Document:

Exhibit 10.1

 

EXECUTION
COPY

AMENDED
AND RESTATED

LOAN
AND SECURITY AGREEMENT BETWEEN

WELLS
FARGO RETAIL FINANCE II, AS LENDER

AND

iPARTY
RETAIL STORES CORP. AND

iPARTY
CORP., AS BORROWERS

 

 

 

	
  ARTICLE 1 -

  	
   

  	
  THE REVOLVING CREDIT

  	
   

  	
  1

  
	
  1-1.

  	
   

  	
  Establishment of Revolving Credit.

  	
   

  	
  1

  
	
  1-2.

  	
   

  	
  Availability

  	
   

  	
  2

  
	
  1-3.

  	
   

  	
  Risks of Value of Inventory

  	
   

  	
  2

  
	
  1-4.

  	
   

  	
  Procedures Under Revolving Credit.

  	
   

  	
  2

  
	
  1-5.

  	
   

  	
  The Loan Account.

  	
   

  	
  5

  
	
  1-6.

  	
   

  	
  The Master Note

  	
   

  	
  5

  
	
  1-7.

  	
   

  	
  Payment of Loan Account.

  	
   

  	
  6

  
	
  1-8.

  	
   

  	
  Interest.

  	
   

  	
  6

  
	
  1-9.

  	
   

  	
  Fees

  	
   

  	
  6

  
	
  1-10.

  	
   

  	
  Lender’s Discretion.

  	
   

  	
  7

  
	
  1-11.

  	
   

  	
  Fees for L/C’s.

  	
   

  	
  8

  
	
  1-12.

  	
   

  	
  Concerning L/C’s.

  	
   

  	
  9

  
	
  1-13.

  	
   

  	
  LIBO Option

  	
   

  	
  11

  
	
  1-14.

  	
   

  	
  LIBO Election.

  	
   

  	
  11

  
	
  1-15.

  	
   

  	
  Prepayment of LIBO Loans.

  	
   

  	
  12

  
	
  1-16.

  	
   

  	
  Increase in Credit Limit.

  	
   

  	
  13

  
	
  ARTICLE 2 -

  	
   

  	
  GRANT OF SECURITY INTEREST

  	
   

  	
  14

  
	
  2-1.

  	
   

  	
  Grant of Security Interest

  	
   

  	
  14

  
	
  2-2.

  	
   

  	
  Extent and Duration of Security Interest

  	
   

  	
  15

  
	
  ARTICLE 3 -

  	
   

  	
  DEFINITIONS

  	
   

  	
  15

  
	
  ARTICLE 4 -

  	
   

  	
  CONDITIONS PRECEDENT

  	
   

  	
  15

  
	
  4-1.

  	
   

  	
  Corporate Due Diligence.

  	
   

  	
  16

  
	
  4-2.

  	
   

  	
  Opinion

  	
   

  	
  16

  
	
  4-3.

  	
   

  	
  Cash Management and Additional Documents

  	
   

  	
  16

  
	
  4-4.

  	
   

  	
  Officers’ Certificates

  	
   

  	
  16

  
	
  4-5.

  	
   

  	
  Representations and Warranties

  	
   

  	
  16

  
	
  4-6.

  	
   

  	
  Initial Minimum Excess Availability

  	
   

  	
  16

  
	
  4-7.

  	
   

  	
  No Event of Default

  	
   

  	
  17

  
	
  4-8.

  	
   

  	
  No Material Adverse Change

  	
   

  	
  17

  
	
  4-9.

  	
   

  	
  Delivery of Documents

  	
   

  	
  17

  
	
  ARTICLE 5 -

  	
   

  	
  GENERAL REPRESENTATIONS. WARRANTIES AND COVENANTS

  	
   

  	
  17

  
	
  5-1.

  	
   

  	
  Payment and Performance of Liabilities

  	
   

  	
  17

  
	
  5-2.

  	
   

  	
  Due Organization - Authorization - No Conflicts.

  	
   

  	
  17

  
	
  5-3.

  	
   

  	
  Trade Names.

  	
   

  	
  18

  
	
  5-4.

  	
   

  	
  Locations, Landlord’s Consents, Waivers.

  	
   

  	
  18

  
	
  5-5.

  	
   

  	
  Title to Assets.

  	
   

  	
  19

  
	
  5-6.

  	
   

  	
  Indebtedness

  	
   

  	
  20

  
	
  5-7.

  	
   

  	
  Insurance Policies.

  	
   

  	
  20

  
	
  5-8.

  	
   

  	
  Licenses

  	
   

  	
  21

  
	
  5-9.

  	
   

  	
  Leases

  	
   

  	
  21

  
	
  5-10.

  	
   

  	
  Requirements of Law

  	
   

  	
  21

  
	
  5-11.

  	
   

  	
  Maintain Properties

  	
   

  	
  22

  
	
  5-12.

  	
   

  	
  Pay Taxes.

  	
   

  	
  22

  
	
  5-13.

  	
   

  	
  No Margin Stock

  	
   

  	
  23

  
	
  5-14.

  	
   

  	
  ERISA

  	
   

  	
  23

  

 

 i
 

 

 

	
  5-15.

  	
   

  	
  Hazardous Materials.

  	
   

  	
  24

  
	
  5-16.

  	
   

  	
  Litigation

  	
   

  	
  24

  
	
  5-17.

  	
   

  	
  Dividends or Investments

  	
   

  	
  24

  
	
  5-18.

  	
   

  	
  Loans

  	
   

  	
  25

  
	
  5-19.

  	
   

  	
  Protection of Assets

  	
   

  	
  25

  
	
  5-20.

  	
   

  	
  Line of Business

  	
   

  	
  26

  
	
  5-21.

  	
   

  	
  Affiliate Transactions

  	
   

  	
  26

  
	
  5-22.

  	
   

  	
  Reserved.

  	
   

  	
  26

  
	
  5-23.

  	
   

  	
  Additional Assurances.

  	
   

  	
  26

  
	
  5-24.

  	
   

  	
  Adequacy of Disclosure.

  	
   

  	
  27

  
	
  5-25.

  	
   

  	
  No Material Adverse Change

  	
   

  	
  27

  
	
  5-26.

  	
   

  	
  Other Covenants

  	
   

  	
  27

  
	
  5-27.

  	
   

  	
  Goods in Possession of Bailee

  	
   

  	
  27

  
	
  5-28.

  	
   

  	
  Letters of Credit

  	
   

  	
  27

  
	
  5-29.

  	
   

  	
  Commercial Tort Claims

  	
   

  	
  27

  
	
  5-30.

  	
   

  	
  Changes in Legal Status

  	
   

  	
  28

  
	
  5-31.

  	
   

  	
  Supply Agreement

  	
   

  	
  28

  
	
  ARTICLE 6 -

  	
   

  	
  USE AND COLLECTION OF COLLATERAL

  	
   

  	
  28

  
	
  6-1.

  	
   

  	
  Use of Inventory Collateral.

  	
   

  	
  28

  
	
  6-2.

  	
   

  	
  Inventory Quality

  	
   

  	
  28

  
	
  6-3.

  	
   

  	
  Adjustments and Allowances

  	
   

  	
  28

  
	
  6-4.

  	
   

  	
  Validity of Accounts.

  	
   

  	
  28

  
	
  6-5.

  	
   

  	
  Notification to Account Debtors

  	
   

  	
  29

  
	
  ARTICLE 7 -

  	
   

  	
  CASH MANAGEMENT

  	
   

  	
  29

  
	
  7-1.

  	
   

  	
  Depository Accounts.

  	
   

  	
  29

  
	
  7-2.

  	
   

  	
  Credit Card Receipts.

  	
   

  	
  30

  
	
  7-3.

  	
   

  	
  The Concentration Account, the Blocked Account and
  the Funding Accounts.

  	
   

  	
  30

  
	
  7-4.

  	
   

  	
  Proceeds and Collection of Accounts.

  	
   

  	
  30

  
	
  7-5.

  	
   

  	
  Payment of Liabilities.

  	
   

  	
  31

  
	
  7-6.

  	
   

  	
  The Funding Account

  	
   

  	
  32

  
	
  7-7.

  	
   

  	
  Capital Infusions, Etc

  	
   

  	
  32

  
	
  ARTICLE 8 -

  	
   

  	
  LENDER AS BORROWER’S ATTORNEY-IN-FACT

  	
   

  	
  32

  
	
  8-1.

  	
   

  	
  Appointment as Attorney-In-Fact

  	
   

  	
  32

  
	
  8-2.

  	
   

  	
  No Obligation to Act

  	
   

  	
  33

  
	
  ARTICLE 9 -

  	
   

  	
  FINANCIAL AND OTHER REPORTING REQUIREMENTS/FINANCIAL
  COVENANTS

  	
   

  	
  33

  
	
  9-1.

  	
   

  	
  Maintain Records

  	
   

  	
  33

  
	
  9-2.

  	
   

  	
  Access to Records.

  	
   

  	
  34

  
	
  9-3.

  	
   

  	
  Immediate Notice to Lender.

  	
   

  	
  35

  
	
  9-4.

  	
   

  	
  Borrowing Base Certificate

  	
   

  	
  36

  
	
  9-5.

  	
   

  	
  Weekly Reports

  	
   

  	
  36

  
	
  9-6.

  	
   

  	
  Monthly Reports.

  	
   

  	
  36

  
	
  9-7.

  	
   

  	
  Annual Reports.

  	
   

  	
  36

  
	
  9-8.

  	
   

  	
  Officer’s Certificates

  	
   

  	
  37

  
	
  9-9.

  	
   

  	
  Inventories, Appraisals, and Audits.

  	
   

  	
  37

  
	
  9-10.

  	
   

  	
  Additional Financial Information.

  	
   

  	
  38

  

 

 ii
 

 

 

	
  9-11.

  	
   

  	
  Financial Performance and Inventory Covenants

  	
   

  	
  39

  
	
  9-12.

  	
   

  	
  Electronic Reporting

  	
   

  	
  39

  
	
  ARTICLE 10 -

  	
   

  	
  EVENTS OF DEFAULT

  	
   

  	
  39

  
	
  10-1.

  	
   

  	
  Failure to Pay Revolving Credit

  	
   

  	
  39

  
	
  10-2.

  	
   

  	
  Failure To Make Other Payments

  	
   

  	
  39

  
	
  10-3.

  	
   

  	
  Failure to Perform Covenant or Liability (No Grace
  Period)

  	
   

  	
  39

  
	
  10-4.

  	
   

  	
  Failure to Perform Covenant or Liability (Grace
  Period)

  	
   

  	
  40

  
	
  10-5.

  	
   

  	
  Misrepresentation

  	
   

  	
  40

  
	
  10-6.

  	
   

  	
  Acceleration of Other Debt. Breach of Lease

  	
   

  	
  40

  
	
  10-7.

  	
   

  	
  Default Under Other Agreements

  	
   

  	
  40

  
	
  10-8.

  	
   

  	
  Casualty Loss, Non-Ordinary Course Sales

  	
   

  	
  40

  
	
  10-9.

  	
   

  	
  Judgment, Restraint of Business.

  	
   

  	
  40

  
	
  10-10.

  	
   

  	
  Business Failure

  	
   

  	
  41

  
	
  10-11.

  	
   

  	
  Bankruptcy

  	
   

  	
  41

  
	
  10-12.

  	
   

  	
  Default by Guarantor

  	
   

  	
  41

  
	
  10-13.

  	
   

  	
  Indictment - Forfeiture

  	
   

  	
  41

  
	
  10-14.

  	
   

  	
  Termination of Guaranty

  	
   

  	
  41

  
	
  10-15.

  	
   

  	
  Challenge to Loan Documents.

  	
   

  	
  41

  
	
  10-16.

  	
   

  	
  Executive Management

  	
   

  	
  42

  
	
  10-17.

  	
   

  	
  Change in Control

  	
   

  	
  42

  
	
  10-18.

  	
   

  	
  Material Adverse Change

  	
   

  	
  42

  
	
  10-19.

  	
   

  	
  Subordinated Indebtedness.

  	
   

  	
  42

  
	
  ARTICLE 11 -

  	
   

  	
  RIGHTS AND REMEDIES UPON DEFAULT

  	
   

  	
  42

  
	
  11-1.

  	
   

  	
  Rights of Enforcement

  	
   

  	
  42

  
	
  11-2.

  	
   

  	
  Sale of Collateral.

  	
   

  	
  43

  
	
  11-3.

  	
   

  	
  Occupation of Business Location

  	
   

  	
  43

  
	
  11-4.

  	
   

  	
  Grant of Nonexclusive License

  	
   

  	
  43

  
	
  11-5.

  	
   

  	
  Assembly of Collateral

  	
   

  	
  44

  
	
  11-6.

  	
   

  	
  Rights and Remedies

  	
   

  	
  44

  
	
  11-7.

  	
   

  	
  Sales on Credit

  	
   

  	
  44

  
	
  11-8.

  	
   

  	
  Standards for Exercising Remedies

  	
   

  	
  44

  
	
  ARTICLE 12 -

  	
   

  	
  NOTICES

  	
   

  	
  45

  
	
  12-1.

  	
   

  	
  Notice Addresses

  	
   

  	
  45

  
	
  12-2.

  	
   

  	
  Notice Given.

  	
   

  	
  46

  
	
  ARTICLE 13 -

  	
   

  	
  TERM

  	
   

  	
  46

  
	
  13-1.

  	
   

  	
  Termination of Revolving Credit

  	
   

  	
  46

  
	
  13-2.

  	
   

  	
  Effect of Termination

  	
   

  	
  46

  
	
  13-3.

  	
   

  	
  Prepayment Premium

  	
   

  	
  47

  
	
  ARTICLE 14 -

  	
   

  	
  GENERAL

  	
   

  	
  47

  
	
  14-1.

  	
   

  	
  Protection of Collateral

  	
   

  	
  47

  
	
  14-2.

  	
   

  	
  Successors and Assigns

  	
   

  	
  47

  
	
  14-3.

  	
   

  	
  Severability

  	
   

  	
  48

  
	
  14-4.

  	
   

  	
  Amendments, Course of Dealing.

  	
   

  	
  48

  
	
  14-5.

  	
   

  	
  Power of Attorney

  	
   

  	
  48

  
	
  14-6.

  	
   

  	
  Application of Proceeds

  	
   

  	
  48

  
	
  14-7.

  	
   

  	
  Lender’s Costs and Expenses

  	
   

  	
  48

  

 

 iii
 

 

 

	
  14-8.

  	
   

  	
  Copies and Facsimiles

  	
   

  	
  49

  
	
  14-9.

  	
   

  	
  Massachusetts Law

  	
   

  	
  49

  
	
  14-10.

  	
   

  	
  Consent to Jurisdiction.

  	
   

  	
  49

  
	
  14-11.

  	
   

  	
  Indemnification

  	
   

  	
  49

  
	
  14-12.

  	
   

  	
  Right of Set-Off

  	
   

  	
  50

  
	
  14-13.

  	
   

  	
  Usury Savings Clause

  	
   

  	
  50

  
	
  14-14.

  	
   

  	
  Waivers.

  	
   

  	
  51

  
	
  14-15.

  	
   

  	
  Confidentiality

  	
   

  	
  51

  
	
  14-16.

  	
   

  	
  Right to Publish Notice

  	
   

  	
  52

  
	
  14-17.

  	
   

  	
  Reserved.

  	
   

  	
  52

  
	
  14-18.

  	
   

  	
  Credit Inquiries

  	
   

  	
  52

  
	
  14-19.

  	
   

  	
  Additional Borrowers

  	
   

  	
  52

  
	
  14-20.

  	
   

  	
  Joint and Several Liability

  	
   

  	
  52

  
	
  14-21.

  	
   

  	
  Financing Statements

  	
   

  	
  54

  
	
  14-22.

  	
   

  	
  Designation of iParty Retail as Agent for Borrowers.

  	
   

  	
  54

  
	
  14-23.

  	
   

  	
  Amendment and Restatement

  	
   

  	
  55

  
	
  14-24.

  	
   

  	
  USA Patriot Act Notice

  	
   

  	
  56

  

 

EXHIBITS

	
  1-6

  	
   

  	
  AMENDED AND RESTATED MASTER NOTE

  
	
  1-2A

  	
   

  	
  AMENDED AND RESTATED TERM NOTE

  
	
  3

  	
   

  	
  DEFINITIONS

  
	
  5-2

  	
   

  	
  RELATED ENTITY

  
	
  5-3

  	
   

  	
  NAMES

  
	
  5-4

  	
   

  	
  BAILEES

  
	
  5-5

  	
   

  	
  ENCUMBRANCES

  
	
  5-6

  	
   

  	
  INDEBTEDNESS

  
	
  5-7

  	
   

  	
  INSURANCE

  
	
  5-9

  	
   

  	
  LEASES

  
	
  5-12

  	
   

  	
  TAXES

  
	
  5-15(B)

  	
   

  	
  HAZARDOUS MATERIALS

  
	
  7-1

  	
   

  	
  DEPOSITORY ACCOUNTS

  
	
  7-2

  	
   

  	
  CREDIT CARD ACCOUNTS

  
	
  9-4

  	
   

  	
  BORROWING BASE CERTIFICATE

  
	
  9-R

  	
   

  	
  REPORTING

  
	
  9-10

  	
   

  	
  BUSINESS PLAN

  
	
  9-11

  	
   

  	
  FINANCIAL COVENANTS

  

 

 iv

 

 

THIS AMENDED AND RESTATED
AGREEMENT is made this 21st day of Decmeber,
2006 between Wells Fargo Retail Finance II, LLC (hereinafter, “Wells Fargo” or “Lender”), a
Delaware limited liability company with its principal executive offices at One
Boston Place, Boston, Massachusetts 02108, and iParty Retail Stores Corp., a Delaware corporation (hereinafter,
“iParty Retail” or a “Borrower”) and iParty Corp., a Delaware corporation
(hereinafter, “iParty Corp.” or a “Borrower” and together with iParty Retail, the “Borrowers”), each with its principal executive offices at
270 Bridge Street, Dedham, Massachusetts 02026, in consideration of the mutual
covenants contained herein and benefits to be derived herefrom.

WHEREAS, the Lender and
Borrowers are party to the Existing Financing Agreements; and

WHEREAS, by this
Agreement, each Borrower desires to acknowledge and reaffirm the Existing
Obligations pursuant to the Existing Financing Agreements (as modified and
restated hereby) and acknowledge their continuing liabilities to the Lender,
and the Lender desires to continue to make loans, advances and financial
accommodations to the Borrowers;

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

WITNESSETH:

ARTICLE 1 - THE REVOLVING
CREDIT

1-1.          Establishment
of Revolving Credit.

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

(b)           The
Lender agrees, subject to the terms and conditions of this Agreement, to make
loans to the Borrowers in an amount outstanding not to exceed Availability at
any one time.

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

(d)           Anything
to the contrary in Section 1-1(b) above notwithstanding, Lender, in the exercise
of its discretion, may reduce Advance Rates or create Reserves without
declaring an Event of Default if it determines that (i) there has occurred a
Material Adverse Change; or (ii) Borrowers are not in compliance with covenants
set forth in EXHIBIT 9-l2(a).

