Document:

<PAGE>
                                                                   EXHIBIT 4(a)

                                CREDIT AGREEMENT

                         Dated as of February 28, 2002

                                    Between

                             BANK OF AMERICA, N.A.

                                 as the Lender

                                      and

                             REEDS JEWELERS, INC.,
                        REEDS FINANCIAL SERVICES, INC.,
                    REEDS JEWELERS OF NORTH CAROLINA, INC.,
                       REEDS CORPORATE SERVICES, INC. and
                         REEDS INSURANCE SERVICES, LTD.

                                as the Borrowers
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                               TABLE OF CONTENTS

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Section                                                                                                        Page
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                                                       ARTICLE 1
                                              LOANS AND LETTERS OF CREDIT

1.1      Total Facility..........................................................................................2
1.2      Revolving Loans.........................................................................................2
1.3      Letters of Credit.......................................................................................4
1.4      Bank Products...........................................................................................7

                                                        ARTICLE 2
                                               SECURITY AND CASH MANAGEMENT

2.1      Security................................................................................................9
2.2      Collection of Accounts; Payments.......................................................................10

                                                        ARTICLE 3
                                                    INTEREST AND FEES

3.1      Interest...............................................................................................12
3.2      Continuation and Conversion Elections..................................................................12
3.3      Maximum Interest Rate..................................................................................13
3.4      Closing and Service Fees...............................................................................14
3.5      Unused Line Fee........................................................................................14
3.6      Letter of Credit Fee...................................................................................14

                                                        ARTICLE 4
                                                PAYMENTS AND PREPAYMENTS

4.1      Revolving Loans........................................................................................15
4.2      Termination of Facility................................................................................15
4.3      LIBOR Rate Loan Prepayments............................................................................15
4.4      Payments by the Borrowers..............................................................................16
4.5      Payments as Revolving Loans............................................................................16
4.6      Application and Reversal of Payments...................................................................16
4.7      Indemnity for Returned Payments........................................................................16
4.8      Lender's Books and Records; Monthly Statements.........................................................17

                                                       ARTICLE 5
                                         TAXES, YIELD PROTECTION AND ILLEGALITY

5.1      Taxes..................................................................................................18
5.2      Illegality.............................................................................................19
5.3      Increased Costs and Reduction of Return................................................................19
5.4      Funding Losses.........................................................................................20
5.5      Inability to Determine Rates...........................................................................20
5.6      Certificates of Lender.................................................................................20
5.7      Survival...............................................................................................20

                                                        ARTICLE 6
                                    BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES

6.1      Books and Records......................................................................................21
6.2      Financial Information..................................................................................21
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                              TABLE OF CONTENTS

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6.3      Notices to the Lender..................................................................................23
6.4      Collateral Reporting...................................................................................25

                                                    ARTICLE 7
                                     GENERAL WARRANTIES AND REPRESENTATIONS

7.1      Authorization, Validity and Enforceability of this Agreement and the Loan
         Documents..............................................................................................27
7.2      Validity and Priority of Security Interest.............................................................27
7.3      Organization and Qualification.........................................................................27
7.4      Corporate Name; Prior Transactions.....................................................................27
7.5      Subsidiaries and Affiliates............................................................................27
7.6      Financial Statements and Projections...................................................................28
7.7      Capitalization.........................................................................................28
7.8      Solvency...............................................................................................28
7.9      Debt...................................................................................................28
7.10     Distributions..........................................................................................28
7.11     Real Estate; Leases....................................................................................28
7.12     Proprietary Rights.....................................................................................29
7.13     Trade Names............................................................................................29
7.14     Litigation.............................................................................................29
7.15     Labor Disputes.........................................................................................29
7.16     Environmental Laws.....................................................................................30
7.17     No Violation of Law....................................................................................31
7.18     No Default.............................................................................................31
7.19     ERISA Compliance.......................................................................................31
7.20     Taxes..................................................................................................32
7.21     Regulated Entities.....................................................................................32
7.22     Use of Proceeds; Margin Regulations....................................................................32
7.23     No Material Adverse Change.............................................................................32
7.24     Full Disclosure........................................................................................32
7.25     Material Agreements....................................................................................32
7.26     Bank Accounts..........................................................................................32
7.27     Governmental Authorization.............................................................................32

                                                    ARTICLE 8
                                        AFFIRMATIVE AND NEGATIVE COVENANTS

8.1      Taxes and Other Obligations............................................................................33
8.2      Legal Existence and Good Standing......................................................................33
8.3      Compliance with Law and Agreements; Maintenance of Licenses............................................33
8.4      Maintenance of Property; Inspection of Property........................................................33
8.5      Insurance..............................................................................................34
8.6      Insurance and Condemnation Proceeds....................................................................35
8.7      Environmental Laws.....................................................................................35
8.8      Compliance with ERISA..................................................................................36
8.9      Mergers, Consolidations or Sales.......................................................................36
8.10     Distributions; Capital Change; Restricted Investments..................................................37
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                              TABLE OF CONTENTS

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8.11     Transactions Affecting Collateral or Obligations.......................................................37
8.12     Guaranties.............................................................................................37
8.13     Debt...................................................................................................37
8.14     Prepayment.............................................................................................38
8.15     Transactions with Affiliates...........................................................................38
8.16     Investment Banking and Finder's Fees...................................................................38
8.17     Business Conducted.....................................................................................38
8.18     Liens..................................................................................................38
8.19     Sale and Leaseback Transactions........................................................................38
8.20     New Subsidiaries.......................................................................................39
8.21     Fiscal Year............................................................................................39
8.22     Fixed Charge Coverage Ratio............................................................................39
8.23     Minimum Excess Availability............................................................................39
8.24     Use of Proceeds........................................................................................39
8.25     Field Examinations.....................................................................................39
8.26     Further Assurances.....................................................................................39
8.27     No Amendment...........................................................................................39

                                                    ARTICLE 9
                                              CONDITIONS OF LENDING

9.1      Conditions Precedent to Making of Loans on the Closing Date............................................40
9.2      Conditions Precedent to Each Loan......................................................................42

                                                   ARTICLE 10
                                               DEFAULT; REMEDIES

10.1     Events of Default......................................................................................44
10.2     Remedies...............................................................................................46

                                                   ARTICLE 11
                                             TERM AND TERMINATION

11.1     Term and Termination...................................................................................49

                                                   ARTICLE 12
                           AMENDMENTS; WAIVERS; PARTICIPATIONS; ASSIGNMENTS SUCCESSORS

12.1     Amendments and Waivers.................................................................................50
12.2     Assignments; Participations............................................................................50

                                                   ARTICLE 13
                                                 MISCELLANEOUS

13.1     No Waivers; Cumulative Remedies........................................................................51
13.2     Severability...........................................................................................51
13.3     Governing Law; Choice of Forum; Service of Process.....................................................51
13.4     WAIVER OF JURY TRIAL...................................................................................52
13.5     Survival of Representations and Warranties.............................................................52
13.6     Other Security and Guaranties..........................................................................52
13.7     Fees and Expenses......................................................................................53
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                              TABLE OF CONTENTS

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13.8     Notices................................................................................................53
13.9     Waiver of Notices......................................................................................54
13.10    Binding Effect.........................................................................................54
13.11    Indemnity of the Lender by each Borrower...............................................................54
13.12    Limitation of Liability................................................................................55
13.13    Final Agreement........................................................................................55
13.14    Counterparts...........................................................................................55
13.15    Captions...............................................................................................56
13.16    Right of Setoff........................................................................................56
13.17    Confidentiality........................................................................................56
13.18    Conflicts with Other Loan Documents....................................................................56
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ANNEXES, EXHIBITS AND SCHEDULES

ANNEX A             -      DEFINED TERMS

EXHIBIT A-1         -      FORM OF BORROWING BASE CERTIFICATE
EXHIBIT B           -      FINANCIAL STATEMENTS
EXHIBIT C           -      FORM OF NOTICE OF BORROWING
EXHIBIT D           -      FORM OF NOTICE OF CONTINUATION/CONVERSION
EXHIBIT E           -      FORM OF COMPLIANCE CERTIFICATE
EXHIBIT F           -      FORM OF APPOINTMENT/REVOCATION OF RESPONSIBLE
                           OFFICER
EXHIBIT G                  FORM OF LANDLORD WAIVER

SCHEDULE 2.1(d)            INFORMATION REGARDING COLLATERAL
SCHEDULE 7.3               ORGANIZATION AND QUALIFICATIONS
SCHEDULE 7.4               CORPORATE NAMES
SCHEDULE 7.7               CAPITAL STOCK
SCHEDULE 7.11              REAL ESTATE; LEASES
SCHEDULE 7.12              PROPRIETARY RIGHTS
SCHEDULE 7.13              TRADE NAMES
SCHEDULE 7.25              MATERIAL AGREEMENTS
SCHEDULE 7.26              BANK ACCOUNTS
SCHEDULE 8.13              DEBT
SCHEDULE 9                 EXISTING LIENS

                                       v
<PAGE>

                                CREDIT AGREEMENT

THIS CREDIT AGREEMENT, dated as of February 28, 2002, (this "Agreement"), is
entered into by and between BANK OF AMERICA, N.A. (the "Lender"), REEDS
JEWELERS, INC., a North Carolina corporation (the "Parent"), REEDS FINANCIAL
SERVICES, INC., a North Carolina corporation ("Reeds Financial"), REEDS
JEWELERS OF NORTH CAROLINA, INC., a North Carolina corporation ("Reeds North
Carolina"), REEDS CORPORATE SERVICES, INC., a Delaware corporation ("Reeds
Corporate"), and REEDS INSURANCE SERVICES, LTD., a British Virgin Islands
corporation (collectively, the "Borrowers" each individually, a "Borrower").

                              W I T N E S S E T H:

         WHEREAS, the Borrowers have requested the Lender provide a revolving
credit facility to the Borrowers upon the terms and conditions hereinafter set
forth;

         WHEREAS, capitalized terms used in this Agreement and not otherwise
defined herein shall have the meanings ascribed thereto in Annex A which is
attached hereto and incorporated herein; the rules of construction contained
therein shall govern the interpretation of this Agreement, and all Annexes,
Exhibits and Schedules attached hereto are incorporated herein by reference;

         NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in this Agreement, and for good and valuable
consideration, the receipt of which is hereby acknowledged, the Lender and the
Borrowers hereby agree as follows.

                                   ARTICLE 1
                          LOANS AND LETTERS OF CREDIT

         1.1      Total Facility. Subject to all of the terms and conditions of
this Agreement, the Lender agrees to make available to the Borrowers from time
to time during the term of this Agreement a total credit facility in an
aggregate amount of up to $30,000,000 (the "Total Facility"); provided,
however, that the Lender shall not, at any time, be obligated to make available
to the Borrowers an amount greater than the Maximum Revolver Amount. The Total
Facility shall be composed of a revolving credit facility consisting of
Revolving Loans and Letters of Credit described herein.

         1.2      Revolving Loans.

                  (a)      Amounts.

                           (i)      Subject to all of the terms and conditions
                  of this Agreement, the Lender agrees, upon a Borrower's
                  request from time to time on any Business Day during the
                  period from the Closing Date to the Termination Date, to make
                  revolving loans (the "Revolving Loans") to such Borrower in
                  amounts not to exceed Availability. The Lender, however, in
                  its discretion, may elect to make
<PAGE>

                  Revolving Loans or issue or arrange to have issued Letters of
                  Credit in excess of the Availability on one or more
                  occasions, but if it does so, the Lender shall not be deemed
                  thereby to have changed the limits of Availability or the
                  Borrowing Base or to be obligated to exceed such limits on
                  any other occasion. If any Borrowing would exceed
                  Availability, the Lender may refuse to make or may otherwise
                  restrict the making of Revolving Loans.

                           (ii)     The Borrowers shall execute and deliver to
                  the Lender a note to evidence the Revolving Loan. Such note
                  shall be in the principal amount of $30,000,000 and be dated
                  the date hereof (the "Note"). The Note shall represent the
                  obligation of the Borrowers to pay the amount of the
                  Revolving Loan Commitment, or, if less, the aggregate unpaid
                  principal amount of all Revolving Loans to the Borrowers
                  together with interest thereon as prescribed in Section 1.2.
                  The entire unpaid balance of the Revolving Loan and all other
                  non-contingent Obligations shall be immediately due and
                  payable in full in immediately available funds on the
                  Termination Date.

                  (b)      Procedure for Borrowing.

                           (i)      Each Borrowing shall be made upon a
                  Borrower's irrevocable written notice delivered to the Lender
                  in the form of a notice of borrowing substantially in the
                  form of Exhibit C ("Notice of Borrowing"), which must be
                  received by the Lender prior to (A) 12:00 noon (Eastern Time)
                  three Business Days prior to the requested Funding Date, in
                  the case of LIBOR Rate Loans and (B) 11:00 a.m. (Eastern
                  Time) on the requested Funding Date, in the case of Base Rate
                  Loans, specifying:

                                    (1)      the amount of the Borrowing, which
                           in the case of a LIBOR Rate Loan must equal or
                           exceed $1,000,000 (and increments of $500,000 in
                           excess of such amount);

                                    (2)      the requested Funding Date, which
                           must be a Business Day;

                                    (3)      whether the Revolving Loans
                           requested are to be Base Rate Loans or LIBOR Rate
                           Loans (and if not specified, it shall be deemed a
                           request for a Base Rate Loan); and

                                    (4)      the duration of the Interest
                           Period for LIBOR Rate Loans (and if not specified,
                           it shall be deemed a request for an Interest Period
                           of one month);

         provided, however, that with respect to the Borrowing to be made on
         the Closing Date, such Borrowings will consist of Base Rate Loans
         only.

                           (ii)     In lieu of delivering a Notice of
                  Borrowing, any Borrower may give the Lender telephonic notice
                  of such request for advances to the Designated Account on or
                  before the deadline set forth above. The Lender shall be
                  entitled to

                                       2
<PAGE>

                  rely on such telephonic notice in making such Revolving
                  Loans, regardless of whether any written confirmation is
                  received.

                           (iii)    Whenever checks are presented to the Lender
                  for payment against the Designated Account or any other
                  accounts of any Borrower maintained with the Lender in an
                  amount greater than the then available balance in such
                  accounts, such presentation shall be deemed to be a request
                  for a Base Rate Loan on the date of such presentation in an
                  amount equal to the excess of such checks over such available
                  balances, and such request shall be irrevocable.

                           (iv)     No Borrower shall have the right to request
                  a LIBOR Rate Loan while a Default or Event of Default has
                  occurred and is continuing.

                  (c)      Reliance upon Authority. Prior to the Closing Date,
         the Borrowers shall deliver to the Lender a notice setting forth the
         accounts of the Borrowers ("Designated Accounts") to which the Lender
         is authorized to transfer the proceeds of the Revolving Loans
         requested hereunder. The Borrowers may designate a replacement
         accounts from time to time by written notice to the Lender. All such
         Designated Accounts must be reasonably satisfactory to the Lender. The
         Lender is entitled to rely conclusively on any Responsible Officer's
         request for Revolving Loans on behalf of the Borrowers. The Lender has
         no duty to verify the identity of any individual representing himself
         or herself as a Responsible Officer.

                  (d)      No Liability. The Lender shall not incur any
         liability to the Borrowers as a result of acting upon any notice
         referred to in Sections 1.2(b) and (c) which the Lender believes in
         good faith to have been given by a Responsible Officer. The crediting
         of Revolving Loans to the Designated Account conclusively establishes
         the obligation of the Borrowers to repay such Revolving Loans as
         provided herein.

                  (e)      Notice Irrevocable. Any Notice of Borrowing (or
         telephonic notice in lieu thereof) made pursuant to Section 1.2(b)
         shall be irrevocable. The Borrowers shall be bound to borrow the funds
         requested therein in accordance therewith.

                  (f)      Overadvances. Subject to the limitations set forth
         below, the Lender may from time to time in its sole discretion (A)
         after the occurrence of a Default or an Event of Default, or (B) at
         any time that any of the other conditions precedent set forth in
         Article 9 have not been satisfied, make Base Rate Loans to the
         Borrowers which the Lender, in its good faith judgment, deems
         necessary or desirable (1) to preserve or protect the Collateral, or
         any portion thereof, (2) to enhance the likelihood of, or maximize the
         amount of, repayment of the Loans and other Obligations (including
         through Base Rate Loans for the purpose of enabling the Borrowers to
         pay their payroll and associated tax obligations), or (3) to pay any
         other amount chargeable to the Borrowers pursuant to the terms of this
         Agreement, including costs, fees and expenses as described in Section
         14.7 (any of such advances are herein referred to as "Overadvances").
         Overadvances shall be secured by the Lender's Liens in and to the
         Collateral and shall constitute Base Rate Loans and Obligations
         hereunder.

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<PAGE>

         1.3      Letters of Credit.

                  (a)      Agreement to Issue. Subject to the terms and
         conditions of this Agreement, the Lender agrees to issue for the
         account of any Borrower one or more commercial/documentary and standby
         letters of credit (each a "Letter of Credit" and, collectively, the
         "Letters of Credit").

                  (b)      Amounts; Outside Expiration Date. The Lender shall
         not have any obligation to issue any Letter of Credit at any time if:
         (i) the maximum face amount of the requested Letter of Credit is
         greater than the Unused Letter of Credit Subfacility at such time;
         (ii) the maximum undrawn amount of the requested Letter of Credit and
         all commissions, fees, and charges due from the Borrowers in
         connection with the opening thereof would exceed Availability at such
         time; or (iii) such Letter of Credit has an expiration date 30 or
         fewer days prior to the Stated Termination Date or more than 12 months
         from the date of issuance thereof for standby letters of credit and
         more than 180 days from the issuance thereof for documentary letters
         of credit. No Letter of Credit shall contain any "evergreen" or
         automatic extension or renewal provision, unless the Lender shall have
         consented in writing to such provision and no such extension or
         renewal shall cause the expiration date of such Letter of Credit to
         extend beyond the 30th day prior to the Stated Termination Date.

                  (c)      Other Conditions. In addition to conditions
         precedent contained in Article 9, the obligation of the Lender to
         issue any Letter of Credit is subject to the following conditions
         precedent having been satisfied in a manner reasonably satisfactory to
         the Lender:

                           (i)      A Borrower shall have delivered to the
                  Lender, at such times and in such manner as the Lender may
                  prescribe, an application in form and substance satisfactory
                  to the Lender, for the issuance of the Letter of Credit and
                  such other documents as may be required pursuant to the terms
                  thereof, and the form, terms and purpose of the proposed
                  Letter of Credit shall be reasonably satisfactory to the
                  Lender; and

                           (ii)     As of the date of issuance, no order of any
                  court, arbitrator or Governmental Authority shall purport by
                  its terms to enjoin or restrain money center banks generally
                  from issuing letters of credit of the type and in the amount
                  of the proposed Letter of Credit, and no law, rule or
                  regulation applicable to money center banks generally and no
                  request or directive (whether or not having the force of law)
                  from any Governmental Authority with jurisdiction over money
                  center banks generally shall prohibit, or request that the
                  Lender refrain from, the issuance of letters of credit
                  generally or the issuance of such Letters of Credit.

                  (d)      Issuance of Letters of Credit.

                           (i)      Request for Issuance. A Borrower shall
                  notify the Lender of a requested Letter of Credit at least
                  three (3) Business Days prior to the proposed issuance date.
                  Such notice shall be irrevocable and must specify the
                  original face

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                  amount of the Letter of Credit requested, the Business Day of
                  issuance of such requested Letter of Credit, whether such
                  Letter of Credit may be drawn in a single or in partial
                  draws, the Business Day on which the requested Letter of
                  Credit is to expire, the purpose for which such Letter of
                  Credit is to be issued, and the beneficiary of the requested
                  Letter of Credit. Any Borrower shall attach to such notice
                  the proposed form of the Letter of Credit.

                           (ii)     Issuance. As of the Business Day
                  immediately preceding the requested issuance date of the
                  Letter of Credit, the Lender shall determine the amount of
                  the applicable Unused Letter of Credit Subfacility and
                  Availability. If (A) the face amount of the requested Letter
                  of Credit does not exceed the Unused Letter of Credit
                  Subfacility and (B) the amount of such requested Letter of
                  Credit and all commissions, fees, and charges due from such
                  Borrower in connection with the opening thereof would not
                  exceed Availability, the Lender shall issue the requested
                  Letter of Credit on the requested issuance date so long as
                  the other conditions hereof are met.

                           (iii)    No Extensions or Amendment. The Lender
                  shall not be obligated to extend, renew or amend any Letter
                  of Credit issued pursuant hereto unless the requirements of
                  this Section 1.3 are met as though a new Letter of Credit
                  were being requested and issued.

                  (e)      Payments Pursuant to Letters of Credit. Each
         Borrower agrees to reimburse immediately the Lender for any draw under
         any Letter of Credit, and to pay the Lender the amount of all other
         charges and fees payable to the Lender in connection with any Letter
         of Credit immediately when due, irrespective of any claim, setoff,
         defense or other right which any Borrower may have at any time against
         the Lender or any other Person. Each drawing under any Letter of
         Credit shall constitute a request by the Borrowers to the Lender for a
         Borrowing of a Base Rate Loan in the amount of such drawing. The
         Funding Date with respect to such borrowing shall be the date of such
         drawing.

                  (f)      Indemnification; Exoneration Power of Attorney.

                           (i)      Indemnification. In addition to amounts
                  payable as elsewhere provided in this Section 1.3, each
                  Borrower agrees to protect, indemnify, pay and hold harmless
                  the Lender from and against any and all claims, demands,
                  liabilities, damages, losses, costs, charges and expenses
                  (including reasonable attorneys' fees) which the Lender may
                  incur or be subject to as a consequence, direct or indirect,
                  of the issuance of any Letter of Credit, except that the
                  foregoing indemnity shall not apply to the Lender to the
                  extent of any wrongful dishonor of a Letter of Credit draw
                  strictly complying with the terms of the Letter of Credit.
                  The Borrowers' obligations under this Section shall survive
                  payment of all other Obligations.

                           (ii)     Assumption of Risk by the Borrowers. As
                  between the Borrowers and the Lender, the Borrowers assume
                  all risks of the acts and omissions of, or

                                       5
<PAGE>

                  misuse of any of the Letters of Credit by, the respective
                  beneficiaries of such Letters of Credit. In furtherance and
                  not in limitation of the foregoing, the Lender shall not be
                  responsible for: (A) the form, validity, sufficiency,
                  accuracy, genuineness or legal effect of any document
                  submitted by any Person in connection with the application
                  for and issuance of and presentation of drafts with respect
                  to any of the Letters of Credit, even if it should prove to
                  be in any or all respects invalid, insufficient, inaccurate,
                  fraudulent or forged; (B) the validity or sufficiency of any
                  instrument transferring or assigning or purporting to
                  transfer or assign any Letter of Credit or the rights or
                  benefits thereunder or proceeds thereof, in whole or in part,
                  which may prove to be invalid or ineffective for any reason;
                  (C) the failure of the beneficiary of any Letter of Credit to
                  comply duly with conditions required in order to draw upon
                  such Letter of Credit, other than the condition of delivery
                  of a proper draw request; (D) errors, omissions,
                  interruptions, or delays in transmission or delivery of any
                  messages, by mail, cable, telegraph, telex or otherwise,
                  whether or not they be in cipher; (E) errors in
                  interpretation of technical terms; (F) any loss or delay in
                  the transmission or otherwise of any document required in
                  order to make a drawing under any Letter of Credit or of the
                  proceeds thereof; (G) the misapplication by the beneficiary
                  of any Letter of Credit of the proceeds of any drawing under
                  such Letter of Credit; (H) any consequences arising from
                  causes beyond the control of the Lender, including any act or
                  omission, whether rightful or wrongful, of any Governmental
                  Authority; or (I) the Lender's honor of a draw for which the
                  draw or any certificate fails to comply in any respect with
                  the terms of the Letter of Credit. None of the foregoing
                  shall affect, impair or prevent the vesting of any rights or
                  powers of the Lender under this Section 1.3(f).

                           (iii)    Exoneration. Without limiting the
                  foregoing, no action or omission whatsoever by the Lender
                  shall result in any liability of the Lender to the Borrowers,
                  or relieve the Borrowers of any of their obligations
                  hereunder to any such Person.

                           (iv)     Rights Against Lender. Nothing contained in
                  this Agreement is intended to limit the Borrowers' rights, if
                  any, with respect to the Lender which arise as a result of
                  the letter of credit application and related documents
                  executed by and between any Borrower and the Lender.

                           (v)      Account Party. The Borrowers hereby
                  authorize and direct the Lender to name any Borrower as the
                  "Account Party" in the Letters of Credit.

                  (g)      Supporting Letter of Credit; Cash Collateral. If,
         notwithstanding the provisions of Section 1.3(b), any Letter of Credit
         is outstanding upon the termination of this Agreement, then the
         Borrowers shall deposit with the Lender, either (i) a standby letter
         of credit (a "Supporting Letter of Credit") in form and substance
         satisfactory to the Lender, issued by an issuer satisfactory to the
         Lender, or (ii) cash collateral in which the Lender has the first
         priority and only Lien ("Cash Collateral"), in an amount equal to the
         greatest amount for which such Letter of Credit may be drawn plus any
         fees and expenses associated with such Letter of Credit, under which
         Supporting Letter of Credit or Cash

                                       6
<PAGE>

         Collateral the Lender is entitled to draw amounts necessary to
         reimburse the Lender for payments to be made by the Lender under such
         Letter of Credit and any fees and expenses associated with such Letter
         of Credit. Such Supporting Letter of Credit or Cash Collateral shall
         be held by the Lender as security for, and to provide for the payment
         of, the aggregate undrawn amount of such Letters of Credit remaining
         outstanding.

         1.4      Bank Products.

                  (a)      The Borrowers may request and the Lender may, in its
         sole and absolute discretion, arrange for the Borrowers to obtain from
         the Lender or the Lender's Affiliates other Bank Products, although
         the Borrowers are not required to do so. If Bank Products are provided
         by an Affiliate of the Lender, the Borrowers agree to indemnify and
         hold the Lender harmless from any and all costs and obligations now or
         hereafter incurred by the Lender which arise from any indemnity given
         by the Lender to its Affiliates related to such Bank Products;
         provided, however, nothing contained herein is intended to limit the
         Borrowers' rights, with respect to the Lender or its Affiliates, if
         any, which arise as a result of the execution of documents by and
         between the Borrowers and the Lender which relate to Bank Products.
         The agreement contained in this Section shall survive termination of
         this Agreement. The Borrowers acknowledge and agree that the obtaining
         of Bank Products from the Lender or the Lender's Affiliates (i) is in
         the sole and absolute discretion of the Lender or the Lender's
         Affiliates, and (ii) is subject to all rules and regulations of the
         Lender or the Lender's Affiliates.

                  (b)      Notwithstanding the foregoing, the Borrowers hereby
         agree to maintain with the Lender all of the Borrowers' principal
         depositary accounts and retain the Lender as provider of all of the
         Borrowers' cash management services.

         1.5      Borrower Joint and Several Liability; Guaranty Provisions.

                  (a)      Notwithstanding any other provision of this
         Agreement, each Borrower shall be jointly and severally liable as
         primary obligor and not merely as surety for repayment of all
         Obligations arising under the Loan Documents. Such joint and several
         liability shall apply to each Borrower regardless of whether (i) any
         Loan or Letter of Credit was only requested by or made to another
         Borrower or the proceeds of any Loan or Letter of Credit were used
         only by or issued to another Borrower, (ii) any interest rate election
         was made only by another Borrower, or (iii) any indemnification
         obligation or any other obligation arose only as a result of the
         actions of another Borrower; provided the liability of each of the
         Borrowers under this Agreement, the Notes and the other Loan Documents
         shall be limited to the maximum amount of the Obligations for which
         such other Borrower may be liable without violating any applicable
         fraudulent conveyance, fraudulent transfer or comparable laws. Each
         Borrower shall retain any right of contribution arising under
         applicable law against the other Borrowers as the result of the
         satisfaction of any Obligations; provided, no Borrower shall assert
         such right of contribution against any other Borrower until the
         Obligations shall have been paid in full and all Commitments hereunder
         shall have terminated.

                                       7
<PAGE>

                  (b)      Without limiting the foregoing provisions of Section
         1.5, each of the Borrowers hereby irrevocably, absolutely and
         unconditionally guarantees the full and punctual payment or
         performance when due, whether at stated maturity, by required
         prepayment, declaration, acceleration, demand or otherwise, of all
         Obligations of each other Borrower owing to the Lender. This guarantee
         constitutes a guaranty of payment and not of collection. The liability
         of each of the Borrowers under the immediately preceding two sentences
         shall be limited to the maximum amount for which such other Borrower
         may be liable without violating any applicable fraudulent conveyance,
         fraudulent transfer or comparable laws.

