii) Indebtedness at any time owing to or for the credit or the account of
Borrower held by the Lender;

(h)           Hold, as cash collateral, any and all balances and
deposits of Borrower held by the Lender, and any amounts received in the Cash
Management Accounts, to secure the full and final repayment of all of the
Obligations;

(i)            Notify any securities intermediary to liquidate the
applicable Securities Account or any related Investment Property maintained or
held thereby and remit the proceeds thereof to the Concentration Account;

(j)            Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Personal Property Collateral. 

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Borrower hereby grants to Lender a license or other
right to use, without charge, such Borrower’s labels, patents, copyrights,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Personal Property
Collateral, in completing production of, advertising for sale, and selling any
Personal Property Collateral and Borrowers rights under all licenses and all
franchise agreements shall inure to the Lender’s benefit;

(k)           Sell, or cause to be sold, the Collateral at either a
public or private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places
(including Borrowers premises) as Lender determines is commercially reasonable,
including, conduct one or more going out of business sales, in the Lender’s own
right or by one or more agents and contractors which may be conducted upon any
premises owned, leased, or occupied by Borrower.  To the extent permitted by law, Lender and
any such agent or contractor, in conjunction with any such sale, may augment
the Inventory with other goods (all of which other goods shall remain the sole
property of Lender or such agent or contractor); and any amounts realized from
the sale of such goods which constitute augmentations to the Inventory (net of
an allocable share of the costs and expenses incurred in their disposition)
shall be the sole property of the Lender or such agent or contractor and
neither Borrower nor any Person claiming under or in right of Borrower shall have
any interest therein..  It is not
necessary that the Collateral be present at any such sale;

(l)            Lender shall give notice of the disposition of the
Collateral as follows:

(i)            Lender
shall give Borrower  a notice in writing
of the time and place of public sale, or, if the sale is a private sale or some
other disposition other than a public sale is to be made of the Collateral, the
time on or after which the private sale or other disposition is to be made and
Borrower agrees that such written notice shall satisfy all requirements for
notice to Borrower which are imposed under the UCC or other applicable law with
respect to the exercise of the Lender’s rights and remedies upon default.
Lender may purchase the Collateral, or any portion of it at any sale held under
this Article.

(ii)           The
notice shall be personally delivered or mailed, postage prepaid, to Borrower as
provided in Section 12, at least 10 days before the earliest time of
disposition set forth in the notice; no notice needs to be given prior to the disposition
of any portion of the Collateral that is perishable or threatens to decline
speedily in value or that is of a type customarily sold on a recognized market;

(m)          Lender may credit bid and purchase at any public sale;

(n)           Lender may seek the appointment of a receiver or keeper to
take possession of all or any portion of the Collateral or to operate same and,
to the maximum extent permitted by law, may seek the appointment of such a
receiver without the requirement of prior notice or a hearing;

(o)           Lender shall have all other rights and remedies available
to it at law or in equity pursuant to any other Loan Documents; and

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

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

10.          TAXES
AND EXPENSES.

If Borrower fails to pay any monies (whether taxes,
assessments, insurance premiums, or, in the case of leased properties or
assets, rents or other amounts payable under such leases) due to third Persons,
or fails to make any deposits or furnish any required proof of payment or
deposit, all as required under the terms of this Agreement, then, Lender, in
its sole discretion and without prior notice to Borrower, may do any or all of
the following:  (a) make payment of
the same or any part thereof, (b) set up such reserves in Borrowers Loan Account
as Lender deems necessary to protect the Lender from the exposure created by
such failure, or (c) in the case of the failure to comply with Section
6.8 hereof, obtain and maintain insurance policies of the type described in
Section 6.8 and take any action with respect to such policies as Lender
deems prudent.  Any such amounts paid by
Lender shall constitute Lender Expenses and any such payments shall not
constitute an agreement by the Lender to make similar payments in the future or
a waiver by the Lender of any Event of Default under this Agreement.  Lender need not inquire as to, or contest the
validity of, any such expense, tax, or Lien and the receipt of the usual
official notice for the payment thereof shall be conclusive evidence that the
same was validly due and owing.