(e)           The
proceeds of loans and advances under the Revolving Credit shall be 

 1
 

 

 

used solely in accordance with the Business Plan for working capital
purposes of the Borrowers and for its Capital Expenditures, all solely to the
extent permitted by this Agreement.

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

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

1-4.          Procedures
Under Revolving Credit.

(a)           The
Borrowers may request loans and advances under the Revolving Credit, each in an
amount specified by the Borrowers.  Each
such request shall be in such manner as may from time to time be acceptable to
the Lender and shall specify the Type of loan or advance to be made under the
Revolving Credit.  In the event that the
Borrowers do not specify the Type of loan or advance to be made under the
Revolving Credit, the Borrowers shall be deemed to have requested a Base Rate
Loan.

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

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

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

(i)            The
Lender’s initiation of the transfer of the proceeds of such loan 

 2
 

 

 

or advance in accordance with the Borrowers’ instructions (if such loan
or advance is of funds requested by the Borrowers).

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

(e)           In
the absence of willful neglect or bad faith on the part of the Lender, there
shall not be any recourse to, nor liability of, the Lender on account of:

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

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

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

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

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

(i)            There
has been no Material Adverse Change.

(ii)           The
Borrowers are in compliance with, and have not breached any of, the covenants
contained in this Agreement.

(iii)          Each
representation which is made herein or in any of the Loan Documents is then
true and complete as of and as if made on the date of such request, except for
any representation which refers to a specific date, which representation shall
be true and correct as of such date.

(iv)          No
Suspension Event is then in existence.

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

(i)            Upon
the occurrence from time to time of any Suspension Event, the Lender may
suspend the Revolving Credit immediately and shall not be obligated, during
such

 3
 

 

 

suspension, to make any loan or advance or to provide
any financial accommodation hereunder.

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

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

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

(A)                              The aggregate Stated Amount of all L/C’s then
outstanding, does not exceed Two Million ($2,000,000.00) Dollars.

(B)                                The expiry of the L/C is not later than the
earlier of thirty (30) days prior to the Maturity Date or the following:

(I)                                    L/C’s other than Documentary L/C’s: One (1)
year from initial issuance.

(II)                                Documentary L/C’s: forty five (45) days from
issuance; and

(C)                                Availability would not be exceeded.

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

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

(A)                              Any delay or refusal by an Issuer to issue an
L/C.

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

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

 4
 

 

 

1-5.          The
Loan Account.

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

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

(c)           All
credits against the Liabilities shall be conditional upon final payment to the
Lender of the items giving rise to such credits. The amount of any item
credited against the Liabilities which is charged back against the Lender for
any reason or is not so paid shall be a Liability and shall be added to the
Loan Account, whether or not the item so charged back or not so paid is
returned.

(d)           Except
as otherwise provided herein, all fees, service charges, costs, and expenses
for which the Borrowers are obligated hereunder are payable on demand. In the
determination of Availability, the Lender may deem fees, service charges,
accrued interest, and other payments or deposits as having been advanced under
the Revolving Credit if such amounts are then due and payable inclusive of
deposits for fees whether incurred at the time of deposit or as duly accounted
for in accordance with the terms set forth herein (provided, however, that fees
which are earned hereunder but not yet due and payable shall not be deemed as
having been advanced under the Revolving Credit).

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

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

1-6.          The
Master Note.  The obligation to repay
loans and advances under the Revolving Credit, with interest as provided
herein, may be evidenced by a note (the “Amended
and Restated Master Note”) in the form of EXHIBIT 1-6, annexed hereto,
executed by the Borrowers.  Neither the
original nor a copy of the Master note shall be required, however, to 

 5
 

 

 

establish or prove any Liability. 
In the event that the Master Note is ever lost, mutilated, or destroyed,
the Borrowers shall execute a replacement thereof and deliver such replacement
to the Lender.

1-7.          Payment
of Loan Account.

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

(b)           The
Borrowers, without notice or demand from the Lender, shall pay the Lender that
amount, from time to time, which is necessary so that the balance of the Loan
Account does not exceed Availability.

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

1-8.          Interest.

(a)           The
unpaid principal balance of the Revolving Credit  Loans that constitute Base Rate Loans shall
bear interest, until repaid (calculated based upon a 360-day year and actual
days elapsed), at an annual rate equal to the aggregate of Base plus the
Applicable Margin (for Base Rate Loans), provided, further that in no event
shall interest be in excess of the maximum rate permitted by applicable law.

(b)           Following
the occurrence of any Event of Default (and whether or not the Lender exercises
any of the Lender’s rights on account of such Event of Default), all loans and
advances made under the Revolving Credit shall bear interest, through the End
Date, at a rate which is the aggregate of that provided for in Section 1-8(a),
above, plus two (2%) percent per annum.

(c)           Accrued
interest on Base Rate Loans shall be payable:

(i)            Monthly
in arrears on the first day of the month next following that during which such
interest accrued.

(ii)           On
the Termination Date.

(iii)          On
the End Date.

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

(a)           Collateral
Monitoring Fees. On the execution date hereof and on the first day of each
month thereafter during the term hereof, a collateral monitoring fee in the
amount of Two Thousand ($2,000) Dollars.

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

 6
 

 

 

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

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

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

(A)                              The Borrowers’ failure to pay that amount
which is necessary so that the principal balance of the Loan Account does not
exceed Availability (as required under Section l-7(b ), above).

(B)                                The providing of a loan or advance under the
Revolving Credit such that Availability would be exceeded.

(C)                                The providing of a same Banking Day loan
requested after the time set forth in Section l-4(b )(i), above.

(D)                               The Borrowers’ failure to provide a financial
statement or report within the applicable time-frame provided for such report
under Article 9, below.

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

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

1-10.        Lender’s
Discretion.

(a)           Each
reference in the Loan Documents to the exercise of discretion or the like by
the Lender shall be to the Lender’s exercise of its judgment, in good faith,
based upon the 

 7
 

 

 

Lender’s consideration of any such factor as the Lender, taking into
account information of which the Lender then has actual knowledge, believes:

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

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

(iii)          Suggests
the likelihood that the Borrowers will become the subject of a bankruptcy or
insolvency proceeding.

(iv)          Constitutes
a Suspension Event.

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

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

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

(iii)          Material
changes in or to the mix of the Borrowers’ Inventory.

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

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

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

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

1-11.        Fees
for L/C’s.

(a)           On the first day of each month during the term hereof, Borrowers shall
pay to Lender the amount (in Dollars) that is equal to the result of one (1.0%)
percent per annum times the aggregate Stated Amount of all L/C’s outstanding at
any time during the previous month.

 8

 

 

(b)           In addition to the fee to be paid as provided in Subsection 1-11 (a),
above, the Borrowers shall pay to the Lender (or to the Issuer, if so requested
by the Lender), on demand, all customary and commercially reasonable issuance,
processing, negotiation, amendment, and administrative fees and other amounts
charged by the Issuer on account of, or in respect to, any L/C.

1-12.        Concerning
L/C’s.

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

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

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

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

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

(i)            Select
an advising bank, if any.

(ii)           Select
a paying bank, if any.

(iii)          Select
a negotiating bank.

(d)           All
directions, correspondence, and funds transfers relating to any L/C are at the
risk of the Borrowers. The Issuer shall have discharged the Issuer’s
obligations under any L/C which, or the drawing under which, includes payment
instructions, by the initiation of the method of payment called for in, and in
accordance with, such instructions (or by any other commercially reasonable and
comparable method). Neither the Lender nor the Issuer shall have any
responsibility for any inaccuracy, interruption, error, or delay in
transmission or delivery by post, telegraph or cable, or for any inaccuracy of
translation.

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

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

 

 9
 

 

 

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

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

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

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

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

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

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

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

(v)           The
Borrowers shall not present to Lender or cause the amendment of an L/C without
satisfactory evidence of one or more of the following: (a) change in delivery 

 10
 

 

 

date; (b) Borrowers’ receipt of partial shipment; or (c) change to
original order reflected in OTB (open to Buy) or other information which may be
so reasonably requested by the Lender.

(i)            In no event, shall Lender or Issuer have any
obligation to honor any L/C presented for payment after its expiration. In the
event no payment has been made, the Stated Amount of such L/C shall continue to
be deducted from Availability for thirty (30) business days beyond expiration
of said L/C.

1-13.        LIBO
Option.  In lieu of having interest
charged at the rate based upon the Base, Borrowers shall have the option (the “LIBO Option”) to have interest on all or a
portion of the loans and advances under the Revolving Credit be charged at a
rate of interest based upon the LIBO Rate. 
Interest on LIBO Rate Loans shall be payable on the Interest Payment
Date.  On the last day of each applicable
Interest Period in respect of a LIBO Rate Loan, unless Borrowers properly have
exercised the LIBO Option with respect thereto, the interest rate applicable to
such LIBO Rate Loan automatically shall convert to the rate of interest then
applicable to Base Rate Loans of the same Type hereunder.  At any time that an Event of Default has
occurred and is continuing, Borrowers no longer shall have the option to
request that loans and advances under the Revolving Credit bear interest at the
LIBO Rate and Lender shall have the right to convert the interest rate on all
outstanding LIBO Rate Loans to the rate then applicable to Base Rate Loans
hereunder.

1-14.        LIBO
Election.

(a)           Borrowers
may, at any time and from time to time, so long as no Event of Default has
occurred and is continuing, elect to exercise the LIBO Option by notifying
Lender prior to 2:00 p.m. (New York time) at least 3 Business Days prior to the
commencement of the proposed Interest Period (the “LIBOR Deadline”). 
Notice of Borrowers’ election of the LIBO Option for a permitted portion
of the loans and advances under the Revolving Credit and an Interest Period
pursuant to this Section shall be made by delivery to Lender of a LIBO Notice
received by Lender before the LIBOR Deadline, or by telephonic notice received
by Lender before the LIBOR Deadline (to be confirmed by delivery to Lender of a
LIBO Notice received by Lender prior to 5:00 p.m. (New York time) on the
same day).

(b)           Each
LIBO Notice shall be irrevocable and binding on Borrowers.  In connection with each LIBO Rate Loan,
Borrowers shall indemnify, defend, and hold Lender harmless against any loss,
cost, or expense incurred by Lender as a result of (a) the payment of any
principal of any LIBO Rate Loan other than on the last day of an Interest
Period applicable thereto (including as a result of an Event of Default), (b)
the conversion of any LIBO Rate Loan other than on the last day of the Interest
Period applicable thereto, or (c) the failure to borrow, convert, continue or
prepay any LIBO Rate Loan on the date specified in any LIBO Notice delivered
pursuant hereto (such losses, costs, and expenses, collectively, “Funding Losses”).  Funding Losses shall, with respect to Lender
, be deemed to equal the amount determined by Lender  to be the excess, if any, of (i) the amount
of interest that would have accrued on the principal amount of such LIBO Rate
Loan had such event not occurred, at the LIBO Rate that would have been
applicable thereto, for the period from the date of such event to the last day
of the then current Interest Period therefor (or, in the case of a failure to
borrow, convert, or continue, for the period that would have been the Interest
Period therefor), minus (ii) the amount 

 11
 

 

 

of interest that would accrue on such
principal amount for such period at the interest rate which Lender  would be offered were it to be offered, at
the commencement of such period, Dollar deposits of a comparable amount and
period in the London interbank market.  A
certificate of Lender delivered to Borrowers setting forth any amount or
amounts that Lender  is entitled to
receive pursuant to this Section 1-14(b) shall be conclusive absent
manifest error.

(c)           Borrowers
shall have not more than 3 LIBO Rate Loans in effect at any given time.  Borrowers only may exercise the LIBO Option
for LIBO Rate Loans of at least $500,000 and integral multiples of $100,000 in
excess thereof.

1-15.        Prepayment
of LIBO Loans.

(a)           Borrowers
may prepay LIBO Rate Loans at any time; provided, however, that
in the event that LIBO Rate Loans are prepaid on any date that is not the last
day of the Interest Period applicable thereto, including as a result of any
automatic prepayment through the required application by Lender of proceeds of
Borrowers’ collections in accordance with this Agreement or for any other
reason, including early termination of the term of this Agreement or
acceleration of all or any portion of the Liabilities pursuant to the terms
hereof, Borrowers shall indemnify, defend, and hold the Lender and its
Participants harmless against any and all Funding Losses in accordance with
Section 1-14(b) above.

(b)           Any
partial prepayment of LIBO Rate Loans shall be prepaid in the chronological
order of their Interest Payment Dates.

(c)           The
LIBO Rate may be adjusted by Lender on a prospective and non-discriminatory
basis to take into account any additional or increased costs to the Lender of
maintaining or obtaining any eurodollar deposits or increased costs due to
changes in applicable law occurring subsequent to the commencement of the then
applicable Interest Period, including changes in tax laws (except changes of
general applicability in corporate income tax laws) and changes in the reserve
requirements imposed by the Board of Governors of the Federal Reserve System
(or any successor), excluding the Reserve Percentage, which additional or
increased costs would increase the cost of funding loans bearing interest at
the LIBO Rate.  In any such event, the
Lender shall give Borrowers notice of such a determination and adjustment and,
upon its receipt of the notice from the Lender, Borrowers may, by notice to the
Lender (y) require the Lender to furnish to Borrowers a statement setting forth
the basis for adjusting such LIBO Rate and the method for determining the
amount of such adjustment, or (z) repay the LIBO Rate Loans with respect to
which such adjustment is made (together with any amounts due under Section 1-14
(b) above).

(d)           In
the event that any change in market conditions or any law, regulation, treaty,
or directive, or any change therein or in the interpretation of application
thereof, shall at any time after the date hereof, in the reasonable opinion of
the Lender, make it unlawful or impractical for the Lender to fund or maintain
LIBO Rate Loans or to continue such funding or maintaining, or to determine or
charge interest rates at the LIBO Rate, the Lender shall give notice of such
changed circumstances to  Borrowers and
(y) in the case of any LIBO Rate Loans that are outstanding, the date specified
in the Lender’s notice shall be deemed to be the last day of the Interest
Period of such LIBO Rate Loans, and interest upon the LIBO Rate Loans of the 

 12
 

 

 

Lender thereafter shall accrue interest at
the rate then applicable to Base Rate Loans, and (z) Borrowers shall not be
entitled to elect the LIBO Option until the Lender determines that it would no
longer be unlawful or impractical to do so. 
The Lender agrees to use reasonable efforts to designate a lending
office that will avoid the need for such a notice of changed circumstances and
would not, in the good faith judgment of the Lender, otherwise be materially
disadvantageous to the Lender.

(e)           Anything
to the contrary contained herein notwithstanding, the Lender, shall not be
required actually to acquire eurodollar deposits to fund or otherwise match
fund any Liabilities as to which interest accrues at the LIBO Rate.  The provisions of this Section shall apply as
if the Lender had match funded any Liabilities as to which interest is accruing
at the LIBO Rate by acquiring eurodollar deposits for each Interest Period in
the amount of the LIBO Rate Loans.

1-16.        Increase
in Credit Limit.

At the Borrowers’ option,
to be exercised in writing and received by Lender at least fifteen (15) days in
advance of the effective date of any requested increase, but in any event no
later than three (3) months prior to the Maturity Date, and subject  to the conditions (a) of payment of a fee in
an amount equal to the result (expressed in Dollars) of one tenth of one (.10%)
percent times the amount of the increase in the Credit Limit requested, (b)
that there is not then in existence any default or Event of Default which has
not been expressly waived in writing by the Lender, and (c) that Borrowers are
then in compliance with all terms of the Loan Agreement, the Credit Limit may
be increased by increments of not less than $500,000, up to a maximum increase
of $2,500,000.

1-17.        Recalculation of Interest.

In the event that Lender
determines, in its reasonable discretion, that the interest rate applicable to
loans and advances under the Revolving Credit was adjusted based upon
information provided by the Borrowers that was not true and accurate in all
material respects, in addition to any other remedies available to the Lender
hereunder or under applicable law, the Lender shall have the right to
recalculate the interest rate applicable to such loans and advances based upon
the Level II of the Applicable Margin. 
The Borrowers shall pay the Lender interest on such loans and advances
at the interest rate as recalculated by the Lender applying Level II of the
Applicable Margin less any interest payments
actually received by Lender on account of such loans and advances.  Such additional interest shall be immediately
due and payable upon demand by the Lender.

ARTICLE 1A - THE
TERM LOAN

1-1A.      Commitment to Make Term Loan.

(a)           The
Lender has made a term loan to the Borrowers as of January 17, 2006, in the
amount requested by the Borrowers not to exceed the Maximum Term Loan Amount
(the “Term Loan”).

(b)           All
obligations in respect of the Term Loan are “Liabilities” pursuant to the term
of this Agreement.

 13
 

 

 

(c)           The
proceeds of the Term Loans shall be used by the Borrowers solely for working
capital, Capital Expenditures and other purposes permitted by this Agreement.

1-2A.      The Term Note.

The obligation to
repay the Term Loan, with interest as provided herein, shall be evidenced by a
Note (the “Amended and Restated Term Note”) in form and substance, attached
hereto as EXHIBIT 1-2A, executed by the Borrowers.  Neither the original nor a copy of the Term
Note shall be required, however, to establish or prove any Liability.  In the event that the Term Note is ever lost,
mutilated, or destroyed, the Borrowers shall execute a replacement thereof and
deliver such replacement to the Lender.

1-3A.      Payment of the Principal of the Term
Loan.

(a)           The
Borrowers may repay all or any portion of the principal balance of the Term
Loan, without penalty, prior to the repayment in full of all other Liabilities
under the Revolving Credit and cash collateralization of all L/Cs.

(b)           The
Borrowers shall repay the then entire balance of the Term Loan and all accrued
and unpaid interest thereon on the Term Loan Termination Date.

(c)           Any
amounts repaid by the Borrowers on account of the Term Loan may not be
reborrowed by the Borrowers.

1-4A.      Interest on the Term Loan.

(a)           Subject
to Section 1-4A(b),  the unpaid principal
balance of the Term Loan shall bear interest, until repaid, at a per annum rate
equal to Base plus 0.75% (the “Term Loan Interest Rate”), payable monthly in
arrears, on the first Business Day of each month and on the Term Loan Maturity
Date.

(b)           Following
the occurrence of any Event of Default (and whether or not the Term Loan is
accelerated), at the discretion of the Lender, interest shall accrue and shall
be payable on the unpaid balance of the Term Loan at the aggregate of the Term
Loan Interest Rate plus two (2%) percent per annum.

1-5A.      Payments on Account of the Term Loan.

The Borrowers
authorize the Lender to determine and to pay over directly to the Lender any
and all amounts due and payable from time to time under or on account of the
Term Loan as advances under the Revolving Credit, it being understood, however,
that the authorization of the Lender provided in this Section 1-5A shall not
excuse the Borrowers from fulfilling their obligations to the Lender on account
of the Term Loan nor place any obligation on the Lender to do so.