                  (c)      It is the intention of the parties that with respect
         to each Borrower its obligations hereunder and under the other Loan
         Documents shall be absolute, unconditional and irrevocable
         irrespective of:

                           (i)      any lack of validity, legality or
                  enforceability of this Agreement, any Note or any other Loan
                  Document as to any other Borrower;

                           (ii)     the failure of the Lender

                                    (A)      to enforce any right or remedy
                           against any other Borrower or any other Person under
                           the provisions of this Agreement, any Note, any
                           other Loan Document or otherwise, or

                                    (B)      to exercise any right or remedy
                           against any guarantor of, or collateral securing,
                           any Obligations;

                           (iii)    any change in the time, manner or place of
                  payment of, or in any other term of, all or any of the
                  Obligations, or any other extension, compromise or renewal of
                  any Obligations;

                           (iv)     any reduction, limitation, impairment or
                  termination of any Obligations with respect to any other
                  Borrower or any other Person for any reason including any
                  claim of waiver, release, surrender, alteration or
                  compromise, and shall not be subject to (and each Borrower
                  hereby waives any right to or claim of) any defense or
                  setoff, counterclaim, recoupment or termination whatsoever by
                  reason of the invalidity, illegality, nongenuineness,
                  irregularity, compromise or unenforceability of, or any other
                  event or occurrence affecting, any Obligations with respect
                  to any other Borrower;

                           (v)      any addition, exchange, release, surrender,
                  impairment or nonperfection of any collateral, or any
                  amendment to or waiver or release or addition of, or consent
                  to departure from, any guaranty, held by the Lender or any
                  holder of any Note evidencing any of the Obligations; or

                           (vi)     any other circumstance which might
                  otherwise constitute a defense available to, or a legal or
                  equitable discharge of, any other Borrower or any surety or
                  any guarantor.

                                       8
<PAGE>

                  (d)      Each Borrower agrees that its joint and several
         liability hereunder shall continue to be effective or be reinstated,
         as the case may be, if at any time any payment (in whole or in part)
         of any of the Obligations is rescinded or must be restored by the
         Lender or any holder of any Note, upon the insolvency, bankruptcy or
         reorganization of any Borrower as though such payment had not been
         made.

                  (e)      Each Borrower hereby expressly waives (i) notice of
         the Lender's acceptance of this Agreement, (ii) notice of the
         existence or creation or non-payment of all or any of the Obligations,
         (iii) presentment, demand, notice of dishonor, protest, and all other
         notices whatsoever other than notices expressly provided for in this
         Agreement and (iv) all diligence in collection or protection of or
         realization upon the Obligations or any thereof, any obligation
         hereunder, or any security for or guaranty of any of the foregoing.

                  (f)      No delay on the Lender's part in the exercise of any
         right or remedy shall operate as a waiver thereof, and no single or
         partial exercise by the Lender of any right or remedy shall preclude
         any other or further exercise thereof or the exercise of any other
         right or remedy. No action of the Lender permitted hereunder shall in
         any way affect or impair any of their rights or any of their
         obligations to any of the Borrowers under this Agreement.

                                       9
<PAGE>

                                   ARTICLE 2
                          SECURITY and cash management

         2.1      Security. As security for the full and timely payment and
performance of all Obligations, the Borrowers shall, and shall cause all other
Credit Parties to, on or before the Closing Date, do or cause to be done all
things necessary in the opinion of the Lender and its counsel to grant to the
Lender a duly perfected first priority security interest in all Collateral
subject to no prior Lien or other encumbrance or restriction on transfer (other
than Permitted Liens and restrictions on transfer imposed by applicable
securities laws).

                  (a)      Pledge of Subsidiary Securities. As security for the
         full and timely payment and performance of all Obligations, the
         Borrowers and each Subsidiary having rights in any Subsidiary
         Securities shall on the Closing Date deliver to the Lender, in form
         and substance reasonably acceptable to the Lender, (i) a Pledge
         Agreement which shall pledge to the Lender 100% of the Subsidiary
         Securities of all Subsidiaries, (ii) if such Subsidiary Securities are
         in the form of certificated securities, such certificated securities,
         together with undated stock powers or other appropriate transfer
         documents endorsed in blank pertaining thereto, (ii) if such
         Subsidiary Securities do not constitute securities and the Subsidiary
         has not elected to have such interests treated as securities under
         Article 8 of the Uniform Commercial Code, a control agreement
         satisfactory to the Lender from the Registrar of such Subsidiary
         Securities; and (iii) Uniform Commercial Code financing statements
         reflecting the Lien in favor of the Lender on such Subsidiary
         Securities. The Borrowers shall, and shall cause each Subsidiary, to
         pledge to the Lender (and as appropriate to reaffirm its prior pledge
         of) all of the Pledged Interests of any Subsidiary acquired or created
         after the Closing Date and to deliver to the Lender all of the
         documents and instruments in connection therewith as are required
         pursuant to the terms hereof and of the Security Instruments.

                  (b)      Mortgages. As security for the full and timely
         payment and performance of all Obligations, the Borrowers and each
         Subsidiary shall deliver to the Lender a Mortgage and related Mortgage
         Support Documents with respect to each parcel of real property owned
         or acquired by the Borrowers or a Subsidiary after the Closing Date.
         Each of the Borrowers hereby certifies that none of the Borrowers own
         any real property on the Closing Date other than the retail location
         at 27 North Front Street, Wilmington, North Carolina.

                  (c)      Future Subsidiaries. As security for the full and
         timely payment and performance of all Obligations, each Subsidiary
         created or acquired after the Closing Date shall joined as a party to
         this Agreement and the Security Instruments pursuant to a joinder
         agreement in form and substance acceptable to the Lender.

                  (d)      Information Regarding Collateral. Each Borrower
         represents, warrants and covenants that (i) the chief executive office
         of such Borrower and each other Person providing Collateral pursuant
         to a Security Instrument (each, a "Grantor") at the Closing Date is
         located at the address or addresses specified on Schedule 2.1(d), and
         (ii) Schedule 2.1(d) contains a true and complete list of (1) the
         exact legal name, jurisdiction of

                                      10
<PAGE>

         formation, and address of each Grantor and of each other Person that
         has effected any merger or consolidation with a Grantor or contributed
         or transferred to a Grantor any property still owned by Grantor and
         constituting Collateral at any time since January 1, 1997 (excluding
         Persons making sales in the ordinary course of their businesses to a
         Grantor of property constituting inventory in the hands of such
         Person), (2) the exact legal name, jurisdiction of formation, and each
         location of the chief executive office of each Grantor at any time
         since January 1, 1997, (3) each location in which goods constituting
         Collateral are or have been located since January 1, 1997 (together
         with the name of each owner of the property located at such address if
         not the applicable Grantor, and a summary description of the
         relationship between the applicable Grantor and such Person), and (4)
         each trade name, trademark or other trade style used by any Grantor
         since January 1, 1997 and the purposes for which it was used.

                  (e)      Further Assurances. At the request of the Lender,
         each Borrower will or will cause all other Credit Parties, as the case
         may be, to execute, by its duly authorized officers, any certificate,
         instrument, financing statement, control agreement, statement or
         document, or to procure any such certificate, instrument, statement or
         document, or to take such other action (and pay all connected costs)
         which the Lender reasonably deems necessary from time to time to
         create, continue or preserve the liens and security interests in
         Collateral (and the perfection and priority thereof) of the Lender
         contemplated hereby and by the other Loan Documents and specifically
         including all Collateral acquired by such Borrower or other Credit
         Party after the Closing Date. The Lender is hereby irrevocably
         authorized to execute and file or cause to be filed, with or if
         permitted by applicable law without the signature of the relevant
         Borrower or any Credit Party appearing thereon, all Uniform Commercial
         Code financing statements reflecting such Borrower or any other Credit
         Party as "debtor" and the Lender as "secured party", and continuations
         thereof and amendments thereto, as the Lender reasonably deems
         necessary or advisable to give effect to the transactions contemplated
         hereby and by the other Loan Documents. Lender shall deliver copies of
         all such filings to the relevant Borrower.

         2.2      Collection of Accounts; Payments.

                  (a)      Until the Lender notifies the Borrowers to the
         contrary, the Borrowers shall and shall cause each other Credit Party
         to make collection of all Accounts and other Collateral for the
         Lender, shall receive all payments as the Lender's trustee, and shall
         immediately deliver all payments in their original form duly endorsed
         in blank into the Blocked Operating Account or the Payment Account
         established with the Lender. The Borrowers shall instruct the Credit
         Card Provider to make all payments directly to the Payment Account.
         If, notwithstanding such instructions, the Borrowers receive any
         proceeds of Accounts, they shall receive such payments as the Lender's
         trustee, and shall immediately deliver such payments to the Lender in
         their original form duly endorsed in blank or deposit them into the
         Payment Account. After and during the continuance of an Event of
         Default, all collections received in the Payment Account or directly
         by the Borrowers or the Lender, and all funds in any other account to
         which collections of Accounts are deposited, shall be subject to the
         Lender's sole control and withdrawals by the Borrowers shall not be
         permitted. The Lender or the Lender's designee may, at any time after
         the occurrence of an Event of Default, notify any Account Debtor or
         the Credit

                                      11
<PAGE>

         Card Provider that the Accounts have been assigned to the Lender and
         of the Lender's security interest therein and may collect them
         directly and charge the collection costs and expenses to the Loan
         Account as a Revolving Loan.

                  (b)      If sales of Inventory are made or services are
         rendered for cash, the Borrowers shall immediately deliver to the
         Lender or deposit into a Payment Account the cash which the Borrowers
         receive.

                  (c)      All payments, including immediately available funds,
         received by the Lender at the Payment Account, will be the Lender's
         sole property for its benefit and will be credited to the Loan Account
         upon final collection; provided, however, that such payments shall be
         deemed to be credited to the Loan Account immediately upon receipt for
         purposes of calculating the Unused Line Fee pursuant to Section 3.5
         hereof.

                  (d)      In the event the Borrowers repay all of the
         Obligations upon the termination of the Credit Agreement or upon
         acceleration of the Obligations, other than through the Lender's
         receipt of payments on account of the Accounts or proceeds of the
         other Collateral, such payment will be credited upon final collection
         to the Borrowers' Loan Account or upon the Lender's receipt of
         immediately available funds.

                                      12
<PAGE>

                                   ARTICLE 3
                               INTEREST AND FEES

         3.1      Interest. All outstanding Obligations shall bear interest on
the unpaid principal amount thereof (including, to the extent permitted by law,
on interest thereon not paid when due) from the date made until paid in full in
cash at a rate determined by reference to the Base Rate or the LIBOR Rate plus
the Applicable Margins as set forth below, but not to exceed the Maximum Rate.
If at any time Loans are outstanding with respect to which the Borrowers have
not delivered to the Lender a notice specifying the basis for determining the
interest rate applicable thereto in accordance herewith, those Loans shall bear
interest at a rate determined by reference to the Base Rate until notice to the
contrary has been given to the Lender in accordance with this Agreement and
such notice has become effective.

                  (a)      Interest Rates. Except as otherwise provided herein,
         the outstanding Obligations shall bear interest as follows:

                           (i)      For all Base Rate Loans and other
                  Obligations (other than LIBOR Rate Loans) at a fluctuating
                  per annum rate equal to the Base Rate plus the Applicable
                  Margin;

                           (ii)     For all LIBOR Rate Loans at a per annum
                  rate equal to the LIBOR Rate plus the Applicable Margin.

         Each change in the Base Rate shall be reflected in the interest rate
         applicable to Base Rate Loans as of the effective date of such change.
         All interest charges shall be computed on the basis of a year of 360
         days and actual days elapsed (which results in more interest being
         paid than if computed on the basis of a 365-day year). The Borrowers
         shall pay to the Lender interest accrued on all Base Rate Loans in
         arrears on the first day of each month hereafter and on the
         Termination Date. The Borrowers shall pay to the Lender interest on
         all LIBOR Rate Loans in arrears on each LIBOR Interest Payment Date.

                  (b)      Default Rate. If any Default or Event of Default
         occurs and is continuing and the Lender so elects, all of the
         Obligations shall bear interest at the Default Rate applicable thereto
         during the continuance of such Default or Event of Default.

         3.2      Continuation and Conversion Elections.

                  (a)      The Borrowers may, provided that the Borrowing of
         LIBOR Rate Loans is then permitted under Section 1.2:

                           (i)      elect, as of any Business Day, in the case
                  of Base Rate Loans to convert any Base Rate Loans (or any
                  part thereof in an amount not less than $1,000,000, or that
                  is in an integral multiple of $500,000 in excess thereof)
                  into LIBOR Rate Loans; or

                           (ii)     elect, as of the last day of the applicable
                  Interest Period, to continue any LIBOR Rate Loans having
                  Interest Periods expiring on such day (or

                                      13
<PAGE>

                  any part thereof in an amount not less than $1,000,000, or
                  that is in an integral multiple of $500,000 in excess
                  thereof);

         provided, that if at any time the aggregate amount of LIBOR Rate Loans
         in respect of any Borrowing is reduced, by payment, prepayment, or
         conversion of part thereof to be less than $1,000,000, such LIBOR Rate
         Loans shall automatically convert into Base Rate Loans; provided
         further that if the notice shall fail to specify the duration of the
         Interest Period, such Interest Period shall be one month.

                  (b)      The Borrowers shall deliver a notice of
         continuation/conversion substantially in the form of Exhibit D
         ("Notice of Continuation/Conversion") to the Lender not later than
         12:00 noon (Eastern time) at least three (3) Business Days in advance
         of the Continuation/Conversion Date, if the Loans are to be converted
         into or continued as LIBOR Rate Loans and specifying:

                           (i)      the proposed Continuation/Conversion Date;

                           (ii)     the aggregate amount of Loans to be
                  converted or continued;

                           (iii)    the type of Loans resulting from the
                  proposed conversion or continuation; and

                           (iv)     the duration of the requested Interest
                  Period, provided, however, the Borrowers may not select an
                  Interest Period that ends after the Stated Termination Date.

                  (c)      If upon the expiration of any Interest Period
         applicable to LIBOR Rate Loans, any Default or Event of Default then
         exists, the Borrowers shall be deemed to have elected to convert such
         LIBOR Rate Loans into Base Rate Loans effective as of the expiration
         date of such Interest Period.

                  (d)      There may not be more than six (6) different LIBOR
         Rate Loans in effect hereunder at any time.

         3.3      Maximum Interest Rate. In no event shall any interest rate
provided for hereunder exceed the maximum rate legally chargeable under
applicable law with respect to loans of the type provided for hereunder (the
"Maximum Rate"). If, in any month, any interest rate, absent such limitation,
would have exceeded the Maximum Rate, then the interest rate for that month
shall be the Maximum Rate, and, if in future months, that interest rate would
otherwise be less than the Maximum Rate, then that interest rate shall remain
at the Maximum Rate until such time as the amount of interest paid hereunder
equals the amount of interest which would have been paid if the same had not
been limited by the Maximum Rate. In the event that, upon payment in full of
the Obligations, the total amount of interest paid or accrued under the terms
of this Agreement is less than the total amount of interest which would, but
for this Section 3.3, have been paid or accrued if the interest rate otherwise
set forth in this Agreement had at all times been in effect, then the Borrowers
shall, to the extent permitted by applicable law, pay the Lender an amount
equal to the excess of (a) the lesser of (i) the amount of interest which would
have been charged if the Maximum Rate had, at all times, been in effect or (ii)
the amount of

                                      14
<PAGE>

interest which would have accrued had the interest rate otherwise set forth in
this Agreement, at all times, been in effect over (b) the amount of interest
actually paid or accrued under this Agreement. If a court of competent
jurisdiction determines that the Lender has received interest and other charges
hereunder in excess of the Maximum Rate, such excess shall be deemed received
on account of, and shall automatically be applied to reduce, the Obligations
other than interest, in the inverse order of maturity, and if there are no
Obligations outstanding, the Lender shall refund to the Borrowers such excess.

         3.4      Closing and Service Fees. The Borrowers agree to pay the
Lender on the Agreement Date, a fee in an amount equal to $150,000 (the
"Closing Fee"). An annual service fee in the amount of $20,000 shall be due and
payable on the Closing Date and on each anniversary thereof during the term of
this Agreement.

         3.5      Unused Line Fee. On the first day of each month and on the
Termination Date the Borrowers agree to pay to the Lender an unused line fee
(the "Unused Line Fee") equal to 37.5 basis points (.375%) per annum times the
amount by which the Revolving Credit Commitment exceeded the sum of the average
daily outstanding amount of Revolving Loans and the average daily undrawn face
amount of outstanding Letters of Credit, during the immediately preceding month
or shorter period if calculated for the first month hereafter or on the
Termination Date. The Unused Line Fee shall be computed on the basis of a
360-day year for the actual number of days elapsed. All principal payments
received by the Lender shall be deemed to be credited to the Borrowers' Loan
Account immediately upon receipt for purposes of calculating the Unused Line
Fee pursuant to this Section 3.5.

         3.6      Letter of Credit Fee. The Borrowers agree to pay to the
Lender (a) a fee for each Letter of Credit (the "Letter of Credit Fee") equal
to, on a per annum basis, at the Applicable Margin (or at any time the Default
Rate is in effect, 2.0% in excess thereof) of the aggregate undrawn face amount
of each outstanding Letter of Credit, and (b) all out-of-pocket costs, fees and
expenses incurred or charged by the Lender in connection with the application
for, processing of, issuance of, or amendment to any Letter of Credit. The
Letter of Credit Fee shall be payable monthly in arrears on the first day of
each month following any month in which a Letter of Credit is outstanding and
on the Termination Date and shall be computed on the basis of a 360-day year
for the actual number of days elapsed.

                                      15
<PAGE>

                                   ARTICLE 4
                            PAYMENTS AND PREPAYMENTS

         4.1      Revolving Loans. The Borrowers shall repay the outstanding
principal balance of the Revolving Loans, plus all accrued but unpaid interest
thereon, on the Termination Date. The Borrowers may prepay Revolving Loans at
any time, and reborrow subject to the terms of this Agreement. In addition, and
without limiting the generality of the foregoing, the Borrowers shall
immediately pay to the Lender the amount, without duplication, by which the
Aggregate Revolver Outstandings exceed the lesser of the Borrowing Base or the
Maximum Revolver Amount.

         4.2      Termination of Facility. The Borrowers may terminate this
Agreement upon at least ten (10) Business Days' notice to the Lender, upon (a)
the payment in full of all outstanding Revolving Loans, together with accrued
interest thereon, and the cancellation and return of all outstanding Letters of
Credit or, with the Lender's consent, the posting of Cash Collateral or
Supporting Letters of Credit with respect thereto in accordance with Section
1.3(g), (b) the payment of the early termination fee set forth below, and (c)
the payment in full in cash of all reimbursable expenses and other Obligations,
including amounts required to be paid pursuant to Section 4.3. If this
Agreement is terminated at any time prior to the Stated Termination Date,
whether pursuant to this Section or pursuant to Section 10.2, the Borrowers
shall pay to the Lender an early termination fee determined in accordance with
the following table:

<TABLE>
<CAPTION>
         PERIOD DURING WHICH                              EARLY TERMINATION
          EARLY TERMINATION                                      FEE
               OCCURS
         -------------------                              -----------------
<S>                                                   <C>
On or prior to the first Anniversary                  1.5% of the Total Facility
Date

After the first Anniversary Date but                  1.0% of the Total Facility
on or prior to the second
Anniversary Date

After the second Anniversary Date                     0.0% of the Total Facility
but prior to the Stated Termination
Date
</TABLE>

         Notwithstanding the foregoing, in the event the Borrowers refinance
the Total Facility with a credit facility provided by the Lender, the early
termination fee shall not be due or payable.

         4.3      LIBOR Rate Loan Prepayments. If any LIBOR Rate Loans are
prepaid prior to the expiration date of the Interest Period applicable thereto,
the Borrowers shall pay to the Lender the amounts described in Section 5.4.

                                      16
<PAGE>

         4.4      Payments by the Borrowers.

                  (a)      All payments to be made by the Borrowers shall be
         made without set-off, recoupment or counterclaim. Except as otherwise
         expressly provided herein, all payments by the Borrowers shall be made
         to the Payment Account and shall be made in Dollars and in immediately
         available funds, no later than 12:00 noon (Eastern time) on the date
         specified herein. Any payment received by the Lender after such time
         shall be deemed (for purposes of calculating interest only) to have
         been received on the following Business Day and any applicable
         interest shall continue to accrue.

                  (b)      Subject to the provisions set forth in the
         definition of "Interest Period", whenever any payment is due on a day
         other than a Business Day, such payment shall be due on the following
         Business Day, and such extension of time shall in such case be
         included in the computation of interest or fees, as the case may be.

         4.5      Payments as Revolving Loans. At the election of the Lender,
all payments of principal, interest, reimbursement obligations in connection
with Letters of Credit, fees, premiums, reimbursable expenses and other sums
payable hereunder or under any other Loan Document, may be paid from the
proceeds of Revolving Loans made hereunder. The Borrowers hereby irrevocably
authorize the Lender to charge the Loan Account for the purpose of paying all
amounts from time to time due hereunder and agrees that all such amounts
charged shall constitute Revolving Loans.

         4.6      Application and Reversal of Payments. All payments, and all
proceeds of Accounts or other Collateral received by the Lender, shall be
applied subject to the provisions of this Agreement, first, to pay any fees,
indemnities or expense reimbursements then due to the Lender from the
Borrowers; second, to pay interest due in respect of all Loans; third, to pay
or prepay principal of the Revolving Loans and unpaid reimbursement obligations
in respect of Letters of Credit; fourth, to pay an amount to the Lender, equal
to all outstanding Obligations (contingent or otherwise) with respect to
outstanding Letters of Credit, to be held as cash collateral for such
Obligations; and fifth, to the payment of any other Obligation including any
amounts relating to Bank Products due to the Lender by the Borrowers.
Notwithstanding anything to the contrary contained in this Agreement, unless so
directed by the Borrowers, or unless an Event of Default has occurred and is
continuing, the Lender shall not apply any payments which it receives to any
LIBOR Rate Loan, except (a) on the expiration date of the Interest Period
applicable to any such LIBOR Rate Loan, or (b) in the event, and only to the
extent, that there are no outstanding Base Rate Loans and, in any event, the
Borrowers shall pay LIBOR breakage losses in accordance with Section 5.4. The
Lender shall have the continuing and exclusive right to apply and reverse and
reapply any and all such proceeds and payments to any portion of the
Obligations.

         4.7      Indemnity for Returned Payments. If after receipt of any
payment which is applied to the payment of all or any part of the Obligations,
the Lender or any Affiliate of the Lender is for any reason compelled, or in
good faith settlement of an avoidance claim, shall elect to surrender such
payment or proceeds to any Person because such payment or application of
proceeds is (or is asserted to be) invalidated, declared fraudulent, set aside,
determined to be void or voidable as a preference, impermissible setoff, or a
diversion of trust funds, or for any other

                                      17
<PAGE>

reason, then the Obligations or part thereof intended to be satisfied shall be
revived and continued and this Agreement shall continue in full force as if
such payment or proceeds had not been received by the Lender and the Borrowers
shall be liable to pay to the Lender, and hereby indemnifies the Lender and
hold the Lender harmless for the amount of such payment or proceeds
surrendered. The provisions of this Section 4.7 shall be and remain effective
notwithstanding any release of Collateral or guarantors, cancellation or return
of Loan Documents or other contrary action which may have been taken by the
Lender in reliance upon such payment or application of proceeds, and any such
contrary action so taken shall be without prejudice to the Lender's rights
under this Agreement and the other Loan Documents and shall be deemed to have
been conditioned upon such payment or application of proceeds having become
final and irrevocable. The provisions of this Section 4.7 shall survive the
termination of this Agreement.

         4.8      Lender's Books and Records; Monthly Statements. The Lender
shall record the principal amount of the Loans, the undrawn face amount of all
outstanding Letters of Credit and the aggregate amount of unpaid reimbursement
obligations outstanding with respect to the Letters of Credit from time to time
on its books. In addition, the Lender may note the date and amount of each
payment or prepayment of principal of the Lender's Loans in its books and
records. Failure by the Lender to make such notation shall not affect the
obligations of the Borrowers with respect to the Loans or the Letters of
Credit. The Borrowers agree that the Lender's books and records showing the
Obligations and the transactions pursuant to this Agreement and the other Loan
Documents shall be admissible in any action or proceeding arising therefrom,
and shall constitute rebuttably presumptive proof thereof, irrespective of
whether any Obligation is also evidenced by a promissory note or other
instrument. The Lender will provide to Reeds a monthly statement of Loans,
payments, and other transactions pursuant to this Agreement. Such statement
shall be deemed correct, accurate, and binding on the Borrowers and an account
stated (except for reversals and reapplications of payments made as provided in
Section 4.6 and corrections of errors discovered by the Lender), unless the
Borrowers notify the Lender in writing to the contrary within thirty (30) days
after such statement is rendered. In the event a timely written notice of
objections is given by the Borrowers, only the items to which exception is
expressly made will be considered to be disputed by the Borrowers.

                                      18
<PAGE>

                                   ARTICLE 5
                     TAXES, YIELD PROTECTION AND ILLEGALITY

         5.1      Taxes.

                  (a)      Any and all payments by the Borrowers to the Lender
         under this Agreement and any other Loan Document shall be made free
         and clear of, and without deduction or withholding for any Taxes. In
         addition, the Borrowers shall pay all Other Taxes.

                  (b)      Each Borrower agrees to indemnify and hold harmless
         the Lender for the full amount of Taxes or Other Taxes (including any
         Taxes or Other Taxes imposed by any jurisdiction on amounts payable
         under this Section) paid by the Lender and any liability (including
         penalties, interest, additions to tax and expenses) arising therefrom
         or with respect thereto, whether or not such Taxes or Other Taxes were
         correctly or legally asserted. Payment under this indemnification
         shall be made within 30 days after the date the Lender makes written
         demand therefor.

                  (c)      If any Borrower shall be required by law to deduct
         or withhold any Taxes or Other Taxes from or in respect of any sum
         payable hereunder to the Lender, then:

                           (i)      the sum payable shall be increased as
                  necessary so that after making all required deductions and
                  withholdings (including deductions and withholdings
                  applicable to additional sums payable under this Section) the
                  Lender receives an amount equal to the sum it would have
                  received had no such deductions or withholdings been made;

                           (ii)     such Borrower shall make such deductions
                  and withholdings;

                           (iii)    such Borrower shall pay the full amount
                  deducted or withheld to the relevant taxing authority or
                  other authority in accordance with applicable law; and

                           (iv)     such Borrowers shall also pay to the
                  Lender, at the time interest is paid, all additional amounts
                  which the Lender specifies as necessary to preserve the
                  after-tax yield the Lender would have received if such Taxes
                  or Other Taxes had not been imposed.

                  (d)      At the Lender's request, within 30 days after the
         date of any payment by a Borrower of Taxes or Other Taxes, such
         Borrower shall furnish the Lender the original or a certified copy of
         a receipt evidencing payment thereof, or other evidence of payment
         satisfactory to the Lender.

                  (e)      If any Borrower is required to pay additional
         amounts to the Lender pursuant to subsection (c) of this Section, then
         the Lender shall use reasonable efforts (consistent with legal and
         regulatory restrictions) to change the jurisdiction of its lending
         office so as to eliminate any such additional payment by such Borrower
         which may

                                      19
<PAGE>

         thereafter accrue, if such change in the judgment of the Lender is not
         otherwise disadvantageous to the Lender.

         5.2      Illegality.

                  (a)      If any Lender determines that the introduction of
         any Requirement of Law, or any change in any Requirement of Law, or in
         the interpretation or administration of any Requirement of Law, has
         made it unlawful, or that any central bank or other Governmental
         Authority has asserted that it is unlawful, for the Lender or its
         applicable lending office to make LIBOR Rate Loans, then, on notice
         thereof by the Lender to the Borrowers, any obligation of the Lender
         to make LIBOR Rate Loans shall be suspended until the Lender notifies
         the Borrowers that the circumstances giving rise to such determination
         no longer exist.

                  (b)      If the Lender determines that it is unlawful to
         maintain any LIBOR Rate Loan, the Borrowers shall, upon their receipt
         of notice of such fact and demand from the Lender, prepay in full such
         LIBOR Rate Loans of the Lender then outstanding, together with
         interest accrued thereon and amounts required under Section 5.4,
         either on the last day of the Interest Period thereof, if the Lender
         may lawfully continue to maintain such LIBOR Rate Loans to such day,
         or immediately, if the Lender may not lawfully continue to maintain
         such LIBOR Rate Loans. If any Borrower is required to so prepay any
         LIBOR Rate Loans, then concurrently with such prepayment, such
         Borrower shall borrow from the Lender a Base Rate Loan in the amount
         of such repayment.

         5.3      Increased Costs and Reduction of Return.

                  (a)      If the Lender determines that due to either (i) the
         introduction of or any change in the interpretation of any law or
         regulation or (ii) the compliance by the Lender with any guideline or
         request from any central bank or other Governmental Authority (whether
         or not having the force of law), there shall be any increase in the
         cost to the Lender of agreeing to make or making, funding or
         maintaining any LIBOR Rate Loans, then the Borrowers shall be liable
         for, and shall from time to time, upon demand pay to the Lender,
         additional amounts as are sufficient to compensate the Lender for such
         increased costs.