11.          WAIVERS;
INDEMNIFICATION.

11.1         Demand; Protest; Special Damages;
etc.  Borrower waives (a) demand,
protest, notice of protest, notice of default or dishonor, notice of payment
and nonpayment, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of documents, instruments, chattel paper, and guarantees
at any time held by the Lender on which Borrower may in any way be liable; and
(b) any claim to consequential, special or punitive damages.

11.2         The Lender’s Liability for
Collateral.  Borrower hereby agrees
that:  (a) so long as the Lender
complies with its obligations, if any, under the Code, Lender shall not in any
way or manner be liable or responsible for: 
(i) the safekeeping of the Collateral, (ii) any loss or damage
thereto occurring or arising in any manner or fashion from any cause,
(iii) any diminution in the value thereof, or (iv) any act or default
of any carrier, warehouseman, bailee, forwarding agency, or other Person, and
(b) all risk of loss, damage, or destruction of the Collateral shall be
borne by Borrower.

11.3         Indemnification.  Borrower shall pay, indemnify, defend, and
hold the Lender-Related Persons, each Participant, and each of their respective
officers, directors, employees, 

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agents, and attorneys-in-fact (each, an “Indemnified Person”) harmless (to the fullest extent
permitted by law) from and against any and all claims, demands, suits, actions,
investigations, proceedings, and damages, and all reasonable attorneys fees and
disbursements and other costs and expenses actually incurred in connection
therewith (as and when they are incurred and irrespective of whether suit is
brought), at any time asserted against, imposed upon, or incurred by any of
them (a) in connection with or as a result of or related to the execution,
delivery, enforcement, performance, or administration of this Agreement, any of
the other Loan Documents, or the transactions contemplated hereby or thereby,
and (b) with respect to any investigation, litigation, or proceeding
related to this Agreement, any other Loan Document, or the use of the proceeds
of the credit provided hereunder (irrespective of whether any Indemnified
Person is a party thereto), or any act, omission, event, or circumstance in any
manner related thereto (all the foregoing, collectively, the “Indemnified Liabilities”). 
The foregoing to the contrary notwithstanding, Borrower shall have no
obligation to any Indemnified Person under this Section 11.3
with respect to any Indemnified Liability that a court of competent
jurisdiction finally determines to have resulted from the gross negligence or
willful misconduct of such Indemnified Person. 
This provision shall survive the termination of this Agreement and any
repayment of the Obligations.  If any
Indemnified Person makes any payment to any other Indemnified Person with
respect to an Indemnified Liability as to which Borrower was required to
indemnify the Indemnified Person receiving such payment, the Indemnified Person
making such payment is entitled to be indemnified and reimbursed by Borrower
with respect thereto.  WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL
APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH
IN WHOLE OR IN PART CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF
SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON.

12.          NOTICES.

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

 

	
  If to Borrower:

  	
  Bidz.com, Inc.

  3562 Eastham Drive

  Culver City, CA 90232

  Attention: Lawrence Kong,

  Chief Financial Officer

  Fax No.: (310) 280-7382

  Email: lawrence@bidz.com

   

  

 

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  With copies to:

  	
  Petillon and Hiraide

  Del Amo Financial Center

  Suite 1260

  21515 Hawthorne Boulevard

  Torrance, CA 90505

  Attention: Mark T. Hirade, Esq.

  Fax No.: (310) 543-0500

  Email: mhiraide@corplawp-h.com

   

  
	
  If to Lender

  	
  LaSalle Retail Finance

  25 Braintree Hill Office Park

  Suite 205

  Braintree, MA 
  02169

  Attention: Robert A. Barnhard, Senior Vice President
  and Group Head

  Fax No.: (781) 353-6101

  Email: robert.barnhard@abnamro.com

   

  and

  
	
   

  	
  LaSalle Retail
  Finance

  11921 Freedom Drive, Suite 550

  Reston, VA 20190

  Attention: Barbara Anderson, Senior Vice President

  Fax No.: (703) 925-5909

  Email: barbara.anderson@abnamro.com

  
	
  With copies to:

  	
  Goulston & Storrs, P.C.