ARTICLE 2 - GRANT OF
SECURITY INTEREST

2-1.          Grant
of Security Interest.  To secure the
Borrowers’ prompt, punctual, and faithful performance of all and each of the
Liabilities, the Borrowers hereby grant to the Lender a 

 14
 

 

 

continuing security interest in and to, and assigns to the Lender, the
following, and each item thereof, whether now owned or now due, or in which the
Borrowers have an interest, or hereafter acquired, arising, or to become due,
or in which the Borrowers obtain an interest (all of which, together with any
other property in which the Lender may in the future be granted a security
interest, is referred to herein as the “Collateral”):

(a)           All
Inventory.

(b)           All
Accounts, accounts receivable, contracts, contract rights, notes, Chattel Paper
(whether tangible or electronic), Deposit Accounts, Letter of Credit Rights
(whether or not the letter of credit is evidenced by a writing), Supporting
Obligations, Commercial Tort Claims, bills, drafts, acceptances, General Intangibles,
Instruments, Documents, Document of Title, securities, Security Entitlements,
Security Accounts, Investment Property, choses in action, and all other debts,
obligations and liabilities in whatever form, owing to Borrower from any
Person, firm or corporation or any other legal entity, whether now existing or
hereafter arising, now or hereafter received by or belonging or owing to
Borrower, for goods sold by it or for services rendered by it, or however
otherwise same may have been established or created, all guarantees and
securities therefor, all right, title and interest of Borrower in the
merchandise or services which gave rise thereto, including the rights of
reclamation and stoppage in transit, all rights to replevy goods, and all
rights or an unpaid seller of merchandise or services.

(c)           All
machinery, Equipment, Fixtures and other Goods (excluding motor vehicles)
whether now owned or hereafter acquired by the Borrowers and wherever located,
all replacements and substitutions therefor or accessions thereto and all
proceeds thereof.

(d)           Leasehold
Interests and rights of occupancy.

(e)           Real
Estate.

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

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

ARTICLE 3 - DEFINITIONS

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

 15

 

 

ARTICLE 4 - CONDITIONS
PRECEDENT

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

4-1.          Corporate
Due Diligence.

(a)           A
Certificate of legal existence and good standing issued by the Secretary of
State or other governing authority of the State of Borrowers’ legal formation.

(b)           Certificates
of due qualification and good standing, issued by the Secretary(ies) of State
or other governing authority of each state in which the nature of the Borrowers’
business conducted or assets owned could require such qualification.

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

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

4-3.          Cash
Management and Additional Documents. 
Such additional instruments and documents including, without limitation,
an agreement for all investment accounts executed by the Borrowers, Lender and
the applicable bank, agreements with Borrowers’ credit card processors and/or
other credit service providers executed by the Borrowers, Lender and each such
processor or service provider, and any other notices or agreements required
under Article 7 hereof, as the Lender or its counsel reasonably may require or
request, in each case in form and substance satisfactory to Lender and its
counsel.

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

4-5.          Representations
and Warranties.  Each of the
representations made by or on behalf of the Borrowers in this Agreement or in
any of the other Loan Documents or in any other report, statement, document, or
paper provided by and or on behalf of the Borrowers shall be true and complete
in all material respects as of the date as of which such representation or
warranty was made.

4-6.          Initial
Minimum Excess Availability. 
Availability, after giving effect to the first loans and advances to be
made under the Revolving Credit; any charges to the Loan Account made in
connection with the establishment of the credit facility contemplated hereby;
and L/C’s issued at, or immediately subsequent to, the establishment of such
Revolving Credit, is not less than five (5%) percent of the Credit Limit.

 16
 

 

 

4-7.          No
Event of Default.  No event shall
have occurred, or failed to occur, which occurrence or which failure constitutes,
or which, solely with the passage of time or the giving of notice (or both)
would constitute, an Event of Default.

4-8.          No
Material Adverse Change.  No Material
Adverse Change has occurred.

4-9.          Delivery
of Documents.  No document shall be
deemed delivered to the Lender until received and accepted by the Lender at its
office in Boston, Massachusetts. Under no circumstances will this Agreement
take effect until executed and accepted by the Lender at said head office.

ARTICLE 5 - GENERAL
REPRESENTATIONS. WARRANTIES AND COVENANTS

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

5-1.          Payment
and Performance of Liabilities.  The
Borrowers shall pay each Liability due Lender when due (or when demanded if
payable on demand) and shall promptly, punctually, and faithfully perform each
other Liability due Lender and pay each obligation due to others in accordance
with its current custom and practice. If Borrowers have any dispute with
respect to any other obligation due to others, Borrowers shall give Lender
notice of said dispute, except with regard to amounts due to others and
disputed by the Borrowers in good faith, provided, however, that no liens shall
arise on the Collateral in connection with such disputed amounts.

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

(a)           Each
Borrower presently is and shall hereafter remain in good standing as a legal
entity in the state in which it is legally formed and is and shall hereafter
remain duly qualified and in good standing in every other state in which, by
reason of the nature or location of such Borrower’s assets or operation of such
Borrower’s business, such qualification may be necessary, except where such
failure to qualify will not have a Material Adverse Change on the Borrowers or
their business or assets, or the Collateral.

(b)           Each
Related Entity is listed on EXHIBIT 5-2, annexed hereto.  The Borrower shall provide the Lender with
prior written notice of any entity’s becoming or ceasing to be a subsidiary of
any Borrower.

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

(d)           The
execution and delivery by each Borrower of each Loan Document to which it is a
party; the Borrowers’ consummation of the transactions contemplated by such
Loan Documents (including, without limitation, the creation of security
interests by the Borrowers as

 17
 

 

 

contemplated hereby); the Borrowers’ performance under those of the
Loan Documents to which it is a party; the borrowings hereunder; and the use of
the proceeds thereof:

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

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

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

(e)           The
Loan Documents have been duly executed and delivered by Borrowers and are the
legal, valid and binding obligations of the Borrowers, enforceable against the
Borrowers in accordance with their respective terms, except to the extent such
enforceability may be limited by bankruptcy and other similar laws of general
application relating to or affecting the enforcement of creditors’ rights
generally.

5-3.          Trade
Names.

(a)           EXHIBIT
5-3, annexed hereto, is a listing of:

(i)            All
names under which each of the Borrowers ever conducted their businesses.

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

(b)           Except
(i) upon not less than twenty-one (21) days prior written notice given the
Lender, and (ii) in compliance with all other provisions of this Agreement, the
Borrowers will not undertake or commit to undertake any action such that the results
of that action, if undertaken prior to the date of this Agreement, would have
been reflected on EXHIBIT 5-3.

(c)           The
Borrowers own and possess, or have the right to use all patents, industrial
designs, trademarks, trade names, trade styles, brand names, service marks,
logos, copyrights, trade secrets, know-how, confidential information, and other
intellectual or proprietary property of any third Person necessary for the
Borrowers’ conduct of the Borrowers’ businesses.

(d)           The
conduct by the Borrowers of the Borrowers’ businesses does not, to the
Borrowers’ knowledge, infringe on the patents, industrial designs, trademarks,
trade names, trade styles, brand names, service marks, logos, copyrights, trade
secrets, know-how, confidential information, or other intellectual or
proprietary property of any third Person.

 18
 

 

 

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

(a)           The
Collateral, and the books, records, and papers of Borrowers pertaining thereto,
are kept and maintained solely at the Borrowers’ chief executive offices as set
forth at the beginning of this Agreement and at those locations which are
listed on EXHIBIT 5-4, annexed hereto, which exhibit includes all service
bureaus with which any such records are maintained and the names and addresses
of each of the Borrowers’ landlords. Except (i) to accomplish sales of
Inventory in the ordinary course of business or (ii) the sale of obsolete
equipment or fixtures (replaced by equipment or fixtures of equal or greater
value) or (iii) to utilize such of the Collateral as is removed from such
locations in the ordinary course of business (such as motor vehicles), the
Borrowers shall not remove any Collateral from said chief executive offices or
those locations listed on EXHIBIT 5-4.

(b)           Warehouse
and Distribution Center.  The Borrowers
do not presently have a warehouse or distribution center.  The Borrowers shall use commercially
reasonable efforts to obtain and deliver to the Lender a consent, waiver and
subordination (reasonably satisfactory to the Lender) by the landlord, if
requested by Lender, for its future store locations, and, if in the future
Borrowers establish a warehouse or distribution center, for such warehouse or
distribution center.

(c)           Without duplication of any Availability
Reserve described above, the Lender may establish an Availability Reserve for
unpaid rent.  The Borrowers will
not commit to, or open any location at which the Borrowers maintain, offers for
sale, or stores any of the Collateral, except those set forth in, or
contemplated by, Business Plan.

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

5-5.          Title
to Assets.

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

(i)            The
security interest created herein.

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

(iii)          Purchase
money security interests for purchase of equipment not to exceed Fifty Thousand
($50,000) Dollars.

(iv)          Equipment
leases, and subsequent replacements of and/or additions to such equipment
leases permitted under Section 5.6.

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

 19
 

 

 

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

(a)           Any
Indebtedness to the Lender.

(b)           The
Indebtedness (if any) listed on EXHIBIT 5-6, annexed hereto.

(c)           Substitutions
or replacements for the Capital Leases described in Sections 5.5 and 5.6, and
any additional Capital Leases not to exceed One Hundred Fifty Thousand
($150,000) Dollars per year, provided Lender is given prompt written notice of
any Capital Lease and no lien on the Collateral arises as a result thereof.

(d)           Unsecured
Indebtedness evidenced by the Seller Note, which shall at all times be subject
to a Subordination Agreement.

(e)           Unsecured
Indebtedness evidenced by the Trade Note, which shall at all times be subject
to a Subordination Agreement.

(f)            Unsecured
Indebtedness evidenced by any guaranty by any Borrowers of any Indebtedness or
other obligations of any other Borrowers that is permitted under this
Agreement.

(g)           Unsecured
Indebtedness evidenced by the Highbridge Note, which shall at all times be
subject to a Subordination Agreement.

(h)           Other
unsecured Indebtedness which is consented to by the Lender in its sole
discretion (“Additional Subordinated Debt”) and which is at all times subject
to a Subordination Agreement.

5-7.          Insurance
Policies.

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

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

 20
 

 

 

obtain such insurance, provided, however, the Lender’s obtaining of
such insurance shall not constitute a cure or waiver of any Event of Default
occasioned by the Borrowers’ failure to have maintained such insurance. The
Borrowers shall furnish to the Lender certificates or other evidence reasonably
satisfactory to the Lender regarding compliance by the Borrowers with the
foregoing insurance provisions.

(c)           The
Borrowers shall advise the Lender of each claim in excess of Twenty-Five
Thousand ($25,000) Dollars made by the Borrowers under any policy of insurance
which covers the Collateral and will permit the Lender following the occurrence
of any Suspension Event, at the Lender’s option in each instance, to the
exclusion of the Borrowers, to conduct the adjustment of each such claim. The
Borrowers hereby appoint the Lender as the Borrowers’ attorney in fact to
obtain, adjust, settle, and cancel any insurance described in this section and
to endorse in favor of the Lender any and all drafts and other instruments with
respect to such insurance. This appointment, being coupled with an interest, is
irrevocable until this Agreement is terminated by a written instrument executed
by a duly authorized officer of the Lender. The Lender shall not be liable on
account of any exercise pursuant to said power except for any exercise in
actual willful misconduct and bad faith. The Lender may apply any proceeds of
such insurance against the Liabilities, whether or not such have matured, in
such order of application as the Lender may determine.

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

5-8.          Licenses.  Each material license, distributorship,
franchise, and similar agreement issued to, or to which the Borrowers are a
party is in full force and effect. To the Borrowers’ knowledge, no party to any
such license or agreement is in default or violation thereof. The Borrowers
have not received any notice or threat of cancellation of any such license or
agreement.

5-9.          Leases.  EXHIBIT 5-9, annexed hereto, is a schedule of
all presently effective Leases and Capital Leases. Each of such Leases and
Capital Leases is in full force and effect. The Borrowers are not, and to the
best of the Borrowers’ knowledge no other party to any such Lease or Capital
Lease is in default or violation of any such Lease or Capital Lease which would
cause the termination of the same and except as set forth on EXHIBIT 5-9, the
Borrowers have not received any notice of default or threat of cancellation of
any such Lease or Capital Lease. The Borrowers hereby authorize the Lender at
any time and from time to time to contact any of the Borrowers’ landlords in
order to confirm the Borrowers’ continued compliance with the terms and
conditions of the Lease( s) between the Borrowers and that landlord and to
discuss such issues, concerning the Borrowers’ occupancy under such Lease(s),
as the Lender may determine.

5-10.        Requirements
of Law.  The Borrowers are in
compliance with, and shall hereafter comply with and use its assets in material
compliance with, all Requirements of Law. The Borrowers have not received any
notice of any violation of any Requirement of Law , which violation has not
been cured or otherwise remedied, and would result in a Material Adverse Change
of the Borrowers’ business and its assets.

 21

 

 

5-11.        Maintain Properties.  The Borrowers shall:

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

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

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

(d)           Except for those sales permitted
under Section 5.4( e )(ii) herein, not sell, lease, or otherwise dispose of any
of the Collateral, other than the following, in each case, subject to the
turning over to the Lender of all Receipts with respect to the same as provided
herein:

(i)            The sale of
Inventory in compliance with this Agreement.

(ii)           The disposal of
Equipment which is obsolete, worn out, or damaged beyond repair, which Equipment
is replaced to the extent necessary to preserve or improve the operating
efficiency of the Borrowers.

5-12.        Pay Taxes.

(a)           The federal income tax returns of the
Borrowers have been audited by the Internal Revenue Service (or closed by
applicable statutes) for all fiscal years through and including the Borrowers’
taxable year referenced on EXHIBIT 5-12, annexed hereto, and all deficiencies,
assessments, and other amounts asserted as a result of such examinations have
been fully paid or settled. No agreement is in existence which waives or
extends any statute of limitations applicable to the right of the Internal
Revenue Service to assert a deficiency or make any other claim for or in
respect to federal income taxes. No issue has been raised in any such examination
which reasonably could be expected to result in the assertion of a deficiency
for any fiscal year open for examination, assessment, or claim by the Internal
Revenue Service.

(b)           All returns of the Borrowers for
state and local income, excise, sales, and other taxes have been audited (or
closed by applicable statutes) for all fiscal years through and including the
Borrowers’ taxable year referenced on EXHIBIT 5-12, annexed hereto, and all
deficiencies, assessments, and other amounts asserted as a result of such
examinations have been fully paid or settled. No agreement is in existence
which waives or extends any statute of limitations applicable to the right of
any state taxing authority to assert a deficiency or make any other claim for
or in respect to any such state taxes. No issue has been raised in any such
examination which reasonably could be expected to result in the assertion of a
deficiency for any fiscal year open for examination, assessment, or claim by
any state or local taxing authority.

(c)           Except as disclosed on said EXHIBIT
5-12, there are no examinations of or with respect to the Borrowers presently
being conducted by the Internal Revenue Service or any state taxing authority.

 22
  
 

 

 

(d)           The Borrowers have, and hereafter
shall: pay, as they become due and payable, all taxes and unemployment
contributions and other charges of any kind or nature levied, assessed or
claimed against the Borrowers or the Collateral by any Person or entity whose
claim could result in an Encumbrance upon any asset of the Borrowers or by any
governmental authority (provided, however, that the Borrowers shall have the
right to contest the payment of such taxes or other charges as long as no
encumbrance is placed upon the Collateral); properly exercise any trust responsibilities
imposed upon the Borrowers by reason of withholding from employees’ pay; timely
make all contributions and other payments as may be required pursuant to any
Employee Benefit Plan now or hereafter established by the Borrowers; and timely
file all tax and other returns and other reports with each governmental
authority to whom the Borrowers are obligated to so file.

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

5-13.        No Margin Stock.  The Borrowers are not engaged in the business
of extending credit for the purpose of purchasing or carrying any margin stock
(within the meaning of Regulations G, U, T, and X, of the Board of Governors of
the Federal Reserve System of the United States). No part of the proceeds of
any borrowing hereunder will be used at any time to purchase or carry any such
margin stock or to extend credit to others for the purpose of purchasing or
carrying any such margin stock.

5-14.        ERISA.  Neither the Borrowers nor any ERISA Affiliate
ever has or hereafter shall in any case where the failure results in a lien on
the Collateral:

(a)           Violate or fail to be in full
compliance with the Borrowers’ Employee Benefit Plan, except where such failure
to be in full compliance will not have a Material Adverse Change on the Borrowers
or its business or assets, or the Collateral.

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

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

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

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

 23
  
 

 

 

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

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

5-15.        Hazardous Materials.

(a)           The Borrowers have never:

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

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

(b)           The Borrowers shall:

(i)            Dispose of any
Hazardous Material only in compliance with all Environmental Laws and except as
set forth on EXHIBIT 5-1 5 (b) (ii) hereof.

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

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

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

5-17.        Dividends or Investments.  Except as otherwise provided in the Business
Plan, the Borrowers shall not:

(a)           Pay any cash dividend or make any
other distribution in respect of any class of the Borrowers’ capital stock.

(b)           Own, redeem, retire, purchase, or
acquire any of the Borrowers’ capital stock.

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

(d)           Merge or consolidate or be merged or
consolidated with or into any other corporation or other entity without the
prior written consent of the Lender, which consent shall not be unreasonably withheld
or delayed if the proposed merger is with iParty Corp.

(e)           Consolidate any of the Borrowers’
operations with those of any other corporation or other entity.

(f)            Organize or create any Related
Entity that is a subsidiary.

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

The foregoing
notwithstanding, in the event that all Indebtedness has been paid in full and
Borrowers submit to Lender a new Business Plan which sets forth any proposed
dividends and such Business Plan is reasonably satisfactory to Lender and such
dividends will not have a material adverse effect on Borrowers’ remaining
working capital, Borrowers may pay the dividends as set forth in the new
Business Plan.

5-18.        Loans.  The Borrowers shall not make any loans or
advances to, nor acquire the Indebtedness of, any Person, provided, however,
the foregoing does not prohibit any of the following:

(a)           Advance payments made to the
Borrowers’ suppliers in the ordinary course.

(b)           Loans, advances and
other intercompany transactions between the Borrowers.

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

5-19.        Protection of Assets.  The Lender, in its discretion, and from time
to time, (after notice to the Borrowers provided no Event of Default has
occurred) may discharge any tax or Encumbrance on any of the Collateral, or
take any other action that the Lender may deem necessary or desirable to
repair, insure, maintain, preserve, collect, or realize upon any of the
Collateral. The Lender shall not have any obligation to undertake any of the
foregoing and shall have no liability on account of any action so undertaken
except where there is a specific finding in a judicial proceeding (in which the
Lender has had an opportunity to be heard), from which finding no further
appeal is available, that the Lender had acted in actual bad faith or in a
grossly negligent manner.

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The Borrowers shall pay
to the Lender, on demand, or the Lender, in its discretion, may add to the Loan
Account, all amounts paid or incurred by the Lender pursuant to this section.
The obligation of the Borrowers to pay such amounts is a Liability.

