Document:

EX-10.13

[EXECUTION COPY]

EXHIBIT 10.13

LOAN AND SECURITY AGREEMENT

by and among

HANCOCK FABRICS, INC.

HF MERCHANDISING, INC.

HANCOCK FABRICS OF MI, INC.

HANCOCKFABRICS.COM, INC.

HANCOCK FABRICS, LLC

as Borrowers

and

HF ENTERPRISES, INC.

HF RESOURCES, INC.

as Guarantors

THE LENDERS AND ISSUING BANK FROM TIME TO TIME PARTY HERETO

GENERAL ELECTRIC CAPITAL CORPORATION,

as Agent, Issuing Bank and Syndication Agent

GE CAPITAL MARKETS, INC.

as Sole Lead Arranger, Manager and Bookrunner

Dated: August 1, 2008

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	Page	 
	SECTION 1 DEFINITIONS
	 	 	1	 
	SECTION 2 CREDIT FACILITIES
	 	 	39	 
	2.1 Revolving Loans
	 	 	39	 
	2.2 Letters of Credit
	 	 	39	 
	SECTION 3 INTEREST AND FEES
	 	 	46	 
	3.1 Interest
	 	 	46	 
	3.2 Fees
	 	 	47	 
	3.3 Changes in Laws and Increased Costs of Loans
	 	 	47	 
	SECTION 4 CONDITIONS PRECEDENT
	 	 	49	 
	4.1 Conditions Precedent to Initial Loans and Letters of Credit
	 	 	49	 
	4.2 Conditions Precedent to All Loans and Letters of Credit
	 	 	53	 
	SECTION 5 GRANT AND PERFECTION OF SECURITY INTEREST
	 	 	54	 
	5.1 Grant of Security Interest
	 	 	54	 
	5.2 Perfection of Security Interests
	 	 	55	 
	SECTION 6 COLLECTION AND ADMINISTRATION
	 	 	59	 
	6.1 Borrowers’ Loan Accounts
	 	 	59	 
	6.2 Statements
	 	 	59	 
	6.3 Cash Management; Collection of Collateral Proceeds
	 	 	60	 
	6.4 Payments.
	 	 	62	 
	6.5 Taxes
	 	 	63	 
	6.6 Authorization to Make Loans
	 	 	66	 
	6.7 Use of Proceeds
	 	 	66	 
	6.8 Appointment of Administrative Borrower as Agent for Requesting Loans
and Receipts of Loans and Statements
	 	 	66	 
	6.9 Pro Rata Treatment
	 	 	67	 
	6.10 Sharing of Payments, Etc
	 	 	67	 
	6.11 Settlement Procedures
	 	 	68	 
	6.12 Obligations Several; Independent Nature of Lenders’ Rights
	 	 	70	 

 i 

 

 

TABLE OF CONTENTS

(continued)

	 	 	 	 	 
	 	 	Page	 
	6.13 Bank Products
	 	 	71	 
	SECTION 7 COLLATERAL REPORTING AND COVENANTS
	 	 	71	 
	7.1 Collateral Reporting
	 	 	71	 
	7.2 Accounts Covenants
	 	 	73	 
	7.3 Inventory Covenants
	 	 	73	 
	7.4 Equipment and Real Property Covenants
	 	 	74	 
	7.5 Collateral Audit
	 	 	75	 
	7.6 Power of Attorney
	 	 	75	 
	7.7 Right to Cure
	 	 	76	 
	7.8 Access to Premises
	 	 	76	 
	SECTION 8 REPRESENTATIONS AND WARRANTIES
	 	 	77	 
	8.1 Existence, Power and Authority
	 	 	77	 
	8.2 Name; State of Organization; Chief Executive Office; Collateral Locations
	 	 	77	 
	8.3 Financial Statements; No Material Adverse Change
	 	 	78	 
	8.4 Priority of Liens; Title to Properties
	 	 	78	 
	8.5 Tax Returns
	 	 	78	 
	8.6 Litigation
	 	 	79	 
	8.7 Compliance with Other Agreements and Applicable Laws
	 	 	79	 
	8.8 Environmental Compliance
	 	 	79	 
	8.9 Employee Benefits
	 	 	80	 
	8.10 Bank Accounts
	 	 	81	 
	8.11 Intellectual Property
	 	 	81	 
	8.12 Subsidiaries; Affiliates; Capitalization; Solvency; Material Adverse Effect
	 	 	82	 
	8.13 Labor Disputes
	 	 	82	 
	8.14 Restrictions on Subsidiaries
	 	 	83	 
	8.15 Material Contracts
	 	 	83	 
	8.16 Credit Card Agreements
	 	 	83	 
	8.17 Interrelated Businesses
	 	 	83	 

 ii 

 

 

TABLE OF CONTENTS

(continued)

	 	 	 	 	 
	 	 	Page	 
	8.18 Payable Practices
	 	 	84	 
	8.19 Accuracy and Completeness of Information
	 	 	84	 
	8.20 Intercompany Indebtedness
	 	 	84	 
	8.21 Survival of Warranties; Cumulative
	 	 	84	 
	SECTION 9 AFFIRMATIVE AND NEGATIVE COVENANTS
	 	 	85	 
	9.1 Maintenance of Existence
	 	 	85	 
	9.2 New Collateral Locations
	 	 	85	 
	9.3 Compliance with Laws, Regulations, Etc
	 	 	85	 
	9.4 Payment of Taxes and Claims
	 	 	86	 
	9.5 Insurance
	 	 	87	 
	9.6 Financial Statements and Other Information
	 	 	87	 
	9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc
	 	 	90	 
	9.8 Encumbrances
	 	 	92	 
	9.9 Indebtedness
	 	 	94	 
	9.10 Loans, Investments, Etc
	 	 	96	 
	9.11 Restricted Payments
	 	 	98	 
	9.12 Transactions with Affiliates
	 	 	99	 
	9.13 Compliance with ERISA
	 	 	100	 
	9.14 End of Fiscal Years; Fiscal Quarters
	 	 	100	 
	9.15 Change in Business
	 	 	100	 
	9.16 Limitation of Restrictions Affecting Subsidiaries
	 	 	100	 
	9.17 License Agreements
	 	 	101	 
	9.18 Credit Card Agreements
	 	 	102	 
	9.19 Minimum Excess Availability
	 	 	102	 
	9.20 After Acquired Real Property
	 	 	102	 
	9.21 Foreign Assets Control Regulations, Etc
	 	 	103	 
	9.22 Costs and Expenses
	 	 	103	 
	9.23 Further Assurances
	 	 	104	 

 iii 

 

 

TABLE OF CONTENTS

(continued)

	 	 	 	 	 
	 	 	Page	 
	9.24 Leasehold Estates
	 	 	105	 
	9.25 Specified Subordinated Debt Documents
	 	 	105	 
	9.26 Credit Card Agreements
	 	 	105	 
	9.27 Post Closing Requirements
	 	 	105	 
	SECTION 10 EVENTS OF DEFAULT AND REMEDIES
	 	 	106	 
	10.1 Events of Default
	 	 	106	 
	10.2 Remedies
	 	 	109	 
	SECTION 11 JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
	 	 	112	 
	11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver
	 	 	112	 
	11.2 Waiver of Notices
	 	 	114	 
	11.3 Amendments and Waivers
	 	 	114	 
	11.4 Waiver of Counterclaims
	 	 	117	 
	11.5 Indemnification
	 	 	117	 
	SECTION 12 THE AGENT
	 	 	117	 
	12.1 Appointment, Powers and Immunities
	 	 	118	 
	12.2 Reliance by Agent
	 	 	118	 
	12.3 Events of Default
	 	 	118	 
	12.4 GE Capital in its Individual Capacity
	 	 	119	 
	12.5 Indemnification
	 	 	119	 
	12.6 Non-Reliance on Agent and Other Lenders
	 	 	119	 
	12.7 Failure to Act
	 	 	120	 
	12.8 Additional Loans
	 	 	120	 
	12.9 Concerning the Collateral and the Related Financing Agreements
	 	 	121	 
	12.10 Field Audit, Examination Reports and other Information; Disclaimer by
Lenders
	 	 	121	 
	12.11 Collateral Matters
	 	 	121	 
	12.12 Agency for Perfection
	 	 	123	 

 iv 

 

 

TABLE OF CONTENTS

(continued)

	 	 	 	 	 
	 	 	Page	 
	12.13 Successor Agent
	 	 	123	 
	12.14 Other Agent Designations
	 	 	124	 
	SECTION 13 TERM OF AGREEMENT; MISCELLANEOUS
	 	 	124	 
	13.1 Term
	 	 	124	 
	13.2 Interpretative Provisions
	 	 	125	 
	13.3 Notices
	 	 	127	 
	13.4 Partial Invalidity
	 	 	128	 
	13.5 Confidentiality
	 	 	128	 
	13.6 Publicity
	 	 	129	 
	13.7 Successors
	 	 	130	 
	13.8 Assignments; Participations
	 	 	130	 
	13.9 Entire Agreement
	 	 	132	 
	13.10 USA PATRIOT Act
	 	 	132	 
	13.11 Counterparts, Etc
	 	 	133	 
	13.12 Designated Senior Debt
	 	 	133	 

 v 

 

 

INDEX

TO

EXHIBITS, SCHEDULES AND ANNEXES

	 	 	 
	Exhibit A

	 	Form of Assignment and Acceptance
	Exhibit B

	 	Information Certificate
	Exhibit C

	 	Form of Borrowing Base Certificate
	Exhibit D

	 	Form of Compliance Certificate
	Exhibit E-1

	 	Application for Standby Letter of Credit
	Exhibit E-2

	 	Application for Commercial Letter of Credit
	Exhibit F

	 	Notice of Borrowing
	Exhibit G

	 	Notice of Conversion/Continuation
	Exhibit H

	 	Form of Applicable Margin Certificate
	Exhibit I

	 	Form of Intercompany Subordination Agreement
	 
	 	 
	Schedule 1.1

	 	Commitments
	Schedule 1.2

	 	Customs Brokers
	Schedule 1.3

	 	Existing Lenders
	Schedule 1.4

	 	Owned Real Properties
	Schedule 1.5

	 	Existing Letters of Credit
	Schedule 1.6

	 	Bankruptcy Claims and Liens
	Schedule 2.1

	 	Lenders
	Schedule 5.2(b)

	 	Chattel Paper and Instruments
	Schedule 5.2(d)

	 	Deposit Accounts
	Schedule 5.2(e)

	 	Investment Property and Investment Accounts
	Schedule 5.2(h)

	 	Letters of Credit, Bankers’ Acceptances and Similar Instruments
	Schedule 5.2(i)

	 	Commercial Tort Claims
	Schedule 5.2(j)

	 	Collateral with Third Parties
	Schedule 8.2

	 	Name; State of Organization; Chief Executive Office; Collateral Locations
	 
	 	 
	Schedule 8.4

	 	Priority of Liens; Title to Properties
	Schedule 8.6

	 	Litigation
	Schedule 8.8

	 	Environmental Compliance
	Schedule 8.10

	 	Bank Accounts
	Schedule 8.11

	 	Intellectual Property
	Schedule 8.12

	 	Subsidiaries; Affiliates; Capitalization; Solvency
	Schedule 8.13

	 	Labor Disputes
	Schedule 8.15

	 	Material Contracts
	Schedule 8.16

	 	Credit Card Agreements
	Schedule 8.20

	 	Intercompany Indebtedness
	Schedule 9.9

	 	Indebtedness
	Schedule 9.10

	 	Loans; Investments

 vi 

 

 

	 	 	 
	Annex 1

	 	Closing Checklist

 vii 

 

 

LOAN AND SECURITY AGREEMENT

     This Loan and Security Agreement dated August 1, 2008 is entered into by and among Hancock
Fabrics, Inc, a Delaware corporation (“Parent”), HF Merchandising, Inc., a Delaware
corporation (“Merchandising”), Hancock Fabrics of MI, Inc., a Delaware corporation
(“Fabrics MI”), hancockfabrics.com, Inc., a Delaware corporation (“Fabrics.com”),
Hancock Fabrics, LLC, a Delaware limited liability company (“Fabrics LLC”, and together
with Parent, Merchandising, Fabrics MI and Fabrics.com, each individually a “Borrower” and
collectively, “Borrowers” as hereinafter further defined), HF Enterprises, Inc., a Delaware
corporation (“Enterprises”), HF Resources, Inc., a Delaware corporation
(“Resources”, and together with Enterprises, each individually a “Guarantor” and
collectively, “Guarantors” as hereinafter further defined), the parties hereto from time to
time as lenders, whether by execution of this Agreement or an Assignment and Acceptance (each
individually, a “Lender” and collectively, “Lenders” as hereinafter further
defined) and General Electric Capital Corporation, a Delaware corporation, in its capacity as agent
for Lenders (in such capacity, “Agent” as hereinafter further defined).

W I T N E S S E T H:

     WHEREAS, on March 21, 2007 (the “Petition Date”), Parent, Fabrics MI, Resources,
Fabrics.com, Merchandising, Enterprises and Fabrics LLC each filed a voluntary petition under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the “Bankruptcy Court”), and on March 21, 2007 such cases were approved for
joint-administration by the Bankruptcy Court, with Case No. 07-10353 (the “Reorganization
Cases”);

     WHEREAS, on July 22, 2008, the Bankruptcy Court entered a Final Order (as hereinafter defined)
approving the plan of reorganization of Parent, Fabrics MI, Resources, Fabrics.com, Merchandising,
Enterprises and Fabrics LLC;

     WHEREAS, Borrowers and Guarantors have requested that Agent and Lenders enter into financing
arrangements with Borrowers pursuant to which Lenders may make loans and provide other financial
accommodations to Borrowers; and

     WHEREAS, each Lender is willing to agree (severally and not jointly) to make such loans and
provide such financial accommodations to Borrowers on a pro rata basis according to its Commitment
(as defined below) on the terms and conditions set forth herein and Agent is willing to act as
agent for Lenders on the terms and conditions set forth herein and the other Financing Agreements;

     NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and
for other good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

SECTION 1  DEFINITIONS

     For purposes of this Agreement, the following terms shall have the respective meanings given
to them below:

 

 

     “Accounts” shall mean, as to each Borrower and Guarantor, all present and future rights of
such Borrower and Guarantor to payment of a monetary obligation, whether or not earned by
performance, which is not evidenced by chattel paper or an instrument, (a) for property that has
been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (b) for services
rendered or to be rendered, (c) for a secondary obligation incurred or to be incurred, or (d)
arising out of the use of a credit or charge card or information contained on or for use with the
card.

     “Adjusted Appraised Fair Market Value” shall mean, as of the date of determination, the value
assigned to the Eligible Real Property by CRE Business Property (GE) or any Affiliate of GECC
approved by the Agent from time to time, which shall be based upon an appraisal conducted in
accordance with Section 7.4. As of the Closing Date the Adjusted Appraised Fair Market Value of
the Baldwyn Real Property is $22,000,000.

     “Adjusted Eurodollar Rate” shall mean, with respect to each Interest Period for any Eurodollar
Rate Loan comprising part of the same borrowing (including conversions, extensions and renewals),
the rate per annum determined by dividing (a) the London Interbank Offered Rate for such Interest
Period by (b) a number equal to 1.0 minus the aggregate (but without duplication) of the
rates (expressed as a decimal fraction) of reserve requirements in effect on the day that is two
(2) Business Days prior to the beginning of such Interest Period (including basic, supplemental,
marginal and emergency reserves under any regulations of the Federal Reserve Board or other
Governmental Authority having jurisdiction with respect thereto, as now and from time to time in
effect) for Eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation
D of the Federal Reserve Board) that are required to be maintained by a member bank of the Federal
Reserve System.

     “Adjusted Excess Availability” shall mean, as of the date of determination, Excess
Availability less $7,500,000.

     “Administrative Borrower” shall mean Hancock Fabrics, Inc., a Delaware corporation in its
capacity as Administrative Borrower on behalf of itself and the other Borrowers pursuant to Section
6.8 hereof and it successors and assigns in such capacity.

     “Affiliate” shall mean, with respect to a specified Person, any other Person which directly or
indirectly, through one or more intermediaries, controls or is controlled by or is under common
control with such Person, and without limiting the generality of the foregoing, includes (a) any
Person which beneficially owns or holds five (5%) percent or more of any class of Voting Stock of
such Person or other equity interests in such Person, (b) any Person of which such Person
beneficially owns or holds five (5%) percent or more of any class of Voting Stock or in which such
Person beneficially owns or holds five (5%) percent or more of the equity interests and (c) any
director or executive officer of such Person. For the purposes of this definition, the term
“control” (including with correlative meanings, the terms “controlled by” and “under common control
with”), as used with respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such Person, whether
through the ownership of Voting Stock, by agreement or otherwise.

2

 

     “Agent” shall mean General Electric Capital Corporation, in its capacity as agent on behalf of
Lenders pursuant to the terms hereof and any replacement or successor agent hereunder.

     “Agent Payment Account” shall mean that certain account of Agent, account number 502-795-13 in
the name of Agent at Deutsche Bank Trust Company Americas in New York, New York (ABA No. 021 001
033) or such other account as Agent may from time to time designate to Administrative Borrower as
Agent Payment Account for purposes of this Agreement and the other Financing Agreements.

     “Agreement” shall mean this Loan and Security Agreement by and among Borrowers, Guarantors, GE
Capital, as Agent and Lender, and the other Lenders from time to time party hereto, as the same may
be amended, supplemented, restated or otherwise modified from time to time.

     “Applicable Margin” shall mean, at any time, as to the interest rate for Prime Rate Loans and
the interest rate for Eurodollar Rate Loans, the applicable percentage (on a per annum basis) set
forth below if the Quarterly Average Excess Availability for the immediately preceding calendar
quarter is at or within the amounts indicated for such percentage as of the last day of the
immediately preceding calendar quarter:

	 	 	 	 	 	 	 	 	 	 	 
	 	 	Quarterly Average	 	Applicable	 	Applicable Prime Rate
	Tier	 	Excess Availability	 	Eurodollar Rate Margin	 	Margin
	1

	 	Greater than $30,000,000
	 	 	1.625	%	 	 	0	%
	 
	 	 	 	 	 	 	 	 	 	 
	2

	 	Less than or equal to
$30,000,000 and greater
than $20,000,000
	 	 	1.875	%	 	 	0.25	%
	 
	 	 	 	 	 	 	 	 	 	 
	3

	 	Less than or equal to
$20,000,000 and greater
than $10,000,000
	 	 	2.125	%	 	 	0.375	%
	 
	 	 	 	 	 	 	 	 	 	 
	4

	 	Less than or equal to
$10,000,000
	 	 	2.375	%	 	 	0.50	%

provided, that (i) the Applicable Eurodollar Rate Margin from the Closing Date through
December 31, 2008 shall be 2.25%, and (ii) the Applicable Prime Rate Margin from the Closing Date
through December 31, 2008 shall be 0.50%. Adjustments in the Applicable Margins commencing January
1, 2009 shall be implemented effective as of each January 1, April 1, July 1, October 1, commencing
at least five (5) days after the date of delivery to Agent of the Applicable Margin Certificate.
Concurrently with the delivery of the Applicable Margin Certificate herein referenced,
Administrative Borrower shall deliver to Agent a certificate, signed by its chief financial
officer, setting forth in reasonable detail the basis for the continuance of, or any change in, the
Applicable Margins. Failure to deliver the Applicable Margin Certificate

3

 

within five (5) days of the date such certificate is required to be delivered pursuant to
Section 7.1(a)(iii) shall, in addition to any other remedy provided for in this Agreement, result
in an increase in the Applicable Margins to the highest level set forth in the foregoing grid,
until the delivery of the Applicable Margin Certificate demonstrating that such an increase is not
required. If an Event of Default has occurred and is continuing at the time any reduction in the
Applicable Margins is to be implemented, that reduction shall be deferred until the date on which
such Event of Default is waived or cured.

     “Applicable Margin Certificate” shall mean the a certificate substantially in the form of
Exhibit H hereto, as such form may from time to time be modified by Agent, which is duly
completed (including all schedules thereto) and executed by the chief financial officer or other
appropriate financial officer of Borrowers acceptable to Agent and delivered to Agent.

     “Assignment and Acceptance” shall mean an Assignment and Acceptance substantially in the form
of Exhibit A attached hereto (with blanks appropriately completed) delivered to Agent in
connection with an assignment of a Lender’s interest hereunder in accordance with the provisions of
Section 13.8 hereof.

     “Baldwyn Real Property” shall mean the Real Property of Parent located at One Fashion Way,
Baldwyn, Mississippi.

     “Baldwyn Real Property Sale-Leaseback” shall mean the sale and leaseback of the Baldwyn Real
Property, the disposition of which shall be permitted by Section 9.7(b)(vi),
provided that:

     (a) the Borrowers shall provide the Agent with at least ten (10) days’ prior written notice
(or such shorter period as may be agreed upon in writing by the Agent) of the closing date of the
proposed sale-leaseback transaction;

     (b) the purchase price of the Baldwyn Real Property pursuant to such sale-leaseback
transaction must be no less than eighty percent (80%) of the then current Adjusted Apprised Fair
Market Value of the Baldwyn Real Property;

     (c) the consideration paid to the Borrowers for the Baldwyn Real Property pursuant to such
sale-leaseback transaction shall be paid one hundred percent (100%) in cash in immediately
available funds, the net proceeds of which shall be applied to the Obligations in accordance with
the terms hereof;

     (d) the Borrowers shall have delivered to the Agent no less than five days prior to the
disposition of the Baldywn Real Property pursuant to such sale-leaseback transaction, true and
complete copies of the most current drafts of any documents, instruments or other similar
agreements to be entered into or completed by the applicable Borrower(s) in connection with such
disposition, such documentation to be in form and substance reasonably acceptable to the Agent; and

     (e) immediately prior to the consummation of such sale-leaseback transaction the Borrowers
shall deliver to the Agent (i) a revised Borrowing Base Certificate, determined as of

4

 

last Business Day of the weekly or monthly period then most recently completed on a pro forma
basis, as applicable pursuant to Section 7.1(a)(i), eliminating therefrom the line item
relating to Real Property Availability and revising the amount of the then outstanding Loans to
reflect the prepayment of the Loans with net proceeds of such sale-leaseback transaction in
accordance with the terms hereof; and (ii) a Collateral Access Agreement.

     “Bank Product Provider” shall mean any Lender, Affiliate of any Lender or other financial
institution (in each case to the extent approved by Agent in writing) that provides any Bank
Products to Borrowers or Guarantors.

     “Bank Products” shall mean any one or more of the following types or services or facilities
provided to a Borrower by Agent, any Lender or any Affiliate of any Lender or any other financial
institution acceptable to Agent: (a) credit cards or stored value cards or (b) cash management or
related services, including (i) the automated clearinghouse transfer of funds for the account of a
Borrower pursuant to agreement or overdraft for any accounts of Borrowers maintained at Agent, any
Lender or any Affiliate of any Lender (in each case to the extent approved by Agent) that are
subject to the control of Agent pursuant to any Deposit Account Control Agreement to which Agent,
such Affiliate of Agent, Lender or Affiliate of Lender is a party, as applicable, and (ii)
controlled disbursement services and (iii) Hedge Agreements if and to the extent permitted
hereunder. Any of the foregoing shall only be included in the definition of the term “Bank
Products” to the extent that the Lender, its Affiliate or the other financial institution has been
approved by Agent in writing.

     “Bankruptcy Claims and Liens” shall mean those claims and Liens existing as of the Closing
Date and identified on Schedule 1.6 hereof, which Schedule shall identify the claimant and
the amount of the claim of each such claimant.

     “Bankruptcy Code” shall mean Title 11 of the United States Code, as amended from time to time
and the Federal Rules of Bankruptcy Procedure, as amended from time to time.

     “Bankruptcy Court” shall have the meaning set forth in the preamble.

     “Blocked Account” shall mean a deposit account established and maintained by a Borrower or a
Guarantor, at its expense, with such banks as are reasonably acceptable to Agent and subject at all
times to a Deposit Account Control Agreement. The Concentration Account shall constitute a Blocked
Account.

     “Borrowers” shall mean, collectively, the following (together with their respective successors
and assigns): (a) Hancock Fabrics, Inc., a Delaware corporation; (b) HF Merchandising, Inc, a
Delaware corporation; (c) Hancock Fabrics of MI, Inc., a Delaware corporation; (d)
hancockfabrics.com, Inc., a Delaware corporation; (e) Hancock Fabrics, LLC, a Delaware limited
liability company, and (f) any other Person that at any time after the date hereof becomes a
Borrower; each sometimes being referred to herein individually as a “Borrower”.

5

 

     “Borrowing Base” shall mean, at any time, the amount equal to:

          (a) the sum of:

               (i) the amount equal to eighty-five (85%) percent of Eligible Credit Card Receivables,
plus

               (ii) the amount equal to ninety (90%) percent of the Net Recovery Percentage multiplied by the
Value of Eligible Inventory, plus

               (iii) the amount equal to ninety (90%) percent of the Net Recovery Percentage multiplied by
the Value of Eligible In-Transit Inventory, plus

               (iv) the amount equal to ninety (90%) percent of the Net Recovery Percentage multiplied by the
Value of Eligible LC Inventory, plus

               (v) the amount equal to sixty (60%) percent of Real Property Availability, minus

          (b) Reserves.

     “Borrowing Base Certificate” shall mean a certificate substantially in the form of Exhibit
C hereto, as such form may from time to time be modified by Agent, which is duly completed
(including all schedules thereto) and executed by the chief financial officer or other appropriate
financial officer of Borrowers acceptable to Agent and delivered to Agent.

     “Business Day” shall mean any day other than a Saturday, Sunday, or other day on which
commercial banks are authorized or required to close under the laws of the State of New York, and a
day on which Agent is open for the transaction of business, except that if a determination of a
Business Day shall relate to any Eurodollar Rate Loans, the term Business Day shall also exclude
any day on which banks are closed for dealings in dollar deposits in the London interbank market or
other applicable Eurodollar Rate market.

     “Capital Leases” shall mean, as applied to any Person, any lease of (or any agreement
conveying the right to use) any property (whether real, personal or mixed) by such Person as lessee
which in accordance with GAAP, is required to be reflected as a liability on the balance sheet of
such Person.

     “Capital Stock” shall mean, with respect to any Person, any and all shares, interests,
participations or other equivalents (however designated) of such Person’s capital stock or
partnership, limited liability company or other equity interests at any time outstanding, and any
and all rights, warrants or options exchangeable for or convertible into such capital stock or
other interests (but excluding any debt security that is exchangeable for or convertible into such
capital stock).

     “Cash Collateral Account” has the meaning set forth in Section 2.2(j).

6

 

     “Cash Equivalents” shall mean, at any time, (a) any evidence of Indebtedness with a maturity
date of ninety (90) days or less issued or directly and fully guaranteed or insured by the United
States of America or any agency or instrumentality thereof; provided, that, the
full faith and credit of the United States of America is pledged in support thereof; (b)
certificates of deposit or bankers’ acceptances with a maturity of ninety (90) days or less of any
financial institution that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $1,000,000,000; (c) commercial paper (including
variable rate demand notes) with a maturity of ninety (90) days or less issued by a corporation
(except an Affiliate of any Borrower or Guarantor) organized under the laws of any State of the
United States of America or the District of Columbia and rated at least A-1 by Standard & Poor’s
Ratings Service, a division of The McGraw-Hill Companies, Inc. or at least P-1 by Moody’s Investors
Service, Inc.; (d) repurchase obligations with a term of not more than thirty (30) days for
underlying securities of the types described in clause (a) above entered into with any financial
institution having combined capital and surplus and undivided profits of not less than
$1,000,000,000; (e) repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the United States of America or issued
by any governmental agency thereof and backed by the full faith and credit of the United States of
America, in each case maturing within ninety (90) days or less from the date of acquisition;
provided, that, the terms of such agreements comply with the guidelines set forth
in the Federal Financial Agreements of Depository Institutions with Securities Dealers and Others,
as adopted by the Comptroller of the Currency on October 31, 1985; and (f) investments in money
market funds and mutual funds which invest substantially all of their assets in securities of the
types described in clauses (a) through (e) above.

     “Change of Control” shall mean (a) the transfer (in one transaction or a series of
transactions) of all or substantially all of the assets of any Borrower or Guarantor to any Person
or group (as such term is used in Section 13(d)(3) of the Exchange Act), other than as permitted in
Section 9.7 hereof; (b) the liquidation or dissolution of any Borrower or Guarantor or the
adoption of a plan by the stockholders of any Borrower or Guarantor relating to the dissolution or
liquidation of such Borrower or Guarantor, other than as permitted in Section 9.7 hereof; (c) the
acquisition by any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act),
other than Sopris Capital Partners, LP, Berg & Berg Enterprises, LLC and Trellus Management and
their respective Affiliates, of more than thirty (30%) percent of beneficial ownership, directly or
indirectly, of the voting power of the total outstanding Voting Stock of Parent or the Board of
Directors of Parent; (d) during any period of two (2) consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (or similar governing body) of any
Borrower or Guarantor (together with any new directors whose nomination for election by the
stockholders of such Borrower or Guarantor was approved by a vote of at least a majority of the
directors (or similar persons) then still in office who were either directors (or similar persons)
at the beginning of such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of Directors (or similar
governing body) of any Borrower or Guarantor then still in office; (e) the failure of Parent to own
and control, directly or indirectly, one hundred (100%) percent of the voting power of the total
outstanding Voting Stock of any other Borrower or Guarantor; provided, however,
that any action taken in accordance with the terms of the Plan of Reorganization, the issuance of
any Specified Warrant or the conversion of the Specified

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Warrants into the Specified Common Stock pursuant to the terms of the Specified Warrant shall
not be considered a “Change of Control” hereunder; or (f) any “Change of Control” (howsoever
defined under the Indenture) occurs.

     “Closing Date” shall mean August 1, 2008.

     “Closing Date Mortgaged Properties” means, collectively, the Real Property owned by the Loan
Parties and located at: (i) the Baldwyn Real Property, (ii) 106 Airpark Road (Guin Building),
Tupelo, MS, (iii) 1240 Ellis Avenue, Jackson, MS, (iv) 215 East Kings Highway Shreveport, LA and
(v) 3314 South Linden Road, Flint, MI.

     “Code” shall mean the Internal Revenue Code of 1986, as the same now exists or may from time
to time hereafter be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.

     “Collateral” shall mean, collectively, all assets of each Borrower and each Guarantor, in each
case, as referred to in Section 5.1 hereof, any Pledge Agreement as “Pledged Collateral” or
as “Collateral”, as the case may be, and all other property that is or is intended under the terms
of the Security Documents to be subject to liens in favor of the Agent for the benefit of the
Lenders and the other Secured Parties.

     “Collateral Access Agreement” shall mean an agreement in writing, in form and substance
reasonably satisfactory to Agent, from any lessor of premises to any Borrower or Guarantor (other
than lessors of retail store locations, except as otherwise agreed to by Administrative Borrower
and Agent), or any other person to whom any Collateral is consigned or who has custody, control or
possession of any such Collateral or is otherwise the owner or operator of any premises on which
any of such Collateral is located, in favor of Agent with respect to the Collateral at such
premises or otherwise in the custody, control or possession of such lessor, consignee or other
person.

     “Commercial Letter of Credit” shall mean any Letter of Credit issued for the purpose of
providing the primary manner of payment for the purchase price of goods or services by a Borrower
in the ordinary course of the business of such Borrower.

     “Commitment” shall mean, at any time, as to each Lender, the principal amount set forth
opposite such Lender’s name on Schedule 1.1 hereto or on Schedule 1 to the Assignment and
Acceptance Agreement pursuant to which such Lender became a Lender hereunder in accordance with the
provisions of Section 13.8 hereof, as the same may be adjusted from time to time in
accordance with the terms hereof; sometimes being collectively referred to herein as “Commitments”.

     “Commitment Termination Date” shall mean the earliest of (a) the Maturity Date, (b) the date
of termination of Lenders’ obligations to make Loans and/or incur Letter of Credit Obligations or
permit existing Loans to remain outstanding pursuant to Section 10.2(b), and (c) the date
of indefeasible prepayment in full in cash by Borrowers of the Loans and the cancellation and
return (or stand-by guarantee) of all Letters of Credit or the cash

8

 

collateralization of all Letter of Credit Obligations pursuant to Section 2.2, and the
permanent reduction of all Obligations to zero dollars ($0).

     “Concentration Account” means that certain deposit account maintained with BancorpSouth Bank,
with account number 01-210513, in the name of Parent, or any replacement account therefor expressly
agreed to in advance in writing by the Agent, which replacement account shall be a Blocked Account.

     “Confirmation Order” shall have the meaning set forth in Section 4.1(w).

     “Consolidated Net Income” shall mean, with respect to any Person for any period, the aggregate
of the net income (loss) of such Person and its Subsidiaries, on a consolidated basis, for such
period (and as to Borrowers and Guarantors, excluding to the extent included therein (i) any
extraordinary, one-time or non-recurring gains, (ii) extraordinary, one-time or non-recurring
non-cash losses or charges, and (iii) operations that have been discontinued on or before the date
hereof) after deducting all charges which should be deducted before arriving at the net income
(loss) for such period (but without regard to operations that have been discontinued on or before
the date hereof) and after deducting the Provision for Taxes for such period, all as determined in
accordance with GAAP; provided, that, (a) the net income of any Person that is not
a wholly-owned Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid or payable to such
Person or a wholly-owned Subsidiary of such Person; (b) except to the extent included pursuant to
the foregoing clause, the net income of any Person accrued prior to the date it becomes a
wholly-owned Subsidiary of such Person or is merged into or consolidated with such Person or any of
its wholly-owned Subsidiaries or that Person’s assets are acquired by such Person or by any of its
wholly-owned Subsidiaries shall be excluded; (c) the effect of any change in accounting principles
adopted by such Person or its Subsidiaries after the date hereof shall be excluded; (d) net income
shall exclude interest accruing, but not paid, on indebtedness owing to a Subsidiary or parent
corporation of such Person; and (e) the net income (if positive) of any wholly-owned Subsidiary to
the extent that the declaration or payment of dividends or similar distributions by such
wholly-owned Subsidiary to such Person or to any other wholly-owned Subsidiary of such Person is
not at the time permitted by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to such wholly-owned
Subsidiary shall be excluded. For the purposes of this definition, net income excludes any gain
and non-cash loss together with any related Provision for Taxes for such gain and non-cash loss
realized upon the sale or other disposition of any assets that are not sold in the ordinary course
of business (including, without limitation, dispositions pursuant to sale and leaseback
transactions and for this purpose sales or other dispositions of retail store locations shall not
be deemed to be in the ordinary course of the business of Borrowers and Guarantors) or of any
Capital Stock of such Person or a Subsidiary of such Person and any net income or non-cash loss
realized as a result of changes in accounting principles or the application thereof to such Person.

     “Credit Card Acknowledgments” shall mean, collectively, the agreements by Credit Card Issuers
or Credit Card Processors who are parties to Credit Card Agreements in favor of Agent acknowledging
Agent’s first priority security interest, for and on behalf of Lenders, in the

9

 

monies due and to become due to a Borrower or Guarantor (including, without limitation,
credits and reserves) under the Credit Card Agreements, and agreeing to transfer all such amounts
to the Blocked Accounts, as the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, sometimes being referred to herein individually as a
“Credit Card Acknowledgment”.

     “Credit Card Agreements” shall mean all agreements now or hereafter entered into by any
Borrower or any Guarantor for the benefit of any Borrower, in each case with any Credit Card Issuer
or any Credit Card Processor, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced, including, but not limited to, the
agreements set forth on Schedule 8.16 hereto and the Elavon Processor Agreement.

     “Credit Card Issuer” shall mean any person (other than a Borrower or a Guarantor) who issues
or whose members issue credit cards, including, without limitation, MasterCard or VISA bank credit
or debit cards or other bank credit or debit cards issued through MasterCard International, Inc.,
Visa, U.S.A., Inc. or Visa International and American Express, Discover, Diners Club, Carte Blanche
and other non-bank credit or debit cards, including, without limitation, credit or debit cards
issued by or through American Express Travel Related Services Company, Inc., and Discover Financial
Services, Inc.

     “Credit Card Processor” shall mean any servicing or processing agent or any factor or
financial intermediary who facilitates, services, processes or manages the credit authorization,
billing transfer and/or payment procedures with respect to any Borrower’s or Guarantor’s sales
transactions involving credit card or debit card purchases by customers using credit cards or debit
cards issued by any Credit Card Issuer.

     “Credit Card Receivables” shall mean, collectively, (a) all present and future rights of any
Borrower or Guarantor to payment from any Credit Card Issuer, Credit Card Processor or other third
party arising from sales of goods or rendition of services to customers who have purchased such
goods or services using a credit or debit card and (b) all present and future rights of any
Borrower or Guarantor to payment from any Credit Card Issuer, Credit Card Processor or other third
party in connection with the sale or transfer of Accounts arising pursuant to the sale of goods or
rendition of services to customers who have purchased such goods or services using a credit card or
a debit card, including, but not limited to, all amounts at any time due or to become due from any
Credit Card Issuer or Credit Card Processor under the Credit Card Agreements or otherwise.

     “Credit Facility” shall mean the Loans and Letters of Credit provided to or for the benefit of
any Borrower pursuant to Sections 2.1 and 2.2 hereof.

     “Customs Broker” shall mean the persons listed on Schedule 1.2 hereto or such other
person selected by any Borrower after written notice by such Borrower to Agent who are reasonably
acceptable to Agent to perform port of entry services to process Inventory imported by such
Borrower from outside the United States of America and to supply facilities, labor and materials to
such Borrower in connection therewith.

10

 

     “Default” shall mean an act, condition or event which with notice or passage of time or both
would constitute an Event of Default.

     “Defaulting Lender” shall have the meaning set forth in Section 6.11(d) hereof.

     “Deposit Account Control Agreement” shall mean an agreement in writing, in form and substance
satisfactory to Agent, by and among Agent, the Borrower or Guarantor with a deposit account at any
bank and the bank at which such deposit account is at any time maintained which provides that such
bank will comply with instructions originated by Agent directing disposition of the funds in the
deposit account without further consent by such Borrower or Guarantor and has such other terms and
conditions as Agent may require.

     “Disclosure Letter” shall mean that Disclosure Letter delivered on the Closing Date pursuant
to Section 4.1(f), which letter shall be in form and substance reasonably satisfactory to
the Agent.

     “Discover Deposit Account” means that certain deposit account maintained with BancorpSouth
Bank, with account number 41972837 in the name of Parent.

     “EBITDA” shall mean, as to any Person, with respect to any period, an amount equal to: (a) the
Consolidated Net Income of such Person and its Subsidiaries for such period, plus (b)
depreciation, amortization, LIFO adjustments consisting of non-cash charges, and other non-cash
charges, including imputed interest, deferred compensation and in the case of Borrowers and
Guarantors, non-cash costs associated with the closing of retail store locations, in each case for
such period (to the extent deducted in the computation of Consolidated Net Income of such Person),
all in accordance with GAAP, plus (c) Interest Expense for such period (to the extent
deducted in the computation of Consolidated Net Income of such Person), plus (d) the
Provision for Taxes for such period (to the extent deducted in the computation of Consolidated Net
Income of such Person).

     “Eligible Credit Card Receivables” shall mean, as of the date of determination, as to each
Borrower, Credit Card Receivables of such Borrower which are and continue to be acceptable to Agent
based on the criteria set forth below. Credit Card Receivables shall be Eligible Credit Card
Receivables if:

          (a) such Credit Card Receivables arise from the actual and bona fide sale and delivery of
goods or rendition of services by such Borrower in the ordinary course of the business of such
Borrower which transactions are completed in accordance with the terms and provisions contained in
any agreements binding on such Borrower or the other party or parties related thereto;

          (b) such Credit Card Receivables are not past due (beyond any stated applicable grace period,
if any, therefor) pursuant to the terms set forth in the Credit Card Agreements with the Credit
Card Issuer or Credit Card Processor of the credit card or debit card used in the purchase which
give rise to such Credit Card Receivables;

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          (c) such Credit Card Receivables are not unpaid more than five (5) Business Days after the
date of the sale of Inventory giving rise to such Credit Card Receivables;

          (d) all material procedures required by the Credit Card Issuer or the Credit Card Processor of
the credit card or debit card used in the purchase which gave rise to such Credit Card Receivables
shall have been followed by such Borrower and all documents required for the authorization and
approval by such Credit Card Issuer or Credit Card Processor shall have been obtained in connection
with the sale giving rise to such Credit Card Receivables;

          (e) the required authorization and approval by such Credit Card Issuer or Credit Card
Processor shall have been obtained for the sale giving rise to such Credit Card Receivables;

          (f) such Borrower shall have submitted all materials required by the Credit Card Issuer or
Credit Card Processor obligated in respect of such Credit Card Receivables in order for such
Borrower to be entitled to payment in respect thereof;

          (g) the Credit Card Issuer or Credit Card Processor obligated in respect of such Credit Card
Receivable has not failed to timely remit any monthly payment in respect of such Credit Card
Receivable;

          (h) such Credit Card Receivables comply with the applicable terms and conditions contained in
Section 7.2 of this Agreement;

          (i) the Credit Card Issuer or Credit Card Processor with respect to such Credit Card
Receivables has not asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such Credit Card
Receivables (other than setoffs to fees and chargebacks consistent with the practices of such
Credit Card Issuer or Credit Card Processor with such Borrower as of the date hereof or as such
practices may change as a result of changes to the policies of such Credit Card Issuer or Credit
Card Processor applicable to its customers generally and unrelated to the circumstance of such
Borrower), but the portion of the Credit Card Receivables owing by such Credit Card Issuer or
Credit Card Processor in excess of the amount owing by such Borrower to such Credit Card Issuer or
Credit Card Processor pursuant to such fees and chargebacks may be deemed Eligible Credit Card
Receivables;

          (j) the Credit Card Issuer or Credit Card Processor with respect to such Credit Card
Receivables has not setoff against amounts otherwise payable by such Credit Card Issuer or Credit
Card Processor to such Borrower for the purpose of establishing a reserve or collateral for
obligations of such Borrower to such Credit Card Issuer or Credit Card Processor (notwithstanding
that the Credit Card Issuer or Credit Card Processor may have setoffs for fees and chargebacks
consistent with the practices of such Credit Card Issuer or Credit Card Processor with such
Borrower as of the date hereof or as such practices may hereafter change as a result of changes to
the policies of such Credit Card Issuer or Credit Card Processor applicable to its customers
generally and unrelated to the circumstances of such Borrower);

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          (k) there are no facts, events or occurrences which would impair the validity, enforceability
or collectability of such Credit Card Receivables or reduce the amount payable or
delay payment thereunder (other than for setoffs for fees and chargebacks consistent with the
practices of such Credit Card Issuer or Credit Card Processor with such Borrower as of the date
hereof or as such practices may hereafter change as a result of changes to the policies of such
Credit Card Issuer or Credit Card Processor applicable to its customers generally and unrelated to
the circumstances of such Borrower or any Guarantor);

          (l) such Credit Card Receivables are subject to the first priority, valid and perfected
security interest and lien of Agent, for and on behalf of itself and Lenders, and any goods giving
rise thereto are not, and were not at the time of the sale thereof, subject to any security
interest or lien in favor of any person other than Agent except as otherwise permitted in this
Agreement, in each case subject to and in accordance with the terms and conditions applicable
hereunder to any such permitted security interest or lien;

          (m) there are no proceedings or actions which are pending or, to the best of any Borrower’s
knowledge, threatened against the Credit Card Issuers or Credit Card Processors with respect to
such Credit Card Receivables which would reasonably be expected to result in any material adverse
change in the financial condition of any such Credit Card Issuer or Credit Card Processor;

          (n) such Credit Card Receivables are owed by Credit Card Issuers or Credit Card Processors
deemed creditworthy at all times by Agent in good faith;

          (o) no event of default has occurred under the Credit Card Agreement of such Borrower with the
Credit Card Issuer or Credit Card Processor who has issued the credit card or debit card or handles
payments under the credit card or debit card used in the sale which gave rise to such Credit Card
Receivables which event of default gives such Credit Card Issuer or Credit Card Processor the right
to cease or suspend payments to such Borrower or any Guarantor and no event shall have occurred
which gives such Credit Card Issuer or Credit Card Processor the right to setoff against amounts
otherwise payable to such Borrower, including on behalf of a Guarantor (other than for then current
fees and chargebacks consistent with the current practices of such Credit Card Issuer or Credit
Card Processor as of the date hereof or as such practices may hereafter change as a result of
changes to the policies of such Credit Card Issuer or Credit Card Processor applicable to its
customers generally and unrelated to the circumstances of such Borrower or any Guarantor), except
as may have been waived in writing on terms and conditions reasonably satisfactory to Agent
pursuant to the Credit Card Acknowledgment by such Credit Card Issuer or Credit Card Processor, or
the right to establish reserves or establish or demand collateral, and the Credit Card Issuer or
Credit Card Processor has not sent any written notice of default and/or notice of its intention to
cease or suspend payments to such Borrower in respect of such Credit Card Receivables or to
establish reserves or cash collateral for obligations of such Borrower to such Credit Card Issuer
or Credit Card Processor, and such Credit Card Agreements are otherwise in full force and effect
and constitute the legal, valid, binding and enforceable obligations of the parties thereto;

13

 

          (p) the terms of the sale giving rise to such Credit Card Receivables and all practices of
such Borrower and Guarantors with respect to such Credit Card Receivables comply in all material
respects with applicable Federal, State, and local laws and regulations; and

          (q) the customer using the credit card or debit card giving rise to such Credit Card
Receivable shall not have returned the merchandise purchased giving rise to such Credit Card
Receivable.

     Credit Card Receivables which would otherwise constitute Eligible Credit Card Receivables
pursuant to this Section will not be deemed ineligible solely by virtue of the Credit Card
Agreements with respect thereto having been entered into by any Guarantor, for the benefit of
Borrowers. Agent shall have the right to establish, modify or eliminate Reserves against Eligible
Credit Card Receivables from time to time in its reasonable credit judgment. In addition, Agent
reserves the right, at any time and from time to time after the Closing Date, to adjust any of the
criteria set forth above, to establish new criteria, and to adjust advance rates with respect to
Eligible Credit Card Receivables, in its reasonable credit judgment, subject to the approval of
Required Lenders in the case of adjustments or new criteria or changes in advance rates which have
the effect of making more credit available. Any Credit Card Receivables which are not Eligible
Credit Card Receivables shall nevertheless be part of the Collateral.

     “Elavon” means Elavon, Inc. (formerly Nova Information Systems, Inc.), as processor under the
Elavon Processor Agreement.

     “Elavon Deposit Account” means that certain deposit account maintained with BancorpSouth Bank,
with account number 41972803 in the name of Parent, or any replacement account therefor expressly
agreed to in advance in writing by the Agent, which replacement account shall be a Blocked Account.

     “Elavon Member” means, as of the date hereof, U.S. Bank, National Association, in its capacity
as “Member” under the Elavon Processor Agreement and any replacement “Member” thereunder.

     “Elavon Processor Agreement” means that certain Terms of Service agreement, dated on or about
the Closing Date, among Parent, Elavon, as processor, and Elavon Member, together with all other
agreements, documents and instruments now or at any time hereafter executed and/or delivered in
connection therewith.

     “Elavon Reserve Account” means that “Reserve Account” identified in the Elavon Processor
Agreement as in effect on the date hereof.

     “Eligible In-Transit Inventory” shall mean, as of the date of determination, without
duplication of other Eligible Inventory, Inventory that as to which: (i) the Inventory is not
purchased with and subject to a Letter of Credit, (ii) the Inventory is then in transit (whether by
vessel, air or land) from a location outside of the continental United States of America to a
location permitted hereunder and for which Agent shall have received such evidence thereof as Agent
may require, (iii) has been paid for and the title of the Inventory has passed to, and such
Inventory is owned by, a Borrower and for which Agent shall have received such evidence

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thereof as
Agent may require, (iv) Agent has received each of the following: (A) a Collateral Access
Agreement, duly authorized, executed and delivered by the customs broker, freight forwarder or
other third party handling the shipping and delivery of such Inventory, (B) a copy of the
certificate of marine cargo insurance in connection therewith in which Agent has been
named as an additional insured and loss payee in a manner acceptable to Agent and (C) a copy
of the invoice, packing slip and manifest with respect thereto, (v) the Inventory is either (A)
subject to a negotiable bill of lading: (1) that is consigned to Agent, (2) that was issued by the
carrier in respect of such Inventory and (3) is either in the possession of the customs broker,
freight forwarder or other third party handling the shipping and delivery of such Inventory acting
on behalf of Agent or the subject of a telefacsimile or other electronic copy which also confirms
that such document is in transit to Agent or the customs broker, freight forwarder or other third
party handling the shipping and delivery of such Inventory acting on behalf of Agent or (B) subject
to a negotiable cargo receipt and is not the subject of a bill of lading (other than a negotiable
bill of lading consigned to, and in the possession of a carrier or Agent, or their respective
agents) and such negotiable cargo receipt is (1) consigned to Agent, (2) issued by a carrier in
respect of such Inventory and (3) either in the possession of Agent or the customs broker, freight
forwarder or other third party handling the shipping and delivery of such Inventory acting on
behalf of Agent or the subject of a telefacsimile or other electronic copy which also confirms that
such document is in transit to Agent or the customs broker, freight forwarder or other third party
handling the shipping and delivery of such Inventory, (vi) such Inventory is insured against types
of loss, damage, hazards, and risks, and in amounts, satisfactory to Agent, (vii) such Inventory
shall not have been in transit for more than forty-five (45) days, and (viii) such Inventory is
otherwise deemed Eligible Inventory (other than in respect of its location) hereunder.

     “Eligible Inventory” shall mean, as of the date of determination, as to each Borrower,
Inventory of such Borrower consisting of finished goods held for resale in the ordinary course of
the business of such Borrower that satisfy the criteria set forth below as determined by Agent. In
general, Eligible Inventory shall not include: (a) raw materials and work-in-process; (b) spare
parts for equipment; (c) packaging and shipping materials; (d) supplies used or consumed in such
Borrower’s business; (e) Inventory at premises other than those owned or leased and controlled by
any Borrower except any Inventory (other than Eligible In-Transit Inventory and Eligible LC
Inventory) which would otherwise be deemed Eligible Inventory that is not located at premises owned
and operated by such Borrower may nevertheless be considered Eligible Inventory: (i) as to retail
store locations which are leased by such Borrower, Agent may, at its option, establish such
Reserves in respect of amounts at any time payable by such Borrower to the lessor thereof as Agent
shall determine in accordance with the definition of Reserves, (ii) as to locations which are
leased by such Borrower (other than retail store locations which are leased), if Agent shall have
received a Collateral Access Agreement from the lessor of such location, duly authorized, executed
and delivered by such lessor, or if Agent shall not have received such Collateral Access Agreement
(or Agent shall determine to accept a Collateral Access Agreement that does not include all
required provisions or provisions in the form otherwise required by Agent), Agent may, at its
option, nevertheless consider Inventory at such location to be Eligible Inventory to the extent
Agent shall have established such Reserves in respect of amounts at any time payable by such
Borrower to the lessor thereof as Agent shall determine in good faith, and (iii) as to locations
operated by a third person, (A) if Agent shall have received a Collateral Access Agreement from
such owner with respect to such location, duly authorized, executed and

15

 

delivered by such operator
or if Agent shall not have received such Collateral Access Agreement (or Agent shall determine to
accept a Collateral Access Agreement that does not include all required provisions or provisions in
the form otherwise required by Agent), Agent may, at its option, nevertheless consider Inventory at
such location to be Eligible Inventory to the extent
Agent shall have established such Reserves in respect of amounts at any time payable by such
Borrower to the owner and operator thereof as Agent shall determine, and (B) in addition, if
required by Agent, if Agent shall have received: (1) UCC financing statements between the owner and
operator, as consignee or bailee and such Borrower, as consignor or bailor, in form and substance
satisfactory to Agent, which are duly assigned to Agent and (2) a written notice to any lender to
the owner and operator of the first priority security interest in such Inventory of Agent; (f)
Inventory subject to a security interest or lien in favor of any Person other than Agent except
those permitted in this Agreement that are subject to an intercreditor agreement in form and
substance satisfactory to Agent between the holder of such security interest or lien and Agent; (g)
bill and hold goods; (h) unserviceable, obsolete or slow moving Inventory; (i) Inventory that is
not subject to the first priority, valid and perfected security interest of and lien in favor of
Agent; (j) returned Inventory that is not saleable and held for sale in the ordinary course of
business; (k) damaged and/or defective Inventory; (l) Inventory purchased or sold on consignment;
(m) Inventory located outside the United States of America; and (n) Inventory of a Borrower sold
under a licensed trademark or trade name or which contains or uses a medium subject to a licensed
copyright, unless, on or prior to the forty-fifth (45th) day after the date of this
Agreement, either (i) Agent shall be satisfied that it has the right to sell or otherwise dispose
of such Inventory without further action or (ii) Agent shall have received a letter agreement, in
form and substance satisfactory to Agent, duly authorized, executed and delivered by such Borrower
and the applicable licensor. Agent shall have the right to establish, modify or eliminate Reserves
against Eligible Inventory from time to time in its reasonable credit judgment. In addition, Agent
reserves the right, at any time and from time to time after the Closing Date, to adjust any of the
criteria set forth above, to establish new criteria, and to adjust advance rates with respect to
Eligible Inventory, in its reasonable credit judgment, subject to the approval of Required Lenders
in the case of adjustments or new criteria or changes in advance rates which have the effect of
making more credit available. Any Inventory that is not Eligible Inventory shall nevertheless be
part of the Collateral.