  400 Atlantic Avenue

  Boston, MA 02110

  Attention: Mary Ellen Welch Rogers, Esq.

  Fax No.: (617) 574-4112

  Email: mrogers@goulstonstorrs.com

  

 

Lender and Borrower may change the address at which
they are to receive notices hereunder, by notice in writing in the foregoing
manner given to the other party.  All
notices or demands sent in accordance with this Section 12, other than
notices by Lender in connection with enforcement rights against the Collateral
under the provisions of the Code, shall be deemed received on the earlier of
the date of actual receipt or 3 Business Days after the deposit thereof in the
mail.  Borrower acknowledges and agrees
that notices sent by the Lender in connection with the exercise of enforcement
rights against Collateral under the provisions of the Code shall be deemed sent
when deposited in the mail or personally delivered, or, where permitted by law,
transmitted by telefacsimile or any other method set forth above.

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

(a)           THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH
OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF
AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO
ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL
BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE COMMONWEALTH OF MASSACHUSETTS.

(b)           THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION
WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED
ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF SUFFOLK,
COMMONWEALTH OF MASSACHUSETTS, PROVIDED, HOWEVER, THAT ANY SUIT
SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT
LENDER’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE LENDER ELECTS TO BRING
SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND.  BORROWER WAIVES, TO THE EXTENT PERMITTED
UNDER APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO ASSERT THE DOCTRINE OF FORUM
NON  CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING
IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b).

(c)           BORROWER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.  BORROWER REPRESENTS THAT IT HAS REVIEWED THIS
WAIVER AND  KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.  IN THE EVENT OF LITIGATION, A COPY OF THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

14.          ASSIGNMENTS AND PARTICIPATIONS;
SUCCESSORS.

14.1         Assignments
and Participations.

(a)           Lender
may assign and delegate to one or more assignees (each an “Assignee”) all, or any ratable part of all, of the
Obligations and the other rights and obligations of Lender hereunder and under
the other Loan Documents, provided, however, that Borrower may
continue to deal solely and directly with Lender in connection with the
interest so assigned to an Assignee until (i) written notice of such
assignment, together with payment instructions, addresses, and related
information with respect to the Assignee, have been given to Borrower, 

 -66-
 

 

 

and (ii)  Lender and its Assignee have delivered
to Borrower an executed Assignment and Acceptance.

(b)           From
and after the date that Lender notifies Borrower that it has received an
executed assignment (i) the Assignee thereunder shall be a party hereto
and, to the extent that rights and obligations hereunder have been assigned to
it pursuant to such Assignment and Acceptance, shall have the rights and
obligations of the Lender under the Loan Documents, and (ii) the assignor
Lender shall relinquish its rights (except with respect to Section 11.3
hereof) and be released from its obligations under this Agreement and Lender
shall cease to be a party hereto and thereto), and such assignment shall affect
a novation between Borrower and the Assignee.

(c)           Lender
may at any time sell to one or more commercial banks, financial institutions,
or other Persons not Affiliates of such Lender (a “Participant”) participating interests in its Obligations
hereunder and under the other Loan Documents; provided, however, that
(i) the Lender shall remain a “Lender” for all purposes of this Agreement
and the other Loan Documents and the Participant receiving the participating
interest in the Obligations and the other rights and interests of the Lender
hereunder shall not constitute a “Lender” hereunder or under the other Loan
Documents and the Lender’s obligations under this Agreement shall remain
unchanged, (ii) the Lender shall remain solely responsible for the
performance of such obligations, and (iii) Borrower shall continue to deal
solely and directly with the original Lender in connection with the Lender’s
rights and obligations under this Agreement and the other Loan Documents.

(d)           In
connection with any such assignment or participation or proposed assignment or
participation, Lender may disclose all documents and information which it now
or hereafter may have relating to Borrower or Borrowers business.

(e)           Any
other provision in this Agreement notwithstanding, Lender may at any time
create a security interest in, or pledge, all or any portion of its rights
under and interest in this Agreement in favor of any Federal Reserve Bank in
accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury
Regulation 31 CFR §203.14, and such Federal Reserve Bank may enforce such
pledge or security interest in any manner permitted under applicable law.