                  (b)      If the Lender shall have determined that (i) the
         introduction of any Capital Adequacy Regulation, (ii) any change in
         any Capital Adequacy Regulation, (iii) any change in the
         interpretation or administration of any Capital Adequacy Regulation by
         any central bank or other Governmental Authority charged with the
         interpretation or administration thereof, or (iv) compliance by the
         Lender or any corporation or other entity controlling the Lender with
         any Capital Adequacy Regulation, affects or would affect the amount of
         capital required or expected to be maintained by the Lender or any
         corporation or other entity controlling the Lender and (taking into
         consideration the Lender's or such corporation's or other entity's
         policies with respect to capital adequacy and the Lender's desired
         return on capital) determines that the amount of such capital is
         increased as a consequence of its Revolving Credit Commitment, loans,
         credits or obligations under this Agreement, then, upon demand of the
         Lender, the Borrowers shall

                                      20
<PAGE>

         pay to the Lender, from time to time as specified by the Lender,
         additional amounts sufficient to compensate the Lender for such
         increase.

         5.4      Funding Losses. The Borrowers shall reimburse the Lender and
hold the Lender harmless from any loss or expense which the Lender may sustain
or incur as a consequence of:

                  (a)      the failure of any Borrower to make on a timely
         basis any payment of principal of any LIBOR Rate Loan;

                  (b)      the failure of any Borrower to borrow, continue or
         convert a Loan after any Borrower has given (or is deemed to have
         given) a Notice of Borrowing or a Notice of Continuation/Conversion;
         or

                  (c)      the prepayment or other payment (including after
         acceleration thereof) of any LIBOR Rate Loans on a day that is not the
         last day of the relevant Interest Period;

         including any such loss of anticipated profit and any loss or expense
         arising from the liquidation or reemployment of funds obtained by it
         to maintain its LIBOR Rate Loans or from fees payable to terminate the
         deposits from which such funds were obtained. Borrowers shall also pay
         any customary administrative fees charged by the Lender in connection
         with the foregoing.

         For purposes of calculating amounts payable by the Borrowers to the
         Lender under this Section 5.4, the Lender shall be deemed to have
         funded each LIBOR Rate Loan made by it at the Offshore Base Rate used
         in determining the LIBOR Rate for such Loan by a matching deposit or
         other borrowing in the applicable offshore interbank market for a
         comparable amount and for a comparable period, whether or not such
         LIBOR Rate Loan was in fact so funded.

         5.5      Inability to Determine Rates. If the Lender determines that
for any reason adequate and reasonable means do not exist for determining the
LIBOR Rate for any requested Interest Period with respect to a proposed LIBOR
Rate Loan, or that the LIBOR Rate for any requested Interest Period with
respect to a proposed LIBOR Rate Loan does not adequately and fairly reflect
the cost to the Lender of funding such Loan, the Lender will promptly so notify
the Parent. Thereafter, the obligation of the Lender to make or maintain LIBOR
Rate Loans hereunder shall be suspended until the Lender revokes such notice in
writing. Upon receipt of such notice, the Parent or any other Borrower may
revoke any Notice of Borrowing or Notice of Continuation/Conversion then
submitted by it. If no Borrower revokes such Notice, the Lender shall make,
convert or continue the Loans, as proposed by the requesting Borrower, in the
amount specified in the applicable notice submitted by such Borrower, but such
Loans shall be made, converted or continued as Base Rate Loans instead of LIBOR
Rate Loans.

         5.6      Certificates of Lender. If the Lender claims reimbursement or
compensation under this Article 5, the Lender shall determine the amount
thereof and shall deliver to Reeds a certificate setting forth in reasonable
detail the amount payable to the Lender, and such certificate shall be
presumptively correct.

                                      21
<PAGE>

         5.7      Survival. The agreements and obligations of the Borrowers in
this Article 5 shall survive the payment of all other Obligations.

                                      22
<PAGE>

                                   ARTICLE 6
               BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES

         6.1      Books and Records. The Borrowers shall maintain, and shall
cause each of their Subsidiaries to maintain, at all times, correct and
complete books, records and accounts in which complete, correct and timely
entries are made of its transactions in accordance with GAAP applied
consistently with the audited Financial Statements required to be delivered
pursuant to Section 6.2(a). The Borrowers shall reflect, and shall cause each
of their Subsidiaries to reflect, by means of appropriate entries in such
accounts and in all Financial Statements, proper liabilities and reserves for
all taxes and proper provision for depreciation and amortization of property
and bad debts, all in accordance with GAAP. The Borrowers shall maintain at all
times books and records pertaining to the Collateral in such detail, form and
scope as the Lender shall reasonably require, including, but not limited to,
records of (a) all payments received and all credits and extensions granted
with respect to the Accounts; (b) the return, rejection, repossession, stoppage
in transit, loss, damage, or destruction of any Inventory; and (c) all other
dealings affecting the Collateral.

         6.2      Financial Information. The Parent shall promptly furnish to
the Lender all such financial information as the Lender shall reasonably
request. Without limiting the foregoing, the Parent will furnish to the Lender,
in such detail as the Lender shall request, the following:

                  (a)      As soon as available, but in any event not later
         than ninety (90) days after the close of each Fiscal Year,
         consolidated audited and consolidating unaudited balance sheets, and
         income statements, cash flow statements and changes in stockholders'
         equity for the Consolidated Parties for such Fiscal Year, and the
         accompanying notes thereto, setting forth in each case in comparative
         form figures for the previous Fiscal Year, all in reasonable detail,
         fairly presenting the financial position and the results of operations
         of the Consolidated Parties as at the date thereof and for the Fiscal
         Year then ended, and prepared in accordance with GAAP. Such statements
         shall be examined in accordance with generally accepted auditing
         standards by and, in the case of such statements performed on a
         consolidated basis, accompanied by a report thereon unqualified in any
         respect of independent certified public accountants selected by the
         Parent and reasonably satisfactory to the Lender. The Parent,
         simultaneously with retaining such independent public accountants to
         conduct such annual audit, shall send a letter to such accountants,
         with a copy to the Lender, notifying such accountants that one of the
         primary purposes for retaining such accountants' services and having
         audited financial statements prepared by them is for use by the
         Lender. The Parent hereby authorizes the Lender to communicate
         directly with its certified public accountants and, by this provision,
         authorizes those accountants to disclose to the Lender any and all
         financial statements and other supporting financial documents and
         schedules relating to the Consolidated Parties and to discuss directly
         with the Lender the finances and affairs of the Consolidated Parties.

                  (b)      As soon as available, but in any event not later
         than thirty (30) days after the end of each month, consolidated and
         consolidating unaudited balance sheets of the Consolidated Parties as
         at the end of the most recently completed Fiscal Month and
         consolidated and consolidating unaudited income statements and cash
         flow statements for

                                      23
<PAGE>

         the Consolidated Parties for such Fiscal Month, and for the period
         from the beginning of the Fiscal Year to the end of such Fiscal Month,
         all in reasonable detail, fairly presenting the financial position and
         results of operations of the Consolidated Parties as at the date
         thereof and for such periods, and, in each case, in comparable form,
         figures for the corresponding period in the prior Fiscal Year and in
         the Consolidated Parties' budget, and prepared in accordance with GAAP
         applied consistently with the audited Financial Statements required to
         be delivered pursuant to Section 6.2(a). The Parent shall certify by a
         certificate signed by a Responsible Officer that all such statements
         have been prepared in accordance with GAAP and present fairly the
         Consolidated Parties' financial position as at the dates thereof and
         its results of operations for the periods then ended, subject to
         normal year-end adjustments.

                  (c)      With each of the audited Financial Statements
         delivered pursuant to Section 6.2(a), a certificate of the independent
         certified public accountants that examined such statement to the
         effect that they have reviewed and are familiar with this Agreement
         and that, in examining such Financial Statements, they did not become
         aware of any fact or condition which then constituted a Default or
         Event of Default with respect to a financial covenant, except for
         those, if any, described in reasonable detail in such certificate.

                  (d)      With each of the annual audited Financial Statements
         delivered pursuant to Section 6.2(a), and within thirty (30) days
         after the end of each fiscal quarter, a certificate of a Responsible
         Officer of the Parent in substantially the form of Exhibit E setting
         forth in reasonable detail the calculations required to establish that
         the Parent was in compliance with the covenants set forth in Sections
         8.21, 8.22 and 8.23 during the period covered in such Financial
         Statements and as at the end thereof. Within thirty (30) days after
         the end of each month, a certificate of a Responsible Officer of the
         Parent stating that, except as explained in reasonable detail in such
         certificate, (i) all of the representations and warranties of the
         Borrowers contained in this Agreement and the other Loan Documents, as
         modified by any amendment or certificate delivered to and acknowledged
         and agreed to by Lender, are correct and complete in all material
         respects as at the date of such certificate as if made at such time,
         except for those that speak as of a particular date, (ii) the
         Borrowers are, at the date of such certificate, in compliance in all
         material respects with all of their respective covenants and
         agreements in this Agreement and the other Loan Documents, (iii) no
         Default or Event of Default then exists or existed during the period
         covered by the Financial Statements for such month, (iv) describing
         and analyzing in reasonable detail all material trends, changes, and
         developments in each and all Financial Statements, (v) explaining the
         variances of the figures in the corresponding budgets and prior Fiscal
         Year financial statements, and (vi) all of the information and
         disclosures provided on the Schedules attached to this Agreement
         continue to be true and correct in all material respects. If such
         certificate discloses that a representation or warranty is not correct
         or complete, or that a covenant has not been complied with, or that a
         Default or Event of Default existed or exists, such certificate shall
         set forth what action the Parent has taken or proposes to take with
         respect thereto. If such certificate discloses that any of the
         information and disclosures provided on the Schedules attached to this
         Agreement are no longer true and correct in all material respects, no
         such Schedules shall be deemed to have been amended, modified or

                                      24
<PAGE>

         superseded, and no cure of any breach of any representation, warranty
         or covenant resulting from the inaccuracy or incompleteness of any
         such Schedule shall be deemed to have occurred, unless and until the
         Lender in its discretion shall have accepted in writing any such
         revisions or updates to such Schedules.

                  (e)      No sooner than sixty (60) days and not less than
         thirty (30) days prior to the beginning of each Fiscal Year, annual
         forecasts (to include forecasted consolidated and consolidating
         balance sheets, income statements and cash flow statements, and
         Borrowing Base and Availability projections) for the Consolidated
         Parties as at the end of and for each month of such Fiscal Year.

                  (f)      As soon as available, but in any event not later
         than thirty (30) days after the end of each month, an accounts payable
         aging report in form acceptable to the Lender and certified as true
         and correct by a Responsible Officer of the Parent.

                  (g)      Promptly after filing with the PBGC and the IRS, a
         copy of each annual report or other filing filed with respect to each
         Plan of the Parent.

                  (h)      Promptly upon the filing thereof, copies of all
         reports, if any, to or other documents filed by the Parent or any of
         its Subsidiaries with the Securities and Exchange Commission under the
         Exchange Act, and all reports, notices, or statements sent or received
         by the Parent or any of its Subsidiaries to or from the holders of any
         equity interests of the Parent (other than routine non-material
         correspondence sent by shareholders of the Parent to the Parent) or
         any such Subsidiary or of any Debt of the Borrowers or any of their
         Subsidiaries registered under the Securities Act of 1933 or to or from
         the trustee under any indenture under which the same is issued.

                  (i)      As soon as available, but in any event not later
         than 15 days after the Parent' receipt thereof, a copy of all
         management reports and management letters prepared for the Parent by
         any independent certified public accountants of the Parent.

                  (j)      Promptly after their preparation, copies of any and
         all proxy statements, financial statements, and reports which the
         Parent makes available to its shareholders.

                  (k)      If requested by the Lender, promptly after filing
         with the IRS, a copy of each tax return filed by the Parent or by any
         of its Subsidiaries.

                  (l)      Such additional information as the Lender may from
         time to time reasonably request regarding the financial and business
         affairs of the Parent or any Subsidiary.

         6.3      Notices to the Lender. Each Borrower shall notify the Lender
in writing of the following matters at the following times:

                  (a)      Immediately after becoming aware of any Default or
         Event of Default;

                  (b)      Immediately after becoming aware of the assertion by
         (i) the holder of any capital stock of any Borrower or of any
         Subsidiary or (ii) the holder of any Debt of any

                                      25
<PAGE>

         Borrower or any Subsidiary in a face amount in excess of $100,000,
         that a default exists with respect thereto or that such Borrower or
         such Subsidiary is not in compliance with the terms thereof, or the
         threat or commencement by such holder of any enforcement action
         because of such asserted default or non-compliance;

                  (c)      Immediately after becoming aware of any event or
         circumstance which could reasonably be expected to have a Material
         Adverse Effect;

                  (d)      Immediately after becoming aware of any pending or
         threatened action, suit, or proceeding, by any Person, or any pending
         or threatened investigation by a Governmental Authority, which could
         reasonably be expected to have a Material Adverse Effect;

                  (e)      Immediately after becoming aware of any pending or
         threatened strike, work stoppage, unfair labor practice claim, or
         other labor dispute affecting the Borrowers or any of their
         Subsidiaries in a manner which could reasonably be expected to have a
         Material Adverse Effect;

                  (f)      Immediately after becoming aware of any violation of
         any law, statute, regulation, or ordinance of a Governmental Authority
         affecting the Borrowers or any Subsidiary which could reasonably be
         expected to have a Material Adverse Effect;

                  (g)      Immediately after receipt of any notice of any
         violation by a Borrower or any of its Subsidiaries of any
         Environmental Law which could reasonably be expected to have a
         Material Adverse Effect or that any Governmental Authority has
         asserted in writing that a Borrower or any Subsidiary is not in
         compliance with any Environmental Law or is investigating such
         Borrower's or such Subsidiary's compliance therewith;

                  (h)      Immediately after receipt of any written notice that
         a Borrower or any of its Subsidiaries is or may be liable to any
         Person as a result of the Release or threatened Release of any
         Contaminant or that a Borrower or any Subsidiary is subject to
         investigation by any Governmental Authority evaluating whether any
         remedial action is needed to respond to the Release or threatened
         Release of any Contaminant;

                  (i)      Immediately after receipt of any written notice of
         the imposition of any Environmental Lien against any property of a
         Borrower or any of their Subsidiaries;

                  (j)      Any change in a Borrower's or any other Credit
         Party's name, state of organization, organizational identification
         number, locations of Collateral, or form of organization, trade names
         under which a Borrower will sell Inventory or create Accounts, or to
         which instruments in payment of Accounts may be made payable, in each
         case at least thirty (30) days prior thereto;

                  (k)      Within ten (10) Business Days after a Borrower or
         any ERISA Affiliate knows, or has reason to know, that an ERISA Event
         or a prohibited transaction (as defined in Sections 406 of ERISA and
         4975 of the Code) has occurred, and, when known, any action taken or
         threatened by the IRS, the DOL or the PBGC with respect thereto;

                                      26
<PAGE>

                  (l)      Upon request, or, in the event that such filing
         reflects a significant change with respect to the matters covered
         thereby, within three (3) Business Days after the filing thereof with
         the PBGC, the DOL or the IRS, as applicable, copies of the following:
         (i) each annual report (form 5500 series), including Schedule B
         thereto, filed with the PBGC, the DOL or the IRS with respect to each
         Plan, (ii) a copy of each funding waiver request filed with the PBGC,
         the DOL or the IRS with respect to any Plan and all communications
         received by a Borrower or any ERISA Affiliate from the PBGC, the DOL
         or the IRS with respect to such request, and (iii) a copy of each
         other filing or notice filed with the PBGC, the DOL or the IRS, with
         respect to each Plan by either a Borrower or any ERISA Affiliate;

                  (m)      Upon request, copies of each actuarial report for
         any Plan or Multi-employer Plan and annual report for any
         Multi-employer Plan; and within three (3) Business Days after receipt
         thereof by the Borrowers or any ERISA Affiliate, copies of the
         following: (i) any notices of the PBGC's intention to terminate a Plan
         or to have a trustee appointed to administer such Plan; (ii) any
         favorable or unfavorable determination letter from the IRS regarding
         the qualification of a Plan under Section 401 (a) of the Code; or
         (iii) any notice from a Multi-employer Plan regarding the imposition
         of withdrawal liability;

                  (n)      Within three (3) Business Days after the occurrence
         thereof (i) any changes in the benefits of any existing Plan which
         increase any Borrower's annual costs with respect thereto by an amount
         in excess of $100,000, or the establishment of any new Plan or the
         commencement of contributions to any Plan to which any Borrower or any
         ERISA Affiliate was not previously contributing; or (ii) any failure
         by any Borrower or any ERISA Affiliate to make a required installment
         or any other required payment under Section 412 of the Code on or
         before the due date for such installment or payment; and

                  (o)      Within three (3) Business Days after any Borrower or
         any ERISA Affiliate knows or has reason to know that any of the
         following events has or will occur: (i) a Multi-employer Plan has been
         or will be terminated; (ii) the administrator or plan sponsor of a
         Multi-employer Plan intends to terminate a Multi-employer Plan; or
         (iii) the PBGC has instituted or will institute proceedings under
         Section 4042 of ERISA to terminate a Multi-employer Plan.

         Each notice given under this Section shall describe the subject matter
thereof in reasonable detail, and shall set forth the action that the
Borrowers, their Subsidiary, or any ERISA Affiliate, as applicable, has taken
or proposes to take with respect thereto.

         6.4      Collateral Reporting

                  (a)      As soon as available, but in any event no later than
         Wednesday of each week, or more frequently if requested by the Lender,
         the Parent shall deliver to the Lender a Borrowing Base Certificate
         establishing the Borrowing Base as of the end of the immediately
         preceding week certified by a Responsible Officer of the Parent.

                                      27
<PAGE>

                  (b)      the Parent shall cause to be prepared at its expense
         and shall deliver the following reports and other information to the
         Lender as of the times set forth below:

                           (i)      no later than 30 days after the end of each
                  month, or more frequently if requested by the Lender, an
                  inventory report as of the end of such month, including a
                  calculation of all Eligible Inventory and all Inventory not
                  constituting Eligible Inventory in form and detail acceptable
                  to the Lender;

                           (ii)     no later than 30 days after the end of each
                  month, or more frequently if requested by the Lender,
                  Inventory reports as of the end of such month by category and
                  location, together with a reconciliation to the Parent's
                  general ledger;

                           (iii)    upon request, but no more than four times
                  each year provided no Default or Event of Default has
                  occurred and is continuing, inventory appraisals prepared by
                  an independent appraisers satisfactory to the Lender;
                  provided, however, if a Default or Event of Default has
                  occurred and is continuing, there shall be no limit on the
                  number of inventory appraisals the Lender may request;

                           (iv)     upon request, copies of customer
                  statements, credit memos, remittance advices and reports,
                  deposit slips, shipping and delivery documents for Inventory
                  and Equipment acquired by the Borrowers, purchase orders and
                  invoices;

                           (v)      upon request, a statement of the balance of
                  all assets and liabilities, however arising, which are due to
                  any Borrower from, or which are due from any Borrower to, or
                  which otherwise arise from any transaction by any Borrower
                  with, any Affiliate of any Borrower;

                           (vi)     such other reports as to the Collateral of
                  the Borrowers as the Lender shall reasonably request from
                  time to time; and

                           (vii)    with the delivery of each of the foregoing,
                  a certificate of the applicable Borrower executed by a
                  Responsible Officer certifying as to the accuracy and
                  completeness of the foregoing.

         If any of the Borrowers' records or reports of the Collateral are
         prepared by an accounting service or other agent, the Borrowers hereby
         authorizes such service or agent to deliver such records, reports, and
         related documents to the Lender and, at the Lender's request, an
         Affiliate of the Lender.

                  (c)      The Borrower shall permit the Lender to conduct
         field examinations of the Borrowers' Inventory and books and records
         up to four times during each twelve month period; provided, however,
         if a Default or Event of Default has occurred and is continuing, there
         shall be no limit on the number of field examinations the Lender may
         conduct.

                                      28
<PAGE>

                                   ARTICLE 7
                     GENERAL WARRANTIES AND REPRESENTATIONS

         The Borrowers warrant and represent to the Lender that except as
hereafter disclosed to and accepted by the Lender in writing:

         7.1      Authorization, Validity and Enforceability of this Agreement
and the Loan Documents. Each Borrower and each of its Subsidiaries has the
power and authority to execute, deliver and perform this Agreement and the
other Loan Documents to which it is a party and to grant the Lender's Liens
and, with respect to the Borrowers only, to incur the Obligations. Each
Borrower and each Subsidiary has taken all necessary action (including
obtaining approval of its stockholders if necessary) to authorize its
execution, delivery, and performance of this Agreement and the other Loan
Documents to which it is a party. This Agreement and the other Loan Documents
to which it is a party have been duly executed and delivered by each Borrower
and each Subsidiary party thereto, and constitute the legal, valid and binding
obligations of each Borrower and each such Subsidiary, enforceable against it
in accordance with its respective terms except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization and other similar laws
affecting creditors' rights generally and as limited by general principles of
equity. Each Borrowers' and each Subsidiary's execution, delivery, and
performance of this Agreement and the other Loan Documents to which it is a
party do not and will not conflict with or constitute a violation or breach of,
in each case to the extent not waived in writing, or result in the imposition
of any Lien upon the property of the Borrowers or any of their Subsidiaries, by
reason of the terms of (a) any contract, mortgage, lease, agreement, indenture,
or instrument to which any Borrower or any such Subsidiary is a party or which
is binding upon it, (b) any Requirement of Law applicable to the Borrowers or
any of their Subsidiaries, or (c) the certificate or articles of incorporation
or by-laws or the limited liability company or limited partnership agreement of
the Borrowers or any of their Subsidiaries.

         7.2      Validity and Priority of Security Interest. The provisions of
this Agreement and the other Loan Documents create legal and valid Liens on all
the Collateral in favor of the Lender, subject to no other Liens, except for
Permitted Liens.

         7.3      Organization and Qualification. Each Borrower (a) is duly
organized or incorporated and validly existing in good standing under the laws
of the state of their organization or incorporation, (b) is qualified to do
business and is in good standing in the jurisdictions set forth on Schedule 7.3
which are the only jurisdictions in which qualification is necessary in order
for them to own or lease their property and conduct their business as now
conducted and (c) has all requisite power and authority to conduct their
business and to own their property.

         7.4      Corporate Name; Prior Transactions. Except as set forth on
Schedule 7.4, none of the Borrowers nor any Subsidiary has, during the past
five (5) years, been known by or used any other corporate or fictitious name,
or been a party to any merger or consolidation, or acquired all or
substantially all of the assets of any Person, or acquired any of its property
outside of the ordinary course of business.

                                      29
<PAGE>

         7.5      Subsidiaries and Affiliates. The Parent has no direct or
indirect Subsidiaries other than the other Borrowers.

         7.6      Financial Statements and Projections.

                  (a)      The Parent has delivered to the Lender the audited
         balance sheet and related statements of income, retained earnings,
         cash flows, and changes in stockholders equity for the Consolidated
         Parties for the Fiscal Year ended February 28, 2001, accompanied by
         the report thereon of the Parent's independent certified public
         accountants, Ernst & Young LLP. The Parent has also delivered to the
         Lender the unaudited balance sheet and related statements of income
         and cash flows for the Consolidated Parties as of December 31, 2001.
         Such financial statements are attached hereto as Exhibit B. All such
         financial statements have been prepared in accordance with GAAP and
         present accurately and fairly in all material respects the financial
         position of the Consolidated Parties as at the dates thereof and their
         results of operations for the periods then ended.

                  (b)      The Latest Projections when submitted to the Lender
         as required herein represent the Parent's best estimate of the future
         financial performance of the Consolidated Parties for the periods set
         forth therein. The Latest Projections have been prepared on the basis
         of the assumptions set forth therein, which the Parent believes are
         fair and reasonable in light of current and reasonably foreseeable
         business conditions at the time submitted to the Lender.

         7.7      Capitalization. The authorized capital stock or other equity
interests of the Borrowers and the beneficially and record owners thereof are
set forth on Schedule 7.7 hereto.

         7.8      Solvency. Each Borrower is Solvent prior to and after giving
effect to the Borrowings to be made on the Closing Date and the issuance of the
Letters of Credit to be issued on the Closing Date, and shall remain Solvent
during the term of this Agreement.

         7.9      Debt. After giving effect to the making of the Loans to be
made on the Closing Date, the Borrowers and their Subsidiaries have no Debt,
except Permitted Debt.

         7.10     Distributions. From February 28, 2001 through the Agreement
Date, no Distribution has been declared, paid, or made upon or in respect of
any capital stock or other securities of the Borrowers or any of their
Subsidiaries.

         7.11     Real Estate; Leases. Schedule 7.11 sets forth, as of the
Agreement Date, a correct and complete list of all leases and subleases of real
or personal property held by the Borrowers or any of their Subsidiaries as
lessee or sublessee (other than leases of personal property as to which the
Borrowers or a Subsidiary is lessee or sublessee for which the value of such
personal property in the aggregate is less than $500,000), and all leases and
subleases of real or personal property held by the Borrowers or any of their
Subsidiaries as lessor, or sublessor. Each of such leases and subleases is
valid and enforceable in accordance with its terms and is in full force and
effect, and no default by any party to any such lease or sublease exists. The
Borrowers or the applicable Subsidiary hold a valid leasehold interests in all
Real Estate set forth on Schedule 7.11, and the Borrowers and each of their
Subsidiaries have good, indefeasible, and

                                      30
<PAGE>

merchantable title to all of their other property reflected on the February 28,
2001 Financial Statements delivered to the Lender, except as disposed of in the
ordinary course of business since the date thereof, free of all Liens except
Permitted Liens.

         7.12     Proprietary Rights. Schedule 7.12 sets forth a correct and
complete list of all of the Borrowers' Proprietary Rights, which Proprietary
Rights constitute all of the property of such type necessary to the current and
anticipated future conduct of the Borrowers' business. None of the Proprietary
Rights is subject to any licensing agreement or similar arrangement except as
set forth on Schedule 7.12. To the best of the Borrowers' knowledge, (a) none
of the Proprietary Rights infringes on or conflicts with any other Person's
property, (b) no other Person's property infringes on or conflicts with the
Proprietary Rights, and (c) no slogan or other advertising device, product,
process, method, substance, part or other material now employed, or now
contemplated to be employed, by the Borrowers or any Subsidiary infringes upon
any rights held by any other Person. No claim or litigation regarding any of
the foregoing is pending or threatened, and to the knowledge of the Borrowers
no patent, invention, device, application, principle or any statute, law, rule,
regulation, standard or code is pending or, to the knowledge of the Borrowers,
proposed, which, in either case, could reasonably be expected to have a
Material Adverse Effect.

         7.13     Trade Names. All trade names or styles under which the
Borrowers or any of their Subsidiaries will sell Inventory or create Accounts,
or to which instruments in payment of Accounts may be made payable, are listed
on Schedule 7.13.

         7.14     Litigation. There is no pending, or to the best of the
Borrowers' knowledge threatened, action, suit, proceeding, or counterclaim by
any Person, or to the best of the Borrowers' knowledge, investigation by any
Governmental Authority, or any basis for any of the foregoing, which could
reasonably be expected to have a Material Adverse Effect.

         7.15     Labor Disputes. As of the Agreement Date (a) there is no
collective bargaining agreement or other labor contract covering employees of
the Borrowers or any of their Subsidiaries, (b) no such collective bargaining
agreement or other labor contract is scheduled to expire during the term of
this Agreement, (c) no union or other labor organization is seeking to
organize, or to be recognized as, a collective bargaining unit of employees of
the Borrowers or any of their Subsidiaries or for any similar purpose, and (d)
there is no pending or (to the best of the Borrowers' knowledge) threatened,
strike, work stoppage, material unfair labor practice claim, or other material
labor dispute against or affecting the Borrowers or their Subsidiaries or their
employees.

         7.16     Environmental Laws.

                  (a)      The Borrowers have complied in all material respects
         with all Environmental Laws and no Borrower nor any of its presently
         owned real property or presently conducted operations, nor its
         previously owned real property or prior operations, is subject to any
         enforcement order from or liability agreement with any Governmental
         Authority or private Person respecting (i) compliance with any
         Environmental Law or (ii) any potential liabilities and costs or
         remedial action arising from the Release or threatened Release of a
         Contaminant.

                                      31
<PAGE>

                  (b)      The Borrowers have obtained all permits necessary
         for their current operations under Environmental Laws, and all such
         permits are in good standing and the Borrowers are in compliance with
         all material terms and conditions of such permits.

                  (c)      No Borrower, nor, to the best of any Borrower's
         knowledge, any of their predecessors in interest, has in violation of
         applicable law stored, treated or disposed of any hazardous waste.

                  (d)      No Borrower has received any summons, complaint,
         order or similar written notice indicating that it is not currently in
         compliance with, or that any Governmental Authority is investigating
         its compliance with, any Environmental Laws or that it is or may be
         liable to any other Person as a result of a Release or threatened
         Release of a Contaminant.