5-20.        Line of Business.  The Borrowers shall not engage in any
business other than the business in which it is currently engaged or a business
reasonably related thereto.

5-21.        Affiliate Transactions.  The Borrowers shall not make any payment, nor
give any value to any Related Entity (other than another Borrower) except for
(a) goods and services actually purchased by the Borrowers from, or sold by the
Borrowers to, such Related Entity, and (b) upstream payments to iParty Corp.
for (i) taxes payable based on taxable income of Borrowers on a stand-alone
basis, (ii) reimbursements for executive personnel and any other such shared
personnel as provided in the Business Plan, and (iii) any other service
provided by iParty Corp. to the Borrowers as provided in the Business Plan, for
a price which shall:

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

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

5-22.        Reserved.

5-23.        Additional Assurances.

(a)           The Borrowers are not the owner of,
nor have they any interest in, any property or asset which, immediately upon
the satisfaction of the conditions precedent to the effectiveness of the credit
facility contemplated hereby (Article 4) will not be subject to a perfected
security interest in favor of the Lender (subject only to those Encumbrances
(if any) described on EXHIBIT 5-5, annexed hereto) to secure the Liabilities.

(b)           The Borrowers will not hereafter
acquire any asset or any interest in property which is not, immediately upon
such acquisition, subject to such a perfected security interest in favor of the
Lender to secure the Liabilities (subject only to Encumbrances (if any)
permitted pursuant to Section 5-5, above).

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

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

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5-24.        Adequacy of Disclosure.

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

(b)           The Borrowers do not have any
contingent obligations or obligation under any Lease or Capital lease which is
not noted in the Borrowers’ financial statements furnished to the Lender prior
to the execution of this Agreement.

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

5-25.        No Material Adverse Change.  There has not been a Material Adverse Change.

5-26.        Other Covenants.  The Borrowers shall not indirectly do or
cause to be done any act which, if done directly by the Borrowers, would breach
any covenant contained in this Agreement.

5-27.        Goods in Possession of Bailee.  If any goods are at any time in the
possession of a bailee, Borrowers shall promptly notify Lender thereof and, if
requested by Lender, shall promptly obtain an acknowledgement from the bailee,
in form and substance reasonably satisfactory to Lender, that the bailee holds
such Collateral for the benefit of Lender and shall act upon the instructions
of Lender, without the further consent of Borrowers. Lender agrees with
Borrowers that Lender shall not give any such instructions unless an Event of
Default has occurred and is continuing or would occur after taking into account
any action by Borrowers with respect to the bailee.

5-28.        Letters of Credit.  If Borrowers are at any time a beneficiary
under a letter of credit now or hereafter issued in favor of Borrowers,
Borrowers shall promptly notify Lender thereof and, at the request and option
of Lender, Borrowers shall, pursuant to an agreement in form and substance
reasonably satisfactory to Lender, either (a) arrange for the issuer and any
confirmer of such letter of credit, or (b) arrange for Lender to become the
transferee beneficiary of the letter of credit, with Lender agreeing, in each
case, that the proceeds of any drawing under the letter of credit are to be
applied in the same manner as any other payment on an Account.

5-29.        Commercial Tort Claims.  If Borrowers shall at any time hold or
acquire a commercial tort claim, Borrowers shall immediately notify Lender in a
writing signed by 

 27
  
 

 

 

Borrowers of the brief details thereof and grant to
Lender in such writing a security interest therein, and in the proceeds
thereof, all upon the terms of this Agreement, with such writing to be in form
and substance reasonably satisfactory to Lender.

5-30.        Changes
in Legal Status.  No Borrower shall
(a) change its name, its place of business or, if more than one, chief
executive office, or its mailing address or organizational identification
number if it has one, or (b) change its type of organization, jurisdiction or
organization or other legal structure; without providing thirty (30) days’
prior written notice to Lender in each case. If any Borrower does not have an
organizational identification number and later obtains one, such Borrower shall
forthwith notify the Lender of such organizational identification number.

5-31.        Supply Agreement.  No party to the Supply Agreement is in
default or violation of the Supply Agreement, and the Supply Agreement is, and
shall at all times remain, in full force and effect.

ARTICLE 6 - USE AND COLLECTION OF COLLATERAL

6-1.          Use of Inventory Collateral.

(a)           Except as otherwise provided in
Section 5-4(f) herein, the Borrowers shall not engage in any sale of the
Inventory other than for fair consideration in the conduct of the Borrowers’
business in the ordinary course and shall not engage in sales or other
dispositions to creditors; sales or other dispositions in bulk; and any use of
any of the Inventory in breach of any provision of this Agreement.

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

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

6-3.          Adjustments and Allowances.  The Borrowers may grant such allowances or
other adjustments to the Borrowers’ Account Debtors (exclusive of extending the
time for payment of any Account or Account Receivable, which shall not be done
without first obtaining the Lender’s prior written consent in each instance) as
the Borrowers may reasonably deem to accord with sound business practice,
provided, however, the authority granted the Borrowers pursuant to this Section
6-3 may be limited or terminated by the Lender at any time in the Lender’s
discretion after and during an Event of Default.

6-4.          Validity
of Accounts.

(a)           The
amount of each Account shown on the books, records, and invoices of the
Borrowers represented as owing by each Account Debtor is and will be the
correct amount 

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actually owing by such Account Debtor and shall have
been fully earned by performance by the Borrowers.

(b)           The
Borrowers have no knowledge of any impairment of the validity or collectibility
of any of the Accounts and shall notify the Lender of any such fact immediately
after Borrowers become aware of any such impairment.

(c)           Except
for any security deposit under any of the Borrowers’ lease arrangements, the
Borrowers shall not post any bond to secure the Borrowers performance under any
agreement to which the Borrowers are a party nor cause any surety, guarantor,
or other third party obligee to become liable to perform any obligation of the
Borrowers (other than to the Lender) in the event of the Borrowers’ failure so
to perform.

6-5.          Notification
to Account Debtors.  The Lender shall
have the right at any time after the occurrence and during the continuance of
an Event of Default to notify any of the Borrowers’ Account Debtors to make
payment directly to the Lender and to collect all amounts due on account of the
Collateral.

ARTICLE 7 - CASH MANAGEMENT

7-1.          Depository
Accounts.

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

(b)           The
Borrowers shall, as a condition to the effectiveness of this Agreement:

(i)            Establish
an account for the benefit of and under the control of, Lender into which all
Receipts shall be deposited (the “Blocked Account”)

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

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

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

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

7-2.          Credit
Card Receipts.

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

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

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

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

(i)            The
Concentration Account: Established by the Lender with The Chase Manhattan Bank,
N.A.

(ii)           The
Funding Account: Has been established by Borrowers with Sovereign Bank.

(iii)          The
Blocked Account: Has been established by Borrowers with Sovereign Bank.

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

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

7-4.          Proceeds
and Collection of Accounts.

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

(b)           The
Borrowers shall cause the ACH or wire transfer to the Blocked Account, no less
frequently than twice per week and daily following the occurrence and during 

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the continuance of an Event of Default (whether or not
there is then an outstanding balance in the Loan Account) of:

(i)            The
then contents of each DDA (other than (A) any Local DDA and (B) the Funding
Account), each such transfer to be net of any minimum balance, not to exceed
Five Thousand ($5,000) Dollars maintained in the subject DDA by the bank at
which such DDA is maintained.

(ii)           The
proceeds of all credit card charges not otherwise provided for pursuant hereto.

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

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

The foregoing
notwithstanding, if there are no Liabilities outstanding and Borrowers do not
anticipate requesting loans or advances under the Revolving Credit for a
substantial period of time, Borrowers may request that the requirement that all
collected balances in the Blocked Account be ACH or wire transferred to the
Concentration Account be waived. In the event that Lender consents to the
foregoing request, then, provided that no Suspension Event of Event of Default
is then is existence, Lender shall direct the Blocked Account to the Funding
Account (such arrangements to be hereinafter referred to as “Alternative Sweep
Arrangements”). Lender’s obligation to notify the Blocked Account Bank to engage
the Alternative Sweep Arrangements is further subject to and condition upon
Lender’s receipt of written authorization of the Borrowers, certified to the
Lender by the President or other authorized signatory of the Borrowers. Lender
shall not be responsible for any failure of the Blocked Account Bank to
implement its instructions under this Alternative Sweep Arrangement. As further
conditions to any advance by the Lender at any time after the Alternative Sweep
Arrangements have been engaged hereunder, the Borrowers shall provide to Lender
written notice of its intent to borrower at least thirty (30) days in advance
of any borrowing request, and Lender shall have received from the Blocked
Account, written acknowledgment of and agreement to the Lender’s instructions
to transfer all funds in the Blocked Account to the Concentration Account in
accordance with the agreement described in Section 7-1 (b)(ii) hereof.

(d)           In
the event that, notwithstanding the provisions of this Section 7-4, the
Borrowers receive or otherwise have dominion and control of any Receipts, or
any proceeds or collections of any Collateral, such Receipts, proceeds, and
collections shall be held in trust by the Borrowers for the Lender and shall
not be commingled with any of the Borrowers’ other funds or deposited in any
account of the Borrowers other than as instructed by the Lender. The foregoing
notwithstanding, nothing herein shall prevent the Borrowers from maintaining a “bank”
in its store registers.

7-5.          Payment of Liabilities.

(a)           On
each Banking Day, upon receipt by Lender, the Lender may apply 

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towards the Liabilities, the then collected balance of
the Concentration Account (net of fees charged, and of such impressed balances
as may be required by the bank at which the Concentration Account is
maintained), provided, however, for
purposes of the calculation of interest on the unpaid principal balance of the
Loan Account, such payment shall be deemed to have been made one (1) Banking
Day after such transfer, provided, however, if no Liabilities are outstanding,
then any amounts contained in the Concentration Account shall then be
transferred immediately to the Funding Account.

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

7-6.          The
Funding Account.  All checks shall be
drawn by the Borrowers upon, and other disbursements made by the Borrowers
solely from, the Funding Account.

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

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

8-1.          Appointment
as Attorney-In-Fact.  The Borrowers
hereby irrevocably constitute and appoint the Lender as the Borrowers’ true and
lawful attorney, with full power of substitution, to convert the Collateral
into cash at the sole risk, cost, and expense of the Borrowers, but for the
sole benefit of the Lender. The rights and powers granted the Lender by this
appointment shall be exercisable by the Lender only after the occurrence and
during the continuance of an Event of Default and include but are not limited
to the right and power to:

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

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

(c)           Endorse
the name of the Borrowers in favor of the Lender upon any and all checks,
drafts, notes, acceptances, or other items or instruments; sign and endorse the
name of 

 32
  
 

 

 

the Borrowers on, and receive as secured party, any of
the Collateral, any invoices, schedules of Collateral, freight or express
receipts, or bills of lading, storage receipts, warehouse receipts, or other
documents of title respectively relating to the Collateral.

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

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

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

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

(h)           Sign
and file or record any financing or other statements in order to perfect or
protect the Lender’s security interest in the Collateral.

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

ARTICLE 9 - FINANCIAL AND
OTHER REPORTING REQUIREMENTS/FINANCIAL COVENANTS

9-1.          Maintain
Records.  The Borrowers shall:

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

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

(c)           At
all times, keep accurate current records of the Collateral including, without
limitation, accurate current stock, cost, and sales records of its Inventory,
accurately and 

 33
  
 

 

 

sufficiently itemizing and describing the kinds,
types, and quantities of Inventory and the cost and selling prices thereof

(d)           At
all times, retain independent certified public accountants who are reasonably
satisfactory to the Lender and instruct such accountants to fully cooperate
with, and be available to, the Lender to discuss the Borrowers’ financial
performance, financial condition, operating results, controls, and such other
matters, within the scope of the retention of such accountants, as may be
raised by the Lender. The Lender acknowledges that Ernst & Young, LLP, are
acceptable independent certified public accountants.

(e)           Not
change the Borrowers’ fiscal year.

(f)            Not
change taxpayer identification number of the Borrowers.

9-2.          Access
to Records.

(a)           The
Borrowers shall accord the Lender and the Lender’s representatives with access
from time to time as the Lender and such representatives may reasonably require
to all properties owned by or over which the Borrowers have control, upon
reasonable notice and in a manner which does not unreasonably interfere with
the use and conduct of the Borrowers’ business (provided no notice shall be
required upon the occurrence of an Event of Default). The Lender and the Lender’s
representatives shall have the right, and the Borrowers will permit the Lender
and such representatives from time to time as the Lender and such representatives
may reasonably request, upon reasonable notice and in a manner which does not
unreasonably interfere with the use and conduct of the Borrowers’ business
(provided no notice shall be required after the occurrence of an Event of
Default) request, to examine, inspect, copy, and make extracts from any and all
of the Borrowers’ books, records, electronically stored data, papers, and
files. The Borrowers shall make all of the Borrowers’ copying facilities
available to the Lender.

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

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

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

(c)           The
Lender shall treat all such information as confidential, except to the extent
necessary for the Lender to enforce its rights under this Agreement and any
agreements executed in connection herewith.

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9-3.          Immediate Notice to Lender.

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

(i)            Within five (5)
days after any change in the Borrowers’ Executive Officers.

(ii)           Within five (5)
days after the completion of any physical count of the Borrowers’ Inventory
(together with a copy of the certified or such other results as may then be
available thereof).

(iii)          Any ceasing of the
Borrowers’ making of payment, in the ordinary course, to any of its creditors
(excluding the ceasing of the making of such payments on account of a bona fide
dispute with a creditor not in excess of Fifty Thousand ($50,000) Dollars).

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

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

(vi)          Any Material Adverse
Change in the business, operations, or financial affairs of the Borrowers.

(vii)         The occurrence of
any Suspension Event.

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

(ix)           Within five (5)
days of learning of any litigation which, if determined adversely to the
Borrowers, might have a material adverse effect on the financial condition of
the Borrowers.

(x)            Within five (5)
days of the reduction by any of Borrowers’ material vendors in the amount of
trade credit or terms provided by such vendor to Borrowers on the date of
execution hereof.

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

(b)           The
Borrowers shall:

(i)            Except
to the extent available on EDGAR, provide the Lender,

 35
  
 

 

 

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

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

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

(iv)          Provide the Lender,
within five (5) days of receipt by the Borrowers, with a copy of any management
letter or similar communications from any accountant of the Borrowers.

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

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

See EXHIBIT 9-R.

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

9-6.          Monthly
Reports.

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

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

See EXHIBIT 9-R

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

See EXHIBIT 9-R

9-7.          Annual
Reports.

(a)           In
addition to the monthly reports required under Article 9-6, annually, within
ninety (90) days following the end of the Borrowers’ fiscal year, the Borrowers
shall furnish the Lender with an original signed counterpart of the Borrowers’
annual financial 

 36
  
 

 

 

statement, which statement shall have been prepared
by, and bearing the unqualified opinion of, the Borrowers’ independent
certified public accountants (i.e. said statement shall be” certified” by such
accountants). Such annual statement shall include, at a minimum (with
comparative information for the then prior fiscal year) a balance sheet, income
statement, statement of changes in shareholders’ equity, and cash flows.

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

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

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

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

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

(c)           Include calculations concerning the Borrowers’
compliance (or failure to comply) at the date of the subject statement with
each of the financial performance covenants included in Section 9-12, below.

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

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

9-9.          Inventories, Appraisals, and Audits.

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

(b)           Upon
the Lender’s request from time to time after reasonable notice (except after
the occurrence of an Event of Default), the Borrowers shall obtain, or shall
permit the Lender to obtain (in all events, at the Borrowers’ expense)
financial or SKU based physical counts and/or inventories of the Collateral,
conducted by such inventory takers as are satisfactory to the Lender and
following such methodology as may be required by the Lender, each of which 

 37
  
 

 

 

physical counts and/or financial or SKU based
inventories shall be observed by the Borrowers’ accountants. The Lender will
require the Borrowers to conduct one (1) such count and/or inventory during
each twelve (12) month period during which this Agreement is in effect, but in
its discretion, may undertake additional such counts or inventories during such
period. The draft or unaudited results of all inventories or counts shall be
furnished to Lender immediately thereafter and final, reconciled results within
fifteen (15) days of the taking of such inventories or counts. The Lender
reserves the right to seek directly unaudited or draft results from such
inventory takers.

(c)           Upon
the Lender’s request from time to time, the Borrowers shall permit the Lender
to obtain appraisals (in all events, at the Borrowers’ expense) conducted by
such appraisers as are satisfactory to the Lender with such frequency as set
forth in the Appraisal/Audit Grid. In its discretion, the Lender may obtain
such additional appraisals (provided, however, absent an Event of Default, such
additional appraisals shall be at Lender’s expense and, following the
occurrence of an Event of Default, such additional appraisals shall be at
Borrowers’ expense.

(d)           The
Lender contemplates conducting commercial finance audits (in each event, at the
Borrowers’ expense) of the Borrowers’ books and records with such frequency as
set forth in the Appraisal/Audit Grid. In its discretion the Lender may
undertake such additional audits (provided, however, absent an Event of
Default, such additional audits shall be at the Lender’s expense; however,
following the occurrence of an Event of Default, such additional audits shall
be at Borrowers’ expense). The current audit fees for a field examination
conducted by the Lender are Eight Hundred ($800) Dollars per man, per day, plus
expenses. The Borrowers acknowledge that the Lender may conduct a field
examination within ninety (90) days of the date hereof.

(e)           In
the event that Borrowers do not undertake “mystery shopping” (so-called) and
share the results of the same with Lender, Lender from time to time (in all
events, at the Borrowers’ expense) may undertake “mystery shopping” (so-called)
visits to all or any of the Borrowers’ business premises. The Lender shall
provide the Borrowers with a copy of any non-company confidential results of
such mystery shopping upon Borrowers’ written request.

9-10.        Additional
Financial Information.

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

(b)           The
Borrowers have provided the Lender with its current Business Plan, a copy of
which is annexed hereto as EXHIBIT 9-10. The Borrowers may provide the Lender,
from time to time hereafter, with updated Business Plans. In all events, the
Borrowers, not later than thirty (30) days prior to the end of each of the
Borrowers’ fiscal years, shall furnish the Lender with an updated and extended
Business Plan which shall go out at least through the end 

 38
  
 

 

 

of the then next fiscal year. Borrowers may also
provide further updated Business Plans during any such fiscal year. In each
event, such updated and extended Business Plans shall be prepared pursuant to a
methodology and shall include such assumptions as are satisfactory to the
Lender. Routinely throughout the year, the Lender, following the receipt of any
of such revised forecast which reflects material adverse business performance,
may, but shall not be under any obligation to, revise the financial performance
covenants included on EXHIBIT 9-11, annexed hereto.

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

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

ARTICLE 10 - EVENTS OF
DEFAULT

The occurrence of any
event described in this Article 10 respectively shall constitute an “Event of
Default” herein. Upon the occurrence of any Event of Default described in
Section 10-11, any and all Liabilities shall become due and payable without any
further act on the part of the Lender. Upon the occurrence of any other Event
of Default, any and all Liabilities shall become immediately due and payable,
at the option of the Lender upon notice to Borrower. The occurrence of any
Event of Default shall also constitute a default under all other agreements
between the Lender and the Borrowers and instruments and papers given the
Lender by the Borrowers, whether such agreements, instruments, or papers now
exist or hereafter arise.