14.2         Successors.  This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties; provided,
however, that Borrower may not assign this Agreement or any rights or
duties hereunder without the Lender’s prior written consent and any prohibited
assignment shall be absolutely void ab initio. 
No consent to assignment by the Lender shall release Borrower from its
obligation to fully pay and perform the Obligations.   Lender may assign this Agreement and the
other Loan Documents and its rights and duties hereunder and thereunder
pursuant to Section 14.1 hereof and, except as expressly required
pursuant to Section 14.1 hereof, no consent or approval by Borrower is
required in connection with any such assignment.

15.          AMENDMENTS; WAIVERS.

15.1         Amendments
and Waivers.  No amendment or waiver
of any provision of this Agreement or any other Loan Document, and no consent
with respect to any departure by 

 -67-
 

 

 

Borrower therefrom, shall be effective unless the same
shall be in writing and signed by the Lender and Borrower  and then any such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given

15.2         No Waivers; Cumulative Remedies.  No failure of Lender to exercise any right,
remedy, or option under this Agreement or, any other Loan Document, or delay
Lender in exercising the same, will operate as a waiver thereof.  No waiver will be effective unless it is in
writing, and then only to the extent specifically stated.  No waiver by Lender on any occasion shall
affect or diminish Lender’s and each Lender’s rights thereafter to require
strict performance by Borrower of any provision of this Agreement.  Lender’s rights under this Agreement and the
other Loan Documents will be cumulative and not exclusive of any other right or
remedy that Lender may have.

16.          GENERAL PROVISIONS.

16.1         Effectiveness.  This Agreement shall be binding and deemed
effective when executed by Borrower and Lender whose signature is provided for
on the signature pages hereof.

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

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

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

16.5         Amendments in Writing.  This Agreement can only be amended by a writing
in accordance with Section 15.1.

16.6         Counterparts; Telefacsimile
Execution.  This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one
and the same Agreement.  Delivery of an
executed counterpart of this Agreement by telefacsimile or by electronic mail
in “pdf” or similar format shall be equally as effective as delivery of an
original executed counterpart of this Agreement.  Any party delivering an executed counterpart
of this Agreement by telefacsimile or by electronic mail in “pdf” or similar
format also shall deliver an original executed counterpart of this Agreement
but the failure to deliver an original executed counterpart shall not affect
the validity, enforceability, and binding effect of this Agreement.  The foregoing shall apply to each other Loan
Document mutatis  mutandis, except as otherwise specifically
provided therein or therefor.

 -68-
 

 

 

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

16.8         USA Patriot Act.  Lender pursuant to the USA PATRIOT Act (Title
III of Pub.L. 107-56 (signed into law October 26, 2001) (the “Act”), hereby
notifies Borrower that pursuant to the requirements of the Act, it is required
to obtain, verify and record information that identifies each person or
corporation who opens an account and/or enters into a business relationship
with it, which information includes the name and address of Borrower and other
information that will allow Lender to identify such person in accordance with
the Act  and any other applicable
law.  Borrower is hereby advised that any
Loans or Letters of Credit hereunder are subject to satisfactory results of
such verification.

16.9         Pledges To Federal Reserve Banks.  Nothing
included in this Agreement shall prevent or limit Lender, to the extent that
Lender is subject to any of the twelve Federal Reserve Banks organized under §4
of the Federal Reserve Act (12 U.S.C. 
§341) from pledging all or any portion of Lender’s interest and rights
under this Agreement, provided, however, neither such pledge nor the enforcement thereof shall
release the Lender from any of its obligations hereunder or under any of the
Loan Documents.

16.10       Confidentiality.  This Agreement and the terms hereof are
confidential, and neither the contents of this Agreement or the details of this
Agreement may be shown or disclosed by Borrower to any bank, finance company or
other lender without the prior written consent of Lender.

16.11       Right to Publish Notice.  Lender may, at its discretion and expense,
publicize or otherwise advertise by so-called “tombstone” advertising or
otherwise Lender’s and Lender’s financing transaction with Borrower.