                  (e)      To the best of each Borrower's knowledge, none of
         the present or past operations of the Borrowers is the subject of any
         investigation by any Governmental Authority evaluating whether any
         remedial action is needed to respond to a Release or threatened
         Release of a Contaminant.

                  (f)      There is not now, nor to the best of each Borrower's
         knowledge has there ever been on or in the Real Estate:

                           (i)      any underground storage tanks or surface
                  impoundments,

                           (ii)     any asbestos-containing material, or

                           (iii)    any polychlorinated biphenyls (PCBs) used
                  in hydraulic oils, electrical transformers or other
                  equipment.

                  (g)      No Borrower has filed any notice under any
         requirement of Environmental Law reporting a spill or accidental and
         unpermitted Release or discharge of a Contaminant into the
         environment.

                  (h)      No Borrower has entered into any negotiations or
         settlement agreements with any Person (including the prior owner of
         its property) imposing material obligations or liabilities on any
         Borrower or any of its Subsidiaries with respect to any remedial
         action in response to the Release of a Contaminant or environmentally
         related claim.

                  (i)      None of the products manufactured, distributed or
         sold by the Borrowers contain asbestos containing material.

                  (j)      No Environmental Lien has attached to the Real
         Estate.

         7.17     No Violation of Law. No Borrower is in violation of any law,
statute, regulation, ordinance, judgment, order, or decree applicable to it
which violation could reasonably be expected to have a Material Adverse Effect.

                                      32
<PAGE>

         7.18     No Default. No Borrower is in default with respect to any
note, indenture, loan agreement, mortgage, lease, deed, or other agreement to
which the Borrowers or such Subsidiary is a party or by which it is bound,
which default could reasonably be expected to have a Material Adverse Effect.

         7.19     ERISA Compliance.

                  (a)      Each Plan is in compliance in all material respects
         with the applicable provisions of ERISA, the Code and other federal or
         state law. Each Plan which is intended to qualify under Section 401(a)
         of the Code has received a favorable determination letter from the IRS
         and to the best knowledge of the Borrowers, nothing has occurred which
         would cause the loss of such qualification. Each Borrower and each
         ERISA Affiliate have made all required contributions to any Plan
         subject to Section 412 of the Code, and no application for a funding
         waiver or an extension of any amortization period pursuant to Section
         412 of the Code has been made with respect to any Plan.

                  (b)      There are no pending or, to the best knowledge of
         any Borrower, threatened claims, actions or lawsuits, or action by any
         Governmental Authority, with respect to any Plan which has resulted or
         could reasonably be expected to result in a Material Adverse Effect.
         There has been no prohibited transaction or violation of the fiduciary
         responsibility rules with respect to any Plan which has resulted or
         could reasonably be expected to result in a Material Adverse Effect.

                  (c)      (i) No ER1SA Event has occurred or is reasonably
         expected to occur; (ii) no Pension Plan has any Unfunded Pension
         Liability; (iii) no Borrower nor any ERISA Affiliate has incurred, or
         reasonably expects to incur, any liability under Title IV of ERISA
         with respect to any Pension Plan (other than premiums due and not
         delinquent under Section 4007 of ERISA); (iv) no Borrower nor any
         ERISA Affiliate has incurred, or reasonably expects to incur, any
         liability (and no event has occurred which, with the giving of notice
         under Section 4219 of ERISA, would result in such liability) under
         Section 4201 or 4243 of ERISA with respect to a Multi-employer Plan;
         and (v) no Borrower nor any ERISA Affiliate has engaged in a
         transaction that could be subject to Section 4069 or 4212(c) of ERISA.

         7.20     Taxes. The Borrowers have filed all federal and other tax
returns and reports required to be filed, and have paid all federal and other
taxes, assessments, fees and other governmental charges levied or imposed upon
them or their properties, income or assets otherwise due and payable unless
such unpaid taxes and assessments would constitute a Permitted Lien.

         7.21     Regulated Entities. None of the Borrowers, any Person
controlling the Borrowers, or any Affiliate of the Borrowers, is an "Investment
Company" within the meaning of the Investment Company Act of 1940. None of the
Borrowers are subject to regulation under the Public Utility Holding Company
Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state
public utilities code or law, or any other federal or state statute or
regulation limiting its ability to incur indebtedness.

                                      33
<PAGE>

         7.22     Use of Proceeds; Margin Regulations. The proceeds of the
Loans are to be used solely to refinance existing Debt on the Closing Date, to
issue standby or commercial letters of credit, and for working capital and
general corporate purposes. None of the Borrowers are engaged in the business
of purchasing or selling Margin Stock or extending credit for the purpose of
purchasing or carrying Margin Stock.

         7.23     No Material Adverse Change. No Material Adverse Effect has
occurred since the date of the audited Financial Statements delivered to the
Lender pursuant to Section 7.6(a).

         7.24     Full Disclosure. None of the representations or warranties
made by the Borrowers in the Loan Documents as of the date such representations
and warranties are made or deemed made, and none of the statements contained in
any exhibit, report, statement or certificate furnished by or on behalf of the
Borrowers in connection with the Loan Documents (including the offering and
disclosure materials delivered by or on behalf of the Borrowers to the Lender
prior to the Agreement Date), contains any untrue statement of a material fact
or omits any material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they are
made, not misleading as of the time when made or delivered.

         7.25     Material Agreements. Schedule 7.25 hereto sets forth as of
the Agreement Date all material agreements and contracts to which the Borrowers
are a party or is bound as of the date hereof.

         7.26     Bank Accounts. Schedule 7.26 contains a complete and accurate
list of all bank accounts maintained by the Borrower with any bank or other
financial institution.

         7.27     Governmental Authorization. No approval, consent, exemption,
authorization, or other action by, or notice to, or filing with, any
Governmental Authority or other Person is necessary or required in connection
with the execution, delivery or performance by, or enforcement against, the
Borrowers of this Agreement or any other Loan Document.

                                      34
<PAGE>

                                   ARTICLE 8
                       AFFIRMATIVE AND NEGATIVE COVENANTS

         Each Borrower covenants to the Lender that so long as any of the
Obligations remain outstanding or this Agreement is in effect:

         8.1      Taxes and Other Obligations. Each Borrower shall (a) file
when due all tax returns and other reports which it is required to file; (b)
pay, or provide for the payment, when due, of all taxes, fees, assessments and
other governmental charges against it or upon its property, income and
franchises, make all required withholding and other tax deposits, and establish
adequate reserves for the payment of all such items, and provide to the Lender,
upon request, satisfactory evidence of its timely compliance with the
foregoing; and (c) pay when due all Debt owed by it and all valid claims of
materialmen, mechanics, carriers, warehousemen, landlords, processors and other
like Persons, and all other indebtedness owed by it and perform and discharge
in a timely manner all other obligations undertaken by it; provided, however,
so long as any Borrower have notified the Lender in writing, such Borrower need
not pay any tax, fee, assessment, or governmental charge (i) it is contesting
in good faith by appropriate proceedings diligently pursued, (ii) as to which
such Borrower has established proper reserves as required under GAAP, and (iii)
the nonpayment of which does not result in the imposition of a Lien (other than
a Permitted Lien).

         8.2      Legal Existence and Good Standing. Each Borrower shall
maintain (a) its legal existence and good standing in its jurisdiction of
organization, and (b) its qualification and good standing in all other
jurisdictions in which the failure to maintain its qualification or good
standing could reasonably be expected to have a Material Adverse Effect.

         8.3      Compliance with Law and Agreements; Maintenance of Licenses.
Each Borrower shall comply in all material respects with all Requirements of
Law of any Governmental Authority having jurisdiction over it or its business
(including the Federal Fair Labor Standards Act and all Environmental Laws).
Each Borrower shall obtain and maintain all licenses, permits, franchises, and
governmental authorizations necessary to own its property and to conduct its
business as conducted on the Agreement Date. No Borrower shall modify, amend or
alter its certificate or articles of incorporation, or its limited liability
company operating agreement or limited partnership agreement, as applicable,
other than in a manner which does not adversely affect the rights of the
Lender.

         8.4      Maintenance of Property; Inspection of Property.

                  (a)      Each Borrower shall maintain all of its property
         necessary and useful in the conduct of its business, in good operating
         condition and repair, ordinary wear and tear and damage by fire or
         other casualty excepted.

                  (b)      Each Borrower shall permit representatives and
         independent contractors of the Lender (at the expense of the
         Borrowers) to visit and inspect any of such Borrower's properties, to
         examine such Borrowers' corporate, financial and operating records,
         and make copies thereof or abstracts therefrom and to discuss such
         Borrowers' affairs, finances and accounts with their respective
         directors, officers and independent public

                                      35
<PAGE>

         accountants, at such reasonable times during normal business hours and
         as soon as may be reasonably desired, upon reasonable advance notice
         to the Parent; provided, however, (i) if no Event of Default exists,
         no Borrower shall be responsible for the expense of such inspections
         and audits exceeding twice per year, and (ii) when an Event of Default
         exists, the Lender may do any of the foregoing at the expense of the
         Borrowers at any time during normal business hours and without advance
         notice.

         8.5      Insurance.

                  (a)      Each Borrower shall maintain with its existing
         insurers or financially sound and reputable insurers having a rating
         of at least A+ or better by Best Rating Guide and reasonably
         acceptable to the Lender, insurance against loss or damage by fire
         with extended coverage; theft, burglary, and loss in transit; public
         liability and third party property damage; larceny, embezzlement or
         other criminal liability; business interruption; public liability and
         third party property damage; and such other hazards or of such other
         types as is customary for Persons engaged in the same or similar
         business, as the Lender, in its discretion, shall specify, in amounts,
         and under policies as are customary for Persons engaged in the same or
         similar business and as are acceptable to the Lender. Without limiting
         the foregoing, in the event that any improved Real Estate covered by
         the Mortgages is determined to be located within an area that has been
         identified by the Director of the Federal Emergency Management Agency
         as a Special Flood Hazard Area ("SFHA"), each Borrower shall purchase
         and maintain flood insurance on the improved Real Estate and any
         Equipment and Inventory located on such Real Estate. The amount of
         said flood insurance will be reasonably determined by the Lender, and
         shall, at a minimum, comply with applicable federal regulations as
         required by the Flood Disaster Protection Act of 1973, as amended.
         Each Borrower shall also maintain flood insurance for its Inventory
         and Equipment which is, at any time, located in a SFHA

                  (b)      Each Borrower shall cause the Lender to be named as
         secured party or mortgagee and sole loss payee or additional insured,
         in a manner acceptable to the Lender. Each policy of insurance shall
         contain a clause or endorsement requiring the insurer to give not less
         than thirty (30) days' prior written notice to the Lender in the event
         of cancellation of the policy for any reason whatsoever (other than
         cancellation for non-payment of premiums as to which not less than ten
         (10) days' prior written notice shall be given) and a clause or
         endorsement stating that the interest of the Lender shall not be
         impaired or invalidated by any act or neglect of any Borrower or any
         of its Subsidiaries. All premiums for such insurance shall be paid by
         the Borrower when due, and certificates of insurance and, if requested
         by the Lender, photocopies of the policies, shall be delivered to the
         Lender, in each case in sufficient quantity for distribution by the
         Lender. If any Borrower fails to procure such insurance or to pay the
         premiums therefor when due, the Lender may do so from the proceeds of
         Revolving Loans.

         8.6      Insurance and Condemnation Proceeds. Any Borrower shall
promptly notify the Lender of any loss of, damage to, or destruction of
Collateral with a value of $100,000 or more, whether or not covered by
insurance. The Lender is hereby authorized to collect all insurance and
condemnation proceeds in respect of Collateral directly and to apply or remit
them as follows:

                                      36
<PAGE>

                  (a)      With respect to insurance and condemnation proceeds
         in excess of $250,000 relating to Collateral other than Fixed Assets,
         after deducting from such proceeds the reasonable expenses, if any,
         incurred by the Lender in the collection or handling thereof, the
         Lender shall apply such proceeds, ratably, to the reduction of the
         Obligations in the order provided for in Section 4.6.

                  (b)      With respect to insurance and condemnation proceeds
         relating to Collateral consisting of Fixed Assets, the Lender shall
         permit or require the Borrowers to use such proceeds, or any part
         thereof, to replace, repair, restore or rebuild the relevant Fixed
         Assets in a diligent and expeditious manner with materials and
         workmanship of substantially the same quality as existed before the
         loss, damage or destruction so long as (i) no Default or Event of
         Default has occurred and is continuing, (ii) the aggregate proceeds do
         not exceed $250,000 and (iii) the Borrowers first (A) provide the
         Lender with plans and specifications for any such repair or
         restoration which shall be reasonably satisfactory to the Lender and
         (B) demonstrate to the reasonable satisfaction of the Lender that the
         funds available to it will be sufficient to complete such project in
         the manner provided therein. In all other circumstances, the Lender
         shall apply such insurance and condemnation proceeds, ratably, to the
         reduction of the Obligations in the order provided for in Section 4.6.

         8.7      Environmental Laws.

                  (a)      Each Borrower shall conduct its business in
         compliance with all Environmental Laws applicable to it, including
         those relating to the generation, handling, use, storage, and disposal
         of any Contaminant. Each Borrower shall take prompt and appropriate
         action to respond to any noncompliance with Environmental Laws and
         shall regularly report to the Lender on such response.

                  (b)      Without limiting the generality of the foregoing,
         the Parent shall submit to the Lender annually, commencing on the
         first Anniversary Date, and on each Anniversary Date thereafter, an
         update of the status of each environmental compliance or liability
         issue. The Lender may request copies of technical reports prepared by
         any Borrower and its communications with any Governmental Authority to
         determine whether such Borrower is proceeding reasonably to correct,
         cure or contest in good faith any alleged non-compliance or
         environmental liability. The Parent shall, at the Lender's request and
         at the Parent's expense, (i) retain an independent environmental
         engineer acceptable to the Lender to evaluate the site, including
         tests if appropriate, where the non-compliance or alleged
         non-compliance with Environmental Laws has occurred and prepare and
         deliver to the Lender a report setting forth the results of such
         evaluation, a proposed plan for responding to any environmental
         problems described therein, and an estimate of the costs thereof, and
         (ii) provide to the Lender a supplemental report of such engineer
         whenever the scope of the environmental problems, or the response
         thereto or the estimated costs thereof, shall increase in any material
         respect.

                  (c)      The Lender and its representatives will have the
         right at any reasonable time to enter and visit the owned Real Estate
         and any other place where any property of any Borrower is located for
         the purposes of observing such owned Real Estate, taking

                                      37
<PAGE>

         and removing soil or groundwater samples, and conducting tests on any
         part of the Real Estate. The Lender is under no duty, however, to
         visit or observe the Real Estate or to conduct tests, and any such
         acts by the Lender will be solely for the purposes of protecting the
         Lender's Liens and preserving the Lender's rights under the Loan
         Documents. No site visit, observation or testing by the Lender will
         result in a waiver of any default of any Borrower or impose any
         liability on the Lender except for direct damages caused by the
         Lender's gross negligence or willful misconduct. In no event will any
         site visit, observation or testing by the Lender be a representation
         that hazardous substances are or are not present in, on or under the
         Real Estate, or that there has been or will be compliance with any
         Environmental Law. None of the Borrowers nor any other party is
         entitled to rely on any site visit, observation or testing by the
         Lender. The Lender owes no duty of care to protect the Borrowers or
         any other party against, or to inform the Borrowers or any other party
         of, any hazardous substances or any other adverse condition affecting
         the Real Estate. The Lender may in its discretion disclose to the
         Borrowers or to any other party if so required by law any report or
         findings made as a result of, or in connection with, any site visit,
         observation or testing by the Lender. The Borrowers understand and
         agree that the Lender makes no warranty or representation to the
         Borrowers or any other party regarding the truth, accuracy or
         completeness of any such report or findings that may be disclosed. The
         Borrowers also understand that depending on the results of any site
         visit, observation or testing by the Lender and disclosed to the
         Borrowers, the Borrowers may have a legal obligation to notify one or
         more environmental agencies of the results, that such reporting
         requirements are site-specific, and are to be evaluated by the
         Borrowers without advice or assistance from the Lender. In each
         instance, the Lender will give the Borrowers reasonable notice before
         entering the Real Estate or any other place the Lender is permitted to
         enter under this Section 8.7(c). The Lender will make reasonable
         efforts to minimize, or if possible, avoid interfering with the
         Borrowers' use of the Real Estate or any other property in exercising
         any rights provided hereunder.

         8.8      Compliance with ERISA. Each Borrower shall, and shall cause
each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all
material respects with the applicable provisions of ERISA, the Code and other
federal or state law; (b) cause each Plan which is qualified under Section
401(a) of the Code to maintain such qualification; (c) make all required
contributions to any Plan subject to Section 412 of the Code; (d) not engage in
a prohibited transaction or violation of the fiduciary responsibility rules
with respect to any Plan; and (e) not engage in a transaction that could be
subject to Section 4069 or 4212(c) of ERISA.

         8.9      Mergers, Consolidations or Sales. None of the Borrowers shall
enter into any transaction of merger, reorganization, or consolidation, or
transfer, sell, assign, lease, or otherwise dispose of all or any part of its
property, or wind up, liquidate or dissolve, or agree to do any of the
foregoing, except (a) for sales of Inventory in the ordinary course of its
business, (b) for sales or other dispositions of Equipment in the ordinary
course of business that are obsolete or no longer useable by the Borrowers or
their Subsidiaries in their business with an orderly liquidation value not to
exceed $250,000 in the aggregate in any Fiscal Year, (c) intra-company
transfers in the ordinary course of business of property with an aggregate
value of less than $250,000 in any Fiscal Year, (d) mergers of any Borrower
with and into any other Borrower, (e) for other dispositions of property in the
ordinary course of business with an

                                      38
<PAGE>

aggregate fair market or book value (whichever is less) of not more than
$100,000 in any Fiscal Year. Within 120 days following each such Equipment sale
or disposition, the Borrowers shall either (i) reinvest the proceeds of that
sale or disposition in other Equipment or (ii) apply such proceeds to the Loans
in accordance with Section 4.6, and (f) for Approved Store Closings. All
Equipment purchased with such proceeds shall be free and clear of all Liens,
except the Lender's Liens.

         8.10     Distributions; Capital Change; Restricted Investments. None
of the Borrowers shall (a) directly or indirectly declare or make, or incur any
liability to make, any Distribution, except Distributions to the Parent by
another Borrower, (b) make any change in its capital structure which could
reasonably be expected to have a Material Adverse Effect or (c) make any
Restricted Investment; provided, however, the Borrowers may consummate
Acquisitions provided (i) no Default or Event of Default exists immediately
prior to or would result from any such Acquisition, (ii) the Lender shall have
received satisfactory pro forma financial statements giving effect to each such
Acquisition and (iii) the Lender shall have consented in writing to such
Acquisition.

         8.11     Transactions Affecting Collateral or Obligations. None of the
Borrowers shall enter into any transaction which could reasonably be expected
to have a Material Adverse Effect.

         8.12     Guaranties. None of the Borrowers shall make, issue, or
become liable on any Guaranty, except Guaranties of the Obligations in favor of
the Lender and other guaranties in support of obligations in an aggregate
amount not in excess of $500,000.

         8.13     Debt. None of the Borrowers shall incur or maintain any Debt,
other than the following (collectively, "Permitted Debt"): (a) the Obligations;
(b) the Subordinated Debt, (c) Debt described on Schedule 8.13; (d) Capital
Leases (including Sale and Leaseback Transactions) of Equipment and purchase
money secured Debt incurred to purchase Equipment provided that (i) all Liens
securing the same attach only to the Equipment acquired by the incurrence of
such Debt, and (ii) the aggregate amount of such Debt (including Capital Leases
and all lease payments under Sale and Leaseback Transactions) outstanding does
not exceed $3,000,000 for the period from the Closing Date through May 31, 2003
and $1,000,000 at any time thereafter; and (e) Debt evidencing a refunding,
renewal or extension of the Debt described on Schedule 8.13; provided that (i)
the principal amount thereof is not increased, (ii) the Liens, if any, securing
such refunded, renewed or extended Debt do not attach to any assets in addition
to those assets, if any, securing the Debt to be refunded, renewed or extended,
(iii) no Person that is not an obligor or guarantor of such Debt as of the
Agreement Date shall become an obligor or guarantor thereof, and (iv) the terms
of such refunding, renewal or extension are no less favorable to the Borrower
or the Lender than the original Debt.

         8.14     Transactions with Affiliates. Except as set forth below, none
of the Borrowers shall, sell, transfer, distribute, or pay any money or
property, including, but not limited to, any fees or expenses of any nature
(including, but not limited to, any fees or expenses for management services),
to any Affiliate, or lend or advance money or property to any Affiliate, or
invest in (by capital contribution or otherwise) or purchase or repurchase any
stock or indebtedness, or any property, of any Affiliate, or become liable on
any Guaranty of the indebtedness, dividends, or other obligations of any
Affiliate. Notwithstanding the foregoing,

                                      39
<PAGE>

the Borrowers may engage in transactions with Affiliates in the ordinary course
of business consistent with past practices, in amounts and upon terms fully
disclosed to the Lender, and no less favorable to the Borrowers and their
Subsidiaries than would be obtained in a comparable arm's-length transaction
with a third party who is not an Affiliate.

         8.15     Investment Banking and Finder's Fees. None of the Borrowers
shall pay or agree to pay, or reimburse any other party with respect to, any
investment banking or similar or related fee, underwriter's fee, finder's fee,
or broker's fee to any Person in connection with this Agreement. The Borrowers
shall defend and indemnify the Lender against and hold them harmless from all
claims of any Person that any Borrower is obligated to pay for any such fees,
and all costs and expenses (including attorneys' fees) incurred by the Lender
in connection therewith.

         8.16     Business Conducted. No Borrower shall engage directly or
indirectly in any line of business other than the businesses in which such
Borrower is engaged on the Agreement Date.

         8.17     Liens. None of the Borrowers shall create, incur, assume, or
permit to exist any Lien on any real or personal property now owned or
hereafter acquired by any of them, except Permitted Liens.

         8.18     Sale and Leaseback Transactions. None of the Borrowers shall,
directly or indirectly, enter into any arrangement with any Person providing
for any Borrower to lease or rent property that any Borrower has sold or will
sell or otherwise transfer to such Person (a "Sale and Leaseback Transaction"),
except to the extent the obligations thereunder are permitted under 8.13(c).

         8.19     New Subsidiaries. The Borrowers shall not, directly or
indirectly, organize, create, acquire or permit to exist any Subsidiary not in
existence on the Closing Date.

         8.20     Fiscal Year. The Borrowers shall not change their Fiscal
Years.

         8.21     EBITDA. The Consolidated Parties will maintain minimum EBITDA
as set forth below:

         (a)      From the Closing Date through February 28, 2003, the
Consolidated Parties will maintain cumulative EBITDA, calculated as of the last
day of each month, for such twelve-month period not less than the amounts set
forth below (figures in parentheses indicate negative numbers):

                                      40
<PAGE>

<TABLE>
<CAPTION>
                  MONTH ENDING                           EBITDA
                  ------------                           ------
                  <S>                                 <C>
                  March 31, 2002                      $  (800,000)
                  April 30, 2002                      $(1,350,000)
                  May 31, 2002                        $  (700,000)
                  June 30, 2002                       $(1,000,000)
                  July 31, 2002                       $(1,450,000)
                  August 31, 2002                     $(1,725,000)
                  September 30, 2002                  $(2,150,000)
                  October 31, 2002                    $(2,550,000)
                  November 30, 2002                   $(1,350,000)
                  December 31, 2002                    $5,600,000
                  January 31, 2003                     $4,750,000
                  February 28, 2003                    $5,200,000
</TABLE>

         (b)      On March 31, 2003 and for each month thereafter, the
Consolidated Parties shall maintain EBITDA, calculated on the last day of each
month, of not less than $5,200,000 for the twelve-month period then ended.

         8.22     Minimum Excess Availability. The Borrowers shall maintain, at
all times, Excess Availability of not less than Minimum Excess Availability.

         8.23     Capital Expenditures. The Borrowers shall not make or incur
any Capital Expenditure if, after giving effect thereto, the aggregate amount
of all Capital Expenditures by the Borrowers on a consolidated basis would
exceed $1,000,000 during any Fiscal Year.

         8.24     Use of Proceeds. The Borrowers shall not use any portion of
the Loan proceeds, directly or indirectly, (i) to purchase or carry Margin
Stock, (ii) to repay or otherwise refinance indebtedness of the Borrowers or
others incurred to purchase or carry Margin Stock, (iii) to extend credit for
the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any
security in any transaction that is subject to Section 13 or 14 of the Exchange
Act.

         8.25     Further Assurances. Each Borrower shall execute and deliver,
or cause to be executed and delivered, to the Lender such documents and
agreements, and shall take or cause to be taken such actions, as the Lender
may, from time to time, reasonably request to carry out the terms and
conditions of this Agreement and the other Loan Documents.

         8.26     No Amendment. None of Borrowers shall amend or supplement in
any material respect or replace any of the Credit Card Related Agreements
without the Lender's prior written consent and copies of any such amendment,
supplement or replacement of any Credit Card Related Agreements shall promptly
be delivered to the Lender.

         8.27     Compensation; Reimbursement of Expenses.

         (a)      Pay any salary, fees, and other direct and indirect
remuneration and compensation to any of its directors and executive officers in
an amount in excess of those amounts paid to

                                      41
<PAGE>

directors and executive officers of comparable companies engaged in the same
general type of business and in similar financial condition;

         (b)      Reimburse any stockholder, officer, director, employee or
agent of any Borrower or any Subsidiary for any expenses incurred by such
Person other than reasonable expenses incurred for or on behalf of such
Borrower in the ordinary course of business.

         8.28     Prepayments, Etc. of Indebtedness.

         (a)      Prepay, redeem, purchase, defease or otherwise satisfy prior
to the scheduled maturity thereof in any manner, or make any payment in
violation of any subordination terms of, any Indebtedness, other than the
Obligations.

         (b)      Make any payment of Subordinated Debt except as permitted by
the Subordination Agreement; or

         (c)      amend, modify or change in any manner any term or condition
of any Permitted Debt or any lease so that the terms and conditions thereof are
less favorable to the Lender than the terms of such Permitted Debt or leases as
of the Closing Date.

                                      42
<PAGE>

                                   ARTICLE 9
                             CONDITIONS OF LENDING

         9.1      Conditions Precedent to Making of Loans on the Closing Date.
The obligation of the Lender to make the initial Revolving Loans on the Closing
Date, and the obligation of the Lender to issue any Letter of Credit on the
Closing Date, are subject to the following conditions precedent having been
satisfied in a manner reasonably satisfactory to the Lender:

                  (a)      This Agreement and the other Loan Documents shall
         have been executed and delivered by each party thereto and each
         Borrower shall have performed and complied with all covenants,
         agreements and conditions contained herein and the other Loan
         Documents which are required to be performed or complied with by each
         Borrower before or on such Closing Date.

                  (b)      Upon making the Revolving Loans (including such
         Revolving Loans made to finance, or otherwise as reimbursement for,
         all fees, costs and expenses then payable under this Agreement or the
         other Loan Documents) and with all its obligations current, the
         Borrowers shall have Excess Availability of at least $5,000,000.

                  (c)      All representations and warranties made hereunder
         and in the other Loan Documents shall be true and correct as if made
         on such date.

                  (d)      No Default or Event of Default shall have occurred
         and be continuing after giving effect to the Loans to be made and the
         Letters of Credit to be issued on the Closing Date.

                  (e)      The Lender shall have received such opinions of
         counsel for the Borrowers and their Subsidiaries as the Lender shall
         request, each such opinion to be in a form, scope, and substance
         reasonably satisfactory to the Lender, and its counsel.

                  (f)      The Lender shall have received a fully executed
         Landlord Waiver with respect to the Parent's chief executive office
         located in Wilmington, North Carolina;

                  (g)      The Lender shall have received:

                           (i)      duly executed financing statements in
                  proper form for filing in all jurisdictions that the Lender
                  may deem necessary or desirable in order to perfect the
                  Lender's Liens; and

                           (ii)     duly executed UCC-3 Termination Statements
                  and such other instruments, in form and substance
                  satisfactory to the Lender, as shall be necessary to
                  terminate and satisfy all Liens on the Collateral except
                  Permitted Liens.

                  (h)      The Borrowers shall have paid all fees and expenses
         incurred by the Lender and the Attorney Costs incurred in connection
         with any of the Loan Documents and the transactions contemplated
         thereby to the extent invoiced.

                                      43
<PAGE>

                  (i)      The Lender shall have received evidence, in form,
         scope, and substance, reasonably satisfactory to the Lender, of all
         insurance coverage as required by this Agreement.

                  (j)      The Lender shall have received evidence, in form,
         scope, and substance, reasonably satisfactory to the Lender, of the
         payment in full of all obligations under and termination of the
         Amended and Restated Credit Agreement between the Borrowers, the
         lenders party thereto and Branch Banking and Trust Company, as agent,
         dated April 28, 1999.