10-1.        Failure
to Pay Revolving Credit.  The failure
by the Borrowers to pay any amount when due under the Revolving Credit.

10-2.        Failure
To Make Other Payments.  The failure
by the Borrowers to pay when due (or upon demand, if payable on demand) any
payment Liability other than under the Revolving Credit which failure is not
cured within one (1) day after the Borrowers are given notice thereof.

10-3.        Failure to Perform Covenant or
Liability (No Grace Period).  The
failure by the Borrowers to promptly, punctually, faithfully and timely
perform, discharge, or comply with any covenant or Liability not otherwise
described in section 10-1 or section 10-2, above, and included in any of the
following provisions hereof: 

	
  Section

  	
   

  	
  Relates to:

  
	
  5-4

  	
   

  	
  Location of Collateral

  
	
  5-5

  	
   

  	
  Title to Assets

  
	
  5-6

  	
   

  	
  Indebtedness

  
	
  5-7

  	
   

  	
  Insurance Policies

  
	
  5-12

  	
   

  	
  Pay Taxes

  

 

 39
  
 

 

 

	
  5-21

  	
   

  	
  Affiliate Transactions

  
	
  5-23

  	
   

  	
  Additional Assurances

  
	
  Article 7

  	
   

  	
  Cash Management

  
	
  Article 9

  	
   

  	
  Financial Reporting Requirements and Financial
  Covenants

  

 

The foregoing
notwithstanding, in the event an involuntary lien is placed on the Collateral,
the Borrowers shall have a thirty (30) day period within which to obtain the
release thereof (provided such lien is not prior to the Lender’s lien on such
Collateral).

10-4.        Failure
to Perform Covenant or Liability (Grace Period).  The failure by the Borrowers to promptly,
punctually and faithfully perform, or observe any term, covenant or agreement
on its part to be performed or observed pursuant to any of the provisions of
this Agreement, other than those described in Sections 10-1, 10-2 or 10-3, or
in any other agreement with Lender which is not remedied within the earlier of
ten (10) days after (i) notice thereof by Lender to Borrowers, or (ii) the date
Borrowers were required to give notice to Lender pursuant to Section 9-3(a)(vi)
hereof.

10-5.        Misrepresentation.  The good faith determination by the Lender
that any representation or warranty at any time made by any Borrower to the
Lender was not true or complete in all material respects when given.

10-6.        Acceleration
of Other Debt. Breach of Lease.  The
occurrence of any event such that any Indebtedness of any Borrower to any
creditor other than the Lender is accelerated or, without the consent of such
Borrower, any Lease is breached and terminated.

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

10-8.        Casualty
Loss, Non-Ordinary Course Sales.  The
occurrence of any (a) uninsured loss, theft, damage, or destruction of or to
any material portion of the Collateral, or (b) sale (other than sales in the
ordinary course of business or otherwise permitted hereunder) of any material
portion of the Collateral.

10-9.        Judgment,
Restraint of Business.

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

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

 40
  

 

 

(c)           The
entry of any order or the imposition of any other process having the force of
law, the effect of which is to restrain in any material way the conduct by any
Borrower of its business in the ordinary course.

10-10.      Business Failure.  Any act by, against, or relating to any
Borrower, or its property or assets, which act constitutes the application for,
consent to, or sufferance of the appointment of a receiver, trustee, or other
Person, pursuant to court action or otherwise, over all, or any part of such
Borrower’s property; the granting of any trust mortgage or execution of an
assignment for the benefit of the creditors of such Borrower, or the occurrence
of any other voluntary or involuntary liquidation or extension of debt
agreement for such Borrower; or the offering by or entering into by such
Borrower of any composition, extension, or any other arrangement seeking relief
from or extension of the debts of such Borrower, or the initiation of any other
judicial or non-judicial proceeding or agreement by, against, or including such
Borrower which seeks or intends to accomplish a reorganization or arrangement
with creditors.

10-11.      Bankruptcy.  The failure by any Borrower to generally pay
the debts of such Borrower as they mature; the filing of any complaint,
application, or petition by or against such Borrower initiating any matter in
which such Borrower is or may be granted any relief from the debts of such
Borrower pursuant to the Bankruptcy Code or any other insolvency statute or
procedure.

10-12.      Default by Guarantor.  The occurrence of any of the foregoing Events
of Default with respect to any guarantor of the Liabilities, as if such
guarantor were a “Borrower” described therein.

10-13.      Indictment - Forfeiture.  The indictment of, or institution of any
legal process or proceeding against, any Borrower, or any guarantor of the
Liabilities under any federal, state, municipal, and other civil or criminal
statute, rule, regulation, order, or other requirement having the force of law
where the relief, penalties, or remedies sought or available include the
forfeiture of any property of such Borrower and/or the imposition of any stay
or other order, the effect of which could be to restrain in any material way
the conduct by such Borrower of its business in the ordinary course.

10-14.      Termination of Guaranty.  The termination or attempted termination of
any guaranty by any guarantor of the Liabilities.

10-15.      Challenge to Loan Documents.

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

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

 41
  
 

 

 

10-16.      Executive
Management.  The death, disability,
or failure of Salvatore Perisano (unless replaced by an individual or
individuals reasonably satisfactory to Lender) at any time to exercise that
authority and discharge those management responsibilities with respect to the
Borrowers as are exercised and discharged by Salvatore Perisano at the execution
of this Agreement.

10-17.      Change in Control.  Any change in the ownership of the capital
stock of iParty Retail Stores Corp. or if Salvatore Perisano (unless replaced
by an individual or individuals reasonably satisfactory to Lender) fails to
remain as Chairman of the Board of Directors or Chief Executive Officer of
iParty Corp.

10-18.      Material Adverse Change.  If there is a Material Adverse Change.

10-19.      Subordinated Indebtedness.

(a)           The occurrence and
continuance of any default or event of default in respect of any the Seller
Note, the Term Note, the Highbridge Note or any Additional Subordinated Debt,
or

(b)           The occurrence of
any breach of any Subordination Agreement by any party thereto.

ARTICLE 11 - RIGHTS AND
REMEDIES UPON DEFAULT

In addition to all of the
rights, remedies, powers, privileges, and discretions which the Lender is
provided prior to the occurrence of an Event of Default, the Lender shall have
the following rights and remedies upon the occurrence of any Event of Default
and at any time thereafter. No stay which otherwise might be imposed pursuant
to the Bankruptcy Code or otherwise shall stay, limit, prevent, hinder, delay,
restrict, or otherwise prevent the Lender’s exercise of any of such rights and
remedies.

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

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

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

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

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

(e)           To
apply the Receivables Collateral or the proceeds of the Collateral towards (but
not necessarily in complete satisfaction of) the Liabilities.

 42
  
 

 

 

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

11-2.        Sale
of Collateral.

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

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

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

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

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

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

11-4.        Grant
of Nonexclusive License.  The
Borrowers hereby grant to the Lender a 

 43
  
 

 

 

royalty free nonexclusive irrevocable license to use,
apply, and affix any trademark, tradename, logo, or the like in which the
Borrowers now or hereafter has rights, such license being with respect to the
Lender’s exercise of the rights hereunder including, without limitation, in
connection with any completion of the manufacture of Inventory or sale or other
disposition of Inventory.

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

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

11-7.        Sales
on Credit.  If the Lender sells any
of the Collateral on credit, the Borrowers will be credited only with payments
actually made by the purchaser of such Collateral and received by the
Lender.  If the purchaser fails to pay
for the Collateral, the Lender may re-sell the Collateral and the Borrowers
shall be credited with the proceeds of the sale.

11-8.        Standards
for Exercising Remedies.  To the
extent that applicable law imposes duties on Lender to exercise remedies in a
commercially reasonable manner, Borrower acknowledges and agrees that it is not
commercially unreasonable for Lender (a) to fail to incur expenses reasonably
deemed significant by Lender to prepare Collateral for disposition or otherwise
to complete raw material or work in process into finished goods or other
finished products for disposition, (b) to fail to obtain third party consents
for access to Collateral to be disposed of, or to obtain or, if not required by
other law, to fail to obtain governmental or third party consents for the
collection or disposition of Collateral to be collected or disposed of, (c) to
fail to exercise collection remedies against account debtors or other persons
obligated on Collateral or to remove liens or encumbrances on or any adverse
claims against Collateral, (d) to exercise collection remedies against account
debtors and other collection specialists, (e) to advertise dispositions of
Collateral through publications or media of general circulation, whether or not
the Collateral is of a specialized nature, (f) to contact other persons,
whether or not in the same business as Borrowers, for expressions of interest
in acquiring all or any portion of the 

 44
  
 

 

 

Collateral, (g) to hire one or more professional
auctioneers to assist in the disposition of Collateral, whether or not the
Collateral is of a specialized nature, (h) to dispose of the Collateral by
utilizing Internet sites that provide for the auction of assets of the types
included in the Collateral or that have the reasonable capability of doing so,
or under any other agreement.  No single
or partial exercise of any of the Lender’s Rights or Remedies, and no express
or implied agreement or transaction of whatever nature entered into between the
Lender and any Person, at any time, shall preclude the other or further
exercise of the Lender’s Rights and Remedies. 
No waiver by the Lender of any of the Lender’s Rights and Remedies on
anyone occasion shall be deemed a waiver on any subsequent occasion, nor shall
it be deemed a continuing waiver.  All of
the Lender’s Rights and Remedies and all of the Lender’s rights, remedies,
powers, privileges, and discretions under any other agreement or transaction
are cumulative, and not alternative or exclusive, and may be exercised by the
Lender at such time or times and in such order of preference as the Lender in
its sole discretion may determine.  The
Lender’s Rights and Remedies may be exercised without resort or regard to any
other source of satisfaction of the Liabilities.

ARTICLE 12 - NOTICES

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

	
  If to the Lender:

  	
   

  	
  Wells Fargo Retail Finance II, LLC

  One Boston Place, 18th Floor

  Boston, MA 02108

  Attention: Michele L. Ayou, Vice President

  Phone: (617) 854-7246

  Fax: (617) 523-4029

  
	
  With a copy to:

  	
   

  	
  Proskauer Rose LLP

  One International Place

  Boston, MA 02110

  Attention: Peter J. Antoszyk, Esq.

  Tel: (617) 526-9749

  Fax: (617) 526-9899

  
	
  If to the
  Borrowers:

  	
   

  	
  iParty Corp.

  270 Bridge Street, Suite 301

  Dedham, MA 02026

  Attention: Sal Perisano, CEO and 

  atrick Farrell, President

  Tel: (781) 329-3952

  Fax: (781) 326-7143

  
	
  With a copy to:

  	
   

  	
  Posternak Blankstein
  & Lund LLP

  Prudential Tower

  800 Boylston Street

  Boston, MA 02199

  Attention: Donald H. Siegel, P.C.

  Tel: (617) 973-6147

  Fax: (617) 722-4954

  

 

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12-2.        Notice
Given.

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

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

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

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

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

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

ARTICLE 13 - TERM

13-1.        Termination
of Revolving Credit.  This Agreement
is, and is intended to be, a continuing agreement and shall remain in full
force and effect for an initial term ending on the Maturity Date.  Lender may terminate this Agreement
immediately and without notice upon the occurrence and during the continuance
of an Event of Default.  Notwithstanding
the foregoing or anything in this Agreement or elsewhere to the contrary, the
security interest, Lender’s rights and remedies hereunder and Borrowers’
obligations and liabilities hereunder shall survive any termination of this
Agreement and shall remain in full force and effect until all of the
Liabilities outstanding, or contracted or committed for (whether or not
outstanding), and any extensions thereof, together with interest accruing
thereon after such notice, shall be finally and irrevocably paid in full.  No Collateral shall be released or financing
statement terminated until such final and irrevocable payment in full of the
Liabilities, as described in the preceding sentence.

13-2.        Effect
of Termination.  Upon the termination
of Revolving Credit, the Borrowers 

 46
  
 

 

 

shall pay the Lender (whether or not then due), in
immediately available funds, all then Liabilities including, without
limitation: the entire balance of the Loan Account; any then remaining
installments of the Commitment Fee; any then remaining balances of the
Collateral Monitoring Fee; any Prepayment Premium and all unreimbursed costs
and expenses of the Lender for which the Borrowers are responsible, and shall
make such arrangements concerning any L/C’s then outstanding are reasonably
satisfactory to the Lender. Until such payment, all provisions of this
Agreement, other than those contained in Article 1 which place an obligation on
the Lender to make any loans or advances or to provide financial accommodations
under the Revolving Credit or otherwise, shall remain in full force and effect
until all Liabilities shall have been paid in full. The release by the Lender
of the security interests granted the Lender by the Borrowers hereunder may be
upon such conditions and indemnifications as the Lender may require.

13-3.        Prepayment
Premium.  If Borrowers pay in full
all or substantially all of the Liabilities prior to the end of the initial
term of this Agreement, other than temporarily from funds internally generated
in the ordinary course of business or through an infusion of capital of, or
into, iParty Corp. (provided this Agreement is not terminated as a consequence
of such payment or infusion or otherwise), at the time of such payment
Borrowers shall also pay to Lender a “Prepayment Premium” in an amount equal
to:  (i) one and one-half (1.5%) percent
of the Credit Limit if paid on or before January 2, 2008, and (ii) one (1.0%)
percent of the of the Credit Limit if paid after January 3, 2008 and on or
before January 2, 2009; and (ii) one-half of one (0.5%) percent of the of the
Credit Limit if paid after January 2, 2009 and before the Maturity Date.  Any payment of the Liabilities following an
acceleration by Lender of the Liabilities pursuant to Article 10 hereof, shall be for purposes of
this section deemed to be a prepayment requiring Borrowers to pay the
aforementioned Prepayment Premium.  Such
Prepayment Premium shall be paid to Lender as additional consideration, and in
view of the impracticality and extreme difficulty of ascertaining the actual
amount of damages to the Lender or profits lost by the Lender as a result of
such early termination and by mutual agreement of the parties as to a
reasonable estimation and calculation of the Lender’s lost profits or damages,
as liquidated damages for the loss of the bargain by Lender and not as a
penalty.

ARTICLE 14 - GENERAL

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

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

 47
  

 

 

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

14-4.        Amendments, Course of Dealing.

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

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

14-5.        Power
of Attorney.  In connection with all
powers of attorney included in this Agreement, the Borrowers hereby grants unto
the Lender full power to do any and all things necessary or appropriate in
connection with the exercise of such powers as fully and effectually as the
Borrowers might or could do, hereby ratifying all that said attorney shall do
or cause to be done by virtue of this Agreement. No power of attorney set forth
in this Agreement shall be affected by any disability or incapacity suffered by
the Borrowers and each shall survive the same. All powers conferred upon the
Lender by this Agreement, being coupled with an interest, shall be irrevocable
until this Agreement is terminated by a written instrument executed by a duly
authorized officer of the Lender.

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

14-7.        Lender’s
Costs and Expenses.  The Borrowers
shall pay on demand all Costs of Collection and all reasonable expenses of the
Lender in connection with the preparation, execution, and delivery of this
Agreement and of any other Loan Documents, whether now 

 48
  
 

 

 

existing or hereafter arising, and all other
reasonable expenses which may be incurred by the Lender in monitoring
compliance with this Agreement and in preparing or amending this Agreement and
all other agreements, instruments, and documents related thereto, or otherwise
incurred with respect to the Liabilities, including, without limiting the
generality of the foregoing, any counsel fees or expenses incurred in any
bankruptcy or insolvency proceedings. The Borrowers specifically authorizes the
Lender to pay all such fees and expenses and in the Lender’s discretion, to add
such fees and expenses to the Loan Account. Borrowers shall be obligated, from
time to time, to pay Lender’s fees, including reasonable attorneys’ fees and
expenses for the preparation, negotiation, amendment and interpretation of this
Agreement and related documents.

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

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

14-10.      Consent
to Jurisdiction.

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

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

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

14-11.      Indemnification.  The Borrowers shall indemnify, defend, and
hold the Lender 

 49
  
 

 

 

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

14-12.      Right
of Set-Off.  Any and all deposits or
other sums at any time credited by or due to the undersigned from the Lender or
from any participant (a “Participant”) with
the Lender in the credit facility contemplated hereby and any cash, securities,
instruments or other property of the undersigned in the possession of the
Lender or any Participant, whether for safekeeping or otherwise (regardless of
the reason such Person had received the same) shall at all times constitute
security for all Liabilities and for any and all obligations of the undersigned
to the Lender and any Participant, and may be applied or set off against the
Liabilities and against such obligations at any time, whether or not such are
then due and whether or not other collateral is then available to the Lender or
any Participant.

14-13.      Usury
Savings Clause.  It is the intention
of the parties hereto to comply strictly with applicable usury laws, if any;
accordingly, notwithstanding any provisions to the contrary in this Agreement
or any other Loan Documents, in no event shall this Agreement or such Loan
Document require or permit the payment, taking, reserving, receiving,
collecting or charging of any sums constituting interest under applicable laws
which exceed the maximum amount permitted by such laws. If any such excess
interest is called for, contracted for, charged, paid, taken, reserved,
collected or received in connection with the Liabilities or in any
communication by Lender or any other Person to the Borrowers or any other
Person, or in the event all or part of the principal of the Liabilities or
interest thereon shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of interest
contracted for, charged, taken, collected, reserved, or received on the amount
of principal actually outstanding from time to time under this Agreement shall
exceed the maximum amount of interest permitted by applicable usury laws, if
any, then in any such event it is agreed as follows: (i) the provisions of this
paragraph shall govern and control, (ii) neither the Borrowers nor any other
Person or entity now or hereafter liable for the payment of the Liabilities
shall be obligated to pay the amount of such interest to the extent such
interest is in excess of the maximum amount of interest permitted by applicable
usury laws, if any, (iii) any such excess which is or has been received
notwithstanding this paragraph shall be credited against the then unpaid
principal balance hereof or, if the Liabilities have been or would be paid in
full by such credit, refunded to the Borrowers, and (iv) the provisions of this
Agreement and the other Loan Documents, and any communication to the Borrowers,
shall immediately be deemed reformed 

 50
  
 

 

 

and such excess interest reduced, without the
necessity of executing any other document, to the maximum lawful rate allowed
under applicable laws as now or hereafter construed by courts having
jurisdiction hereof or thereof. Without limiting the foregoing, all
calculations of the rate of interest contracted for, charged, taken, collected,
reserved, or received in connection herewith which are made for the purpose of
determining whether such rate exceeds the maximum lawful rate shall be made to
the extent permitted by applicable laws by amortizing, prorating, allocating
and spreading during the period of the full term of the Liabilities, including
all prior and subsequent renewals and extensions, all interest at any time
contracted for, charged, taken, collected, reserved or received. The terms of
this paragraph shall be deemed to be incorporated in every Loan Document and
communication relating to the Liabilities.