 -69-
 

 

 

16.12       Credit Inquiries.  Borrower hereby authorizes Lender to
(provided, however, Lender shall incur no liability for the failure to) respond
to credit inquiries concerning Borrower in accordance with Lender’s normal and
customary practices.  Borrower hereby
indemnifies and holds Lender harmless for any action taken by Lender in
reliance upon the foregoing authorization.

16.13       Joint Preparation.  This Agreement has been prepared through the
joint efforts of all the parties. Neither its provisions nor any alleged
ambiguity shall be interpreted or resolved against any party on the ground that
such party’s counsel was the draftsman of this Agreement.  Each of the parties declares that such party
has carefully read this Agreement and the agreements, documents and instruments
being entered into in connection herewith and that such party knows the
contents thereof and signs the same freely and voluntarily.  The parties hereto acknowledge that they have
been represented in negotiations for and preparation of this Agreement and the
agreements, documents and instrument being entered into in connection herewith
by legal counsel of their own choosing, and that each of them has read the same
and had their contents fully explained by such counsel and is fully aware of
their contents and legal effect.

16.14       Right Of Set-Off.  Any
and all deposits or other sums at any time credited by or due to Borrower from
Lender or any Participant or from any Affiliate of any of the foregoing, and
any cash, securities, instruments or other property of Borrower in the possession
of any of the foregoing, whether for safekeeping or otherwise (regardless of
the reason such Person had received the same) shall at all times constitute
security for all Obligations and for any and all obligations of Borrower to
Lender or any Participant or such Affiliate and may be applied or set off
against the Obligations and against such Obligations at any time, whether or
not such are then due and whether or not other collateral is then available to
Lender.

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

[Remainder of page left
blank intentionally.]

 -70-
 

 

 

 

IN WITNESS WHEREOF,
the parties hereto have caused this Agreement to be executed and delivered as
of the date first above written.

	
  

  	
  BIDZ.COM,
  INC.

  a California corporation

   

   

  
	
   

  	
  By:

  	
  /s/ Lawrence Y.
  Kong

  
	
   

  	
  Lawrence Y. Kong

  
	
   

  	
  CFO and
  Treasurer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  

  	
  BIDZ.COM,
  INC.

  a Delaware corporation

   

   

  
	
   

  	
  By:

  	
  /s/ Lawrence Y.
  Kong

  
	
   

  	
  Lawrence Y. Kong

  
	
   

  	
  CFO and
  Treasurer

  

 

Signature Page to Loan and
Security Agreement

by and between Bidz.com, Inc. and LaSalle Retail Finance

 

 -71-
 

 

 

Signature of Lender to Loan and
Security Agreement

 

 

	
  

  	
  LASALLE
  RETAIL FINANCE,

  
	
   

  	
  A
  DIVISION OF LASALLE BUSINESS CREDIT, LLC, AS AGENT FOR LASALLE MIDWEST BANK
  NATIONAL ASSOCIATION

   

   

  
	
   

  	
  By:

  	
  /s/ Barbara
  Anderson

  
	
   

  	
  Barbara Anderson

  
	
   

  	
  Senior Vice
  President

  
	
   

  	
   

  

 

Signature Page to Loan and
Security Agreement

by and between Bidz.com, Inc. and LaSalle Retail Finance

 

 -72-Exhibit 10.1

AMENDMENT
NO. 1 TO OFFICE LEASE

This AMENDMENT NO.
1 TO OFFICE LEASE (“Amendment No. 1”) is entered into as of June 12, 2006 (“Effective
Date”), by and between THORNMINT I, A CALIFORNIA LIMITED PARTNERSHIP (“Landlord”),
and IMAGEWARE SYSTEMS, INC., (“Tenant”) with reference to the facts set forth
in the Recitals below.

RECITALS

A.             Landlord and Tenant
are parties to an Office Lease Agreement and Addendum dated September 26, 2003
(“Lease”), by and between Thornmint I, a California limited partnership (“Landlord”)
and ImageWare Systems Inc., (“Tenant”) for certain Leased Premises consisting
of 16,020 square feet of rentable area of the Building located at 10883
Thornmint Road, San Diego, CA 92127, as more specifically described in the
Lease.  The term of this Lease is
scheduled to expire on September 30, 2006.