                  (k)      The Lender shall have had an opportunity to examine
         the books of account and other records and files of the Borrowers and
         to make copies thereof, and to conduct a pre-closing audit which shall
         include, without limitation, verification of Inventory, Accounts and
         the Borrowing Base, and the results of such examination and audit
         shall have been satisfactory to the Lender in all respects.

                  (l)      The Lender shall be satisfied with all environmental
         aspects relating to the Borrowers and their Business.

                  (m)      The Lender shall have received an appraisal of the
         Borrowers' inventory satisfactory to the Lender.

                  (n)      The Lender shall have received such historic
         financial statements and pro forma financial statements and
         projections with respect to the Borrowers as the Lender deems
         appropriate, all in such form and substance acceptable to the Lender.

                  (o)      All proceedings taken in connection with the
         execution of this Agreement, all other Loan Documents and all
         documents and papers relating thereto shall be satisfactory in form,
         scope, and substance to the Lender and the Lender's counsel in their
         reasonable discretion.

                  (p)      Without limiting the generality of the items
         described above, each of the Borrowers and each Person guarantying or
         securing payment of the Obligations shall have delivered or caused to
         be delivered to the Lender (in form and substance reasonably
         satisfactory to the Lender), the financial statements, instruments,
         resolutions, documents, agreements, certificates, opinions and other
         items set forth on the "Closing Checklist" delivered by the Lender to
         the Borrowers no less than five (5) days prior to the Agreement Date.

                  (q)      In the good faith judgment of the Lender:

                           (i)      there shall not have occurred or become
                  known to the Lender any event, condition, situation or status
                  since the date of the information contained in the financial
                  and business projections, budgets, pro forma data and
                  forecasts concerning the Credit Parties delivered to the
                  Lender prior to the Closing Date that has had or could
                  reasonably be expected to result in a Material Adverse
                  Effect;

                                      44
<PAGE>

                           (ii)     no litigation, action, suit, investigation
                  or other arbitral, administrative or judicial proceeding
                  shall be pending or threatened which could reasonably be
                  likely to result in a Material Adverse Effect; and

                           (iii)    there shall not have occurred any
                  disruption or adverse change in the financial or capital
                  markets generally; and

                           (iv)     the Credit Parties shall have received all
                  approvals, consents and waivers, and shall have made or given
                  all necessary filings and notices as shall be required to
                  consummate the transactions contemplated hereby without the
                  occurrence of any default under, conflict with or violation
                  of (A) any applicable law, rule, regulation, order or decree
                  of any Governmental Authority or arbitral authority or (B)
                  any agreement, document or instrument to which any of the
                  Credit Parties is a party or by which any of them or their
                  properties is bound.

                  (r)      The Lender shall have received certified copies of
         all of the Credit Card Related Agreements.

                  (s)      The Borrower shall have received proceeds of the
         incurrence of the Additional Subordinated Debt in the amount of
         $2,000,000 and the Lender shall have received certified copies of all
         documents evidencing the Additional Subordinated Debt in form and
         content satisfactory to the Lender.

         The acceptance by the Borrowers of any Loans made or Letters of Credit
issued on the Closing Date shall be deemed to be a representation and warranty
made by each Borrower to the effect that all of the conditions precedent to the
making of such Loans or the issuance of such Letters of Credit have been
satisfied, with the same effect as delivery to the Lender of a certificate
signed by a Responsible Officer of each Borrower, dated the Closing Date, to
such effect.

         9.2      Conditions Precedent to Each Loan. The obligation of the
Lender to make each Loan, including the initial Revolving Loans on the Closing
Date, and the obligation of the Lender to issue any Letter of Credit, shall be
subject to the further conditions precedent that on and as of the date of any
such extension of credit:

                  (a)      The following statements shall be true, and the
         acceptance by each Borrower of any extension of credit shall be deemed
         to be a statement to the effect set forth in clauses (i), (ii) and
         (iii) with the same effect as the delivery to the Lender of a
         certificate signed by a Responsible Officer, dated the date of such
         extension of credit, stating that:

                           (i)      The representations and warranties
                  contained in this Agreement and the other Loan Documents are
                  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, other than any such representation or warranty which
                  relates to a specified prior date and except to the extent
                  the Lender has been notified in writing by any Borrower that

                                      45
<PAGE>

                  any representation or warranty is not correct and the Lender
                  has explicitly waived in writing compliance with such
                  representation or warranty; and

                           (ii)     No event has occurred and is continuing, or
                  would result from such extension of credit, which constitutes
                  a Default or an Event of Default; and

                                      46
<PAGE>

                           (iii)    No event has occurred and is continuing, or
                  would result from such extension of credit, which has had or
                  could reasonably be expected to have a Material Adverse
                  Effect.

                  (b)      No such Borrowing shall exceed Availability.

                                      47
<PAGE>

                                  ARTICLE 10
                               DEFAULT; REMEDIES

         10.1     Events of Default. It shall constitute an event of default
("Event of Default") if any one or more of the following shall occur for any
reason:

                  (a)      any failure by the Borrowers to pay the principal of
         or interest on any of the Obligations or any fee or other amount owing
         hereunder or under any of the other Loan Documents when due, whether
         upon demand or otherwise;

                  (b)      any representation or warranty made or deemed made
         by the Borrowers in this Agreement or by the Borrowers in any of the
         other Loan Documents, any Financial Statement, or any certificate
         furnished by the Borrowers at any time to the Lender shall prove to be
         untrue in any material respect as of the date on which made, deemed
         made, or furnished;

                  (c)      (i) any default shall occur in the observance or
         performance of any of the covenants and agreements contained in
         Sections 6.4, 8.2, 8.5, 8.9 through 8.27 of this Agreement, (ii) any
         default shall occur in the observance or performance of any of the
         covenants and agreements contained in Sections 6.2 or 6.3 of this
         Agreement or any other section of the Security Agreement and such
         default shall continue for three (3) Business Days or more after any
         Borrower has knowledge thereof or is given notice thereof by Lender;
         or (iii) any default shall occur in the observance or performance of
         any of the other covenants or agreements contained in any other
         Section of this Agreement, any other Loan Document, or any other
         agreement entered into at any time to which any Borrower or any
         Subsidiary and the Lender are party (including in respect of any Bank
         Products) and such default shall continue for fifteen (15) days or
         more after the Borrowers have knowledge thereof or is given notice
         thereof by Lender;

                  (d)      any default shall occur with respect to any Debt
         (other than the Obligations) of any Borrower or any of its
         Subsidiaries in an outstanding principal amount which exceeds
         $250,000, or under any agreement or instrument under or pursuant to
         which any such Debt may have been issued, created, assumed, or
         guaranteed by any Borrowers or any of its Subsidiaries, and such
         default shall continue for more than the period of grace, if any,
         therein specified, if the effect thereof (with or without the giving
         of notice or further lapse of time or both) is to accelerate, or to
         permit the holders of any such Debt to accelerate, the maturity of any
         such Debt; or any such Debt shall be declared due and payable or be
         required to be prepaid (other than by a regularly scheduled required
         prepayment) prior to the stated maturity thereof;

                  (e)      any Borrower shall (i) file a voluntary petition in
         bankruptcy or file a voluntary petition or an answer or otherwise
         commence any action or proceeding seeking reorganization, arrangement
         or readjustment of its debts or for any other relief under the federal
         Bankruptcy Code, as amended, or under any other bankruptcy or
         insolvency act or law, state or federal, now or hereafter existing, or
         consent to, approve of, or acquiesce in, any such petition, action or
         proceeding; (ii) apply for or acquiesce in the appointment of a
         receiver, assignee, liquidator, sequestrator, custodian, monitor,
         trustee or similar

                                      48
<PAGE>

         officer for it or for all or any part of its property; (iii) make an
         assignment for the benefit of creditors; or (iv) be unable generally
         to pay its debts as they become due;

                  (f)      an involuntary petition shall be filed or an action
         or proceeding otherwise commenced seeking reorganization, arrangement,
         consolidation or readjustment of the debts of any Borrower or for any
         other relief under the federal Bankruptcy Code, as amended, or under
         any other bankruptcy or insolvency act or law, state or federal, now
         or hereafter existing, and such petition or proceeding shall not be
         dismissed within sixty (60) days after the filing or commencement
         thereof or an order of relief shall be entered with respect thereto;

                  (g)      a receiver, assignee, liquidator, sequestrator,
         custodian, monitor, trustee or similar officer for any Borrower or for
         all or any part of its property shall be appointed or a warrant of
         attachment, execution or similar process shall be issued against any
         part of the property of the Borrowers or any of their Subsidiaries;

                  (h)      any Borrower shall file a certificate of dissolution
         under applicable state law or shall be liquidated, dissolved or
         wound-up or shall commence or have commenced against it any action or
         proceeding for dissolution, winding-up or liquidation, or shall take
         any action in furtherance thereof;

                  (i)      all or any material part of the property of any
         Borrower shall be nationalized, expropriated or condemned, seized or
         otherwise appropriated, or custody or control of such property or of
         any Borrower shall be assumed by any Governmental Authority or any
         court of competent jurisdiction at the instance of any Governmental
         Authority, except where contested in good faith by proper proceedings
         diligently pursued where a stay of enforcement is in effect;

                  (j)      any Loan Document shall be terminated, revoked or
         declared void or invalid or unenforceable or challenged by any
         Borrower or any other obligor;

                  (k)      one or more judgments, orders, decrees or
         arbitration awards is entered against any Borrower involving in the
         aggregate liability as to any single or related or unrelated series of
         transactions, incidents or conditions, of $250,000 or more, and the
         same shall remain unsatisfied, unvacated and unstayed pending appeal
         for a period of thirty (30) days after the entry thereof;

                  (l)      any loss, theft, damage or destruction of any item
         or items of Collateral or other property of any Borrower occurs which
         could reasonably be expected to cause a Material Adverse Effect and is
         not adequately covered by insurance;

                  (m)      there is filed against any Borrower any action, suit
         or proceeding under any federal or state racketeering statute
         (including the Racketeer Influenced and Corrupt Organization Act of
         1970), which action, suit or proceeding (i) is not dismissed within
         one hundred twenty (120) days, and (ii) could reasonably be expected
         to result in the confiscation or forfeiture of any material portion of
         the Collateral;

                                      49
<PAGE>

                  (n)      if, for any reason other than the failure of the
         Lender to take any action available to it to maintain perfection of
         the Lender's Liens pursuant to the Loan Documents, without Lender's
         consent any Loan Document ceases to be in full force and effect or any
         Lien with respect to any material portion of the Collateral intended
         to be secured thereby ceases to be, or is not, valid, perfected and
         prior to all other Liens (other than Permitted Liens) or is
         terminated, revoked or declared void;

                  (o)      (i) an ERISA Event shall occur with respect to a
         Pension Plan or Multi-employer Plan which has resulted or could
         reasonably be expected to result in liability of any Borrower under
         Title IV of ERISA to the Pension Plan, Multi-employer Plan or the PBGC
         in an aggregate amount in excess of $100,000; (ii) the aggregate
         amount of Unfunded Pension Liability among all Pension Plans at any
         time exceeds $100,000; or (iii) any Borrower or any ERISA Affiliate
         shall fail to pay when due, after the expiration of any applicable
         grace period, any installment payment with respect to its withdrawal
         liability under Section 4201 of ERISA under a Multi-employer Plan in
         an aggregate amount in excess of $100,000; or

                  (p)      there occurs a Change of Control.; or

                  (q)      a default shall occur under the Credit Card Related
         Agreements and such default shall continue for more than the period of
         grace, if any, therein specified or the Credit Card Program
         established under the Credit Card Related Agreements shall terminate
         or any notice of the termination thereof shall be given by either
         party thereto; or

                  (r)      there occurs an event having a Material Adverse
                           Effect.

         10.2     Remedies.

                  (a)      If a Default or an Event of Default exists, the
         Lender may, in its discretion, do one or more of the following at any
         time or times and in any order, without notice to or demand on the
         Borrowers: (i) reduce the Maximum Revolver Amount, or the advance
         rates against Eligible Inventory used in computing the Borrowing Base,
         or reduce one or more of the other elements used in computing the
         Borrowing Base; (ii) restrict the amount of or refuse to make
         Revolving Loans; and (iii) restrict or refuse to provide Letters of
         Credit. If an Event of Default exists, the Lender may do one or more
         of the following, in addition to the actions described in the
         preceding sentence, at any time or times and in any order, without
         notice to or demand on the Borrowers: (A) terminate the Revolving
         Credit Commitment and this Agreement; (B) declare any or all
         Obligations to be immediately due and payable; provided, however, that
         upon the occurrence of any Event of Default described in Sections
         10.1(e), 10.1(f), 10.1(g), 10.1(h), the Revolving Credit Commitment
         shall automatically and immediately expire and all Obligations shall
         automatically become immediately due and payable without notice or
         demand of any kind; (C) require the Borrowers to cash collateralize
         all Obligations (contingent or otherwise) with respect to outstanding
         Letters of Credit; and (D) pursue its other rights and remedies under
         the Loan Documents and applicable law.

                                      50
<PAGE>

                  (b)      If an Event of Default has occurred and is
         continuing: (i) the Lender shall have, in addition to all other rights
         of the Lender, the rights and remedies of a secured party under the
         Loan Documents and the UCC; (ii) the Lender may, at any time, take
         possession of the Collateral and keep it on the Borrowers' premises,
         at no cost to the Lender, or remove any part of it to such other place
         or places as the Lender may desire, or the Borrowers shall, upon the
         Lender's demand, at the Borrowers' cost, assemble the Collateral and
         make it available to the Lender at a place reasonably convenient to
         the Lender; and (iii) the Lender may sell and deliver any Collateral
         at public or private sales, for cash, upon credit or otherwise, at
         such prices and upon such terms as the Lender deems advisable, in its
         sole discretion, and may, if the Lender deems it reasonable, postpone
         or adjourn any sale of the Collateral by an announcement at the time
         and place of sale or of such postponed or adjourned sale without
         giving a new notice of sale. Without in any way requiring notice to be
         given in the following manner, the Borrowers agree that any notice by
         the Lender of sale, disposition or other intended action hereunder or
         in connection herewith, whether required by the UCC or otherwise,
         shall constitute reasonable notice to the Borrowers if such notice is
         mailed by registered or certified mail, return receipt requested,
         postage prepaid, or is delivered personally against receipt, at least
         fourteen (14) days prior to such action to the Borrowers' addresses
         specified in or pursuant to Section 14.8. If any Collateral is sold on
         terms ------------ other than payment in full at the time of sale, no
         credit shall be given against the Obligations until the Lender
         receives payment, and if the buyer defaults in payment, the Lender may
         resell the Collateral without further notice to the Borrowers. In the
         event the Lender seeks to take possession of all or any portion of the
         Collateral by judicial process, the Borrowers irrevocably waive: (A)
         the posting of any bond, surety or security with respect thereto which
         might otherwise be required; (B) any demand for possession prior to
         the commencement of any suit or action to recover the Collateral; and
         (C) any requirement that the Lender retain possession and not dispose
         of any Collateral until after trial or final judgment. The Borrowers
         agree that the Lender has no obligation to preserve rights to the
         Collateral or marshal any Collateral for the benefit of any Person.
         The Lender is hereby granted a license or other right to use, without
         charge, the Borrowers' labels, patents, copyrights, name, trade
         secrets, trade names, trademarks, and advertising matter, or any
         similar property, in completing production of, advertising or selling
         any Collateral, and the Borrowers' rights under all licenses and all
         franchise agreements shall inure to the Lender's benefit for such
         purpose. The proceeds of sale shall be applied first to all expenses
         of sale, including attorneys' fees, and then to the Obligations. The
         Lender will return any excess to the Borrowers and the Borrowers shall
         remain liable for any deficiency.

                  (c)      If an Event of Default occurs, the Borrowers hereby
         waive all rights to notice and hearing prior to the exercise by the
         Lender of the Lender's rights to repossess the Collateral without
         judicial process or to reply, attach or levy upon the Collateral
         without notice or hearing.

                                      51
<PAGE>

                                   ARTICLE 11
                              TERM AND TERMINATION

         11.1     Term and Termination. The term of this Agreement shall end on
the Stated Termination Date unless sooner terminated in accordance with the
terms hereof. The Lender may terminate this Agreement without notice upon the
occurrence of an Event of Default. Upon the effective date of termination of
this Agreement for any reason whatsoever, all Obligations (including all unpaid
principal, accrued and unpaid interest and any early termination or prepayment
fees or penalties) shall become immediately due and payable and the Borrowers
shall immediately arrange for the cancellation and return of all Letters of
Credit then outstanding or, with the Lender's consent, the posting of Cash
Collateral or Supporting Letters of Credit with respect thereto in accordance
with Section 1.3(g). Notwithstanding the termination of this Agreement, until
all Obligations are indefeasibly paid and performed in full in cash, the
Borrowers shall remain bound by the terms of this Agreement and shall not be
relieved of any of its Obligations hereunder or under any other Loan Document,
and the Lender shall retain all its rights and remedies hereunder (including
the Lender's Liens in and all rights and remedies with respect to all then
existing and after-arising Collateral).

                                      52
<PAGE>

                                  ARTICLE 12
          AMENDMENTS; WAIVERS; PARTICIPATIONS; ASSIGNMENTS SUCCESSORS

         12.1     Amendments and Waivers.

                  (a)      No amendment or waiver of any provision of this
         Agreement or any other Loan Document, and no consent with respect to
         any departure by the Borrowers therefrom, shall be effective unless
         the same shall be in writing and signed by the Lender and the
         Borrowers and then any such waiver or consent shall be effective only
         in the specific instance and for the specific purpose for which given.

         12.2     Assignments; Participations.

                  (a)      Any Lender may assign and delegate to one or more
         Eligible Assignees all, or any ratable part of all, of the Loans, the
         Revolving Credit Commitment and the other rights and obligations of
         such Lender hereunder, provided, however, that the Borrowers may
         continue to deal solely and directly with the Lender in connection
         with the interest so assigned to an Assignee until written notice of
         such assignment, together with payment instructions, addresses and
         related information with respect to the Assignee, shall have been
         given to the Borrowers. The obligations of the Borrowers hereunder and
         under all other Loan Documents are not assignable without the written
         consent of the Lender.

                  (b)      The Lender may at any time sell to one or more
         commercial banks, financial institutions, or other Persons not
         Affiliates of the Borrowers (a "Participant") participating interests
         in any Loans, the Commitment of the Lender and the other interests of
         the Lender (the "originating Lender") hereunder and under the other
         Loan Documents and all amounts payable by the Borrowers hereunder
         shall be determined as if the Lender had not sold such participation;
         except that, if amounts outstanding under this Agreement are due and
         unpaid, or shall have become due and payable upon the occurrence of an
         Event of Default, each Participant shall be deemed to have the right
         of set-off in respect of its participating interest in amounts owing
         under this Agreement to the same extent and subject to the same
         limitation as if the amount of its participating interest were owing
         directly to it as a Lender under this Agreement.

                  (c)      Notwithstanding any other provision in this
         Agreement, the 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 FRB or U.S. Treasury Regulation 31 CFR ss.203.14,
         and such Federal Reserve Bank may enforce such pledge or security
         interest in any manner permitted under applicable law.

                                      53
<PAGE>

                                  ARTICLE 13
                                 MISCELLANEOUS

         13.1     No Waivers; Cumulative Remedies. No failure by the Lender to
exercise any right, remedy, or option under this Agreement or any present or
future supplement hereto, or in any other agreement between or among the
Borrowers and the Lender, or delay by the Lender in exercising the same, will
operate as a waiver thereof. No waiver by the Lender will be effective unless
it is in writing, and then only to the extent specifically stated. No waiver by
the Lender on any occasion shall affect or diminish the Lender's rights
thereafter to require strict performance by the Borrowers of any provision of
this Agreement. The Lender may proceed directly to collect the Obligations
without any prior recourse to the Collateral. The Lender's rights under this
Agreement will be cumulative and not exclusive of any other right or remedy
which the Lender may have.

         13.2     Severability. The illegality or unenforceability of any
provision of this Agreement or any Loan Document or any instrument or agreement
required hereunder shall not in any way affect or impair the legality or
enforceability of the remaining provisions of this Agreement or any instrument
or agreement required hereunder.

         13.3     Governing Law; Choice of Forum; Service of Process.

                  (a)      THIS AGREEMENT SHALL BE INTERPRETED AND THE RIGHTS
         AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH
         THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS,
         PROVIDED THAT PERFECTION ISSUES WITH RESPECT TO ARTICLE 9 OF THE UCC
         MAY GIVE EFFECT TO APPLICABLE CHOICE OR CONFLICT OF LAW RULES SET
         FORTH 1N ARTICLE 9 OF THE UCC) OF THE STATE OF NORTH CAROLINA;
         PROVIDED THAT THE AGENT AND THE LENDERS SHALL RETAIN ALL RIGHTS
         ARISING UNDER FEDERAL LAW.

                  (b)      ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
         AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF
         THE STATE OF NORTH CAROLINA OR OF THE UNITED STATES OF AMERICA LOCATED
         IN MECKLENBURG COUNTY, NORTH CAROLINA, AND BY EXECUTION AND DELIVERY
         OF THIS AGREEMENT, EACH OF THE BORROWERS, THE LENDER CONSENTS, FOR
         ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE
         JURISDICTION OF THOSE COURTS. EACH OF THE BORROWERS AND THE LENDER
         IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE
         LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH
         IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR
         PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY
         DOCUMENT RELATED HERETO. NOTWITHSTANDING THE FOREGOING: (i) THE LENDER
         SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE
         BORROWERS OR THEIR PROPERTY 1N THE COURTS OF ANY OTHER JURISDICTION
         THE LENDER DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE

                                      54
<PAGE>

         COLLATERAL OR OTHER SECURITY FOR THE OBLIGATIONS AND (ii) EACH OF THE
         PARTIES HERETO ACKNOWLEDGES THAT ANY APPEALS FROM THE COURTS DESCRIBED
         IN THE IMMEDIATELY PRECEDING SENTENCE MAY HAVE TO BE HEARD BY A COURT
         LOCATED OUTSIDE THOSE JURISDICTIONS.

                  (c)      THE BORROWERS HEREBY WAIVE PERSONAL SERVICE OF ANY
         AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS
         MAY BE MADE BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO
         THE BORROWERS AT THEIR ADDRESS SET FORTH 1N SECTION 14.8 AND SERVICE
         SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE (5) DAYS AFTER THE SAME
         SHALL HAVE BEEN SO DEPOSITED IN THE U.S. MAILS POSTAGE PREPAID.
         NOTHING CONTAINED HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE
         LEGAL PROCESS BY ANY OTHER MANNER PERMITTED BY LAW.

         13.4     WAIVER OF JURY TRIAL. THE BORROWERS AND THE LENDER EACH
IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN
ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE
PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR
ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.
THE BORROWERS AND THE LENDER EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION
SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING,
THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS
WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER
PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS.

         13.5     Survival of Representations and Warranties. All of the
Borrowers' representations and warranties contained in this Agreement and the
other Loan Documents shall survive the execution, delivery, and acceptance
thereof by the parties, notwithstanding any investigation by the Lender or its
respective agents.

         13.6     Other Security and Guaranties. The Lender may, without notice
or demand and without affecting the Borrowers' obligations hereunder, from time
to time: (a) take from any Person and hold collateral (other than the
Collateral) for the payment of all or any part of the Obligations and exchange,
enforce or release such collateral or any part thereof; and (b) accept and hold
any endorsement or guaranty of payment of all or any part of the Obligations
and release or substitute any such endorser or guarantor, or any Person who has
given any Lien in

                                      55
<PAGE>

any other collateral as security for the payment of all or any part of the
Obligations, or any other Person in any way obligated to pay all or any part of
the Obligations.

         13.7     Fees and Expenses. The Borrowers agree to pay to the Lender
on demand, all reasonable costs and expenses that the Lender pays or incurs in
connection with the negotiation, preparation, syndication, consummation,
administration, enforcement, and termination of this Agreement or any of the
other Loan Documents, including: (a) Attorney Costs; (b) costs and expenses
(including attorneys' and paralegals' fees and disbursements) for any
amendment, supplement, waiver, consent, or subsequent closing in connection
with the Loan Documents and the transactions contemplated thereby; (c) costs
and expenses of lien and title searches and title insurance; (d) taxes, fees
and other charges for recording the Mortgages, filing financing statements and
continuations, and other actions to perfect, protect, and continue the Lender's
Liens (including costs and expenses paid or incurred by the Lender in
connection with the consummation of this Agreement); (e) sums paid or incurred
to pay any amount or take any action required of the Borrowers under the Loan
Documents that the Borrowers fail to pay or take; (f) costs of the due
diligence review conducted by the Lender, including appraisals, inspections,
environmental audits, and verifications of the Collateral, including travel,
lodging, and meals for inspections of the Collateral and the Borrowers'
operations by the Lender plus the Lender's then customary charge for field
examinations and audits and the preparation of reports thereof (such charge is
currently $750 per day (or portion thereof) for each Person retained or
employed by the Lender with respect to each field examination or audit) and all
out-of-pocket expenses for field examinations; and (g) costs and expenses of
forwarding loan proceeds, collecting checks and other items of payment, and
establishing and maintaining Payment Accounts and lock boxes, and costs and
expenses of preserving and protecting the Collateral. In addition, the
Borrowers agree to pay on demand to the Lender all costs and expenses incurred
by the Lender (including Attorneys' Costs), on demand, all reasonable and
actual fees, expenses and disbursements incurred by the Lender for one law firm
retained by the Lender paid or incurred to obtain payment of the Obligations,
enforce the Lender's Liens, sell or otherwise realize upon the Collateral, and
otherwise enforce the provisions of the Loan Documents, or to defend any claims
made or threatened against the Lender arising out of the transactions
contemplated hereby (including preparations for and consultations concerning
any such matters). The foregoing shall not be construed to limit any other
provisions of the Loan Documents regarding costs and expenses to be paid by the
Borrowers. All of the foregoing costs and expenses shall be charged to the
Borrowers' Loan Account as Revolving Loans as described in Section 4.5.

         13.8     Notices. Except as otherwise provided herein, all notices,
demands and requests that any party is required or elects to give to any other
shall be in writing, or by a telecommunications device capable of creating a
written record, and any such notice shall become effective (a) upon personal
delivery thereof, including, but not limited to, delivery by overnight mail and
courier service, (b) four (4) days after it shall have been mailed by United
States mail, first class, certified or registered, with postage prepaid, or (c)
in the case of notice by such a telecommunications device, when properly
transmitted, in each case addressed to the party to be notified as follows:

                  If to the Lender:

                  Bank of America, N.A.

                                      56
<PAGE>

                  GA1-006-05-14
                  600 Peachtree Street, NE
                  5th Floor
                  Atlanta, Georgia 30308
                  Attention:  Valerie Peppe
                              Business Credit Account Executive
                  Telephone: (404) 607-5533
                  Telecopy: (404) 607-6439

                  If to the Borrowers:

                  c/o REEDS JEWELERS, INC.
                  P.O. Box 2229
                  Wilmington, North Carolina 28402
                  Attention: Chief Financial Officer and President
                  Telephone: (919) 350-3116
                  Telecopy:  (919) 350-3353

                  with a copy to:

                  ZIMMER & ZIMMER
                  111 Princess Street
                  Wilmington, North Carolina  28404
                  Attention: Herbert J. Zimmer
                  Telephone:  (910) 763-4669
                  Telecopy:    (910) 762-1999

or to such other address as each party may designate for itself by like notice.
Failure or delay in delivering copies of any notice, demand, request, consent,
approval, declaration or other communication to the persons designated above to
receive copies shall not adversely affect the effectiveness of such notice,
demand, request, consent, approval, declaration or other communication.

         13.9     Waiver of Notices. Unless otherwise expressly provided
herein, the Borrowers waive presentment, and notice of demand or dishonor and
protest, as to any instrument. No notice to or demand on the Borrowers which
the Lender may elect to give shall entitle the Borrowers to any or further
notice or demand in the same, similar or other circumstances.

         13.10    Binding Effect. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective representatives,
successors, and assigns of the parties hereto; provided, however, that no
interest herein may be assigned by the Borrowers without prior written consent
of the Lender. The rights and benefits of the Lender hereunder shall, if such
Persons so agree, inure to any party acquiring any interest in the Obligations
or any part thereof.

         13.11    Indemnity of the Lender by the Borrowers.

                                      57
<PAGE>

                  (a)      Each Borrower agrees to defend, indemnify and hold
         harmless the Lender and each of its respective officers, directors,
         employees, counsel, representatives, agents and attorneys-in-fact
         (each, an "Indemnified Person") from and against any and all
         liabilities, obligations, losses, damages, penalties, actions,
         judgments, suits, costs, charges, expenses and disbursements
         (including Attorney Costs) of any kind or nature whatsoever which may
         at any time (including at any time following repayment of the Loans)
         be imposed on, incurred by or asserted against any such Indemnified
         Person in any way relating to or arising out of this Agreement, the
         Loan Documents or any other document contemplated by or referred to
         herein, or the transactions contemplated hereby or thereby, or any
         action taken or omitted by any such Indemnified Person under or in
         connection with any of the foregoing, including with respect to any
         investigation, litigation or proceeding (including any Insolvency
         Proceeding or appellate proceeding) related to or arising out of this
         Agreement, any other Loan Document, or the Loans or the use of the
         proceeds thereof, whether or not any Indemnified Person is a party
         thereto (all the foregoing, collectively, the "Indemnified
         Liabilities"); provided, that the Borrowers shall have no obligation
         hereunder to any Indemnified Person with respect to Indemnified
         Liabilities resulting solely from the gross negligence or willful
         misconduct of such Indemnified Person. The agreements in this Section
         shall survive payment of all other Obligations.