14-14.      Waivers.

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

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

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

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

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

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

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

14-15.      Confidentiality.  This Agreement and the terms hereof are
confidential, and neither the contents of this Agreement or the details of this
Agreement may be shown or 

 51
  
 

 

 

disclosed by the Borrowers to any bank, finance
company or other lender without the prior written consent of the Lender;
provided however that the confidentiality provisions herein remain subject to
any governmental
authority, court order or court proceeding, including any court proceeding
relating to Big Party.

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

14-17.      Reserved.

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

14-19.      Additional Borrowers.  With prior written consent of the Lender, an
Affiliate of any Borrower may become a Borrower hereunder (a “New Borrower”) by executing and delivering
to the Lender an assumption agreement and by executing and delivering to the
Lender a demand promissory note in the maximum principal amount of the Credit
Limit payable to the order of the Lender and executed by the New Borrower and
the then existing Borrower(s), in each case in form and substance acceptable to
the Lender in its sole discretion.

14-20.      Joint and Several Liability

(a)           Each Borrower is
accepting joint and several liability under this Agreement and the Master Note
in consideration of the financial accommodations to be provided by Lender a
joinder to the new Amended and Restated Master Note and Amended and Restated
Term Note (the “Notes”).

(b)           Each Borrower,
jointly and severally, hereby irrevocably and unconditionally accepts, not
merely as a surety but also as a co-debtor, joint and several liability with
each Borrower, with respect to the payment and performance of all of the
Liabilities of each Borrower to Lender under this Agreement and the Notes
(including, without limitation, any Liabilities arising under this section), it
being the intention of the parties hereto that all the Liabilities of each
Borrower to Lender under this Agreement and the Notes shall be the joint and several
Liabilities of each of the Borrowers without preferences or distinction among
them.

(c)           If
and to the extent that any of the Borrowers shall fail to make any payment with
respect to any of the Liabilities of each Borrower to Lender under this
Agreement or the Notes, as and when due or to perform any of such Liabilities
in accordance with the terms thereof, then in each such event the other
Borrower, under this Agreement or the Notes will make such payment with respect
to, or perform, such Liabilities.

(d)           The
Liabilities of each Borrower under the provisions of this section constitute
full recourse Liabilities of each Borrower enforceable against each such
Borrower to the full extent of its properties and assets, irrespective of the
validity, regularity or enforceability 

 52
  
 

 

 

of this Agreement or any other circumstance
whatsoever.

(e)           Each
Borrower hereby waives notice of acceptance of its joint and several liability,
notice of any loans made under this Agreement, notice of any action at any time
taken or omitted by Lender under or in respect of any of the Liabilities of
each Borrower to Lender under this Agreement and the Notes, and, generally, to
the extent permitted by applicable law, all demands, notices and other
formalities of every kind in connection with this Agreement. Each Borrower
hereby assents to, and waives notice of, any extension or postponement of the
time for the payment of any of the Liabilities of each Borrower to Lender under
this Agreement and the Notes, the acceptance of any payment of any such
Liabilities, the acceptance of any partial payment thereon, any waiver, consent
or other action or acquiescence by Lender at any time or times in respect of
any default by any Borrower in the performance or satisfaction of any term,
covenant, condition or provision of this Agreement, any and all other
indulgences whatsoever by Lender in respect of any of the Liabilities of each
Borrower to Lender under this Agreement and the Notes, and the taking,
addition, substitution or release, in whole or in part, at any time or times,
of any security for any of such Liabilities of each Borrower to Lender or the
addition, substitution or release, in whole or in part, of any Borrower. Without
limiting the generality of the foregoing, each Borrower assents to any other
action or delay in acting or failure to act on Lender’s part with respect to
the failure by any Borrower to comply with any of its respective Liabilities,
including, without limitation, any failure strictly or diligently to assert any
right or to pursue any remedy or to comply fully with applicable laws or
regulations thereunder, which might, but for the provisions of this section,
afford grounds for terminating, discharging or relieving any Borrower, in while
or in part, from any of its Liabilities under this section, it being the
intention of each Borrower that, so long as any of the Liabilities under this
Agreement remain unsatisfied, the Liabilities of such Borrower under this
section shall not be discharged except by performance and then only to the
extent of such performance. The Liabilities of each Borrower under this section
shall not be diminished or rendered unenforceable by any winding up,
reorganization, arrangement , liquidation, reconstruction or similar proceeding
with respect to any other Borrower or Lender. The joint and several liability
of each Borrower under this Agreement shall continue in full force and effect
notwithstanding any absorption, merger, amalgamation or any other change
whatsoever in the name, membership, constitution or place of formation of any
Borrower or Lender.

(f)            The
provisions of this section are made for the benefit of Lender and Lender’s
successors and assigns, and may be enforced by Lender in good faith from time
to time against any or all of the Borrowers as often as occasion therefor may
arise and without requirement on Lender’s part first to marshal any of its
claims or to exercise any of its rights against any Borrower or to exhaust any
remedies available to Lender against any other Borrower or to resort to any
other source or means of obtaining payment of any of the Liabilities under this
Agreement or to elect any other remedy. The provisions of this section shall
remain in effect until all of the Liabilities of each Borrower to Lender under
this Agreement and the Notes shall have been paid in full or otherwise fully
satisfied. If at any time, any payment, or any part thereof, made in respect of
any of such Liabilities of each Borrower to Lender, is rescinded or must
otherwise be restored or returned by Lender upon the insolvency, bankruptcy or
reorganization of any Borrower, or otherwise, the provisions of this section
will forthwith be reinstated in effect, as though such payment had not been
made.

 53
  
 

 

 

(g)           Until
such time as all outstanding Liabilities are paid and discharged in full, each
Borrower agrees that it shall not have, and hereby expressly waives: (i) any
right to subrogation or indemnification, and any other right to payment from or
reimbursement by any other Borrower, in connection with or as a consequence of
any payment made by any Borrower to Lender, (ii) any right to enforce any right
or remedy which Lender have or may hereafter have against any other Borrower,
and (iii) any benefit of, and any right to participate in (A) any collateral
now or hereafter held by Lender, or (B) any payment to Lender by, or collection
by Lender from any other Borrower. The provisions of this paragraph are made
for the express benefit of each Borrower as well as Lender, and may be enforced
independently by each Borrower or any successor in interest to each Borrower.

14-21.      Financing Statements.  Borrowers hereby irrevocably authorize Lender
at any time and from time to time to file in any Uniform Commercial Code
jurisdiction any initial financing statements and amendments thereto that (a)
indicate the Collateral (i) as all assets of Borrower or words of similar
effect, regardless of whether any particular asset comprised in the Collateral
falls within the scope of Article 9 of the Uniform Commercial Code of such
jurisdiction, or (ii) as being of an equal or lesser scope or with greater
detail, and (b) contain any other information required by the Uniform
Commercial Code for the sufficiency or filing office acceptance of any
financing statement or amendment, including (i) whether Borrower is an
organization, the type of organization and any organization identification
number issued to Borrower, and (ii) in the case of a financing statement filed
as a fixture filing or indicating Collateral as as-extracted Collateral or timber
to be cut, a sufficient description of real property to which the Collateral
related. Borrower agrees to furnish any such information to Lender promptly
upon request. Borrower also ratified its authorization for Lender to have filed
in any Uniform Commercial Code jurisdiction any like initial financing
statements or amendments thereto if filed prior to the date hereof. All
reasonable charges, expenses and fees Lender may incur in filing any of the
foregoing, together with reasonable costs and expenses of any lien search
required by Lender, and any taxes relating thereto, shall be charged to the
Revolving Loan Account and added to the Liabilities.

14-22.      Designation of iParty Retail as
Agent for Borrowers.

(a)           Each Borrower hereby
irrevocably designates and appoints the iParty Retail as that Borrower’s agent
to obtain loans and advance and L/Cs hereunder, the proceeds of which shall be
available to each Borrower for those uses as those set forth herein. As the
disclosed principal for its agent, each Borrower shall be obligated to the
Lender on account of loans so made and L/Cs so issued hereunder as if made
directly by the Lender to that Borrower, notwithstanding the manner by which
such loans and L/Cs are recorded on the books and records of iParty Retail and
of any Borrower.

(b)           Each Borrower
recognizes that credit available to it hereunder is in excess of and on better
terms than it otherwise could obtain on and for its own account and that one of
the reasons therefor is its joining in the credit facility contemplated herein
with all other Borrowers. Consequently, each Borrower hereby assumes,
guarantees, and agrees to discharge all Liabilities of all other Borrowers as
if the Borrower so assuming and guarantying were each other Borrower.

 54
  
 

 

 

(c)            iParty Retail shall
act as a conduit for each Borrower (including itself, as a “Borrower”) on whose
behalf the iParty Retail has requested a loan or L/C. iParty Retail shall cause
the transfer of the proceeds of each loan to the (those) Borrower(s) on whose
behalf such loan was obtained. The Lender shall not have any obligation to see
to the application of such proceeds.

(d)           Each
of the Borrowers shall remain jointly and severally liable to the Lender for
the payment and performance of all Liabilities (which payment and performance
shall continue to be secured by all Collateral granted by each of the
Borrowers) notwithstanding any determination by the Lender to cease making
loans or causing L/Cs to be issued to or for the benefit of any Borrower.

(e)          The authority of the iParty Retail to
request loans on behalf of, and to bind, the Borrowers, shall continue unless
and until the Lender acts as provided in subparagraph (c), above, or the Lender
actually receives

(i)          written
notice of: (i) the termination of such authority, and (ii) the subsequent
appointment of a successor agent for the Borrowers, which notice is signed by
the respective Presidents of each Borrower (other than the President of the
iParty Retail being replaced) then eligible for borrowing under this Agreement;
and

(ii)           written
notice from such successive iParty Retail(i) accepting such appointment; (ii)
acknowledging that such removal and appointment has been effected by the
respective Presidents of such Borrowers eligible for borrowing under this
Agreement; and (iii) acknowledging that from and after the date of such
appointment, the newly appointed iParty Retail shall be bound by the terms
hereof.

14-23.      Amendment
and Restatement.  Effective as of the
date hereof, each Borrower hereby agrees to become a borrower, debtor and
obligor under, and to bind itself to, the Existing Financing Agreements to
which Borrowers are bound generally (in each case, as modified and restated
hereby), and, in such capacity, to assume and bind itself to all Liabilities of
Borrowers thereunder (as modified and restated hereby). The terms, conditions,
agreements, covenants, representations and warranties set forth in and relating
to the Existing Credit Agreement are hereby amended, restated, replaced and
superseded in their entirety by the terms, conditions, agreements, covenants,
representations and warranties set forth in this Agreement. This Agreement does
not extinguish the obligations, including, without limitation, obligations for
the payment of money, outstanding under the Existing Credit Agreement or
discharge or release the obligations or the liens or priority of any mortgage,
pledge, security agreement or any other security therefor, which shall
continue, as modified and restated hereby, without interruption and in full force
and effect. Nothing herein contained shall be construed as a substitution or
novation of the obligations outstanding under the Existing Credit Agreement or
instruments securing the same, which shall remain in full force and effect,
except in each case as amended, 

 55
  
 

 

 

restated, replaced and superseded hereby or by
instruments executed in connection herewith. Nothing expressed or implied in
this Agreement shall be construed as a release or other discharge of any
Borrower or guarantor from any of their obligations or liabilities under the
Existing Financing Agreements or any of the security agreements, pledge
agreements, mortgages, guaranties or other loan documents executed in
connection therewith, except in each case as amended, restated, replaced and
superseded hereby or by instruments executed in connection herewith. Each
Borrower hereby confirms and agrees that (i) the Existing Agreement and each
Existing Financing Agreement to which it is a party is, and shall continue to
be, in full force and effect and is hereby ratified and confirmed in all
respects, in each case as amended, restated, replaced and superseded hereby or
by instruments executed in connection herewith, except that on and after the
date hereof all references in any such Existing Financing Agreement to “the
Agreement”, “thereto”, “thereof” “thereunder” or words of like import referring
to the Existing Credit Agreement shall mean the Existing Credit Agreement as
amended, restated, replaced and superseded by this Agreement; and (ii) to the
extent that any such Existing Financing Agreement purports to assign or pledge
to the Lender a security interest in or lien on, any collateral as security for
the Liability of any Borrower from time to time existing in respect of the
Existing Credit Agreement, such pledge, assignment or grant of the security
interest or lien is hereby ratified and confirmed in all respects in favor of
the Lender, which shall remain in full force and effect, except as amended,
restated, replaced and superseded hereby or by instruments executed in
connection herewith.

14-24.      USA
Patriot Act Notice.  The Lender hereby notifies the
Borrowers that pursuant to the requirements of the USA Patriot Act (Title III
of Pub. L. 107-56 (signed into law October 26, 2001)(the “Act”), it is required
to obtain, verify and record information that identifies the Borrowers, which
information includes the name and address of each Borrower and other
information that will allow the Lender to identify such Borrower in accordance
with the Act

 56
  
 

 

 

Executed as a sealed instrument this 21st day of December, 2006.

	
  

  	
   

  	
  iPARTY RETAIL STORES CORP.

  
	
   

  	
   

  	
  (BORROWER)

  
	
   

  	
   

  	
  By:

  	
  /s/ PATRICK FARRELL

  
	
   

  	
   

  	
   

  	
  Print Name:

  	
  Patrick Farrell

  
	
   

  	
   

  	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
  iPARTY CORP

  
	
   

  	
   

  	
  (BORROWER)

  
	
   

  	
   

  	
  By:

  	
  /s/ PATRICK FARRELL

  
	
   

  	
   

  	
   

  	
  Print Name:

  	
  Patrick Farrell

  
	
   

  	
   

  	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
  WELLS FARGO RETAIL
  FINANCE II, LLC

  (LENDER)

  
	
   

  	
   

  	
  By:

  	
  /s/ MICHELE AYOU

  
	
   

  	
   

  	
   

  	
  Print Name:

  	
  Michele Ayou

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Vice President

  

 

 57
  

 

 

EXHIBIT
1-6 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

AMENDED
AND RESTATED MASTER NOTE (REVOLVING)

Up to $15,000,000                                                                                                                         Boston,
Massachusetts
                                                                                                                                                        December
  , 2006

For value received, the
undersigned, iParty Retail Stores Corp., a Delaware corporation and iParty
Corp., a Delaware corporation (collectively, the “Borrowers”), hereby promises to pay on January 2, 2010, to
the order of Wells Fargo Retail Finance II, LLC, a Delaware limited liability
company (the “Lender”), at its
main office in Boston, Massachusetts, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of Fifteen Million
($15,000,000.00) Dollars or, if less, the aggregate unpaid principal amount of
all advances made by the Lender to the Borrowers hereunder, together with
interest on the principal amount hereunder remaining unpaid from time to time,
computed on the basis of the actual number of days elapsed and a 360-day year,
from the date hereof until this Note is fully paid at the rate from time to
time in effect under the Amended and Restated Loan and Security Agreement of
even date herewith (as amended, modified, supplemented or restated from time to
time, the “Loan Agreement”) by and
between the Lender and the Borrowers. The principal hereof and interest
accruing thereon shall be due and payable as provided in the Loan Agreement.
This Note may be prepaid only in accordance with the Loan Agreement.

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

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

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

This Note amends and
restates, supersedes and replaces an Amended Master Note dated January 2, 2004
in the original principal amount of $12,500,000 executed by the Borrower in
favor of the Lender.

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

This Note shall be deemed
to be under seal.

	
  

  	
  iPARTY RETAIL
  STORES CORP.

  
	
   

  	
  By:

  	
   

  
	
   

  	
  iPARTY CORP.

  
	
   

  	
  By:

  	
   

  

 

  
  
 

 

 

EXHIBIT
1-2A TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

AMENDED
AND RESTATED TERM NOTE

	
  $500,000

  	
   

  	
  BOSTON, MASSACHUSETTS

  
	
   

  	
   

  	
  DECEMBER   , 2006

  

 

For value received, the
undersigned, iParty Retail Stores Corp., a Delaware corporation and iParty
Corp., a Delaware corporation (collectively, the “Borrowers”), hereby promises to pay on October 31, 2007, to
the order of Wells Fargo Retail Finance II, LLC, a Delaware limited liability
company (the “Lender”), at its
main office in Boston, Massachusetts, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of Five Hundred Thousand
($500,000.00) Dollars, together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Amended and
Restated Loan and Security Agreement of even date herewith (as amended,
modified, supplemented or restated from time to time, the “Loan Agreement”) by and between the Lender
and the Borrowers. This Note may be prepaid only in accordance with the Loan
Agreement.

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

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

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

This Note amends and
restates, supersedes and replaces a Term Note dated January 17, 2006 in the
original principal amount of $500,000 executed by the Borrowers to the Lender.

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

This Note shall be deemed
to be under seal.

	
  

  	
  iPARTY RETAIL
  STORES CORP.

  
	
   

  	
  By:

  	
   

  
	
   

  	
  iPARTY CORP.

  
	
   

  	
  By:

  	
   

  

 

  
  

 

 

EXHIBIT
3

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

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

“Accounts Receivable”
include, without limitation, “accounts” as defined in the DCC.

“ACH”: Automated clearing
house.

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

“Affiliate”: With respect
to any two Persons, a relationship in which (a) one holds, directly or
indirectly, not less than fifty (50%) percent of the capital stock, beneficial
interests, partnership interests, or other equity interests of the other; or
(b) one has, directly or indirectly, Control of the other; or (c) not less than
fifty (50%) percent of their respective ownership is directly or indirectly
held by the same third Person.

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

“Amended and Restated
Term Note”: Is defined in Section 1-2A.

“Applicable Margin” means
the rates for Base Rate Loans and LIBO Loans set forth below:

	
  Level

  	
   

  	
  Excess

  Availability

  	
   

  	
  LIBOR

  Rate Loans

  Applicable Margin

  	
   

  	
  Base Rate Loans

  Applicable Margin

  	
   

  
	
  I

  	
   

  	
  >$3,000,000

  	
   

  	
  1.75

  	
  %

  	
  0.00

  	
  %

  
	
  II

  	
   

  	
  £$3,000,000

  	
   

  	
  2.00

  	
  %

  	
  0.25

  	
  %

  

 

Initially, as of the date
of this Agreement, Level I pricing will be applicable.  Thereafter, the Applicable Margin shall be
subject to adjustment each fiscal quarter commencing March 30, 2007, based upon
(A) the calculation of the average daily Excess Availability during the
immediately preceding fiscal quarter as determined by the Lender.  Average daily Excess Availability shall be
determined based upon Borrowing Base Certificate(s) received by the Lender
pursuant to Section 9-4.

Notwithstanding the
foregoing upon the occurrence of an Event of Default, at the option of the
Lender, interest shall be determined in the manner set forth in Section 1-8(b).