B.               Landlord and Tenant
have agreed to extend the term of this Lease for a new twenty-four (24) month
term (“Extension Term”) under all of the same terms and conditions of the Lease
and Addendum, except as specifically provided below in this Amendment No.
1.  Landlord and Tenant have further
agreed to make certain modifications to the Lease, including, among other
things, (i) modifying the Base Rental payable under the Lease.

AMENDMENT

NOW, THEREFORE, in
consideration of the Recitals above, the mutual covenants and conditions below,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:

1.                 Extension of
the Term.  Landlord and Tenant hereby
agree that the term of the Lease shall be extended for the Extension Term,
commending on October 1, 2006, on all of the same terms and conditions of the
Lease and Addendum, except as specifically modified by this Amendment No. 1.  All references o the Lease Agreement to the “Expiration
Date” shall mean September 30, 2008.

2.                 Base Rental.  Base Rental Payment during the Extension Term
shall be payable pursuant to the following schedule:

 

	
  Months

  	
   

  	
  Monthly Base Rental

  
	
  01-12

  	
   

  	
  $

  	
  18,423.33

  
	
  13-24

  	
   

  	
  $

  	
  19,224.00

  

 

 

3.                 Tenant
Improvements.  Landlord, at Landlord’s
expense, shall complete the following Tenant Improvements utilizing building
standard materials within sixty (60) days from full executive of this Lease
Amendment 1:

%                 Install
a new building standard garbage disposal.

%                 Re-paint
reception entrance handrails and the handrails in the stairwell on the west
side of the Building.

%                 Repair
roof leaks.

%                 Replace
damaged ceiling tiles.

%                 Men’s
restrooms:

•      1st Floor:

Replace damaged flooring tile.

•      2nd Floor:

Repair leaking urinal.

Repair/replace one (1) fan.

Install new plastic light covers for the restroom lights above the sinks (1st
& 2nd Floors).

%                 Women’s
restrooms:

•      1st Floor:

Repair/replace two (2) fans.

•      2nd Floor:

Repair/replace one (1) fan.

Install new plastic light covers for the restroom lights above the sinks (1st
& 2nd Floors).

%                 Cap
one (1) existing floor plug on the first floor that is exposed.

%                Remove wallpaper
in the reception entrance up to the top of the stairwell and repaint the
reception area with a mutually agreed upon color.

%                 Repair/replace
two (2) recessed lights in the reception area.

%                 Investigate
the possibility of fixing the fraying carpet in Wayne Wetherall’s office.

All Tenant Improvement work shall be completed during
normal business hours and Tenant shall be responsible for the removal of their
Furniture, Fixtures and Equipment as necessary in order for Landlord to
complete the above mentioned Tenant Improvement work.

4.                 Brokers.  Tenant represents and warrants to Landlord
that it has dealt directly with (and only with) CB Richard Ellis (“Landlord’s
Broker”) as broker in connection with this Amendment No. 1.

5.                 No
Construction Against Party Drafting Amendment.  Landlord and Tenant acknowledge and agree
that each of them, and their respective professional advisors, have reviewed
this Amendment and that the provisions of this Amendment shall not be construed
against either party.  The rule of
construction ambiguities are to be construed against the party drafting the
agreement shall not imply to the interpretation of this Amendment No. 1 and is
waived.

 

6.                 Continued
Effect.  Except as specifically
modified by this Amendment No. 1, all of the terms, conditions and provisions
of the Lease shall remain in full force and effect.  Unless otherwise specifically defined in this
Amendment No. 1, terms with initial capital letter in this Amendment No. 1
shall have the same meaning as such terms have in the Lease.

IN WITNESS
WHEREOF, the parties have executed this Amendment No. 1 to Office lease as of
the Effective Date.

	
  “LANDLORD”

  	
  Thornmint 1, a California Limited Partnership

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  s/David C. Price

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  David C. Price

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  General Partner

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Date:

  	
  July 3, 2006

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ‘TENANT”

  	
  ImageWare Systems, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  s/S. James Miller, Jr.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  S. James Miller, Jr.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  Chairman & CEO

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Date:

  	
  June 23, 2006

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