                  (b)      Each Borrower agrees to indemnify, defend and hold
         harmless each Indemnified Party from any loss or liability directly or
         indirectly arising out of the use, generation, manufacture,
         production, storage, release, threatened release, discharge, disposal
         or presence of a hazardous substance relating to any Borrower's
         operations, business or property. This indemnity will apply whether
         the hazardous substance is on, under or about any Borrower's property
         or operations or property leased to any Borrower. The indemnity
         includes but is not limited to Attorneys Costs. "Hazardous substances"
         means any substance, material or waste that is or becomes designated
         or regulated as "toxic," "hazardous," "pollutant," or "contaminant" or
         a similar designation or regulation under any federal, state or local
         law (whether under common law, statute, regulation or otherwise) or
         judicial or administrative interpretation of such, including petroleum
         or natural gas. This indemnity will survive repayment of all other
         Obligations.

         13.12    Limitation of Liability. NO CLAIM MAY BE MADE BY THE
BORROWERS AGAINST THE LENDER, OR ITS AFFILIATES, DIRECTORS, OFFICERS,
EMPLOYEES, COUNSEL, REPRESENTATIVES, AGENTS OR ATTORNEYS-IN-FACT OF ANY OF THEM
FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY
CLAIM FOR BREACH OF CONTRACT OR ANY OTHER THEORY OF LIABILITY ARISING OUT OF OR
RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, AND
THE BORROWERS HEREBY WAIVE, RELEASE AND AGREE NOT TO SUE UPON ANY CLAIM FOR
SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO
EXIST IN ITS FAVOR.

         13.13    Final Agreement. This Agreement and the other Loan Documents
are intended by the Borrowers and the Lender to be the final, complete, and
exclusive expression of the

                                      58
<PAGE>

agreement between them. This Agreement supersedes any and all prior oral or
written agreements relating to the subject matter hereof. No modification,
rescission, waiver, release, or amendment of any provision of this Agreement or
any other Loan Document shall be made, except by a written agreement signed by
the Borrowers (except as set forth in Section 12.1(a)) and a duly authorized
officer of the Lender.

         13.14    Counterparts. This Agreement may be executed in any number of
counterparts, and by the Lender and the Borrowers in separate counterparts,
each of which shall be an original, but all of which shall together constitute
one and the same agreement; signature pages may be detached from multiple
separate counterparts and attached to a single counterpart so that all
signature pages are physically attached to the same document.

         13.15    Captions. The captions contained in this Agreement are for
convenience of reference only, are without substantive meaning and should not
be construed to modify, enlarge, or restrict any provision.

         13.16    Right of Setoff. In addition to any rights and remedies of
the Lender provided by law, if an Event of Default exists or the Loans have
been accelerated, the Lender is authorized at any time and from time to time,
without prior notice to the Borrowers, any such notice being waived by the
Borrowers to the fullest extent permitted by law, to set off and apply any and
all deposits (general or special, time or demand, provisional or final) at any
time held by, and other indebtedness at any time owing by, the Lender or any
Affiliate of the Lender to or for the credit or the account of the Borrowers
against any and all Obligations owing to the Lender, now or hereafter existing,
irrespective of whether or not the Lender shall have made demand under this
Agreement or any Loan Document and although such Obligations may be contingent
or unmatured. The Lender agrees promptly to notify the Borrowers after any such
set-off and application made by the Lender; provided, however, that the failure
to give such notice shall not affect the validity of such set-off and
application.

         13.17    Confidentiality. The Lender agrees to take normal and
reasonable precautions and exercise due care to maintain the confidentiality of
all financial information and other information identified as "confidential" or
"secret" by the Borrowers and provided to the Lender by or on behalf of the
Borrowers, under this Agreement or any other Loan Document, except to the
extent that such information (i) was or becomes generally available to the
public other than as a result of disclosure by the Lender, or (ii) was or
becomes available on a nonconfidential basis from a source other than the
Borrowers, provided that such source is not bound by a confidentiality
agreement with the Borrowers known to the Lender; provided, however, that the
Lender may disclose such information (A) at the request or pursuant to any
requirement of any Governmental Authority to which the Lender is subject or in
connection with an examination of the Lender by any such Governmental
Authority; (B) pursuant to subpoena or other court process; (C) when required
to do so in accordance with the provisions of any applicable Requirement of
Law; (D) to the extent reasonably required in connection with any litigation or
proceeding (including, but not limited to, any bankruptcy proceeding) to which
the Lender or its Affiliates may be party; (E) to the extent reasonably
required in connection with the exercise of any remedy hereunder or under any
other Loan Document; (F) to the Lender's independent auditors, accountants,
attorneys and other professional advisors; (G) to any prospective Participant
or Assignee under any Assignment and Acceptance, actual or potential, provided
that

                                      59
<PAGE>

such prospective Participant or Assignee agrees to keep such information
confidential to the same extent required of the Lender hereunder; (H) as
expressly permitted under the terms of any other document or agreement
regarding confidentiality to which the Borrowers are party or are deemed party
with the Lender; and (I) to its Affiliates.

         13.18    Conflicts with Other Loan Documents. Unless otherwise
expressly provided in this Agreement (or in another Loan Document by specific
reference to the applicable provision contained in this Agreement), if any
provision contained in this Agreement conflicts with any provision of any other
Loan Document, the provision contained in this Agreement shall govern and
control.

                                      60
<PAGE>

Signature Page 2 of 2

         IN WITNESS WHEREOF, the parties have entered into this Agreement on
the date first above written.

                                    BORROWERS:

                                    REEDS JEWELERS, INC., a North Carolina
                                    corporation

                                    By:
                                       -----------------------------------
                                    Name:
                                         ---------------------------------
                                    Title:
                                          --------------------------------

                                    REEDS FINANCIAL SERVICES, INC., a
                                    North Carolina corporation

                                    By:
                                       -----------------------------------
                                    Name:
                                         ---------------------------------
                                    Title:
                                          --------------------------------

                                    REEDS JEWELERS OF NORTH
                                      CAROLINA, INC., a North Carolina
                                      corporation

                                    By:
                                       -----------------------------------
                                    Name:
                                         ---------------------------------
                                    Title:
                                          --------------------------------

                                    REEDS CORPORATE SERVICES, INC., a
                                    Delaware corporation

                                    By:
                                       -----------------------------------
                                    Name:
                                         ---------------------------------
                                    Title:
                                          --------------------------------

                                    REEDS INSURANCE SERVICES, LTD., a
                                    British Virgin Islands corporation

                                    By:
                                       -----------------------------------
                                    Name:
                                         ---------------------------------
                                    Title:
                                          --------------------------------

                             Signature Page 1 of 2
<PAGE>

                                    LENDER:

                                    BANK OF AMERICA, N.A., as the Lender

                                    By:
                                       ---------------------------------
                                    Name:
                                         -------------------------------
                                    Title:
                                          ------------------------------

                             Signature Page 2 of 2
<PAGE>

                                    ANNEX A
                                       TO
                                CREDIT AGREEMENT

                                  DEFINITIONS

         Capitalized terms used in the Loan Documents shall have the following
respective meanings (unless otherwise defined therein), and all section
references in the following definitions shall refer to sections of the
Agreement:

         "Account Purchase Agreement" means that certain Purchase and Sale
Agreement dated as of December 7, 2001, as amended and in effect on the Closing
Date, by and between Reeds Financial and the Credit Card Provider or any
similar agreement acceptable to the Lender providing for credit card services
and amending or replacing such agreement.

         "Accounts" means all of the Borrowers' now owned or hereafter acquired
or arising accounts (as defined in the UCC) other than the Purchased Accounts,
including all proceeds thereof.

         "Account Debtor" means each Person obligated in any way on or in
connection with an Account, Chattel Paper or General Intangibles (including a
payment intangible).

         "ACH Transactions" means any cash management or related services
including the automatic clearing house transfer of funds by the Lender for the
account of the Borrowers pursuant to agreement or overdrafts.

         "Acquisition" means the acquisition of (i) a controlling equity
interest in another Person (including the purchase of an option, warrant or
convertible or similar type security to acquire such a controlling interest at
the time it becomes exercisable by the holder thereof), whether by purchase of
such equity interest or upon exercise of an option or warrant for, or
conversion of securities into, such equity interest, or (ii) assets of another
Person which constitute any material part of the assets of such Person or of a
line or lines of business conducted by such Person.

         "Additional Subordinated Debt" shall mean the secured subordinated
indebtedness of the Borrower to the Additional Shareholder Lenders in the
principal amount of $2,000,000 incurred pursuant to that certain Promissory
Note dated as of the Closing Date.

         "Additional Shareholder Lenders" means Alan M. Zimmer, Herbert J.
Zimmer and Jeffrey L. Zimmer.

         "Adjusted Net Earnings from Operations" means, with respect to any
fiscal period of the Consolidated Parties, the Consolidated Parties' net income
after provision for income taxes for such fiscal period, as determined in
accordance with GAAP and reported on the Financial Statements prepared in
accordance with the terms of the Agreement for such period, excluding any and
all of the following included in such net income: (a) gain or loss arising from
the sale of any capital assets; (b) gain arising from any write-up in the book
value of any asset; (c) earnings

                                   Annex A-1
<PAGE>

of any Person, substantially all the assets of which have been acquired by a
Consolidated Party in any manner, to the extent realized by such other Person
prior to the date of acquisition; (d) earnings of any Person in which a
Consolidated Party has an ownership interest unless (and only to the extent)
such earnings shall actually have been received by such Consolidated Party in
the form of cash distributions; (e) earnings of any Person to which assets of a
Consolidated Party shall have been sold, transferred or disposed of, or into
which a Consolidated Party shall have been merged, or which has been a party
with a Consolidated Party to any consolidation or other form of reorganization,
prior to the date of such transaction; (f) gain arising from the acquisition of
debt or equity securities of a Consolidated Party or from cancellation or
forgiveness of Debt; and (g) gain arising from extraordinary items, as
determined in accordance with GAAP, or from any other non-recurring
transaction.

         "Affiliate" means, as to any Person, any other Person which, directly
or indirectly, is in control of, is controlled by, or is under common control
with, such Person or which owns, directly or indirectly, five percent (5%) or
more of the outstanding equity interest of such Person. A Person shall be
deemed to control another Person if the controlling Person possesses, directly
or indirectly, the power to direct or cause the direction of the management and
policies of the other Person, whether through the ownership of voting
securities, by contract, or otherwise.

         "Aggregate Revolver Outstandings" means, at any date of determination,
the sum of (a) the unpaid balance of Revolving Loans, (b) the aggregate amount
of Pending Revolving Loans, (c) one hundred percent (100%) of the aggregate
undrawn face amount of all outstanding Letters of Credit, and (d) the aggregate
amount of any unpaid reimbursement obligations in respect of Letters of Credit.

         "Agreement" means the Credit Agreement to which this Annex A is
attached, as from time to time amended, modified or restated.

         "Agreement Date" means the date of the Agreement.

         "Anniversary Date" means each anniversary of the Agreement Date.

         "Applicable Margin" means

         (i)      with respect to Base Rate Loans and all other Obligations
                  (other than LIBOR Rate Loans), 0.50%; and

         (ii)     with respect to LIBOR Rate Loans, 2.75%.

         The Applicable Margins shall be adjusted (up or down) prospectively on
a quarterly basis as determined by the Consolidated Parties' financial
performance, commencing with the first day of the first calendar month that
occurs more than 5 days after delivery of the Consolidated Parties' audited
Financial Statements to Lender for the Fiscal Year ending on February 28, 2003
and each fiscal quarter thereafter. Adjustments in Applicable Margins shall be
determined by reference to the following grid:

                                   Annex A-2
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                               APPLICABLE MARGIN FOR
IF EBITDA FOR THE MOST          LIBOR RATE LOANS AND       APPLICABLE MARGIN FOR
RECENT FISCAL QUARTER IS:      LETTER OF CREDIT FEES:         BASE RATE LOANS
--------------------------------------------------------------------------------
<S>                            <C>                         <C>
<$5,600,000                            2.75%                       .50%
--------------------------------------------------------------------------------
>$5,600,000, but                       2.50%                       .25%
<$6,000,000
--------------------------------------------------------------------------------
>$6,000,000, but                       2.25%                       .00%
<$7,000,000
--------------------------------------------------------------------------------
>$7,000,000                            2.00%                       .00%
--------------------------------------------------------------------------------
</TABLE>

         All adjustments in the Applicable Margins after February 28, 2003
shall be implemented quarterly on a prospective basis for each calendar month
commencing 5 days after the date of delivery to the Lender of the unaudited or
audited (as applicable) Financial Statements evidencing the need for an
adjustment. Concurrently with the delivery of those Financial Statements, the
Parent shall deliver to the Lender a certificate, signed by a Responsible
Officer, setting forth in reasonable detail the basis for the continuance of,
or any change in, the Applicable Margins. Failure to timely deliver such
Financial Statements shall, in addition to any other remedy provided for in the
Agreement, result in an increase in the Applicable Margins to the highest level
set forth in the foregoing grid, until the first day of the first calendar
month following the delivery of those Financial Statements demonstrating that
such an increase is not required. If a Default or Event of Default has occurred
and is continuing at the time any reduction in the Applicable Margins is to be
implemented, no reduction may occur until the first day of the first calendar
month following the date on which such Default or Event of Default is cured or
waived, respectively.

         "Approved Store Closings" means the sale or other disposition of
property of the Parent, other than Inventory, constituting the eight (8) retail
locations disclosed to the Lender prior to the Closing Date.

         "Assignee" has the meaning specified in Section 12.2(a).

         "Attorney Costs" means and includes all reasonable fees, expenses and
disbursements of any law firm or other counsel engaged by the Lender, and the
reasonably allocated costs and expenses of internal legal services of the
Lender.

          "Availability" means, at any time (a) the lesser of (i) the Maximum
Revolver Amount or (ii) the Borrowing Base, minus (b) Reserves other than
Reserves deducted in the calculation of the Borrowing Base, minus (c) in each
case, the Aggregate Revolver Outstandings, excluding the amount of the Pending
Revolving Loan being requested at the time Availability is being calculated.

         "Bank Products" means any one or more of the following types of
services or facilities extended to the Borrowers by the Lender, or by any
affiliate of the Lender in reliance on the Lender's agreement to indemnify such
affiliate: (a) credit cards; (b) ACH Transactions; (c) cash management,
including controlled disbursement services; and (d) Hedge Agreements.

                                   Annex A-3
<PAGE>

         "Bank Product Reserves" means all reserves which the Lender from time
to time establishes in its reasonable discretion for the Bank Products then
provided or outstanding.

         "Bankruptcy Code" means Title 11 of the United States Code (11
U.S.C.ss. 101 et seq.).

         "Base Rate" means, for any day, the rate of interest in effect for
such day as publicly announced from time to time by the Lender in Charlotte,
North Carolina as its "prime rate" (the "prime rate" being a rate set by the
Lender based upon various factors including the Lender's costs and desired
return, general economic conditions and other factors, and is used as a
reference point for pricing some loans, which may be priced at, above, or below
such announced rate). Any change in the prime rate announced by the Lender
shall take effect at the opening of business on the day specified in the public
announcement of such change. Each Interest Rate based upon the Base Rate shall
be adjusted simultaneously with any change in the Base Rate.

         "Base Rate Loan" means a Revolving Loan during any period in which it
bears interest based on the Base Rate.

         "Blocked Account Agreement" means that certain Blocked Account
Agreement dated as of the date hereof among the Parent, the Lender and Branch
Banking and Trust.

         "Blocked Operating Account" means the account of the Parent with
Branch Banking and Trust Company, account number 5113720966, which is subject
to the Blocked Account Agreement.

         "Borrowing" means a borrowing hereunder consisting of Revolving Loans
made on the same day by the Lender to the Borrowers or the issuance of Letters
of Credit hereunder.

         "Borrowing Base" means, at any time, an amount equal to (a) the
Borrowing Base Percentage of the value of Eligible Inventory; minus (b) the
amount of Minimum Excess Availability, minus (c) at the option of the Lender,
Reserves from time to time established by the Lender in accordance with the
Lender's customary business practices.

         "Borrowing Base Certificate" means a certificate by a Responsible
Officer of the Parent, substantially in the form of Exhibit A (or another form
acceptable to the Lender in its reasonable discretion) setting forth the
calculation of the Borrowing Base, including a calculation of each component
thereof, all in such detail as shall be reasonably satisfactory to the Lender.
All calculations of the Borrowing Base in connection with the preparation of
any Borrowing Base Certificate shall originally be made by the Parent and
certified to the Lender; provided, that the Lender shall have the right to
review and adjust, in the exercise of its reasonable credit judgment, any such
calculation (a) to reflect its reasonable estimate of declines in value of any
of the Collateral described therein, and (b) to the extent that such
calculation is not in accordance with the Agreement.

                                   Annex A-4
<PAGE>

         "Borrowing Base Percentage" is calculated according to the following
chart and shall be established as the lesser of (a) the percentage of net
amount of Eligible Inventory or (b) the percentage of the GOB Appraisal Value
indicated:

<TABLE>
<CAPTION>
         --------------------------------------------------------------
                                  PERCENTAGE OF NET   PERCENTAGE OF
                                      ELIGIBLE        GOB APPRAISAL
         PERIOD                      INVENTORY            VALUE
         --------------------------------------------------------------
         <S>                      <C>                 <C>
         January 1 to September          60%               85%
         14 of each year
         --------------------------------------------------------------
         September 15 to                 65%               85%
         December 31 of
         each year
         --------------------------------------------------------------
</TABLE>

         "Business Day" means (a) any day that is not a Saturday, Sunday, or a
day on which banks in Charlotte, North Carolina are required or permitted to be
closed, and (b) with respect to all notices, determinations, fundings and
payments in connection with the LIBOR Rate or LIBOR Rate Loans, any day that is
a Business Day pursuant to clause a above and that is also a day on which
trading in Dollars is carried on by and between banks in the London interbank
market.

         "Capital Adequacy Regulation" means any guideline, request or
directive of any central bank or other Governmental Authority, or any other
law, rule or regulation, whether or not having the force of law, in each case,
regarding capital adequacy of any bank or of any corporation controlling a
bank.

         "Capital Expenditures" means all payments due (whether or not paid
during any fiscal period) in respect of the cost of any fixed asset or
improvement, or replacement, substitution, or addition thereto, which has a
useful life of more than one year, including, without limitation, those costs
arising in connection with the direct or indirect acquisition of such asset or
in connection with a Capital Lease.

         "Capital Lease" means any lease of property by the Borrowers or any of
their Subsidiaries which, in accordance with GAAP, should be reflected as a
capital lease on the balance sheet of the Consolidated Parties.

         "Cash Collateral" has the meaning specified in Section 1.3(g).

                  "Change of Control" means, at any time:

                           (i)      the Principle Shareholders shall (A) cease
                  to own beneficially and of record at least 75% of all Voting
                  Securities of the Parent (on a fully diluted basis) or (B)
                  not have the ability, directly or indirectly, to elect a
                  majority of the board of directors of the Parent;

                                   Annex A-5
<PAGE>

                           (ii)     during any period of up to 24 consecutive
                  months, commencing on the Closing Date, individuals who at
                  the beginning of such 24-month period were directors of the
                  Parent shall cease for any reason (other than the death,
                  disability or retirement of an officer of the Parent that is
                  serving as a director at such time so long as another officer
                  of the Parent replaces such Person as a director) to
                  constitute a majority of the board of directors of the
                  Parent;

                           (iii)    any Person or two or more Persons acting in
                  concert shall have acquired by contract or otherwise, or
                  shall have entered into a contract or arrangement that, upon
                  consummation thereof, will result in its or their acquisition
                  of the power to exercise, directly or indirectly, a
                  controlling influence on the management or policies of the
                  Parent; or

                           (iv)     the Parent shall cease to own all of the
                  Voting Securities of the other Borrowers.

         "Chattel Paper" means all of the Borrowers' now owned or hereafter
acquired chattel paper, as defined in the UCC, including electronic chattel
paper.

         "Closing Date" means the later of the Agreement Date and the first
date on which all of the conditions set forth in Article 9 have been fulfilled.

         "Code" means the Internal Revenue Code of 1986.

         "Collateral" means all of the Collateral as defined in the Security
Instruments and all other assets of any Person from time to time subject to
Lender's Liens securing payment or performance of the Obligations.

         "Consolidated Parties" means the Borrowers and each of their
Subsidiaries whose financial statements are consolidated with the Parent's
financial statements in accordance with GAAP.

         "Contaminant" means any waste, pollutant, hazardous substance, toxic
substance, hazardous waste, special waste, petroleum or petroleum-derived
substance or waste, asbestos in any form or condition, polychlorinated
biphenyls ("PCBs"), or any constituent of any such substance or waste.

         "Continuation/Conversion Date" means the date on which a Loan is
converted into or continued as a LIBOR Rate Loan.

         "Credit Card Program Agreement" means that certain Private Label
Credit Card Program Agreement dated as of November 30, 2001, as amended and in
effect on the Closing Date, by and between Reeds North Carolina and the Credit
Card Provider or any similar agreement acceptable to the Lender providing for
credit card services and amending or replacing such agreement.

                                   Annex A-6
<PAGE>

         "Credit Card Provider" means World Financial Network National Bank.

         "Credit Card Related Agreements" means the Credit Card Program
Agreement and the Account Purchase Agreement.

         "Credit Parties" means, collectively, the Borrowers and each other
Person providing Collateral pursuant to any Security Instrument.

         "Debt" means, without duplication, all liabilities, obligations and
indebtedness of each of the Borrowers and their Subsidiaries to any Person, of
any kind or nature, now or hereafter owing, arising, due or payable, howsoever
evidenced, created, incurred, acquired or owing, whether primary, secondary,
direct, contingent, fixed or otherwise, consisting of indebtedness for borrowed
money or the deferred purchase price of property, excluding trade payables and
the endorsement of checks and other similar instruments in the ordinary course
of business, but including (a) all Obligations; (b) all obligations and
liabilities of any Person secured by any Lien on any Borrower's or any of its
Subsidiaries' property, even though such Borrower or any such Subsidiary shall
not have assumed or become liable for the payment thereof; provided, however,
that all such obligations and liabilities which are limited in recourse to such
property shall be included in Debt only to the extent of the book value of such
property as would be shown on a balance sheet of the Consolidated Parties
prepared in accordance with GAAP; (c) all obligations or liabilities created or
arising under any Capital Lease or conditional sale or other title retention
agreement with respect to property used or acquired by any Borrower or any of
its Subsidiaries, even if the rights and remedies of the lessor, seller or
lender thereunder are limited to repossession of such property; provided,
however, that all such obligations and liabilities which are limited in
recourse to such property shall be included in Debt only to the extent of the
book value of such property as would be shown on a balance sheet of the
Consolidated Parties prepared in accordance with GAAP; (d) all obligations and
liabilities under Guaranties; and (e) the present value (discounted at the Base
Rate) of lease payments due under synthetic leases.

         "Default" means any event or circumstance which, with the giving of
notice, the lapse of time, or both, would (if not cured, waived, or otherwise
remedied during such time) constitute an Event of Default.

         "Default Rate" means a fluctuating per annum interest rate at all
times equal to the sum of (a) the otherwise applicable Interest Rate plus (b)
two percent (2%) per annum. Each Default Rate shall be adjusted simultaneously
with any change in the applicable Interest Rate.

         "Designated Account" has the meaning specified in Section 1.2(c).

         "Distribution" means, in respect of any corporation: (a) the payment
or making of any dividend or other distribution of property in respect of
capital stock (or any options or warrants for, or other rights with respect to,
such stock) of such corporation, other than distributions in capital stock (or
any options or warrants for such stock) of the same class; or (b) the
redemption or other acquisition by such corporation of any capital stock (or
any options or warrants for such stock) of such corporation.

                                   Annex A-7
<PAGE>

         "Documents" means all documents as such term is defined in the UCC,
including bills of lading, warehouse receipts or other documents of title, now
owned or hereafter acquired by the Borrowers.

         "DOL" means the United States Department of Labor or any successor
department or agency.

         "Dollar" and "$" means dollars in the lawful currency of the United
States. Unless otherwise specified, all payments under the Agreements shall be
made in Dollars.

          "EBITDA" means, with respect to any fiscal period of the Consolidated
Parties, Adjusted Net Earnings from Operations, plus, to the extent deducted in
the determination of Adjusted Net Earnings from Operations for that fiscal
period, Interest Expense, Federal, state, local and foreign income taxes,
depreciation and amortization, in each case on a consolidated basis for the
Consolidated Parties.

         "Eligible Assignee" means (a) a commercial bank, commercial finance
company or other asset based lender, having total assets in excess of
$1,000,000,000; (b) any Affiliate of the Lender; and (c) if an Event of Default
has occurred and is continuing, any Person reasonably acceptable to the Lender.

         "Eligible Inventory" means Inventory, valued at the lower of cost (on
a first-in, first-out basis) or fair market value, which the Lender, in its
reasonable discretion, determines to be Eligible Inventory. Without limiting
the discretion of the Lender to establish other criteria of ineligibility,
Eligible Inventory shall not include any Inventory:

         (a)      that is not owned by the Borrowers;

         (b)      that is not subject to the Lender's Liens, which are
perfected as to such Inventory, or that are subject to any other Lien
whatsoever (other than the Liens described in clauses (a) and (d) of the
definition of Permitted Liens provided that such Permitted Liens (i) are junior
in priority to the Lender's Liens or subject to Reserves and (ii) do not impair
directly or indirectly the ability of the Lender to realize on or obtain the
full benefit of the Collateral);

         (c)      that does not consist of finished goods or raw materials;

         (d)      that consists of work-in-process, chemicals, samples,
prototypes, supplies, or packing and shipping materials;

         (e)      that is not in good condition, is unmerchantable, is
defective, or does not meet all standards imposed by any Governmental Authority
having regulatory authority over such goods, their use or sale;

                                   Annex A-8
<PAGE>

         (f)      that is not currently either usable or salable, at prices
approximating at least cost, in the normal course of the Borrowers' business,
or that is obsolete, defective, slow moving or stale;

         (g)      that is obsolete or returned or repossessed or used goods
taken in trade;

         (h)      that is located outside the United States of America (or that
is in-transit from vendors or suppliers);

         (i)      that is located in a public warehouse or in possession of a
bailee or in a facility, other than stores operated by the Borrowers or their
Subsidiaries in the ordinary course of business, leased by the Borrowers or any
Subsidiary, if the warehouseman, or the bailee, or the lessor has not delivered
to the Lender, if requested by the Lender, a subordination agreement in form
and substance satisfactory to the Lender or if a Reserve for rents or storage
charges has not been established for Inventory at that location;

         (j)      that contains or bears any Proprietary Rights licensed to the
Borrowers by any Person, if the Lender is not satisfied that it may sell or
otherwise dispose of such Inventory in accordance with the terms of the
Security Agreement and Section 10.2 without infringing the rights of the
licensor of such Proprietary Rights or violating any contract with such
licensor (and without payment of any royalties other than any royalties due
with respect to the sale or disposition of such Inventory pursuant to the
existing license agreement), and, as to which the Borrowers have not delivered
to the Lender a consent or sublicense agreement from such licensor in form and
substance acceptable to the Lender if requested;

         (k)      that is not reflected in the details of a current perpetual
inventory report; or

         (l)      that is Inventory placed on consignment.

         If any Inventory at any time ceases to be Eligible Inventory, such
Inventory shall promptly be excluded from the calculation of Eligible
Inventory.

         "Environmental Claims" means all claims, however asserted, by any
Governmental Authority or other Person alleging potential liability or
responsibility for violation of any Environmental Law, or for a Release or
injury to the environment.

         "Environmental Compliance Reserve" means any reserve which the Lender
establishes in its reasonable discretion after prior written notice to the
Borrowers from time to time for amounts that are reasonably likely to be
expended by the Borrowers in order for the Borrowers and their operations and
property (a) to comply with any notice from a Governmental Authority asserting
material non-compliance with Environmental Laws, or (b) to correct any such
material non-compliance identified in a report delivered to the Lender pursuant
to Section 8.7.

         "Environmental Laws" means all federal, state or local laws, statutes,
common law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed

                                   Annex A-9
<PAGE>

duties, licenses, authorizations and permits of, and agreements with, any
Governmental Authority, in each case relating to environmental, health, safety
and land use matters.

         "Environmental Lien" means a Lien in favor of any Governmental
Authority for (a) any liability under Environmental Laws, or (b) damages
arising from, or costs incurred by such Governmental Authority in response to,
a Release or threatened Release of a Contaminant into the environment.