  
  
 

 

“Appraisal/Audit Grid”
refers to the number of appraisals and commercial finance audits at Borrowers’
expense permitted during any 12 month period based upon the applicable level of
Excess Availability at all times tested during the previous fiscal quarter as
set forth in the Grid :

	
  Excess Availability

  (at all times tested during the

  previous fiscal quarter)

  	
   

  	
  Frequency of Appraisals

  (each at Borrowers’ expense

  
	
  >$3 million

  	
   

  	
  2 times during any 12 month period

  
	
  £$3
  million

  	
   

  	
  3 times during any 12 month period

  

 

“Availability”: Means at
any time of determination an amount equal to the lesser of (x) the Borrowing
Base and (y) the Credit Limit less the then outstanding principal balance of
the Term Loan in either case, minus (i) the then unpaid principal balance of
the Loan Account, minus (ii) the then aggregate of such Reserves (other than
Inventory Reserves) as may have been established by Lender, minus (iii) one
hundred (100%) percent of the then outstanding Stated Amount of all L/C’ s plus
all freight and duty charges applicable thereto, plus (iv) the product of a
percentage equal to the difference between one hundred (100%) percent and the
then applicable Advance Rate times the then outstanding Stated Amount of all
Documentary L/C’ s with an expiration of thirty (30) days or less from the date
of issuance.

“Availability Reserves”:
Such reserves as the Lender from time to time determines in the Lender’s
discretion as being appropriate to reflect the impediments to the Lender’s
ability to realize upon the Collateral. Without limiting the generality of the
foregoing, Availability Reserves may include (but are not limited to) reserves
based on the following:

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

(b)           In store customer
credits and gift certificates.

(c)           Payables (based upon
payables which are past due normal trade terms) to the extent that the failure
to make such payments would have a material adverse effect on Borrowers.

(d)           Frequent Shopper
Programs.

(e)           Layaway and Customer
Deposits.

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

  
  
 

 

(g)           Held or post-dated
checks.

(h)           The Minimum
Availability Block.

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

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

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

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

“Base LIBO Rate”: Means
the rate per annum, determined by Lender in accordance with its customary
procedures, and utilizing such electronic or other quotation sources as it
considers appropriate (rounded upwards, if necessary, to the next 1/100%), to
be the rate at which Dollar deposits (for delivery on the first day of the
requested Interest Period) are offered to major banks in the London interbank
market at approximately 11 a.m. (London time) 2 Business Days prior to the
commencement of the requested Interest Period, for a term and in an amount
comparable to the Interest Period and the amount of the LIBO Rate Loan
requested (whether as an initial LIBO Rate Loan or as a continuation of an
extant LIBO Rate Loan or as a conversion of a Base Rate Loan to a LIBO Rate
Loan) by Borrowers in accordance with this Agreement, which determination shall
be conclusive in the absence of manifest error.

“Base Rate Loan”:  Means any loan or advance under the Revolving
Credit bearing interest at the rate determined by reference to Base.

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

“Borrowers”: Is defined
in the Preamble.

“Borrowing
Base”:  Means, as of any date of
determination, the sum of

(a)                                  (i)            for the period between October 1st and June 30th, the lesser of (x)
85% of the Net Retail Liquidation Value of Acceptable Inventory and (y) 70% of
the value (at Cost) of Acceptable Inventory and

(ii)           for
the period between July 1st and September 30th, the lesser
of (x) 90% of the Net Retail Liquidation Value of Acceptable
Inventory and (y) 75% of the value (at Cost) of Acceptable Inventory,

plus

  
  
 

 

(b)          the lesser of (i) 85% of Eligible Credit Card Receivables
and (ii) $2,000,000,

plus

(c)          the
principal balance of the Term Loan then extant or in effect on such date

provided, that, notwithstanding
the foregoing, at no time shall the Borrowing Base exceed 98% of the sum of the
Net Retail Liquidation Value of Acceptable Inventory plus Eligible Credit Card
Receivables.”

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

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

“Capital Expenditures”:
Means, for any period of determination, the sum (without duplication) of
capital expenditures and payments under Capital Leases and other expenditures
that are or should be treated as capital expenditures under GAAP, for such
period determined in accordance with GAAP.

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

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

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

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

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

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

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

  
  
 

 

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

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

“Credit Limit”: Means
Twelve Million Five Hundred Thousand ($12,500,000.00) Dollars, subject to
increase pursuant to Section 1-16 of this Agreement.

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

“Documentary L/C”: Means
an issued and outstanding L/C (a) issued to facilitate the purchase by the
applicable Borrowers of Acceptable Inventory, (b) in form and substance
reasonably acceptable to Lender, and (c) that is only drawable by the
beneficiary thereof by the presentation of, among other documents, either (i) a
negotiable bill of lading that is consigned to Lender (either directly or by
means of endorsements) or is otherwise subject to the control of Lender in form
and substance reasonably acceptable to Lender, and that was issued by the
carrier respecting the subject Acceptable Inventory, or (ii) a negotiable cargo
receipt that is consigned to Lender (either directly or by means of
endorsements) or is otherwise subject to the control of Lender in form and
substance reasonably acceptable to Lender, and that was issued by a
consolidator respecting the subject Acceptable Inventory; provided, however,
that, in the latter case, no bill of lading shall have been issued by the
carrier (other than a bill of lading consigned to the consolidator or to
Lender).”

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

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

“Eligible Credit Card
Receivables”:  Means Accounts due to
Borrowers on a non-recourse basis from Visa, MasterCard, American Express Co.,
Discover card or other major Credit Card Processor reasonably acceptable to
Lender (and if due on account of any private label credit card program,
Accounts which are deemed eligible in Lender’s discretion), which Accounts
arise in the ordinary course of business from the sale of Inventory to
purchasers and which have been fully earned by performance and are reflected in
the most recent Borrowing Base Certificate delivered by Borrowers to Lender and
on other information available to Lender, 

  
  
 

 

Lender shall in its discretion determine which
Accounts are “eligible” and shall not include, without limitation, Accounts
owned by Credit Card Processors which:

(i)                          do not
arise from the sale of goods or the performance of services by Borrowers in the
ordinary course of its business;

(ii)                       upon which
Borrowers’ right to receive payment is not absolute or is contingent upon the
fulfillment of any condition whatsoever or as to which Borrowers are not able
to bring suit or otherwise enforce its remedies against Credit Card Processors
through the judicial process;

(iii)                    with respect
to which any Credit Card Processor, other than Visa, MasterCard, American
Express and Discover, has not signed a written acknowledgment and consent in
accordance with Section 7-2(b) hereof;

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

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

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

(A)                                the
Account is not paid within three (3) Banking Days past the date of the sale of
Inventory which creates the Account;

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

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

(vii)                as to which there
is any Encumbrance other than Lender’s Encumbrance, or Lender’s Encumbrance
thereon is not a first priority perfected lien;

(viii)             as to which any of
the representations or warranties in the Loan Documents is untrue;

(ix)                     to the extent
such Account exceeds any credit limit established by Lender, in its discretion

(x)                        that is
payable in any currency other than Dollars.

“Employee Benefit Plan”:
As defined in ERISA.

“Encumbrance”: Each of
the following:

(a)           security interest,
mortgage, pledge, hypothecation, lien, attachment, or charge of any kind
(including any agreement to give any of the foregoing); the interest of a
lessor under a Capital Lease; conditional sale or other title retention
agreement; sale of accounts 

  
  
 

 

receivable or chattel paper; or other arrangement
pursuant to which any Person is entitled to any preference or priority with
respect to the property or assets of another Person or the income or profits of
such other Person or which constitutes an interest in property to secure an
obligation; each of the foregoing whether consensual or non-consensual and
whether arising by way of agreement, operation of law, legal process or
otherwise.

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

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

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

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

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

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

“Excess Availability”:  As of any date of determination, the
difference between  (i) Availability
minus (ii) all past due obligations of the Borrowers not being contested in
good faith.

“Executive Officer”: Any
Person who (without regard to title) who is designated as an executive officer
of a Borrower by such Borrower’s board of directors or any Person who is the
successor to any of the foregoing or who exercises a substantial portion of the
authority being exercised by such officers who exist as of the execution of
this Agreement, or who otherwise has Control of the Borrowers.

“Existing Credit
Agreement”:  The Loan and Security
Agreement dated as of August 23, 2000, as amended by that First Amendment to
the Loan and Security Agreement dated as of May 23, 2002 by and between
Borrowers and Lender; as amended by that Second Amendment to the Loan and
Security Agreement dated as of January 2, 2004 by and between Borrowers and
Lender; as amended by that Third Amendment to the Loan and Security Agreement
dated as of April 27, 2005 by and between Borrowers and Lender; as amended by
that Fourth Amendment to the Loan and Security Agreement dated as of January
17, 2006 by and between Borrowers and Lender; as amended by that Consent and
Fifth Amendment to the Loan and Security Agreement dated as of August 7, 2006;
as amended by that Sixth Amendment to the Loan and Security Agreement dated as
of October 31, 2006.

  
  
 

 

“Existing Financing
Agreements”:  The “Loan Documents”, as
defined in the Existing Credit Agreement.

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

“Funding Losses”: Is
defined in Section 1-14(b).

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

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

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

Sales (Minus) Cost of Goods
Sold

Sales

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

  
  

 

 

“Highbridge Note” means
that certain Senior Subordinated Note dated September 15, 2006 in the face
amount of $2,500,000 executed by iParty Corp. in favor of Highbridge
International LLC.

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

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

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

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

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

(e)           On account of
deposits or advances owed to Persons.

(f)            As lessee under
Capital Leases.

“Indebtedness” of any
Person shall also include:

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

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

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

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

“Interest Payment Date”:
Means (a) with respect to any Base Rate Loan, the first day of each calendar
month, and (b) with respect to any LIBO Loan, the last day of the Interest
Period applicable to the loan or advance under the Revolving Credit of which
LIBO Loan is a part, and, in addition, if such LIBO Loan has an Interest Period
of greater than 90 days, on the last day of the third month of such Interest
Period.

“Interest Period”: Means,
with respect to any LIBO Loan, the period commencing on the date of such LIBO
Loan and ending on the numerically corresponding day in the calendar month that
is one, two, three or six months thereafter, as the Borrowers may elect by
notice to the 

 

Lender in accordance with the provisions of this
Agreement, provided that (a) if any Interest Period would end on a day other
than a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless such next succeeding Business Day would fall in
the next calendar month, in which case such Interest Period shall end on the
next preceding Business Day, and (b) any Interest Period that commences on the
last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the last calendar month during which such
Interest Period ends) shall end on the last Business Day of the calendar month
during which such Interest Period ends, (c) any Interest Period which would
otherwise end after the Termination Date shall end on the Termination Date, and
(d) notwithstanding the provisions of clause (c), no Interest Period shall have
a duration of less than one month, and if any Interest Period applicable to a
LIBO Loan would be for a shorter period, such Interest Period shall not be
available hereunder. For purposes hereof, the date of a loan initially shall be
the date on which such loan is made and thereafter shall be the effective date
of the most recent conversion or continuation of such loan.

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

“Inventory Reserves”:
Means such reserves as Lender determines from time to time in its discretion as
being appropriate to reflect the impediments to Lender’s ability to realize
upon the Collateral.  Without limiting
the generality of the foregoing, Inventory Reserves may include (but are not
limited to) reserves based on goods which are defective, damaged, or prepared
for return to vendor.

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

“Issuer”: The issuer of
any L/C.

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

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

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

“Leasehold Interests”:
Shall mean the Borrowers’ leasehold estate or interest in each of the
properties at or upon which the Borrowers conducts business, offers any
Inventory for sale, or maintains any of the Collateral, whether or not for
retail sale, together with Borrowers’ interest in any of the improvements and
fixtures located upon or appurtenant to each leasehold interest.

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

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

 

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

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

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

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

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

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

“LIBO Deadline”:  Is defined in Section 1-14(a).

“LIBO Option”:  Is defined in Section 1-13.

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

“LIBO Rate Loan”: Means
any loan or advance under the Revolving Credit comprised of LIBO Loans.

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

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

“Local DDA”: A depository
account maintained by the Borrowers, the only contents of which may be
transfers from the Funding Account and actually used solely (i) for petty cash
purposes; or (ii) for payroll.

“Loan Maintenance Fee”: Is defined in Section
1-9(b).

 

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

“Maturity Date”: January
2, 2010.

“Maximum Term Loan Amount”:
Means $500,000, provided that such amount shall automatically be reduced to
zero ($0) dollars as of the Term Loan Termination Date.

“Minimum Availability
Block”:  Means an amount  expressed in Dollars equal to at least five
(5.0%) percent of the Credit Limit.

“Net Liquidation
Percentage”:  Means, at any date of
determination, the percentage of the Cost value of Borrowers’ Acceptable
Inventory that is estimated to be recoverable in an orderly liquidation of such
Acceptable Inventory, net of liquidation expenses, such percentage to be as
determined from time to time by Lender in its discretion with the assistance of
a qualified appraisal company selected by Lender.”

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

“Notes”: Is defined in
Section 14-20(a).

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

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

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

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

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

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

 

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

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

“Related Entity”:

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

(b)           Any Affiliate.

“Requirement of Law”: As
to any Person:

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

(b)           That Person’s
charter, certificate of incorporation, articles of organization, and/or other
organizational documents, as applicable; and (c) that Person’s by-laws and/or
other instruments which deal with corporate or similar governance, as applicable.

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

“Reserve Percentage”:
Means, on any day, the maximum percentage prescribed by the Board of Governors
of the Federal Reserve System (or any successor Governmental Authority) for
determining the reserve requirements (including any basic, supplemental,
marginal, or emergency reserves) that are in effect on such date with respect
to eurocurrency funding (currently referred to as “eurocurrency liabilities”)
of the Lender, but so long as the Lender is not required or directed under
applicable regulations to maintain such reserves, the Reserve Percentage shall
be zero.

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

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

 

“Seller
Note” means that certain Subordinated Promissory Note dated as of August
7, 2006 in the face amount of $600,000 executed by iParty Retail in favor of
Party City Corporation.

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

“Subordination
Agreement” means a subordination agreement, in form and substance acceptable to
the Lender in its sole discretion, pursuant to which a creditor of the
Borrowers or any guarantor of the Liabilities acknowledges and agrees that the
obligations of the Borrowers or any guarantor of the Liabilities to such
creditor are subordinate to the obligations of the Borrowers and any guarantor
of the Liabilities to the Lender.

“Supply
Agreement” means into a Supply Agreement dated as of August 7, 2006 by and
between Amscan, Inc. and iParty Corp. (or any replacement thereof entered into
by the Borrowers with the prior written consent of the Lender, which consent
shall not be unreasonably withheld or delayed) pursuant to which iParty Corp.
has agreed to purchase party goods from Amscan, Inc. and will receive certain
favorable pricing terms and rebates.

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

“Term Loan”: Is defined in
Section 1-1A.

“Term Loan Interest Rate”:
Is defined in Section 1-4A.

“Term Loan Maturity Date”:
Shall mean October 31, 2007, or if such day is not a Business day, the next
Business Day.

“Term Loan Termination
Date”: Shall mean the earliest to occur of: (a) the Term Loan Maturity Date,
(b) the occurrence of an event described in Section 10-11 or (c) Lender’s
notice to the Borrowers of the termination of this Agreement following the
occurrence of any Event of Default not described in Section 10-11.

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

“Trade
Note” means that certain Subordinated Promissory Note in the face amount
of $1,819, 373.11 dated October 24, 2006, executed by iParty Retail and made
payable to Amscan, Inc.

“Type”:  When used in reference to any loan or advance
under the Revolving Credit, refers to whether the rate of interest on such loan
or advance is determined by reference to the 
LIBO Rate or the Base Rate.

“UCC”: The Uniform
Commercial Code as presently in effect in Massachusetts (Mass. Gen. Laws, Ch.
106).Exhibit
10.17

INVESTOR RIGHTS
AGREEMENT

THIS INVESTOR RIGHTS AGREEMENT (this “Agreement”)
is made as of December 26, 2006, by and among Aldabra Acquisition Corporation,
a Delaware corporation (the “Company”); Madison Dearborn Capital
Partners IV, L.P., a Delaware corporation (“MDCP”), certain directors
and officers of the Company who are shareholders of the Company on the date
hereof and who are signatories to this Agreement (the “Aldabra Shareholders”),
each of the Persons listed on the signature pages hereto as “Other Investors”
(the “Other Investors”), and for the purposes set forth in Section
13(e), Great Lakes Dredge & Dock Holdings Corp. (“Holdco”).  Certain capitalized terms have the meanings
set forth in Section 12 hereof. 
Capitalized terms used, but not otherwise defined, herein shall have the
meanings set forth in the Merger Agreement (as hereinafter defined).

The Company, GLDD Acquisitions Corp. (“GLDD”),
Aldabra Merger Sub, L.L.C., a Delaware limited liability company (“Merger
Sub”), MDCP (solely in its capacity as Company Representative) and the
Buyer Representative (as named therein) are parties to that certain Agreement
and Plan of Merger, dated as of June 20, 2006 (as amended, modified,
supplemented or waived from time to time, the “Merger Agreement”)
pursuant to which GLDD is merging with and into Merger Sub (the “Merger”).

The Aldabra Shareholders own shares of Common Stock of
the Company and warrants exercisable for shares of Common Stock and are
agreeing to the covenants herein as a condition to the obligation of the
Company to consummate the Merger.

Certain Other Investors are members of management of
GLDD and its Subsidiaries are parties to a Management Equity Agreement among
such Other Investors and the Company dated as of December 26, 2003 (as amended
or modified from time to time, the “Management Equity Agreement”) and
are acquiring shares of Common Stock of the Company in connection with the
Merger and agreeing that the Common Stock so acquired remain subject to certain
restrictions of the Management Equity Agreement and that certain other
provisions of the Management Equity Agreement are hereby terminated.

MDCP and certain Other Investors that are not members
of management of the Company are acquiring shares of Common Stock of the Company
in connection with the Merger.

The Company’s execution and delivery of this Agreement
is a condition to GLDD’s obligations under the Merger Agreement.

The parties hereto agree as follows:

1.             Board Representatives.  Subject to the limitations set forth in this Section
1, the holders of a majority of MDCP Registrable Securities shall have the
right to designate up to the Applicable Number of representatives for election
to the Board (individually a “Board Representative” and collectively the
“Board Representatives”).  The
terms and conditions governing the election, term of office, filling of
vacancies and other features of such directorships shall be as follows:

 

(a)           Interim
Appointment of Directors.  From and
after the date that MDCP is no longer entitled to designate directors with
multiple votes (as determined in accordance with the Company’s Certificate of
Incorporation) (the “Beginning Date”) until the Expiration Date, the
holders of a majority of the MDCP Registrable Securities may nominate up to the
Applicable Number of Board Representatives to be elected to the Board.  Subject only to such actions not being in
violation of the fiduciary duties of members of the Board to the Company, the
Company shall take all action necessary such that the number of directors on
the Board shall (if necessary) be increased by the Applicable Number and such
vacancies shall be filled by the designees of the holders of a majority of MDCP
Registrable Securities effective as of the day following the Beginning Date (or,
if later, the date that the holders of a majority of MDCP Registrable
Securities determines to appoint such Board Representative); provided
that if the Company avoids its obligations under this sentence or this Section
1(a) because it deems such nomination to be in violation of fiduciary
duties of members of the Board, the holders of MDCP Registrable Securities
shall be entitled to appoint an alternative nominee to be a Board
Representative.  Each Board
Representative appointed pursuant to this Section 1(a) shall continue to
hold office until such Board Representative’s term expires, subject, however,
to prior death, resignation, retirement, disqualification or termination of
term of office as provided in this Section 1.