     “Eligible LC Inventory” shall mean, as of the date of determination, without duplication of
other Eligible Inventory, Inventory that as to which: (i) the Inventory is purchased with and
subject to a Letter of Credit, (ii) the Inventory is then in transit (whether by vessel, air or
land) from a location outside of the continental United States of America to a location permitted
hereunder and for which Agent shall have received such evidence thereof as Agent may require, (iii)
the title of the Inventory has passed to, and such Inventory is owned by, a Borrower and for which
Agent shall have received such evidence thereof as Agent may require, (iv) Agent has received each
of the following: (A) a Collateral Access Agreement, duly authorized, executed and delivered by the
customs broker, freight forwarder or other third party handling the shipping and delivery of such
Inventory, (B) a copy of the certificate of marine cargo insurance in connection therewith in which
Agent has been named as an additional insured and loss payee in a manner acceptable to Agent and
(C) a copy of the invoice, packing slip and manifest with respect thereto, (v) the Inventory is
either (A) subject to a negotiable bill of lading: (1) that is consigned to Agent, (2) that was
issued by the carrier in respect of such Inventory and (3) is either in the

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possession of the
customs broker, freight forwarder or other third party handling the shipping and delivery of such
Inventory acting on behalf of Agent or the subject of a telefacsimile or other electronic copy
which also confirms that such document is in transit to Agent or the customs broker, freight
forwarder or other third party handling the shipping and delivery of such
Inventory acting on behalf of Agent or (B) subject to a negotiable cargo receipt and is not
the subject of a bill of lading (other than a negotiable bill of lading consigned to, and in the
possession of a carrier or Agent, or their respective agents) and such negotiable cargo receipt is
(1) consigned to Agent, (2) issued by a carrier in respect of such Inventory and (3) either in the
possession of Agent or the customs broker, freight forwarder or other third party handling the
shipping and delivery of such Inventory acting on behalf of Agent or the subject of a telefacsimile
or other electronic copy which also confirms that such document is in transit to Agent or the
customs broker, freight forwarder or other third party handling the shipping and delivery of such
Inventory, (vi) such Inventory is insured against types of loss, damage, hazards, and risks, and in
amounts, satisfactory to Agent, (vii) such Inventory shall not have been in transit for more than
forty-five (45) days, and (viii) such Inventory is otherwise deemed Eligible Inventory (other than
in respect of its location) hereunder.

     “Eligible Real Property” shall mean, as to any Borrower, Real Property owned by such Borrower
in fee simple in each case which are acceptable to Agent in good faith based on the criteria set
forth below. In general, Eligible Real Property shall not include: (i) Real Property which is not
operated by a Borrower except as Agent may otherwise agree; (ii) Real Property subject to a
security interest, lien, mortgage or other encumbrance in favor of any person other than Agent (and
other than those permitted under Section 9.8(b), 9.8(c) or 9.8(d) hereof or
are subject to an intercreditor agreement in form and substance satisfactory to Agent between the
holder of such lien and Agent); (iii) Real Property that is not located in the continental United
States of America; (iv) Real Property that is not subject to the valid and enforceable, first
priority, perfected security interest, lien and mortgage of Agent; (v) Real Property where Agent
determines that issues relating to compliance with Environmental Laws adversely affect such Real
Property in such manner that such Real Property would not be acceptable for purposes of including
it in the calculation of the Borrowing Base based on the customary practices, procedures and
policies of Agent and its Affiliates; provided, that, if the Real Property is
acceptable for such purposes in accordance with such practices, procedures and policies, subject to
the satisfaction of the other conditions set forth herein and any requirements arising pursuant to
such practices, procedures and policies, such Real Property will be considered Eligible Real
Property but subject to the right of Agent to establish Reserves to reflect the adverse affect of
any environmental conditions or events with respect thereto on its value or the ability of Agent to
sell or otherwise realize on such Collateral; (vi) Real Property improved with residential housing;
(vii) Real Property that is not subject to a then current final written appraisal by an appraiser
reasonably acceptable to Agent (which shall be one of the appraisers selected by Agent from its
list of approved appraisers), on which Agent and Lenders are expressly permitted to rely, and that
is in form, scope and methodology reasonably satisfactory to Agent; (viii) if requested by Agent,
Real Property for which Agent shall not have received a then current environmental audit conducted
by an independent environmental engineering firm reasonably acceptable to Agent (based on Agent’s
list of approved firms and in form, scope, substance and methodology reasonably satisfactory to
Agent, the results of which are satisfactory to Agent; (ix) if requested by Agent, Real Property
for which Agent shall not have received, in form and

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substance reasonably satisfactory to Agent, a
valid and effective title insurance policy (whether in the form of a pro form policy or a marked up
title policy commitment) issued by a company and agent reasonably acceptable to Agent: (A)
insuring the priority, amount and sufficiency of the Mortgage with respect to such Real Property,
(B) insuring against matters that would be
disclosed by surveys and (C) containing any legally available endorsements, assurances or
affirmative coverage requested by Agent for protection of its interests; and (x) any Real Property
other than the Baldwyn Real Property, except as Agent may otherwise agree. Any Real Property that
is not Eligible Real Property shall nevertheless be part of the Collateral.

     “Eligible Transferee” shall mean (a) any Lender; (b) the parent company of any Lender and/or
any Affiliate of such Lender which is at least fifty (50%) percent owned by such Lender or its
parent company; (c) any person (whether a corporation, partnership, trust or otherwise) that is
engaged in the business of making, purchasing, holding or otherwise investing in bank loans and
similar extensions of credit in the ordinary course of its business and is administered or managed
by a Lender or with respect to any Lender that is a fund which invests in bank loans and similar
extensions of credit, any other fund that invests in bank loans and similar extensions of credit
and is managed by the same investment advisor as such Lender or by an Affiliate of such investment
advisor, and in each case is approved by Agent; and (d) any other commercial bank, financial
institution or “accredited investor” (as defined in Regulation D under the Securities Act of 1933)
approved by Agent, provided, that, (i) neither any Borrower nor any Guarantor or
any Affiliate of any Borrower or Guarantor shall qualify as an Eligible Transferee and (ii) no
Person to whom any Indebtedness which is in any way subordinated in right of payment to any other
Indebtedness of any Borrower or Guarantor shall qualify as an Eligible Transferee, except as Agent
may otherwise specifically agree in writing.

     “Environmental Laws” shall mean all foreign, Federal, State and local laws (including common
law), legislation, rules, codes, licenses, permits (including any conditions imposed therein),
authorizations, judicial or administrative decisions, injunctions or agreements between any
Borrower or Guarantor and any Governmental Authority, (a) relating to pollution and the protection,
preservation or restoration of the environment (including air, water vapor, surface water, ground
water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life
or any other natural resource), or to human health or safety, (b) relating to the exposure to, or
the use, storage, recycling, treatment, generation, manufacture, processing, distribution,
transportation, handling, labeling, production, release or disposal, or threatened release, of
Hazardous Materials, or (c) relating to all laws with regard to recordkeeping, notification,
disclosure and reporting requirements respecting Hazardous Materials. The term “Environmental
Laws” includes: (i) the Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the Federal Water Pollution
Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto),
the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii)
applicable state counterparts to such laws and (iii) any common law or equitable doctrine that may
impose liability or obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Materials.

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     “Equipment” shall mean, as to each Borrower and Guarantor, all of such Borrower’s and
Guarantor’s now owned and hereafter acquired equipment, wherever located, including machinery, data
processing and computer equipment (whether owned or licensed and including
embedded software), vehicles, tools, furniture, fixtures, all attachments, accessions and
property now or hereafter affixed thereto or used in connection therewith, and substitutions and
replacements thereof, wherever located.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, together with all
rules, regulations and interpretations thereunder or related thereto.

     “ERISA Affiliate” shall mean any person required to be aggregated with any Borrower, any
Guarantor or any of its or their respective Subsidiaries under Sections 414(b), 414(c), 414(m) or
414(o) of the Code.

     “ERISA Event” shall mean (a) any “reportable event”, as defined in Section 4043(c) of ERISA or
the regulations issued thereunder, with respect to a Pension Plan, other than events as to which
the requirement of notice has been waived in regulations by the Pension Benefit Guaranty
Corporation; (b) the adoption of any amendment to a Pension Plan or the taking of any action with
respect to a Pension Plan that would require the provision of security pursuant to the Pension
Funding Rules; (c) a complete or partial withdrawal by any Borrower, Guarantor or any ERISA
Affiliate from a Multiemployer Plan or a cessation of operations which is treated as such a
withdrawal or notification that a Multiemployer Plan is in reorganization; (d) the filing of a
notice of intent to terminate, the treatment of a Pension Plan amendment as a termination under
Section 4041 or 4041A of ERISA, or the commencement of proceedings by the Pension Benefit Guaranty
Corporation to terminate a Pension Plan; (e) 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 Plan; (f) the imposition of any liability under Title
IV of ERISA, other than the Pension Benefit Guaranty Corporation premiums due but not delinquent
under Section 4007 of ERISA, upon any Borrower, Guarantor or any ERISA Affiliate in excess of
$750,000 and (g) any other event or condition with respect to a Plan including any Pension Plan
subject to Title IV of ERISA maintained, or contributed to, by any ERISA Affiliate that could
reasonably be expected to result in liability of any Borrower in excess of $750,000.

     “Eurodollar Rate Loans” shall mean any Revolving Loans or portion thereof on which interest is
payable based on the Adjusted Eurodollar Rate in accordance with the terms hereof.

     “Event of Default” shall mean the occurrence or existence of any event or condition described
in Section 10.1 hereof.

     “Excess Availability” shall mean the amount, as determined by Agent, calculated at any time,
equal to:

          (a) the lesser of (i) the Borrowing Base or (ii) the Maximum Credit (in each case under (i) or
(ii) after giving effect to any Reserves (other than any Reserves in respect of Letters of Credit
to the extent such amounts are deducted pursuant to clause (b)(ii) below)), minus

19

 

          (b) the sum of (i) the amount of the then outstanding Loans, plus (ii) the aggregate
undrawn amount of all outstanding Letters of Credit plus any fees and expenses then due and owing
in respect to all Letters of Credit.

     “Exchange Act” shall mean the Securities Exchange Act of 1934, together with all rules,
regulations and interpretations thereunder or related thereto.

     “Existing Lenders” shall mean the lenders to Borrowers listed on Schedule 1.3 hereto
and their respective predecessors, successors and assigns.

     “Existing Letters of Credit” means those Letters of Credit identified on Schedule 1.5
hereto.

     “Federal Funds Rate” shall mean, for any day, a floating rate per annum equal to the weighted
average of the rates on overnight Federal funds transactions among members of the Federal Reserve
System, as determined by Agent in its sole discretion, which determination shall be final, binding
and conclusive (absent manifest error).

     “Federal Reserve Board” shall mean the Board of Governors of the Federal Reserve System.

     “Fee Letter” shall mean the letter agreement, dated of even date herewith, by and among
Borrowers and Agent, setting forth certain fees payable by Borrowers in connection with the Credit
Facility, as the same now exists or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.

     “Fees” shall mean any and all fees payable to Agent or any Lender pursuant to this Agreement
or any of the other Financing Agreements.

     “Final Order” means (a) an order or judgment of the Bankruptcy Court, or other court of
competent jurisdiction, as entered on the docket in any Reorganization Case, the docket of an
adversary proceedings related to any Reorganization Case or the docket of any other court of
competent jurisdiction, (b) that has not been reversed, stayed, modified or amended, (c) as to
which the time to appeal or seek certiorari or move for a new trial, reargument or rehearing has
expired, and (d) for which no appeal or petition for certiorari or other proceedings for a new
trial, reargument or rehearing has been timely taken, or as to which any appeal that has been taken
or any petition for certiorari that has been timely filed has been withdrawn with prejudice or
resolved by the highest court to which the order or judgment was appealed or from which certiorari
was sought or the new trial, reargument or rehearing shall have been denied or resulted in no
modification of such order.

     “Financing Agreements” shall mean, collectively, this Agreement and all notes, the Letter of
Credit Documents, all Security Documents, the Intercompany Subordination Agreement, the
Subordination Provisions, the Disclosure Letter, the Transfer of Letter of Credit Liability Letter,
all guarantees, all other intercreditor agreements, all subordination agreements and all other
agreements, documents and instruments now or at any time hereafter executed and/or delivered

20

 

by any Borrower or Guarantor in connection with this Agreement; provided,
that, the Financing Agreements shall not include Hedge Agreements other than Secured Rate
Contracts.

     “Fiscal Month” shall mean one of the three fiscal periods in a Fiscal Quarter, the first of
such periods comprised of four weeks, the second of such periods comprised of five weeks, and the
third of such periods comprised of four weeks, with each of the weeks in a Fiscal Quarter ending on
the close of business on a Saturday (except that the last fiscal period in the last Fiscal Quarter
of a 53 week year shall be five weeks). There are twelve Fiscal Months in a Fiscal Year.

     “Fiscal Quarter” means one of four thirteen or fourteen week quarters in a Fiscal Year, with
the first of such quarters beginning on the first day of a Fiscal Year and ending on the Saturday
of the last week in such quarter.

     “Fiscal Year” shall mean the 52 or 53 week period ending on the Saturday nearest to January 31
of each calendar year.

     “Foreign Lender” shall mean any Lender that is organized under the laws of a jurisdiction
other than that in which a Borrower is resident for tax purposes. For purposes of this definition,
the United States of America, each State thereof and the District of Columbia shall be deemed to
constitute a single jurisdiction.

     “Funding Bank” shall have the meaning given to such term in Section 3.3(a) hereof.

     “GAAP” shall mean generally accepted accounting principles in the United States of America as
in effect from time to time as set forth in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied.

     “GE Capital” shall mean General Electric Capital Corporation, a Delaware corporation.

     “Governmental Authority” shall mean any nation or government, any state, province, or other
political subdivision thereof, any central bank (or similar monetary or regulatory authority)
thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.

     “Guarantors” shall mean, collectively, the following (together with their respective
successors and assigns): (a) each Borrower, (b) HF Enterprises, Inc., a Delaware corporation; (c)
HF Resources, Inc., a Delaware corporation; and (d) any other Person that at any time after the
date hereof becomes party to a guarantee in favor of Agent for the benefit of any Secured Party or
otherwise liable on or with respect to the Obligations or who is the owner of any property which is
security for the Obligations (other than Borrowers); each sometimes being referred to herein
individually as a “Guarantor”.

     “Hazardous Materials” shall mean any hazardous, toxic or dangerous substances, materials and
wastes, including hydrocarbons (including naturally occurring or man-made petroleum and
hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation,

21

 

radioactive materials, biological substances, polychlorinated biphenyls, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants (including materials which
include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar
substances, materials, or wastes and including any other substances, materials or wastes that are
or become regulated under any Environmental Law (including any that are or become classified as
hazardous or toxic under any Environmental Law).

     “Hedge Agreement” shall mean an agreement between any Borrower or Guarantor and a Bank Product
Provider that is a rate swap agreement, basis swap, forward rate agreement, commodity swap,
interest rate option, forward foreign exchange agreement, spot foreign exchange agreement, rate cap
agreement, rate floor agreement, rate collar agreement, currency swap agreement, cross-currency
rate swap agreement, currency option, any other similar agreement (including any option to enter
into any of the foregoing or a master agreement for any the foregoing together with all supplements
thereto) for the purpose of protecting against or managing exposure to fluctuations in interest or
exchange rates, currency valuations or commodity prices; sometimes being collectively referred to
herein as “Hedge Agreements”.

     “Indebtedness” shall mean, with respect to any Person, any liability, whether or not
contingent, (a) in respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such Person or only to a portion thereof) or evidenced by bonds, notes,
debentures or similar instruments; (b) representing the balance deferred and unpaid of the purchase
price of any property or services (other than an account payable to a trade creditor (whether or
not an Affiliate) incurred in the ordinary course of business of such Person and payable in
accordance with customary trade practices); (c) all obligations as lessee under leases which have
been, or should be, in accordance with GAAP recorded as Capital Leases; (d) any contractual
obligation, contingent or otherwise, of such Person to pay or be liable for the payment of any
indebtedness described in this definition of another Person, including, without limitation, any
such indebtedness, directly or indirectly guaranteed, or any agreement to purchase, repurchase, or
otherwise acquire such indebtedness, obligation or liability or any security therefor, or to
provide funds for the payment or discharge thereof, or to maintain solvency, assets, level of
income, or other financial condition; (e) all obligations with respect to redeemable stock and
redemption or repurchase obligations under any Capital Stock or other equity securities issued by
such Person; (f) all reimbursement obligations and other liabilities of such Person with respect to
surety bonds (whether bid, performance or otherwise), letters of credit, banker’s acceptances,
drafts or similar documents or instruments issued for such Person’s account; (g) all indebtedness
of such Person in respect of indebtedness of another Person for borrowed money or indebtedness of
another Person otherwise described in this definition which is secured by any consensual lien,
security interest, collateral assignment, conditional sale, mortgage, deed of trust, or other
encumbrance on any asset of such Person, whether or not such obligations, liabilities or
indebtedness are assumed by or are a personal liability of such Person, all as of such time; (h)
all obligations, liabilities and indebtedness of such Person (marked to market) arising under swap
agreements, cap agreements and collar agreements and other agreements or arrangements designed to
protect such person against fluctuations in interest rates or currency or commodity values; (i) all
obligations owed by such Person under License Agreements with respect to non-refundable, advance or
minimum guarantee royalty payments; (j) indebtedness of any partnership or joint venture in which
such Person is a general partner or a

22

 

joint venturer to the extent such Person is liable therefor as a result of such Person’s
ownership interest in such entity, except to the extent that the terms of such indebtedness
expressly provide that such Person is not liable therefor or such Person has no liability therefor
as a matter of law; and (k) the principal and interest portions of all rental obligations of such
Person under any synthetic lease or similar off-balance sheet financing where such transaction is
considered to be borrowed money for tax purposes but is classified as an operating lease in
accordance with GAAP.

     “Indenture” shall mean that certain Indenture dated as of June 17, 2008 between Deutsche Bank
National Trust Company, as trustee, and the Parent, as Issuer, in respect of the Floating Rate
Series A Secured Notes Due 2013.

     “Information Certificate” shall mean, collectively, the Information Certificates of Borrowers
and Guarantors each substantially in the form of Exhibit B hereto containing material
information with respect to Borrowers and Guarantors, their respective businesses and assets
provided by or on behalf of Borrowers and Guarantors to Agent in connection with the preparation of
this Agreement and the other Financing Agreements and the financing arrangements provided for
herein.

     “Intellectual Property” shall mean, as to each Borrower and Guarantor, such Borrower’s and
Guarantor’s now owned and hereafter arising or acquired: patents, patent rights, patent
applications, copyrights, works which are the subject matter of copyrights, copyright applications,
copyright registrations, trademarks, servicemarks, trade names, trade styles, trademark and service
mark applications, and licenses and rights to use any of the foregoing and all applications,
registrations and recordings relating to any of the foregoing as may be filed in the United States
Copyright Office, the United States Patent and Trademark Office or in any similar office or agency
of the United States, any State thereof, any political subdivision thereof or in any other country
or jurisdiction, together with all rights and privileges arising under applicable law with respect
to any Borrower’s or Guarantor’s use of any of the foregoing; all extensions, renewals, reissues,
divisions, continuations, and continuations-in-part of any of the foregoing; all rights to sue for
past, present and future infringement of any of the foregoing; inventions, trade secrets, formulae,
processes, compounds, drawings, designs, blueprints, surveys, reports, manuals, and operating
standards; goodwill (including any goodwill associated with any trademark or servicemark, or the
license of any trademark or servicemark); customer and other lists in whatever form maintained;
trade secret rights, copyright rights, rights in works of authorship, domain names and domain name
registration; software and contract rights relating to computer software programs, in whatever form
created or maintained.

     “Intercompany Indebtedness” shall have the meaning set forth in Section 8.20 hereof.

     “Intercompany Royalty Accounts” shall mean, collectively, the following bank accounts
maintained at PNC Bank: (a) the bank account of Resources bearing account number 5602229374 and (b)
the bank account of Enterprises bearing account number 5602229788.

     “Intercompany Subordination Agreement” shall mean the Intercompany Subordination Agreement
substantially in the form of Exhibit I attached hereto executed by the Borrowers and each
of their subsidiaries from time to time.

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     “Interest Expense” shall mean, for any period, as to any Person, as determined in accordance
with GAAP, the total interest expense of such Person, whether paid or accrued during such period
(including the interest component of Capital Leases for such period), including, without
limitation, discounts in connection with the sale of any Accounts and bank fees, commissions,
discounts and other fees and charges owed with respect to letters of credit, banker’s acceptances
or similar instruments.

     “Interest Period” shall mean for any Eurodollar Rate Loan, each period commencing on a
Business Day selected by Administrative Borrower and ending one (1), two (2), or three (3) months
thereafter as selected by Administrative Borrower in an irrevocable notice to Agent as set forth in
Section 2.1, the exact duration to be determined in accordance with the customary practice
in the applicable Eurodollar Rate market; provided, that:

          (a) if any Interest Period would otherwise end on a day that is not a Business Day, such
Interest Period shall be extended to the next succeeding 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 immediately preceding Business Day;

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

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

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

          (e) Administrative Borrower shall select Interest Periods so that there shall be no more than
5 separate Eurodollar Rate Loans in existence at any one time.

     “Interest Rate” shall mean,

          (a) Subject to clause (b) of this definition below:

               (i) as to Prime Rate Loans, a rate equal to the then Applicable Margin for Prime Rate Loans on
a per annum basis plus the Prime Rate, and

               (ii) as to Eurodollar Rate Loans, a rate equal to the then Applicable Margin for Eurodollar
Rate Loans on a per annum basis plus the Adjusted Eurodollar Rate.

          (b) Notwithstanding anything to the contrary contained herein, during the continuance of an
Event of Default under Sections 10.1(a), 10.1(f), 10.1(g) or
10.1(h) or, during the continuance of any other Event of Default and at election of Agent
(or at the direction of the Required Lenders), the Interest Rates applicable to the Loans and
Letters of Credit Fees shall be increased by two (2%) percent per annum above the rates of interest
or rates for such fees otherwise applicable hereunder.

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     “Inventory” shall mean, as to each Borrower and Guarantor, all of such Borrower’s and
Guarantor’s now owned and hereafter existing or acquired goods, wherever located, which (a) are
leased by such Borrower or Guarantor as lessor; (b) are held by such Borrower or Guarantor for sale
or lease or to be furnished under a contract of service; (c) are furnished by such Borrower or
Guarantor under a contract of service; or (d) consist of raw materials, work in process, finished
goods or materials used or consumed in its business.

     “Investment” shall have the meaning set forth in Section 9.10 hereof.

     “Investment Property Control Agreement” shall mean an agreement in writing, in form and
substance satisfactory to Agent, by and among Agent, any Borrower or Guarantor (as the case may be)
and any securities intermediary, commodity intermediary or other person who has custody, control or
possession of any investment property of such Borrower or Guarantor acknowledging that such
securities intermediary, commodity intermediary or other person has custody, control or possession
of such investment property on behalf of Agent, that it will comply with entitlement orders
originated by Agent with respect to such investment property, or other instructions of Agent, and
has such other terms and conditions as Agent may require.

     “Issuing Bank” shall have the meaning set forth in Section 2.2(a).

     “Lenders” shall mean (a) GE Capital, the other Lenders named on the signature pages of this
Agreement, and, if any such Lender shall decide to assign all or any portion of the Obligations in
accordance with Section 13.8, such term shall include any assignee of such Lender, and (b)
solely for the purpose of (x) obtaining the benefit of the liens granted to Agent for the benefit
of Lenders under any Financing Agreement and (y) obtaining the benefit of any guarantees by the
Guarantors, a Person to whom any Obligations in respect of a Secured Rate Contract are owed. For
the avoidance of doubt, any Person to whom any Obligations in respect of a Secured Rate Contract
are owed and which does not hold any Loans or Commitments shall not be entitled to any other rights
as a “Lender” under this Agreement or any other Financing Agreements.

     “Letter of Credit Documents” shall mean, with respect to any Letter of Credit, such Letter of
Credit, any amendments thereto, any documents delivered in connection therewith, including, without
limitation, any Master Commercial Agreement and/or Master Standby Agreement, any application
therefor, and any agreements, instruments, guarantees or other documents (whether general in
application or applicable only to such Letter of Credit) governing or providing for i) the rights
and obligations of the parties concerned or at risk or ii) any collateral security for such
obligations.

     “Letter of Credit Fee” shall have the meaning set forth in Section 2.2(b).

     “Letter of Credit Limit” shall mean $20,000,000.

     “Letter of Credit Obligations” shall mean all outstanding obligations incurred by Agent and
Lenders, whether direct or indirect, contingent or otherwise, due or not due, in connection with
the issuance of Letters of Credit by the Issuing Bank or the purchase of a participation as set
forth in Section 2.2 with respect to any Letter of Credit. The amount of such Letter of Credit

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Obligations shall equal the maximum amount that may be payable at such time or at any time
thereafter Agent or Lenders thereupon or pursuant thereto.

     “Letters of Credit” shall mean all letters of credit (whether documentary or stand-by and
whether for the purchase of inventory, equipment or otherwise) issued by an Issuing Bank for the
account of any Borrower pursuant to this Agreement, and all amendments, renewals, extensions or
replacements thereof. The Existing Letters of Credit shall constitute Letters of Credit hereunder
for all purposes.

     “License Agreements” shall have the meaning set forth in Section 8.11 hereof.

     “Loans” shall mean the Revolving Loans.

     “London Interbank Offered Rate” shall mean, for each Interest Period, a rate of interest
determined by Agent equal to the offered rate for deposits in United States dollars for the
applicable Interest Period that appears on Reuters Screen LIBOR01 Page as of 11:00 a.m. (London
time), on the second full Business Day next preceding the first day of such Interest Period (unless
such date is not a Business Day, in which event the next succeeding Business Day will be used). If
such interest rates shall cease to be available from Telerate News Service (or its successor
satisfactory to Agent), the London Interbank Offered Rate shall be determined from such financial
reporting service or other information as shall be mutually acceptable to Agent and Administrative
Borrower.

     “Master Commercial Agreement” shall mean the Master Agreement for Commercial Letters of Credit
dated as of the Closing Date among Borrowers, as Applicant(s), and GE Capital.

     “Master Standby Agreement” shall mean the Master Agreement for Standby Letters of Credit dated
as of the Closing Date among Borrowers, as Applicant(s), and GE Capital, as issuer.

     “Master Warrant Agreement shall mean the Master Warrant Agreement dated as of June 17, 2008
between Continental Stock Transfer & Trust Company, as Warrant Agent, and Parent, in respect of the
Specified Warrants of Parent to be issued thereunder.

     “Material Adverse Effect” shall mean a material adverse effect on (a) the financial condition,
business, performance or operations of Borrowers; (b) the legality, validity or enforceability of
this Agreement or any of the other Financing Agreements; (c) the legality, validity,
enforceability, perfection or priority of the security interests and liens of Agent upon the
Collateral; (d) the Collateral or its value; (e) the ability of any Borrower to repay the
Obligations or of any Borrower to perform its obligations under this Agreement or any of the other
Financing Agreements as and when to be performed; or (f) the ability of Agent or any Lender to
enforce the Obligations or realize upon the Collateral or otherwise with respect to the rights and
remedies of Agent and Lenders under this Agreement or any of the other Financing Agreements.

     “Material Contract” shall mean (a) any contract or other agreement (other than the Financing
Agreements), written or oral, of any Borrower or Guarantor involving monetary liability of or to
any Person in an amount in excess of $5,000,000 in any Fiscal Year and (b) any

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other contract or other agreement (other than the Financing Agreements), whether written or
oral, to which any Borrower or Guarantor is a party as to which the breach, nonperformance,
cancellation or failure to renew by any party thereto would have a Material Adverse Effect.

     “Maturity Date” shall mean the earlier of the date which is (i) August 1, 2013 or (ii) 120
calendar days prior to the “Maturity Date” (as defined in the Indenture).

     “Maximum Credit” shall mean the amount of $100,000,000.

     “Mortgage” shall means each of the mortgages, deeds of trust, leasehold mortgages, leasehold
deeds of trust, collateral assignments of leases or other real estate security documents delivered
by any Borrower or any Guarantor to Agent on behalf of itself and Secured Parties with respect to
the Real Property of the Borrowers and the Guarantors, all in form and substance reasonably
satisfactory to Agent, including, without limitation, the Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing, dated even date herewith by Parent in favor of
Agent with respect to the Real Property and related assets of such Borrower located in Baldwyn,
Mississippi, as the same now exist or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.

     “Multiemployer Plan” shall mean 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 any Borrower, Guarantor or any ERISA Affiliate or with respect to which any
Borrower, Guarantor or any ERISA Affiliate may incur any liability.

     “Net Recovery Percentage” shall mean the net appraised liquidation value of Borrowers’
Eligible Inventory, Eligible LC Inventory and Eligible In-Transit Inventory as set forth in
Borrowers’ inventory ledger as determined from time to time in accordance with an independent
appraisal satisfactory to Agent.

     “Notice of Borrowing” shall have the meaning set forth in Section 2.1(a).

     “Notice of Conversion/Continuation” shall have the meaning set forth in Section
3.1(b).

     “Obligations” shall mean (a) any and all Loans, Letter of Credit Obligations and all other
obligations, liabilities and indebtedness of every kind, nature and description owing by any or all
of Borrowers to Agent or any Lender or any Secured Swap Provider, including principal, interest,
charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser,
guarantor or otherwise, arising under this Agreement or any of the other Financing Agreements or
any Secured Rate Contract, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of this Agreement or after the commencement of any
case with respect to such Borrower under the United States Bankruptcy Code or any similar statute
(including the payment of interest and other amounts which would accrue and become due but for the
commencement of such case, whether or not such amounts are allowed or allowable in whole or in part
in such case), whether direct or indirect, absolute or contingent, joint or several, due or not
due, primary or secondary, liquidated or unliquidated, or secured or unsecured and (b) for purposes
only of Section 5.1 hereof and the Security Documents and subject to the priority in right
of payment set forth in Section 6.4 hereof, all obligations,

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liabilities and indebtedness of every kind, nature and description owing by any or all of
Borrowers or Guarantors to Agent, any Secured Swap Provider arising under or pursuant to any
Secured Rate Contract or any Bank Product Provider arising under or pursuant to any Bank Products,
whether now existing or hereafter arising, provided, that, (i) as to any such
obligations, liabilities and indebtedness arising under or pursuant to a Hedge Agreement (other
than a Secured Rate Contract), the same shall only be included within the Obligations if upon
Agent’s request, Agent shall have entered into an agreement, in form and substance satisfactory to
Agent, with the Bank Product Provider that is a counterparty to such Hedge Agreement, as
acknowledged and agreed to by Borrowers and Guarantors, providing for the delivery to Agent by such
counterparty of information with respect to the amount of such obligations and providing for the
other rights of Agent and such Bank Product Provider in connection with such arrangements, (ii) any
Bank Product Provider, other than GE Capital and its Affiliates or a Secured Swap Provider, shall
have delivered written notice to Agent that (A) such Bank Product Provider has entered into a
transaction to provide Bank Products to a Borrower and Guarantor and (B) the obligations arising
pursuant to such Bank Products provided to Borrowers and Guarantors constitute Obligations entitled
to the benefits of the security interest of Agent granted hereunder, and Agent shall have accepted
such notice in writing, and (iii) in no event shall any Bank Product Provider (other than a Secured
Swap Provider) to whom such obligations, liabilities or indebtedness are owing be deemed a Lender
for purposes hereof to the extent of and as to such obligations, liabilities or indebtedness other
than for purposes of Section 5.1 hereof and other than for purposes of Sections
12.1, 12.2, 12.3(b), 12.6, 12.7, 12.9, 12.12
and 13.7 hereof and in no event shall such obligations be included in the Obligations to
the extent that the effect is that the value of the Collateral (as determined by Agent) is less
than the Obligations and in no event shall the approval of any such person be required in
connection with the release or termination of any security interest or lien of Agent.

     “Obligor” shall mean any guarantor, endorser, acceptor, surety or other person liable on or
with respect to the Obligations or who is the owner of any property which is security for the
Obligations (including, without limitation, Guarantors).

     “Other Taxes” shall have the meaning set forth in Section 6.5(c).

     “Owned Real Properties” shall mean, collectively, the Real Properties of Parent listed on
Schedule 1.4.

     “Parent” shall mean Hancock Fabrics, Inc., a Delaware corporation, and its successors and
assigns.

     “Participant” shall mean any financial institution that acquires and holds a participation in
the interest of any Lender in any of the Loans and Letters of Credit in conformity with the
provisions of Section 13.8 of this Agreement governing participations.

     “Pension Funding Rules” shall mean the rules of the Code and ERISA regarding minimum required
contributions (including any installment payment thereof) to certain Plans and set forth in, with
respect to plan years ending prior to the effective date as to any such Plan of the Pension
Protection Act of 2006, Section 412 of the Code and Part 3, Subtitle I, of Title I of

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ERISA each as in effect prior to the Pension Protection Act of 2006 and, thereafter, Sections
412 and 430 of the Code and Sections 302 and 303 of ERISA.

     “Pension Plan” shall mean an employee benefit plan (as defined in Section 3(3) of ERISA)
subject to the Pension Funding Rules which is or was at any time during the current year or the
immediately preceding six (6) years contributed to by any Borrower, Guarantor or any ERISA
Affiliate or with respect to which any Borrower, Guarantor or any ERISA Affiliate may incur any
liability, other than a Multiemployer Plan.

     “Permits” shall have the meaning set forth in Section 8.7(b).

     “Permitted Acquisitions” shall mean the purchase by a Borrower or Guarantor after the date
hereof of all or substantially all of the assets of any Person or a business or division of such
Person (including pursuant to a merger with such Person or the formation of a wholly owned
Subsidiary solely for such purpose that is merged with such Person) or of all or a majority of the
Capital Stock (such assets or Person being referred to herein as the “Acquired Business”) and in
one or a series of transaction that satisfies each of the following conditions as determined by
Agent:

          (a) Agent shall have received not less than ten (10) Business Days’ prior written notice of
the proposed acquisition and such information with respect thereto as Agent may request, including
(i) the proposed date and amount of the acquisition, (ii) a list and description of the assets or
shares to be acquired, (iii) the total purchase price for the assets to be purchased (and the terms
of payment of such purchase price), and (iv) a summary of the due diligence undertaken by Borrowers
in connection with such acquisition,

          (b) the Acquired Business shall be an operating company that engages in a line of business
substantially similar to the business that Borrowers are engaged in on the date hereof,

          (c) (i) the aggregate consideration paid for or in connection with the assets or shares of the
Acquired Business shall not exceed $15,000,000 (calculated after giving effect to all payments or
other consideration paid in respect of such acquisition and after giving effect to the assumption
of all Indebtedness in connection with such acquisition), and (ii) the aggregate consideration paid
for or in connection with all Permitted Acquisitions shall not exceed $30,000,000 (calculated after
giving effect to all payments or other consideration paid in respect of all Permitted Acquisitions
and after giving effect to the assumption of all Indebtedness in connection with all Permitted
Acquisition),

          (d) if requested by Agent, Agent shall have received: (i) the most recent annual and interim
financial statements with respect to the Acquired Business and related statements of income and
cash flows, (ii) detailed forecasts of cash flows for the Acquired Business, (iii) detailed
projections for Parent and its Subsidiaries through the Maturity Date, on a monthly basis for the
first year after the acquisition and on a quarterly basis thereafter, giving pro forma effect to
such acquisition, based on assumptions satisfactory to Agent and demonstrating pro forma compliance
with all financial covenants set forth in this Agreement, prepared in good faith an in a manner and
using such methodology as is consistent with the most recent financial

29

 

statements delivered to Agent pursuant to Section 9.6 hereof and in form and substance
satisfactory to Agent and (iv) current, updated projections of the amount of the Borrowing Base and
Excess Availability for the six month period after the date of such acquisition, in a form
reasonably satisfactory to Agent, representing Borrowers’ reasonable best estimate of the future
Borrowing Base and Excess Availability for the period set forth therein as of the date not more
than ten (10) days prior to the date of such acquisition, which projections shall have been
prepared on the basis of the assumptions set forth therein which Borrowers believe are fair and
reasonable as of the date of preparation in light of current and reasonably foreseeable business
conditions,

          (e) if Agent so elects, Agent shall have received an appraisal of the inventory of the
Acquired Business and such other assets of the Acquired Business as Agent may specify, in each case
in form and containing assumptions and appraisal methods satisfactory to Agent by an appraiser
acceptable to Agent, on which Agent and Lenders are expressly permitted to rely,

          (f) if Agent so elects, Agent shall have completed a field examination with respect to the
business and assets of the Acquired Business in accordance with Agent’s customary procedures and
practices and as otherwise required by the nature and circumstances of the business of the Acquired
Business, the scope and results of which shall be satisfactory to Agent and any inventory of the
Acquired Business shall only be Eligible Inventory to the extent the criteria for Eligible
Inventory set forth herein are satisfied with respect thereto in accordance with this Agreement (or
such other or additional criteria as Agent may, at its option, establish with respect thereto in
accordance with this Agreement and subject to such Reserves as Agent may establish in connection
with the Acquired Business),

          (g) Agent shall have received (i) all items required by Sections 5.2 and 9.23
in connection with the Acquired Business, (ii) evidence satisfactory to Agent that all liens and
encumbrances with respect to the assets of the Acquired Business (other than liens and encumbrances
permitted under Section 9.8) have been discharged in full or arrangements therefor
satisfactory to the Agent have been made and (iii) evidence satisfactory to Agent that any
Indebtedness assumed in connection with such acquisition shall constitute Indebtedness permitted
under Section 9.9,

          (h) in the case of the acquisition of the Capital Stock of another Person, the board of
directors (or other comparable governing body) of such other Person shall have duly approved such
acquisition and such Person shall not have announced that it will oppose such acquisition or shall
not have commenced any action which alleges that such acquisition will violate applicable law,

          (i) Adjusted Excess Availability shall have been not less than $25,000,000 for each of the two
consecutive months immediately prior to the date of any such acquisition based on the Borrowing
Base as of the end of each of such months and after giving effect to the acquisition and all
payments and other consideration in respect thereof, on a pro forma basis using the Adjusted Excess
Availability as of the end of the month immediately prior to the date of such acquisition and
payments or other consideration, Adjusted Excess Availability shall be not less than $25,000,000,

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          (j) no Default or Event of Default shall exist or have occurred as of the date of the
acquisition or any payment in respect thereof and after giving effect to the acquisition or such
payment,

          (k) Agent shall have received true, correct and complete copies of all agreements, documents
and instruments relating to such acquisition, which documents shall be satisfactory to Agent, and

          (l) if required by Agent, Agent shall have received a certificate of the chief financial
officer or chief executive officer of Administrative Borrower certifying to Agent and Lenders as to
the matters set forth above in this definition.

     “Permitted Dispositions” shall mean each of the following:

          (a) sales of Inventory in the ordinary course of business,

          (b) the sale or other disposition of Equipment (including worn-out or obsolete Equipment or
Equipment no longer used or useful in the business of any Borrower or Guarantor) so long as such
sales or other dispositions do not involve Equipment having an aggregate fair market value in
excess of $500,000 for all such Equipment disposed of in any Fiscal Year of Borrowers or as Agent
may otherwise agree,

          (c) sales or other dispositions by any Borrower of assets in connection with the closing or
sale of a retail store location of such Borrower in the ordinary course of such Borrower’s business
which consist of leasehold interests in the premises of such store, the Equipment and fixtures
located at such premises and the books and records relating exclusively and directly to the
operations of such store; provided, that, as to each and all such sales and
closings, (i) after giving effect thereto, no Default or Event of Default shall exist or have
occurred and be continuing, and (ii) such sale shall be on commercially reasonable prices and terms
in a bona fide arm’s length transaction,

          (d) the grant by any Borrower or Guarantor after the date hereof of a non-exclusive license to
any person for the use of any Intellectual Property consisting of trademarks owned by such Borrower
or Guarantor; provided, that, as to any such license, each of the following
conditions is satisfied, (i) such licenses shall be on commercially reasonable prices and terms in
a bona fide arms’ length transactions, (ii) the rights of the licensee shall be subject to the
rights of Agent, and shall not adversely affect, limit or restrict the rights of Agent to use any
Intellectual Property of a Borrower or Guarantor to sell or otherwise dispose of any Inventory or
other Collateral, (iii) Agent shall have received, true, correct and complete copies of the
executed license agreement, promptly upon the execution thereof and (iv) as of the date of the
grant of any such license, and after giving effect thereto, no Default or Event of Default shall
exist or have occurred,

          (e) sales, transfers and dispositions of assets of a Borrower to another Borrower or by a
Guarantor or other Subsidiary of Parent to a Borrower or Guarantor, in each case to the extent
permitted under Section 9.12 hereof; and

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          (f) the sale of the Tupelo Real Property, any of the Owned Real Properties (other than the
Baldwyn Real Property), the Equipment and fixtures located at the Tupelo Real Property and the
Owned Real Properties (other than the Baldwyn Real Property) and the books and records relating
exclusively and directly to the operations of the Tupelo Real Property or any of the Owned Real
Properties (other than the Baldwyn Real Property); provided, that, as to such sale and closing, (i)
Agent shall have received not less than ten (10) Business Days prior written notice of such sale or
closing, which notice shall set forth in reasonable detail satisfactory to Agent, the parties to
such sale, the purchase price and the manner of payment thereof and such other information with
respect thereto as Agent may request, (ii) after giving effect thereto, no Default or Event of
Default shall exist or have occurred and be continuing, (iii) such sale shall be on commercially
reasonable prices and terms in a bona fide arm’s length transaction.

     “Permitted Investments” shall mean each of the following:

          (a) the endorsement of instruments for collection or deposit in the ordinary course of
business;

          (b) Investments in cash or Cash Equivalents, provided, that, (i) no Loans are
then outstanding and (ii) the terms and conditions of Section 5.2 hereof shall have been
satisfied with respect to the deposit account, investment account or other account in which such
cash or Cash Equivalents are held;

          (c) the existing Investments of each Borrower and Guarantor as of the date hereof in its
Subsidiaries, provided, that, no Borrower or Guarantor shall have any further
obligations or liabilities to make any capital contributions or other additional investments or
other payments to or in or for the benefit of any of such Subsidiaries;

          (d) loans and advances by any Borrower or Guarantor to employees of such Borrower or Guarantor
not to exceed the principal amount of $250,000 in the aggregate at any time outstanding for: (i)
reasonably and necessary work-related travel or other ordinary business expenses to be incurred by
such employee in connection with their work for such Borrower or Guarantor and (ii) reasonable and
necessary relocation expenses of such employees (including home mortgage financing for relocated
employees);

          (e) stock or obligations issued to any Borrower or Guarantor by any Person (or the
representative of such Person) in respect of Indebtedness of such Person owing to such Borrower or
Guarantor in connection with the insolvency, bankruptcy, receivership or reorganization of such
Person or a composition or readjustment of the debts of such Person; provided,
that, the original of any such stock or instrument evidencing such obligations shall be
promptly delivered to Agent, upon Agent’s request, together with such stock power, assignment or
endorsement by such Borrower or Guarantor as Agent may request; and

          (f) obligations of account debtors to any Borrower or Guarantor arising from Accounts which
are past due evidenced by a promissory note made by such account debtor payable to such Borrower or
Guarantor; provided, that, promptly upon the receipt of the original of any such
promissory note by such Borrower or Guarantor, such promissory note shall be

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endorsed to the order of Agent by such Borrower or Guarantor and promptly delivered to Agent
as so endorsed.

     “Person” or “person” shall mean any individual, sole proprietorship, partnership, corporation
(including any corporation which elects subchapter S status under the Code), limited liability
company, limited liability partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any agency or
instrumentality or political subdivision thereof.

     “Petition Date” shall have the meaning set forth in the preamble.

     “Plan” shall mean an employee benefit plan (as defined in Section 3(3) of ERISA) which any
Borrower or Guarantor sponsors, maintains, or to which it makes, is making, or is obligated to make
contributions, or, in the case of a Multiemployer Plan, has made contributions at any time during
the immediately preceding six (6) plan years or with respect to which any Borrower or Guarantor may
incur liability.

     “Plan of Reorganization” shall mean a plan (within the meaning of the Bankruptcy Code)
proposed in the Reorganization Cases which is confirmed by a Final Order of the Bankruptcy Court
and is in form and substance satisfactory to Agent.

     “Pledge Agreements” shall mean that certain Pledge Agreement dated as of the Closing Date
executed and delivered by Borrowers, Guarantors and Agent and any pledge agreements entered into
after the Closing Date by any Borrower or Guarantor (as required by this Agreement or any other
Financing Agreement).

     “Prime Rate” shall mean, on any date, the greater of (a) the rate publicly quoted from time to
time by The Wall Street Journal as the “prime rate” (or, if The Wall Street Journal ceases quoting
a prime rate, the highest per annum rate of interest published by the Federal Reserve Board in
Federal Reserve statistical release H.15 (519) entitled “Selected Interest Rates” as the Bank prime
loan rate or its equivalent) or (b) the Federal Funds Rate in effect on such day plus one-half
(1/2%) percent. Each change in any interest rate provided for in this Agreement based upon the
Prime Rate shall take effect at the time of such change in the Prime Rate.

     “Prime Rate Loans” shall mean any Revolving Loans or portion thereof on which interest is
payable based on the Prime Rate in accordance with the terms thereof.

     “Pro Rata Share” shall mean as to any Lender, the fraction (expressed as a percentage) the
numerator of which is such Lender’s Commitment and the denominator of which is the aggregate amount
of all of the Commitments of Lenders, as adjusted from time to time in accordance with the
provisions of Section 13.8 hereof; provided, that, if the Commitments have
been terminated, the numerator shall be the unpaid amount of such Lender’s Loans and its interest
in the Letters of Credit and the denominator shall be the aggregate amount of all unpaid Loans and
Letters of Credit.

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     “Provision for Taxes” shall mean an amount equal to all taxes imposed on or measured by net
income, whether Federal, State, county or local, and whether foreign or domestic, that are paid or
payable by any Person in respect of any period in accordance with GAAP.

     “Quarterly Average Excess Availability” shall mean, as of the date of determination, the daily
average of the aggregate amount of the Adjusted Excess Availability, calculated for the immediately
preceding calendar quarter then most recently ended.

     “Rate Contracts” shall mean swap agreements (as such term is defined in Section 101 of the
Bankruptcy Code) and any other agreements or arrangements designed to provide protection against
fluctuations in interest or currency exchange rates.

     “Real Property” shall mean all now owned and hereafter acquired real property of each Borrower
and Guarantor, including leasehold interests, together with all buildings, structures, and other
improvements located thereon and all licenses, easements and appurtenances relating thereto,
wherever located.

     “Real Property Availability” shall mean the Adjusted Appraised Fair Market Value of Eligible
Real Property as set forth in the most recent acceptable appraisal (or acceptable updates of
existing appraisals) of such Real Property received by Agent in accordance with Section 4.1
or 7.4 hereof.

     “Receivables” shall mean all of the following now owned or hereafter arising or acquired
property of each Borrower and Guarantor: (a) all Accounts; (b) all interest, fees, late charges,
penalties, collection fees and other amounts due or to become due or otherwise payable in
connection with any Account; (c) all payment intangibles of such Borrower or Guarantor; (d) letters
of credit, indemnities, guarantees, security or other deposits and proceeds thereof issued payable
to any Borrower or Guarantor or otherwise in favor of or delivered to any Borrower or Guarantor in
connection with any Account; or (e) all other accounts, contract rights, chattel paper,
instruments, notes, general intangibles and other forms of obligations owing to any Borrower or
Guarantor, whether from the sale and lease of goods or other property, licensing of any property
(including Intellectual Property or other general intangibles), rendition of services or from loans
or advances by any Borrower or Guarantor or to or for the benefit of any third person (including
loans or advances to any Affiliates or Subsidiaries of any Borrower or Guarantor) or otherwise
associated with any Accounts, Inventory or general intangibles of any Borrower or Guarantor
(including, without limitation, choses in action, causes of action, tax refunds, tax refund claims,
any funds which may become payable to any Borrower or Guarantor in connection with the termination
of any Plan or other employee benefit plan and any other amounts payable to any Borrower or
Guarantor from any Plan or other employee benefit plan, rights and claims against carriers and
shippers, rights to indemnification, business interruption insurance and proceeds thereof, casualty
or any similar types of insurance and any proceeds thereof and proceeds of insurance covering the
lives of employees on which any Borrower or Guarantor is a beneficiary).

     “Records” shall mean, as to each Borrower and Guarantor, all of such Borrower’s and
Guarantor’s present and future books of account of every kind or nature, purchase and sale
agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements,

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correspondence, memoranda, credit files and other data relating to the Collateral or any
account debtor, together with the tapes, disks, diskettes and other data and software storage media
and devices, file cabinets or containers in or on which the foregoing are stored (including any
rights of any Borrower or Guarantor with respect to the foregoing maintained with or by any other
person).

     “Register” shall have the meaning set forth in Section 13.8(b) hereof.

     “Reorganization Cases” shall have the meaning set forth in the preamble.

     “Required Lenders” shall mean, at any time, those Lenders whose Pro Rata Shares aggregate more
than fifty (50%) percent of the aggregate of the Commitments of all Lenders, or if the Commitments
shall have been terminated, Lenders to whom more than fifty (50%) percent of the then outstanding
Obligations are owing; provided, that, if the Pro Rata Share of any Lender exceeds
fifty (50%) percent at a time when more than one Lender exists, then Required Lenders shall mean
such Lender and at least one other Lender.