         "Equipment" means all of the Borrowers' now owned and hereafter
acquired machinery, equipment, furniture, furnishings, fixtures, and other
tangible personal property (except Inventory), including embedded software,
motor vehicles with respect to which a certificate of title has been issued,
aircraft, dies, tools, jigs, molds and office equipment, as well as all of such
types of property leased by the Borrowers and all of the Borrowers' rights and
interests with respect thereto under such leases (including, without
limitation, options to purchase); together with all present and future
additions and accessions thereto, replacements therefor, component and
auxiliary parts and supplies used or to be used in connection therewith, and
all substitutes for any of the foregoing, and all manuals, drawings,
instructions, warranties and rights with respect thereto; wherever any of the
foregoing is located.

         "ERISA" means the Employee Retirement Income Security Act of 1974, and
regulations promulgated thereunder.

         "ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with a Borrower within the meaning of
Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for
purposes of provisions relating to Section 412 of the Code).

         "ERISA Event" means (a) a Reportable Event with respect to a Pension
Plan, (b) a withdrawal by a Borrower or any ERISA Affiliate from a Pension Plan
subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation
of operations which is treated as such a withdrawal under Section 4062(e) of
ERISA, (c) a complete or partial withdrawal by a Borrower or any ERISA
Affiliate from a Multi-employer Plan or notification that a Multi-employer Plan
is in reorganization, (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment as a termination under Section 4041 or 4041A of
ERISA, or the commencement of proceedings by the PBGC to terminate a Pension
Plan or Multi-employer Plan, (e) the occurrence of an event or condition which
might reasonably be expected to constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any
Pension Plan or Multi-employer Plan, or (f) the imposition of any liability
under Title IV of ERISA, other than for PBGC premiums due but not delinquent
under Section 4007 of ERISA, upon a Borrower or any ERISA Affiliate.

         "Event of Default" has the meaning specified in Section 10.1.

                                  Annex A-10
<PAGE>

         "Excess Availability" means, at any time, (a) the Borrowing Base,
minus (b) Reserves other than Reserves deducted in the calculation of the
Borrowing Base, minus (c) the Aggregate Revolver Outstandings.

         "Exchange Act" means the Securities Exchange Act of 1934, and
regulations promulgated thereunder.

         "Existing Credit Agreement" has the meaning assigned thereto in the
recitals.

         "FDIC" means the Federal Deposit Insurance Corporation, and any
Governmental Authority succeeding to any of its principal functions.

         "Federal Funds Rate" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Business Day next
succeeding such day; provided that (a) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Business Day as so published on the next succeeding Business
Day, and (b) if no such rate is so published on such next succeeding Business
Day, the Federal Funds Rate for such day shall be the average rate charged to
the Bank on such day on such transactions as determined by the Lender.

         "Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any successor thereto.

         "Financial Statements" means, according to the context in which it is
used, the financial statements referred to in Sections 6.2 and 7.6 or any other
financial statements required to be given to the Lender pursuant to the
Agreement.

         "Fiscal Month" means each of the twelve consecutive fiscal periods of
the Borrowers constituting a Fiscal Year, as set forth on Schedule 10 hereto.

         "Fiscal Year" means the Borrowers' Fiscal Year for financial
accounting purposes. The current Fiscal Year of the Borrowers will end on March
31, 2002.

         "Fixed Assets" means the Equipment and Real Estate of the Borrowers.

         "Four-Quarter Period" means a period of four full consecutive fiscal
quarters taken together as one accounting period.

         "Funding Date" means the date on which a Borrowing occurs.

         "GAAP" means generally accepted accounting principles and practices
set forth from time to time in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified Public
Accountants and statements and pronouncements of the

                                  Annex A-11
<PAGE>

Financial Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the U.S. accounting profession), which
are applicable to the circumstances as of the Agreement Date.

         "General Intangibles" means all of the Borrowers' now owned or
hereafter acquired general intangibles, choses in action and causes of action
and all other intangible personal property of the Borrowers of every kind and
nature (other than Accounts), including, without limitation, all contract
rights, payment intangibles, Proprietary Rights, corporate or other business
records, inventions, designs, blueprints, plans, specifications, patents,
patent applications, trademarks, service marks, trade names, trade secrets,
goodwill, copyrights, computer software, customer lists, registrations,
licenses, franchises, tax refund claims, any funds which may become due to a
Borrower in connection with the termination of any Plan or other employee
benefit plan or any rights thereto and any other amounts payable to a Borrower
from any Plan or other employee benefit plan, rights and claims against
carriers and shippers, rights to indemnification, business interruption
insurance and proceeds thereof, property, casualty or any similar type of
insurance and any proceeds thereof, proceeds of insurance covering the lives of
key employees on which a Borrower is beneficiary, rights to receive dividends,
distributions, cash, Instruments and other property in respect of or in
exchange for pledged equity interests or Investment Property and any letter of
credit, guarantee, claim, security interest or other security held by or
granted to a Borrower.

         "GOB Appraisal Value" means that value, net of expenses, established
by the appraisal conducted by an independent professional appraiser
satisfactory to the Lender prior to the Closing Date and each other periodic
appraisal delivered pursuant to Section 6.2(f) hereof.

         "Governmental Authority" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.

         "Guaranty" means, with respect to any Person, all obligations of such
Person which in any manner directly or indirectly guarantee or assure, or in
effect guarantee or assure, the payment or performance of any indebtedness,
dividend or other obligations of any other Person (the "guaranteed
obligations"), or assure or in effect assure the holder of the guaranteed
obligations against loss in respect thereof, excluding the endorsement of
checks and other similar instruments in the ordinary course of business, but
including any such obligations incurred through an agreement, contingent or
otherwise: (a) to purchase the guaranteed obligations or any property
constituting security therefor; (b) to advance or supply funds for the purchase
or payment of the guaranteed obligations or to maintain a working capital or
other balance sheet condition; or (c) to lease property or to purchase any debt
or equity securities or other property or services; provided, however,
"Guaranty" shall not include guaranties by a Borrower of lease obligations of
its Subsidiaries relating to leased stores.

          "Hedge Agreement" means any and all transactions, agreements or
documents now existing or hereafter entered into, which provides for an
interest rate, credit, commodity or equity

                                  Annex A-12
<PAGE>

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 purpose of hedging the
Borrowers' exposure to fluctuations in interest or exchange rates, loan, credit
exchange, security or currency valuations or commodity prices.

         "Indemnified Person" has the meaning specified in Section 14.11(a).

         "Instruments" means all instruments as such term is defined in the
UCC, now owned or hereafter acquired by the Borrowers.

         "Intercreditor Agreement" means that certain Intercreditor Agreement
dated as of the date hereof by and among the Lender, the Credit Card Provider
and the Borrowers, as from time to time amended, supplemented or replaced.

         "Interest Expense" means, for any fiscal period, the aggregate amount
of interest required to be paid or accrued by the Consolidated Parties during
such period on all Debt of the Consolidated Parties during such period, whether
such interest was or is required to be reflected as an item of expense or
capitalized, including payments consisting of interest in respect of Capital
Leases or synthetic leases, and including unused commitment fees, facility fees
and similar fees or expenses in connection with the borrowing of money
(including all fees and expenses in connection with Hedge Agreements).

         "Interest Period" means, as to any LIBOR Rate Loan, the period
commencing on the Funding Date of such Loan or on the Continuation/Conversion
Date on which the Loan is converted into or continued as a LIBOR Rate Loan, and
ending on the date one, two, three or six months thereafter as selected by a
Borrower in its Notice of Borrowing, or Notice of Continuation/Conversion,
provided that:

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

                  (b)      any Interest Period pertaining to a LIBOR Rate Loan
         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) shall end on the last
         Business Day of the calendar month at the end of such Interest Period;
         and

                  (c)      no Interest Period shall extend beyond the Stated
         Termination Date.

         "Interest Rate" means each or any of the interest rates, including the
Default Rate, set forth in Section 3.1.

         "Inventory" means all of the Borrowers' now owned and hereafter
acquired inventory, goods and merchandise, wherever located, to be furnished
under any contract of service or held for sale or lease, all returned goods,
raw materials, work-in-process, finished goods (including

                                  Annex A-13
<PAGE>

embedded software), other materials and supplies of any kind, nature or
description which are used or consumed in the Borrowers' businesses or used in
connection with the packing, shipping, advertising, selling or finishing of
such goods, merchandise, and all documents of title or other Documents
representing them.

         "Investment Property" means all of the Borrowers' rights, title and
interest in and to any and all: (a) securities whether certificated or
uncertificated; (b) securities entitlements; (c) securities accounts; (d)
commodity contracts; or (e) commodity accounts.

         "IRS" means the Internal Revenue Service and any Governmental
Authority succeeding to any of its principal functions under the Code.

         "Landlord Waiver" means a Landlord Waiver, Estoppel and Consent in the
form attached hereto as Exhibit G, or such other form as is acceptable to the
Lender.

         "Latest Projections" means: (a) on the Agreement Date and thereafter
until the Lender receives new projections pursuant to Section 6.2(e), the
projections of the Consolidated Parties' financial condition, results of
operations, and cash flows, and Borrowing Base and Availability projections,
for the period commencing on February 28, 2002 and ending on February 28, 2003
and delivered to the Lender prior to the Agreement Date; and (b) thereafter,
the projections most recently received by the Lender pursuant to Section
6.2(e).

         "Lender" means Bank of America, N.A., and shall include its successors
and assigns.

         "Letter of Credit" has the meaning specified in Section 1.3(a).

         "Letter of Credit Fee" has the meaning specified in Section 3.6.

         "Letter of Credit Subfacility" means an amount equal to $1,500,000.

         "LIBOR Interest Payment Date" means, with respect to a LIBOR Rate
Loan, the Termination Date and the last day of each Interest Period applicable
to such Loan and, with respect to each Interest Period of two months or longer
duration, the first day of each calendar month.

         "LIBOR Rate" means, for any Interest Period, with respect to LIBOR
Rate Loans, the rate of interest per annum determined pursuant to the following
formula:

               LIBOR Rate  =           Offshore Base Rate
                              ------------------------------------
                              1.00 - Eurodollar Reserve Percentage

         Where,

                  "Offshore Base Rate" means the rate per annum appearing on
         Telerate Page 3750 (or any successor page) as the London interbank
         offered rate for deposits in Dollars at approximately 11:00 a.m.
         (London time) two Business Days prior to the first day of such
         Interest Period for a term comparable to such

                                  Annex A-14
<PAGE>

         Interest Period. If for any reason such rate is not available, the
         Offshore Base Rate shall be, for any Interest Period, the rate per
         annum appearing on Reuters Screen LIBO Page as the London interbank
         offered rate for deposits in Dollars at approximately 11:00 a.m.
         (London time) two Business Days prior to the first day of such
         Interest Period for a term comparable to such Interest Period;
         provided, however, if more than one rate is specified on Reuters
         Screen LIBO Page, the applicable rate shall be the arithmetic mean of
         all such rates. If for any reason none of the foregoing rates is
         available, the Offshore Base Rate shall be, for any Interest Period,
         the rate per annum determined by Lender as the rate of interest at
         which dollar deposits in the approximate amount of the LIBOR Rate Loan
         comprising part of such Borrowing would be offered by the Lender's
         London Branch to major banks in the offshore dollar market at their
         request at or about 11:00 a.m. (London time) two Business Days prior
         to the first day of such Interest Period for a term comparable to such
         Interest Period.

                  "Eurodollar Reserve Percentage" means, for any day during any
         Interest Period, the reserve percentage (expressed as a decimal,
         rounded upward to the next 1/100th of 1%) in effect on such day
         applicable to member banks under regulations issued from time to time
         by the Federal Reserve Board for determining the maximum reserve
         requirement (including any emergency, supplemental or other marginal
         reserve requirement) with respect to Eurocurrency funding (currently
         referred to as "Eurocurrency liabilities"). The Offshore Rate for each
         outstanding LIBOR Rate Loan shall be adjusted automatically as of the
         effective date of any change in the Eurodollar Reserve Percentage.

          "LIBOR Rate Loan" means a Revolving Loan during any period in which
it bears interest based on the LIBOR Rate.

         "Lien" means: (a) any interest in property securing an obligation owed
to, or a claim by, a Person other than the owner of the property, whether such
interest is based on the common law, statute, or contract, and including a
security interest, charge, claim, or lien arising from a mortgage, deed of
trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement,
agreement, security agreement, conditional sale or trust receipt or a lease,
consignment or bailment for security purposes; (b) to the extent not included
under clause (a), any reservation, exception, encroachment, easement,
right-of-way, covenant, condition, restriction, lease or other title exception
or encumbrance affecting property; and (c) any contingent or other agreement to
provide any of the foregoing.

         "Loan Account" means the loan account of the Borrowers, which account
shall be maintained by the Lender.

         "Loan Documents" means this Agreement, the Security Instruments, the
Subordination Agreement, the Intercreditor Agreement, the Blocked Account
Agreement, the Landlord Waiver and any other agreements, instruments, and
documents heretofore, now or hereafter evidencing, securing, guaranteeing or
otherwise relating to the Obligations, the Collateral, or any other aspect of
the transactions contemplated by the Agreement.

         "Loans" means, collectively, all loans and advances provided for in
Article 1.

                                  Annex A-15
<PAGE>

         "Margin Stock" means "margin stock" as such term is defined in
Regulation T, U or X of the Federal Reserve Board.

         "Material Adverse Effect" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, condition
(financial or otherwise) or prospects of the Borrowers or any of their
Subsidiaries, the Collateral or any guarantor of the Obligations; (b) a
material impairment of the ability of the Borrowers or any Affiliate of
Borrowers to perform under any Loan Document to which it is a party; or (c) a
material adverse effect upon the legality, validity, binding effect or
enforceability against the Borrowers of any Loan Document to which it is a
party.

         "Maximum Rate" has the meaning specified in Section 3.3.

         "Maximum Revolver Amount" means the amount of Revolving Loans that the
Lender shall make available to the Borrowers which shall be equal to the
difference of (a) the Revolving Loan Commitment, less (b) the undrawn face
amount of all outstanding Letters of Credit plus the aggregate amount of all
unpaid reimbursement obligations in respect of all Letters of Credit.

         "Minimum Excess Availability" means $250,000.

         "Mortgage" means each mortgage, deed of trust, deed to secure debt,
assignment and other instrument executed and delivered by the Borrowers or any
other Credit Party to or for the benefit of the Lender by which the Lender
acquires the Lender's Liens on the Mortgaged Property or a collateral
assignment of the Borrowers' interest under leases of Mortgaged Property, and
all amendments, modifications and supplements thereto.

         "Mortgaged Property" means, collectively, any Real Estate owned or
acquired by any Borrower or any Subsidiary.

         "Mortgage Support Documents" means for each Mortgaged Property (i) the
Title Policy pertaining thereto, (ii) as-built surveys, flood hazard
certifications and appraisals prepared by recognized experts in their
respective fields selected by the Borrowers and reasonably acceptable to the
Lender and containing results satisfactory to the Lender, (iii) as to Mortgaged
Property located in a flood hazard area, such flood hazard insurance as the
Lender may require, (iv) such owner's or lessee's affidavits as the Lender may
require, (v) such opinions of local counsel with respect to the Mortgages as
the Lender may require, and (vi) such other documentation as the Lender may
reasonably require, in each case as shall be in form and substance reasonably
acceptable to the Lender.

         "Multi-employer Plan" means a "multi-employer plan" as defined in
Section 4001(a)(3) of ERISA which is or was at any time during the current year
or the immediately preceding six (6) years contributed to by the Borrowers or
any ERISA Affiliate.

         "Net Proceeds" has the meaning specified in Section 4.4(b).

         "Note" has the meaning specified in Section 1.2(a)(ii).

                                  Annex A-16
<PAGE>

         "Notice of Borrowing" has the meaning specified in Section 1.2(b).

         "Notice of Continuation/Conversion" has the meaning specified in
Section 3.2(b).

         "Obligations" means all present and future loans, advances,
liabilities, obligations, covenants, duties, and debts owing by any Borrower to
the Lender and/or any Indemnified Person, arising under or pursuant to the
Agreement or any of the other Loan Documents, whether or not evidenced by any
note, or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect, absolute or
contingent, due or to become due, primary or secondary, as principal or
guarantor, and including all principal, interest, charges, expenses, fees,
attorneys' fees, Attorney Costs, filing fees and any other sums chargeable to
the Borrowers hereunder or under any of the other Loan Documents. "Obligations"
includes, without limitation, (a) all debts, liabilities, and obligations now
or hereafter arising from or in connection with the Letters of Credit and (b)
all debts, liabilities and obligations now or hereafter arising from or in
connection with Bank Products.

         "Other Taxes" means any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies which arise
from any payment made hereunder or from the execution, delivery or registration
of, or otherwise with respect to, the Agreement or any other Loan Documents.

         "Overadvances" has the meaning given to such term in Section 1.2(f).

         "Participant" means any Person who shall have been granted the right
by the Lender to participate in the financing provided by such Lender under the
Agreement, and who shall have entered into a participation agreement in form
and substance satisfactory to the Lender.

         "Payment Account" means that certain bank account established with the
Lender, account number 3752169306, to which the proceeds of Accounts and other
Collateral are deposited or credited, and which is maintained in the name of
the Lender or the Borrowers, as the Lender may determine, on terms acceptable
to the Lender.

         "PBGC" means the Pension Benefit Guaranty Corporation or any
Governmental Authority succeeding to the functions thereof.

         "Pending Revolving Loans" means, at any time, the aggregate principal
amount of all Revolving Loans requested in any Notice of Borrowing received by
the Lender which have not yet been advanced.

         "Pension Plan" means a pension plan (as defined in Section 3(2) of
ERISA) subject to Title IV of ERISA which the Borrowers sponsor, maintain, or
to which they make, are making, or are obligated to make contributions, or in
the case of a Multi-employer Plan have made contributions at any time during
the immediately preceding five (5) plan years.

         "Permitted Debt" has the meaning specified in Section 8.13.

                                  Annex A-17
<PAGE>

         "Permitted Liens" means:

         (a)      Liens for taxes not delinquent or statutory Liens for taxes
in an amount not to exceed $100,000 provided that the payment of such taxes
which are due and payable is being contested in good faith and by appropriate
proceedings diligently pursued and as to which adequate financial reserves have
been established on Borrowers' books and records and a stay of enforcement of
any such Lien is in effect;

         (b)      the Lender's Liens;

         (c)      Liens consisting of deposits made in the ordinary course of
business in connection with, or to secure payment of, obligations under
worker's compensation, unemployment insurance, social security and other
similar laws, or to secure the performance of bids, tenders or contracts (other
than for the repayment of Debt) or to secure indemnity, performance or other
similar bonds for the performance of bids, tenders or contracts (other than for
the repayment of Debt) or to secure statutory obligations (other than liens
arising under ERISA or Environmental Liens) or surety or appeal bonds, or to
secure indemnity, performance or other similar bonds;

         (d)      Liens securing the claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords and other like Persons, provided
that if any such Lien arises from the nonpayment of such claims or demand when
due and such Liens are not being contested by appropriate proceeding being
diligently conducted, such claims or demands do not exceed $100,000 in the
aggregate;

         (e)      Liens securing Capital Leases and purchase money Debt to the
extent permitted in Section 8.13(d);

         (f)      Liens constituting encumbrances in the nature of
reservations, exceptions, encroachments, easements, rights of way, covenants
running with the land, and other similar title exceptions or encumbrances
affecting any Real Estate, provided that they do not in the aggregate
materially detract from the value of the Real Estate or materially interfere
with its use in the ordinary conduct of the Borrowers' businesses;

         (g)      Liens arising from judgments and attachments in connection
with court proceedings, provided that the attachment or enforcement of such
Liens would not result in an Event of Default hereunder and such Liens are
being contested in good faith by appropriate proceedings, adequate reserves
have been set aside and no material Collateral is subject to a material risk of
loss or forfeiture and the claims in respect of such Liens are fully covered by
insurance (subject to ordinary and customary deductibles) and a stay of
execution pending appeal or proceeding for review is in effect;

         (h)      Liens in favor of the Credit Card Provider upon Purchased
Accounts granted pursuant to the Account Purchase Agreement;

         (i)      those Liens existing on the Agreement Date listed on Schedule
9 hereto; and

                                  Annex A-18
<PAGE>

         (j)      Liens in favor of the Additional Shareholder Lenders securing
the Additional Subordinated Debt and subject to the Subordination Agreement.

         "Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, Governmental Authority, or any other entity.

         "Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which a Borrower sponsors or maintains or to which a Borrower makes, is
making, or is obligated to make contributions and includes any Pension Plan.

         "Pledge Agreement" means, collectively (or individually as the context
may indicate), (i) that certain Securities Pledge Agreement dated as of the
date hereof between the Parent and the Lender, and (ii) any additional Pledge
Agreement signed by any new Subsidiaries in the future and delivered to the
Lender, each as hereafter amended, supplemented (including by Pledge Agreement
Supplement) or amended and restated from time to time.

         "Pledge Agreement Supplement" means the Pledge Agreement Supplement in
the form affixed as an Exhibit to the Pledge Agreement.

         "Pledged Interests" means the Subsidiary Securities required to be
pledged as Collateral pursuant to Article 2 or the terms of the Pledge
Agreement.

         "Principal Shareholders" means Alan M. Zimmer, Arlene Zimmer
Schreiber, Herbert J. Zimmer and Jeffrey L. Zimmer.

          "Proprietary Rights" means all of the Borrowers' and each
Subsidiary's now owned and hereafter arising or acquired: licenses, franchises,
permits, patents, patent rights, copyrights, works which are the subject matter
of copyrights, trademarks, service marks, trade names, trade styles, patent,
trademark and service mark applications, and all licenses and rights related to
any of the foregoing, including those patents, trademarks, service marks, trade
names and copyrights set forth on Schedule 7.12 hereto, and all other rights
under any of the foregoing, all extensions, renewals, reissues, divisions,
continuations, and continuations-in-part of any of the foregoing, and all
rights to sue for past, present and future infringement of any of the
foregoing.

         "Purchased Accounts" means all accounts receivable of Reeds Financial
purchased by the Credit Card Provider pursuant to the Account Purchase
Agreement.

         "Real Estate" means all of the Borrowers' and each Subsidiary's now or
hereafter owned or leased estates in real property, including, without
limitation, all fees, leaseholds and future interests, together with all of the
Borrowers' and each Subsidiary's now or hereafter owned or leased interests in
the improvements thereon, the fixtures attached thereto and the easements
appurtenant thereto.

          "Registrar" means, with respect to any Subsidiary Securities, any
Person authorized or obligated to maintain records of the registration of
ownership or transfer of ownership of interests in such Subsidiary Securities,
and in the event no such Person shall have been expressly

                                  Annex A-19
<PAGE>

designated by the related Subsidiary, shall mean (i) as to any corporation or
limited liability company, its Secretary (or comparable official), and (ii) as
to any partnership, its general partner (or managing general partner if one
shall have been appointed).

         "Release" means a release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration of a
Contaminant into the indoor or outdoor environment or into or out of any Real
Estate or other property, including the movement of Contaminants through or in
the air, soil, surface water, groundwater or Real Estate or other property.

         "Reportable Event" means, any of the events set forth in Section
4043(b) of ERISA or the regulations thereunder, other than any such event for
which the 30-day notice requirement under ERISA has been waived in regulations
issued by the PBGC.

         "Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person
or any of its property or to which the Person or any of its property is
subject.

         "Reserves" means reserves that limit the availability of credit
hereunder, consisting of reserves against Availability, Eligible Accounts or
Eligible Inventory, established by the Lender from time to time in the Lender's
reasonable credit judgment. Without limiting the generality of the foregoing,
the following reserves shall be deemed to be a reasonable exercise of the
Lender's credit judgment: (a) Bank Product Reserves, (b) Inventory shrinkage,
(c) customs charges, (d) dilution, and (e) warehousemen's or bailees' charges.

         "Responsible Officer" means any of the President or Chief Executive
Officer of a Borrower or, with respect to financial matters, the chief
financial officer of a Borrower, or any other Person expressly designated by
the Board of Directors of a Borrower (or the appropriate committee thereof) as
a Responsible Officer of such Borrower, as set forth from time to time in a
certificate in the form of Exhibit F.

          "Restricted Investment" means, as to the Borrowers, any acquisition
of property by the Borrowers in exchange for cash or other property, whether in
the form of an acquisition of stock, debt, or other indebtedness or obligation,
or the purchase or acquisition of any other property, or a loan, advance,
capital contribution, or subscription, except the following: (a) acquisitions
of Equipment to be used in the business of the Borrowers so long as the
acquisition costs thereof constitute Capital Expenditures permitted hereunder;
(b) acquisitions of Inventory in the ordinary course of business of the
Borrowers; (c) acquisitions of current assets acquired in the ordinary course
of business of the Borrowers; (d) direct obligations of the United States of
America, or any agency thereof, or obligations guaranteed by the United States
of America, provided that such obligations mature within one year from the date
of acquisition thereof; (e) acquisitions of certificates of deposit maturing
within one year from the date of acquisition, bankers' acceptances, Eurodollar
bank deposits, or overnight bank deposits, in each case issued by, created by,
or with a bank or trust company organized under the laws of the United States
of America or any state thereof having capital and surplus aggregating at least
$100,000,000; (f) acquisitions of commercial paper given a rating of "A2" or
better by Standard & Poor's

                                  Annex A-20
<PAGE>

Corporation or "P2" or better by Moody's Investors Service, Inc. and maturing
not more than 90 days from the date of creation thereof; and (g) Hedge
Agreements.

         "Revolving Loans" has the meaning specified in Section 1.2.

         "Revolving Loan Commitment" means $30,000,000.

          "Security Agreement" means, collectively (or individually as the
context may indicate), (i) the Security Agreement dated as of the date hereof
by the Borrowers to the Lender, and (ii) any additional Security Agreement
signed by any new Subsidiaries in the future and delivered to the Lender, as
hereafter modified, amended or supplemented from time to time.

         "Security Instruments" means, collectively, the Pledge Agreement, the
Security Agreement, and all other agreements (including control agreements),
instruments and other documents, whether now existing or hereafter in effect,
pursuant to which the Borrowers or any Subsidiary or other Person shall grant
or convey to the Lender a Lien in, or any other Person shall acknowledge any
such Lien in, property as security for all or any portion of the Obligations or
any other obligation under any Loan Document, as any of them may be amended,
modified or supplemented from time to time.

         "Settlement" and "Settlement Date" have the meanings specified in
Section 13.15(a)(ii).

         "Shareholder Lenders" means Alan M. Zimmer, Arlene Zimmer Schreiber,
Ronna T. Zimmer.

         "Existing Subordinated Debt" means that certain indebtedness of the
Borrowers owing to the Shareholders Lenders in the aggregate outstanding
principal amount of $845,000 as of the date hereof evidenced by (a) that
certain Promissory Note in favor of Alan M. Zimmer dated as of May 11, 1990 in
the original principal amount of $615,000, (b) that certain Promissory Note in
favor of Arlene Zimmer Schreiber dated as of May 11, 1990 in the original
principal amount of $185,000, and (c) that certain Promissory Note in favor of
Ronna T. Zimmer dated as of May 11, 1990 in the original principal amount of
$100,000, all of which is subject to the Subordination Agreement.

         "Solvent" means, when used with respect to any Person, that at the
time of determination:

                  (a)      the assets of such Person, at a fair valuation, are
         in excess of the total amount of its debts (including contingent
         liabilities); and

                  (b)      the present fair saleable value of its assets is
         greater than its probable liability on its existing debts as such
         debts become absolute and matured; and

                  (c)      it is then able and expects to be able to pay its
         debts (including contingent debts and other commitments) as they
         mature; and

                  (d)      it has capital sufficient to carry on its business
         as conducted and as proposed to be conducted.

                                  Annex A-21
<PAGE>

         For purposes of determining whether a Person is Solvent, the amount of
any contingent liability shall be computed as the amount that, in light of all
the facts and circumstances existing at such time, represents the amount that
can reasonably be expected to become an actual or matured liability.

         "Stated Termination Date" means February 28, 2005.

         "Subordinated Debt" means the Existing Subordinated Debt and the
Additional Subordinated Debt.

         "Subordination Agreement" means (i) that certain Subordination
Agreement I dated as of the date hereof by the Shareholder Lenders in favor of
the Lender relating to the Existing Subordinated Debt and (ii) that certain
Subordination Agreement II dated as of the date hereof by the Additional
Shareholder Lenders in favor of the Lender relating to the Additional
Subordinated Debt.

         "Subsidiary" of a Person means any corporation, association,
partnership, limited liability company, joint venture or other business entity
of which more than fifty percent (50%) of the voting stock or other equity
interests (in the case of Persons other than corporations), is owned or
controlled directly or indirectly by the Person, or one or more of the
Subsidiaries of the Person, or a combination thereof. Unless the context
otherwise clearly requires, references herein to a "Subsidiary" refer to a
Subsidiary of a Borrower.

         "Subsidiary Securities" means the shares of capital stock or the other
equity interests issued by or equity participations in any Subsidiary, whether
or not constituting a "security" under Article 8 of the Uniform Commercial Code
as in effect in any jurisdiction.

         "Supporting Letter of Credit" has the meaning specified in Section
1.4(g).

         "Supporting Obligations" means all supporting obligations as such term
is defined in the UCC.

         "Taxes" means any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities to a governmental unit
with respect thereto, excluding, in the case of the Lender, such taxes
(including income taxes or franchise taxes) as are imposed on or measured by
the Lender's net income in any the jurisdiction (whether federal, state or
local and including any political subdivision thereof) under the laws of which
the Lender is organized or maintains a lending office.

         "Termination Date" means the earliest to occur of (a) the Stated
Termination Date, (b) the date the Revolving Credit Commitment are terminated
either by the Borrowers pursuant to Section 4.2 or by the Lender pursuant to
Section 10.2, and (c) the date the Agreement is otherwise terminated for any
reason whatsoever pursuant to the terms of the Agreement.

         "Title Policy" means, with respect to each Mortgaged Property, the
mortgagee title insurance policy (together with such endorsements as the Lender
may reasonably require) issued to the Lender in respect of such Mortgaged
Property by an insurer selected by the Borrowers and

                                  Annex A-22
<PAGE>

reasonably acceptable to the Lender, insuring (in an amount satisfactory to the
Lender) the Lien of the Lender on such Mortgaged Property to be duly perfected
and of first priority, subject only to such exceptions as shall be acceptable
to the Lender.

         "Total Facility" has the meaning specified in Section 1.1.

         "UCC" means the Uniform Commercial Code, as in effect from time to
time, of the State of North Carolina or of any other state the laws of which
are required as a result thereof to be applied in connection with the issue of
perfection of security interests.

         "Unfunded Pension Liability" means the excess of a Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Plan's assets, determined in accordance with the assumptions used for funding
the Pension Plan pursuant to Section 412 of the Code for the applicable plan
year.

         "Unused Letter of Credit Subfacility" means an amount equal to
$1,500,000 minus the sum of (a) the aggregate undrawn amount of all outstanding
Letters of Credit plus, without duplication, (b) the aggregate unpaid
reimbursement obligations with respect to all Letters of Credit.

         "Unused Line Fee" has the meaning specified in Section 3.5.

         "Voting Securities" means shares of capital stock issued by a
corporation, or equivalent interests in any other Person, the holders of which
are ordinarily, in the absence of contingencies, entitled to vote for the
election of all or a class of directors (or persons performing similar
functions) of such Person, even if the right so to vote has been suspended by
the happening of such a contingency.

         Accounting Terms. Any accounting term used in the Agreement shall
have, unless otherwise specifically provided herein, the meaning customarily
given in accordance with GAAP, and all financial computations in the Agreement
shall be computed, unless otherwise specifically provided therein, in
accordance with GAAP as consistently applied and using the same method for
inventory valuation as used in the preparation of the Financial Statements.

         Interpretive Provisions. (a) The meanings of defined terms are equally
applicable to the singular and plural forms of the defined terms.

         (b)      The words "hereof," "herein," "hereunder" and similar words
refer to the Agreement as a whole and not to any particular provision of the
Agreement; and Subsection, Section, Schedule and Exhibit references are to the
Agreement unless otherwise specified.

         (c)      (i)      The term "documents" includes any and all
instruments, documents, agreements, certificates, indentures, notices and other
writings, however evidenced.

                  (ii)     The term "including" is not limiting and means
         "including without limitation."

                                  Annex A-23
<PAGE>

                  (iii)    In the computation of periods of time from a
         specified date to a later specified date, the word "from" means "from
         and including," the words "to" and "until" each mean "to but
         excluding" and the word "through" means "to and including."

                  (iv)     The word "or" is not exclusive.

         (d)      Unless otherwise expressly provided herein, (i) references to
agreements (including the Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other modifications thereto,
but only to the extent such amendments and other modifications are not
prohibited by the terms of any Loan Document, and (ii) references to any
statute or regulation are to be construed as including all statutory and
regulatory provisions consolidating, amending, replacing, supplementing or
interpreting the statute or regulation.

         (e)      The captions and headings of the Agreement and other Loan
Documents are for convenience of reference only and shall not affect the
interpretation of the Agreement.

         (f)      The Agreement and other Loan Documents may use several
different limitations, tests or measurements to regulate the same or similar
matters. All such limitations, tests and measurements are cumulative and shall
each be performed in accordance with their terms.

         (g)      For purposes of Section 10.1, a breach of a financial
covenants contained in Sections 8.22 and 8.23 shall be deemed to have occurred
as of any date of determination thereof by the Lender or as of the last day of
any specified measuring period, regardless of when the Financial Statements
reflecting such breach are delivered to the Lender.

         (h)      The Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Lender, the
Borrowers and the other parties, and are the products of all parties.
Accordingly, they shall not be construed against the Lender merely because of
the Lender's involvement in their preparation.

                                  Annex A-24
<PAGE>

                                   EXHIBIT A

                       FORM OF BORROWING BASE CERTIFICATE

                                     A-1-1
<PAGE>
                                   EXHIBIT B

                              FINANCIAL STATEMENTS

                                      B-1
<PAGE>
                                   EXHIBIT C

                              NOTICE OF BORROWING

                                                    Date:  ______________, 200_

         To:      BANK OF AMERICA, N.A. as Lender (the "Lender") under that
                  certain Credit Agreement dated as of February 28, 2002 (as
                  extended, renewed, amended or restated from time to time, the
                  "Credit Agreement") between the Lender and REEDS JEWELERS,
                  INC., REEDS FINANCIAL SERVICES, INC., REEDS JEWELERS OF NORTH
                  CAROLINA, INC., REEDS CORPORATE SERVICES, INC. and REEDS
                  INSURANCE SERVICES, INC.

         Ladies and Gentlemen:

         The undersigned, ___________________________ (the "Borrower"), refers
to the Credit Agreement, the terms defined therein being used herein as therein
defined, and hereby gives you notice irrevocably of the Borrowing specified
below:

                  1.       The Business Day of the proposed Borrowing is ______,
         200_.

                  2.       The aggregate amount of the proposed Borrowing is
         $__________.

                  3.       The Borrowing is to be comprised of $__________ of
         Base Rate and $__________ of LIBOR Rate Loans.

                  4.       The duration of the Interest Period for the LIBOR
         Rate Loans, if any, included in the Borrowing shall be _____ months.

         The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the proposed
Borrowing, before and after giving effect thereto and to the application of the
proceeds therefrom:

         (a)      The representations and warranties of the Borrower contained
in the Credit Agreement are true and correct in all material respects as though
made on and as of such date except to the extent they relate solely to an
earlier date or have been modified by an amendment or certificate acknowledged
and agreed to by the Lender;

         (b)      No Default or Event of Default has occurred and is
continuing, or would result from such proposed Borrowing; and

                                      C-1
<PAGE>

         (c)      The proposed Borrowing will not cause (i) the aggregate
principal amount of all outstanding Revolving Loans plus the aggregate amount
available for drawing under all outstanding Letters of Credit, to exceed the
Borrowing Base or the Revolving Credit Commitment of the Lender, or (ii) the
Borrowers to violate the Excess Availability requirement set forth in the
Credit Agreement.

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

                                    By:
                                       --------------------------
                                    Name:
                                         ------------------------
                                    Title:
                                          -----------------------

                                      C-2
<PAGE>

                                   EXHIBIT D

                       NOTICE OF CONTINUATION/CONVERSION

                                                   Date: _______________ , 200_

         To:      BANK OF AMERICA, N.A. as Lender (the "Lender") under that
                  certain Credit Agreement dated as of February 28, 2002 (as
                  extended, renewed, amended or restated from time to time, the
                  "Credit Agreement") between the Lender and REEDS JEWELERS,
                  INC., REEDS FINANCIAL SERVICES, INC., REEDS JEWELERS OF NORTH
                  CAROLINA, INC., REEDS CORPORATE SERVICES, INC. and REEDS
                  INSURANCE SERVICES, INC.

         Ladies and Gentlemen:

         The undersigned, ___________________________ (the "Borrower"), refers
to the Credit Agreement, the terms defined therein being used herein as therein
defined, and hereby gives you notice irrevocably of the [conversion]
[continuation] of the Loans specified herein, that:

         1.       The Continuation/Conversion Date is _______________ , 200_.

         2.       The aggregate amount of the Loans to be [converted]
[continued] is $__________.

         3.       The Loans are to be [converted into] [continued as] [LIBOR
Rate] [Base Rate] Loans.

         4.       The duration of the Interest Period for the LIBOR Rate Loans
included in the [conversion] [continuation] shall be ______ months.

         The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the proposed
Continuation/Conversion Date, before and after giving effect thereto and to the
application of the proceeds therefrom:

                  (a)      The representations and warranties of the Borrower
         contained in the Credit Agreement are true and correct in all material
         respects as though made on and as of such date except to the extent
         they relate solely to an earlier date or have been modified by an
         amendment or certificate acknowledged and agreed to by the Lender;

                  (b)      Default or Event of Default has occurred and is
         continuing, or would result from such proposed [conversion]
         [continuation]; and

                  (c)      The proposed conversion-continuation will not cause
         (i) the aggregate principal amount of all outstanding Revolving Loans
         [plus the aggregate amount available for drawing under all outstanding
         Letters of Credit] to exceed the Borrowing Base or the Revolving
         Credit Commitment of the Lender, or (ii) the Borrowers to violate the
         Excess Availability requirement set forth in the Credit Agreement.

                                      D-1
<PAGE>

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

                                    By:
                                       --------------------------
                                    Name:
                                         ------------------------
                                    Title:
                                          -----------------------

                                      D-2
<PAGE>

                                   EXHIBIT E

                        [FORM OF] COMPLIANCE CERTIFICATE

         The undersigned, _________________________________, the
___________________ of REEDS JEWELERS, INC. (the "Parent"), pursuant to that
certain Credit Agreement dated as of February 28, 2002 (as amended from time to
time, the "Credit Agreement") among the BANK OF AMERICA, N.A. as Lender (the
"Lender") REEDS JEWELERS, INC., REEDS FINANCIAL SERVICES, INC., REEDS JEWELERS
OF NORTH CAROLINA, INC., REEDS CORPORATE SERVICES, INC. and REEDS INSURANCE
SERVICES, INC., does hereby certify to the Lender pursuant to SECTION 6.2(D) of
the Credit Agreement that as of the date of this Certificate:

         (a)      all of the representations and warranties of the Borrowers
contained in the Credit Agreement and the other Loan Documents are correct and
complete in all material respects as of the date hereof as if made on the date
hereof, except for those that speak as of a particular date or have been
modified by an amendment or certificate acknowledged and agreed to by the
Lender;

         (b)      the Borrowers are, as of the date hereof, in compliance in
all material respects with all of its covenants and agreements in the Credit
Agreement and the other Loan Documents;

         (c)      no Default or Event of Default exists [or, if a Default or
Event of Default exists, set forth on Annex B attached hereto is complete and
accurate information specifying the Default or Event of Default, when it
occurred, whether it is continuing and the steps being taken with respect to
such Default or Event of Default] or existed during the period covered by the
Financial Statements to which this Certificate relates [or, if a Default or
Event of Default existed, set forth on Annex B attached hereto is complete and
accurate information specifying the Default or Event of Default, when it
occurred and when and how it was cured];

         (d)      set forth on Annex C attached hereto is a detailed
description and analysis of all material trends, changes and developments in
the Financial Statements to which this certificate relates, and an explanation
of the variances of the figures in the corresponding budget and prior Fiscal
Year financial statements;

         (e)      all of the information and disclosures provided on the
Schedules attached to the Credit Agreement are true and correct in all material
respects except as set forth on Annex D attached hereto; and

         (f)      the information set forth on Annex A attached hereto is
complete and accurate.

         Unless defined herein, capitalized terms used herein shall have the
         meanings set forth in the Credit Agreement.

                                      E-1
<PAGE>

         IN WITNESS WHEREOF, the undersigned has executed and delivered this
Certificate on behalf of the Borrowers as of __________________, 200__.

                                    -----------------------------
                                    By:
                                       --------------------------
                                    Name:
                                         ------------------------
                                    Title:
                                          -----------------------

                                      E-2
<PAGE>

                                    ANNEX A

                        FINANCIAL COVENANT CALCULATIONS

         1.       Compliance with Section 8.21: EBITDA:

         A.       For the period from the Closing Date through February 28,
2003, EBITDA as of the last day of _____________, 200__ (the "Determination
Date") was as follows:

<TABLE>
                  <S>      <C>                                          <C>
                  1.       Adjusted Net Earnings from
                           Operations for the month ending
                           on the Determination Date                    $___________

                  2.       Interest Expense for the month ending
                           on the Determination Date                    $___________

                  3.       Taxes on income for the month
                           ending on the Determination Date             $___________

                  4.       Amortization for the month
                           ending on the Determination Date             $___________

                  5.       Depreciation for the month
                           ending on the Determination Date             $___________

                  6.       Sum of A.1 + A.2 + A.3 + A.4 + A.5           $____________

                  7.       Cumulative EBITDA as of the last
                           month-end prior to the Determination Date    $____________

                  8.       Sum of  Line A.6 + A.7                       $____________
</TABLE>

         REQUIRED: Line A.8 must be greater than [Fill in required amount from
8.21]

         B.       For the period after February 28, 2003, EBITDA as of the last
day of _____________, 200__ (the "Determination Date") was as follows:

<TABLE>
                  <S>      <C>                                          <C>
                  1.       Adjusted Net Earnings from Operations
                           for the twelve-month period ending
                           on the Determination Date                    $___________

                  2.       Interest Expense for the twelve-month
                           period ending on the Determination Date      $___________

                  3.       Taxes on income for the twelve-month
                           period ending on the Determination Date      $___________
</TABLE>

<PAGE>

<TABLE>
                  <S>      <C>                                          <C>
                  4.       Amortization for the twelve-month
                           period ending on the Determination Date      $___________

                  5.       Depreciation for the twelve-month
                           period ending on the Determination Date      $___________

                  6.       Sum of B.1 + B.2 + B.3 + B.4 + B.5           $____________
</TABLE>

         REQUIRED: Line B.6 must be greater than $5,200,000

                                      E-2
<PAGE>

                                    ANNEX B

                           DEFAULTS/EVENTS OF DEFAULT

<PAGE>

                                    ANNEX C

          DESCRIPTION AND ANALYSIS OF TRENDS, CHANGES AND DEVELOPMENTS

<PAGE>

                                    ANNEX D

                            SUPPLEMENTS TO SCHEDULES

<PAGE>

                                   EXHIBIT F

          Notice of Appointment (or Revocation) of Responsible Officer

         Reference is hereby made to the Credit Agreement dated as of February
28, 2002 (as amended from time to time, the "Credit Agreement") among the BANK
OF AMERICA, N.A. as Lender (the "Lender") REEDS JEWELERS, INC., REEDS FINANCIAL
SERVICES, INC., REEDS JEWELERS OF NORTH CAROLINA, INC., REEDS CORPORATE
SERVICES, INC. and REEDS INSURANCE SERVICES, INC. Capitalized terms used but
not defined herein shall have the respective meanings therefor set forth in the
Agreement.

         The Borrower hereby nominates, constitutes and appoints each
individual named below as a Responsible Officer under the Loan Documents, and
hereby represents and warrants that (i) set forth opposite each such
individual's name is a true and correct statement of such individual's office
(to which such individual has been duly elected or appointed), a genuine
specimen signature of such individual and an address for the giving of notice,
and (ii) each such individual has been duly authorized by the Borrowers to act
as Responsible Officer under the Loan Documents:

    Name and Address                Office                Specimen Signature

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

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

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

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

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

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

Borrower hereby revokes (effective upon receipt hereof by the Lender) the prior
appointment of ________________ as a Responsible Officer.

         This the ___ day of __________________, ____.

                                             REEDS JEWELERS, INC.

                                             By:
                                                ------------------------
                                             Name:
                                                  ----------------------
                                             Title:
                                                   ---------------------

                                      F-1
<PAGE>

                                   EXHIBIT G

                            Form of Landlord Waiver

                                      G-1
<PAGE>

                                SCHEDULE 2.1(d)

                        INFORMATION REGARDING COLLATERAL

<PAGE>

                                  SCHEDULE 7.3

                        ORGANIZATION AND QUALIFICATIONS

<PAGE>

                                  SCHEDULE 7.4

                                CORPORATE NAMES

<PAGE>

                                  SCHEDULE 7.7

                                 CAPITAL STOCK

<PAGE>

                                 SCHEDULE 7.11

                              REAL ESTATE; LEASES

<PAGE>

                                 SCHEDULE 7.12

                               PROPRIETARY RIGHTS

<PAGE>

                                 SCHEDULE 7.13

                                  TRADE NAMES

<PAGE>

                                 SCHEDULE 7.25

                              MATERIAL AGREEMENTS

<PAGE>

                                 SCHEDULE 7.26

                                 BANK ACCOUNTS

<PAGE>

                                 SCHEDULE 8.13

                                 EXISTING DEBT

<PAGE>

                                   SCHEDULE 9

                                 EXISTING LIENS<PAGE>
                                                                    EXHIBIT 4(b)

                                PROMISSORY NOTE

                                                         Date: February 28, 2002

THE UNDERSIGNED REPRESENT THAT THE LOAN EVIDENCED HEREBY IS BEING OBTAINED FOR
BUSINESS/COMMERCIAL OR AGRICULTURAL PURPOSES. For value received, the
undersigned, jointly and severally, if more than one (the "Borrowers"), promise
to pay to ALAN ZIMMER, HERBERT ZIMMER, and JEFFREY ZIMMER (collectively, the
"Lenders") the sum of TWO MILLION Dollars ($2,000,000), in immediately available
coin or currency of the United States of America. Interest shall accrue from the
date hereof on the unpaid principal balance outstanding from time to time in the
following manner:

Payment of Interest.  Interest shall be payable monthly on the fifth day of each
month, and shall initially bear interest at a rate equal to the Prime Rate of
Branch Banking and Trust Company (the "Bank") plus 6.0%.

Mandatory Principal Payments.  To the extent permitted under that certain Credit
Agreement among the Borrowers, Bank of America, N.A. ("Bank of America"), and
the other lenders party thereto (the "B of A Agreement"), the Borrowers are
required to make payments of principal in an amount equal to 100% of the amount
permitted to be made in accordance with the B of A Agreement.

Any remaining amount of principal, along with accrued interest, is due in full
at maturity on February 28, 2005.

In addition, the undersigned promises to pay to Lenders, or order, a late fee in
the amount of two percent (2%) of any installment past due. When any installment
payment is past due, subsequent payments shall first be applied to the past due
balance; nonetheless, in all cases, payments shall be applied first to interest
and other charges and then to principal. All interest shall be computed and
charged for the actual number of days elapsed on the basis of a year consisting
of three hundred sixty (360) days. In the event periodic accruals of interest
shall exceed any periodic fixed payment amount described above, the fixed
payment amount shall be immediately increased, or additional supplemental
interest payments required on the same periodic basis as specified above
(increased fixed payments or supplemental payments to be determined in the
Lenders' sole discretion), in such amounts and at such times as shall be
necessary to pay all accruals of interest for the period and all accruals of
unpaid interest from previous periods. Such adjustments to the fixed payment
amount or supplemental payments shall remain in effect for so long as the
interest accruals shall exceed the original fixed payment amount and shall be
further adjusted upward or downward to reflect changes in the variable interest
rate. In no event shall the fixed payment amount be reduced below the original
fixed payment amount specified above.

This note ("NOTE") is given by the undersigned in connection with the following
agreements (if any) between the undersigned and the Lenders:
Security Agreement conveying a security interest in favor of the Lenders dated
the date hereof given by the undersigned.

All of the terms, conditions and covenants of the above described agreements
(the "Agreements") are expressly made a part of this Note by reference in the
same manner and with the same effect as if set forth herein at length and any
holder of this Note is entitled to the benefits of and remedies provided in the
Agreements and any other agreements by and between the undersigned and the
Lenders.

No delay or omission on the part of the holder in exercising any right hereunder
shall operate as a waiver of such right or of any other right of such holder,
nor shall any delay, omission or waiver on any one occasion be deemed a bar to
or waiver of the same or of any other right on any future occasion. Every one of
the undersigned and every endorser or guarantor of this note regardless of the
time, order or place of signing waives presentment, demand, protest and notices
of every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral if at any time there be available to the holder
collateral for this Note, and to the additions or releases of any other parties
or persons primarily or secondarily liable.

The failure to pay any part of the principal or interest when due on this Note
or to fully perform any covenant, obligation or warranty on this or any other
liability to the Lenders by any one or more of the undersigned, by any affiliate
of the undersigned (as defined in 11 USC Section (101)(2)), or by any guarantor
or surety of this Note (said affiliate, guarantor, and surety are herein called
Obligor), or if any financial statement or other representation made to the
Lenders by any of the undersigned or any Obligor shall be found to be materially
incorrect or incomplete, or in the event of default pursuant to any of the
Agreements or any other obligation of any of the undersigned or any Obligor in
favor of the Lenders, or in the event the Lenders demand that the undersigned
secure or provide additional security for its obligations under this Note and
security deemed adequate and sufficient by the Lenders is not given when
demanded, or in the event one or more of the undersigned or any Obligor shall
die, terminate its existence, allow the appointment of a receiver for any part
of its property, make an assignment for the benefit of creditors, or where a
proceeding under bankruptcy or insolvency laws is initiated by or against any of
the undersigned or any Obligor, or in the event the Lenders should otherwise
deem themselves, their security interest, or any collateral unsafe or insecure;
or should the Lenders in good faith believe that the prospect of payment or
other performance is impaired, or if there is an attachment, execution, or other
judicial seizure of all or any portion of the Borrowers' or any Obligor's
assets, and such seizure is not discharged within 20 days, or if final judgment
for the payment of money shall be rendered against the Borrowers or any Obligor
which is not covered by insurance and shall remain undischarged for a period of
30 days unless such judgment or execution thereon is effectively stayed, or the
termination of any guaranty agreement given in connection with this Note, then
any one of the same shall be a material default hereunder and this Note and
other debts due to the Lenders by any one or more of undersigned shall
immediately become due and payable without notice, at the option of the Lenders.
From and after any event of default hereunder, interest shall accrue on the sum
of the principal balance and accrued interest then outstanding at the variable
rate equal to the Bank's Prime Rate plus 5% per annum ("Default Rate"), provided
that such rate shall not exceed at any time the highest rate of interest
permitted by the laws of the State of North Carolina; and further provided that
such rate also shall apply after judgment, if applicable. In the event of any
default, the then remaining unpaid principal amount and accrued but unpaid
interest then outstanding shall bear interest at the Default Rate called for
hereunder until such principal and interest have been paid in full. In addition,
upon default, the Lenders may pursue their full legal remedies at law or equity,
and the balance due hereunder may be charged against any obligation of the
Lenders to any party including any Obligor. Lenders shall not be obligated to
accept any check, money order, or other payment instrument marked "payment in
full" on any disputed amount due hereunder, and Lenders expressly reserve the
right to reject all such payment instruments. Borrowers agree that tender of its
check or other payment instrument so marked will not satisfy or discharge its
obligation under this Note, disputed or otherwise, even if such check or payment
instrument is inadvertently deposited by Lenders unless in fact such payment is
in fact sufficient to pay the amount due hereunder.

The term "Prime Rate," if used herein, means the rate of interest per annum
announced by the Bank from time to time and adopted as its Prime Rate. Bank
lends at rates above and below the Prime Rate, and the Prime Rate is one of
several rate indexes employed by the Bank when extending credit. Any change in
the interest rate resulting from a change in the Bank's Prime Rate shall become
effective as of the opening of business on the effective date of the change. If
this Note is placed with an
<PAGE>
attorney for collection, the undersigned agrees to pay, in addition to
principal and interest, all costs of collection and reasonable attorneys' fees.
All obligations of the undersigned and of any Obligor shall bind his heirs,
executors, administrators, successors, and/or assigns. Use of the masculine
pronoun herein shall include the feminine and the neuter, and also the plural.
If more than one party shall execute this Note, the term "undersigned" as used
herein shall mean all the parties signing this Note and each of them, and all
such parties shall be jointly and severally obligated hereunder. Wherever
possible, each provision of this Note shall be interpreted in such a manner to
be effective and valid under applicable law, but if any provision of this Note
shall be prohibited by or invalid under such law, such provision shall be
ineffective but only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Note. All of the undersigned hereby waive all exemptions and homestead
laws. The proceeds of the loan evidenced by this Note may be paid to any one or
more of the undersigned. From time to time the maturity date of this Note may
be extended, or this Note may be renewed in whole or in part, or a new note of
different form may be substituted for this Note, or the rate of interest may be
modified, or changes may be made in consideration of loan extensions, and the
holder hereof, from time to time may waive or surrender, either in whole or in
part any rights, guaranties, secured interest, or liens, given for the benefit
of the holder in connection with the payment and the securing the payment of
this Note; but no such occurrence shall in any manner affect, limit, modify, or
otherwise impair any rights, guaranties or security of the holder not
specifically waived, released, or surrendered in writing nor shall the
undersigned makers, or any guarantor, endorser, or any person who is or might
be liable hereon, either primarily or contingently, be released from such
event. The holder hereof, from time to time, shall have the unlimited right to
release any person who might be liable hereon, and such release shall not
affect or discharge the liability of any other person who is or might be liable
hereon. No waivers and modifications shall be valid unless in writing and
signed by the Lenders. The Lenders may, at their option, charge any fees for
the modification, renewal, additional advance, extension, or amendment of any
of the terms of the Note permitted by applicable law. In case of a conflict
between the terms of this Note and the Loan Agreement or Commitment Letter
issued in connection herewith, the priority of controlling terms shall be first
this Note, then the Loan Agreement, and then the Commitment Letter. This Note
shall be governed by and construed in accordance with the laws of North
Carolina, and the Borrowers hereby submit to the jurisdiction of North Carolina
in connection with any foreclosure or enforcement proceeding undertaken in
connection with the Borrowers' property situated in North Carolina.

Borrowers agree that the only interest charge is the interest actually stated in
this Note, and that any loan or origination fee shall be deemed charges rather
than interest, which charges are fully earned and non-refundable. It is further
agreed that any late charges are not a charge for the use of money but are
imposed to compensate Lenders for some of the costs and losses associated with
any delinquency or default under this Note, and said charges shall be fully
earned and non-refundable when accrued. All other charges imposed by Lenders
upon Borrowers in connection with this Note and the loan including, without
limitation, any commitment fees, loan fees, facility fees, origination fees,
discount points, default and late charges, prepayment fees, statutory attorneys'
fees and reimbursements for costs and expenses paid by Lenders to third parties
or for damages incurred by Lenders are and shall be deemed to be charges made to
compensate Lenders for costs or losses incurred and to be incurred by Lenders in
connection with this Note and the loan and shall under no circumstances be
deemed to be charges for the use of money. All such charges shall be fully
earned and non-refundable when due.

It is the intention of Lenders and Borrowers to conform strictly to the usury
laws now or hereafter in effect, and any interest payable hereunder shall be
subject to reduction to the amount not in excess of the maximum non-usurious
amount allowed under applicable usury laws now or hereafter construed by courts
having jurisdiction over such matters. If the maturity of this Note is
accelerated by reason of any provision of this Note or by reason of voluntary
prepayment by the undersigned, or otherwise, then earned interest may never
include more than the maximum amount permitted by law, computed from the date of
each advance of loan proceeds hereunder until payment and any interest in excess
of the maximum amount permitted by law shall be cancelled automatically and, if
paid, shall at the option of Lenders if allowed by applicable law, either be
rebated to Borrowers or credited on the principal amount of this Note, or if all
principal has heretofore been repaid, then the excess shall be rebated to
Borrowers.

                            [SIGNATURE PAGE FOLLOWS]

<PAGE>

     IN WITNESS WHEREOF, the undersigned, on the day and year first written
above, has caused this Note to be executed under seal.

                                                       REEDS JEWELERS, INC.

                                             By:   /s/ Alan M. Zimmer
                                                  ------------------------------

                                             Title:  Alan M. Zimmer, President
                                                    ----------------------------

                                                  REEDS FINANCIAL SERVICES, INC.

                                             By:   /s/ Alan M. Zimmer
                                                  ------------------------------

                                             Title:  Alan M. Zimmer, President
                                                    ----------------------------

                                                  REEDS JEWELERS OF NORTH
                                                  CAROLINA, INC.

                                             By:   /s/ Alan M. Zimmer
                                                  ------------------------------

                                             Title:  Alan M. Zimmer, President
                                                    ----------------------------

                                                   REEDS CORPORATE SERVICES INC.

                                             By:   /s/ Alan M. Zimmer
                                                  ------------------------------

                                             Title:  Alan M. Zimmer, President
                                                    ----------------------------

                                                  REEDS INSURANCE SERVICES, LTD.

                                             By:   /s/ Alan M. Zimmer
                                                  ------------------------------

                                             Title:  Alan M. Zimmer, President
                                                    ----------------------------

Doc. No. 340974.1

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