     “Reserves” shall mean as of any date of determination, such amounts as Agent may from time to
time establish and revise in good faith reducing the amount of Revolving Loans and Letters of
Credit which would otherwise be available to Borrowers that Agent may, in its reasonable credit
judgment, establish from time to time. Without limiting the generality of the foregoing, Reserves
may be established to reflect any of the following: dilution; gift certificates; customs duties and
other costs to release Inventory which is being imported into the United States; inventory
shrinkage; mark downs and cost variances; taxes; rental payments, services charges and other
amounts to become due to lessors of real property to the extent Inventory or Records are located in
or on such property or such Records are needed to monitor or otherwise deal with the Collateral,
provided, that, the Reserves established in respect of such payments and charges as to
retail store locations that are leased shall not exceed at any time the aggregate of amounts
payable for the next three (3) months to the lessors of such retail store locations located in
those States where any right of the lessor to Collateral may have priority over the security
interest and lien of Agent therein, provided, further, that such limitation
on the amount of the Reserves shall only apply so long as: (A) no Event of Default shall exist or
have occurred, (B) neither a Borrower, Guarantor nor Agent shall have received notice of any event
of default under the lease with respect to such location and (C) no Borrower has granted to the
lessor a security interest or lien upon any assets of such Borrower; customer deposits; other
obligations, liabilities or indebtedness (contingent or otherwise) of any Borrower or any Guarantor
to any Bank Product Provider arising under or in connection with any Bank Products or to any other
Person arising in connection with any deposit accounts or other cash management arrangements; and
Letter of Credit Outstandings. Without limiting the generality of the foregoing, Reserves
established to ensure the payment of accrued Interest Expenses or Indebtedness shall be deemed to
be a reasonable exercise of Agent’s credit judgment.

     “Restricted Payment” shall mean (a) any cash dividend or other cash distribution, direct or
indirect, on account of any shares of any class of Capital Stock of Parent or any of its
Subsidiaries, as the case may be, now or hereafter outstanding, (b) any redemption, retirement,
sinking fund or similar payment on account of, or purchase or other acquisition for value, direct
or indirect, of any shares of any class of Capital Stock of Parent or any of its Subsidiaries,
except

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for any redemption, retirement, sinking funds or similar payment payable solely in such shares
of that class of stock or in any class of stock junior to that class, (c) any cash payment made to
redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants,
options or other rights to acquire any shares of any class of Capital Stock of Parent or any of its
Subsidiaries now or hereafter outstanding, (d) any payment or other transfer of funds or other
property made in satisfaction of any Indebtedness arising under any Subordinated Debt Documents,
(e) any payment or other transfer of funds or other property made in satisfaction of any liability
or obligation owing to any Person arising under any Subordinated Debt Documents, including any
fees, expenses, premiums, indemnification obligations or otherwise arising under any Specified
Subordinated Indebtedness Documents, or (f) any payment (including, without limitation, any payment
of management, consulting, monitoring or advisory fees) to any Affiliate of any Borrower except to
the extent expressly permitted in this Agreement.

     “Revolving Loans” shall mean the loans now or hereafter made by or on behalf of any Lender or
by Agent for the account of any Lender on a revolving basis pursuant to the Credit Facility
(involving advances, repayments and readvances) as set forth in Section 2.1 hereof.

     “Secured Parties” shall mean, collectively, (i) Agent, (ii) Lenders, (iii) the Issuing Bank
and (iv) any Bank Product Provider (including, in the avoidance of doubt, any Secured Swap
Provider); provided, that, (i) as to any Bank Product Provider, only to the extent
of the Obligations owing to such Bank Product Provider and (ii) such parties are sometimes referred
to herein individually as a “Secured Party”.

     “Secured Rate Contract” shall mean any Rate Contract between a Borrower and a Secured Swap
Provider.

     “Secured Swap Provider” shall mean a Person with whom a Borrower has entered into a Secured
Rate Contract provided or arranged by GE Capital or an Affiliate of GE Capital, and any assignee
thereof.

     “Security Documents” shall mean, collectively, the following agreements (as the same now exist
or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced): this
Agreement, each Pledge Agreement, each Mortgage, each Collateral Access Agreement, each Credit Card
Acknowledgment, each Deposit Account Control Agreement, each Investment Property Control Agreement,
each trademark security agreement, each copyright security agreement, each patent security
agreement, each landlord waiver and consent, each customs broker agreement and any other Financing
Agreements as Agent may from time to time designate as a “Security Document” in a writing delivered
by Agent to Administrative Borrower.

     “Settlement Period” shall have the meaning set forth in Section 6.11(b).

     “Solvent” shall mean, with respect to any Person on a particular date, that on such date (a)
the fair value of the property of such Person is greater than the total amount of liabilities,
including contingent liabilities, of such Person; (b) the present fair salable value of the assets
of such Person is not less than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured; (c) such Person does not intend to,
and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay
as such

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debts and liabilities mature; and (d) such Person is not engaged in a business or transaction,
and is not about to engage in a business or transaction, for which such Person’s property would
constitute an unreasonably small capital. The amount of contingent liabilities (such as
litigation, guaranties and pension plan liabilities) at any time shall be computed as the amount
that, in light of all the facts and circumstances existing at the time, represents the amount that
can reasonably be expected to become an actual or matured liability.

     “Special Agent Advances” shall have the meaning set forth in Section 12.11(a) hereof.

     “Specified Amount” shall mean, as of the date of determination, twenty five percent (25%) of
the Borrowing Base then most recently delivered to Agent pursuant to the terms hereof.

     “Specified Common Stock” shall mean the shares of common stock of Parent issuable upon
exercise of the Specified Warrants.

     “Specified Subordinated Indebtedness” shall mean the floating rate secured promissory notes to
be issued by Parent in the aggregate principal amount of $20,000,000 on terms reasonably acceptable
to Agent and subject to documentation reasonably acceptable to Agent.

     “Specified Subordinated Indebtedness Documents” shall mean, collectively, (i) the Indenture,
(ii) each of the “Notes” issued pursuant to and as defined under the Indenture, (iii) each of the
“Collateral Documents” entered into pursuant to and under the Indenture, and (iv) each of the
Indenture Documents as defined in the Indenture as in effect on the date hereof.

     “Specified Warrants” shall mean the warrants to be issued by Parent to purchase an aggregate
of 9,500,000 shares of common stock of Parent in connection with the issuance of the Specified
Subordinated Indebtedness.

     “Standby Letters of Credit” shall mean all Letters of Credit other than Commercial Letters of
Credit.

     “Store Accounts” shall mean each of the deposit accounts of a Borrower that are used solely
for receiving store receipts from a retail store location of a Borrower.

     “Subordinated Debt Documents” shall mean, collectively, any and all agreements, documents and
instruments evidencing or otherwise related to Indebtedness permitted under Section 9.9(g)
hereof, including, without limitation the Specified Subordinated Indebtedness Documents.

     “Subordination Provisions” shall mean Article XI of the Indenture.

     “Subsidiary” or “subsidiary” shall mean, with respect to any Person, any corporation, limited
liability company, limited liability partnership or other limited or general partnership, trust,
association or other business entity of which an aggregate of at least a majority of the
outstanding Capital Stock or other interests entitled to vote in the election of the board of
directors of such corporation (irrespective of whether, at the time, Capital Stock of any other
class or classes of such corporation shall have or might have voting power by reason of the

37

 

happening of any contingency), managers, trustees or other controlling persons, or an
equivalent controlling interest therein, of such Person is, at the time, directly or indirectly,
owned by such Person and/or one or more subsidiaries of such Person.

     “Supermajority Lenders” shall mean, at any time, those Lenders whose Pro Rata Shares aggregate
more than eighty (80%) percent of the aggregate of the Commitments of all Lenders, or if the
Commitments shall have been terminated, Lenders to whom more than eighty (80%) percent of the then
outstanding Obligations are owing.

     “Taxes” shall have the meaning set forth in Section 6.5(a).

     “Transfer of Letter of Credit Liability Letter” shall mean that certain Letter Agreement
regarding the Existing Letters of Credit pursuant to which, among other things, Wachovia Bank, N.A.
transfers to GE Capital all liability with respect to the Existing Letters of Credit.

     “Tupelo Real Property” shall mean the Real Property of Parent located at 3400 Convention
Drive, Tupelo, Mississippi.

     “UCC” shall mean the Uniform Commercial Code as in effect in the State of New York and any
successor statute, as in effect from time to time (except that terms used herein which are defined
in the Uniform Commercial Code as in effect in the State of New York on the date hereof shall
continue to have the same meaning notwithstanding any replacement or amendment of such statute
except as Agent may otherwise determine).

     “Value” shall mean, as determined by Agent in good faith, with respect to Inventory, the lower
of (a) cost computed on a first-in first-out basis in accordance with GAAP or (b) market value,
provided, that, for purposes of the calculation of the Borrowing Base, (i) the
Value of the Inventory shall not include: (A) the portion of the value of Inventory equal to the
profit earned by any Borrower or Guarantor on the sale thereof to any other Borrower, or (B) that
portion of the value of Inventory constituting capitalized costs incurred in the acquisition,
storage or distribution of any Inventory or (C) write-ups or write-downs in value with respect to
currency exchange rates and (ii) notwithstanding anything to the contrary contained herein, the
cost of the Inventory shall be computed in the same manner and consistent with the most recent
appraisal of the Inventory received and accepted by Agent prior to the date hereof, if any.

     “Voting Stock” shall mean with respect to any Person, (a) one (1) or more classes of Capital
Stock of such Person having general voting powers to elect at least a majority of the board of
directors, managers or trustees of such Person, irrespective of whether at the time Capital Stock
of any other class or classes have or might have voting power by reason of the happening of any
contingency, and (b) any Capital Stock of such Person convertible or exchangeable without
restriction at the option of the holder thereof into Capital Stock of such Person described in
clause (a) of this definition.

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SECTION 2  CREDIT FACILITIES

     2.1 Revolving Loans.

          (a)
(i) Subject to and upon the terms and conditions contained herein, each Lender severally
(and not jointly) agrees to make its Pro Rata Share of Revolving Loans to Borrowers from time to
time until the Commitment Termination Date in amounts requested by Administrative Borrower on
behalf of the applicable Borrower up to the aggregate amount outstanding for all Lenders at any
time equal to the Borrowing Base at such time. The Pro Rata Share of the Revolving Loan of any
Lender shall not at any time exceed its separate Commitment. Until the Commitment Termination
Date, Borrowers may borrow, repay and reborrow under this Section 2.1(a)(i).

   
            (ii) Each Revolving Loan shall be made on notice by Administrative Borrower on behalf of the
applicable Borrower to one of the representatives of Agent identified on Schedule 2.1 at the
address specified therein. Any such notice must be given no later than (1) 1 p.m. (Eastern time)
on the Business Day of the proposed Revolving Loan, in the case of an Prime Rate Loan, or (2) 1
p.m. (Eastern time) on the date which is three (3) Business Days prior to the proposed Revolving
Loan, in the case of a Eurodollar Rate Loan. Each such notice (each a “Notice of Borrowing”) must
be given in writing (by telecopy or overnight courier) substantially in the form of Exhibit
F, and shall include the information required in such Exhibit and such other information as may
be required by Agent.

          (b) Except in Agent’s discretion, with the consent of all Lenders, or as otherwise provided
herein, the aggregate principal amount of the Revolving Loans and the Letter of Credit Obligations
outstanding at any time shall not exceed Excess Availability.

          (c) In the event that the aggregate principal amount of the Revolving Loans and the Letter of
Credit Obligations outstanding at any time exceed Adjusted Excess Availability, such event shall
not limit, waive or otherwise affect any rights of Agent or Lenders in such circumstances or on any
future occasions and Borrowers shall, upon demand by Agent, which may be made at any time or from
time to time, immediately repay to Agent the entire amount of any such excess(es) for which payment
is demanded.

     2.2 Letters of Credit.

          (a) (i) Subject to and upon the terms and conditions contained herein and in the Letter of
Credit Documents, at the request of Administrative Borrower on behalf of the applicable Borrower
for such Borrower’s account, Agent and Lenders agree to incur, from time to time prior to the
Commitment Termination Date, Letter of Credit Obligations by causing Letters of Credit to be issued
by GE Capital or a Subsidiary thereof or a bank or other legally authorized Person selected by or
acceptable to Agent in its sole discretion (each “an Issuing Bank”). Issuing Bank agrees to issue,
for the account of such Borrower, one or more Letters of Credit, for the ratable risk of each
Lender according to its Pro Rata Share, containing terms and conditions acceptable to Agent and
Issuing Bank. No such Letter of Credit shall have an expiry date that is more than one year
following the date of issuance thereof, unless otherwise determined by Agent, in its sole
discretion (including with respect to customary evergreen

39

 

provisions), and neither Agent nor Lenders shall be under any obligation to incur Letter of
Credit Obligations in respect of, or purchase risk participations in, any Letter of Credit having
an expiry date that is later than the Commitment Termination Date.

          (b) In addition to any charges, fees or expenses charged by any bank or issuer in connection
with the Letters of Credit, Borrowers shall pay to Agent, for the benefit of Lenders, monthly a
letter of credit fee (the “Letter of Credit Fee”) at a rate equal to the percentage (on a
per annum basis) set forth below on the daily outstanding balance of the Commercial Letters of
Credit and Standby Letters of Credit during the immediately preceding month (or part thereof),
payable in arrears as of the first Business Day of each succeeding month and on the Commitment
Termination Date and calculated based on a three hundred and sixty (360) day year and actual days
elapsed, provided, that, such percentage shall be increased or decreased, as the
case may be, to the percentage (on a per annum basis) set forth below based on the Quarterly
Average Excess Availability for the immediately preceding calendar quarter being at or within the
amounts indicated for such percentage:

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Commercial	 	Standby
	 	 	 	 	Quarterly Average Excess 	 	Letter of	 	Letter of
	Tier	 	Availability	 	Credit Rate	 	Credit Rate
	 	1	 	 	Greater than $30,000,000
	 	 	1.375	%	 	 	1.625	%
	 	2	 	 	Less than or equal to $30,000,000 and greater than $20,000,000
	 	 	1.625	%	 	 	1.875	%
	 	3	 	 	Less than or equal to $20,000,000 and greater than $10,000,000
	 	 	1.875	%	 	 	2.125	%
	 	4	 	 	Less than or equal to $10,000,000
	 	 	2.125	%	 	 	2.375	%

provided, that, (i) the Commercial Letter of Credit Rate from the Closing Date
through December 31, 2008 shall be 1.75%, and (ii) the Standby Letter of Credit Rate from the
Closing Date through December 31, 2008 shall be 2.25%. Adjustments in the rates applicable for
Letter of Credit Fees commencing January 1, 2009 shall be implemented effective as of each January
1, April 1, July 1, October 1, commencing at least five (5) days after the date of delivery to
Agent of the Applicable Margin Certificate. Concurrently with the delivery of the Applicable
Margin Certificate herein referenced, Administrative Borrower shall deliver to Agent a certificate,
signed by its chief financial officer, setting forth in reasonable detail the basis for the
continuance of, or any change in, the rates for the Letter of Credit Fees. Failure to deliver such
Applicable Margin Certificate within five (5) days of the date such certificate is required to be
delivered pursuant to Section 7.1(a)(iii) shall, in addition to any other remedy provided
for in this Agreement, result in an increase in the rates in the Letter of Credit Fees to the
highest level set forth in the foregoing grid, until the delivery of the Applicable Margin
Certificate demonstrating that such an increase is not required. If an Event of Default has
occurred and is continuing at the time any reduction in

40

 

the rates applicable for the Letter of Credit Fees is to be implemented, that reduction shall be
deferred until the date on which such Event of Default is waived or cured.

          (c) Borrowers shall give Agent at least three (3) Business Days’ prior written notice
requesting the incurrence of any Letter of Credit Obligation. The notice shall be accompanied by
the form of the Letter of Credit (which shall be acceptable to the Issuing Bank) and a completed
Application for Standby Letter of Credit or Application and Agreement for Commercial Letter of
Credit or Application for Commercial Letter of Credit (as applicable) in the form of Exhibit
E-1 or E-2 attached hereto. Notwithstanding anything contained herein to the contrary,
Letter of Credit applications by Borrowers and approvals by Agent and the Issuing Bank may be made
and transmitted pursuant to electronic codes and security measures mutually agreed upon and
established by and among Borrowers, Agent and the Issuing Bank. In addition to being subject to
the satisfaction of the applicable conditions precedent contained in Section 4 hereof and the other
terms and conditions contained herein, no Letter of Credit shall be available unless each of the
following conditions precedent have been satisfied in a manner reasonably satisfactory to Agent:
(i) Administrative Borrower on behalf of the applicable Borrower shall have delivered to Issuing
Bank at such times and in such manner as Issuing Bank may require, an application, in form and
substance satisfactory to Issuing Bank and Agent, for the issuance of the Letter of Credit and such
other Letter of Credit Documents as may be required pursuant to the terms thereof, and the form and
terms of the proposed Letter of Credit shall be reasonably satisfactory to Agent and Issuing Bank,
(ii) as of the date of issuance, no order of any court, arbitrator or other 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 Issuing Bank refrain from, the issuance of letters of
credit generally or the issuance of such Letter of Credit, (iii) after giving effect to the
issuance of such Letter of Credit, the Letter of Credit Obligations shall not exceed the Letter of
Credit Limit, and (iv) Adjusted Excess Availability, prior to giving effect to any Reserves in the
calculation of Excess Availability with respect to such Letter of Credit, on the date of the
proposed issuance of any Letter of Credit shall be equal to or greater than an amount equal to one
hundred (100%) percent of the face amount of such Commercial Letter of Credit or Standby Letter of
Credit being requested and all other commitments and obligations made or incurred by Agent with
respect thereto. Effective on the issuance of each Letter of Credit, a Reserve shall be
established in the amount equal to one hundred (100%) percent of the face amount of such Commercial
Letter of Credit or Standby Letter of Credit being requested and all other commitments and
obligations made or incurred by Agent with respect thereto.

          (d) Each Borrower shall reimburse immediately Issuing Bank for any draw under any Letter of
Credit issued for the account of such Borrower and pay Issuing Bank the amount of all other charges
and fees payable to Issuing Bank in connection with any Letter of Credit issued for the account of
such Borrower immediately when due, irrespective of any claim, setoff, defense or other right which
such Borrower may have at any time against Issuing Bank or any other Person. Each drawing under
any Letter of Credit or other amount payable in connection therewith when due shall constitute a
request by the Borrower for whose account

41

 

such Letter of Credit was issued to Agent for a Prime Rate Loan in the amount of such drawing
or other amount then due, and shall be made by Agent on behalf of Lenders as a Revolving Loan (or
Special Agent Advance, as the case may be). The date of such Loan shall be the date of the drawing
or as to other amounts, the due date therefor. Any payments made by or on behalf of Agent or any
Lender to Issuing Bank and/or related parties in connection with any Letter of Credit shall
constitute additional Revolving Loans to such Borrower pursuant to this Section 2 (or Special Agent
Advances as the case may be).

          (e) Borrowers and Guarantors shall indemnify and hold the Issuing Bank, Agent and Lenders
harmless from and against any and all losses, claims, damages, liabilities, costs and expenses
which the Issuing Bank, Agent or any Lender may suffer or incur in connection with any Letter of
Credit and any documents, drafts or acceptances relating thereto, including any losses, claims,
damages, liabilities, costs, charges and expenses (including reasonable attorneys’ fees) due to any
action taken by any issuer or correspondent with respect to any Letter of Credit, except for such
losses, claims, damages, liabilities, costs or expenses that are a direct result of the gross
negligence or willful misconduct of the Issuing Bank, Agent or such Lender as determined pursuant
to a final non-appealable order of a court of competent jurisdiction. Each Borrower and Guarantor
assumes all risks with respect to the acts or omissions of the drawer under or beneficiary of any
Letter of Credit and for such purposes the drawer or beneficiary shall be deemed such Borrower’s
agent. Each Borrower and Guarantor assumes all risks for, and agrees to pay, all foreign, Federal,
State and local taxes, duties and levies relating to any goods subject to any Letter of Credit or
any documents, drafts or acceptances thereunder. Each Borrower and Guarantor hereby releases and
holds the Issuing Bank, Agent and Lenders harmless from and against any acts, waivers, errors,
delays or omissions, whether caused by any Borrower, Guarantor, by any issuer or correspondent or
otherwise with respect to or relating to any Letter of Credit, except for the gross negligence or
willful misconduct of the Issuing Bank, Agent or such Lender as determined pursuant to a final,
non-appealable order of a court of competent jurisdiction. The provisions of this Section
2.2(e) shall survive the payment of Obligations and the termination of this Agreement. Nothing
contained herein shall be deemed to limit or to expand any waivers, covenants or indemnities made
by Borrowers in favor of any Issuing Bank in any letter of credit application, reimbursement
agreement or similar document, instrument or agreement between or among Borrowers and such Issuing
Bank, including an Application and Agreement For Commercial Letter of Credit, a Master Commercial
Agreement and a Master Standby Agreement entered into with Agent.

          (f) In connection with Inventory purchased pursuant to any Letter of Credit, Borrowers and
Guarantors shall, at Agent’s request, instruct all suppliers, carriers, forwarders, customs
brokers, warehouses or others receiving or holding cash, checks, Inventory, documents or
instruments in which Agent holds a security interest that, upon Agent’s request, such items shall
be delivered to Agent and/or subject to Agent’s order, and if they shall come into such Borrower’s
or Guarantor’s possession, to deliver them, upon Agent’s request, to Agent in their original form;
provided, that, so long as no Default or Event of Default shall then be continuing,
Agent shall not exercise the rights under this clause (f) to have such Persons deliver any
cash, checks, Inventory, documents or instruments so long as the same are held by a Customs Broker
that has entered into a customs broker agreement in form and substance reasonably satisfactory

42

 

to the Agent). Borrowers and Guarantors shall also, at Agent’s request, designate Agent as
the consignee on all bills of lading and other negotiable and non-negotiable documents.

          (g) Each Borrower and Guarantor hereby irrevocably authorizes and directs Issuing Bank to name
such Borrower or Guarantor as the account party therein and to deliver to Agent all instruments,
documents and other writings and property received by Issuing Bank pursuant to any Letter of Credit
and to accept and rely upon Agent’s instructions and agreements with respect to all matters arising
in connection with any Letter of Credit or the Letter of Credit Documents with respect thereto.
Nothing contained herein shall be deemed or construed to grant any Borrower or Guarantor any right
or authority to pledge the credit of Agent or any Lender in any manner. Borrowers and Guarantors
shall be bound by any reasonable interpretation made in good faith by Agent, or Issuing Bank under
or in connection with any Letter of Credit or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any instructions of any Borrower
or Guarantor.

          (h) Immediately upon the issuance or amendment of any Letter of Credit, each Lender shall be
deemed to have irrevocably and unconditionally purchased and received, without recourse or
warranty, an undivided interest and participation to the extent of such Lender’s Pro Rata Share of
the liability with respect to such Letter of Credit and the obligations of Borrowers with respect
thereto (including all Letter of Credit Obligations with respect thereto). Each Lender shall
absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be
obligated to pay to Issuing Bank therefor and discharge when due, its Pro Rata Share of all of such
obligations arising under such Letter of Credit. Without limiting the scope and nature of each
Lender’s participation in any Letter of Credit, to the extent that Issuing Bank has not been
reimbursed or otherwise paid as required hereunder or under any such Letter of Credit, each such
Lender shall pay to Issuing Bank its Pro Rata Share of such unreimbursed drawing or other amounts
then due to Issuing Bank in connection therewith. If it shall be illegal or unlawful for Borrowers
to incur Revolving Loans because of an Event of Default described in Sections 10.1(f),
10.1(g) or 10.1(h) or otherwise or if it shall be illegal or unlawful for any
Lender to be deemed to have assumed a ratable share of the reimbursement obligations owed to an
Issuing Bank, or if the Issuing Bank is a Lender, then (A) immediately and without further action
whatsoever, each Lender shall be deemed to have irrevocably and unconditionally purchased from
Agent (or such Issuing Bank, as the case may be) an undivided interest and participation equal to
such Lender’s Pro Rata Share (based on the Maximum Credit) of the Letter of Credit Obligations in
respect of all Letters of Credit then outstanding and (B) thereafter, immediately upon issuance of
any Letter of Credit, each Lender shall be deemed to have irrevocably and unconditionally purchased
from Agent (or such Issuing Bank, as the case may be) an undivided interest and participation in
such Lender’s Pro Rata Share (based on the Maximum Credit) of the Letter of Credit Obligations with
respect to such Letter of Credit on the date of such issuance. Each Lender shall fund its
participation in all payments or disbursements made under the Letters of Credit in the same manner
as provided in this Agreement with respect to Revolving Loans.

          (i) The obligations of Borrowers to pay each Letter of Credit Obligations and the obligations
of Lenders to make payments to Agent for the account of Issuing Bank with respect to Letters of
Credit shall be absolute, unconditional and irrevocable without necessity of

43

 

presentment, demand, protest or other formalities, and the obligations of each Lender to make
payments to the Issuing Bank with respect to Letters of Credit shall be unconditional and
irrevocable. Such obligations of the Borrowers and Lenders shall be paid strictly in accordance
with the terms hereof under all circumstances, including, without limitation: (i) any lack of
validity or enforceability of any Letter of Credit or this Agreement or any other Financing
Agreement, (ii) the existence of any claim, setoff, defense or other right that any Borrower or any
of their respective Affiliates or any Lender may at any time have against a beneficiary or any
transferee of any Letter of Credit (or any Persons or entities for whom any such transferee may be
acting), Issuing Bank, Agent, any Lender, or any other Person, whether in connection with this
Agreement, the Letter of Credit, the transactions contemplated herein or therein or any unrelated
transaction (including any underlying transaction between any Borrower or any of their respective
Affiliates and the beneficiary for which the Letter of Credit was procured), (iii) any draft,
demand, certificate or any other document presented under any Letter of Credit proving to be
forged, fraudulent, invalid or insufficient in any respect or statement therein being untrue or
inaccurate in any respect, (iv) payment by any Issuing Bank under any Letter of Credit or guaranty
thereof against presentation of a demand, draft or certificate or other document that does not
comply with the terms of such Letter of Credit or guaranty, (v) the failure to satisfy any other
condition set forth in Section 4 (including whether a Default or Event of Default has
occurred and is continuing) or (vi) any other event or circumstance that is similar to the
foregoing. Furthermore, as between Agent, Issuing Bank, any Lender and the Borrowers, Borrowers
assume all risk of the acts and omissions of, or misuse of any Letter of Credit by beneficiaries,
of any Letter of Credit. If such amount is not made available by a Lender when due, Agent shall be
entitled to recover such amount on demand from such Lender with interest thereon, for each day from
the date such amount was due until the date such amount is paid to Agent at the interest rate then
payable by any Borrower in respect of Loans that are Prime Rate Loans. Any such reimbursement
shall not relieve or otherwise impair the obligation of Borrowers to reimburse Issuing Bank under
any Letter of Credit or make any other payment in connection therewith.

          (j) (i) If a Borrower is required to provide cash collateral for any Letter of Credit
Obligations pursuant to this Agreement, including Section 10.2 of this Agreement, prior to
the Commitment Termination Date, such Borrower will pay to Agent for the ratable benefit of itself
and Lenders cash or Cash Equivalents in an amount equal to one hundred five (105%) percent of the
amount of the Letter of Credit Obligations plus the amount of any fees and expenses payable in
connection therewith through the end of the latest expiration date of such Letter of Credit
Obligations. Such funds or Cash Equivalents shall be held by Agent in a cash collateral account
(the “Cash Collateral Account”) maintained at a bank or financial institution acceptable to
Agent. The Cash Collateral Account shall be in the name of the applicable Borrower and shall be
pledged to, and subject to the control of, Agent, for the benefit of Agent and Lenders, in a manner
reasonably satisfactory to Agent. Each Borrower hereby pledges and grants to Agent, on behalf of
itself and Lenders, a security interest in all such funds and Cash Equivalents held in the Cash
Collateral Account from time to time and all proceeds thereof, as security for the payment of all
amounts due in respect of the Letter of Credit Obligations and other Obligations, whether or not
then due. This Agreement shall constitute a security agreement under applicable law.

44

 

               (ii) If any Letter of Credit Obligations, whether or not then due and payable, shall for any
reason be outstanding on the Commitment Termination Date, Borrowers shall either (A) provide cash
collateral therefor in the manner described above, or (B) cause all such Letters of Credit and
guaranties thereof, if any, to be canceled and returned, or (C) deliver a stand-by letter (or
letters) of credit in guaranty of such Letter of Credit Obligations, which stand-by letter (or
letters) of credit shall be of like tenor and duration (plus thirty (30) additional days) as, and
in an amount equal to one hundred five (105%) percent of the amount of the Letter of Credit
Obligations plus the amount of any fees and expenses payable in connection therewith through the
end of the latest expiration date of such Letter of Credit Obligations, and shall be issued by a
Person, and shall be subject to such terms and conditions, as are be satisfactory to Agent in its
sole discretion.

               (iii) From time to time after funds are deposited in the Cash Collateral Account by any
Borrower, whether before or after the Commitment Termination Date, Agent may apply such funds or
Cash Equivalents then held in the Cash Collateral Account to the payment of any amounts, and in
such order as Agent may elect, as shall be or shall become due and payable by such Borrower to
Agent and Lenders with respect to such Letter of Credit Obligations of such Borrower and, upon the
satisfaction in full of all Letter of Credit Obligations of such Borrower, to any other Obligations
of any Borrower then due and payable.

               (iv) No Borrower nor any Person claiming on behalf of or through any Borrower shall have any
right to withdraw any of the funds or Cash Equivalents held in the Cash Collateral Account. Upon
the termination of any Letter of Credit and the payment of all amounts payable by Borrowers to
Agent and Lenders in respect thereof, the Agent shall promptly pay to the Borrowers unless
otherwise required by law such amounts in excess of 105% of the then extant Letter of Credit
Obligations. Interest earned on deposits in the Cash Collateral Account shall be for the account
of the Borrowers and held as additional collateral. Upon payment in full in cash of all
Obligations and the termination of all Commitments to lend hereunder, the Agent shall return to the
Borrowers any accrued interest not otherwise applied to the payment of the Obligations, unless
otherwise required by law.

          (k) Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be
deemed to be the stated amount of such Letter of Credit in effect at such time; provided,
however, that with respect to any Letter of Credit that, by its terms or the terms of any
Letter of Credit Document, provides for one or more automatic increases in the stated amount
thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of
such Letter of Credit after giving effect to all such increases, whether or not such maximum stated
amount is in effect at such time.

          (l) All Existing Letters of Credit shall be deemed to have been issued pursuant hereto, and
from and after the Closing Date shall be subject to and governed by the terms and conditions
hereof.

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SECTION 3  INTEREST AND FEES

     3.1 Interest.

          (a) Borrowers shall pay to Agent, for the benefit of Lenders, interest on the outstanding
principal amount of the Loans at the Interest Rate as provided in clause (d) of this
Section 3.1; provided, however, all interest accruing hereunder on and
after the date of any Event of Default or the Commitment Termination Date shall be payable on
demand.

          (b) Administrative Borrower on behalf of the applicable Borrower may from time to time (i)
request that Prime Rate Loans be converted to Eurodollar Rate Loans, (ii) request to convert any
Eurodollar Rate Loan to a Prime Rate Loan upon payment of an administrative fee of $250 and subject
to payment of Eurodollar breakage costs in accordance with Section 3.3(c) if such
conversion is made prior to the expiration of the Interest Period applicable thereto, or (iii)
request that all or any portion of any Eurodollar Rate Loan be continued as a Eurodollar Rate Loan
upon the expiration of the applicable Interest Period and the succeeding Interest Period of that
continued Loan shall commence on the first day after the last day of the Interest Period of the
Loan to be continued. Any Loan or group of Loans having the same proposed Interest Period to be
made or continued as, or converted into, a Eurodollar Rate Loan must be in a minimum amount of
$5,000,000 and integral multiples of $1,000,000 in excess of such amount. Such request must be
made by 1 p.m. (Eastern time) on the third Business Day prior to (1) the date of any proposed Loan
which is to bear interest at the Eurodollar Rate, (2) the end of each Interest Period with respect
to any Eurodollar Rate Loans to be continued as such, or (3) the date on which Administrative
Borrower wishes to convert any Prime Rate Loan to a Eurodollar Rate Loan for an Interest Period
designated by Administrative Borrower in such election. Any request by Administrative Borrower on
behalf of a Borrower for Eurodollar Rate Loans or to convert Prime Rate Loans to Eurodollar Rate
Loans or to continue any existing Eurodollar Rate Loans shall be irrevocable. Notwithstanding
anything to the contrary contained herein, Agent and Lenders shall not be required to purchase
United States Dollar deposits in the London interbank market or other applicable Eurodollar Rate
market to fund any Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if
Agent and Lenders had purchased such deposits to fund the Eurodollar Rate Loans. Administrative
Borrower on behalf of the applicable Borrower must make such election by notice to Agent in
writing, by telecopy or overnight courier. In the case of any conversion or continuation, such
election must be made pursuant to a written notice (a “Notice of Conversion/Continuation”)
substantially in the form of Exhibit G.

          (c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate Loans upon the last
day of the applicable Interest Period, unless Agent has received and approved a request to continue
such Eurodollar Rate Loan at least three (3) Business Days prior to such last day in accordance
with the terms hereof. Any Eurodollar Rate Loans shall, at Agent’s option, upon notice by Agent to
Parent, be subsequently converted to Prime Rate Loans in the event that this Agreement shall
terminate or not be renewed. Borrowers shall pay to Agent, for the benefit of Lenders, upon demand
by Agent (or Agent may, at its option, charge any loan account of any Borrower) any amounts
required to compensate any Lender or Participant for any loss (including loss of anticipated
profits), cost or expense incurred by such

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person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to
any of the foregoing.

          (d) Interest shall be payable by Borrowers to Agent, for the account of Lenders, monthly in
arrears not later than the first Business Day of each calendar month and shall be calculated on the
basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate on
non-contingent Obligations (other than Eurodollar Rate Loans) shall increase or decrease by an
amount equal to each increase or decrease in the Prime Rate effective on the first day of the month
after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day
of the month in which any such change occurs. In no event shall charges constituting interest
payable by Borrowers to Agent and Lenders exceed the maximum amount or the rate permitted under any
applicable law or regulation, and if any such part or provision of this Agreement is in
contravention of any such law or regulation, such part or provision shall be deemed amended to
conform thereto.

     3.2 Fees.

          (a) Borrowers shall pay to Agent, for the account of Lenders a monthly unused line fee at a
rate equal to the percentage (on a per annum basis) of 0.25% calculated upon the amount by which
the Maximum Credit exceeds the average daily principal balance of the outstanding Revolving Loans
and Letters of Credit during the immediately preceding month (or part thereof). Such fee shall be
payable on the first Business Day of each month in arrears and on the Commitment Termination Date
and shall be calculated based on a three hundred sixty (360) day year and actual days elapsed.

          (b) Borrowers agree to pay to Agent the other fees and amounts set forth in the Fee Letter in
the amounts and at all times specified therein.

     3.3 Changes in Laws and Increased Costs of Loans.

          (a) If after the date hereof, either (i) any change in, or in the interpretation of, any law
or regulation is introduced, including, without limitation, with respect to reserve requirements,
applicable to any Lender or any banking or financial institution from whom any Lender borrows funds
or obtains credit (a “Funding Bank”), or (ii) a Funding Bank or any Lender complies with any future
guideline or request from any central bank or other Governmental Authority or (iii) a Funding Bank,
any Lender or Issuing Bank determines that the adoption of any applicable law, rule or regulation
regarding capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any Governmental Authority, central bank or comparable agency charged
with the interpretation or administration thereof has or would have the effect described below, or
a Funding Bank, any Lender or Issuing Bank complies with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central bank or comparable
agency, and in the case of any event set forth in this clause (iii), such adoption, change or
compliance has or would have the direct or indirect effect of reducing the rate of return on any
Lender’s or Issuing Bank’s capital as a consequence of its obligations hereunder to a level below
that which such Lender or Issuing Bank could have achieved but for such adoption, change or
compliance (taking into consideration the Funding Bank’s or Lender’s or Issuing Bank’s policies
with respect to capital

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adequacy) by an amount deemed by such Lender or Issuing Bank to be material, and the result of
any of the foregoing events described in clauses (i), (ii) or (iii) is or
results in an increase in the cost to any Lender or Issuing Bank of funding or maintaining the
Loans, the Letters of Credit or its Commitment, then Borrowers and Guarantors shall from time to
time upon demand by Agent pay to Agent additional amounts sufficient to indemnify such Lender, as
the case may be, against such increased cost on an after-tax basis (after taking into account
applicable deductions and credits in respect of the amount indemnified). A certificate as to the
amount of such increased cost shall be submitted to Administrative Borrower by Agent or the
applicable Lender and shall be conclusive, absent manifest error.

          (b) If prior to the first day of any Interest Period, (i) Agent shall have determined in good
faith (which determination shall be conclusive and binding upon Borrowers and Guarantors) that, by
reason of circumstances affecting the relevant market, adequate and reasonable means do not exist
for ascertaining the Adjusted Eurodollar Rate for such Interest Period, (ii) Agent has received
notice from the Required Lenders that the Adjusted Eurodollar Rate determined or to be determined
for such Interest Period will not adequately and fairly reflect the cost to Lenders of making or
maintaining Eurodollar Rate Loans during such Interest Period, or (iii) Dollar deposits in the
principal amounts of the Eurodollar Rate Loans to which such Interest Period is to be applicable
are not generally available in the London interbank market, Agent shall give telecopy or telephonic
notice thereof to Administrative Borrower as soon as practicable thereafter, and will also give
prompt written notice to Administrative Borrower when such conditions no longer exist. If such
notice is given (A) any Eurodollar Rate Loans requested to be made on the first day of such
Interest Period shall be made as Prime Rate Loans, (B) any Loans that were to have been converted
on the first day of such Interest Period to or continued as Eurodollar Rate Loans shall be
converted to or continued as Prime Rate Loans and (C) each outstanding Eurodollar Rate Loan shall
be converted, on the last day of the then-current Interest Period thereof, to Prime Rate Loans.
Until such notice has been withdrawn by Agent, no further Eurodollar Rate Loans shall be made or
continued as such, nor shall Administrative Borrower on behalf of any Borrower have the right to
convert Prime Rate Loans to Eurodollar Rate Loans.

          (c) Notwithstanding any other provision herein, if the adoption of or any change in any law,
treaty, rule or regulation or final, non-appealable determination of an arbitrator or a court or
other Governmental Authority or in the interpretation or application thereof occurring after the
date hereof shall make it unlawful for Agent or any Lender to make or maintain Eurodollar Rate
Loans as contemplated by this Agreement, (i) Agent or such Lender shall promptly give written
notice of such circumstances to Administrative Borrower (which notice shall be withdrawn whenever
such circumstances no longer exist), (ii) the commitment of such Lender hereunder to make
Eurodollar Rate Loans, continue Eurodollar Rate Loans as such and convert Prime Rate Loans to
Eurodollar Rate Loans shall forthwith be canceled and, until such time as it shall no longer be
unlawful for such Lender to make or maintain Eurodollar Rate Loans, such Lender shall then have a
commitment only to make a Prime Rate Loan when a Eurodollar Rate Loan is requested and (iii) such
Lender’s Loans then outstanding as Eurodollar Rate Loans, if any, shall be converted automatically
to Prime Rate Loans on the respective last days of the then current Interest Periods with respect
to such Loans or within such earlier period as required by law. If any such conversion of a
Eurodollar Rate Loan occurs on a day which is

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not the last day of the then current Interest Period with respect thereto, Borrowers and
Guarantors shall pay to such Lender such amounts, if any, as may be required pursuant to
Section 3.3(d) below.

          (d) Borrowers and Guarantors shall jointly and severally indemnify Agent and each Lender and
to hold Agent and each Lender harmless from any loss or expense which Agent or such Lender may
sustain or incur as a consequence of (i) default by any Borrower in making a borrowing of,
conversion into or extension of Eurodollar Rate Loans after Administrative Borrower on behalf of
such Borrower has given a notice requesting the same in accordance with the provisions of this
Agreement, (ii) default by any Borrower in making any prepayment of a Eurodollar Rate Loan after
Administrative Borrower on behalf of such Borrower has given a notice thereof in accordance with
the provisions of this Agreement, and (iii) the making of a prepayment of Eurodollar Rate Loans on
a day which is not the last day of an Interest Period with respect thereto. With respect to
Eurodollar Rate Loans, such indemnification may include an amount equal to the excess, if any, of
(A) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed,
converted or extended, for the period from the date of such prepayment or of such failure to
borrow, convert or extend to the last day of the applicable Interest Period (or, in the case of a
failure to borrow, convert or extend, the Interest Period that would have commenced on the date of
such failure) in each case at the applicable rate of interest for such Eurodollar Rate Loans
provided for herein over (B) the amount of interest (as determined by such Agent or such Lender)
which would have accrued to Agent or such Lender on such amount by placing such amount on deposit
for a comparable period with leading banks in the interbank Eurodollar market. This covenant shall
survive the termination or non-renewal of this Agreement and the payment of the Obligations.

SECTION 4  CONDITIONS PRECEDENT

     4.1 Conditions Precedent to Initial Loans and Letters of Credit. The obligation of
Agent and Lenders to make the initial Loans or of Issuing Bank to issue the initial Letters of
Credit hereunder is subject to the satisfaction of, or waiver of, immediately prior to or
concurrently with the making of such Loan or the issuance of such Letter of Credit of each of the
following conditions precedent:

          (a) this Agreement or counterparts hereof shall have been duly executed by, and delivered to,
Borrowers, Guarantors, Agent and Lenders; and Agent shall have received such documents,
instruments, agreements and legal opinions as Agent shall reasonably request in connection with the
transactions contemplated by this Agreement and the other Financing Agreement, including all those
listed in the Closing Checklist attached hereto as Annex 1, each in form and substance
reasonably satisfactory to Agent;

          (b) Agent shall have received, in form and substance satisfactory to Agent, all releases,
terminations and such other documents as Agent may request to evidence and effectuate the
termination by the Existing Lenders of their respective financing arrangements with Borrowers and
Guarantors;

          (c) all requisite corporate action and proceedings in connection with this Agreement and the
other Financing Agreements shall be satisfactory in form and substance to

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Agent, and Agent shall have received all information and copies of all documents, including
records of requisite corporate action and proceedings which Agent may have requested in connection
therewith, such documents to be certified by appropriate corporate officers or Governmental
Authority (and including a copy of the certificate of incorporation or formation of each Borrower
and Guarantor certified by the Secretary of State (or equivalent Governmental Authority) which
shall set forth the same complete name of such Borrower or Guarantor as is set forth herein and
such document as shall set forth the organizational identification number of each Borrower or
Guarantor, if one is issued in its jurisdiction of incorporation or formation);

          (d) a certificate signed by the chief executive officer, chief financial officer, president or
vice president of each Borrower, certifying that since February 2, 2008 no event has occurred, that
alone or together with other events, could reasonably be expected to have a Material Adverse
Effect;

          (e) Agent shall have completed a field review of the Records and such other information with
respect to the Collateral as Agent may require to determine the amount of Loans available to
Borrowers (including, without limitation, current perpetual inventory records with respect to the
distribution center of Borrowers and/or roll-forwards of Accounts and Inventory through the date of
closing and test counts of the Inventory in a manner reasonably satisfactory to Agent, together
with such supporting documentation as may be necessary or appropriate, and other documents and
information that will enable Agent to accurately identify and verify the Collateral), the results
of which in each case shall be reasonably satisfactory to Agent, not more than seven (7) Business
Days prior to the date hereof or such earlier date as Agent may agree;

          (f) Agent shall have received, in form and substance reasonably satisfactory to Agent, (i) an
opening pro-forma balance sheet of Parent and its Subsidiaries (on a consolidated basis),
reflecting the transactions contemplated hereby and (ii) the Disclosure Letter attaching the
projected income statements, balance sheets and statements of cash flow for Parent and its
Subsidiaries (on a consolidated basis) prepared on a monthly basis for the period through the end
of the 2009 Fiscal Year and thereafter, on an annual basis for each Fiscal Year through the end of
the 2012 Fiscal Year, in each case with the results and assumptions set forth in all of such
projections in form and substance reasonably satisfactory to Agent;

          (g) Agent shall have received a certificate signed by the chief executive officer or chief
financial officer of Administrative Borrower, in form and substance satisfactory to Agent,
attaching all consents, waivers, acknowledgments and other agreements from third persons which
Agent may deem necessary or desirable in order to permit, protect and perfect its security
interests in and liens upon the Collateral or to effectuate the provisions or purposes of this
Agreement and the other Financing Agreements, including, without limitation, Collateral Access
Agreements (other than from the lessors of retail store locations) and Credit Card Acknowledgments;

          (h) Adjusted Excess Availability as determined by Agent, as of the Closing Date, shall be not
less than $12,000,000 after giving effect to the Plan of Reorganization, the initial Loans made or
to be made, the Letters of Credit issued or to be issued in connection with the initial
transactions hereunder, the incurrence of the Specified Subordinated Indebtedness, and

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the payment of all trade payables and expenses and liabilities of Borrowers in the ordinary
course of business;

          (i) Agent shall have received evidence, in form and substance satisfactory to Agent, that
Agent has a valid perfected first priority security interest in all of the Collateral;

          (j) Agent shall have received and reviewed lien search results for each Borrower and Guarantor
in such jurisdictions as Agent shall request, which search results shall be in form and substance
satisfactory to Agent;

          (k) Agent shall have received environmental audits of the Baldwyn Real Property conducted by
an independent environmental engineering firm acceptable to Agent, and in form, scope and
methodology reasonably satisfactory to Agent, the results of which shall be satisfactory to Agent;

          (l) Agent shall have received, in form and substance reasonably satisfactory to Agent, a valid
and effective title insurance policy issued by a company and agent acceptable to Agent: (i)
insuring the priority, amount and sufficiency of the Closing Date Mortgaged Property, (ii) insuring
against matters that would be disclosed by surveys and (iii) containing any legally available
endorsements, assurances or affirmative coverage requested by Agent for protection of its
interests;

          (m) Agent shall have received originals of the shares of the stock certificates (if any)
representing all of the issued and outstanding shares of the Capital Stock of each Borrower and
Guarantor (other than Parent) and owned by any Borrower or Guarantor, in each case together with
stock powers duly executed in blank with respect thereto;

          (n) Agent shall have received a Borrowing Base Certificate setting forth the Loans and Letters
of Credit available to Borrowers as of the date hereof as completed in a manner reasonably
satisfactory to Agent and duly authorized, executed and delivered on behalf of Borrowers;

          (o) Agent shall have received evidence of insurance and loss payee endorsements required
hereunder and under the other Financing Agreements, in form and substance satisfactory to Agent,
and certificates of insurance policies and/or endorsements naming Agent as loss payee;

          (p) Agent shall have received a written appraisal as to the Inventory of Borrowers and
Guarantors and the Baldwyn Real Property, in each case by an appraiser acceptable to Agent, in
form, scope and methodology reasonably acceptable to Agent, addressed to Agent and upon which Agent
and Lenders are expressly permitted to rely;

          (q) no material pending or threatened, litigation, proceeding, bankruptcy (other than the
Reorganization Cases) or insolvency, injunction, order or claims with respect to Borrowers and
Guarantors shall exist;

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          (r) as of the date hereof and after giving effect to the transactions contemplated hereby, no
defaults or events of default on any material Indebtedness or any other Material Contracts of
Borrowers or Guarantors shall exist or have occurred and be continuing;

          (s) Agent shall have received, in form and substance reasonably satisfactory to Agent, such
opinion letters of counsel to Borrowers and Guarantors with respect to the Financing Agreements and
such other matters as Agent may request;

          (t) Agent shall have received the audited financial statements of Borrowers and their
Subsidiaries for the Fiscal Year ended February 2, 2008, and such financial statements shall be in
form and substance reasonably satisfactory to Agent;

          (u) Agent shall have received satisfactory background and reference checks on (i) each
Borrower and each Guarantor and (ii) the chief executive officer, chief financial officer, chief
operating officer and each other officer and director of each Borrower and each Guarantor, in each
case, as determined by the Agent, and the Borrowers and the Guarantors shall have delivered all
such documents and instruments necessary to effectuate such background and reference checks;

          (v) Agent shall have received evidence satisfactory to Agent that Borrowers shall have
received the Specified Subordinated Indebtedness, together with copies, certified by the chief
executive officer or chief financial officer of the Administrative Borrower of all Specified
Subordinated Indebtedness Documents. The terms of the Specified Subordinated Indebtedness and the
Specified Subordinated Indebtedness Documents shall be reasonably acceptable to Agent, including,
without limitation, with respect to payment subordination and blockage, remedy standstill periods,
cross-default provisions and agreement not to contest the Obligations and the liens granted to
Agent under the Financing Agreements, and the Obligations arising under the Financing Agreements
and the liens granted to Agent under the Financing Agreements shall be senior and first in
priority, as applicable, in all respects;

          (w) all motions and other documents to be filed with and submitted to the Bankruptcy Court in
connection with this Agreement and the Plan of Reorganization and the approval hereof and thereof
shall be satisfactory in form and substance to Agent. All service and notice requirements in
connection this Agreement and the Plan of Reorganization shall have been timely complied with and
such requirements have been fulfilled in accordance with all applicable laws and rules. A Final
Order confirming the Plan of Reorganization in form and substance acceptable to Agent (the
“Confirmation Order”) shall have been entered in the Reorganization Cases, which order
shall not have been subject to injunction, stayed, modified, appealed, reversed or otherwise
affected;

          (x) Borrowers’ Plan of Reorganization, as confirmed, shall be in form and substance
satisfactory to Agent, including, without limitation, providing for the discharge of all
Indebtedness and other claims against the Borrowers existing as of the Petition Date, the
termination of all commitments relating thereto, and the termination, release and discharge of all
liens or security interests granted thereunder (other than Permitted Liens), in each case on terms
satisfactory to the Agent. The Bankruptcy Court shall have approved any amendments or
modifications to the Plan of Reorganization and entered any and all related orders requested or

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approved by Agent in connection therewith, and no other amendments or modifications thereto
shall have occurred except as shall have been consented to by Agent or the Required Lenders, as
appropriate. All conditions precedent to the Effective Date (as defined in the Plan of
Reorganization) of the Plan of Reorganization shall have been met (or the Agent shall have granted
its prior written consent to a waiver thereof) and the Effective Date of the Plan of Reorganization
shall have occurred or shall be scheduled to occur but for the initial Loans under this Agreement
to be made on the Closing Date. The Confirmation Order shall be a Final Order and shall not have
been reversed, modified, amended, subject to injunction, or stayed, shall be in full force and
effect, and, unless otherwise agreed by Agent, all appeal periods relating to the Confirmation
Order shall have expired, and, unless otherwise agreed by Agent, no appeals from the Confirmation
Order shall be outstanding. Except with the prior written consent of the Agent, the Bankruptcy
Court’s retention of jurisdiction under the Final Order confirming the Plan of Reorganization shall
not extend to nor govern the enforcement of the Financing Agreements from and after the Closing
Date, or any rights or remedies relating thereto;

          (y) Agent shall have completed its legal due diligence with results reasonably satisfactory to
Agent (including without limitation Agent’s reasonable satisfactory with any previously undisclosed
issues of a business nature that arise in connection with the legal due diligence) for which Agent
previously did not have actual knowledge of such issues prior to the date the Commitment Letter
dated as of April 8, 2008 having been executed and which such issues affect any Borrower or any of
its Subsidiaries or the Transaction that in the Agent’s reasonable judgment is inconsistent in a
material and adverse manner with any such information disclosed to the Agent prior to the date of
such Commitment Letter. Without limiting the generality of the foregoing, the corporate structure
of the Borrowers and their subsidiaries, documentation evidencing Indebtedness of the Borrowers and
their subsidiaries, material contracts and Governing Documents of the Borrowers and their
subsidiaries shall be reasonably acceptable to the Agent; and

          (z) Agent shall have received an officer’s certificate duly executed by chief executive
officer, president, vice president or treasurer of each of the Borrowers and Guarantors certifying
and attesting that, as of the Closing Date, (i) no appeal of the Confirmation Order has been filed;
(ii) no request for a stay of the Confirmation Order pending appeal has been made; and (iii) the
Confirmation Order has not been stayed in any manner.

          (aa) Agent shall have received such other documents and instruments reasonably as Agent or its
counsel may require or request.

     4.2 Conditions Precedent to All Loans and Letters of Credit . The obligation of
Lenders to make the Loans, including the initial Loans, or of the Issuing Bank to issue any Letter
of Credit, including the initial Letters of Credit and any further Loans and Letters of Credit, is
subject to the further satisfaction of, or waiver of, immediately prior to or concurrently with the
making of each such Loan or the issuance of such Letter of Credit of each of the following
conditions precedent:

          (a) all representations and warranties contained herein and in the other Financing Agreements
shall be true and correct in all material respects with the same effect as though such
representations and warranties had been made on and as of the date of the making of

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each such Loan or providing each such Letter of Credit and after giving effect thereto, except
to the extent that such representations and warranties expressly relate solely to an earlier date
(in which case such representations and warranties shall have been true and accurate in all
material respects on and as of such earlier date);

          (b) no law, regulation, order, judgment or decree of any Governmental Authority shall exist,
and no action, suit, investigation, litigation or proceeding shall be pending or threatened in any
court or before any arbitrator or Governmental Authority, which (i) purports to enjoin, prohibit,
restrain or otherwise affect (A) the making of the Loans or providing the Letters of Credit, or (B)
the consummation of the transactions contemplated pursuant to the terms hereof or the other
Financing Agreements or (ii) has or has a reasonable likelihood of having a Material Adverse
Effect; and

          (c) no Default or Event of Default shall exist or have occurred and be continuing on and as of
the date of the making of such Loan or providing each such Letter of Credit and after giving effect
thereto;

          (d) Borrowers shall be in compliance with the covenant set forth in Section 9.19; and

          (e) the Final Order confirming the Plan of Reorganization shall be in full force and effect
and shall not have been vacated, reversed, modified, amended or stayed.

SECTION 5  GRANT AND PERFECTION OF SECURITY INTEREST

     5.1 Grant of Security Interest. To secure payment and performance of all Obligations,
each Borrower and Guarantor hereby grants to Agent, for itself and the benefit of the Secured
Parties, a continuing security interest in, a lien upon, and a right of set off against, and hereby
assigns to Agent, for itself and the benefit of the Lenders, as security, all of the following
personal property, and interests in personal property, of each Borrower and Guarantor, whether now
owned or hereafter acquired or existing, and wherever located (together with all other collateral
security for the Obligations at any time granted to or held or acquired by Agent or any Lender,
collectively, the “Collateral”), including:

          (a) all Accounts;

          (b) all general intangibles, including, without limitation, Intellectual Property;

          (c) all goods, including without limitation, Inventory and Equipment;

          (d) all Real Property (other than leasehold estates) and fixtures;

          (e) all chattel paper, including without limitation, all tangible and electronic chattel
paper;

          (f) all instruments. including without limitation, all promissory notes;

          (g) all documents;

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          (h) all deposit accounts;

          (i) all letters of credit, banker’s acceptances and similar instruments and including all
letter of credit rights;

          (j) all supporting obligations and all present and future liens, security interests, rights,
remedies, title and interest in, to and in respect of Receivables and other Collateral, including
(i) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit
and credit and other insurance related to the Collateral; (ii) rights of stoppage in transit,
replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or
secured party; (iii) goods described in invoices, documents, contracts or instruments with respect
to, or otherwise representing or evidencing, other Collateral, including returned, repossessed and
reclaimed goods; and (iv) deposits by and property of account debtors and other persons securing
the obligations of account debtors;

          (k) all (i) investment property (including securities, whether certificated or uncertificated,
securities accounts, security entitlements, commodity contracts or commodity accounts) and (ii)
monies, credit balances, deposits and other property of any Borrower or Guarantor now or hereafter
held or received by or in transit to Agent or any Lender or its Affiliates at any other depository
or other institution from or for the account of any Borrower or Guarantor, whether for safekeeping,
pledge, custody transmission, collection or otherwise;

          (l) all commercial tort claims, including, without limitation, those identified on Schedule
5.2(i);

          (m) to the extent not described above, all Receivables;

          (n) all Records; and

          (o) all products and proceeds of the foregoing, in any form, including insurance proceeds and
all claims against third parties for loss or damage to or destruction of or other involuntary
conversion of any kind or nature of any or all of the other Collateral.

     5.2 Perfection of Security Interests.

          (a) Each Borrower and Guarantor irrevocably and unconditionally authorizes Agent (or its
agent) to file at any time and from time to time such financing statements with respect to the
Collateral naming Agent or its designee as the secured party and such Borrower or Guarantor as
debtor, as Agent may require, and including any other information with respect to such Borrower or
Guarantor or otherwise required by part 5 of Article 9 of the Uniform Commercial Code of such
jurisdiction as Agent may determine, together with any amendment and continuations with respect
thereto, which authorization shall apply to all financing statements filed on, prior to or after
the date hereof. Each Borrower and Guarantor hereby ratifies and approves all financing statements
naming Agent or its designee as secured party and such Borrower or Guarantor, as the case may be,
as debtor with respect to the Collateral (and any amendments with respect to such financing
statements) filed by or on behalf of Agent prior to the date hereof and ratifies and confirms the
authorization of Agent to file such financing statements

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(and amendments, if any). Each Borrower and Guarantor hereby authorizes Agent to adopt on
behalf of such Borrower and Guarantor any symbol required for authenticating any electronic filing.
In the event that the description of the collateral in any financing statement naming Agent or its
designee as the secured party and any Borrower or Guarantor as debtor includes assets and
properties of such Borrower or Guarantor that do not at any time constitute Collateral, whether
hereunder, under any of the other Financing Agreements or otherwise, the filing of such financing
statement shall nonetheless be deemed authorized by such Borrower or Guarantor to the extent of the
Collateral included in such description and it shall not render the financing statement ineffective
as to any of the Collateral or otherwise affect the financing statement as it applies to any of the
Collateral. In no event shall any Borrower or Guarantor at any time file, or permit or cause to be
filed, any correction statement or termination statement with respect to any financing statement
(or amendment or continuation with respect thereto) naming Agent or its designee as secured party
and such Borrower or Guarantor as debtor.

          (b) Each Borrower and Guarantor does not have any chattel paper (whether tangible or
electronic) or instruments as of the date hereof, except as set forth on Schedule 5.2(b).
In the event that any Borrower or Guarantor shall be entitled to or shall receive any chattel paper
or instrument after the date hereof, Borrowers and Guarantors shall promptly notify Agent thereof
in writing. Promptly upon the receipt thereof by or on behalf of any Borrower or Guarantor
(including by any agent or representative), such Borrower or Guarantor shall deliver, or cause to
be delivered to Agent, all tangible chattel paper and instruments that such Borrower or Guarantor
has or may at any time acquire, accompanied by such instruments of transfer or assignment duly
executed in blank as Agent may from time to time specify, in each case except as Agent may
otherwise agree. At Agent’s option, each Borrower and Guarantor shall, or Agent may at any time on
behalf of any Borrower or Guarantor, cause the original of any such instrument or chattel paper to
be conspicuously marked in a form and manner acceptable to Agent with the following legend
referring to chattel paper or instruments as applicable: “This [chattel paper][instrument] is
subject to the security interest of General Electric Capital Corporation in its capacity as Agent
and any sale, transfer, assignment or encumbrance of this [chattel paper][instrument] violates the
rights of such secured party.”

          (c) In the event that any Borrower or Guarantor shall at any time hold or acquire an interest
in any electronic chattel paper or any “transferable record” (as such term is defined in Section
201 of the Federal Electronic Signatures in Global and National Commerce Act or in Section 16 of
the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction), such Borrower
or Guarantor shall promptly notify Agent thereof in writing. Promptly upon Agent’s request, such
Borrower or Guarantor shall take, or cause to be taken, such actions as Agent may request to give
Agent control of such electronic chattel paper under Section 9-105 of the UCC and control of such
transferable record under Section 201 of the Federal Electronic Signatures in Global and National
Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as in
effect in such jurisdiction.

          (d) Each Borrower and Guarantor does not have any deposit accounts as of the date hereof,
except as set forth on Schedule 5.2(d). Borrowers and Guarantors shall not, directly or
indirectly, after the date hereof open, establish or maintain any deposit account unless each of
the following conditions is satisfied: (i) Agent shall have received not less than five (5)

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Business Days prior written notice of the intention of any Borrower or Guarantor to open or establish such account which notice shall specify in reasonable detail and specificity
acceptable to Agent the name of the account, the owner of the account, the name and address of the
bank at which such account is to be opened or established, the individual at such bank with whom
such Borrower or Guarantor is dealing and the purpose of the account, except as to any
Store Account opened or established after the date hereof, so long as no Event of Default shall
exist or have occurred and be continuing, Agent shall only have received such information as to
such Store Account on the next monthly report with respect to deposit accounts in accordance with
Section 7.1(a) hereof, (ii) the bank where such account is opened or maintained shall be
acceptable to Agent, and (iii) on or before the opening of such deposit account (other than as to a
Store Account so long as no Default or Event of Default shall exist or have occurred and be
continuing), such Borrower or Guarantor shall deliver to Agent a Deposit Account Control Agreement
with respect to such deposit account duly authorized, executed and delivered by such Borrower or
Guarantor and the bank at which such deposit account is opened and maintained. At all times the
Borrowers and Guarantors shall maintain a Deposit Account Control Agreement in full force and
effect with respect to the Concentration Account and the Elavon Deposit Account. The terms of this
subsection (d) shall not apply to deposit accounts specifically and exclusively used for
payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of any
Borrower’s or Guarantor’s salaried employees.

          (e) No Borrower or Guarantor owns or holds, directly or indirectly, beneficially or as record
owner or both, any investment property, as of the date hereof, or have any investment account,
securities account, commodity account or other similar account with any bank or other financial
institution or other securities intermediary or commodity intermediary as of the date hereof, in
each case except as set forth on Schedule 5.2(e).

          (f) In the event that any Borrower or Guarantor shall be entitled to or shall at any time
after the date hereof hold or acquire any certificated securities, such Borrower or Guarantor shall
promptly endorse, assign and deliver the same to Agent, accompanied by such instruments of transfer
or assignment duly executed in blank as Agent may from time to time specify. If any securities,
now or hereafter acquired by any Borrower or Guarantor are uncertificated and are issued to such
Borrower or Guarantor or its nominee directly by the issuer thereof, such Borrower or Guarantor
shall immediately notify Agent thereof and shall cause the issuer to agree to comply with
instructions from Agent as to such securities, without further consent of any Borrower or Guarantor
or such nominee.

          (g) Borrowers and Guarantors shall not, directly or indirectly, after the date hereof open,
establish or maintain any investment account, securities account, commodity account or any other
similar account (other than a deposit account) with any securities intermediary or commodity
intermediary unless each of the following conditions is satisfied: (A) Agent shall have received
not less than five (5) Business Days prior written notice of the intention of such Borrower or
Guarantor to open or establish such account which notice shall specify in reasonable detail and
specificity acceptable to Agent the name of the account, the owner of the account, the name and
address of the securities intermediary or commodity intermediary at which such account is to be
opened or established, the individual at such intermediary with whom such Borrower or Guarantor is
dealing and the purpose of the account,

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(B) the securities intermediary or commodity intermediary
(as the case may be) where such account is opened or maintained shall be acceptable to Agent, and (C) on or before the opening
of such investment account, securities account or other similar account with a securities
intermediary or commodity intermediary, such Borrower or Guarantor shall as Agent may specify
either (i) execute and deliver, and cause to be executed and delivered to Agent, an Investment
Property Control Agreement with respect thereto duly authorized, executed and delivered by such
Borrower or Guarantor and such securities intermediary or commodity intermediary or (ii) arrange
for Agent to become the entitlement holder with respect to such investment property on terms and
conditions acceptable to Agent.

          (h) Borrowers and Guarantors are not the beneficiary or otherwise entitled to any right to
payment under any letter of credit, banker’s acceptance or similar instrument as of the date
hereof, except as set forth on Schedule 5.2(h). In the event that any Borrower or
Guarantor shall be entitled to or shall receive any right to payment under any letter of credit,
banker’s acceptance or any similar instrument, whether as beneficiary thereof or otherwise after
the date hereof, such Borrower or Guarantor shall promptly notify Agent thereof in writing. Such
Borrower or Guarantor shall immediately, as Agent may specify, either (i) deliver, or cause to be
delivered to Agent, with respect to any such letter of credit, banker’s acceptance or similar
instrument, the written agreement of the issuer and any other nominated person obligated to make
any payment in respect thereof (including any confirming or negotiating bank), in form and
substance reasonably satisfactory to Agent, consenting to the assignment of the proceeds of the
letter of credit to Agent by such Borrower or Guarantor and agreeing to make all payments thereon
directly to Agent or as Agent may otherwise direct or (ii) cause Agent to become, at Borrowers’
expense, the transferee beneficiary of the letter of credit, banker’s acceptance or similar
instrument (as the case may be).

          (i) Borrowers and Guarantors do not have any commercial tort claims as of the date hereof,
except as set forth on Schedule 5.2(i). In the event that any Borrower or Guarantor shall
at any time after the date hereof have any commercial tort claims, such Borrower or Guarantor shall
promptly notify Agent thereof in writing, which notice shall (i) set forth in reasonable detail the
basis for and nature of such commercial tort claim and (ii) include the express grant by such
Borrower or Guarantor to Agent of a security interest in such commercial tort claim (and the
proceeds thereof). In the event that such notice does not include such grant of a security
interest, the sending thereof by such Borrower or Guarantor to Agent shall be deemed to constitute
such grant to Agent. Upon the sending of such notice, any commercial tort claim described therein
shall constitute part of the Collateral and shall be deemed included therein. Without limiting the
authorization of Agent provided in Section 5.2(a) hereof or otherwise arising by the
execution by such Borrower or Guarantor of this Agreement or any of the other Financing Agreements,
Agent is hereby irrevocably authorized from time to time and at any time to file such financing
statements naming Agent or its designee as secured party and such Borrower or Guarantor as debtor,
or any amendments to any financing statements, covering any such commercial tort claim as
Collateral. In addition, each Borrower and Guarantor shall promptly upon Agent’s request, execute
and deliver, or cause to be executed and delivered, to Agent such other agreements, documents and
instruments as Agent may require in connection with such commercial tort claim.

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          (j) Borrowers and Guarantors do not have any goods, documents of title or other Collateral in
the custody, control or possession of a third party as of the Closing Date, except as set forth on
Schedule 5.2(j) and except for goods located in the United States in transit to a location
of a Borrower or Guarantor permitted herein in the ordinary course of business of such Borrower or
Guarantor in the possession of the carrier transporting such goods. In the event that any goods,
documents of title or other Collateral are at any time after the date hereof in the custody,
control or possession of any other person not referred to on Schedule 5.2(j) or such
carriers, Borrowers and Guarantors shall promptly notify Agent thereof in writing. Promptly upon
Agent’s request, Borrowers and Guarantors shall deliver to Agent a Collateral Access Agreement duly
authorized, executed and delivered by such person and the Borrower or Guarantor that is the owner
of such Collateral.

          (k) Borrowers and Guarantors shall take any other actions reasonably requested by Agent from
time to time to cause the attachment, perfection and first priority of, and the ability of Agent to
enforce, the security interest of Agent in any and all of the Collateral, including, without
limitation, (i) executing, delivering and, where appropriate, filing financing statements and
amendments relating thereto under the UCC or other applicable law, to the extent, if any, that any
Borrower’s or Guarantor’s signature thereon is required therefor, (ii) causing Agent’s name to be
noted as secured party on any certificate of title for a titled good if such notation is a
condition to attachment, perfection or priority of, or ability of Agent to enforce, the security
interest of Agent in such Collateral, (iii) complying with any provision of any statute, regulation
or treaty of the United States as to any Collateral if compliance with such provision is a
condition to attachment, perfection or priority of, or ability of Agent to enforce, the security
interest of Agent in such Collateral, (iv) obtaining the consents and approvals of any Governmental
Authority or third party, including, without limitation, any consent of any licensor, lessor or
other person obligated on Collateral, and (v) taking all actions required by any earlier versions
of the UCC or by other law, as applicable in any relevant jurisdiction.

SECTION 6  COLLECTION AND ADMINISTRATION

     6.1 Borrowers’ Loan Accounts. Agent shall maintain one or more loan account(s) on its
books in which shall be recorded (a) all Loans, Letters of Credit and other Obligations and the
Collateral, (b) all payments made by or on behalf of any Borrower or Guarantor and (c) all other
appropriate debits and credits as provided in this Agreement, including fees, charges, costs,
expenses and interest. All entries in the loan account(s) shall be made in accordance with Agent’s
customary practices as in effect from time to time.

     6.2 Statements. Agent shall render to Administrative Borrower each month a statement
setting forth the balance in Borrowers’ loan account(s) maintained by Agent for Borrowers pursuant
to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each
such statement shall be subject to subsequent adjustment by Agent but shall, absent manifest errors
or omissions, be considered correct and deemed accepted by Borrowers and Guarantors and
conclusively binding upon Borrowers and Guarantors as an account stated except to the extent that
Agent receives a written notice from Administrative Borrower of any specific exceptions of
Administrative Borrower thereto within forty-five (45) days after the date such statement has been
received by Parent. Only those items expressly objected to in such

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notice shall be deemed to be disputed by Administrative Borrower. Until such time as Agent
shall have rendered to Administrative Borrower a written statement as provided above, the balance
in any Borrower’s loan account(s) shall be presumptive evidence of the amounts due and owing to
Agent and Lenders by Borrowers and Guarantors.

     6.3 Cash Management; Collection of Collateral Proceeds.

          (a) Each Borrower and Guarantor shall establish and maintain, at its expense, deposit account
arrangements and merchant payment arrangements with the banks set forth on Schedule 8.10
and subject to Section 5.2(d) hereof, such other banks as such Borrower or Guarantor may
hereafter select. The banks set forth on Schedule 8.10 constitute all of the banks with
which Borrowers and Guarantors have deposit account arrangements and merchant payment arrangements
as of the date hereof, which such Schedule identifies those deposit accounts that constitute a
Store Account or otherwise describes the nature of the use of such deposit account by such
Borrower.

          (b) (i)  Each Borrower shall deposit all proceeds from sales of Inventory in every form,
including, without limitation, cash, checks, credit card sales drafts, credit card sales or charge
slips or receipts and other forms of daily store receipts, from each retail store location of such
Borrower on each Business Day into the Store Account of such Borrower used solely for such purpose
or the Concentration Account; provided, that, each retail store of a Borrower shall
be permitted to retain cash on hand in an amount not to exceed $1,000 immediately after giving
effect to the deposit of funds from such store into the applicable Store Account or Concentration
Account. All such funds deposited into the Store Accounts shall be sent by wire transfer or other
electronic funds transfer on each Business Day to the Concentration Account as provided in
Section 6.3(c), except for nominal amounts required to be maintained in such Store Accounts
under the terms of such Borrower’s arrangements with the bank at which such Store Accounts are
maintained (which nominal amounts shall not at any time exceed $3,000 as to each Store Account).

               (ii) Each Borrower shall cause Elavon Processor to deposit into the Elavon Deposit Account or
the Concentration Account all amounts payable by Elavon Processor to any Borrower, such deposits to
occur at least twice per calendar week by wire transfer or other electronic funds transfer. All
amounts in the Elavon Deposit Account in excess of $200,000 in the aggregate shall be transferred
by wire transfer or other electronic funds transfer on each Business Day to the Concentration
Account as provided in Section 6.3(c).

               (iii) Each Borrower shall cause all Credit Card Processors (other than Elavon Processor) and
all Credit Card Issuers to deposit into the Concentration Account as provided in Section
6.3(c) all amounts payable from such Credit Card Processor or such Credit Card Issuer to any
Borrower by wire transfer or other electronic funds transfer.

               (iv) Borrowers shall, and shall cause each of their Subsidiaries to, transfer any funds
released from the Elavon Reserve Account, on the day such funds are released therefrom, to the
Concentration Account as provided in Section 6.3(c), by wire transfer or other electronic
funds transfer.

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               (v) All amounts in each Intercompany Royalty Account shall be sent by wire transfer or other
electronic funds transfer on each Business Day to the Concentration Account as provided in
Section 6.3(c).

          (c) Each Borrower shall either (i) cause all amounts (other than to the extent expressly
permitted under Section 6.3(b)(i) hereof) on deposit in the Store Accounts of such Borrower
to be deposited by wire transfer or other electronic funds transfer on each Business Day in the
Concentration Account (or, to the extent consented to in advance in writing by the Agent in its
sole discretion, another Blocked Account), or (ii) shall itself deposit or cause to be deposited on
each Business Day in the Concentration Account (or, to the extent consented to in advance in
writing by the Agent in its sole discretion, another Blocked Account) in immediately available
funds all proceeds of Collateral, including all proceeds from sales of Inventory and all other
proceeds of Collateral. Borrowers and Guarantors shall deliver, or cause to be delivered to Agent
a Deposit Account Control Agreement duly authorized, executed and delivered by each bank where a
Blocked Account is maintained as provided in Section 5.2 hereof. From and after the
Closing Date, all available amounts received in the applicable Blocked Account or, subject to
Section 6.3(d), any Store Account (except as provided in Section 6.3(b) above)
shall be transferred daily from such Blocked Account or Store Account to the Agent Payment Account.

          (d) At any time a Default or an Event of Default shall exist or have occurred and be
continuing, promptly upon Agent’s request, Borrowers and Guarantors shall deliver, or cause to be
delivered, to Agent a Deposit Account Control Agreement duly authorized, executed and delivered by
such banks where a Store Account is maintained as Agent shall specify. Without limiting any other
rights or remedies of Agent or Lenders, in the event that a Deposit Account Control Agreement is in
effect for a Store Account, then Agent may, at its option, instruct the depository bank at which
the Store Account is maintained to transfer all available funds received or deposited into the
Store Account to Agent Payment Account at any time that an Event of Default shall exist or have
occurred and be continuing.

          (e) At all times, all payments made to the the Concentration Account, the Elavon Deposit
Account, all Blocked Accounts or Store Accounts subject to a Deposit Account Control Agreement,
whether in respect of the Receivables, as proceeds of Inventory or other Collateral or otherwise
shall be treated as payments to Agent in respect of the Obligations and therefore shall constitute
the property of Agent and Lenders to the extent of the then outstanding Obligations.

          (f) No Borrower shall, or shall cause or permit any Subsidiary thereof, to accumulate or
maintain cash in any payroll accounts as of any date of determination in excess of checks
outstanding against such accounts as of that date and amounts necessary to meet minimum balance
requirements.

          (g) For purposes of calculating the amount of the Loans available to each Borrower, such
payments will be applied (conditional upon final collection) to the Obligations on the Business Day
of receipt by Agent of immediately available funds in Agent Payment Account; provided such
payments and notice thereof are received in accordance with Agent’s usual and customary practices
as in effect from time to time and within sufficient time to credit the applicable loan account on
such day, and if not, then on the next Business Day.

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          (h) Each Borrower and Guarantor and their respective employees, agents and Subsidiaries shall,
acting as trustee for Agent, receive, as the property of Agent, any monies, checks, notes, drafts
or any other payment relating to and/or proceeds of Accounts or other Collateral which come into
their possession or under their control and promptly upon receipt thereof, shall deposit or cause
the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be
remitted, in kind, to Agent.

          (i) Borrowers agree to reimburse Agent on demand for any amounts owed or paid to any bank or
other financial institution at which a Blocked Account or any other deposit account or investment
account is established or any other bank, financial institution or other person involved in the
transfer of funds to or from the Blocked Accounts arising out of Agent’s payments to or
indemnification of such bank, financial institution or other person. The obligations of Borrowers
to reimburse Agent for such amounts pursuant to this Section 6.3 shall survive the
termination of this Agreement.

     6.4 Payments.

          (a) All Obligations shall be payable to Agent Payment Account as provided in Section 6.3 or
such other place as Agent may designate from time to time. Subject to the other terms and
conditions contained herein, Agent shall apply payments received or collected from any Borrower or
Guarantor or for the account of any Borrower or Guarantor (including the monetary proceeds of
collections or of realization upon any Collateral) as follows: first, to pay any fees,
indemnities or expense reimbursements then due to Agent, Lenders and Issuing Bank from any Borrower
or Guarantor; second, to pay interest due in respect of any Loans (and including any
Special Agent Advances) or Letter of Credit Obligations; third, to pay principal in respect
of Special Agent Advances; fourth, to pay principal in respect of the Loans, any then due
Obligations under any Secured Rate Contract and to provide cash collateral for then outstanding
Letter of Credit Obligations in the manner described in Section 2.2, ratably to the
aggregate, combined principal balance of the principal of the Revolving Loans, the then due
Obligations under any Secured Rate Contract and the outstanding Letter of Credit Obligations;
fifth, to pay Obligations then due arising under or pursuant to any Hedge Agreement (other
than any Secured Rate Contract) of a Borrower or Guarantor with a Bank Product Provider (up to the
amount of any then effective Reserve established in respect of such Obligations), on a pro rata
basis; sixth, to pay or prepay any other Obligations whether or not then due, in such order
and manner as Agent determines and, at any time an Event of Default exists or has occurred and is
continuing, to be held as cash collateral in connection with any Letter of Credit; and
seventh, to pay Obligations arising under or pursuant to any Bank Product (other than to
the extent provided for above) on a pro rata basis. Notwithstanding anything to the contrary
contained in this Agreement, (i) unless so directed by Agent, or unless a Default or an Event of
Default shall exist or have occurred and be continuing, Agent shall not apply any payments which it
receives to any Eurodollar Rate Loans, except (A) on the expiration date of the Interest Period
applicable to any such Eurodollar Rate Loans or (B) in the event that there are no outstanding
Prime Rate Loans and (ii) to the extent any Borrower uses any proceeds of the Loans or Letters of
Credit to acquire rights in or the use of any Collateral or to repay any Indebtedness used to
acquire rights in or the use of any Collateral, payments in respect of the Obligations shall be
deemed applied first to the Obligations arising from Loans and Letter of Credit Obligations that
were not used for such

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purposes and second to the Obligations arising from Loans and Letter of Credit Obligations the
proceeds of which were used to acquire rights in or the use of any Collateral in the chronological
order in which such Borrower acquired such rights in or the use of such Collateral.

          (b) At Agent’s option, all principal, interest, fees, costs, expenses and other charges
provided for in this Agreement or the other Financing Agreements may be charged directly to the
loan account(s) of any Borrower maintained by Agent. If after receipt of any payment of, or
proceeds of Collateral applied to the payment of, any of the Obligations, Agent, any Lender or
Issuing Bank is required to surrender or return such payment or proceeds to any Person for any
reason, then the Obligations intended to be satisfied by such payment or proceeds shall be
reinstated and continue and this Agreement shall continue in full force and effect as if such
payment or proceeds had not been received by Agent or such Lender. Borrowers and Guarantors shall
be liable to pay to Agent, and do hereby indemnify and hold Agent and Lenders harmless for the
amount of any payments or proceeds surrendered or returned. This Section 6.4(b) shall
remain effective notwithstanding any contrary action which may be taken by Agent or any Lender in
reliance upon such payment or proceeds. This Section 6.4 shall survive the payment of the
Obligations and the termination of this Agreement.

          (c) (i) Immediately upon receipt by any Borrower of any cash proceeds of any asset disposition
(other than any Permitted Disposition described in clauses (a), (b), (e)
and (f) of the definition thereof), Borrowers shall prepay the Loans in an amount equal to
all such proceeds, net of (A) commissions and other reasonable and customary transaction costs,
fees and expenses properly attributable to such transaction and payable by Borrowers in connection
therewith (in each case, paid to non-Affiliates), (B) transfer taxes, (C) amounts payable to
holders of senior Liens on such asset (to the extent such Liens constitute encumbrances permitted
hereunder), if any, and (D) an appropriate reserve for income taxes in accordance with GAAP in
connection therewith. Any such prepayment shall be applied in accordance with Section
6.4(a). The Commitment shall not be permanently reduced by the amount of any such prepayments.

               
(ii) If any Borrower issues Capital Stock or incurs any Indebtedness (other than Indebtedness
permitted by Section 9.9), no later than the Business Day following the date of receipt of
the proceeds thereof, Borrowers shall prepay the Loans (and cash collateralize Letter of Credit
Obligations) in an amount equal to all such proceeds, net of underwriting discounts and commissions
and other reasonable costs paid to non-Affiliates in connection therewith. Any such prepayment
shall be applied in accordance with Section 6.4(a). The Commitment shall not be
permanently reduced by the amount of any such prepayments.

     6.5 Taxes.

          (a) Any and all payments by or on account of any of the Obligations shall be made free and
clear of and without deduction or withholding for or on account of, any setoff, counterclaim,
defense, duties, taxes, levies, imposts, fees, deductions, charges, withholdings, liabilities,
restrictions or conditions of any kind, excluding (i) in the case of each Lender, Issuing Bank and
Agent (A) taxes measured by its net income, and franchise taxes imposed on it, by the jurisdiction
(or any political subdivision thereof) under the laws of which such Lender, Issuing Bank or Agent
(as the case may be) is organized and (B) any United States withholding taxes payable with respect
to payments under the Financing Agreements under laws (including any

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statute, treaty or regulation) in effect on the date hereof (or, in the case of an Eligible
Transferee, the date of the Assignment and Acceptance) applicable to such Lender, Issuing Bank or
Agent, as the case may be, but not excluding any United States withholding taxes payable as a
result of any change in such laws occurring after the date hereof (or the date of such Assignment
and Acceptance) and (ii) in the case of each Lender, taxes measured by its net income, and
franchise taxes imposed on it as a result of a connection between such Lender and the jurisdiction
of the Governmental Authority imposing such tax or any taxing authority thereof or therein (all
such non-excluded taxes, levies, imposts, fees, deductions, charges, withholdings and liabilities
being hereinafter referred to as “Taxes”).

          (b) If any Taxes shall be required by law to be deducted from or in respect of any sum payable
in respect of the Obligations to any Lender, Issuing Bank or Agent (i) the sum payable shall be
increased as may be necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 6.5), such Lender or Agent (as the
case may be) receives an amount equal to the sum it would have received had no such deductions been
made, (ii) the relevant Borrower or Guarantor shall make such deductions, (iii) the relevant
Borrower or Guarantor shall pay the full amount deducted to the relevant taxing authority or other
authority in accordance with applicable law and (iv) the relevant Borrower or Guarantor shall
deliver to Agent evidence of such payment.

          (c) In addition, each Borrower and Guarantor agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar levies of the United
States or any political subdivision thereof or any applicable foreign jurisdiction, and all
liabilities with respect thereto, in each case arising from any payment made hereunder or under any
of the other Financing Agreements or from the execution, delivery or registration of, or otherwise
with respect to, this Agreement or any of the other Financing Agreements (collectively, “Other
Taxes”).

          (d) Each Borrower and Guarantor shall indemnify each Lender, Issuing Bank and Agent for the
full amount of Taxes and Other Taxes (including any Taxes and Other Taxes imposed by any
jurisdiction on amounts payable under this Section 6.5) paid by such Lender, Issuing Bank
or Agent (as the case may be) and any liability (including for penalties, interest and expenses)
arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly
or legally asserted, unless the payment thereof by such Lender, Issuing Bank or Agent (as the case
may be) resulted from the gross negligence or willful misconduct of such Lender, Issuing Bank or
Agent (as the case may be) as determined pursuant to a final, non-appealable order of a court of
competent jurisdiction. This indemnification shall be made within ten (10) days from the date such
Lender, Issuing Bank or Agent (as the case may be) makes written demand therefor. A certificate as
to the amount of such payment or liability delivered to Administrative Borrower by a Lender or
Issuing Bank (in each case with a copy to Agent) or by Agent on its own behalf or on behalf of a
Lender or Issuing Bank, shall be conclusive absent manifest error.

          (e) If Agent, Issuing Bank or any Lender receives a refund or credit in respect of any Taxes
or Other Taxes for which Agent, Issuing Bank or such Lender has received payment from any Borrower
or Guarantor hereunder, so long as no Event of Default shall exist

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or have occurred and be continuing, Agent, Issuing Bank or such Lender (as the case may be)
shall credit to the loan account of Borrowers the amount of such refund or the amount of any tax
savings (if any) realized by Agent, Issuing Bank or such Lender directly attributable to such
credit.

          (f) As soon as practicable after any payment of Taxes or Other Taxes by any Borrower or
Guarantor, such Borrower or Guarantor shall furnish to Agent, at its address referred to herein,
the original or a certified copy of a receipt evidencing payment thereof.

          (g) Without prejudice to the survival of any other agreements of any Borrower or Guarantor
hereunder or under any of the other Financing Agreements, the agreements and obligations of such
Borrower or Guarantor contained in this Section 6.5 shall survive the termination of this
Agreement and the payment in full of the Obligations.

          (h) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax
under the law of the jurisdiction in which the applicable Borrower is resident for tax purposes, or
any treaty to which such jurisdiction is a party, with respect to payments hereunder or under any
of the other Financing Agreements shall deliver to Administrative Borrower (with a copy to Agent),
at the time or times prescribed by applicable law or reasonably requested by Administrative
Borrower or Agent (in such number of copies as is reasonably requested by the recipient), whichever
of the following is applicable (but only if such Foreign Lender is legally entitled to do so): (i)
duly completed copies of Internal Revenue Service Form W-8BEN claiming exemption from, or a
reduction to, withholding tax under an income tax treaty, or any successor form, (ii) duly
completed copies of Internal Revenue Service Form 8-8ECI claiming exemption from withholding
because the income is effectively connection with a U.S. trade or business or any successor form,
(iii) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio
interest under Sections 871(h) or 881(c) of the Code, (A) a certificate of the Lender to the effect
that such Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10
percent shareholder” of a Borrower within the meaning of Section 881(c)(3)(B) of the Code or a
“controlled foreign corporation” described and Section 881(c)(3)(C) of the Code and (B) duly
completed copies of Internal Revenue Service Form W-8BEN claiming exemption from withholding under
the portfolio interest exemption or any successor form or (iv) any other applicable form,
certificate or document prescribed by applicable law as a basis for claiming exemption from or a
reduction in United States withholding tax duly completed together with such supplementary
documentation as may be prescribed by applicable law to permit a Borrower to determine the
withholding or deduction required to be made. Unless Administrative Borrower and Agent have
received forms or other documents reasonably satisfactory to them indicating that payments
hereunder or under any of the other Financing Agreements to or for a Foreign Lender are not subject
to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax
treaty, Borrowers or Agent shall withhold amounts required to be withheld by applicable
requirements of law from such payments at the applicable statutory rate.

          (i) Any Lender claiming any additional amounts payable pursuant to this Section 6.5
shall use its reasonable efforts (consistent with its internal policy and legal and regulatory
restrictions) to change the jurisdiction of its applicable lending office if the making of

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such a change would avoid the need for, or reduce the amount of, any such additional amounts
that would be payable or may thereafter accrue and would not, in the sole determination of such
Lender, be otherwise disadvantageous to such Lender.

     6.6 Authorization to Make Loans. Agent and Lenders are authorized to make the Loans
based upon telephonic or other instructions received from anyone purporting to be an officer of
Administrative Borrower or any Borrower or other authorized person or, at the discretion of Agent,
if such Loans are necessary to satisfy any Obligations. All requests for Loans or Letters of
Credit hereunder shall specify the date on which the requested advance is to be made (which day
shall be a Business Day) and the amount of the requested Loan. Requests received after 1 p.m.
(Eastern time) on any day shall be deemed to have been made as of the opening of business on the
immediately following Business Day. All Loans and Letters of Credit under this Agreement shall be
conclusively presumed to have been made to, and at the request of and for the benefit of, any
Borrower or Guarantor when deposited to the credit of any Borrower or Guarantor or otherwise
disbursed or established in accordance with the instructions of any Borrower or Guarantor or in
accordance with the terms and conditions of this Agreement.

     6.7 Use of Proceeds. Borrowers shall use the initial proceeds of the Loans and
Letters of Credit hereunder only for: (a) refinancing the Indebtedness (i) owed to the Existing
Lenders and (ii) for purposes of consummating the Plan of Reorganization, (b) expenses actually
incurred with the consummation of the Plan of Reorganization and (c) costs, expenses and fees
incurred in connection with the preparation, negotiation, execution and delivery of this Agreement
and the other Financing Agreements. Borrowers shall deliver to Agent a description of Borrowers’
sources and uses of funds as of the Closing Date, including Loans and Letter of Credit Obligations
to be made or incurred on that date, and a funds flow memorandum detailing how funds from each
source are to be transferred to particular uses. All other Loans made or Letters of Credit
provided to or for the benefit of any Borrower pursuant to the provisions hereof shall be used only
for general operating purposes, working capital purposes and other proper corporate purposes of
Borrowers and Guarantors not otherwise prohibited by the terms hereof. None of the proceeds will
be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or
for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of the Loans to be
considered a “purpose credit” within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System, as amended.

     6.8 Appointment of Administrative Borrower as Agent for Requesting Loans and Receipts of
Loans and Statements.

          (a) Each Borrower hereby irrevocably appoints and constitutes Administrative Borrower as its
agent and attorney-in-fact to request and receive Loans and Letters of Credit pursuant to this
Agreement and the other Financing Agreements from Agent or any Lender in the name or on behalf of
such Borrower. Agent and Lenders may disburse the Loans to such bank account of Administrative
Borrower or a Borrower or otherwise make such Loans to a Borrower and provide such Letters of
Credit to a Borrower as Administrative Borrower may designate or direct, without notice to any
other Borrower or Guarantor. Notwithstanding anything to the

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contrary contained herein, Agent may at any time and from time to time require that Loans to
or for the account of any Borrower be disbursed directly to an operating account of such Borrower.

          (b) Administrative Borrower hereby accepts the appointment by Borrowers to act as the agent
and attorney-in-fact of Borrowers pursuant to this Section 6.8. Administrative Borrower
shall ensure that the disbursement of any Loans to each Borrower requested by or paid to or for the
account of Parent, or the issuance of any Letter of Credit for a Borrower hereunder, shall be paid
to or for the account of such Borrower.

          (c) Each Borrower and other Guarantor hereby irrevocably appoints and constitutes
Administrative Borrower as its agent to receive statements on account and all other notices from
Agent and Lenders with respect to the Obligations or otherwise under or in connection with this
Agreement and the other Financing Agreements.

          (d) Any notice, election, representation, warranty, agreement or undertaking by or on behalf
of any other Borrower or any Guarantor by Administrative Borrower shall be deemed for all purposes
to have been made by such Borrower or Guarantor, as the case may be, and shall be binding upon and
enforceable against such Borrower or Guarantor to the same extent as if made directly by such
Borrower or Guarantor.

          (e) No purported termination of the appointment of Administrative Borrower as agent as
aforesaid shall be effective, except after ten (10) days’ prior written notice to Agent.

     6.9 Pro Rata Treatment. Except to the extent otherwise provided in this Agreement or
as otherwise agreed by Lenders: (a) the making and conversion of Loans shall be made among the
Lenders based on their respective Pro Rata Shares as to the Loans and (b) each payment on account
of any Obligations to or for the account of one or more of Lenders in respect of any Obligations
due on a particular day shall be allocated among the Lenders entitled to such payments based on
their respective Pro Rata Shares and shall be distributed accordingly.

     6.10 Sharing of Payments, Etc.

          (a) Each Borrower and Guarantor agrees that, in addition to (and without limitation of) any
right of setoff, banker’s lien or counterclaim Agent or any Lender may otherwise have, each Lender
shall be entitled, at its option (but subject, as among Agent and Lenders, to the provisions of
Section 12.3(b) hereof), to offset balances held by it for the account of such Borrower or
Guarantor at any of its offices, in dollars or in any other currency, against any principal of or
interest on any Loans owed to such Lender or any other amount payable to such Lender hereunder,
that is not paid when due (regardless of whether such balances are then due to such Borrower or
Guarantor), in which case it shall promptly notify Administrative Borrower and Agent thereof;
provided, that, such Lender’s failure to give such notice shall not affect the
validity thereof.

          (b) If any Lender (including Agent) shall obtain from any Borrower or Guarantor payment of any
principal of or interest on any Loan owing to it or payment of any other amount under this
Agreement or any of the other Financing Agreements through the exercise of any right of setoff,
banker’s lien or counterclaim or similar right or otherwise (other

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than from Agent as provided herein), and, as a result of such payment, such Lender shall have
received more than its Pro Rata Share of the principal of the Loans or more than its share of such
other amounts then due hereunder or thereunder by any Borrower or Guarantor to such Lender than the
percentage thereof received by any other Lender, it shall promptly pay to Agent, for the benefit of
Lenders, the amount of such excess and simultaneously purchase from such other Lenders a
participation in the Loans or such other amounts, respectively, owing to such other Lenders (or
such interest due thereon, as the case may be) in such amounts, and make such other adjustments
from time to time as shall be equitable, to the end that all Lenders shall share the benefit of
such excess payment (net of any expenses that may be incurred by such Lender in obtaining or
preserving such excess payment) in accordance with their respective Pro Rata Shares or as otherwise
agreed by Lenders. To such end all Lenders shall make appropriate adjustments among themselves (by
the resale of participation sold or otherwise) if such payment is rescinded or must otherwise be
restored.

          (c) Each Borrower and Guarantor agrees that any Lender purchasing a participation (or direct
interest) as provided in this Section may exercise, in a manner consistent with this Section, all
rights of setoff, banker’s lien, counterclaim or similar rights with respect to such participation
as fully as if such Lender were a direct holder of Loans or other amounts (as the case may be)
owing to such Lender in the amount of such participation.

          (d) Nothing contained herein shall require any Lender to exercise any right of setoff,
banker’s lien, counterclaims or similar rights or shall affect the right of any Lender to exercise,
and retain the benefits of exercising, any such right with respect to any other Indebtedness or
obligation of any Borrower or Guarantor. If, under any applicable bankruptcy, insolvency or other
similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies,
such Lender shall, to the extent practicable, assign such rights to Agent for the benefit of
Lenders and, in any event, exercise its rights in respect of such secured claim in a manner
consistent with the rights of Lenders entitled under this Section to share in the benefits of any
recovery on such secured claim.

     6.11 Settlement Procedures.

          (a) In order to administer the Credit Facility in an efficient manner and to minimize the
transfer of funds between Agent and Lenders, Agent may, at its option, subject to the terms of this
Section, make available, on behalf of Lenders, the full amount of the Loans requested or charged to
any Borrower’s loan account(s) or otherwise to be advanced by Lenders pursuant to the terms hereof,
without requirement of prior notice to Lenders of the proposed Loans.

          (b) With respect to all Loans made by Agent on behalf of Lenders as provided in this Section,
the amount of each Lender’s Pro Rata Share of the outstanding Loans shall be computed weekly, and
shall be adjusted upward or downward on the basis of the amount of the outstanding Loans as of 5:00
p.m. (Eastern time) on the Business Day immediately preceding the date of each settlement
computation; provided, that, Agent retains the absolute right at any time or from
time to time to make the above described adjustments at intervals more frequent than weekly. Agent
shall deliver to each of the Lenders after the end of each week, or at such lesser period or
periods as Agent shall determine, a summary statement of the amount of outstanding

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Loans for such period (such week or lesser period or periods being hereinafter referred to as
a “Settlement Period”). If the summary statement is sent by Agent and received by a Lender
prior to 1:00 p.m. (Eastern time), then such Lender shall make the settlement transfer described in
this Section by no later than 3:00 p.m. (Eastern time) on the same Business Day and if received by
a Lender after 1:00 p.m. (Eastern time), then such Lender shall make the settlement transfer by not
later than 3:00 p.m. (Eastern time) on the next Business Day following the date of receipt. If, as
of the end of any Settlement Period, the amount of a Lender’s Pro Rata Share of the outstanding
Loans is more than such Lender’s Pro Rata Share of the outstanding Loans as of the end of the
previous Settlement Period, then such Lender shall forthwith (but in no event later than the time
set forth in the preceding sentence) transfer to Agent by wire transfer in immediately available
funds the amount of the increase. Alternatively, if the amount of a Lender’s Pro Rata Share of the
outstanding Loans in any Settlement Period is less than the amount of such Lender’s Pro Rata Share
of the outstanding Loans for the previous Settlement Period, Agent shall forthwith transfer to such
Lender by wire transfer in immediately available funds the amount of the decrease. The obligation
of each of the Lenders to transfer such funds and effect such settlement shall be irrevocable and
unconditional and without recourse to or warranty by Agent. Agent and each Lender agrees to mark
its books and records at the end of each Settlement Period to show at all times the dollar amount
of its Pro Rata Share of the outstanding Loans and Letters of Credit. Each Lender shall only be
entitled to receive interest on its Pro Rata Share of the Loans to the extent such Loans have been
funded by such Lender. Because Agent on behalf of Lenders may be advancing and/or may be repaid
Loans prior to the time when Lenders will actually advance and/or be repaid such Loans, interest
with respect to Loans shall be allocated by Agent in accordance with the amount of Loans actually
advanced by and repaid to each Lender and Agent and shall accrue from and including the date such
Loans are so advanced to but excluding the date such Loans are either repaid by Borrowers or
actually settled with the applicable Lender as described in this Section.

          (c) To the extent that Agent has made any such amounts available and the settlement described
above shall not yet have occurred, upon repayment of any Loans by a Borrower, Agent may apply such
amounts repaid directly to any amounts made available by Agent pursuant to this Section. In lieu
of weekly or more frequent settlements, Agent may, at its option, at any time require each Lender
to provide Agent with immediately available funds representing its Pro Rata Share of each Loan,
prior to Agent’s disbursement of such Loan to Borrower. In such event, all Loans under this
Agreement shall be made by the Lenders simultaneously and proportionately to their Pro Rata Shares.
No Lender shall be responsible for any default by any other Lender in the other Lender’s
obligation to make a Loan requested hereunder nor shall the Commitment of any Lender be increased
or decreased as a result of the default by any other Lender in the other Lender’s obligation to
make a Loan hereunder.

          (d) If Agent is not funding a particular Loan to a Borrower (or Administrative Borrower for
the benefit of such Borrower) pursuant to Sections 6.11(a) and 6.11(b) above on any
day, but is requiring each Lender to provide Agent with immediately available funds on the date of
such Loan as provided in Section 6.11(c) above, Agent may assume that each Lender will make
available to Agent such Lender’s Pro Rata Share of the Loan requested or otherwise made on such day
and Agent may, in its discretion, but shall not be obligated to, cause a corresponding amount to be
made available to or for the benefit of such Borrower on such day. If Agent makes

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such corresponding amount available to a Borrower and such corresponding amount is not in fact
made available to Agent by such Lender, Agent shall be entitled to recover such corresponding
amount on demand from such Lender together with interest thereon for each day from the date such
payment was due until the date such amount is paid to Agent at the Federal Funds Rate for each day
during such period (as published by the Federal Reserve Bank of New York or at Agent’s option based
on the arithmetic mean determined by Agent of the rates for the last transaction in overnight
Federal funds arranged prior to 9:00 a.m. (Eastern time) on that day by each of the three leading
brokers of Federal funds transactions in New York, New York selected by Agent) and if such amounts
are not paid within three (3) days of Agent’s demand, at the highest Interest Rate provided for in
Section 3.1 hereof applicable to Prime Rate Loans. During the period in which such Lender has not
paid such corresponding amount to Agent, notwithstanding anything to the contrary contained in this
Agreement or any of the other Financing Agreements, the amount so advanced by Agent to or for the
benefit of any Borrower shall, for all purposes hereof, be a Loan made by Agent for its own
account. Upon any such failure by a Lender to pay Agent, Agent shall promptly thereafter notify
Administrative Borrower of such failure and Borrowers shall immediately pay such corresponding
amount to Agent for its own account. A Lender who fails to pay Agent its Pro Rata Share of any
Loans made available by Agent on such Lender’s behalf, or any Lender who fails to pay any other
amount owing by it to Agent, is a “Defaulting Lender”. Agent shall not be obligated to transfer to
a Defaulting Lender any payments received by Agent for the Defaulting Lender’s benefit, nor shall a
Defaulting Lender be entitled to the sharing of any payments hereunder (including any principal,
interest or fees). Amounts payable to a Defaulting Lender shall instead be paid to or retained by
Agent. Agent may hold and, in its discretion, relend to a Borrower the amount of all such payments
received or retained by it for the account of such Defaulting Lender. For purposes of voting or
consenting to matters with respect to this Agreement and the other Financing Agreements and
determining Pro Rata Shares, such Defaulting Lender shall be deemed not to be a “Lender” and such
Lender’s Commitment shall be deemed to be zero (0). This Section shall remain effective with
respect to a Defaulting Lender until such default is cured. The operation of this Section shall
not be construed to increase or otherwise affect the Commitment of any Lender, or relieve or excuse
the performance by any Borrower or Guarantor of their duties and obligations hereunder.

          (e) Nothing in this Section or elsewhere in this Agreement or the other Financing Agreements
shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender
from its obligation to fulfill its Commitment hereunder or to prejudice any rights that any
Borrower may have against any Lender as a result of any default by any Lender hereunder in
fulfilling its Commitment.

     6.12 Obligations Several; Independent Nature of Lenders’ Rights. The obligation of
each Lender hereunder is several, and no Lender shall be responsible for the obligation or
commitment of any other Lender hereunder. Nothing contained in this Agreement or any of the other
Financing Agreements and no action taken by the Lenders pursuant hereto or thereto shall be deemed
to constitute the Lenders to be a partnership, an association, a joint venture or any other kind of
entity. The amounts payable at any time hereunder to each Lender shall be a separate and
independent debt, and subject to Section 12.3 hereof, each Lender shall be entitled

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to protect and enforce its rights arising out of this Agreement and it shall not be necessary
for any other Lender to be joined as an additional party in any proceeding for such purpose.

     6.13 Bank Products. Borrowers and Guarantors, or any of their Subsidiaries, may (but
no such Person is required to) request that the Bank Product Providers provide or arrange for such
Person to obtain Bank Products from Bank Product Providers, and each Bank Product Provider may, in
its sole discretion, provide or arrange for such Person to obtain the requested Bank Products.
Borrowers and Guarantors or any of their Subsidiaries that obtains Bank Products shall indemnify
and hold Agent, each Lender and their respective Affiliates harmless from any and all obligations
now or hereafter owing to any other Person by any Bank Product Provider in connection with any Bank
Products other than for gross negligence or willful misconduct on the part of any such indemnified
Person. This Section 6.13 shall survive the payment of the Obligations and the termination
of this Agreement. Borrower and its Subsidiaries acknowledge and agree that the obtaining of Bank
Products from Bank Product Providers (a) is in the sole discretion of such Bank Product Provider,
and (b) is subject to all rules and regulations of such Bank Product Provider. Each Bank Product
Provider shall be deemed a party hereto for purposes of any reference in a Financing Agreement to
the parties for whom Agent is acting, provided, that, the rights of such Bank
Product Provider hereunder and under any of the other Financing Agreements shall consist
exclusively of such Bank Product Provider’s right to share in payments and collections out of the
Collateral as set forth herein. In connection with any such distribution of payments and
collections, Agent shall be entitled to assume that no amounts are due to any Bank Product Provider
unless such Bank Product Provider has notified Agent in writing of any such liability owed to it as
of the date of any such distribution.

SECTION 7  COLLATERAL REPORTING AND COVENANTS

     7.1 Collateral Reporting.

          (a) Borrowers shall provide Agent with the following documents in a form satisfactory to
Agent:

               (i) as soon as possible after (1) the end of each Fiscal Month (but in any event within
fifteen (15) days after the end thereof) or (2) the end of each week (but in any event by no later
than Thursday of the immediately following week) if Excess Availability is less than the Specified
Amount as of the last day of the immediately preceding Fiscal Month or week, as applicable, or (3)
any request made by the Agent at any time or times, a Borrowing Base Certificate setting forth the
calculation of the Borrowing Base as of the last Business Day of the immediately preceding weekly
or monthly period as to the Inventory, duly completed and executed by the chief financial officer,
vice president of finance, treasurer or controller of Administrative Borrower, together with all
schedules required pursuant to the terms of the Borrowing Base Certificate duly completed,
including but not limited to (A) a monthly aging of Credit Card Receivables identifying those
outstanding more then five (5) Business Days since the sale date giving rise thereto and (B) an
inventory summary report by category (and upon Agent’s request, letter of credit inventory) and
identifying where such Inventory is located;

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               (ii) as soon as possible after the end of each Fiscal Month (but in any event within fifteen
(15) days after the end thereof), on a monthly basis, or more frequently as Agent may request, (A)
rollforward inventory reports supported by monthly updates of adjusted cost factors and
intercompany eliminations (and including the amounts of Inventory and the value thereof at any
leased locations and at premises of warehouses, processors or other third parties), (B) list or
agings of outstanding accounts payable (and including information indicating the amounts owing to
owners and lessors of leased premises, warehouses, fulfillment centers, processors, custom brokers,
freight forwarders and other third parties from time to time in possession of any Collateral), and
(C) a certificate of an authorized officer of Administrative Borrower certifying that sales and use
tax collections, deposits and payments are current;

               (iii) as soon as possible after the end of each calendar month (but in any event within five
(5) days after the end thereof), on a monthly basis, or more frequently as Agent may request, a
duly completed Applicable Margin Certificate, duly signed by an authorized officer of the
Administrative Borrower;

               (iv) as soon as possible after the end of each Fiscal Quarter (but in any event within fifteen
(15) Business Days after the end thereof), on a quarterly basis or more frequently as Agent may
request, reports by retail store location of sales and operating profits for each such retail store
location;

               (v) upon Agent’s reasonable request, (A) reports of sales for each category of Inventory, (B)
reports of aggregate Inventory purchases and identifying items of Inventory in transit to any
Borrower or Guarantor related to the applicable documentary letter of credit and/or bill of lading
number, (C) copies of remittance advices and reports, and copies of deposit slips and bank
statements, (D) copies of shipping and delivery documents, (E) copies of purchase orders, invoices
and delivery documents for Inventory and Equipment acquired by Borrowers and Guarantor, (F) reports
of inventory subject to a license granted to a Borrower by a third party, identifying such
inventory by item, source, licensor, royalties paid, royalties payable and applicable license
agreement, and (G) a report of all Inventory purchased or sold by Borrowers on consignment;

               (vi) upon Agent’s reasonable request, (A) copies of customer statements, purchase orders,
sales invoices, credit memos, remittance advices and reports, and copies of deposit slips and bank
statements, (B) copies of shipping and delivery documents, and (C) copies of purchase orders,
invoices and delivery documents for Inventory and Equipment acquired by any Borrower or Guarantor;
and

               (vii) such other reports as to the Collateral as Agent shall reasonably request from time to
time.

          (b) Nothing contained in any Borrowing Base Certificate shall be deemed to limit, impair or
otherwise affect the rights of Agent contained herein and in the event of any conflict or
inconsistency between the calculation of the Borrowing Base as set forth in any Borrowing Base
Certificate and as determined by Agent in good faith, the determination of Agent shall govern and
be conclusive and binding upon Borrowers and Guarantors. Without limiting the foregoing, Borrowers
shall furnish to Agent any information which Agent may

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reasonably request regarding the determination and calculation of any of the amounts set forth
in any Borrowing Base Certificate. The Borrowing Base may be adjusted based on the information set
forth in the reports received by Agent under Section 7.1(a)(i) above. If any Borrower’s or
Guarantor’s records or reports of the Collateral are prepared or maintained by an accounting
service, contractor, shipper or other agent, such Borrower and Guarantor hereby irrevocably
authorizes such service, contractor, shipper or agent to deliver such records, reports, and related
documents to Agent and to follow Agent’s instructions with respect to further services.

     7.2 Accounts Covenants.

          (a) Borrowers shall notify Agent promptly of the assertion of (i) any claims, offsets,
defenses or counterclaims by any account debtor, Credit Card Issuer or Credit Card Processor or any
disputes with any of such persons or any settlement, adjustment or compromise thereof, to the
extent any of the foregoing exceeds $250,000 in any one case or $500,000 in the aggregate, (ii) all
material adverse information relating to the financial condition of any account debtor, Credit Card
Issuer or Credit Card Processor, and (iii) any event or circumstance which, to the best of any
Borrower’s or Guarantor’s knowledge, which would cause Agent to consider any then existing Credit
Card Receivables as no longer Eligible Credit Card Receivables. No credit, discount, allowance or
extension or agreement for any of the foregoing shall be granted to any account debtor, Credit Card
Issuer or Credit Card Processor except in the ordinary course of a Borrower’s business in
accordance with the current practices of such Borrower as in effect on the date hereof. So long as
no Event of Default exists or has occurred and is continuing, no Borrower shall settle, adjust or
compromise any claim, offset, counterclaim or dispute with any account debtor, Credit Card Issuer,
Credit Card Processor. At any time that an Event of Default exists or has occurred and is
continuing, Agent shall, at its option, have the exclusive right to settle, adjust or compromise
any claim, offset, counterclaim or dispute with account debtors, Credit Card Issuers or Credit Card
Processors or grant any credits, discounts or allowances.

          (b) Borrowers shall notify Agent promptly of: (i) any notice of a material default by such
Borrower under any of the Credit Card Agreements or of any default which has a reasonable
likelihood of resulting in the Credit Card Issuer or Credit Card Processor ceasing to make payments
or suspending payments to such Borrower, (ii) any notice from any Credit Card Issuer or Credit Card
Processor that such person is ceasing or suspending, or will cease or suspend, any present or
future payments due or to become due to any Borrower from such person, or that such person is
terminating or will terminate any of the Credit Card Agreements, and (iii) the failure of such
Borrower to comply with any material terms of the Credit Card Agreements or any terms thereof which
has a reasonable likelihood of resulting in the Credit Card Issuer or Credit Card Processor ceasing
or suspending payments to such Borrower.

          (c) Agent shall have the right at any time or times, in Agent’s name or in the name of a
nominee of Agent, to verify the validity, amount or any other matter relating to any Receivables or
other Collateral, by mail, telephone, facsimile transmission or otherwise.

     7.3 Inventory Covenants. With respect to the Inventory: (a) each Borrower and
Guarantor shall at all times maintain inventory records reasonably satisfactory to Agent, keeping
correct and accurate records reasonably describing the kind, type, quality and quantity of
Inventory, such Borrower’s or Guarantor’s cost therefor and daily withdrawals therefrom and

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additions thereto; (b) Borrowers and Guarantors shall, at their expense, conduct a physical
count of the Inventory either through periodic cycle counts or wall to wall counts, so that all
Inventory is subject to such counts at least once each year, provided, that Borrowers and
Guarantors shall conduct additional physical counts of Inventory as provided herein at any time or
times as Agent may request, such additional physical counts at Agent’s expense unless an Event of
Default then exists, in which case at Borrowers’ and Guarantors’ expense, and promptly following
all such physical inventories (whether through periodic cycle counts or wall to wall counts)
Borrowers shall supply Agent with a report in the form and with such specificity as may be
reasonably satisfactory to Agent concerning such physical count; (c) Borrowers and Guarantors shall
not remove any Inventory from the locations set forth or permitted herein, without the prior
written consent of Agent (which consent shall not be unreasonably withheld), except for sales of
Inventory in the ordinary course of its business and except to move Inventory directly from one
location set forth or permitted herein to another such location and except for Inventory shipped
from the manufacturer thereof to such Borrower or Guarantor which is in transit to the locations
set forth or permitted herein and except to return defective or non-conforming Inventory to the
manufacturers or vendors thereof; (d) Borrowers shall, and shall cause their Subsidiaries to,
cooperate with any appraiser retained by Agent in the conduct of appraisals of Inventory, such
appraisals (i) to be conducted at such time or times as Agent may request, (ii)(x) to be conducted,
at Borrower’s expense, no less than two (2) times in any twelve (12) month period, unless Adjusted
Excess Availability is less than the Specified Amount, then no less than three (3) times in such
twelve (12) month period and (y) to be conducted, at Agent’s expense unless an Event of Default
then exists in which case at Borrowers’ expense, and (ii) to be in form, scope and methodology
acceptable to Agent, addressed to Agent and Lenders and upon which Agent and Lenders are expressly
permitted to rely; (e) Borrowers and Guarantors shall produce, use, store and maintain the
Inventory with all reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with applicable laws (including the requirements of the Federal Fair
Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (f)
none of the Inventory or other Collateral constitutes farm products or the proceeds thereof; (g)
each Borrower and Guarantor assumes all responsibility and liability arising from or relating to
the production, use, sale or other disposition of the Inventory; (h) Borrowers and Guarantors shall
not sell Inventory to any customer on approval, or any other basis which entitles the customer to
return or may obligate any Borrower or Guarantor to repurchase such Inventory except for the right
of return given to retail customers of such Borrower or Guarantor in the ordinary course of the
business of such Borrower or Guarantor in accordance with the then current return policy of such
Borrower or Guarantor; (i) Borrowers and Guarantors shall keep the Inventory in good and marketable
condition; and (j) Borrowers and Guarantors shall not, without prior written notice to Agent or the
specific identification of such Inventory in a report with respect thereto provided by
Administrative Borrower to Agent pursuant to Section 7.1(a) hereof, acquire or accept any
Inventory on consignment or approval.

     7.4 Equipment and Real Property Covenants. (a) The Borrowers and Guarantors shall,
and shall cause their Subsidiaries to, cooperate with any appraiser retained by Agent in the
conduct of appraises of the Eligible Real Property, such appraises (i) to be conducted at the
Borrowers’ and Guarantors’ expense no more than one (1) time in any twelve (12) month period, but
at any time or times as Agent may request at the Agent’s expense unless an Event of Default

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then exists in which case at the Borrowers’ and Guarantors’ expense and (ii) to be in form,
scope and methodology (including, without limitation the FIRREA requirements) acceptable to Agent,
addressed to Agent and upon which Agent is expressly permitted to rely; (b) Borrowers and
Guarantors shall keep the Equipment in good order, repair, and operating condition (ordinary wear
and tear excepted); (c) Borrowers and Guarantors shall use the Equipment and Real Property with all
reasonable care and caution and in accordance with applicable standards of any insurance and in
material conformity with all applicable laws; (d) the Equipment is and shall be used in the
business of Borrowers and Guarantors and not for personal, family, household or farming use; (e)
Borrowers and Guarantors shall not remove any Equipment from the locations set forth or permitted
herein, except to the extent necessary to have any Equipment repaired or maintained in the ordinary
course of its business (or to return defective or non-conforming Equipment to the manufacturers or
vendors thereof) or to move Equipment directly from one location set forth or permitted herein to
another such location and except for the movement of motor vehicles used by or for the benefit of
such Borrower or Guarantor in the ordinary course of business; (f) the Equipment is now and shall
remain personal property and Borrowers and Guarantors shall not permit any of the Equipment to be
or become a part of or affixed to real property; and (g) each Borrower and Guarantor assumes all
responsibility and liability arising from the use of the Equipment and Real Property.

     7.5 Collateral Audit. With respect to the Collateral, Borrowers and Guarantors shall,
and shall cause their Subsidiaries to, cooperate with any auditor retained by the Agent in the
conduct of an audit of the Collateral, such audit to occur (i) no less than two (2) times in any
twelve (12) month period, unless Adjusted Excess Availability is less than the Specified Amount,
then three (3) times in such twelve (12) month period, in either case, at the Borrowers’ and
Guarantors’ expense, and (ii) at such time or times as Agent may request at Agent’s expense unless
an Event of Default then exists in which case at Borrowers’ and Guarantors’ expense. Such audit
shall in form, scope and methodology acceptable to Agent, addressed to Agent and Lenders and upon
which Agent and Lenders are expressly permitted to rely.

     7.6 Power of Attorney. Each Borrower and Guarantor hereby irrevocably designates and
appoints Agent (and all persons designated by Agent) as such Borrower’s and Guarantor’s true and
lawful attorney-in-fact, and authorizes Agent, in such Borrower’s, Guarantor’s or Agent’s name, to:
(a) at any time an Event of Default exists or has occurred and is continuing (i) demand payment on
any Collateral, (ii) enforce payment of any of the Collateral by legal proceedings or otherwise,
(iii) exercise all of such Borrower’s or Guarantor’s rights and remedies to collect any Collateral,
(iv) sell or assign any Collateral upon such terms, for such amount and at such time or times as
Agent deems advisable, (v) settle, adjust, compromise, extend or renew any of the Collateral, (vi)
discharge and release any Collateral, (vii) prepare, file and sign such Borrower’s or Guarantor’s
name on any proof of claim in bankruptcy or other similar document against an account debtor or
other obligor in respect of any Collateral, (viii) notify the post office authorities to change the
address for delivery of remittances from account debtors or other obligors in respect of Collateral
to an address designated by Agent, and open and dispose of all mail addressed to such Borrower or
Guarantor and handle and store all mail relating to the Collateral; and (ix) do all acts and things
which are necessary, in Agent’s determination, to fulfill such Borrower’s or Guarantor’s
obligations under this Agreement and the other Financing Agreements and (b) at any time to (i) take
control in any manner of any item of payment

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constituting Collateral or otherwise received in or for deposit in the Blocked Accounts or any
item of payment constituting Collateral is otherwise received by Agent or any Lender, (ii) have
access to any lockbox or postal box into which remittances from account debtors or other obligors
in respect of Collateral are sent or received, (iii) endorse such Borrower’s or Guarantor’s name
upon any items of payment in respect of Collateral received by Agent and any Lender and deposit the
same in Agent’s account for application to the Obligations, (iv) endorse such Borrower’s or
Guarantor’s name upon any chattel paper, document, instrument, invoice, or similar document or
agreement relating to any Receivable or any goods pertaining thereto or any other Collateral,
including any warehouse or other receipts, or bills of lading and other negotiable or
non-negotiable documents, (v) clear Inventory the purchase of which was financed with a Letter of
Credit through U.S. Customs or foreign export control authorities in such Borrower’s or Guarantor’s
name, Agent’s name or the name of Agent’s designee, and to sign and deliver to customs officials
powers of attorney in such Borrower’s or Guarantor’s name for such purpose, and to complete in such
Borrower’s or Guarantor’s or Agent’s name, any order, sale or transaction, obtain the necessary
documents in connection therewith and collect the proceeds thereof, and (vi) sign such Borrower’s
or Guarantor’s name on any verification of amounts owing constituting Collateral and notices
thereof to account debtors or any secondary obligors or other obligors in respect thereof. Each
Borrower and Guarantor hereby releases Agent and Lenders and their respective officers, employees
and designees from any liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of Agent’s or any
Lender’s own gross negligence or willful misconduct as determined pursuant to a final
non-appealable order of a court of competent jurisdiction.

     7.7 Right to Cure. Agent may, at its option, upon notice to Administrative Borrower,
(a) cure any default by any Borrower or Guarantor under any material agreement with a third party
that affects the Collateral, its value or the ability of Agent to collect, sell or otherwise
dispose of the Collateral or the rights and remedies of Agent or any Lender therein or the ability
of any Borrower or Guarantor to perform its obligations hereunder or under any of the other
Financing Agreements, (b) pay or bond on appeal any judgment entered against any Borrower or
Guarantor, (c) discharge taxes, liens, security interests or other encumbrances at any time levied
on or existing with respect to the Collateral and (d) pay any amount, incur any expense or perform
any act which, in Agent’s judgment, is necessary or appropriate to preserve, protect, insure or
maintain the Collateral and the rights of Agent and Lenders with respect thereto. Agent may add
any amounts so expended to the Obligations and charge any Borrower’s account therefor, such amounts
to be repayable by Borrowers on demand. Agent and Lenders shall be under no obligation to effect
such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation
or liability of any Borrower or Guarantor. Any payment made or other action taken by Agent or any
Lender under this Section shall be without prejudice to any right to assert an Event of Default
hereunder and to proceed accordingly.

     7.8 Access to Premises. From time to time as requested by Agent, at the cost and
expense of Borrowers, (a) Agent or its designee shall have complete access to all of each
Borrower’s and Guarantor’s premises during normal business hours and after notice to Parent, or at
any time and without notice to Administrative Borrower if an Event of Default exists or has
occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral

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and all of each Borrower’s and Guarantor’s books and records, including the Records, and (b)
each Borrower and Guarantor shall promptly furnish to Agent such copies of such books and records
or extracts therefrom as Agent may request, and Agent or any Lender or Agent’s designee may use
during normal business hours such of any Borrower’s and Guarantor’s personnel, equipment, supplies
and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or
has occurred and is continuing for the collection of Receivables and realization of other
Collateral. Furthermore, so long as any Event of Default has occurred and is continuing, Borrowers
shall provide Agent with access to their suppliers, provided that the Administrative Agent will
afford the Borrowers a reasonable opportunity to participate in any discussions with such
suppliers. Each Borrower and Guarantor shall deliver any document or instrument necessary for
Agent, as it may from time to time reasonably request, to obtain records from any service bureau or
other Person that maintains records for such Borrower or Guarantor, and shall maintain duplicate
records or supporting documentation on media, including computer tapes and discs owned by such
Borrower or Guarantor.

SECTION 8 REPRESENTATIONS AND WARRANTIES

     Each Borrower and Guarantor hereby represents and warrants to Agent, Lenders and Issuing Bank
the following (which shall survive the execution and delivery of this Agreement):

     8.1 Existence, Power and Authority. Each Borrower and Guarantor is a corporation or
limited liability company duly organized and in good standing under the laws of its jurisdiction of
organization or formation and is duly qualified as a foreign corporation or limited liability
company and in good standing in all states or other jurisdictions where the nature and extent of
the business transacted by it or the ownership of assets makes such qualification necessary, except
for those jurisdictions in which the failure to so qualify would not have a Material Adverse
Effect. The execution, delivery and performance of this Agreement, the other Financing Agreements
and the transactions contemplated hereunder and thereunder (a) are all within each Borrower’s and
Guarantor’s powers, (b) have been duly authorized, (c) are not in contravention of law or the terms
of any Borrower’s or Guarantor’s certificate of incorporation or formation, by laws, operating
agreements or other organizational documentation, or any indenture, agreement or undertaking to
which any Borrower or Guarantor is a party or by which any Borrower or Guarantor or its property
are bound and (d) will not result in the creation or imposition of, or require or give rise to any
obligation to grant, any lien, security interest, charge or other encumbrance upon any property of
any Borrower or Guarantor. This Agreement and the other Financing Agreements to which any Borrower
or Guarantor is a party constitute legal, valid and binding obligations of such Borrower and
Guarantor enforceable in accordance with their respective terms.

     8.2 Name; State of Organization; Chief Executive Office; Collateral Locations.

          (a) The exact legal name of each Borrower and Guarantor is as set forth on the signature page
of this Agreement and on Schedule 8.2. No Borrower or Guarantor has, during the five years
prior to the date of this Agreement, 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 or assets out of the ordinary course of business,
except as set forth on Schedule 8.2.

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          (b) Each Borrower and Guarantor is an organization of the type and organized in the
jurisdiction set forth on Schedule 8.2. Schedule 8.2 accurately sets forth the
organizational identification number of each Borrower and Guarantor or accurately states that such
Borrower or Guarantor has none and accurately sets forth the federal employer identification number
of each Borrower and Guarantor.

          (c) The chief executive office and mailing address of each Borrower and Guarantor and each
Borrower’s and Guarantor’s Records concerning Accounts are located only at the address identified
as such on Schedule 8.2 and its only other places of business and the only other locations
of Collateral, if any, are the addresses set forth on Schedule 8.2, subject to the rights
of any Borrower or Guarantor to establish new locations in accordance with Section 9.2
below. Schedule 8.2 correctly identifies any of such locations which are not owned by a
Borrower or Guarantor and sets forth the owners and/or operators thereof.

     8.3 Financial Statements; No Material Adverse Change. All financial statements
relating to any Borrower or Guarantor which have been or may hereafter be delivered by any Borrower
or Guarantor to Agent and Lenders have been prepared in accordance with GAAP (except as to any
interim financial statements, to the extent such statements are subject to normal year-end
adjustments and do not include any notes) and fairly present in all material respects the financial
condition and the results of operation of such Borrower and Guarantor as at the dates and for the
periods set forth therein. Except as disclosed in any interim financial statements furnished by
Borrowers and Guarantors to Agent prior to the date of this Agreement and except for the filing of
the Reorganization Cases, there has been no act, condition or event which has had or is reasonably
likely to have a Material Adverse Effect since the date of the most recent audited financial
statements of any Borrower or Guarantor furnished by any Borrower or Guarantor to Agent prior to
the date of this Agreement. The projections dated March 5, 2008 for the Fiscal Years ending in
2008 through 2012 that have been delivered to Agent or any projections hereafter delivered to Agent
have been prepared in light of the past operations of the businesses of Borrowers and Guarantors
and are based upon estimates and assumptions stated therein, all of which Borrowers and Guarantors
have determined to be reasonable and fair in light of the then current conditions and current facts
and reflect the good faith and reasonable estimates of Borrowers and Guarantors of the future
financial performance of Parent and its Subsidiaries and of the other information projected therein
for the periods set forth therein.

     8.4 Priority of Liens; Title to Properties. The security interests and liens granted
to Agent under this Agreement and the other Financing Agreements constitute valid and perfected
first priority liens and security interests in and upon the Collateral subject only to the liens
indicated on Schedule 8.4 and the other liens permitted under Section 9.8 hereof.
Each Borrower and Guarantor has good and marketable fee simple title to or valid leasehold
interests in all of its Real Property and good, valid and merchantable title to all of its other
properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or
charges of any kind, except those granted to Agent and such others as are specifically listed on
Schedule 8.4 or permitted under Section 9.8 hereof.

     8.5 Tax Returns. Each Borrower and Guarantor has filed, or caused to be filed, in a
timely manner (including, subject to any extensions permitted by applicable law) all tax returns,

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reports and declarations which are required to be filed by it. All information in such tax
returns, reports and declarations is complete and accurate in all material respects. Each Borrower
and Guarantor has paid or caused to be paid all taxes due and payable or claimed due and payable in
any assessment received by it, except taxes the validity of which are being contested in good faith
by appropriate proceedings diligently pursued and available to such Borrower or Guarantor and with
respect to which adequate reserves have been set aside on its books. Adequate provision has been
made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other
taxes whether or not yet due and payable and whether or not disputed.

     8.6 Litigation. Except as set forth on Schedule 8.6, (a) there is no
investigation by any Governmental Authority pending, or to the best of any Borrower’s or
Guarantor’s knowledge threatened, against or affecting any Borrower or Guarantor, its or their
assets or business and (b) there is no action, suit, proceeding or claim by any Person pending, or
to the best of any Borrower’s or Guarantor’s knowledge threatened, against any Borrower or
Guarantor or its or their assets or goodwill, or against or affecting any transactions contemplated
by this Agreement, in each case, which if adversely determined against such Borrower or Guarantor
has or could reasonably be expected to have a Material Adverse Effect.

     8.7 Compliance with Other Agreements and Applicable Laws.

          (a) Borrowers and Guarantors are not in default in any respect under, or in violation in any
respect of the terms of, any material agreement, contract, instrument, lease or other commitment to
which it is a party or by which it or any of its assets are bound. Borrowers and Guarantors are in
compliance with the requirements of all applicable laws, rules, regulations and orders of any
Governmental Authority relating to their respective businesses, including, without limitation,
those set forth in or promulgated pursuant to the Occupational Safety and Health Act of 1970, as
amended, the Fair Labor Standards Act of 1938, as amended, ERISA, the Code, as amended, and the
rules and regulations thereunder, all Environmental Laws, all Federal, State and local statutes,
regulations, rules and orders relating to consumer credit (including, without limitation, as each
has been amended, the Truth-in-Lending Act, the Fair Credit Billing Act, the Equal Credit
Opportunity Act and the Fair Credit Reporting Act, and regulations, rules and orders promulgated
thereunder), and all Federal, State and local states, regulations, rules and orders pertaining to
sales of consumer goods (including, without limitation, the Consumer Products Safety Act of 1972,
as amended, and the Federal Trade Commission Act of 1914, as amended, and all regulations, rules
and orders promulgated thereunder).

          (b) Borrowers and Guarantors have obtained all material permits, licenses, approvals,
consents, certificates, orders or authorizations of any Governmental Authority required for the
lawful conduct of its business (the “Permits”). All of the Permits are valid and
subsisting and in full force and effect. There are no actions, claims or proceedings pending or to
the best of any Borrower’s or Guarantor’s knowledge, threatened that seek the revocation,
cancellation, suspension or modification of any of the Permits.

     8.8 Environmental Compliance.

          (a) Except as set forth on Schedule 8.8, Borrowers, Guarantors and any Subsidiary of
any Borrower or Guarantor have not generated, used, stored, treated, transported,

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manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises
(whether or not owned by it) in any manner which at any time violates in any material respect any
applicable Environmental Law or Permit, and the operations of Borrowers, Guarantors and any
Subsidiary of any Borrower or Guarantor complies in all material respects with all Environmental
Laws and all Permits.

          (b) Except as set forth on Schedule 8.8, there has been no investigation by any
Governmental Authority or any proceeding, complaint, order, directive, claim, citation or notice by
any Governmental Authority or any other person nor is any pending or to the best of any Borrower’s
or Guarantor’s knowledge threatened, with respect to any non compliance with or violation of the
requirements of any Environmental Law by any Borrower or Guarantor or the release, spill or
discharge, threatened or actual, of any Hazardous Material or the generation, use, storage,
treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials
or any other environmental, health or safety matter, which adversely affects or could reasonably be
expected to adversely affect in any material respect any Borrower or Guarantor or its or their
business, operations or assets or any properties at which such Borrower or Guarantor has
transported, stored or disposed of any Hazardous Materials.

          (c) Except as set forth on Schedule 8.8, Borrowers and Guarantors have no material
liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or
actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials.

          (d) Borrowers and Guarantors have all Permits required to be obtained or filed in connection
with the operations of Borrowers and Guarantors under any Environmental Law and all of such
licenses, certificates, approvals or similar authorizations and other Permits are valid and in full
force and effect.

     8.9 Employee Benefits.

          (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 Internal Revenue
Service and to the best of any Borrower’s or Guarantor’s knowledge, nothing has occurred which
would cause the loss of such qualification. Each Borrower and its ERISA Affiliates 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 the Pension Funding Rules has
been made with respect to any Plan.

          (b) There are no pending, or to the best of any Borrower’s or Guarantor’s knowledge,
threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to
any Plan. There has been no prohibited transaction or violation of the fiduciary responsibility
rules with respect to any Plan.

          (c) (i) Except for the filing of the Reorganization Cases, no ERISA Event has occurred or is
reasonably expected to occur; (ii) based on the latest valuation of each Pension Plan and on the
actuarial methods and assumptions employed for such valuation (determined in

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accordance with the assumptions used for funding such Pension Plan pursuant to the Pension
Funding Rules), the aggregate current value of accumulated benefit liabilities of such Pension Plan
under Section 4001(a)(16) of ERISA does not exceed the aggregate current value of the assets of
such Pension Plan; (iii) each Borrower and Guarantor, and their ERISA Affiliates, have not incurred
and do not reasonably expect to incur, any liability under Title IV of ERISA with respect to any
Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) each Borrower
and Guarantor, and their ERISA Affiliates, have not incurred and do not reasonably expect 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
Multiemployer Plan; and (v) each Borrower and Guarantor, and their ERISA Affiliates, have not
engaged in a transaction that would be subject to Section 4069 or 4212(c) of ERISA.

     8.10 Bank Accounts. All of the deposit accounts, investment accounts or other
accounts in the name of or used by any Borrower or Guarantor maintained at any bank or other
financial institution are set forth on Schedule 8.10, subject to the right of each Borrower
and Guarantor to establish new accounts in accordance with Section 5.2 hereof.

     8.11 Intellectual Property. Each Borrower and Guarantor owns or licenses or otherwise
has the right to use all Intellectual Property necessary for the operation of its business as
presently conducted or proposed to be conducted. Borrowers and Guarantors do not have any
Intellectual Property registered, or subject to pending applications, in the United States Patent
and Trademark Office or any similar office or agency in the United States, any State thereof, any
political subdivision thereof or in any other country, other than those described on Schedule
8.11 and has not granted any licenses with respect thereto other than as set forth on
Schedule 8.11. No event has occurred which permits or would permit after notice or passage
of time or both, the revocation, suspension or termination of such rights. To the best of any
Borrower’s and Guarantor’s knowledge, no slogan or other advertising device, product, process,
method, substance or other Intellectual Property or goods bearing or using any Intellectual
Property presently contemplated to be sold by or employed by any Borrower or Guarantor infringes
any patent, trademark, servicemark, tradename, copyright, license or other Intellectual Property
owned by any other Person presently and no claim or litigation is pending or threatened against or
affecting any Borrower or Guarantor contesting its right to sell or use any such Intellectual
Property. Schedule 8.11 sets forth all of the agreements or other arrangements of each
Borrower and Guarantor pursuant to which such Borrower or Guarantor has a license or other right to
use any trademarks, logos, designs, representations or other Intellectual Property owned by another
person as in effect on the date hereof and the dates of the expiration of such agreements or other
arrangements of such Borrower or Guarantor as in effect on the date hereof (collectively, together
with such agreements or other arrangements as may be entered into by any Borrower or Guarantor
after the date hereof, collectively, the “License Agreements” and individually, a
“License Agreement”). No trademark, servicemark, copyright or other Intellectual Property
at any time used by any Borrower or Guarantor which is owned by another person, or owned by such
Borrower or Guarantor subject to any security interest, lien, collateral assignment, pledge or
other encumbrance in favor of any person other than Agent, is affixed to any Eligible Inventory,
except (a) to the extent permitted under the term of the license agreements listed on Schedule
8.11 and (b) to the extent the sale of Inventory to which such Intellectual Property is affixed
is

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permitted to be sold by such Borrower or Guarantor under applicable law (including the United
States Copyright Act of 1976).

     8.12 Subsidiaries; Affiliates; Capitalization; Solvency; Material Adverse Effect.

          (a) Each Borrower and Guarantor does not have any direct or indirect Subsidiaries and is not
engaged in any joint venture or partnership except as set forth on Schedule 8.12.

          (b) Each Borrower and Guarantor is the record and beneficial owner of all of the issued and
outstanding shares of Capital Stock of each of the Subsidiaries listed on Schedule 8.12 as
being owned by such Borrower or Guarantor and there are no proxies, irrevocable or otherwise, with
respect to such shares and no equity securities of any of the Subsidiaries are or may become
required to be issued by reason of any options, warrants, rights to subscribe to, calls or
commitments of any kind or nature and there are no contracts, commitments, understandings or
arrangements by which any Subsidiary is or may become bound to issue additional shares of it
Capital Stock or securities convertible into or exchangeable for such shares.

          (c) The issued and outstanding shares of Capital Stock of each Borrower (other than Parent)
and Guarantor are directly and beneficially owned and held by the Persons indicated on Schedule
8.12, and in each case all of such shares have been duly authorized and are fully paid and
non-assessable, free and clear of all claims, liens, pledges and encumbrances of any kind, except
as disclosed in writing to Agent prior to the date hereof.

          (d) Each Borrower and Guarantor (other than with respect to Fabrics MI and Merchandising and,
as to Merchandising, solely on account of the Intercompany Indebtedness) is Solvent and will
continue to be Solvent after the creation of the Obligations, the security interests of Agent and
the other transaction contemplated hereunder.

          (e) Since February 2, 2008, no event has occurred, that alone or together with other events,
could reasonably be expected to have a Material Adverse Effect.

     8.13 Labor Disputes.

          (a) Set forth on Schedule 8.13 is a list (including dates of termination) of all
collective bargaining or similar agreements between or applicable to each Borrower and Guarantor
and any union, labor organization or other bargaining agent in respect of the employees of any
Borrower or Guarantor on the date hereof.

          (b) There is (i) no significant unfair labor practice complaint pending against any Borrower
or Guarantor or, to the best of any Borrower’s or Guarantor’s knowledge, threatened against it,
before the National Labor Relations Board, and no significant grievance or significant arbitration
proceeding arising out of or under any collective bargaining agreement is pending on the date
hereof against any Borrower or Guarantor or, to best of any Borrower’s or Guarantor’s knowledge,
threatened against it, and (ii) no significant strike, labor dispute,

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slowdown or stoppage is
pending against any Borrower or Guarantor or, to the best of any Borrower’s or Guarantor’s
knowledge, threatened against any Borrower or Guarantor.

     8.14 Restrictions on Subsidiaries. Except for restrictions contained in this
Agreement or any other agreement with respect to Indebtedness of any Borrower or Guarantor
permitted hereunder, there are no contractual or consensual restrictions on any Borrower or
Guarantor or any of its Subsidiaries which prohibit or otherwise restrict (a) the transfer of cash
or other assets (i) between any Borrower or Guarantor and any of its or their Subsidiaries or (ii)
between any Subsidiaries of any Borrower or Guarantor or (b) the ability of any Borrower or
Guarantor or any of its or their Subsidiaries to incur Indebtedness or grant security interests to
Agent or any Lender in the Collateral.

     8.15 Material Contracts. Schedule 8.15 sets forth all Material Contracts to
which any Borrower or Guarantor is a party or is bound as of the date hereof. Borrowers and
Guarantors have delivered true, correct and complete copies of such Material Contracts to Agent on
or before the date hereof. Borrowers and Guarantors are not in breach or in default in any
material respect of or under any Material Contract and have not received any notice of the
intention of any other party thereto to terminate any Material Contract.

     8.16 Credit Card Agreements. Set forth on Schedule 8.16 is a correct and
complete list of all of the Credit Card Agreements and all other agreements, documents and
instruments existing as of the date hereof between or among any Borrower, any of its Subsidiaries,
the Credit Card Issuers, the Credit Card Processors and any of their Affiliates. The Credit Card
Agreements constitute all of such agreements necessary for each Borrower to operate its business as
presently conducted with respect to credit cards and debit cards and no Receivables of any Borrower
arise from purchases by customers of Inventory with credit cards or debit cards, other than those
which are issued by Credit Card Issuers with whom such Borrower has entered into one of the Credit
Card Agreements set forth on Schedule 8.16 hereto or with whom Borrower has entered into a
Credit Card Agreement in accordance with Section 9.18 hereof. Each of the Credit Card
Agreements constitutes the legal, valid and binding obligations of the Borrower that is party
thereto and to the best of each Borrower’s and Guarantor’s knowledge, the other parties thereto,
enforceable in accordance with their respective terms and is in full force and effect. No material
default or material event of default, or act, condition or event which after notice or passage of
time or both, would constitute a material default or a material event of default under any of the
Credit Card Agreements exists or has occurred that would entitle the other party thereto to
suspend, withhold or reduce amounts that would otherwise be payable to a Borrower. Each Borrower
and the other parties thereto have complied in all material respects with all of the terms and
conditions of the Credit Card Agreements to the extent necessary for such Borrower to be entitled
to receive all payments thereunder. Borrowers have delivered, or caused to be delivered to Agent,
true, correct and complete copies of all of the Credit Card Agreements.

     8.17 Interrelated Businesses. Borrowers and Guarantors make up a related organization
of various entities constituting a single economic and business enterprise so that Borrowers and
Guarantors share an identity of interests such that any benefit received by any one of them
benefits the others. Borrowers and Guarantors render services to or for the benefit of the other
Borrowers and/or Guarantors, as the case may be, purchase or sell and supply goods to or

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from or
for the benefit of the others, make loans, advances and provide other financial accommodations to
or for the benefit of the other Borrowers and Guarantors (including inter alia, the payment by
Borrowers and Guarantors of creditors of the other Borrowers or Guarantors and
guarantees by Borrowers and Guarantors of indebtedness of the other Borrowers and Guarantors
and provide administrative, marketing, payroll and management services to or for the benefit of the
other Borrowers and Guarantors). Substantially all of the Inventory is paid for pursuant to
Letters of Credit funded by Merchandising on behalf of the other Borrowers or are otherwise paid
for by Merchandising, and Borrowers use substantially all of the proceeds from the disposition of
the Inventory so purchased to repay the amounts owing to Merchandising as a result of such
arrangements. Borrowers and Guarantors have centralized accounting and legal services, certain
common officers and directors and generally do not provide consolidating financial statements to
creditors and certain Borrowers and Guarantors have the same chief executive office.

     8.18 Payable Practices. Each Borrower and Guarantor have not made any material change
in the historical accounts payable practices from those in effect immediately prior to the date
hereof.

     8.19 Accuracy and Completeness of Information. All information furnished by or on
behalf of any Borrower or Guarantor in writing to Agent or any Lender in connection with this
Agreement or any of the other Financing Agreements or any transaction contemplated hereby or
thereby, including all information on the Schedules hereto and in the Information Certificate is
true and correct in all material respects on the date as of which such information is dated or
certified and does not omit any material fact necessary in order to make such information not
misleading. No event or circumstance has occurred which has had or could reasonably be expected to
have a Material Adverse Affect, which has not been fully and accurately disclosed to Agent in
writing prior to the date hereof.

     8.20 Intercompany Indebtedness. As of the Closing Date, Schedule 8.20 sets
forth a list of all intercompany Indebtedness of the Parent and its Subsidiaries (such Indebtedness
hereinafter referred to as the “Intercompany Indebtedness”), identifying the payor and
payee in respect thereof, the outstanding principal amount of such Intercompany Indebtedness, and
whether or not such Intercompany Indebtedness is evidenced by a note or other document.

     8.21 Survival of Warranties; Cumulative. All representations and warranties contained
in this Agreement or any of the other Financing Agreements shall survive the execution and delivery
of this Agreement and shall be deemed to have been made again to Agent and Lenders on the date of
each additional borrowing or other credit accommodation hereunder and shall be conclusively
presumed to have been relied on by Agent and Lenders regardless of any investigation made or
information possessed by Agent or any Lender. The representations and warranties set forth herein
shall be cumulative and in addition to any other representations or warranties which any Borrower
or Guarantor shall now or hereafter give, or cause to be given, to Agent or any Lender.

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SECTION 9 AFFIRMATIVE AND NEGATIVE COVENANTS

     9.1 Maintenance of Existence.

          (a) Each Borrower and Guarantor shall at all times preserve, renew and keep in full force and
effect its existence and rights and franchises with respect thereto and maintain in
full force and effect all licenses, trademarks, tradenames, approvals, authorizations, leases,
contracts and Permits necessary to carry on the business as presently or proposed to be conducted,
other than as permitted in Section 9.7 hereto and other than the termination or expiration
of leases in the ordinary course of business.

          (b) No Borrower or Guarantor shall change its name unless each of the following conditions is
satisfied: (i) Agent shall have received not less than thirty (30) days prior written notice from
Administrative Borrower of such proposed change in its corporate name, which notice shall
accurately set forth the new name; and (ii) Agent shall have received a copy of the amendment to
the certificate of incorporation or formation of such Borrower or Guarantor providing for the name
change certified by the Secretary of State of the jurisdiction of incorporation or organization of
such Borrower or Guarantor as soon as it is available.

          (c) No Borrower or Guarantor shall change its chief executive office or its mailing address or
organizational identification number (or if it does not have one, shall not acquire one) unless
Agent shall have received not less than thirty (30) days’ prior written notice from Administrative
Borrower of such proposed change, which notice shall set forth such information with respect
thereto as Agent may require and Agent shall have received such agreements as Agent may reasonably
require in connection therewith. No Borrower or Guarantor shall change its type of organization,
jurisdiction of organization or other legal structure.

     9.2 New Collateral Locations. Each Borrower and Guarantor may only open any new
location, provided (a) such Borrower or Guarantor (i) gives Agent twenty (20) days prior written
notice of the intended opening of any such new location, (ii) prior to the opening of any new
location and the relocation of any Collateral or other assets or properties thereto, takes all
steps Agent deems necessary or desirable to grant to the Agent, for the benefit of the Secured
Parties, a first priority, perfected security interest in and lien on such assets or properties and
(iii) executes and delivers, or causes to be executed and delivered, to Agent such agreements,
documents, and instruments, including opinions of local counsel, as Agent may deem reasonably
necessary or desirable to protect its interests in the Collateral, assets and properties at such
location.

     9.3 Compliance with Laws, Regulations, Etc.

          (a) Each Borrower and Guarantor shall, and shall cause any Subsidiary to, at all times, comply
in all material respects with all laws, rules, regulations, licenses, approvals, orders and other
Permits applicable to it and duly observe all requirements of any foreign, Federal, State or local
Governmental Authority.

          (b) Borrowers and Guarantors shall give written notice to Agent immediately upon any
Borrower’s or Guarantor’s receipt of any notice of, or any Borrower’s or Guarantor’s

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otherwise
obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge,
threatened or actual, of any Hazardous Material or (ii) any investigation, proceeding, complaint,
order, directive, claims, citation or notice with respect to: (A) any non-compliance with or
violation of any Environmental Law by any Borrower or Guarantor or (B) the release, spill or
discharge, threatened or actual, of any Hazardous Material other than in the ordinary course of
business and other than as permitted under any applicable Environmental Law. Copies
of all environmental surveys, audits, assessments, feasibility studies and results of remedial
investigations shall be promptly furnished, or caused to be furnished, by such Borrower or
Guarantor to Agent. Each Borrower and Guarantor shall take prompt action to respond to any
material non-compliance with any of the Environmental Laws and shall regularly report to Agent on
such response.

          (c) Without limiting the generality of the foregoing, whenever Agent reasonably determines
that there is non-compliance, or any condition which requires any action by or on behalf of any
Borrower or Guarantor in order to avoid any non compliance, with any Environmental Law, Borrowers
shall, at Agent’s request and Borrowers’ expense: (i) cause an independent environmental engineer
reasonably acceptable to Agent to conduct such tests of the site where non-compliance or alleged
non compliance with such Environmental Laws has occurred as to such non-compliance and prepare and
deliver to Agent a report as to such non-compliance setting forth the results of such tests, a
proposed plan for responding to any environmental problems described therein, and an estimate of
the costs thereof and (ii) provide to Agent a supplemental report of such engineer whenever the
scope of such non-compliance, or such Borrower’s or Guarantor’s response thereto or the estimated
costs thereof, shall change in any material respect.

          (d) Each Borrower and Guarantor shall indemnify and hold harmless Agent and Lenders and their
respective directors, officers, employees, agents, invitees, representatives, successors and
assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses
(including reasonable attorneys’ fees and expenses) directly or indirectly arising out of or
attributable to the use, generation, manufacture, reproduction, storage, release, threatened
release, spill, discharge, disposal or presence of a Hazardous Material, including the costs of any
required or necessary repair, cleanup or other remedial work with respect to any property of any
Borrower or Guarantor and the preparation and implementation of any closure, remedial or other
required plans. All representations, warranties, covenants and indemnifications in this Section
9.3 shall survive the payment of the Obligations and the termination of this Agreement.

     9.4 Payment of Taxes and Claims. Each Borrower and Guarantor shall, and shall cause
any Subsidiary to, promptly pay and discharge all material taxes, assessments, contributions and
governmental charges upon or against it or its properties or assets, except for taxes the validity
of which are being contested in good faith by appropriate proceedings diligently pursued and
available to such Borrower, Guarantor or Subsidiary, as the case may be; provided,
that (i) adequate reserves with respect to such contest are maintained on the books of such
Borrower or Guarantor, in accordance with GAAP; (ii) no lien shall be imposed to secure payment of
such charges (other than payments to warehousemen and/or bailees) that is superior to any of the
liens securing the Obligations and such contest is maintained and prosecuted

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continuously and with
diligence and operates to suspend collection or enforcement of such charges; (iii) none of the
Collateral becomes subject to forfeiture or loss as a result of such contest; and (iv) such
Borrower or Guarantor shall promptly pay or discharge such contested charges, Taxes or claims and
all additional charges, interest, penalties and expenses, if any, and shall deliver to Agent
evidence reasonably acceptable to Agent of such compliance, payment or
discharge, if such contest is terminated or discontinued adversely to such Borrower or
Guarantor or the conditions set forth in this Section 9.4 are no longer met.

     9.5 Insurance. Each Borrower and Guarantor shall, and shall cause any Subsidiary to,
at all times, maintain with financially sound and reputable insurers insurance with respect to the
Collateral against loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation engaged in the
same or similar businesses and similarly situated. Said policies of insurance shall be reasonably
satisfactory to Agent as to form, amount and insurer. Borrowers and Guarantors shall furnish
certificates, policies or endorsements to Agent as Agent shall reasonably require as proof of such
insurance, and, if any Borrower or Guarantor fails to do so, Agent is authorized, but not required,
to obtain such insurance at the expense of Borrowers. All policies shall provide for at least
thirty (30) days prior written notice to Agent of any cancellation or reduction of coverage and
that Agent may act as attorney for each Borrower and Guarantor in obtaining, and at any time an
Event of Default exists or has occurred and is continuing, adjusting, settling, amending and
canceling such insurance. Borrowers and Guarantors shall cause Agent to be named as a lender loss
payee and an additional insured (but without any liability for any premiums) under such insurance
policies and Borrowers and Guarantors shall obtain non-contributory lender’s loss payable
endorsements to all insurance policies in form and substance satisfactory to Agent. Such lender’s
loss payable endorsements shall specify that the proceeds of such insurance shall be payable to
Agent as its interests may appear and further specify that Agent and Lenders shall be paid
regardless of any act or omission by any Borrower, Guarantor or any of its or their Subsidiaries.
Without limiting any other rights of Agent or Lenders, any insurance proceeds received by Agent at
any time may be applied to payment of the Obligations, whether or not then due, in any order and in
such manner as Agent may determine. Upon application of such proceeds to the Revolving Loans,
Revolving Loans may be available subject and pursuant to the terms hereof to be used for the costs
of repair or replacement of the Collateral lost or damages resulting in the payment of such
insurance proceeds.

     9.6 Financial Statements and Other Information.

          (a) Each Borrower and Guarantor shall, and shall cause any Subsidiary to, keep proper books
and records in which true and complete entries shall be made of all dealings or transactions of or
in relation to the Collateral and the business of such Borrower, Guarantor and its Subsidiaries in
accordance with GAAP. Borrowers and Guarantors shall promptly furnish to Agent and Lenders all
such financial and other information as Agent shall reasonably request relating to the Collateral
and the assets, business and operations of Borrowers and Guarantors, and Borrower shall notify the
auditors and accountants of Borrowers and Guarantors that Agent is authorized to obtain such
information directly from them. Without limiting the foregoing, Borrowers shall furnish or cause
to be furnished to Agent, the following:

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               (i) within thirty (30) days after the end of each Fiscal Month, consolidated unaudited balance
sheets as of the close of such Fiscal Month and the related statements of income (including a
calculation of EBITDA) and cash flows for such Fiscal Month and for that portion of the Fiscal Year
ending as of the close of such Fiscal Month, together with a comparison of the figures for the
corresponding periods in the prior Fiscal Year and the figures
contained in the projections for such Fiscal Year, all prepared in accordance with GAAP
(subject to normal year-end adjustments). Such financial information shall be accompanied by a
certificate substantially in the form of Exhibit D hereto signed by the chief financial
officer of Parent certifying that (a) such financial information presents fairly in accordance with
GAAP (subject to normal year-end adjustments) the financial position and results of operations of
Parent and its Subsidiaries, on a consolidated basis, in each case as at the end of such Fiscal
Month and for that portion of the Fiscal Year then ended, (b) any other information presented is
true, correct and complete in all material respects and that there was no Default or Event of
Default in existence as of such time or, if a Default or Event of Default has occurred and is
continuing, describing the nature thereof and all efforts undertaken to cure such Default or Event
of Default, and (c) whether Borrowers and Guarantors were in compliance with the covenants set
forth in Section 9.19 of this Agreement for such Fiscal Month and attaching a schedule in
form reasonably satisfactory to Agent showing calculations used in determining, as of the end of
such Fiscal Month, whether Borrowers and Guarantors were in compliance with the covenant set forth
in Section 9.19 of this Agreement for such Fiscal Month.

               (ii) within ninety (90) days after the end of each Fiscal Year, audited consolidated financial
statements and unaudited consolidating financial statements of Parent and its Subsidiaries
(including, in each case, balance sheets, statements of income and loss, statements of cash flow
and statements of shareholders’ equity), and the accompanying notes thereto, all in reasonable
detail, fairly presenting in all material respects the financial position and the results of the
operations of Parent and its Subsidiaries as of the end of and for such Fiscal Year, together with
the unqualified opinion of independent certified public accountants with respect to the audited
consolidated financial statements, which accountants shall be an independent accounting firm
selected by the audit committee of Parent and acceptable to Agent (it being understood that any of
the “Big Four” accounting firms Burr, Pilger & Mayer, LLP or Horne, LLP is acceptable to Agent),
that such audited consolidated financial statements have been prepared in accordance with GAAP, and
present fairly in all material respects the results of operations and financial condition of Parent
and its Subsidiaries as of the end of and for the Fiscal Year then ended, and

               (iii) at such time as available, but in no event later than fifteen (15) days prior to the end
of each Fiscal Year (commencing with the Fiscal Year of Borrowers ending on or about February 2,
2008), projected consolidated financial statements (including, in each case, forecasted balance
sheets and statements of income and loss, statements of cash flow, and statements of shareholders’
equity) of Parent and its Subsidiaries for the next Fiscal Year and a projected availability model,
all in reasonable detail, and in a format consistent with the projections delivered by Borrowers to
Agent prior to the date hereof, together with such supporting information as Agent may reasonably
request. Such projected financial statements and availability model shall be prepared on a monthly
basis for the next succeeding year. Such projections and availability model shall represent the
reasonable best estimate by Borrowers and

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Guarantors of the future financial performance of Parent
and its Subsidiaries for the periods set forth therein and shall have been prepared on the basis of
the assumptions set forth therein which Borrowers and Guarantors believe are fair and reasonable as
of the date of preparation in light of current and reasonably foreseeable business conditions (it
being understood that actual results may differ from those set forth in such projected financial
statements and availability model).
Each year Borrowers shall provide to Agent a semi-annual update with respect to such
projections and availability model or, at any time a Default or Event of Default exists or has
occurred and is continuing, more frequently as Agent may require.

          (b) Borrowers and Guarantors shall promptly notify Agent in writing of the details of (i) any
loss, damage, investigation, action, suit, proceeding or claim relating to Collateral having a
value of more than $250,000 or which if adversely determined would result in any material adverse
change in any Borrower’s or Guarantor’s business, properties, assets, goodwill or condition,
financial or otherwise, (ii) any Material Contract being terminated or amended or any new Material
Contract entered into (in which event Borrowers and Guarantors shall provide Agent with a copy of
such Material Contract), (iii) any order, judgment or decree in excess of $250,000 shall have been
entered against any Borrower or Guarantor any of its or their properties or assets, (iv) any
notification of a material violation of laws or regulations received by any Borrower or Guarantor,
(v) any ERISA Event, and (vi) the occurrence of any Default or Event of Default.

          (c) Promptly after the sending or filing thereof, Borrowers shall send to Agent copies of (i)
all reports which Parent or any of its Subsidiaries sends to its security holders generally, (ii)
all reports and registration statements which Parent or any of its Subsidiaries files with the
Securities Exchange Commission, any national or foreign securities exchange or the National
Association of Securities Dealers, Inc., and such other reports as Agent may hereafter specifically
identify to Administrative Borrower that Agent will require be provided to Agent, (iii) all press
releases and (iv) all other statements concerning material changes or developments in the business
of a Borrower or Guarantor made available by any Borrower or Guarantor to the public.

          (d) Borrowers and Guarantors shall furnish or cause to be furnished to Agent such budgets,
forecasts, projections and other information respecting the Collateral and the business of
Borrowers and Guarantors, as Agent may, from time to time, reasonably request. Agent is hereby
authorized to deliver a copy of any financial statement or any other information relating to the
business of Borrowers and Guarantors to any court or other Governmental Authority or to any Lender
or Participant or prospective Lender or Participant or any Affiliate of any Lender or Participant.
Each Borrower and Guarantor hereby irrevocably authorizes and directs all accountants or auditors
to deliver to Agent, at Borrowers’ expense, copies of the financial statements of any Borrower and
Guarantor and any reports or management letters prepared by such accountants or auditors on behalf
of any Borrower or Guarantor and to disclose to Agent and Lenders such information as they may have
regarding the business of any Borrower and Guarantor. Any documents, schedules, invoices or other
papers delivered to Agent or any Lender may be destroyed or otherwise disposed of by Agent or such
Lender one (1) year after the same are delivered to Agent or such Lender, except as otherwise
designated by Administrative Borrower to Agent or such Lender in writing.

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          (e) Borrowers and Guarantors shall promptly notify Agent in advance in writing of any proposed
material amendment to the Elavon Processor Agreement (it is understood and agreed that any
amendment to to Section B.6 of the Elavon Processor Agreement, any grant of the security interests
and liens made by Parent thereunder or in respect
thereof or the obligations secured by such security interests and liens shall be deemed to be
a material amendment to the Elavon Processor Agreement) and/or replacement of the Elavon Member.

     9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Each Borrower and
Guarantor shall not, and shall not permit any Subsidiary to, directly or indirectly,

          (a) merge into or with or consolidate with any other Person or permit any other Person to
merge into or with or consolidate with it except that any wholly-owned Subsidiary of Parent (other
than any Borrower) may merge with and into or consolidate with any other wholly-owned Subsidiary of
Parent (other than any Borrower, and including any such Subsidiary that only becomes a Subsidiary
after giving effect to such merger or consolidation subject to the conditions set forth herein) and
any Borrower may merge with and into or consolidate with any other Borrower, provided,
that, in each case each of the following conditions is satisfied as determined by Agent:
(i) Agent shall have received not less than ten (10) Business Days’ prior written notice of the
intention of such Subsidiaries to so merge or consolidate, which notice shall set forth in
reasonable detail satisfactory to Agent, the Persons that are merging or consolidating, which
Person will be the surviving entity, the locations of the assets of the Persons that are merging or
consolidating, and the material agreements and documents relating to such merger or consolidation,
(ii) Agent shall have received such other information with respect to such merger or consolidation
as Agent may reasonably request, (iii) as of the effective date of the merger or consolidation and
after giving effect thereto, no Default or Event of Default shall exist or have occurred, (iv)
Agent shall have received, true, correct and complete copies of all agreements, documents and
instruments relating to such merger or consolidation, including, but not limited to, the
certificate or certificates of merger to be filed with each appropriate Secretary of State (with a
copy as filed promptly after such filing), and (v) the surviving corporation shall expressly
confirm, ratify and assume the Obligations and the Financing Agreements to which it is a party in
writing, in form and substance reasonably satisfactory to Agent, and Borrowers and Guarantors shall
execute and deliver such other agreements, documents and instruments as Agent may request in
connection therewith;

          (b) sell, issue, assign, lease, license, transfer, abandon or otherwise dispose of any Capital
Stock or Indebtedness to any other Person or any of its assets to any other Person, except for:

               (i) Permitted Dispositions; provided, that, in the event of a sale of Real
Property (other than the Baldwyn Real Property) by any Borrower or Guarantor, (A) Agent shall have
received not less than ten (10) Business Days’ prior written notice of such sale by such Borrower
or Guarantor, which notice shall specify the parties to whom such Real Property is to be sold, the
terms of such sale, the total amount which it is anticipated will be realized from the sale of such
Real Property and the net cash proceeds which it is anticipated will be received by such Borrower
or Guarantor from such sale, (B) the terms and conditions of the sale thereof

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shall be acceptable
to Agent, (C) except as Agent may otherwise agree in writing, all of the proceeds of the sale of
such Real Property shall be paid to Agent for application to the Obligations in accordance with the
terms hereof and (D) as of the date of such sale and after giving effect thereto, no Default or
Event of Default shall exist or have occurred,

               (ii) the issuance of Capital Stock of Parent consisting of common stock pursuant to a
restricted stock award, an employee stock option or grant or similar equity plan or 401(k) plans of
Parent for the benefit of its employees, directors and consultants, provided, that,
in no event shall Parent be required to issue, or shall Parent issue, Capital Stock pursuant to
such stock plans or 401(k) plans which would result in a Change of Control or other Event of
Default,

               (iii) the sublease by any Borrower or Guarantor of any Real Property leased by such Borrower
or Guarantor; provided, that, as to any such sublease, (A) after giving effect
thereto, no Default or Event of Default shall exist or have occurred and be continuing, and (B)
such sublease shall be on commercially reasonable prices and terms in a bona fide arm’s length
transaction,

               (iv) Licenses and sublicenses of Intellectual Property by a Borrower or Guarantor to another
Borrower or Guarantor in the ordinary course of business and consistent with past practices,

               (v) the issuance of the Specified Subordinated Indebtedness, the Specified Warrants and the
Specified Common Stock in accordance with the term of the Specified Subordinated Indebtedness
Documents, or

               (vi) the Baldwyn Real Property Sale-Leaseback.

          (c) wind up, liquidate or dissolve except that any Guarantor or Subsidiary of Parent (other
than a Borrower) may wind up, liquidate and dissolve, provided, that, each of the
following conditions is satisfied: (i) the winding up, liquidation and dissolution of such
Guarantor or other Subsidiary shall not violate any law or any order or decree of any court or
other Governmental Authority in any material respect and shall not conflict with or result in the
breach of, or constitute a default under, any indenture, mortgage, deed of trust, or any other
agreement or instrument to which any Borrower or Guarantor is a party or may be bound, (ii) such
winding up, liquidation or dissolution shall be done in accordance with the requirements of all
applicable laws and regulations, (iii) effective upon such winding up, liquidation or dissolution,
all of the assets and properties of such Guarantor or other Subsidiary shall be duly and validly
transferred and assigned to its shareholders, free and clear of any liens, restrictions or
encumbrances other than the security interest and liens of Agent (and Agent shall have received
such evidence thereof as Agent may require) and Agent shall have received such deeds, assignments
or other agreements as Agent may request to evidence and confirm the transfer of such assets of
such Guarantor to a Borrower, (iv) Agent shall have received all documents and agreements that any
Borrower or Guarantor has filed with any Governmental Authority or as are otherwise required to
effectuate such winding up, liquidation or dissolution, (v) no Borrower or Guarantor shall assume
any Indebtedness, obligations or liabilities as a result of such winding up, liquidation or
dissolution, or otherwise become liable in respect of any obligations or liabilities of the entity
that is winding up, liquidating or dissolving, unless such Indebtedness is otherwise

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expressly
permitted hereunder, (vi) Agent shall have received not less than ten (10) Business Days prior
written notice of the intention of such Guarantor or Subsidiary to wind up, liquidate or dissolve,
and (vii) as of the date of such winding up, liquidation or dissolution and after giving effect
thereto, no Default or Event of Default shall exist or have occurred; or

          (d) agree to do any of the foregoing.

     9.8 Encumbrances. Each Borrower and Guarantor shall not, and shall not permit any
Subsidiary to, create, incur, assume or suffer to exist any security interest, mortgage, pledge,
lien, charge or other encumbrance of any nature whatsoever on any of its assets or properties,
including the Collateral, or file or permit the filing of, or permit to remain in effect, any
financing statement or other similar notice of any security interest or lien with respect to any
such assets or properties, except:

          (a) the security interests and liens of Agent for itself and the benefit of the Secured
Parties;

          (b) liens securing the payment of taxes, assessments or other governmental charges or levies
either not yet overdue or the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to such Borrower, or Guarantor or Subsidiary, as the
case may be and with respect to which adequate reserves have been set aside on its books;

          (c) non-consensual statutory liens (other than liens securing the payment of taxes) arising in
the ordinary course of such Borrower’s, Guarantor’s or Subsidiary’s business to the extent: (i)
such liens secure Indebtedness which is not overdue or (ii) such liens secure Indebtedness relating
to claims or liabilities which are fully insured and being defended at the sole cost and expense
and at the sole risk of the insurer or being contested in good faith by appropriate proceedings
diligently pursued and available to such Borrower, Guarantor or such Subsidiary, in each case prior
to the commencement of foreclosure or other similar proceedings and with respect to which adequate
reserves have been set aside on its books;

          (d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the
use of Real Property which do not interfere in any material respect with the use of such Real
Property or ordinary conduct of the business of such Borrower, Guarantor or such Subsidiary as
presently conducted thereon or materially impair the value of the Real Property which may be
subject thereto;

          (e) purchase money security interests in Equipment (including Capital Leases) and purchase
money mortgages on Real Property to secure Indebtedness permitted under Section 9.9(b)
hereof;

          (f) pledges and deposits of cash by any Borrower or Guarantor after the date hereof in the
ordinary course of business in connection with workers’ compensation, unemployment insurance and
other types of social security benefits consistent with the current practices of such Borrower or
Guarantor as of the date hereof;

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          (g) pledges and deposits of cash by any Borrower or Guarantor after the date hereof to secure
the performance of tenders, bids, leases, trade contracts (other than for the repayment of
Indebtedness), statutory obligations and other similar obligations in each case in the ordinary
course of business consistent with the current practices of such Borrower or Guarantor as of the
date hereof; provided, that, in connection with any performance bonds issued
by a surety or other person, the issuer of such bond shall have waived in writing any rights
in or to, or other interest in, any of the Collateral in an agreement, in form and substance
reasonably satisfactory to Agent;

          (h) liens arising from (i) operating leases and the precautionary UCC financing statement
filings in respect thereof and (ii) equipment or other materials which are not owned by any
Borrower or Guarantor located on the premises of such Borrower or Guarantor (but not in connection
with, or as part of, the financing thereof) from time to time in the ordinary course of business
and consistent with current practices of such Borrower or Guarantor and the precautionary UCC
financing statement filings in respect thereof;

          (i) liens or rights of setoff against credit balances of Borrowers with Credit Card Issuers or
Credit Card Processors or amounts owing by such Credit Card Issuers or Credit Card Processors to
Borrower in the ordinary course of business, but not liens on or rights of setoff against any other
property or assets of Borrowers, pursuant to the Credit Card Agreements (as in effect on the date
hereof) to secure the obligations of Borrowers to the Credit Card Issuers or Credit Card Processors
as a result of fees and chargebacks;

          (j) statutory or common law liens or rights of setoff of depository banks with respect to
funds of Borrowers or Guarantors at such banks to secure fees and charges in connection with
returned items or the standard fees and charges of such banks in connection with the deposit
accounts maintained by Borrowers and Guarantors at such banks (but not any other Indebtedness or
obligations);

          (k) judgments and other similar liens arising in connection with court proceedings that do not
constitute an Event of Default, provided, that, (i) such liens are being contested
in good faith and by appropriate proceedings diligently pursued, (ii) adequate reserves or other
appropriate provision, if any, as are required by GAAP have been made therefor, (iii) a stay of
enforcement of any such liens is in effect and (iv) Agent may establish a Reserve with respect
thereto;

          (l) the security interests and liens set forth on Schedule 8.4 which are not permitted
by the other provisions of Section 9.8 above;

          (m) non-consensual security interests and liens which are not permitted by the other
provisions of Section 9.8 above to secure Indebtedness and other liabilities in an amount
not to exceed $100,000 in the aggregate;

          (n) liens of the trustee for the holders of the Specified Subordinated Indebtedness securing
the Specified Subordinated Indebtedness, provided that such liens are junior in rank to the
security interests and liens of Agent for itself and the benefit of the Secured Parties and subject
to the Subordination Provisions; and

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          (o) the security interests and liens identified on Schedule 1.6 hereof, provided that
Borrowers are in compliance with Section 9.27(a).

     9.9 Indebtedness. Each Borrower and Guarantor shall not, and shall not permit any
Subsidiaries to, incur, create, assume, become or be liable in any manner with respect to, or
permit to exist, any Indebtedness, or guarantee, assume, endorse, or otherwise become responsible
for (directly or indirectly), the Indebtedness, performance, obligations or dividends of any other
Person, except:

          (a) the Obligations;

          (b) purchase money Indebtedness (including Capital Leases) arising after the date hereof to
the extent secured by purchase money security interests in Equipment (including Capital Leases) and
purchase money mortgages on Real Property not to exceed $2,500,000 in the aggregate at any time
outstanding so long as such security interests and mortgages do not apply to any property of such
Borrower, Guarantor or Subsidiary other than the Equipment or Real Property so acquired, and the
Indebtedness secured thereby does not exceed the cost of the Equipment or Real Property so
acquired, as the case may be;

          (c) guarantees by any Borrower or Guarantor of the Obligations of the other Borrowers or
Guarantors in favor of Agent for the benefit of Lenders;

          (d) the Indebtedness of any Borrower or Guarantor to any other Borrower or Guarantor arising
pursuant to loans permitted under Section 9.10(d) or (e) hereof, provided,
that, as to any such Indebtedness at any time owing by a Borrower to a Guarantor, (i) the
Indebtedness arising pursuant to such loans shall be subject to, and subordinate in right of
payment to, the right of Agent and Lenders to receive the prior final payment and satisfaction in
full of all of the Obligations on terms and conditions acceptable to Agent, (ii) such Borrower or
such Guarantor shall join the Intercompany Subordination Agreement pursuant to a joinder agreement
in form and substance reasonably satisfactory to the Agent, (iii) such Borrower shall not, directly
or indirectly make, or be required to make, any payments in respect of such Indebtedness prior to
the end of the then current term of this Agreement, except that Parent and Merchandising may make
regularly scheduled payments of interest to Resources on a semi-annual basis at the end of the
second and fourth Fiscal Quarters of Parent in respect of intercompany loans made by Resources to
Parent or Merchandising, as the case may be, so long as Resources immediately applies all of the
proceeds of such interest payments to make an intercompany loan in cash to Parent or Merchandising
in accordance with the terms of Section 9.10(d) hereof; and (iv) in the case of any
Indebtedness owing to a Borrower or Guarantor, the Indebtedness arising pursuant to any such loan
shall not be evidenced by a promissory note or other instrument, unless the single original of such
note or other instrument is promptly delivered to Agent upon its request to hold as part of the
Collateral, with such endorsement and/or assignment by the payee of such note or other instrument
as Agent may require;

          (e) Indebtedness of any Borrower or Guarantor entered into in the ordinary course of business
pursuant to a Hedge Agreement; provided, that, (i) such arrangements are with a
Bank Product Provider, (ii) such arrangements are not for speculative purposes, and (iii) such
Indebtedness shall be unsecured, except to the extent such Indebtedness constitutes part

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of the
Obligations arising under or pursuant to Hedge Agreements with any Bank Product Provider that are
secured under the terms hereof;

          (f) unsecured guarantees by Parent or a Borrower of the obligations of a Borrower arising
pursuant to a lease from a third party in a bona fide arm’s length transaction of real property for
use as a retail store location in the ordinary course of the business of such Borrower;
provided, that, (i) the Person issuing such guarantee is permitted hereunder to
incur directly the obligation that is being guaranteed and (ii) as of the date on which such
guarantee is issued no Event of Default exists or has occurred and is continuing;

          (g) Specified Subordinated Indebtedness and unsecured Indebtedness of any Borrower or
Guarantor arising after the Closing Date to any third person (but not to any other Borrower or
Guarantor), provided, that, in each case, each of the following conditions is
satisfied as determined by Agent: (i) such Indebtedness shall be on terms and conditions acceptable
to Agent and shall be subject and subordinate in right of payment to the right of Agent and Lenders
to receive the prior indefeasible payment and satisfaction in full payment of all of the
Obligations pursuant to the terms of an intercreditor agreement between Agent and such third party,
in form and substance satisfactory to Agent, (ii) Agent shall have received not less than ten (10)
days prior written notice of the intention of such Borrower or Guarantor to incur such
Indebtedness, which notice shall set forth in reasonable detail satisfactory to Agent the amount of
such Indebtedness, the person or persons to whom such Indebtedness will be owed, the interest rate,
the schedule of repayments and maturity date with respect thereto and such other information as
Agent may request with respect thereto, (iii) Agent shall have received true, correct and complete
copies of all Subordinated Debt Documents evidencing or otherwise related to such Indebtedness,
(iv) except as Agent may otherwise agree in writing, and except with respect to the Specified
Subordinated Indebtedness, all of the proceeds of the loans or other accommodations giving rise to
such Indebtedness shall be paid to Agent for application to the Obligations in accordance with
Section 6.4(a), (v) as of the date of incurring such Indebtedness and after giving effect
thereto, no Default or Event of Default shall exist or have occurred, (vi) such Borrower and
Guarantor shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such
Indebtedness or any agreement, document or instrument related thereto, except, that, such Borrower
or Guarantor may, after prior written notice to Agent, amend, modify, alter or change the terms
thereof so as to extend the maturity thereof, or defer the timing of any payments in respect
thereof, or to forgive or cancel any portion of such Indebtedness (other than pursuant to payments
thereof), or to reduce the interest rate or any fees in connection therewith, or (B) redeem,
retire, defease, purchase or otherwise acquire such Indebtedness (except as otherwise expressly
permitted under Section 9.11(g)), or set aside or otherwise deposit or invest any sums for
such purpose, and (vii) Borrowers and Guarantors shall furnish to Agent all notices or demands in
connection with such Indebtedness either received by any Borrower or Guarantor or on its behalf
promptly after the receipt thereof, or sent by any Borrower or Guarantor or on its behalf
concurrently with the sending thereof, as the case may be;

          (h) Indebtedness arising from lease payments in connection with one or more sale-leaseback
transactions in respect of (i) the Owned Real Properties, and (ii) the Real Properties formerly
owned by Borrowers located at 3245 South Florida Avenue, Lakeland, Florida 33803 and 4705 Navarro
Street, Victoria, Texas 77904;

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          (i) the Indebtedness set forth on Schedule 9.9 to which are not permitted by the other
provisions of Section 9.9 above; provided, that, (i) Borrowers and
Guarantors may only
make regularly scheduled payments of principal and interest in respect of such Indebtedness in
accordance with the terms of the agreement or instrument evidencing or giving rise to such
Indebtedness as in effect on the date hereof, (ii) Borrowers and Guarantors shall not, directly or
indirectly, (A) amend, modify, alter or change the terms of such Indebtedness or any agreement,
document or instrument related thereto as in effect on the date hereof except, that, Borrowers and
Guarantors may, after prior written notice to Agent, amend, modify, alter or change the terms
thereof so as to extend the maturity thereof, or defer the timing of any payments in respect
thereof, or to forgive or cancel any portion of such Indebtedness (other than pursuant to payments
thereof), or to reduce the interest rate or any fees in connection therewith, or (B) redeem,
retire, defease, purchase or otherwise acquire such Indebtedness, or set aside or otherwise deposit
or invest any sums for such purpose, and (iii) Borrowers and Guarantors shall furnish to Agent all
notices or demands in connection with such Indebtedness either received by any Borrower or
Guarantor or on its behalf, promptly after the receipt thereof, or sent by any Borrower or
Guarantor or on its behalf, concurrently with the sending thereof, as the case may be; and

          (j) unsecured Indebtedness of any Borrower or Guarantor arising after the date hereof to any
third person which is not permitted by the other provisions of Section 9.9 above in an
aggregate outstanding amount not to exceed $100,000 at any time.

     9.10 Loans, Investments, Etc. Each Borrower and Guarantor shall not, and shall not
permit any Subsidiary to, directly or indirectly, purchase, hold or acquire (including pursuant to
any merger with any Person that was not a wholly owned Subsidiary immediately prior to such merger)
any Capital Stock, evidences of indebtedness or other securities (including any option, warrant or
other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to,
or make or permit to exist any investment or any other interest in, any other Person, or purchase
or otherwise acquire (in one transaction or a series of transactions) any assets of any other
Person constituting a business unit or all or a substantial part of the assets or property of any
other Person (whether through purchase of assets, merger or otherwise), or form or acquire any
Subsidiaries, or agree to do any of the foregoing (each of the foregoing an “Investment”), except:

          (a) Permitted Investments;

          (b) Permitted Acquisitions;

          (c) Investments by a Borrower, Guarantor or other Subsidiary of Parent in a Borrower or by a
Guarantor or other Subsidiary of Parent (other than a Borrower) in another Guarantor, in each case
after the date hereof, provided, that, to the extent that such Investment gives
rise to any Indebtedness, such Indebtedness is permitted hereunder and to the extent that such
Investment gives rise to the issuance of any shares of Capital Stock, such issuance is permitted
hereunder;

          (d) loans by a Borrower or Guarantor to another Borrower or Guarantor after the date hereof,
provided, that,

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               (i) as to all of such loans, (A) within thirty (30) days after the end of each Fiscal Month,
Borrowers shall provide to Agent a report in form and substance reasonably satisfactory to Agent of
the outstanding amount of such loans as of the last day of the immediately preceding month and
indicating any loans made and payments received during the immediately preceding month, (B) the
Indebtedness arising pursuant to any such loan shall not be evidenced by a promissory note or other
instrument, unless the single original of such note or other instrument (and any amendment or
modification thereto) is promptly delivered to Agent to hold as part of the Collateral, with such
endorsement and/or assignment by the payee of such note or other instrument as Agent may require,

               (ii) as to loans by a Borrower to a Guarantor or by a Guarantor to another Guarantor, (A) as
of the date of any such loan and after giving effect thereto, the Borrower or Guarantor making such
loan shall be Solvent, and (B) as of the date of any such loan and after giving effect thereto, as
of the date of any such loan and after giving effect thereto, no Default or Event of Default shall
exist or have occurred and be continuing,

               (iii) as to loans by a Guarantor to a Borrower, (A) the Indebtedness arising pursuant to such
loan shall be subject to, and subordinate in right of payment to, the right of Agent and Lenders to
receive the prior final payment and satisfaction in full of all of the Obligations on terms and
conditions acceptable to Agent, (B) promptly upon Agent’s request, Agent shall have received a
subordination agreement, in form and substance satisfactory to Agent, providing for the terms of
the subordination in right of payment of such Indebtedness of such Borrower to the prior final
payment and satisfaction in full of all of the Obligations, duly authorized, executed and delivered
by such Guarantor and such Borrower, and (C) such Borrower shall not, directly or indirectly make,
or be required to make, any payments in respect of such Indebtedness prior to the end of the then
current term of this Agreement, except that Parent and Merchandising may make regularly scheduled
payments of interest to Resources on a semi-annual basis at the end of the second and fourth Fiscal
Quarters of Parent in respect of intercompany loans made by Resources to Parent or Merchandising,
as the case may be, so long as Resources immediately applies all of the proceeds of such interest
payments to make an intercompany loan in cash to Parent or Merchandising in accordance with the
terms of Section 9.10(d) hereof; and

               (iv) the aggregate outstanding principal amount of all loans made by Borrowers to Guarantors
shall not exceed $100,000 at any time; and

          (e) the loans and advances set forth on Schedule 9.10 which are not permitted by the
other provisions of Section 9.10 above; provided, that:

               (i) as to all such loans and advances, (A) Borrowers and Guarantors shall not, directly or
indirectly, amend, modify, alter or change the terms of such loans and advances or any agreement,
document or instrument related thereto, except that Borrowers and Guarantors may amend any such
agreement, document or instrument to increase the principal amount of any loans made by a Guarantor
to a Borrower so long as the single original of any amendment to any note or other instrument shall
be promptly delivered to Agent to hold as part of the Collateral with such endorsement and/or
assignment by the payee of such note or other instrument as Agent may require, and (B) Borrowers
and Guarantors shall furnish to Agent all

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notices or demands in connection with such loans and advances either received by any Borrower
or Guarantor or on its behalf, promptly after the receipt thereof, or sent by any Borrower or
Guarantor or on its behalf, concurrently with the sending thereof, as the case may be; and

               (ii) as to loans by a Guarantor to a Borrower, (A) the Indebtedness arising pursuant to such
loan shall be subject to, and subordinate in right of payment to, the right of Agent and Lenders to
receive the prior final payment and satisfaction in full of all of the Obligations on terms and
conditions acceptable to Agent, (B) Agent shall have received the Intercompany Subordination
Agreement duly authorized, executed and delivered by such Guarantor and such Borrower, and (C) such
Borrower shall not, directly or indirectly make, or be required to make, any payments in respect of
such Indebtedness prior to the end of the then current term of this Agreement, except that Parent
and Merchandising may make payments of interest to Resources on a quarterly basis in respect of
intercompany loans by Resources to Parent or Merchandising, as the case may be, so long as
Resources immediately applies all of the proceeds of such interest payments to make an intercompany
loan in cash to Parent or Merchandising in accordance with the terms of Section 9.10(d)
hereof.

     9.11 Restricted Payments. Each Borrower and Guarantor shall not, and shall not permit
any Subsidiary to, declare or make, or agree to pay or make, directly or indirectly, any Restricted
Payment, except:

          (a) Parent may make Restricted Payments with respect to its Capital Stock payable solely in
additional shares of its Capital Stock that satisfies the requirements for issuance of Capital
Stock by Parent under Section 9.7(b)(ii) hereof;

          (b) Subsidiaries of any Borrower or Guarantor may make Restricted Payments to a Borrower;

          (c) Enterprises may make Restricted Payments to Resources for the purpose of paying dividends
in respect of the Capital Stock of Enterprises so long as Resources immediately applies all of the
proceeds of such Restricted Payments to make an intercompany loan in cash to Parent in accordance
with the terms of Section 9.10(d) hereof;

          (d) Borrowers and Guarantors may repurchase Capital Stock consisting of common stock held by
employees pursuant to any employee stock ownership plan thereof upon the termination, retirement or
death of any such employee in accordance with the provisions of such plan or upon the vesting of
restricted stock in any such employee in accordance with the provisions of the restricted stock
plan, provided, that, as to any such repurchase, each of the following conditions
is satisfied: (i) as of the date of the payment for such repurchase and after giving effect
thereto, no Default or Event of Default shall exist or have occurred and be continuing, (ii) such
repurchase shall be paid with funds legally available therefor, (iii) such repurchase shall not
violate any law or regulation or the terms of any indenture, agreement or undertaking to which such
Borrower or Guarantor is a party or by which such Borrower or Guarantor or its or their property
are bound, and (iv) the aggregate amount of all payments for such repurchases in any calendar year
shall not exceed $1,000,000, except that the aggregate amount of all payments for such repurchases
in any calendar year may exceed $1,000,000 (but shall not exceed $4,000,000) if (A) Adjusted Excess
Availability shall have been equal to or

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greater than $25,000,000 for each of the two consecutive months immediately prior to the date
of such payment based on the Borrowing Base as of the end of each of such months and after giving
effect to the payment of such repurchases, on a pro forma basis using Adjusted Excess Availability
as of the end of the month immediately prior to the date of such repurchases, and Adjusted Excess
Availability shall be not less than $25,000,000, and (B) as of the date of any such payment and
after giving effect thereto, no Default or Event of Default shall exist or have occurred;

          (e) Parent may make Restricted Payments for the purpose of paying dividends and paying other
distributions in respect of its Capital Stock or the repurchase of its Capital Stock in an amount
not to exceed $1,000,000 in the aggregate in any calendar year and not to exceed $3,000,000 in the
aggregate during the term of this Agreement, provided, that, each of the following
conditions is satisfied as determined by Agent: (i) Administrative Borrower shall have provided to
Agent not less than ten (10) Business Days’ prior written notice of the intention of such Borrower
or Guarantor to pay such dividends or other distributions or make such other repurchases
(specifying the amount to be paid by Borrowers or Guarantors), (ii) such dividends, distributions
or repurchases shall paid with funds legally available therefor, (iii) such repurchase shall not
violate any law or regulation or the terms of any indenture, agreement or undertaking to which such
Borrower or Guarantor is a party or by which such Borrower or Guarantor or its or their property
are bound, (iv) Adjusted Excess Availability shall have been not less than $40,000,000 for each of
the two consecutive months immediately prior to the date of any such payment based on the Borrowing
Base as of the end of each of such months and after giving effect to the payment of such dividends
or other distributions or repurchases, on a pro forma basis using Adjusted Excess Availability as
of the end of the month immediately prior to the date of such dividends or other distributions or
repurchases, Adjusted Excess Availability shall be not less than $40,000,000, and (v) as of the
date of any such payment and after giving effect thereto, no Default or Event of Default shall
exist or have occurred; and

          (f) Parent may (i) make scheduled payments of interest (whether in cash or in kind) with
respect to the Specified Subordinated Indebtedness, provided, that, (x) no Default
or Event of Default is continuing or would result after giving effect to such Restricted Payment,
and (y) for any payment of interest in kind, such payment shall accrue prior to the first
anniversary of such Specified Subordinated Indebtedness; and (ii) pay the trustee under the
Indenture its usual and customary fees and expenses arising in the ordinary course of business as
set forth in Section 7.7 of the Indenture (as in effect on the date hereof) and indemnification
obligations arising under such Section 7.7 thereof.

     9.12 Transactions with Affiliates. Each Borrower and Guarantor shall not, directly or
indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property
to, any officer, director or other Affiliate of such Borrower or Guarantor, except (a) in the
ordinary course of such Borrower’s or Guarantor’s business and upon terms no less favorable to such
Borrower or Guarantor than such Borrower or Guarantor would obtain in a comparable arm’s length
transaction with an unaffiliated person, (b) for any purchase or acquisition by any Borrower from
another Borrower, any sale or transfer by any Borrower to another Borrower, or any lease of any
property by any Borrower from another Borrower or lease of any property from

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any Borrower to another Borrower and (c) transactions expressly permitted by Section
9.7, 9.9, 9.10 or 9.11 hereof.

     9.13 Compliance with ERISA. Each Borrower and Guarantor 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 and State law; (b) cause each Plan which
is qualified under Section 401(a) of the Code to maintain such qualification; (c) not terminate any
Pension Plan so as to incur any material liability to the Pension Benefit Guaranty Corporation; (d)
not allow or suffer to exist any prohibited transaction involving any Plan or any trust created
thereunder which would subject such Borrower, Guarantor or such ERISA Affiliate to a material tax
or other liability on prohibited transactions imposed under Section 4975 of the Code or ERISA; (e)
make all required contributions to any Plan (determined without regard to any waiver) which it is
obligated to pay under the Pension Funding Rules or the terms of such Plan; (f) not engage in a
transaction that could be subject to Section 4069 or 4212(c) of ERISA; or (g) not allow or suffer
to exist any occurrence of a reportable event or any other event or condition which presents a
material risk of termination by the Pension Benefit Guaranty Corporation of any Pension Plan that
is a single employer plan, which termination could result in any material liability to the Pension
Benefit Guaranty Corporation.

     9.14 End of Fiscal Years; Fiscal Quarters. Each Borrower and Guarantor shall, for
financial reporting purposes, cause its, and each of its Subsidiaries’ (a) fiscal years to end on
the last Saturday closest to January 31st of each year and (b) fiscal quarters to end on or about
each April 30th, July 31st, October 31st and January 31st of each year.

     9.15 Change in Business. Each Borrower and Guarantor shall not engage in any business
other than the business of such Borrower or Guarantor on the date hereof and any business
reasonably related, ancillary or complimentary to the business in which such Borrower or Guarantor
is engaged on the date hereof.

     9.16 Limitation of Restrictions Affecting Subsidiaries. Each Borrower and Guarantor
shall not, directly, or indirectly, create or otherwise cause or suffer to exist any encumbrance or
restriction which prohibits or limits the ability of any Subsidiary of such Borrower or Guarantor
to (a) pay dividends or make other distributions or pay any Indebtedness owed to such Borrower or
Guarantor or any Subsidiary of such Borrower or Guarantor; (b) make loans or advances to such
Borrower or Guarantor or any Subsidiary of such Borrower or Guarantor, (c) transfer any of its
properties or assets to such Borrower or Guarantor or any Subsidiary of such Borrower or Guarantor;
or (d) create, incur, assume or suffer to exist any lien upon any of its property, assets or
revenues, whether now owned or hereafter acquired, except for encumbrances and restrictions arising
under (i) applicable law, (ii) this Agreement, (iii) customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of such Borrower or Guarantor or any
Subsidiary of such Borrower or Guarantor, (iv) customary restrictions on dispositions of real
property interests found in reciprocal easement agreements of such Borrower or Guarantor or any
Subsidiary of such Borrower or Guarantor, (v) any agreement relating to Indebtedness incurred by a
Subsidiary of such Borrower or Guarantor prior to the date on which such Subsidiary was acquired by
such Borrower or such Guarantor and outstanding on such acquisition date, and (vi) the extension or
continuation of contractual obligations in existence on

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the date hereof; provided, that, any such encumbrances or restrictions
contained in such extension or continuation are no less favorable to Agent and Lenders than those
encumbrances and restrictions under or pursuant to the contractual obligations so extended or
continued.

     9.17 License Agreements.

          (a) With respect to a License Agreement applicable to Intellectual Property that is owned by a
third party and licensed to a Borrower or Guarantor and that is affixed to or otherwise used in
connection with the manufacture, sale or distribution of any Inventory, each Borrower and Guarantor
shall (i) give Agent not less than ninety (90) days prior written notice of its intention to not
renew or to terminate, cancel, surrender or release its rights under any such License Agreement, or
to amend any such License Agreement or related arrangements to limit the scope of the right of such
Borrower or Guarantor to use the Intellectual Property subject to such License Agreement in any
material respect, either with respect to product, territory, term or otherwise, or to increase in
any material respect the amounts to be paid by such Borrower or Guarantor thereunder or in
connection therewith (and Agent may establish such Reserves as a result of any of the foregoing as
Agent may reasonably determine), (ii) give Agent prompt written notice of any such License
Agreement entered into by such Borrower or Guarantor after the date hereof, or any material
amendment to any such License Agreement existing on the date hereof, in each case together with a
true, correct and complete copy thereof and such other information with respect thereto as Agent
may in good faith request, (iii) give Agent prompt written notice of any material breach of any
obligation, or any default, by the third party that is the licensor or by the Borrower or Guarantor
that is the licensee or any other party under any such License Agreement, and deliver to Agent
(promptly upon the receipt thereof by such Borrower or Guarantor in the case of a notice to such
Borrower or Guarantor and concurrently with the sending thereof in the case of a notice from such
Borrower or Guarantor) a copy of each notice of default and any other notice received or delivered
by such Borrower or Guarantor in connection with any such a License Agreement that relates to the
scope of the right, or the continuation of the right, of such Borrower or Guarantor to use the
Intellectual Property subject to such License Agreement or the amounts required to be paid
thereunder.

          (b) With respect to a License Agreement applicable to Intellectual Property that is owned by a
third party and licensed to a Borrower or Guarantor and that is affixed to or otherwise used in
connection with the manufacture, sale or distribution of any Inventory, at any time an Event of
Default shall exist or have occurred and be continuing, or if after giving effect to any Reserves
or the reduction in the Borrowing Base as a result of Eligible Inventory using such licensed
Intellectual Property ceasing to be Eligible Inventory, the Excess Availability is less than the
amount required pursuant to Section 9.19 hereof, Agent shall have, and is hereby granted,
the irrevocable right and authority, at its option, to renew or extend the term of such License
Agreement, whether in its own name and behalf, or in the name and behalf of a designee or nominee
of Agent or in the name and behalf of such Borrower or Guarantor, subject to and in accordance with
the terms of such License Agreement. Agent may, but shall not be required to, perform any or all
of such obligations of such Borrower or Guarantor under any of the License Agreements, including,
but not limited to, the payment of any or all sums due from such Borrower or Guarantor thereunder.
Any sums so paid by Agent shall constitute part of the Obligations.

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     9.18 Credit Card Agreements. Each Borrower shall (a) observe and perform all material
terms, covenants, conditions and provisions of the Credit Card Agreements to be observed and
performed by it at the times set forth therein; and (b) at all times maintain in full force and
effect the Credit Card Agreements and not terminate, cancel, surrender, modify, amend, waive or
release any of the Credit Card Agreements, or consent to or permit to occur any of the foregoing;
except, that, (i) any Borrower may terminate or cancel any of the Credit Card Agreements in the
ordinary course of the business of such Borrower; provided, that, such Borrower
shall give Agent not less than thirty (30) days prior written notice of its intention to so
terminate or cancel any of the Credit Card Agreements; (d) not enter into any new Credit Card
Agreements with any new Credit Card Issuer unless (i) Agent shall have received not less than
thirty (30) days prior written notice of the intention of such Borrower to enter into such
agreement (together with such other information with respect thereto as Agent may request) and (ii)
such Borrower delivers, or causes to be delivered to Agent, a Credit Card Acknowledgment in favor
of Agent, (e) give Agent immediate written notice of any Credit Card Agreement entered into by such
Borrower after the date hereof, together with a true, correct and complete copy thereof and such
other information with respect thereto as Agent may request; and (f) furnish to Agent, promptly
upon the request of Agent, such information and evidence as Agent may require from time to time
concerning the observance, performance and compliance by such Borrower or the other party or
parties thereto with the terms, covenants or provisions of the Credit Card Agreements.

     9.19 Minimum Excess Availability. Borrowers shall at all times maintain Excess
Availability of not less than $7,500,000.

     9.20 After Acquired Real Property. If any Borrower or Guarantor hereafter acquires
any Real Property, fixtures or any other property that is of the kind or nature described in the
Baldwyn Real Property Mortgage and such Real Property, fixtures or other property is adjacent to,
contiguous with or necessary or related to or used in connection with any Real Property then
subject to the Baldwyn Real Property Mortgage, or if such Real Property is not adjacent to,
contiguous with or related to or used in connection with such Real Property, then if such Real
Property, fixtures or other property at any location (or series of adjacent, contiguous or related
locations, and regardless of the number of parcels) has a fair market value in an amount equal to
or greater than $250,000 (or if an Event of Default exists, then regardless of the fair market
value of such assets), without limiting any other rights of Agent or any Lender, or duties or
obligations of any Borrower or Guarantor, reasonably promptly upon Agent’s request, such Borrower
or Guarantor shall execute and deliver to Agent a Mortgage, as Agent may determine, in form and
substance reasonably satisfactory to the Agent and in form appropriate for recording in the real
estate records of the jurisdiction in which such Real Property or other property is located
granting to Agent a first and only lien and mortgage on and security interest in such Real
Property, fixtures or other property (except as such Borrower or Guarantor would otherwise be
permitted to incur hereunder or under the Mortgage or as otherwise consented to in writing by
Agent) and such other agreements, documents and instruments as Agent may require in connection
therewith provided, that, as to any such Real Property that is not adjacent,
contiguous or related to Real Property then subject to the Baldwyn Real Property Mortgage, if the
purchase price for such Real Property is paid with the initial proceeds of a loan from a financial
institution giving rise to Indebtedness permitted under Section 9.9(b) hereof, then such
Borrower or

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Guarantor shall not be required to execute and deliver such mortgage, deed of trust or deed to
secure debt in favor of Agent with respect to such Real Property.

     9.21 Foreign Assets Control Regulations, Etc. None of the requesting or borrowing of
the Loans or the requesting or issuance, extension or renewal of any Letter of Credit or the use of
the proceeds of any thereof will violate the Trading With the Enemy Act (50 USC §1 et seq., as
amended) (the “Trading With the Enemy Act”) or any of the foreign assets control regulations of the
United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) (the “Foreign
Assets Control Regulations”) or any enabling legislation or executive order relating thereto
(including, but not limited to (a) Executive order 13224 of September 21, 2001 Blocking Property
and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66
Fed. Reg. 49079 (2001)) (the “Executive Order”) and (b) the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law
107-56). None of Borrowers or any of their Subsidiaries is or will become a “blocked person” as
described in the Executive Order, the Trading with the Enemy Act or the Foreign Assets Control
Regulations or engages or will engage in any dealings or transactions, or be otherwise associated,
with any such “blocked person”.

     9.22 Costs and Expenses. Borrowers and Guarantors shall pay to Agent reasonably
promptly after demand all costs, expenses, filing fees and taxes paid or payable in connection with
the preparation, negotiation, execution, delivery, recording, syndication, administration,
collection, liquidation, enforcement and defense of the Obligations, Agent’s rights in the
Collateral, this Agreement, the other Financing Agreements and all other documents related hereto
or thereto, including any amendments, supplements or consents which may hereafter be contemplated
(whether or not executed) or entered into in respect hereof and thereof, including: (a) all costs
and expenses of filing or recording (including Uniform Commercial Code financing statement filing
taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if
applicable); (b) costs and expenses and fees for insurance premiums, environmental audits, title
insurance premiums, surveys, assessments, engineering reports and inspections, appraisal fees and
search fees, background checks, costs and expenses of remitting loan proceeds, collecting checks
and other items of payment, and establishing and maintaining the Blocked Accounts, together with
Agent’s customary charges and fees with respect thereto; (c) charges, fees or expenses charged by
any Lender in connection with any Letter of Credit; (d) costs and expenses of preserving and
protecting the Collateral; (e) costs and expenses paid or incurred in connection with obtaining
payment of the Obligations, enforcing the security interests and liens of Agent, selling or
otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement
and the other Financing Agreements or defending any claims made or threatened against Agent or any
Lender arising out of the transactions contemplated hereby and thereby (including preparations for
and consultations concerning any such matters); (f) all out-of-pocket expenses and costs heretofore
and from time to time hereafter incurred by Agent during the course of periodic field examinations
of the Collateral and such Borrower’s or Guarantor’s operations, plus a per diem charge at Agent’s
then standard rate for Agent’s examiners in the field and office; (g) costs and expenses incurred
in connection with any workout or restructuring of the Loans during the pendency of one or more
Events of Default, provided, that in the case of reimbursement of counsel for the Lenders
(other than the Agent),

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such reimbursement shall be limited to one counsel for all such Lenders, and (h) the fees and
disbursements of counsel to Agent in connection with any of the foregoing.

     9.23 Further Assurances. (a) In the case of the formation or acquisition by a
Borrower or Guarantor of any Subsidiary after the date hereof, as to any such Subsidiary, (i) the
Borrower or Guarantor forming such Subsidiary shall cause any such Subsidiary to execute and
deliver to Agent, the following (each in form and substance reasonably satisfactory to Agent), (A)
an absolute and unconditional guarantee of payment of the Obligations, (B) a security agreement
granting to Agent a first security interest and lien (except as otherwise consented to in writing
by Agent) upon all of the assets of any such Subsidiary of the type or category of the assets of
Borrowers subject to the security interests and liens pursuant hereto, and (C) such other
agreements, documents and instruments as Agent may require in connection with the documents
referred to above in order to make such Subsidiary a party to this Agreement as a “Borrower” or as
a “Guarantor” as Agent may determine, including, but not limited to, supplements and amendments
hereto, authorization to file UCC financing statements, Collateral Access Agreements and other
consents, waivers, acknowledgments and other agreements from third persons which Agent may deem
necessary or desirable in order to permit, protect and perfect its security interests in and liens
upon the assets purchased, corporate resolutions and other organization and authorizing documents
of such Person, and favorable opinions of counsel to such person and (ii) the Borrower or Guarantor
forming such Subsidiary shall (A) execute and deliver to Agent, a pledge and security agreement, in
form and substance reasonably satisfactory to Agent, granting to Agent a first pledge of and lien
on all of the issued and outstanding shares of Capital Stock of any such Subsidiary, and (B)
deliver the original stock certificates evidencing such shares of Capital Stock (or such other
evidence as may be issued in the case of a limited liability company), together with stock powers
with respect thereto duly executed in blank (or the equivalent thereof in the case of a limited
liability company in which such interests are certificated, or otherwise take such actions as Agent
shall require with respect to Agent’s security interests therein).

          (b) In the case of an acquisition of assets (other than Capital Stock) by a Borrower or
Guarantor pursuant to a Permitted Acquisition after the date hereof, Agent shall have received, in
form and substance reasonably satisfactory to Agent, (i) evidence that Agent has valid and
perfected security interests in and liens upon all purchased assets, (ii) all Collateral Access
Agreements and other consents, waivers, acknowledgments and other agreements from third persons
which Agent may deem necessary or desirable in order to permit, protect and perfect its security
interests in and liens upon the assets purchased, (iii) the agreement of the seller consenting to
the collateral assignment by the Borrower or Guarantor purchasing such assets of all rights and
remedies and claims for damages of such Borrower or Guarantor relating to the Collateral
(including, without limitation, any bulk sales indemnification) under the agreements, documents and
instruments relating to such acquisition and (iv) such other agreements, documents and instruments
as Agent may require in connection with the documents referred to above, including, but not limited
to, supplements and amendments hereto, corporate resolutions and other organization and authorizing
documents and favorable opinions of counsel to such person.

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          (c) At the request of Agent at any time and from time to time, Borrowers and Guarantors shall,
at their expense, duly execute and deliver, or cause to be duly executed and delivered, such
further agreements, documents and instruments, and do or cause to be done such further acts as may
be necessary or proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this
Agreement or any of the other Financing Agreements. Agent may at any time and from time to time
request a certificate from an officer of any Borrower or Guarantor representing that all conditions
precedent to the making of Loans and providing Letters of Credit contained herein are satisfied.
In the event of such request by Agent, Agent and Lenders may, at Agent’s option, cease to make any
further Loans or provide any further Letters of Credit until Agent has received such certificate
and, in addition, Agent has determined that such conditions are satisfied.

     9.24 Leasehold Estates. The Borrowers shall not, and shall not permit any of their
Subsidiaries to, enter into any leasehold mortgage, deed of trust or any other agreement
irrespective of how so identified which grants to any third party a leasehold mortgage in such
leasehold estate and the properties and assets located therein.

     9.25 Specified Subordinated Debt Documents. The Borrowers shall not, and shall not
permit any of their Subsidiaries to, consent to any amendment, supplement, waiver or other
modification of any Specified Subordinated Debt Document without the prior written consent of the
Agent.

     9.26 Credit Card Agreements. The Borrowers shall not, and shall not permit any of
their Subsidiaries to, consent to any material amendment, supplement, waiver or other modification
of any Credit Card Agreement without the prior written consent of the Agent.

     9.27 Post Closing Requirements. The Borrowers shall, and shall cause their
Subsidiaries to, cause the following actions shall be taken or documents executed and/or delivered
or, caused to be taken, executed and/or delivered, on or prior to the dates set forth below:

          (a) On or before a date which is seven (7) days following the Closing Date, Borrowers shall
close the Discover Deposit Account and shall deliver evidence satisfactory to the Agent that such
account has been closed.

          (b) On or before a date which is seven (7) days following the Closing Date, Borrower shall
deliver to the Agent insurance certificates in form and substance satisfactory to the Agent.

          (c) On or before a date which is thirty (30) days following the Closing Date, Borrowers shall
(i) pay in full in cash the Bankruptcy Claims and Liens identified on Schedule 1.6 hereof,
(ii) deliver evidence to the Agent that such Bankruptcy Claims and Liens has been paid in full in
cash, such evidence to be in form and substance satisfactory to the Agent, and (iiii) use
commercially reasonably efforts to deliver to the Agent evidence that the Liens associated with
such Bankruptcy Claims and Liens have been discharged and terminated and, to the extent

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identified on any public record, terminated and released on such public record, such evidence
to be in form and substance satisfactory to the Agent.

          (d) On or before a date which is thirty (30) days following the Closing Date, Borrowers shall
deliver to Agent a good standing certificate from the Secretary of State of the State of
Mississippi evidencing Merchandising as being in good standing in such State, such good standing
certificate to be in form satisfactory to the Agent.

          (e) On or before a date which is thirty (30) days following the Closing Date, Borrowers shall
deliver to Agent a good standing certificate from the Secretary of State of the State of Tennessee
evidencing Parent as being in good standing in each such State, such good standing certificates to
be in form satisfactory to the Agent.

          (f) On or before a date which is sixty (60) days following the Closing Date, Borrowers shall
either: (i) install or cause the installation of a secondary containment system for the
approximate 250-gallon above-ground storage tank located to the west of the distribution center
building at the Baldwyn Real Property (the “Tank”) which secondary containment system shall
be (x) capable of containing, at a minimum, 110% of the maximum capacity of such above-ground
storage tank and (y) satisfactory to the Agent; or (ii) remove the Tank from the Property in
accordance with all applicable Laws. On or prior to the date that is sixty (60) days following the
Closing Date, Borrowers shall deliver evidence satisfactory to Agent that the Borrowers have
satisfied the obligations set forth in this Section 9.27.

SECTION 10 EVENTS OF DEFAULT AND REMEDIES

     10.1 Events of Default. The occurrence or existence of any one or more of the
following events are referred to herein individually as an “Event of Default”, and
collectively as “Events of Default”:

          (a) (i) any Borrower fails to pay any of the Obligations when due; or (ii) any Borrower or
Guarantor fails to perform any of the covenants contained in Sections 9.3, 9.4,
9.13, 9.14, 9.15 and 9.16 of this Agreement and such failure shall
continue for twenty (20) days; provided, that, such twenty (20) day period shall
not apply in the case of: (A) any failure to observe any such covenant which is not capable of
being cured at all or within such twenty (20) day period or which has been the subject of a prior
failure within a six (6) month period or (B) an intentional breach by any Borrower or Guarantor of
any such covenant; or (iii) any Borrower or Guarantor fails to perform any of the terms, covenants,
conditions or provisions contained in this Agreement other than those described in Sections
10.1(a)(i) and 10.1(a)(ii) above; or (iv) any Borrower or Guarantor fails to perform
any of the terms, covenants, conditions or provisions contained in any of the other Financing
Agreements other than those described in Sections 10.1(a)(i) and 10.1(a)(ii) above;

          (b) any representation, warranty or statement of fact made by any Borrower or Guarantor to
Agent in this Agreement, the other Financing Agreements or any other written agreement, schedule,
confirmatory assignment or otherwise shall when made or deemed made be false or misleading in any
material respect;

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          (c) any Guarantor revokes or terminates or purports to revoke or terminate or fails to perform
any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other
agreement of such party in favor of Agent or any Lender;

          (d) one or more judgments for the payment of money is or are rendered against any Borrower or
Guarantor in excess of $750,000 in the aggregate (to the extent not covered by insurance where the
insurer has assumed responsibility in writing for such judgment) and shall remain undischarged or
unvacated for a period in excess of thirty (30) days or execution shall at any time not be
effectively stayed, or any judgment other than for the payment of money, or injunction, attachment,
garnishment or execution is rendered against any Borrower or Guarantor or any of the Collateral
having a value in excess of $750,000; provided, however, any payment of money
timely paid in accordance with the terms of the Plan of Reorganization shall not be deemed an
“Event of Default” hereunder;

          (e) any Obligor (being a natural person or a general partner of an Obligor which is a
partnership) dies or any Borrower or Obligor, which is a partnership, limited liability company,
limited liability partnership or a corporation, dissolves or suspends or discontinues doing
business;

          (f) any Borrower or Guarantor makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer of any of their respective assets or calls a meeting of its creditors or
principal creditors in connection with a moratorium or adjustment of the Indebtedness due to them;

          (g) a case or proceeding under the bankruptcy laws of the United States of America now or
hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether
at law or in equity) is filed against any Borrower or Guarantor (other than the Reorganization
Cases) or all or any part of its properties and such petition or application is not dismissed
within thirty (30) days after the date of its filing or any Borrower or Guarantor shall file any
answer admitting or not contesting such petition or application or indicates its consent to,
acquiescence in or approval of, any such action or proceeding or the relief requested is granted
sooner;

          (h) a case or proceeding under the bankruptcy laws of the United States of America now or
hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether
at a law or equity) is filed by any Borrower or Guarantor (other than the Reorganization Cases) or
for all or any part of its property;

          (i) any default by any Borrower or Guarantor under any agreement, document or instrument
relating to any Indebtedness owing to any person other than Lenders, or any capitalized lease
obligations, contingent indebtedness in connection with any guarantee, letter of credit, indemnity
or similar type of instrument in favor of any person other than Lenders, in an amount in excess of
$750,000 which default continues for more than the applicable cure period, if any, with respect
thereto, or any default by any Borrower or Guarantor under any Material Contract, which default
continues for more than the applicable cure period, if any, with respect

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thereto and/or is not waived in writing by the other parties thereto or any Credit Card Issuer
or Credit Card Processor withholds payment of amounts otherwise payable to a Borrower to fund a
reserve account or otherwise hold as collateral, or shall require a Borrower to pay funds into a
reserve account or for such Credit Card Issuer or Credit Card Processor to otherwise hold as
collateral, or any Borrower shall provide a letter of credit, guarantee, indemnity or similar
instrument to or in favor of such Credit Card Issuer or Credit Card Processor such that in the
aggregate all of such funds in the reserve account, other amounts held as collateral and the amount
of such letters of credit, guarantees, indemnities or similar instruments shall exceed $750,000 or
any such Credit Card Issuer or Credit Card Processor shall debit or deduct any amounts in excess of
$750,000 in the aggregate in any Fiscal Year of Borrowers and Guarantors from any deposit account
of any Borrower;

          (j) any Credit Card Issuer or Credit Card Processor shall send notice to Borrower that it is
ceasing to make or suspending payments to Borrower of amounts due or to become due to Borrower or
shall cease or suspend such payments, or shall send notice to Borrower that it is terminating its
arrangements with Borrower or such arrangements shall terminate as a result of any event of default
under such arrangements, which continues for more than the applicable cure period, if any, with
respect thereto, unless (in the case of any of the foregoing) Borrower shall have entered into
arrangements with another Credit Card Issuer or Credit Card Processor, as the case may be, within
sixty (60) days after the date of any such notice;

          (k) any bank at which any deposit account of Borrower or Guarantor is maintained shall fail to
comply with any of the material terms of any Deposit Account Control Agreement to which such bank
is a party or any securities intermediary, commodity intermediary or other financial institution at
any time in custody, control or possession of any investment property of Borrower or Guarantor
shall fail to comply with any of the material terms of any Investment Property Control Agreement to
which such person is a party;

          (l) any material provision hereof or of any of the other Financing Agreements shall for any
reason cease to be valid, binding and enforceable with respect to any party hereto or thereto
(other than Agent) in accordance with its terms, or any such party shall challenge the
enforceability hereof or thereof, or shall assert in writing, or take any action or fail to take
any action based on the assertion that any provision hereof or of any of the other Financing
Agreements has ceased to be or is otherwise not valid, binding or enforceable in accordance with
its terms, or any security interest provided for herein or in any of the other Financing Agreements
shall cease to be a valid and perfected first priority security interest in any of the Collateral
purported to be subject thereto except as otherwise permitted herein or therein and except as to
Collateral having an aggregate value of not more than $250,000;

          (m) an ERISA Event shall occur which results in or could reasonably be expected to result in
liability of any Borrower in an aggregate amount in excess of $750,000;

          (n) any Change of Control;

          (o) the indictment by any Governmental Authority, or as Agent may reasonably and in good faith
determine, the threatened indictment by any Governmental

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Authority of any Borrower or Guarantor of which any Borrower, Guarantor or Agent receives
notice, in either case, as to which there is a reasonable possibility of an adverse determination,
in the good faith determination of Agent, under any criminal statute, or commencement or threatened
commencement of criminal or civil proceedings against such Borrower or Guarantor, pursuant to which
statute or proceedings the penalties or remedies sought or available include forfeiture of (i) any
of the Collateral having a value in excess of $750,000 or (ii) any other property of any Borrower
or Guarantor which is necessary or material to the conduct of its business;

          (p) (i) the Bankruptcy Court or another court of competent jurisdiction shall enter any order
amending, supplementing, altering, staying, suspending, vacating, rescinding or otherwise modifying
the Confirmation Order (unless consented to in writing in advance by Agent or the Required Lenders,
as may be appropriate); or (ii) any appeal to the Confirmation Order is filed; or

          (q) Elavon or Elavon Member shall exercise any right of offset, deduction, chargeback or
withdraw against any deposit account or securities account of any Borrower or any Guarantor other
than from the Elavon Deposit Account or the Elavon Reserve Account.

     10.2 Remedies.

          (a) At any time an Event of Default exists or has occurred and is continuing, Agent and
Lenders shall have all rights and remedies provided in this Agreement, the other Financing
Agreements, the UCC and other applicable law, all of which rights and remedies may be exercised
without notice to or consent by any Borrower or Guarantor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights, remedies and powers
granted to Agent and Lenders hereunder, under any of the other Financing Agreements, the UCC or
other applicable law, are cumulative, not exclusive and enforceable, in Agent’s discretion,
alternatively, successively, or concurrently on any one or more occasions, and shall include,
without limitation, the right to apply to a court of equity for an injunction to restrain a breach
or threatened breach by any Borrower or Guarantor of this Agreement or any of the other Financing
Agreements. Subject to Section 12 hereof, Agent may, and at the direction of the Required
Lenders shall, at any time or times, proceed directly against any Borrower or Guarantor to collect
the Obligations without prior recourse to the Collateral.

          (b) Without limiting the generality of the foregoing, at any time an Event of Default exists
or has occurred and is continuing, Agent may, at its option and shall upon the direction of the
Required Lenders, (i) upon notice to Administrative Borrower, accelerate the payment of all
Obligations and demand immediate payment thereof to Agent for itself and the benefit of Lenders
(provided, that, upon the occurrence of any Event of Default described in
Sections 10.1(f), 10.1(g) and 10.1(h), all Obligations shall automatically
become immediately due and payable), and (ii) terminate the Commitments whereupon the obligation of
each Lender to make any Loan and Issuing Bank to issue any Letter of Credit shall immediately
terminate (provided, that, upon the occurrence of any Event of Default described in
Sections 10.1(f), 10.1(g) and 10.1(h), the Commitments and any other
obligation of Agent or a Lender hereunder shall automatically terminate).

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          (c) Without limiting the foregoing, at any time an Event of Default exists or has occurred and
is continuing, Agent may, in its discretion (i) with or without judicial process or the aid or
assistance of others, enter upon any premises on or in which any of the Collateral may be located
and take possession of the Collateral or complete processing, manufacturing and repair of all or
any portion of the Collateral, (ii) require any Borrower or Guarantor, at Borrowers’ expense, to
assemble and make available to Agent any part or all of the Collateral at any place and time
designated by Agent, (iii) collect, foreclose, receive, appropriate, setoff and realize upon any
and all Collateral, (iv) remove any or all of the Collateral from any premises on or in which the
same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof
or for any other purpose, (v) sell, lease, transfer, assign, deliver or otherwise dispose of any
and all Collateral (including entering into contracts with respect thereto, public or private sales
at any exchange, broker’s board, at any office of Agent or elsewhere) at such prices or terms as
Agent may deem reasonable, for cash, upon credit or for future delivery, with Agent having the
right to purchase the whole or any part of the Collateral at any such public sale, all of the
foregoing being free from any right or equity of redemption of any Borrower or Guarantor, which
right or equity of redemption is hereby expressly waived and released by Borrowers and Guarantors
and/or (vi) terminate this Agreement. If any of the Collateral is sold or leased by Agent upon
credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until
payment therefor is finally collected by Agent. If notice of disposition of Collateral is required
by law, ten (10) days prior notice by Agent to Administrative Borrower designating the time and
place of any public sale or the time after which any private sale or other intended disposition of
Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrowers and
Guarantors waive any other notice. In the event Agent institutes an action to recover any
Collateral or seeks recovery of any Collateral by way of prejudgment remedy, each Borrower and
Guarantor waives the posting of any bond which might otherwise be required. At any time an Event of
Default exists or has occurred and is continuing, upon Agent’s request, Borrowers will either, as
Agent shall specify, furnish cash collateral to Issuing Bank to be used to secure and fund the
reimbursement obligations to Issuing Bank in connection with any Letter of Credit Obligations or
furnish cash collateral to Issuing Bank for the Letter of Credit Obligations. Such cash collateral
shall be in the amount equal to one hundred five (105%) percent of the amount of the Letter of
Credit Obligations plus the amount of any fees and expenses payable in connection therewith through
the end of the latest expiration date of such Letter of Credit Obligations.

          (d) At any time or times that an Event of Default exists or has occurred and is continuing,
Agent may, in its discretion, enforce the rights of any Borrower or Guarantor against any account
debtor, secondary obligor or other obligor in respect of any of the Accounts or other Receivables.
Without limiting the generality of the foregoing, Agent may, in its discretion, at such time or
times (i) notify any or all account debtors (including Credit Card Issuers and Credit Card
Processors), secondary obligors or other obligors in respect thereof that the Receivables have been
assigned to Agent and that Agent has a security interest therein and Agent may direct any or all
account debtors(including Credit Card Issuers and Credit Card Processors), secondary obligors and
other obligors to make payment of Receivables directly to Agent, (ii) extend the time of payment
of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any
terms or conditions, any and all Receivables or other obligations included in the Collateral and
thereby discharge or release the account debtor or any secondary

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obligors or other obligors in respect thereof without affecting any of the Obligations, (iii)
demand, collect or enforce payment of any Receivables or such other obligations, but without any
duty to do so, and Agent and Lenders shall not be liable for any failure to collect or enforce the
payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv)
take whatever other action Agent may deem necessary or desirable for the protection of its
interests and the interests of Lenders. At any time that an Event of Default exists or has
occurred and is continuing, at Agent’s request, all invoices and statements sent to any account
debtor shall state that the Accounts and such other obligations have been assigned to Agent and are
payable directly and only to Agent and Borrowers and Guarantors shall deliver to Agent such
originals of documents evidencing the sale and delivery of goods or the performance of services
giving rise to any Accounts as Agent may require. In the event any account debtor returns
Inventory when an Event of Default exists or has occurred and is continuing, Borrowers shall, upon
Agent’s request, hold the returned Inventory in trust for Agent, segregate all returned Inventory
from all of its other property, dispose of the returned Inventory solely according to Agent’s
instructions, and not issue any credits, discounts or allowances with respect thereto without
Agent’s prior written consent.

          (e) To the extent that applicable law imposes duties on Agent or any Lender to exercise
remedies in a commercially reasonable manner (which duties cannot be waived under such law), each
Borrower and Guarantor acknowledges and agrees that it is not commercially unreasonable for Agent
or any Lender (i) to fail to incur expenses reasonably deemed significant by Agent or any Lender to
prepare Collateral for disposition or otherwise to complete raw material or work in process into
finished goods or other finished products for disposition, (ii) to fail to obtain third party
consents for access to Collateral to be disposed of, or to obtain or to fail to obtain consents of
any Governmental Authority or other third party for the collection or disposition of Collateral to
be collected or disposed of, except to the extent such failure violates applicable law, (iii) to
fail to exercise collection remedies against account debtors, secondary obligors or other persons
obligated on Collateral or to remove liens or encumbrances on or any adverse claims against
Collateral, (iv) to exercise collection remedies against account debtors and other persons
obligated on Collateral directly or through the use of collection agencies and other collection
specialists, (v) to advertise dispositions of Collateral through publications or media of general
circulation, whether or not the Collateral is of a specialized nature, (vi) to contact other
persons, whether or not in the same business as any Borrower or Guarantor, for expressions of
interest in acquiring all or any portion of the Collateral, (vii) to hire one or more professional
auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a
specialized nature, (viii) to dispose of Collateral by utilizing Internet sites that provide for
the auction of assets of the types included in the Collateral or that have the reasonable
capability of doing so, or that match buyers and sellers of assets, (ix) to dispose of assets in
wholesale rather than retail markets, (x) to disclaim disposition warranties, (xi) to purchase
insurance or credit enhancements to insure Agent or Lenders against risks of loss, collection or
disposition of Collateral or to provide to Agent or Lenders a guaranteed return from the collection
or disposition of Collateral, or (xii) to the extent deemed appropriate by Agent, to obtain the
services of other brokers, investment bankers, consultants and other professionals to assist Agent
in the collection or disposition of any of the Collateral. Each Borrower and Guarantor acknowledges
that the purpose of this Section is to provide non-exhaustive indications of what actions or
omissions by Agent or any Lender would not be commercially unreasonable in the

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exercise by Agent or any Lender of remedies against the Collateral and that other actions or
omissions by Agent or any Lender shall not be deemed commercially unreasonable solely on account of
not being indicated in this Section. Without limitation of the foregoing, nothing contained in this
Section shall be construed to grant any rights to any Borrower or Guarantor or to impose any duties
on Agent or Lenders that would not have been granted or imposed by this Agreement or by applicable
law in the absence of this Section.

          (f) For the purpose of enabling Agent to exercise the rights and remedies hereunder, each
Borrower and Guarantor hereby grants to Agent, to the extent assignable, an irrevocable,
non-exclusive license (exercisable at any time an Event of Default shall exist or have occurred and
for so long as the same is continuing) without payment of royalty or other compensation to any
Borrower or Guarantor, to use, assign, license or sublicense any of the trademarks, service-marks,
trade names, business names, trade styles, designs, logos and other source of business identifiers
and other Intellectual Property and general intangibles now owned or hereafter acquired by any
Borrower or Guarantor, wherever the same maybe located, including in such license reasonable access
to all media in which any of the licensed items may be recorded or stored and to all computer
programs used for the compilation or printout thereof.

          (g) At any time an Event of Default exists or has occurred and is continuing, Agent may apply
the cash proceeds of Collateral actually received by Agent from any sale, lease, foreclosure or
other disposition of the Collateral to payment of the Obligations, in whole or in part and in
accordance with the terms hereof, whether or not then due or may hold such proceeds as cash
collateral for the Obligations. Borrowers and Guarantors shall remain liable to Agent and Lenders
for the payment of any deficiency with interest at the highest rate provided for herein and all
costs and expenses of collection or enforcement, including attorneys’ fees and expenses.

          (h) Without limiting the foregoing, upon the occurrence of a Default or an Event of Default,
(i) Agent and Lenders may, at Agent’s option, and upon the occurrence of an Event of Default at the
direction of the Required Lenders, Agent and Lenders shall, without notice, (A) cease making Loans
or arranging for Letters of Credit or reduce the lending formulas or amounts of Loans and Letters
of Credit available to Borrowers and/or (B) terminate any provision of this Agreement providing for
any future Loans to be made by Agent and Lenders or Letters of Credit to be issued by Issuing Bank
and (ii) Agent may, at its option, establish such Reserves as Agent determines, without limitation
or restriction, notwithstanding anything to the contrary contained herein.

SECTION 11 JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW

     11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.

          (a) The validity, interpretation and enforcement of this Agreement and the other Financing
Agreements (except as otherwise provided therein) and any dispute arising out of the relationship
between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by
the internal laws of the State of New York but excluding any principles of choice

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of law and conflicts of law (other than Section 5-1401 and Section 5-1402 of the General
Obligations Laws of the State of New York).

          (b) Borrowers, Guarantors, Agent, Lenders and Issuing Bank irrevocably consent and submit to
the non-exclusive jurisdiction of the Supreme Court of the State of New York in New York County and
the United States District Court for the Southern District of New York, whichever Agent may elect,
and waive any objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Agreement or any of the other Financing Agreements or in any
way connected with or related or incidental to the dealings of the parties hereto in respect of
this Agreement or any of the other Financing Agreements or the transactions related hereto or
thereto, in each case whether now existing or hereafter arising, and whether in contract, tort,
equity or otherwise, and agree that any dispute with respect to any such matters shall be heard
only in the courts described above (except that Agent and Lenders shall have the right to bring any
action or proceeding against any Borrower or Guarantor or its or their property in the courts of
any other jurisdiction which Agent deems necessary or appropriate in order to realize on the
Collateral or to otherwise enforce its rights against any Borrower or Guarantor or its or their
property).

          (c) Each Borrower and Guarantor hereby waives personal service of any and all process upon it
and consents that all such service of process may be made by U.S. certified mail (return receipt
requested) directed to its address set forth herein and service so made shall be deemed to be
completed immediately upon receipt thereof by the applicable Borrower or Guarantor, or, at Agent’s
option, by service upon any Borrower or Guarantor (or Administrative Borrower on behalf of such
Borrower or Guarantor) in any other manner provided under the rules of any such courts. Within
thirty (30) days after such service, such Borrower or Guarantor shall appear in answer to such
process, failing which such Borrower or Guarantor shall be deemed in default and judgment may be
entered by Agent against such Borrower or Guarantor for the amount of the claim and other relief
requested.

          (d) BORROWERS, GUARANTORS, AGENT, LENDERS AND ISSUING BANK EACH HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS AGREEMENT OR ANY
OF THE OTHER FINANCING AGREEMENTS OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING
AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWERS, GUARANTORS,
AGENT, LENDERS AND ISSUING BANK EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY BORROWER, ANY
GUARANTOR, AGENT, ANY LENDER OR ISSUING BANK MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.

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          (e) Agent, Lenders and Issuing Bank shall not have any liability to any Borrower or Guarantor
(whether in tort, contract, equity or otherwise) for losses suffered by such Borrower or Guarantor
in connection with, arising out of, or in any way related to the transactions or relationships
contemplated by this Agreement, or any act, omission or event occurring in connection herewith,
unless it is determined by a final and non-appealable judgment or court order binding on Agent,
such Lender and Issuing Bank, that the losses were the result of acts or omissions constituting
gross negligence or willful misconduct. In any such litigation, Agent, Lenders and Issuing Bank
shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with
the exercise of ordinary care in the performance by it of the terms of this Agreement. Each
Borrower and Guarantor: (i) certifies that neither Agent, any Lender, nor any representative,
agent or attorney acting for or on behalf of Agent, any Lender or Issuing Bank has represented,
expressly or otherwise, that Agent, Lenders and Issuing Bank would not, in the event of litigation,
seek to enforce any of the waivers provided for in this Agreement or any of the other Financing
Agreements and (ii) acknowledges that in entering into this Agreement and the other Financing
Agreements, Agent, Lenders and Issuing Bank are relying upon, among other things, the waivers and
certifications set forth in this Section 11.1 and elsewhere herein and therein.

     11.2 Waiver of Notices. Each Borrower and Guarantor hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect to any and all
instruments and chattel paper, included in or evidencing any of the Obligations or the Collateral,
and any and all other demands and notices of any kind or nature whatsoever with respect to the
Obligations, the Collateral and this Agreement, except such as are expressly provided for herein.
No notice to or demand on any Borrower or Guarantor which Agent or any Lender may elect to give
shall entitle such Borrower or Guarantor to any other or further notice or demand in the same,
similar or other circumstances.

     11.3 Amendments and Waivers.

          (a) Neither this Agreement nor any other Financing Agreement nor any terms hereof or thereof
may be amended, waived, discharged or terminated unless such amendment, waiver, discharge or
termination is in writing signed by Agent and the Required Lenders or at Agent’s option, by Agent
with the authorization or consent of the Required Lenders, and as to amendments to any of the
Financing Agreements (other than with respect to any provision of Section 12 hereof), by
any Borrower and such amendment, waiver, discharger or termination shall be effective and binding
as to all Lenders only in the specific instance and for the specific purpose for which given;
except, that, no such amendment, waiver, discharge or termination shall:

               (i) reduce the interest rate or any fees or extend the time of payment of principal, interest
or any fees or reduce the principal amount of any Loan or Letter of Credit, in each case without
the consent of each Lender directly affected thereby,

               (ii) increase the Commitment of any Lender over the amount thereof then in effect or provided
hereunder, in each case without the consent of the Lender directly affected thereby,

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               (iii) release any Collateral (except as expressly required hereunder or under any of the other
Financing Agreements or applicable law and except as permitted under Section 12.11(b)
hereof), without the consent of Agent and all of Lenders,

               (iv) reduce any percentage specified in the definition of Required Lenders, without the
consent of Agent and all of Lenders,

               (v) consent to the assignment or transfer by any Borrower or Guarantor of any of their rights
and obligations under this Agreement, without the consent of Agent and all of Lenders,

               (vi) amend, modify or waive any terms of this Section 11.3 hereof, without the consent
of Agent and all of Lenders,

               (vii) amend, modify or waive any terms of Section 9.19 to reduce the minimum Excess
Availability required thereunder, without the consent of the Agent and the Supermajority Lenders,
or

               (viii) increase the advance rates constituting part of the Borrowing Base, without the consent
of Agent and all of Lenders.

          (b) Agent, Lenders and Issuing Bank shall not, by any act, delay, omission or otherwise be
deemed to have expressly or impliedly waived any of its or their rights, powers and/or remedies
unless such waiver shall be in writing and signed as provided herein. Any such waiver shall be
enforceable only to the extent specifically set forth therein. A waiver by Agent, any Lender or
Issuing Bank of any right, power and/or remedy on any one occasion shall not be construed as a bar
to or waiver of any such right, power and/or remedy which Agent, any Lender or Issuing Bank would
otherwise have on any future occasion, whether similar in kind or otherwise.

          (c) Notwithstanding anything to the contrary contained in Section 11.3(a) above, in
connection with any amendment, waiver, discharge or termination, in the event that any Lender whose
consent thereto is required shall fail to consent or fail to consent in a timely manner (such
Lender being referred to herein as a “Non-Consenting Lender”), but the consent of any other Lenders
to such amendment, waiver, discharge or termination that is required are obtained, if any, then GE
Capital shall have the right, but not the obligation, at any time thereafter, and upon the exercise
by GE Capital of such right, such Non-Consenting Lender shall have the obligation, to sell, assign
and transfer to GE Capital or such Eligible Transferee as GE Capital may specify, the Commitment of
such Non-Consenting Lender and all rights and interests of such Non-Consenting Lender pursuant
thereto. GE Capital shall provide the Non-Consenting Lender with prior written notice of its
intent to exercise its right under this Section, which notice shall specify on date on which such
purchase and sale shall occur. Such purchase and sale shall be pursuant to the terms of an
Assignment and Acceptance (whether or not executed by the Non-Consenting Lender), except that on
the date of such purchase and sale, GE Capital, or such Eligible Transferee specified by GE
Capital, shall pay to the Non-Consenting Lender (except as GE Capital and such Non-Consenting
Lender may otherwise agree) the amount equal to: (i) the principal balance of the Loans held by the
Non-Consenting Lender

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outstanding as of the close of business on the business day immediately preceding the
effective date of such purchase and sale, plus (ii) amounts accrued and unpaid in respect of
interest and fees payable to the Non-Consenting Lender to the effective date of the purchase (but
in no event shall the Non-Consenting Lender be deemed entitled to any early termination fee). Such
purchase and sale shall be effective on the date of the payment of such amount to the
Non-Consenting Lender and the Commitment of the Non-Consenting Lender shall terminate on such date.

          (d) The consent of Agent shall be required for any amendment, waiver or consent affecting the
rights or duties of Agent hereunder or under any of the other Financing Agreements, in addition to
the consent of the Lenders otherwise required by this Section and the exercise by Agent of any of
its rights hereunder with respect to Reserves or Eligible Accounts or Eligible Inventory shall not
be deemed an amendment to the advance rates provided for in this Section 11.3. The consent
of Issuing Bank shall be required for any amendment, waiver or consent affecting the rights or
duties of Issuing Bank hereunder or under any of the other Financing Agreements, in addition to the
consent of the Lenders otherwise required by this Section, provided, that, the
consent of Issuing Bank shall not be required for any other amendments, waivers or consents.
Notwithstanding anything to the contrary contained in Section 11.3(a) above, (i) in the
event that Agent shall agree that any items otherwise required to be delivered to Agent as a
condition of the initial Loans and Letters of Credit hereunder may be delivered after the date
hereof, Agent may, in its discretion, agree to extend the date for delivery of such items or take
such other action as Agent may deem appropriate as a result of the failure to receive such items as
Agent may determine or may waive any Event of Default as a result of the failure to receive such
items, in each case without the consent of any Lender and (ii) Agent may consent to any change in
the type of organization, jurisdiction of organization or other legal structure of any Borrower,
Guarantor or any of their Subsidiaries and amend the terms hereof or of any of the other Financing
Agreements as may be necessary or desirable to reflect any such change, in each case without the
approval of any Lender.

          (e) The consent of Agent and any Bank Product Provider that is providing Bank Products and has
outstanding any such Bank Products at such time that are secured hereunder shall be required for
any amendment to the priority of payment of Obligations arising under or pursuant to any Hedge
Agreements of a Borrower or Guarantor or other Bank Products as set forth in Section 6.4(a)
hereof.

          (f) No amendment, modification or waiver of this Agreement or any Financing Agreement altering
the ratable treatment of Obligations arising under Secured Rate Contracts resulting in such
Obligations being junior in right of payment to principal on the Loans or resulting in Obligations
owing to any Secured Swap Provider becoming unsecured (other than release of Liens in accordance
with the terms hereof), in each case in a manner adverse to any Secured Swap Provider, shall be
effective without the written consent of GE Capital.

     11.4 Waiver of Counterclaims. Each Borrower and Guarantor waives all rights to
interpose any claims, deductions, setoffs or counterclaims of any nature (other then compulsory
counterclaims) in any action or proceeding involving Agent, Issuing Bank or any Lender with

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respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.

     11.5 Indemnification. Each Borrower and Guarantor shall, jointly and severally,
indemnify and hold Agent, each Lender and Issuing Bank and their respective officers, directors,
agents, employees, advisors and counsel and their respective Affiliates (each such person being an
“Indemnitee”), harmless from and against any and all losses, claims, damages, liabilities,
costs or expenses (including attorneys’ fees and expenses) imposed on, incurred by or asserted
against any of them in connection with any litigation, investigation, claim or proceeding commenced
or threatened related to the negotiation, preparation, execution, delivery, enforcement,
performance or administration of this Agreement, any other Financing Agreements, or any undertaking
or proceeding related to any of the transactions contemplated hereby or any act, omission, event or
transaction related or attendant thereto, including amounts paid in settlement, court costs, and
the fees and expenses of counsel except that Borrowers and Guarantors shall not have any obligation
under this Section 11.5 to indemnify an Indemnitee with respect to a matter covered hereby
resulting from the gross negligence or willful misconduct of such Indemnitee as determined pursuant
to a final, non-appealable order of a court of competent jurisdiction (but without limiting the
obligations of Borrowers or Guarantors as to any other Indemnitee). To the extent that the
undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable
because it violates any law or public policy, Borrowers and Guarantors shall pay the maximum
portion which it is permitted to pay under applicable law to Agent and Lenders in satisfaction of
indemnified matters under this Section. To the extent permitted by applicable law, no Borrower or
Guarantor shall assert, and each Borrower and Guarantor hereby waives, any claim against any
Indemnitee, on any theory of liability for special, indirect, consequential or punitive damages (as
opposed to direct or actual damages) arising out of, in connection with, or as a result of, this
Agreement, any of the other Financing Agreements or any undertaking or transaction contemplated
hereby. No Indemnitee referred to above shall be liable for any damages arising from the use by
unintended recipients of any information or other materials distributed by it through
telecommunications, electronic or other information transmission systems in connection with this
Agreement or any of the other Financing Agreements or the transaction contemplated hereby or
thereby, except for damages resulting from the gross negligence or willful misconduct of such
Indemnitee as determined pursuant to a final, non-appealable order of a court of competent
jurisdiction. All amounts due under this Section shall be payable upon demand. The foregoing
indemnity shall survive the payment of the Obligations and the termination or non-renewal of this
Agreement.

SECTION 12 THE AGENT

     12.1 Appointment, Powers and Immunities. Each Secured Party irrevocably designates,
appoints and authorizes GE Capital to act as Agent hereunder and under the other Financing
Agreements with such powers as are specifically delegated to Agent by the terms of this Agreement
and of the other Financing Agreements, together with such other powers as are reasonably incidental
thereto. Agent (a) shall have no duties or responsibilities except those expressly set forth in
this Agreement and in the other Financing Agreements, and shall not by reason of this Agreement or
any other Financing Agreement be a trustee or fiduciary for any Secured Party; (b) shall not be
responsible to Lenders for any recitals, statements, representations

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or warranties contained in this Agreement or in any of the other Financing Agreements, or in
any certificate or other document referred to or provided for in, or received by any of them under,
this Agreement or any other Financing Agreement, or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any other Financing Agreement or
any other document referred to or provided for herein or therein or for any failure by any Borrower
or any Guarantor or any other Person to perform any of its obligations hereunder or thereunder; and
(c) shall not be responsible to Lenders for any action taken or omitted to be taken by it hereunder
or under any other Financing Agreement or under any other document or instrument referred to or
provided for herein or therein or in connection herewith or therewith, except for its own gross
negligence or willful misconduct as determined by a final non-appealable judgment of a court of
competent jurisdiction. Agent may employ agents and attorneys in fact and shall not be responsible
for the negligence or misconduct of any such agents or attorneys in fact selected by it in good
faith. Agent may deem and treat the payee of any note as the holder thereof for all purposes
hereof unless and until the assignment thereof pursuant to an agreement (if and to the extent
permitted herein) in form and substance satisfactory to Agent shall have been delivered to and
acknowledged by Agent. GE Capital Markets, Inc. is hereby designated as the sole lead arranger,
manager and bookrunner with respect to the Credit Facility. The designation of GE Capital Markets,
Inc. as sole lead arranger, manager and bookrunner shall not create any rights in favor of it in
such capacity nor subject it to any duties or obligations in such capacity.

     12.2 Reliance by Agent. Agent shall be entitled to rely upon any certification,
notice or other communication (including any thereof by telephone, telecopy, telex, telegram or
cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of
the proper Person or Persons, and upon advice and statements of legal counsel, independent
accountants and other experts selected by Agent. As to any matters not expressly provided for by
this Agreement or any other Financing Agreement, Agent shall in all cases be fully protected in
acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given
by the Required Lenders or all of Lenders as is required in such circumstance, and such
instructions of such Agents and any action taken or failure to act pursuant thereto shall be
binding on all Lenders.

     12.3 Events of Default.

          (a) Agent shall not be deemed to have knowledge or notice of the occurrence of a Default or an
Event of Default or other failure of a condition precedent to the Loans and Letters of Credit
hereunder, unless and until Agent has received written notice from a Lender, or Borrower specifying
such Event of Default or any unfulfilled condition precedent, and stating that such notice is a
“Notice of Default or Failure of Condition”. In the event that Agent receives such a Notice of
Default or Failure of Condition, Agent shall give prompt notice thereof to the Lenders. Agent
shall (subject to Section 12.7) take such action with respect to any such Event of Default
or failure of condition precedent as shall be directed by the Required Lenders to the extent
provided for herein; provided, that, unless and until Agent shall have received
such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking
such action, with respect to or by reason of such Event of Default or failure of condition
precedent, as it shall deem advisable in the best interest of Lenders. Without limiting the
foregoing, and

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notwithstanding the existence or occurrence and continuance of an Event of Default or any other
failure to satisfy any of the conditions precedent set forth in Section 4 of this Agreement to the
contrary, unless and until otherwise directed by the Required Lenders, Agent may, but shall have no
obligation to, continue to make Loans and Issuing Bank may, but shall have no obligation to, issue
or cause to be issued any Letter of Credit for the ratable account and risk of Lenders from time to
time if Agent believes making such Loans or issuing or causing to be issued such Letter of Credit
is in the best interests of Lenders.

          (b) Except with the prior written consent of Agent, no Lender or Issuing Bank may assert or
exercise any enforcement right or remedy in respect of the Loans, Letters of Credit or other
Obligations, as against any Borrower or Guarantor or any of the Collateral or other property of any
Borrower or Guarantor.

     12.4 GE Capital in its Individual Capacity. With respect to its Commitment and the
Loans made and Letters of Credit issued or caused to be issued by it (and any successor acting as
Agent), so long as GE Capital shall be a Lender hereunder, it shall have the same rights and powers
hereunder as any other Lender and may exercise the same as though it were not acting as Agent, and
the term “Lender” or “Lenders” shall, unless the context otherwise indicates, include GE Capital in
its individual capacity as Lender hereunder. GE Capital (and any successor acting as Agent) and
its Affiliates may (without having to account therefor to any Lender) lend money to, make
investments in and generally engage in any kind of business with Borrower (and any of its
Subsidiaries or Affiliates) as if it were not acting as Agent, and GE Capital and its Affiliates
may accept fees and other consideration from any Borrower or Guarantor and any of its Subsidiaries
and Affiliates for services in connection with this Agreement or otherwise without having to
account for the same to Lenders.

     12.5 Indemnification. Lenders agree to indemnify Agent and Issuing Bank (to the
extent not reimbursed by Borrowers hereunder and without limiting any obligations of Borrowers
hereunder) ratably, in accordance with their Pro Rata Shares, for any and all claims of any kind
and nature whatsoever that may be imposed on, incurred by or asserted against Agent (including by
any Lender) arising out of or by reason of any investigation in or in any way relating to or
arising out of this Agreement or any other Financing Agreement or any other documents contemplated
by or referred to herein or therein or the transactions contemplated hereby or thereby (including
the costs and expenses that Agent is obligated to pay hereunder) or the enforcement of any of the
terms hereof or thereof or of any such other documents, provided, that, no Lender
shall be liable for any of the foregoing to the extent it arises from the gross negligence or
willful misconduct of the party to be indemnified as determined by a final non-appealable judgment
of a court of competent jurisdiction. The foregoing indemnity shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.

     12.6 Non-Reliance on Agent and Other Lenders. Each Secured Party agrees that it has,
independently and without reliance on Agent or any other Secured Party, and based on such documents
and information as it has deemed appropriate, made its own credit analysis of Borrowers and
Guarantors and has made its own decision to enter into this Agreement and that it will,
independently and without reliance upon Agent or any other Secured Party, and based on such
documents and information as it shall deem appropriate at the time, continue to make its

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own analysis and decisions in taking or not taking action under this Agreement or any of the
other Financing Agreements. Agent shall not be required to keep itself informed as to the
performance or observance by any Borrower or Guarantor of any term or provision of this Agreement
or any of the other Financing Agreements or any other document referred to or provided for herein
or therein or to inspect the properties or books of any Borrower or Guarantor. Agent will use
reasonable efforts to provide Lenders with any information received by Agent from any Borrower or
Guarantor which is required to be provided to Lenders or deemed to be requested by Lenders
hereunder and with a copy of any Notice of Default or Failure of Condition received by Agent from
any Borrower or any Lender; provided, that, Agent shall not be liable to any Lender
for any failure to do so, except to the extent that such failure is attributable to Agent’s own
gross negligence or willful misconduct as determined by a final non-appealable judgment of a court
of competent jurisdiction. Except for notices, reports and other documents expressly required to
be furnished to Lenders by Agent or deemed requested by Lenders hereunder (including the documents
provided for in Section 12.10 hereof), Agent shall not have any duty or responsibility to
provide any Lender with any other credit or other information concerning the affairs, financial
condition or business of any Borrower or Guarantor that may come into the possession of Agent.

     12.7 Failure to Act. Except for action expressly required of Agent hereunder and
under the other Financing Agreements, Agent shall in all cases be fully justified in failing or
refusing to act hereunder and thereunder unless it shall receive further assurances to its
satisfaction from Lenders of their indemnification obligations under Section 12.5 hereof
against any and all liability and expense that may be incurred by it by reason of taking or
continuing to take any such action.

     12.8 Additional Loans. Agent shall not make any Revolving Loans or Issuing Bank
provide any Letter of Credit to any Borrower on behalf of Lenders intentionally and with actual
knowledge that such Revolving Loans or Letter of Credit would cause the aggregate amount of the
total outstanding Revolving Loans and Letters of Credit to exceed the Borrowing Base, without the
prior consent of all Lenders, except, that, Agent may make such additional Revolving Loans or
Issuing Bank may provide such additional Letter of Credit on behalf of Lenders, intentionally and
with actual knowledge that such Revolving Loans or Letters of Credit will cause the total
outstanding Revolving Loans and Letters of Credit to exceed the Borrowing Base, as Agent may deem
necessary or advisable in its discretion, provided, that: (a) the total principal
amount of the additional Revolving Loans or additional Letters of Credit which Agent may make or
Issuing Bank may provide after obtaining such actual knowledge that the aggregate principal amount
of the Revolving Loans equal or exceed the Borrowing Base, plus the amount of Special Agent
Advances made pursuant to Section 12.11(a)(ii) hereof then outstanding, shall not exceed
the aggregate amount equal to ten (10%) percent of the Maximum Credit and shall not cause the total
principal amount of the Loans and Letter of Credit Obligations to exceed the Maximum Credit and (b)
no such additional Revolving Loan or Letter of Credit shall be outstanding more than ninety (90)
days after the date such additional Revolving Loan or Letter of Credit is made or issued (as the
case may be), except as the Required Lenders may otherwise agree. Each Lender shall be obligated
to pay Agent the amount of its Pro Rata Share of any such additional Revolving Loans or Letters of
Credit.

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     12.9 Concerning the Collateral and the Related Financing Agreements. Each Secured
Party authorizes and directs Agent to enter into this Agreement and the other Financing Agreements.
Each Secured Party agrees that any action taken by Agent or Required Lenders in accordance with
the terms of this Agreement or the other Financing Agreements and the exercise by Agent or Required
Lenders of their respective powers set forth therein or herein, together with such other powers
that are reasonably incidental thereto, shall be binding upon all Secured Parties.

     12.10 Field Audit, Examination Reports and other Information; Disclaimer by Lenders.
By signing this Agreement, each Lender:

          (a) is deemed to have requested that Agent furnish such Lender (and Agent agrees that it will
furnish to such Lender), promptly after it becomes available, a copy of each field audit or
examination report and report with respect to the Borrowing Base prepared or received by Agent
(each field audit or examination report and report with respect to the Borrowing Base being
referred to herein as a “Report” and collectively, “Reports”), appraisals with
respect to the Collateral and financial statements with respect to Parent and its Subsidiaries
received by Agent;

          (b) expressly agrees and acknowledges that Agent (i) does not make any representation or
warranty as to the accuracy of any Report, appraisal or financial statement or (ii) shall not be
liable for any information contained in any Report, appraisal or financial statement;

          (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or
examinations, that Agent or any other party performing any audit or examination will inspect only
specific information regarding Borrowers and Guarantors and will rely significantly upon Borrowers’
and Guarantors’ books and records, as well as on representations of Borrowers’ and Guarantors’
personnel; and

          (d) agrees to keep all Reports confidential and strictly for its internal use in accordance
with the terms of Section 13.5 hereof, and not to distribute or use any Report in any other
manner.

     12.11 Collateral Matters.

          (a) Agent may, at its option, from time to time, at any time on or after an Event of Default
and for so long as the same is continuing or upon any other failure of a condition precedent to the
Loans and Letters of Credit hereunder, make such disbursements and advances (“Special Agent
Advances”) which Agent, in its sole discretion, (i) deems necessary or desirable either to
preserve or protect the Collateral or any portion thereof or (ii) to enhance the likelihood or
maximize the amount of repayment by Borrowers and Guarantors of the Loans and other Obligations,
provided, that, (A) the aggregate principal amount of the Special Agent Advances
pursuant to this clause (ii) outstanding at any time, plus the then outstanding principal amount of
the additional Loans and Letters of Credit which Agent may make or provide as set forth in
Section 12.8 hereof, shall not exceed the amount equal to ten (10%) percent of the Maximum
Credit and (B) the aggregate principal amount of the Special Agent Advances

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pursuant to this clause (ii) outstanding at any time, plus the then outstanding principal
amount of the Loans, shall not exceed the Maximum Credit, or (iii) to pay any other amount
chargeable to any Borrower or Guarantor pursuant to the terms of this Agreement or any of the other
Financing Agreements consisting of (A) costs, fees and expenses and (B) payments to Issuing Bank in
respect of any Letter of Credit. The Special Agent Advances shall be repayable on demand and
together with all interest thereon shall constitute Obligations secured by the Collateral. Special
Agent Advances shall not constitute Loans but shall otherwise constitute Obligations hereunder.
Interest on Special Agent Advances shall be payable at the Interest Rate then applicable to Prime
Rate Loans and shall be payable on demand. Without limitation of its obligations pursuant to
Section 6.11, each Lender agrees that it shall make available to Agent, upon Agent’s
demand, in immediately available funds, the amount equal to such Lender’s Pro Rata Share of each
such Special Agent Advance. If such funds are not made available to Agent by such Lender, such
Lender shall be deemed a Defaulting Lender and Agent shall be entitled to recover such funds, on
demand from such Lender together with interest thereon for each day from the date such payment was
due until the date such amount is paid to Agent at the Federal Funds Rate for each day during such
period (as published by the Federal Reserve Bank of New York or at Agent’s option based on the
arithmetic mean determined by Agent of the rates for the last transaction in overnight Federal
funds arranged prior to 9:00 a.m. (Eastern time) on that day by each of the three leading brokers
of Federal funds transactions in New York City selected by Agent) and if such amounts are not paid
within three (3) days of Agent’s demand, at the highest Interest Rate provided for in Section
3.1 hereof applicable to Prime Rate Loans.

          (b) Lenders hereby irrevocably authorize Agent, at its option and in its discretion to release
any security interest in, mortgage or lien upon, any of the Collateral (i) upon termination of the
Commitments and payment and satisfaction of all of the Obligations and delivery of cash collateral
to the extent required under Section 13.1 below, or (ii) constituting property being sold
or disposed of if Administrative Borrower or any Borrower or Guarantor certifies to Agent that the
sale or disposition is made in compliance with Section 9.7 hereof (and Agent may rely conclusively
on any such certificate, without further inquiry), or (iii) constituting property in which any
Borrower or Guarantor did not own an interest at the time the security interest, mortgage or lien
was granted or at any time thereafter, or (iv) having a value in the aggregate in any twelve (12)
month period of less than $5,000,000, and to the extent Agent may release its security interest in
and lien upon any such Collateral pursuant to the sale or other disposition thereof, such sale or
other disposition shall be deemed consented to by Lenders, or (v) if required or permitted under
the terms of any of the other Financing Agreements, including any intercreditor agreement, or (vi)
approved, authorized or ratified in writing by all of Lenders. Except as provided above, Agent
will not release any security interest in, mortgage or lien upon, any of the Collateral without the
prior written authorization of all of Lenders. Upon request by Agent at any time, Lenders will
promptly confirm in writing Agent’s authority to release particular types or items of Collateral
pursuant to this Section. In no event shall the consent or approval of Issuing Bank to any release
of Collateral be required. Except as provided in Section 11.3(f), nothing contained herein
shall be construed to require the consent of any Bank Product Provider to any release of any
Collateral or termination of security interests in any Collateral.

          (c) Without any manner limiting Agent’s authority to act without any specific or further
authorization or consent by the Required Lenders, each Lender agrees to confirm in

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writing, upon request by Agent, the authority to release Collateral conferred upon Agent under
this Section. Agent shall (and is hereby irrevocably authorized by Lenders to) execute such
documents as may be necessary to evidence the release of the security interest, mortgage or liens
granted to Agent upon any Collateral to the extent set forth above; provided, that,
(i) Agent shall not be required to execute any such document on terms which, in Agent’s opinion,
would expose Agent to liability or create any obligations or entail any consequence other than the
release of such security interest, mortgage or liens without recourse or warranty and (ii) such
release shall not in any manner discharge, affect or impair the Obligations or any security
interest, mortgage or lien upon (or obligations of any Borrower or Guarantor in respect of) the
Collateral retained by such Borrower or Guarantor.

          (d) Agent shall have no obligation whatsoever to any Lender, Issuing Bank or any other Person
to investigate, confirm or assure that the Collateral exists or is owned by any Borrower or
Guarantor or is cared for, protected or insured or has been encumbered, or that any particular
items of Collateral meet the eligibility criteria applicable in respect of the Loans or Letters of
Credit hereunder, or whether any particular reserves are appropriate, or that the liens and
security interests granted to Agent pursuant hereto or any of the Financing Agreements or otherwise
have been properly or sufficiently or lawfully created, perfected, protected or enforced or are
entitled to any particular priority, or to exercise at all or in any particular manner or under any
duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and
powers granted or available to Agent in this Agreement or in any of the other Financing Agreements,
it being understood and agreed that in respect of the Collateral, or any act, omission or event
related thereto, subject to the other terms and conditions contained herein, Agent may act in any
manner it may deem appropriate, in its discretion, given Agent’s own interest in the Collateral as
a Lender and that Agent shall have no duty or liability whatsoever to any other Lender or Issuing
Bank.

     12.12 Agency for Perfection. Each Secured Party hereby appoints Agent and each other
Secured Party as agent and bailee for the purpose of perfecting the security interests in and liens
upon the Collateral of Agent in assets which, in accordance with Article 9 of the UCC can be
perfected only by possession (or where the security interest of a secured party with possession has
priority over the security interest of another secured party) and Agent and each Secured Party
hereby acknowledges that it holds possession of any such Collateral for the benefit of Agent as
secured party. Should any Secured Party obtain possession of any such Collateral, such Lender
shall notify Agent thereof, and, promptly upon Agent’s request therefor shall deliver such
Collateral to Agent or in accordance with Agent’s instructions.

     12.13 Successor Agent. Agent may resign as Agent upon thirty (30) days’ notice to
Lenders and Parent. If Agent resigns under this Agreement, the Required Lenders shall appoint from
among the Lenders a successor agent for Lenders. If no successor agent is appointed prior to the
effective date of the resignation of Agent, Agent may appoint, after consulting with Lenders and
Parent, a successor agent from among Lenders. Upon the acceptance by the Lender so selected of its
appointment as successor agent hereunder, such successor agent shall succeed to all of the rights,
powers and duties of the retiring Agent and the term “Agent” as used herein and in the other
Financing Agreements shall mean such successor agent and the retiring Agent’s appointment, powers
and duties as Agent shall be terminated. After any retiring Agent’s

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resignation hereunder as Agent, the provisions of this Section 12 shall inure to its
benefit as to any actions taken or omitted by it while it was Agent under this Agreement. If no
successor agent has accepted appointment as Agent by the date which is thirty (30) days after the
date of a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall
nonetheless thereupon become effective and Lenders shall perform all of the duties of Agent
hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided
for above.

     12.14 Other Agent Designations. Agent may at any time and from time to time determine
that a Lender may, in addition, be a “Co-Agent”, “Syndication Agent”, “Documentation Agent” or
similar designation hereunder and enter into an agreement with such Lender to have it so identified
for purposes of this Agreement. Any such designation shall be effective upon written notice by
Agent to Administrative Borrower of any such designation. Any Lender that is so designated as a
Co-Agent, Syndication Agent, Documentation Agent or such similar designation by Agent shall have no
right, power, obligation, liability, responsibility or duty under this Agreement or any of the
other Financing Agreements other than those applicable to all Lenders as such. Without limiting
the foregoing, the Lenders so identified shall not have or be deemed to have any fiduciary
relationship with any Lender and no Lender shall be deemed to have relied, nor shall any Lender
rely, on a Lender so identified as a Co-Agent, Syndication Agent, Documentation Agent or such
similar designation in deciding to enter into this Agreement or in taking or not taking action
hereunder.

SECTION 13 TERM OF AGREEMENT; MISCELLANEOUS

     13.1 Term.

          (a) This Agreement and the other Financing Agreements shall become effective as of the Closing
Date and shall continue in full force and effect for a term ending on the Maturity Date, unless
sooner terminated pursuant to the terms hereof. In addition, Borrowers may terminate this
Agreement at any time upon ten (10) days prior written notice to Agent (which notice shall be
irrevocable) and Agent may, at its option, and shall at the direction of Required Lenders,
terminate this Agreement at any time on or after an Event of Default. Upon the Commitment
Termination Date, Borrowers shall pay to Agent all outstanding and unpaid Obligations and shall
furnish cash collateral to Agent (or at Agent’s option, a letter of credit issued for the account
of Borrowers and at Borrowers’ expense, in form and substance satisfactory to Agent, by an issuer
acceptable to Agent and payable to Agent as beneficiary) in such amounts as Agent determines are
reasonably necessary to secure Agent, Lenders and Issuing Bank from loss, cost, damage or expense,
including attorneys’ fees and expenses, in connection with any contingent Obligations, including
issued and outstanding Letter of Credit Obligations and checks or other payments provisionally
credited to the Obligations and/or as to which Agent or any Lender has not yet received final and
indefeasible payment (and including any contingent liability of Agent to any bank at which deposit
accounts of Borrowers and Guarantors are maintained under any Deposit Account Control Agreement)
and for any of the Obligations arising under or in connection with any Bank Products in such
amounts as the party providing such Bank Products may require (unless such Obligations arising
under or in connection with any Bank Products are paid in full in cash and terminated in a manner
satisfactory to such other party). The amount of such cash collateral (or letter of credit, as
Agent

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may determine) as to any Letter of Credit Obligations shall be in the amount equal to one
hundred five (105%) percent of the amount of the Letter of Credit Obligations plus the amount of
any fees and expenses payable in connection therewith through the end of the latest expiration date
of the then outstanding Letters of Credit. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer in Federal funds to Agent Payment Account or such
other bank account of Agent, as Agent may, in its discretion, designate in writing to
Administrative Borrower for such purpose. Interest shall be due until and including the next
Business Day, if the amounts so paid by Borrowers to Agent Payment Account or other bank account
designated by Agent are received in such bank account later than 1:00 p.m. (Eastern time).

          (b) No termination of the Commitments, this Agreement or any of the other Financing Agreements
shall relieve or discharge any Borrower or Guarantor of its respective duties, obligations and
covenants under this Agreement or any of the other Financing Agreements until all Obligations have
been fully and finally discharged and paid, and Agent’s continuing security interest in the
Collateral and the rights and remedies of Agent and Lenders hereunder, under the other Financing
Agreements and applicable law, shall remain in effect until all such Obligations have been fully
and finally discharged and paid. Accordingly, each Borrower and Guarantor waives any rights it may
have under the UCC to demand the filing of termination statements with respect to the Collateral
and Agent shall not be required to send such termination statements to Borrowers or Guarantors, or
to file them with any filing office, unless and until this Agreement shall have been terminated in
accordance with its terms and all Obligations paid and satisfied in full in immediately available
funds.

     13.2 Interpretative Provisions.

          (a) All terms used herein which are defined in Article 1, Article 8 or Article 9 of the UCC
shall have the meanings given therein unless otherwise defined in this Agreement.

          (b) All references to the plural herein shall also mean the singular and to the singular shall
also mean the plural unless the context otherwise requires.

          (c) All references to any Borrower, Guarantor, Agent and Lenders pursuant to the definitions
set forth in the recitals hereto, or to any other person herein, shall include their respective
successors and assigns.

          (d) The words “hereof”, “herein”, “hereunder”, “this Agreement” and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.

          (e) The word “including” when used in this Agreement shall mean “including, without
limitation” and the word “will” when used in this Agreement shall be construed to have the same
meaning and effect as the word “shall”.

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          (f) An Event of Default shall exist or continue or be continuing until such Event of Default
is waived in accordance with Section 11.3 or is cured in a manner satisfactory to Agent, if
such Event of Default is capable of being cured as determined by Agent.

          (g) All references to the term “good faith” used herein when applicable to Agent or any Lender
shall mean, notwithstanding anything to the contrary contained herein or in the UCC, honesty in
fact in the conduct or transaction concerned. Borrowers and Guarantors shall have the burden of
proving any lack of good faith on the part of Agent or any Lender alleged by any Borrower or
Guarantor at any time.

          (h) Any accounting term used in this Agreement shall have, unless otherwise specifically
provided herein, the meaning customarily given in accordance with GAAP, and all financial
computations hereunder shall be computed unless otherwise specifically provided herein, in
accordance with GAAP as consistently applied and using the same method for inventory valuation as
used in the preparation of the financial statements of Parent most recently received by Agent prior
to the date hereof. Notwithstanding anything to the contrary contained in GAAP or any
interpretations or other pronouncements by the Financial Accounting Standards Board or otherwise,
the term “unqualified opinion” as used herein to refer to opinions or reports provided by
accountants shall mean an opinion or report that is unqualified and also does not include any
explanation, supplemental comment or other comment concerning the ability of the applicable person
to continue as a going concern or the scope of the audit.

          (i) 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”.

          (j) Unless otherwise expressly provided herein, (i) references herein to any agreement,
document or instrument shall be deemed to include all subsequent amendments, modifications,
supplements, extensions, renewals, restatements or replacements with respect thereto, but only to
the extent the same are not prohibited by the terms hereof or of any other Financing Agreement, and
(ii) references to any statute or regulation are to be construed as including all statutory and
regulatory provisions consolidating, amending, replacing, recodifying, supplementing or
interpreting the statute or regulation.

          (k) The captions and headings of this Agreement are for convenience of reference only and
shall not affect the interpretation of this Agreement.

          (l) This Agreement and other Financing Agreements 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.

          (m) This Agreement and the other Financing Agreements are the result of negotiations among and
have been reviewed by counsel to Agent and the other parties, and are the products of all parties.
Accordingly, this Agreement and the other Financing Agreements shall not be construed against Agent
or Lenders merely because of Agent’s or any Lender’s involvement in their preparation.

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     13.3 Notices.

          (a) All notices, requests and demands hereunder shall be in writing and deemed to have been
given or made: if delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next Business Day, one (1)
Business Day after sending; and if by certified mail, return receipt requested, five (5) days after
mailing by deposit (postage prepaid) in the U.S. mail. Notices delivered through electronic
communications shall be effective to the extent set forth in Section 13.3(b) below. All notices,
requests and demands upon the parties are to be given to the following addresses (or to such other
address as any party may designate by notice in accordance with this Section):

	 	 	 	 	 
	 

	 	If to any Borrower or Guarantor:
	 	Hancock Fabrics, Inc.
	 

	 	 	 	One Fashion Way
	 

	 	 	 	Baldwyn, MS 38824
	 

	 	 	 	Attention: Rob Driskell, CFO
	 

	 	 	 	Telephone No.: (662) 365-6112
	 

	 	 	 	Telecopy No.: (662) 365-6025
	 
	 	 	 	 
	 

	 	with a copy to:
	 	Baker, Donelson, Bearman, Caldwell &
	 

	 	 	 	   Berkowitz, PC
	 

	 	 	 	165 Madison Avenue
	 

	 	 	 	First Tennessee Building
	 

	 	 	 	Memphis, TN 38103
	 

	 	 	 	Attention: Sam D. Chafetz, Esq.
	 

	 	 	 	Telephone No.: (901) 577-2148
	 

	 	 	 	Telecopy No.: (901) 577-0854
	 
	 	 	 	 
	 

	 	If to Agent:
	 	General Electric Capital Corporation
	 

	 	 	 	401 Merritt 7, P.O. Box 5201
	 

	 	 	 	Norwalk, CT 06856-5201
	 

	 	 	 	Attention: Hancock Fabrics Account Manager
	 

	 	 	 	Telephone No.: (203) 956-4598
	 

	 	 	 	Telecopy No.: (203) 956-4002
	 
	 	 	 	 
	 

	 	With copies to:	 	 
	 

	 	 	 	Bingham McCutchen LLP
	 

	 	 	 	One Federal Street
	 

	 	 	 	Boston, MA 02110
	 

	 	 	 	Attention: Robert A. J. Barry, Esq.
	 

	 	 	 	Telephone No.: (617) 951-8624
	 

	 	 	 	Telecopy No.: (617) 951-8736
	 
	 	 	 	 
	 

	 	and	 	 
	 

	 	 	 	General Electric Capital Corporation
	 

	 	 	 	401 Merritt 7

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	 	 	 	Norwalk, CT 06851
	 

	 	 	 	Attention: Corporate Counsel —
Corporate Lending
	 

	 	 	 	Telephone No.: (203) 956-4001
	 

	 	 	 	Telecopy No.: (203) 229-1800

          (b) Notices and other communications to Lenders and Issuing Bank hereunder may be delivered or
furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant
to procedures approved by Agent or as otherwise determined by Agent, provided,
that, the foregoing shall not apply to notices to any Lender pursuant to Section 2
hereof if such Lender or Issuing Bank, as applicable, has notified Agent that it is incapable of
receiving notices under such Section by electronic communication. Unless Agent otherwise requires,
(i) notices and other communications sent to an e-mail address shall be deemed received upon the
sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt
requested” function, as available, return e-mail or other written acknowledgement),
provided, that, if such notice or other communication is not given during the
normal business hours of the recipient, such notice shall be deemed to have been sent at the
opening of business on the next Business Day for the recipient, and (ii) notices or communications
posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the
intended recipient at its e-mail address as described in the foregoing clause (i) of
notification that such notice or communications is available and identifying the website address
therefor.

     13.4 Partial Invalidity. If any provision of this Agreement is held to be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole,
but this Agreement shall be construed as though it did not contain the particular provision held to
be invalid or unenforceable and the rights and obligations of the parties shall be construed and
enforced only to such extent as shall be permitted by applicable law.

     13.5 Confidentiality.

          (a) Agent, each Lender and Issuing Bank shall use all reasonable efforts to keep confidential,
in accordance with its customary procedures for handling confidential information and safe and
sound lending practices, any non-public information supplied to it by any Borrower pursuant to this
Agreement which is clearly and conspicuously marked as confidential at the time such information is
furnished by such Borrower to Agent, such Lender or Issuing Bank, provided, that,
nothing contained herein shall limit the disclosure of any such information: (i) to the extent
required by statute, rule, regulation, subpoena or court order, (ii) to bank examiners and other
regulators, auditors and/or accountants, in connection with any litigation to which Agent, such
Lender or Issuing Bank is a party, (iii) to any Lender or Participant (or prospective Lender or
Participant) or to any Affiliate of any Lender or Issuing Bank so long as such Lender, Participant
(or prospective Lender or Participant or Issuing Bank) shall have agreed to treat such information
as confidential in accordance with this Section 13.5 and such Lender, Participant (or
prospective Lender or Participant or Issuing Bank) shall have caused such Affiliate to treat such
information as confidential in accordance with this

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Section 13.5, or (iv) to counsel for Agent, any Lender, Issuing Bank or Participant (or
prospective Lender or Participant).

          (b) In the event that Agent, any Lender or Issuing Bank receives a request or demand to
disclose any confidential information pursuant to any subpoena or court order, Agent, such Lender
or Issuing Bank, as the case may be, agrees (i) to the extent permitted by applicable law or if
permitted by applicable law, to the extent Agent, such Lender or Issuing Bank determines in good
faith that it will not create any risk of liability to Agent, Issuing Bank or such Lender, Agent or
such Lender or Issuing Bank will promptly notify Administrative Borrower of such request so that
Administrative Borrower may seek a protective order or other appropriate relief or remedy and (ii)
if disclosure of such information is required, disclose such information and, subject to
reimbursement by Borrowers of Agent’s or Issuing Bank’s or such Lender’s expenses, cooperate with
Administrative Borrower in the reasonable efforts to obtain an order or other reliable assurance
that confidential treatment will be accorded to such portion of the disclosed information which
Administrative Borrower so designates, to the extent permitted by applicable law or if permitted by
applicable law, to the extent Agent, such Lender or Issuing Bank determines in good faith that it
will not create any risk of liability to Agent, such Lender or Issuing Bank.

          (c) In no event shall this Section 13.5 or any other provision of this Agreement, any
of the other Financing Agreements or applicable law be deemed: (i) to apply to or restrict
disclosure of information that has been or is made public by any Borrower, Guarantor or any third
party or otherwise becomes generally available to the public other than as a result of a disclosure
in violation hereof, (ii) to apply to or restrict disclosure of information that was or becomes
available to Agent, any Lender, Issuing Bank (or any Affiliate of any Lender or Issuing Bank) on a
non-confidential basis from a person other than a Borrower or Guarantor (unless Agent, Issuing Bank
or such Lender knows that such information was disclosed in violation of a confidentiality
agreement or applicable law), (iii) to require Agent, any Lender or Issuing Bank to return any
materials furnished by a Borrower or Guarantor to Agent, a Lender or Issuing Bank or prevent Agent,
a Lender or Issuing Bank from responding to routine informational requests in accordance with the
Code of Ethics for the Exchange of Credit Information promulgated by The Robert Morris Associates
or other applicable industry standards relating to the exchange of credit information. The
obligations of Agent, Lenders and Issuing Bank under this Section 13.5 shall supersede and replace
the obligations of Agent, Lenders or Issuing Bank under any confidentiality letter signed prior to
the date hereof or any other arrangements concerning the confidentiality of information provided by
any Borrower or Guarantor to Agent, any Lender or Issuing Bank. In addition, Agent, Lenders and
Issuing Bank may disclose information relating to the Credit Facility to Gold Sheets and other
similar publications with such information to consist of deal terms and other information
customarily found in such publications and that Agent and its affiliates may otherwise use the
corporate name and logo of Borrowers and Guarantors in “tombstones” or other advertisements or
public statements.

     13.6 Publicity. Each Borrower and Guarantor agrees that neither it nor its Affiliates
will in the future issue any press releases or other public disclosure (other than any disclosures
required by the Securities and Exchange Commission) using the name of GE Capital or its affiliates
or referring to this Agreement, the other Financing Agreements without at least two (2)

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Business Days’ prior notice to GE Capital and without the prior written consent of GE Capital
unless (and only to the extent that) such Borrower, Guarantor or Affiliate is required to do so
under law and then, in any event, such Borrower, Guarantor or Affiliate will consult with GE
Capital before issuing such press release or other public disclosure. GE Capital hereby agrees
that neither it nor its Affiliates will in the future issue any press releases or other public
disclosure (other than any disclosures required by the Securities and Exchange Commission) using
the name of the Borrowers or their affiliates or referring to this Agreement, the other Financing
Agreements without at least two (2) Business Days’ prior notice to the Administrative Borrower
without the prior written consent of the Administrative Borrower unless (and only to the extent
that) GE Capital or such Affiliate is required to do so under law and then, in any event, GE
Capital or such Affiliate will consult with the Administrative Borrower before issuing such press
release or other public disclosure. Notwithstanding the foregoing to the contrary, Agent reserves
the right to provide to industry trade organizations information necessary and customary for
inclusion in league table measurements.

     13.7 Successors. This Agreement, the other Financing Agreements and any other
document referred to herein or therein shall be binding upon and inure to the benefit of and be
enforceable by Agent, Secured Parties, Issuing Bank, Borrowers, Guarantors and their respective
successors and assigns, except that Borrower may not assign its rights under this Agreement, the
other Financing Agreements and any other document referred to herein or therein without the prior
written consent of Agent and Lenders. Any such purported assignment without such express prior
written consent shall be void. No Lender may assign its rights and obligations under this
Agreement without the prior written consent of Agent, except as provided in Section 13.8
below. The terms and provisions of this Agreement and the other Financing Agreements are for the
purpose of defining the relative rights and obligations of Borrowers, Guarantors, Agent, Issuing
Bank and Lenders with respect to the transactions contemplated hereby and there shall be no third
party beneficiaries of any of the terms and provisions of this Agreement or any of the other
Financing Agreements.

     13.8 Assignments; Participations.

          (a) Each Lender may, with the prior written consent of Agent, assign all or, if less than all,
a portion equal to at least $7,500,000 in the aggregate for the assigning Lender, of such rights
and obligations under this Agreement to one or more Eligible Transferees (but not including for
this purpose any assignments in the form of a participation), each of which assignees shall become
a party to this Agreement as a Lender by execution of an Assignment and Acceptance;
provided, that, (i) such transfer or assignment will not be effective until
recorded by Agent on the Register and (ii) Agent shall have received for its sole account payment
of a processing fee from the assigning Lender or the assignee in the amount of $5,000.

          (b) Agent shall maintain a register of the names and addresses of Lenders, their Commitments
and the principal amount of their Loans (the “Register”). Agent shall also maintain a copy
of each Assignment and Acceptance delivered to and accepted by it and shall modify the Register to
give effect to each Assignment and Acceptance. The entries in the Register shall be conclusive and
binding for all purposes, absent manifest error, and any Borrowers, Guarantors, Agent and Lenders
may treat each Person whose name is recorded in the

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Register as a Lender hereunder for all purposes of this Agreement. The Register shall be
available for inspection by Administrative Borrower and any Lender at any reasonable time and from
time to time upon reasonable prior notice.

          (c) Upon such execution, delivery, acceptance and recording, from and after the effective date
specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and to
the other Financing Agreements and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations
(including, without limitation, the obligation to participate in Letter of Credit Obligations) of a
Lender hereunder and thereunder and the assigning Lender shall, to the extent that rights and
obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance,
relinquish its rights and be released from its obligations under this Agreement.

          (d) By execution and delivery of an Assignment and Acceptance, the assignor and assignee
thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other
than as provided in such Assignment and Acceptance, the assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with this Agreement or any of the other Financing
Agreements or the execution, legality, enforceability, genuineness, sufficiency or value of this
Agreement or any of the other Financing Agreements furnished pursuant hereto, (ii) the assigning
Lender makes no representation or warranty and assumes no responsibility with respect to the
financial condition of any Borrower, Guarantor or any of their Subsidiaries or the performance or
observance by any Borrower or Guarantor of any of the Obligations; (iii) such assignee confirms
that it has received a copy of this Agreement and the other Financing Agreements, together with
such other documents and information it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance, (iv) such assignee will, independently and
without reliance upon the assigning Lender, Agent and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in taking or not
taking action under this Agreement and the other Financing Agreements, (v) such assignee appoints
and authorizes Agent to take such action as agent on its behalf and to exercise such powers under
this Agreement and the other Financing Agreements as are delegated to Agent by the terms hereof and
thereof, together with such powers as are reasonably incidental thereto, and (vi) such assignee
agrees that it will perform in accordance with their terms all of the obligations which by the
terms of this Agreement and the other Financing Agreements are required to be performed by it as a
Lender. Agent and Lenders may furnish any information concerning any Borrower or Guarantor in the
possession of Agent or any Lender from time to time to assignees and Participants.

          (e) Each Lender may sell participations to one or more banks or other entities in or to all or
a portion of its rights and obligations under this Agreement and the other Financing Agreements
(including, without limitation, all or a portion of its Commitments and the Loans owing to it and
its participation in the Letter of Credit Obligations, without the consent of Agent or the other
Lenders); provided, that, (i) such Lender’s obligations under this Agreement
(including, without limitation, its Commitment hereunder) and the other Financing Agreements

131

 

shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations, and Borrowers, Guarantors, the other Lenders and
Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s
rights and obligations under this Agreement and the other Financing Agreements, and (iii) the
Participant shall not have any rights under this Agreement or any of the other Financing Agreements
(the Participant’s rights against such Lender in respect of such participation to be those set
forth in the agreement executed by such Lender in favor of the Participant relating thereto) and
all amounts payable by any Borrower or Guarantor hereunder shall be determined as if such Lender
had not sold such participation.

          (f) Nothing in this Agreement shall prevent or prohibit any Lender from pledging its Loans
hereunder to a Federal Reserve Bank in support of borrowings made by such Lenders from such Federal
Reserve Bank; provided, that, no such pledge shall release such Lender from any of
its obligations hereunder or substitute any such pledgee for such Lender as a party hereto.

          (g) Borrowers and Guarantors shall assist Agent or any Lender permitted to sell assignments or
participations under this Section 13.8 in whatever manner reasonably necessary in order to
enable or effect any such assignment or participation, including (but not limited to) the execution
and delivery of any and all agreements, notes and other documents and instruments as shall be
requested and the delivery of informational materials, appraisals or other documents for, and the
participation of relevant management in meetings and conference calls with, potential Lenders or
Participants. Borrowers shall certify the correctness, completeness and accuracy, in all material
respects, of all descriptions of Borrowers and Guarantors and their affairs provided, prepared or
reviewed by any Borrower or Guarantor that are contained in any selling materials and all other
information provided by it and included in such materials.

          (h) Any Lender that is an Issuing Bank may at any time assign all of its Commitments pursuant
to this Section 13.8. If such Issuing Bank ceases to be Lender, it may, at its option,
resign as Issuing Bank and such Issuing Bank’s obligations to issue Letters of Credit shall
terminate but it shall retain all of the rights and obligations of Issuing Bank hereunder with
respect to Letters of Credit outstanding as of the effective date of its resignation and all Letter
of Credit Obligations with respect thereto (including the right to require Lenders to make
Revolving Loans or fund risk participations in outstanding Letter of Credit Obligations), shall
continue.

     13.9 Entire Agreement. This Agreement, the other Financing Agreements, any
supplements hereto or thereto, and any instruments or documents delivered or to be delivered in
connection herewith or therewith represents the entire agreement and understanding concerning the
subject matter hereof and thereof between the parties hereto, and supersede all other prior
agreements, understandings, negotiations and discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject matter hereof, whether oral or written. In
the event of any inconsistency between the terms of this Agreement and any schedule or exhibit
hereto, the terms of this Agreement shall govern.

     13.10 USA PATRIOT Act. Each Lender subject to the USA PATRIOT Act (Title III of
Pub.L. 107-56 (signed into law October 26, 2001) (the “Act”) hereby notifies Borrowers and
Guarantors that pursuant to the requirements of the Act, it is required to obtain, verify and
record

132

 

information that identifies each person or corporation who opens an account and/or enters into
a business relationship with it, which information includes the name and address of Borrowers and
Guarantors and other information that will allow such Lender to identify such person in accordance
with the Act and any other applicable law. Borrowers and Guarantors are hereby advised that any
Loans or Letters of Credit hereunder are subject to satisfactory results of such verification.

     13.11 Counterparts, Etc. This Agreement or any of the other Financing Agreements may
be executed in any number of counterparts, each of which shall be an original, but all of which
taken together shall constitute one and the same agreement. Delivery of an executed counterpart of
this Agreement or any of the other Financing Agreements by telefacsimile or other electronic method
of transmission shall have the same force and effect as the delivery of an original executed
counterpart of this Agreement or any of such other Financing Agreements. Any party delivering an
executed counterpart of any such agreement by telefacsimile or other electronic method of
transmission shall also deliver an original executed counterpart, but the failure to do so shall
not affect the validity, enforceability or binding effect of such agreement.

     13.12 Designated Senior Debt. All Obligations shall be “Designated Senior
Indebtedness” for purposes of and as defined in the Indenture.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

133

 

     IN WITNESS WHEREOF, Agent, Lenders, Borrowers and Guarantors have caused these presents to be
duly executed as of the day and year first above written.

	 	 	 	 	 	 	 
	 	 	BORROWERS	 	 
	 
	 	 	 	 	 	 
	 	 	HANCOCK FABRICS, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Robert W. Driskell	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:	 	Senior Vice President and Chief Financial Officer	 	 
	 

	 	 	 	 

	 	 
	 	 	HF MERCHANDISING, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Robert W. Driskell	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:	 	Senior Vice President and Chief Financial Officer	 	 
	 

	 	 	 	 

	 	 
	 	 	HANCOCK FABRICS OF MI, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Robert W. Driskell	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:	 	Senior Vice President and Chief Financial Officer	 	 
	 

	 	 	 	 

	 	 
	 	 	HANCOCKFABRICS.COM, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Robert W. Driskell	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:	 	Treasurer	 	 
	 

	 	 	 	 

	 	 
	 	 	HANCOCK FABRICS, LLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Larry D. Fair	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:	 	Treasurer	 	 
	 

	 	 	 	 

	 	 
	 	 	GUARANTORS	 	 
	 
	 	 	 	 	 	 
	 	 	HF ENTERPRISES, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Robert W. Driskell	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:	 	Vice President	 	 
	 

	 	 	 	 

	 	 
	 	 	HF RESOURCES, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Robert W. Driskell	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:	 	Vice President	 	 
	 

	 	 	 	 

	 	 

[SIGNATURES CONTINUED ON NEXT PAGE]

 

 

[SIGNATURES CONTINUED FROM PREVIOUS PAGE]

	 	 	 	 	 	 	 
	 	 	AGENT	 	 
	 
	 	 	 	 	 	 
	 	 	GENERAL ELECTRIC CAPITAL
 CORPORATION, as Agent and
Issuing Bank	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Charles D. Chiodo	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:	 	Its Duly Authorized Signatory	 	 
	 

	 	 	 	 

	 	 

D-2

 

[SIGNATURES CONTINUED FROM PREVIOUS PAGE]

	 	 	 	 	 	 	 
	 	 	GENERAL ELECTRIC CAPITAL
 CORPORATION, as Lender	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Charles D. Chiodo	 	 
	 

	 	 	 	 

	 	 
	 

	 	Title:	 	Its Duly Authorized Signatory	 	 
	 

	 	 	 	 

	 	 

D-3EX-10.14

EXHIBIT 10.14

PLEDGE AND SECURITY AGREEMENT

     This PLEDGE AND SECURITY AGREEMENT (as amended and in effect from time to time, this “Pledge
Agreement”), dated as of August 1, 2008, is by each of the undersigned Persons (as defined in the
Loan Agreement, as hereinafter defined) (each a “Pledgor”, and, collectively, the “Pledgors”) to
and in favor of GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation, in its capacity as
agent (in such capacity, “Pledgee”) pursuant to the Loan Agreement (as hereinafter defined) acting
for and on behalf of the Lenders (as defined in the Loan Agreement).

W I T N E S S E T H:

     WHEREAS, each Pledgor is now the direct and beneficial owner of all of the issued and
outstanding shares of capital stock of the Persons listed on Exhibit A hereto (which may be
amended, updated or otherwise modified from time to time pursuant to the terms hereof);

     WHEREAS, Pledgee and the Lenders have entered into or are about to enter into financing
arrangements pursuant to which Lenders (or Pledgee on behalf of Lenders) may make loans and
advances and provide other financial accommodations to Hancock Fabrics, Inc, a Delaware corporation
(“Parent”), HF Merchandising, Inc., a Delaware corporation (“Merchandising”), Hancock Fabrics of
MI, Inc., a Delaware corporation (“Fabrics MI”), hancockfabrics.com, Inc., a Delaware corporation
(“Fabrics.com”), and Hancock Fabrics, LLC, a Delaware limited liability company (“Fabrics LLC”, and
together with Parent, Merchandising, Fabrics MI and Fabrics.com, each individually a “Borrower” and
collectively, “Borrowers”) as set forth in the Loan and Security Agreement, dated of even date
herewith, by and among Borrowers, certain affiliates of Borrowers, Pledgee and Lenders (as the same
now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, the “Loan Agreement”) and other agreements, documents and instruments referred to therein
or at any time executed and/or delivered in connection therewith or related thereto, including, but
not limited to, the Guarantee (as hereinafter defined) and this Pledge Agreement (all of the
foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced, being collectively referred to
herein as the “Financing Agreements”);

     WHEREAS, each Pledgor has absolutely and unconditionally guaranteed the payment and
performance of the Obligations as set forth in the Guarantee, dated of even date herewith, by
Pledgors in favor of Pledgee and Lenders (as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced, the “Guarantee”); and

     WHEREAS, in order to induce Pledgee and Lenders to enter into the Loan Agreement and the other
Financing Agreements and to make loans and advances and provide other financial accommodations to
Borrowers pursuant thereto, each Pledgor has agreed to secure the payment and performance of the
Obligations and to accomplish same by (i) executing and delivering to Pledgee this Pledge
Agreement, (ii) delivering to Pledgee the Pledged Securities which are

 

 

registered in the name of such Pledgor, together with appropriate powers duly executed in blank by
such Pledgor, and (iii) delivering to Pledgee any and all other documents which Pledgee deems
necessary to protect Pledgee’s and Lenders’ interests hereunder.

     NOW, THEREFORE, in consideration of the premises and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, each Pledgor hereby agrees as
follows:

     1. DEFINITIONS All capitalized terms used herein without definition shall have the
meanings ascribed thereto in the Loan Agreement, and the following terms shall have the following
meanings:

               (a) “Issuers” shall mean the corporations now owned or hereafter acquired (whether in
connection with any recapitalization, reclassification or reorganization of the capital of any such
corporation or any successors in interest thereto) by any Pledgor, including, without limitation,
those corporations listed on Exhibit A attached hereto.

               (b) “Pledged Securities” shall mean all capital stock of the Issuers, including, without
limitation, the capital stock listed on Exhibit A hereto (which may be amended, updated or
otherwise modified from time to time) pledged by the Pledgors pursuant to this Pledge Agreement.

     2. GRANT OF SECURITY INTEREST

     As collateral security for the prompt performance, observance and indefeasible payment in full
in cash of all of the Obligations, each Pledgor hereby assigns, pledges, hypothecates, transfers
and sets over to Pledgee and grants to Pledgee, for itself and for the benefit of Lenders, a
security interest in and lien upon: (a) the Pledged Securities owned by such Pledgor, together with
all cash dividends, stock dividends, interests, profits, redemptions, warrants, subscription
rights, stock, securities options, substitutions, exchanges and other distributions now or
hereafter distributed by any Issuer in which such Pledgor owns capital stock of such Issuer or
which may hereafter be delivered to the possession of such Pledgor or Pledgee with respect thereto,
(b) such Pledgor’s records with respect to the foregoing, (c) all additional capital stock of any
Issuer owned by such Pledgor or any capital stock of any other Person from time to time acquired by
such Pledgor in any manner (which additional capital stock shall be deemed part of the Pledged
Securities whether or not Exhibit A has been updated in accordance with the terms hereof) and (d)
the proceeds of all of the foregoing (all of the foregoing being collectively referred to herein as
the “Pledged Property”). Each Pledgor agrees that the Pledgee may from time to time attach as
Exhibit A hereto an updated list of the Pledged Securities, securities or other capital
stock at the time pledged to the Pledgee hereunder without the consent of any Pledgor hereunder.

     3. OBLIGATIONS SECURED

     The security interest, lien and other interests granted to Pledgee (for itself and on behalf
of Lenders) pursuant to this Pledge Agreement shall secure the prompt performance and payment in
full of any and all Obligations.

2

 

     4. REPRESENTATIONS, WARRANTIES AND COVENANTS

     Each Pledgor hereby represents, warrants and covenants with and to Pledgee and Lenders the
following (all of such representations, warranties and covenants being continuing so long as any of
the Obligations are outstanding):

     (a) The Pledged Securities owned by such Pledgor are duly authorized, validly issued, fully
paid and non-assessable capital stock of each applicable Issuer and constitute such Pledgor’s
entire interest in each such Issuer, and are not registered, nor has such Pledgor authorized the
registration thereof, in the name of any person or entity other than such Pledgor or Pledgee.

     (b) The Pledged Property pledged by such Pledgor is directly, legally and beneficially
owned by such Pledgor, free and clear of all claims, liens, pledges and encumbrances of any
kind, nature or description, except for (i) the pledge and security interest in favor of
Pledgee, for itself and for the benefit of Lenders, and (ii) the subordinated lien permitted
pursuant to Section 9.8(n) of the Loan Agreement.

     (c) The Pledged Property pledged by such Pledgor is not subject to any restrictions
relative to the transfer thereof and such Pledgor has the right to transfer and hypothecate such
Pledged Property free and clear of any liens, encumbrances or restrictions.

     (d) The Pledged Property pledged by such Pledgor is duly and validly pledged to Pledgee,
for itself and for the benefit of Lenders, and no consent or approval of any governmental or
regulatory authority or of any securities exchange or the like, nor any consent or approval of
any other third party, was or is necessary to the validity and enforceability of this Pledge
Agreement.

     (e) Such Pledgor authorizes Pledgee to: (i) store, deposit and safeguard the Pledged
Property pledged by such Pledgor, (ii) perform any and all other acts which Pledgee in good
faith deems reasonable and/or necessary for the protection and preservation of such Pledged
Property or its value or Pledgee’s security interest therein, including, without limitation,
transferring, registering or arranging for the transfer or registration of such Pledged Property
to or in Pledgee’s or any Lender’s own name and receiving the income therefrom as additional
security for the Obligations and (iii) pay any charges or expenses which Pledgee deems necessary
for the foregoing purpose, but without any obligation to do so. Any obligation of Pledgee for
reasonable care for such Pledged Property in Pledgee’s possession shall be limited to the same
degree of care which Pledgee uses for similar property pledged to Pledgee by other Persons.

     (f) If such Pledgor shall become entitled to receive or acquire, or shall receive any stock
certificate, or option or right with respect to the capital stock of any Issuer owned by such
Pledgor (including without limitation, any certificate representing a dividend or a distribution
or exchange of or in connection with reclassification of the Pledged Securities owned by such
Pledgor) whether as an addition to, in substitution of, or in exchange for any of the Pledged
Property pledged by such Pledgor or otherwise, such Pledgor agrees to accept same as Pledgee’s
agent, to hold same in trust for Pledgee and to deliver same forthwith to

3

 

Pledgee or Pledgee’s agent or bailee in the form received, with the endorsement(s) of such
Pledgor where necessary and/or appropriate powers and/or assignments duly executed to be held by
Pledgee or Pledgee’s agent or bailee subject to the terms hereof, as further security for the
Obligations.

     (g) Such Pledgor shall not, without the prior written consent of Pledgee, directly or
indirectly, sell, assign, transfer, or otherwise dispose of, or grant any option with respect to
the Pledged Property pledged by such Pledgor, nor shall such Pledgor create, incur or permit any
further pledge, hypothecation, encumbrance, lien, mortgage or security interest with respect to
such Pledged Property.

     (h) So long as no Event of Default (as hereinafter defined) has occurred and is continuing,
such Pledgor shall have the right to vote and exercise all corporate rights with respect to the
Pledged Securities owned by such Pledgor, except as expressly prohibited herein, and to receive
any dividends (payable in cash or in property) in respect of the Pledged Securities owned by
such Pledgor and to receive any other distributions with respect to such Pledged Securities that
are permitted by the Loan Agreement.

     (i) Such Pledgor shall not permit any Issuer in which such Pledgor owns capital stock,
directly or indirectly, to issue, sell, grant, assign, transfer or otherwise dispose of, any
additional shares of capital stock of such Issuer or any option or warrant with respect to, or
other right or security convertible into, any additional shares of capital stock of such Issuer,
now or hereafter authorized, unless all such additional shares, options, warrants, rights or
other such securities are made and shall remain part of the Pledged Property pledged by such
Pledgor subject to the pledge and security interest granted herein.

     (j) Such Pledgor shall pay all charges and assessments of any nature against the Pledged
Property pledged by such Pledgor or with respect thereto prior to said charges and/or
assessments being delinquent.

     (k) Such Pledgor shall promptly reimburse Pledgee and Lenders on demand, together with
interest at the rate then applicable to the Obligations set forth in the Loan Agreement, for any
charges, assessments or expenses paid or incurred by Pledgee or any Lender in Pledgee’s
discretion for the protection, preservation and maintenance of the Pledged Property pledged by
such Pledgor and the enforcement of Pledgee’s or Lenders’ rights hereunder, including, without
limitation, attorneys’ fees and legal expenses incurred by Pledgee or any Lender in seeking to
protect, collect or enforce its rights in such Pledged Property or otherwise hereunder. Any
such amounts paid or incurred by Pledgee shall constitute part of the Obligations under the Loan
Agreement and may be charged by Pledgee to any loan account of the Borrowers maintained by
Pledgee, at its option.

     (l) Such Pledgor shall furnish, or cause to be furnished, to Pledgee such information
concerning any Issuer in which such Pledgor owns capital stock and the Pledged Property pledged
by such Pledgor as may from time to time be required under the Loan Agreement.

     (m) Pledgee may notify any Issuer in which such Pledgor owns capital stock or the
appropriate transfer agent of the Pledged Securities owned by such Pledgor to register the

4

 

security interest and pledge granted herein and honor the rights of Pledgee and Lenders
under this Pledge Agreement.

     (n) Such Pledgor waives: (i) all rights to require Pledgee or any Lender to proceed against
any other Person, entity or collateral or to exercise any remedy, (ii) the defense of the
statute of limitations in any action upon any of the Obligations, (iii) any right of subrogation
or interest in the Obligations or the Pledged Property until all Obligations have been
indefeasibly paid in full in cash, (iv) any rights to notice of any kind or nature whatsoever,
unless specifically required in this Pledge Agreement or non-waivable under any applicable law,
and (v) to the extent permissible, its rights under Section 9-207 of the UCC. Such Pledgor
agrees that the Pledged Property, other collateral, or any other guarantor or endorser may be
released, substituted or added with respect to the Obligations, in whole or in part, without
releasing or otherwise affecting the liability of such Pledgor, the pledge and security
interests granted hereunder, or this Pledge Agreement. Pledgee, for and on behalf of itself and
Lenders, is entitled to all of the benefits of a secured party set forth in Section 9-207 of the
UCC.

     5. EVENTS OF DEFAULT

     The occurrence or existence of any Event of Default under and as defined in any of the
Financing Agreements is referred to herein individually as an “Event of Default” and collectively
as “Events of Default”.

     6. RIGHTS AND REMEDIES

     At any time an Event of Default exists or has occurred and is continuing, in addition to all
other rights and remedies of Pledgee and Lenders, whether provided under this Pledge Agreement, the
Loan Agreement, the other Financing Agreements, applicable law or otherwise, Pledgee shall have the
following rights and remedies which may be exercised without notice to, or consent by, any Pledgor
except as such notice or consent is expressly provided for hereunder:

     (a) Pledgee, at its option, shall be empowered to exercise its continuing right to instruct
any Issuer (or the appropriate transfer agent of the Pledged Securities) to register any or all
of the Pledged Securities in the name of Pledgee or in the name of Pledgee’s nominee (including,
without limitation, any Lender) and Pledgee may complete, in any manner Pledgee may deem
expedient, any and all stock powers, assignments or other documents heretofore or hereafter
executed in blank by such Pledgor and delivered to Pledgee. After said instruction, and without
further notice, Pledgee shall have the exclusive right to exercise all voting and corporate
rights with respect to the Pledged Securities and other Pledged Property, and exercise any and
all rights of conversion, redemption, exchange, subscription or any other rights, privileges, or
options pertaining to any shares of the Pledged Securities or other Pledged Property as if
Pledgee were the absolute owner thereof, including, without limitation, the right to exchange,
in its discretion, any and all of the Pledged Securities and other Pledged Property upon any
merger, consolidation, reorganization, recapitalization or other readjustment with respect
thereto. Upon the exercise of any such rights, privileges or options by Pledgee, Pledgee shall
have the right to deposit and deliver any and all of the Pledged Securities and other Pledged
Property to any committee, depository, transfer agent,

5

 

registrar or other designated agency upon such terms and conditions as Pledgee may
determine, all without liability, except to account for property actually received by Pledgee.
However, Pledgee shall have no duty to exercise any of the aforesaid rights, privileges or
options (all of which are exercisable in the sole discretion of Pledgee) and shall not be
responsible for any failure to do so or delay in doing so.

     (b) In addition to all the rights and remedies of a secured party under the UCC or other
applicable law, Pledgee shall have the right, at any time and without demand of performance or
other demand, advertisement or notice of any kind (except the notice specified below of time and
place of public or private sale) to or upon any Pledgor or any other Person (all and each of
which demands, advertisements and/or notices are hereby expressly waived to the extent permitted
by applicable law), to proceed forthwith to collect, redeem, recover, receive, appropriate,
realize, sell, or otherwise dispose of and deliver the Pledged Property or any part thereof in
one or more lots at public or private sale or sales at any exchange, broker’s board or at any of
Pledgee’s offices or elsewhere at such prices and on such terms as Pledgee may deem best. The
foregoing disposition(s) may be for cash or on credit or for future delivery without assumption
of any credit risk, with Pledgee having the right to purchase all or any part of such Pledged
Property so sold at any such sale or sales, public or private, free of any right or equity of
redemption in such Pledgor, which right or equity is hereby expressly waived or released by such
Pledgor. The proceeds of any such collection, redemption, recovery, receipt, appropriation,
realization, sale or other disposition, after deducting all costs and expenses of every kind
incurred relative thereto or incidental to the care, safekeeping or otherwise of any and all of
such Pledged Property or in any way relating to the rights of Pledgee hereunder, including
attorneys’ fees and legal expenses, shall be applied first to the satisfaction of the
Obligations (in such order as Pledgee may elect and whether or not due) and then to the payment
of any other amounts required by applicable law, including Section 9-615(a)(3) of the UCC, with
such Pledgor to be and remain liable for any deficiency. Each Pledgor shall be jointly and
severally liable to Pledgee and Lenders for the payment on demand of all such costs and
expenses, together with interest at the then applicable rate set forth in the Loan Agreement,
and any attorneys’ fees and legal expenses. Each Pledgor agrees that ten (10) days prior
written notice by Pledgee designating the place and time of any public sale or of the time after
which any private sale or other intended disposition of any or all of the Pledged Property
pledged by such Pledgor is to be made, is reasonable notification of such matters.

     (c) Each Pledgor recognizes that Pledgee may be unable to effect a public sale of all or
part of the Pledged Property by reason of certain prohibitions contained in the Securities Act
of 1933 (as amended and as now or hereafter in effect, the “Act”), or in applicable Blue Sky or
other state securities law, as now or hereafter in effect, but may be compelled to resort to one
or more private sales to a restricted group of purchasers who will be obliged to agree, among
other things, to acquire the Pledged Property pledged by such Pledgor for their own account for
investment and not with a view to the distribution or resale thereof. If at the time of any
sale of such Pledged Property or any part thereof, the same shall not, for any reason
whatsoever, be effectively registered (if required) under the Act (or other applicable state
securities law), as then in effect, Pledgee in its sole and absolute discretion is authorized to
sell such Pledged Property or such part thereof by private sale in such manner and under such
circumstances as Pledgee or its counsel may deem necessary or advisable in order that such

6

 

sale may legally be effected without registration. Each Pledgor agrees that private sales
so made may be at prices and other terms less favorable to the seller than if such Pledged
Property were sold at public sale, and that Pledgee has no obligation to delay the sale of any
such Pledged Property for the period of time necessary to permit any Issuer in which such
Pledgor owns capital stock, even if such Issuer would agree, to register such Pledged Property
for public sale under such applicable securities laws. Each Pledgor agrees that any private
sales made under the foregoing circumstances shall be deemed to have been in a commercially
reasonable manner. If Pledgee determines in its sole discretion that it is necessary or
advisable to effect a public registration of all or part of the Pledged Property pledged by a
Pledgor pursuant to the Act, such Pledgor shall cooperate in all respects to effectuate such
registration.

     (d) All of the rights and remedies of Pledgee and Lenders, including, but not limited to,
the foregoing and those otherwise arising under this Pledge Agreement, the Loan Agreement and
the other Financing Agreements, the instruments comprising the Pledged Property, applicable law
or otherwise, shall be cumulative and not exclusive and shall be enforceable alternatively,
successively or concurrently as Pledgee and Lenders may deem expedient. No failure or delay on
the part of Pledgee in exercising any of its options, powers or rights or partial or single
exercise thereof, shall constitute a waiver of such option, power or right.

        7. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW

     (a) The validity, interpretation and enforcement of this Pledge Agreement and any dispute
arising out of the relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of New York without regard to
principles of conflicts of law or choice of law (other than Section 5-1401 and Section 5-1402 of
the General Obligations Laws of the State of New York).

     (b) Each Pledgor irrevocably consents and submits to the non exclusive jurisdiction of the
Supreme Court of the State of New York in New York County and the United States District Court
for the Southern District of New York, whichever Pledgee may elect, and waives any objection
based on venue or forum non conveniens with respect to any action instituted therein arising
under this Pledge Agreement or in any way connected with or related or incidental to the
dealings of the parties hereto in respect of this Pledge Agreement or the transactions related
hereto or thereto, in each case whether now existing or hereafter arising, and whether in
contract, tort, equity or otherwise, and agrees that any dispute with respect to any such
matters shall be heard only in the courts described above (except that Pledgee shall have the
right to bring any action or proceeding against any Pledgor or its property in the courts of any
other jurisdiction which Pledgee deems necessary or appropriate in order to realize on the
Pledged Property or to otherwise enforce its rights against such Pledgor or its property).

     (c) Each Pledgor hereby waives personal service of any and all process upon it and consents
that all such service of process may be made by U.S. certified mail (return receipt requested)
directed to its address set forth herein and service so made shall be deemed to be

7

 

completed immediately upon receipt thereof by such Pledgor, or, at Pledgee’s option, by
service upon Pledgor in any other manner provided under the rules of any such courts. Within
thirty (30) days after such service, such Pledgor shall appear in answer to such process,
failing which such Pledgor shall be deemed in default and judgment may be entered by Pledgee
against such Pledgor for the amount of the claim and other relief requested.

     (d) PLEDGORS AND PLEDGEE EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS PLEDGE AGREEMENT OR ANY OF THE OTHER
FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS
OF ANY PLEDGOR AND PLEDGEE OR ANY LENDER IN RESPECT OF THIS PLEDGE AGREEMENT OR ANY OF THE OTHER
FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW
EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH PLEDGOR
HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE
DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT SUCH PLEDGOR OR PLEDGEE MAY FILE A COPY OF THIS
PLEDGE AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

     (e) Pledgee and Lenders shall not have any liability to any Pledgor (whether in tort,
contract, equity or otherwise) for losses suffered by any Pledgor in connection with, arising
out of, or in any way related to the transactions or relationships contemplated by this Pledge
Agreement, or any act, omission or event occurring in connection herewith, unless it is
determined by a final and non-appealable judgment or court order binding on Pledgee or such
Lender, that the losses were the result of acts or omissions constituting gross negligence or
willful misconduct by Pledgee or such Lender. In any such litigation, Pledgee and Lenders shall
be entitled to the benefit of the rebuttable presumption that it acted in good faith and with
the exercise of ordinary care in the performance by it of the terms of this Pledge Agreement.

        8. MISCELLANEOUS

     (a) Each Pledgor agrees that at any time and from time to time upon the written request of
Pledgee, such Pledgor shall execute and deliver such further documents, including, but not
limited to, irrevocable proxies or stock powers, in form satisfactory to Pledgee, and will take
or cause to be taken such further acts as Pledgee may request in order to effect the purposes of
this Pledge Agreement and perfect or continue the perfection of the security interest in the
Pledged Property pledged by such Pledgor to Pledgee hereunder.

     (b) Beyond the exercise of reasonable care to assure the safe custody of the Pledged
Property (whether such custody is exercised by Pledgee, or Pledgee’s nominee, agent or bailee)
Pledgee or Pledgee’s nominee agent or bailee shall have no duty or liability to protect or
preserve any rights pertaining thereto and shall be relieved of all responsibility for such

8

 

Pledged Property upon surrendering it to the applicable Pledgor or foreclosure with respect
thereto.

     (c) All notices, requests and demands to or upon the respective parties hereto shall be in
writing and shall be deemed to have been duly given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon
sending and upon confirmation of receipt; if by nationally recognized overnight courier service
with instructions to deliver the next business day, one (1) business day after sending; and if
by registered or certified mail, return receipt requested, five (5) days after mailing by
deposit (postage prepaid) in the U.S. mail. All notices, requests and demands upon the parties
are to be given to the following addresses (or to such other address as any party may designate
by notice in accordance with this Section 8):

	 	 	 
	If to any Pledgor:

	 	c/o Hancock Fabrics, Inc.

One Fashion Way

Baldwyn, Mississippi 38824

Attention: Robert Driskell, CFO

Telephone No.: (662) 365-6112

Telecopy No.: (662) 365-6025
	 
	 	 
	With a copy to:

	 	Baker, Donelson, Bearman, Caldwell &

Berkowitz, PC

165 Madison Avenue

First Tennessee Building

Memphis, TN 38103

Attention: Sam D. Chafetz, Esq.

Telephone No.: (901) 577-2148

Telecopy No.: (901) 577-0854
	 
	 	 
	If to Pledgee:

	 	General Electric Capital Corporation, as Agent

401 Merritt 7, P.O. Box 5201

Norwalk, CT 06856-5201

Attention: Hancock Fabrics Account Manager

Telephone No.: (203) 956-4598

Telecopy No.: (203) 956-4002
	 
	 	 
	With copies to:

	 	Bingham McCutchen LLP

One Federal Street

Boston, MA 02110

Attention: Robert A. J. Barry, Esq.

Telephone No.: (617) 951-8624

Telecopy No.: (617) 951-8736
	 
	 	 
	and

	 	General Electric Capital Corporation

401 Merritt 7

9

 

	 	 	 
	 

	 	Norwalk, CT 06851

Attention: Corporate Counsel — Corporate

Lending

Telephone No.: (203) 956-4001

Telecopy No.: (203) 229-1800

     (d) All references to the plural herein shall also mean the singular and to the singular
shall also mean the plural. All references to any Pledgor, Pledgee, Borrowers, any Lender and
any Issuer pursuant to the definitions set forth in the recitals hereto, or to any other Person
herein, shall include their respective successors and assigns. The words “hereof,” “herein,”
“hereunder,” “this Pledge Agreement” and words of similar import when used in this Pledge
Agreement shall refer to this Pledge Agreement as a whole and not any particular provision of
this Pledge Agreement and as this Pledge Agreement now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced. An Event of Default shall
exist or continue or be continuing until such Event of Default is waived in accordance with
Section 8(g) hereof or the provisions of the Loan Agreement.

     (e) This Pledge Agreement shall be binding upon each Pledgor and its successors and assigns
and inure to the benefit of and be enforceable by Pledgee and its successors and assigns.

     (f) If any provision of this Pledge Agreement is held to be invalid or unenforceable, such
invalidity or unenforceability shall not invalidate this Pledge Agreement as a whole, but this
Pledge Agreement shall be construed as though it did not contain the particular provision held
to be invalid or unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.

     (g) Neither this Pledge Agreement nor any provision hereof shall be amended, modified,
waived or discharged orally or by course of conduct, but only by a written agreement signed by
an authorized officer of Pledgee. Neither Pledgee nor Lenders shall, by any act, delay,
omission or otherwise be deemed to have expressly or impliedly waived any of their respective
rights, powers and/or remedies unless such waiver shall be in writing and signed by an
authorized officer of Pledgee. Any such waiver shall be enforceable only to the extent
specifically set forth therein. A waiver by Pledgee or any Lender of any right, power and/or
remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Pledgee or such Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.

     (h) This Pledge Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of this Pledge Agreement by telefacsimile or
other means of electronic transmission shall have the same force and effect as the delivery of
an original executed counterpart of this Pledge Agreement. Any party delivering an executed
counterpart of this Pledge Agreement by telefacsimile or other means of electronic transmission
shall also deliver an original executed counterpart, but the failure to do so shall not affect
the validity, enforceability or binding effect of this Pledge Agreement.

10

 

     (i) New Subsidiaries of the Pledgors or other entities (each an “Additional Pledgor”) may
hereafter become parties to this Pledge Agreement by executing a counterpart hereof or,
alternatively, by executing a joinder agreement in form and substance satisfactory to Pledgee,
and there shall be no need to re-execute, amend or restate this Pledge Agreement in connection
therewith. Upon such execution and delivery by any Additional Pledgor, such Additional Pledgor
shall be deemed to have made the representations and warranties set forth in Section 4 hereof,
and shall be bound by all of the terms, covenants and conditions hereof to the same extent as if
such Additional Pledgor had executed this Pledge Agreement as of the Closing Date, and Pledgee
and the Lenders shall be entitled to all of the benefits of such Additional Pledgor’s
obligations hereunder.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

11

 

     IN WITNESS WHEREOF, each Pledgor has executed this Pledge Agreement as of the day and year
first above written.

	 	 	 	 	 
	 	PLEDGORS

	 
	 
	 	HANCOCK FABRICS, INC.

 	 
	 	By:  	/s/ Robert W. Driskell	 
	 	 	Name:  	Robert W. Driskell 	 
	 	 	Title:  	Senior Vice President and Chief Financial Officer 	 
	 
	 	HF MERCHANDISING, INC. 

 	 
	 	By:  	/s/ Robert W. Driskell	 
	 	 	Name:  	Robert W. Driskell 	 
	 	 	Title:  	Senior Vice President and Chief Financial Officer 	 
	 
	 	HANCOCK FABRICS OF MI, INC.

 	 
	 	By:  	/s/ Robert W. Driskell	 
	 	 	Name:  	Robert W. Driskell 	 
	 	 	Title:  	Senior Vice President and Chief Financial Officer 	 
	 
	 	HANCOCKFABRICS.COM, INC.

 	 
	 	By:  	/s/ Robert W. Driskell	 
	 	 	Name:  	Robert W. Driskell 	 
	 	 	Title:  	Treasurer 	 
	 
	 	HANCOCK FABRICS, LLC

 	 
	 	By:  	/s/ Larry D. Fair	 
	 	 	Name:  	Larry D. Fair 	 
	 	 	Title:  	Treasurer 	 
	 
	 	HF ENTERPRISES, INC.

 	 
	 	By:  	/s/ Robert W. Driskell	 
	 	 	Name:  	Robert W. Driskell 	 
	 	 	Title:  	Vice President 	 
	 
	 	HF RESOURCES, INC.

 	 
	 	By:  	/s/ Robert W. Driskell	 
	 	 	Name:  	Robert W. Driskell 	 
	 	 	Title:  	Vice President 	 
	 

[Signature Page to Pledge and Security Agreement (Corporations)]

 

 

EXHIBIT A

TO

PLEDGE AND SECURITY AGREEMENT

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Certificate	 	No. of	 	 	 	 
	Pledgor	 	Issuer	 	No.	 	Shares	 	Type	 	Percentage
	Hancock Fabrics,
Inc.

	 	Hancock Fabrics of
MI, Inc.
	 	 	1	 	 	 	1,000	 	 	Common Stock,
one-cent par value
per share
	 	 	100	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Hancock Fabrics,
Inc.

	 	hancockfabrics.com,
Inc.
	 	 	1	 	 	 	1,000	 	 	Common Stock,
one-cent par value
per share
	 	 	100	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Hancock Fabrics,
Inc.

	 	HF Resources, Inc.
	 	 	1	 	 	 	1,000	 	 	Common Stock,
one-cent par value
per share
	 	 	100	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	HF Resources, Inc.

	 	HF Enterprises, Inc.
	 	 	2	 	 	 	1,000	 	 	Common Stock,
one-cent par value
per share
	 	 	100	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	HF Resources, Inc.

	 	HF Merchandising,
Inc.
	 	 	2	 	 	 	1,000	 	 	Common Stock,
one-cent par value
per share
	 	 	100	%

A-1

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