(b)           Continuing
Designation of Board Representatives. 
On and prior to the Expiration Date, in connection with the expiration
of the term of any Board Representative, the Company shall, subject to the
provisions of Section 1(c) and subject only to such nomination not being
in violation of the fiduciary duties of members of the Board, nominate the
Board Representative(s) designated by the holders of a majority of MDCP
Registrable Securities for election to the Board by the holders of voting
capital stock and solicit proxies from the Company’s stockholders in favor of
the election of such Board Representative(s); provided that if the
Company avoids its obligations under this sentence or this Section 1(b)
because it deems such nomination to be in violation of fiduciary duties of
members of the Board, the holders of MDCP Registrable Securities shall be
entitled to appoint an alternative nominee to be a Board Representative.  Subject to the provisions of Section 1(c),
the Company shall use commercially reasonable efforts to cause such Board
Representative(s) to be elected to the Board (including voting all unrestricted
proxies in favor of the election of such Board Representative(s) and including
recommending approval of such Board Representative(s)’ appointment to the Board
as provided for in the Company’s proxy statement) and shall not take any action
which would diminish the prospects of such Board Representative(s) being
elected to the Board.

(c)           Termination of
Board Representative Designation Rights. 
The right of holders of a majority of MDCP Registrable Securities to
designate a Board Representative pursuant to this Section 1 shall
terminate on the Expiration Date.  If the
rights of holders of a majority of MDCP Registrable Securities to designate a
Board Representative cease under the immediately preceding sentence, then the
Company may use commercially reasonable efforts to effect the removal of such
director.

(d)           Resignation;
Removal; and Vacancies.

(i)                                     Resignation.  An elected Board Representative may resign
from the Board at any time by giving written notice to the Company at its
principal executive office.  The
resignation is effective without acceptance when the 

 2
 

 

notice is given to the Company, unless a
later effective time is specified in the notice.

(ii)                                  Removal.  So long as the holders of a majority of MDCP
Registrable Securities retain the right to designate a director pursuant to Section
1(b), the Company shall use commercially reasonable efforts to remove any
Board Representative only if so directed in writing by the holders of a majority
of MDCP Registrable Securities.

(iii)                               Vacancies.  In the event of a vacancy on the Board
resulting from the death, disqualification, resignation, retirement or
termination of term of office of the Board Representative designated by the
holders of a majority of MDCP Registrable Securities, then the Company shall
use commercially reasonable efforts to fill such vacancy with a representative
designated by the holders of a majority of the MDCP Registrable Securities as
provided hereunder, in either case to serve until the next annual or special
meeting of the stockholders (and at such meeting, such representative, or
another representative designated by such holders, will be elected to the Board
in the manner set forth in the Company’s Bylaws).  If the holders of MDCP Registrable Securities
fail or decline to fill the vacancy, then the directorship shall remain open
until such time as the holders of a majority of MDCP Registrable Securities
elect to fill it with a representative designated hereunder.  During any such period that the holders of
MDCP Registrable Securities, as the case may be, are entitled to, but have
failed or declined to, designate a Board Representative, the holders of a
majority of MDCP Registrable Securities shall have the right to designate one
representative to attend all Board meetings as a non-voting
observer.  The observer shall be entitled
to notice of all Board meetings in the manner that notice is provided to
members of the Board, shall be entitled to receive all materials provided to
members of the Board, shall be entitled to attend (whether in person, by
telephone, or otherwise) all meetings of the Board as a non-voting
observer, and shall be entitled to fees and expenses paid to Board
Representatives pursuant to Section 1(e).

(e)           Fees &
Expenses.  Board Representatives
shall be entitled to fees, other compensation and reimbursement of expenses
paid to Board members who are not employees of the Company or its Subsidiaries.

(f)            Subsidiary
Boards; Committees.  Subject to
applicable law, at the request of MDCP, the Company shall use commercially
reasonable efforts to cause the Board Representative(s) to have proportional
representation (relative to their percentage on the whole Board) on the board
of directors (or similar governing body) of each Subsidiary of the Company
(each, a “Sub Board”) and each committee of the Board and each Sub
Board.

(g)           Reporting
Information.  With respect to each
Board Representative designated pursuant to the provisions of this Section 1,
the holders of MDCP Registrable Securities shall cause the Board Representative
to provide to the Company with all necessary 

 3
 

 

assistance and
information related to such Board Representative that is required under
Regulation 14A under the Securities Exchange Act of 1934 (as amended) to be
disclosed in solicitations of proxies or otherwise, including such Person’s
written consent to being named in the proxy statement (if applicable) and to
serving as a director if elected.

2.             Covenants.

(a)           Financial
Statements and Other Information. 
The Company shall deliver to each holder of more than 25% of the MDCP
Registrable Securities:

(i)                                     as
soon as available but in any event within 30 days after the end of each monthly
accounting period in each fiscal year, unaudited consolidating and consolidated
statements of income and cash flows of the Company and its Subsidiaries for
such monthly period and for the period from the beginning of the fiscal year to
the end of such month, and unaudited consolidating and consolidated balance
sheets of the Company and its Subsidiaries as of the end of such monthly
period, setting forth in each case comparisons to the Company’s annual budget
and to the corresponding period in the preceding fiscal year;

(ii)                                  within
45 days after the end of each quarterly accounting period in each fiscal year,
unaudited consolidating and consolidated statements of income and cash flows of
the Company and its Subsidiaries for such quarterly period and for the period
from the beginning of the fiscal year to the end of such quarter, and unaudited
consolidating and consolidated balance sheets of the Company and its
Subsidiaries as of the end of such quarterly period, setting forth in each case
comparisons to the Company’s annual budget and to the corresponding period in
the preceding fiscal year, and all such items shall be prepared in accordance
with generally accepted accounting principles, consistently applied and shall
be certified by a senior executive officer of the Company;

(iii)                               within
90 days after the end of each fiscal year, consolidating and consolidated
statements of income, cash flows and shareholders’ equity of the Company and
its Subsidiaries for such fiscal year, and consolidating and consolidated
balance sheets of the Company and its Subsidiaries as of the end of such fiscal
year, setting forth in each case comparisons to the Company’s annual budget and
to the preceding fiscal year, all prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied by (a)
with respect to the consolidated portions of such statements, an opinion
containing no material exceptions or qualifications (except for qualifications
regarding specified contingent liabilities) of an independent accounting firm
of recognized national standing, and (b) when applicable, a copy of such firm’s
annual management letter to the Company’s board of directors;

 4
 

 

(iv)                              promptly
upon receipt thereof, any additional reports, management letters or other
detailed information concerning significant aspects of the Company’s or its
Subsidiaries’ operations or financial affairs given to the Company by its
independent accountants (and not otherwise contained in other materials
provided hereunder);

(v)                                 not
later than 45 days after the beginning of each fiscal year, an annual budget
prepared on a monthly basis for the Company and its Subsidiaries for such
fiscal year (displaying anticipated statements of income and cash flows and
balance sheets), and promptly upon preparation thereof any other significant
budgets prepared by the Company and any revisions of such annual or other
budgets; and

(vi)                              with
reasonable promptness, such other information and financial data concerning the
Company and its Subsidiaries as any Person entitled to receive information
under this Section 2(a) may reasonably request.

Each of the financial statements referred to in
subparagraphs (i), (ii) and (iii) above shall be true and correct in all
material respects as of the dates and for the periods stated therein, subject
in the case of the unaudited financial statements to changes resulting from
normal year-end adjustments for recurring accruals (none of which would, alone
or in the aggregate, be materially adverse to the business, condition
(financial or otherwise), operating results, assets, liabilities, operations,
business prospects or customer, supplier or employee relations of the Company
and its Subsidiaries taken as a whole).

(b)           Inspection Rights.  The Company shall permit any representatives
designated by any holder of more than 25% of the MDCP Registrable Securities,
upon reasonable notice and during normal business hours to (i) visit and
inspect any of the properties of the Company and its Subsidiaries, (ii) examine
the corporate and financial records of the Company and its Subsidiaries and
make copies thereof or extracts therefrom and (iii) discuss the affairs,
finances and accounts of any such corporations with the directors, officers,
key employees and independent accountants of the Company and its
Subsidiaries.  The presentation of an
executed copy of this Agreement by any such holder to the Company’s independent
accountants shall constitute the Company’s permission to its independent
accountants to participate in discussions with such Persons.

(c)           Confidentiality.  To the extent that any such information made
available to any holder of MDCP Registrable Securities would require disclosure
under Regulation FD, such holder shall as a condition to receiving any such
information that is not otherwise publicly available agree in writing to keep
such information confidential and not disclose such information to any Person
(i) unless such Person agrees to keep such information confidential or (ii)
except as may be required by applicable law (including securities law).  Each holder of Registrable Securities party
to this Agreement shall be deemed by its execution hereof to have satisfied the
condition referred to in this Section 2(c).

 5
 

 

(d)           Restrictions.  As long as MDCP owns at least 25% of the
voting power of all shares of capital stock of the Company, from and after the
Effective Time, the Company shall not, without the prior written consent of
MDCP:

(i)                                     directly
or indirectly declare or pay any dividends or make any distributions upon any
of its capital stock or other equity securities, except that the Company may
declare and pay dividends payable in shares of Common Stock issued upon the
outstanding shares of Common Stock and any Subsidiary may declare and pay
dividends or make distributions to the Company or any Wholly-Owned Subsidiary;

(ii)                                  directly
or indirectly redeem, purchase or otherwise acquire, or permit any Subsidiary
to redeem, purchase or otherwise acquire, any of the Company’s or any
Subsidiary’s capital stock or other equity securities (including, without
limitation, warrants, options and other rights to acquire such capital stock or
other equity securities) or directly or indirectly redeem, purchase or make any
payments with respect to any stock appreciation rights, phantom stock plans or
similar rights or plans, except for acquisitions of capital stock pursuant to
agreements or plans, including equity incentive agreements with service
providers, which allow the Company to repurchase shares of Common Stock upon
the termination of services or an exercise of the Company’s right of first
refusal upon a proposed transfer.

(iii)                               except
as expressly contemplated by this Agreement and the Merger Agreement,
authorize, issue or enter into any agreement providing for the issuance
(contingent or otherwise) of, (a) any notes or debt securities containing equity
or voting features (including, without limitation, any notes or debt securities
convertible into or exchangeable for capital stock or other equity securities,
issued in connection with the issuance of capital stock or other equity
securities or containing profit participation features) or (b) any capital
stock or other equity securities (or any securities convertible into or
exchangeable for any capital stock or other equity securities);

(iv)                              make,
or permit any Subsidiary to make, any loans or advances to, guarantees for the
benefit of, or investments in, any Person (other than the Company or a
Wholly-Owned Subsidiary), except for (a) reasonable advances to employees
in the ordinary course of business, (b) acquisitions permitted pursuant to
subparagraph (viii) below, (c) Investments having a stated maturity no
greater than one year from the date the Company or any Subsidiary makes such
Investment in (1) obligations of the United States government or any agency
thereof or obligations guaranteed by the United States government, (2)
certificates of deposit of commercial banks having combined capital and surplus
of at least $50 million, (3) commercial paper with a rating of at least “Prime-1”
by Moody’s Investors Service, Inc., or (d) loans for acquisitions of
capital stock pursuant to agreements or plans, 

 6
 

 

including equity incentive agreements with
service providers, which allow the Company to repurchase shares of Common Stock
upon the termination of services or an exercise of the Company’s right of first
refusal upon a proposed transfer;

(v)                                 merge
or consolidate with any Person;

(vi)                              sell,
lease or otherwise dispose of, or permit any Subsidiary to sell, lease or
otherwise dispose of, more than 25% of the consolidated assets of the Company
and its Subsidiaries (computed on the basis of book value, determined in
accordance with generally accepted accounting principles consistently applied,
or fair market value, determined by the Company’s board of directors in its
reasonable good faith judgment) in any transaction or series of related
transactions or sell or permanently dispose of any of its or any Subsidiary’s
Intellectual Property Rights;

(vii)                           liquidate,
dissolve or effect a recapitalization or reorganization in any form of
transaction (including, without limitation, any reorganization into a limited
liability company, a partnership or any other non-corporate entity which is
treated as a partnership for federal income tax purposes);

(viii)                        acquire or
enter into, or permit any Subsidiary to acquire or enter into, any interest in
any company or business (whether by a purchase of assets, purchase of stock,
merger or otherwise), except acquisitions for purchase consideration of not
more than $20,000,000 in the aggregate, or any joint venture;

(ix)                                reclassify
or recapitalize any securities of the Company or any of its Subsidiaries;

(x)                                   enter
into, or permit any Subsidiary to enter into, the ownership, active management
or operation of any business other than dredging and demolition;

(xi)                                make
any amendment to or rescind (including, without limitation, in each case by
merger or consolidation) any provision of the certificate of incorporation or
articles of incorporation, or the by-laws, of the Company or any of its
Subsidiaries, or file any resolution of the board of directors with the
secretary of state of the state of incorporation of the Company or any of its
Subsidiaries;

(xii)                             enter
into, amend, modify or supplement, or permit any Subsidiary to enter into,
amend, modify or supplement, any agreement, transaction, commitment or
arrangement with any of its or any Subsidiary’s officers, directors, employees,
stockholders or Affiliates or with any individual related by blood, marriage or
adoption to any such individual or with any entity in which any such Person or
individual owns a beneficial interest, except for customary employment
arrangements and benefit programs on 

 7
 

 

reasonable terms and except as otherwise
expressly contemplated by this Agreement;

(xiii)                          create,
incur, assume or suffer to exist, or permit any Subsidiary to create, incur,
assume or suffer to exist, indebtedness for borrowed money and/or capitalized
lease obligations exceeding an aggregate principal amount of $20,000,000
outstanding at any time on a consolidated basis, other than pursuant to facilities
in effect on the date of this Agreement;

(xiv)                         issue or
sell, or permit any Subsidiary to issue or sell, any shares of the capital
stock, or rights to acquire shares of the capital stock, of any Subsidiary to
any Person other than the Company or a Wholly-Owned Subsidiary; or

(xv)                            agree
to any of the foregoing.

(e)           Affirmative
Covenants.  As long as MDCP owns at
least 25% of the voting power of all shares of capital stock of the Company,
from and after the Effective Time, the Company shall unless it has received the
prior written consent of MDCP:

(i)                                     at
all times cause to be done all things necessary to maintain, preserve and renew
its corporate existence and all material licenses, authorizations and permits
necessary to the conduct of its businesses;

(ii)                                  maintain
and keep its material properties in good repair, working order and condition,
and from time to time make all necessary or desirable repairs, renewals and
replacements, so that its businesses may be properly and advantageously
conducted in all material respects at all times;

(iii)                               pay
and discharge when payable all taxes, assessments and governmental charges
imposed upon its properties or upon the income or profits therefrom (in each
case before the same becomes delinquent and before penalties accrue thereon)
and all claims for labor, materials or supplies which if unpaid would by law
become a lien, encumbrance or  other
restriction upon any of its property, unless and to the extent that the same
are being contested in good faith and by appropriate proceedings and adequate
reserves (as determined in accordance with generally accepted accounting
principles, consistently applied) have been established on its books and
financial statements with respect thereto;

(iv)                              comply
with all other material obligations which it incurs pursuant to any contract or
agreement, whether oral or written, express or implied, as such obligations
become due, unless and to the extent that the same are being contested in good
faith and by appropriate proceedings and adequate reserves (as determined in
accordance with generally accepted accounting principles, consistently applied)
have been established on its books and financial statements with respect
thereto;

 8
 

 

(v)                                 comply
with all applicable laws, rules and regulations of all governmental
authorities, the violation of which would reasonably be expected to have a
material adverse effect upon the business, condition (financial or otherwise),
operating results, assets, liabilities, operations, business prospects or
customer, supplier or employee relations of the Company and its Subsidiaries
taken as a whole;

(vi)                              apply
for and continue in force with good and responsible insurance companies
adequate insurance covering risks of such types and in such amounts as are
customary for well-insured companies of similar size engaged in similar lines
of business; and

(vii)                           maintain
proper books of record and account which present fairly in all material
respects its financial condition and results of operations and make provisions
on its financial statements for all such proper reserves as in each case are
required in accordance with generally accepted accounting principles,
consistently applied.

3.             Demand Registrations.

(a)           Requests for
Registration.  At any time after the
date hereof, the holders of at least a majority of MDCP Registrable Securities
may request registration under the Securities Act of all or any portion of
their Registrable Securities (i) on Form S-1 or any similar long-form
registration (“Long-Form Registrations”) and (ii) on Form S-3 or any
similar short-form registration (“Short-Form Registrations”) if
available.  In addition, from and after
February 17, 2008, the holders of at least a majority of Aldabra Registrable
Securities may request registration under the Securities Act of all or any
portion of their Registrable Securities in the form of (i) a Long-Form
Registration and (ii) a Short-Form Registration, if available.  All registrations requested pursuant to this Section
3(a) are referred to herein as “Demand Registrations.”  Each request for a Demand Registration shall
specify the approximate number of Registrable Securities requested to be
registered and the anticipated per share price range for such offering.  Within ten days after receipt of any such
request, the Company shall give written notice of such requested registration
to all other holders of Registrable Securities and (subject to the remainder of
this Section 3) shall include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within 15 days after the receipt of the Company’s notice.

(b)           Number of Demand
Registrations.  The holders of MDCP
Registrable Securities shall be entitled to request three Long-Form
Registrations and an unlimited number of Short-Form Registrations and the
holders of Aldabra Registrable Securities shall be entitled, to the extent
provided under Section 3(a), to request one Long-Form Registration and
one Short-Form Registration, as applicable, with respect to which the Company
shall pay all Registration Expenses as set forth in Section 4; provided
that the aggregate offering value of the Registrable Securities requested to be
registered in any Long-Form Registration must equal at least $20 million.  A registration shall not count as one of the
permitted Long-Form Registrations until it has become effective, and no
Long-Form Registration shall count as one of the permitted Long-Form
Registrations unless the holders of Registrable Securities are able to register
and sell at 

 9
 

 

least 90% of
the Registrable Securities requested to be included in such registration; provided
that in any event the Company shall pay all Registration Expenses in connection
with any registration initiated as a Demand Registration whether or not it has
become effective.

(c)           Priority on
Demand Registrations.  The Company
shall not include in any Demand Registration any securities which are not
Registrable Securities without the prior written consent of the holders of 50%
or more of the Registrable Securities included in such registration.  If a Demand Registration is an underwritten
offering and the managing underwriters advise the Company in writing that in
their opinion the number of Registrable Securities and, if permitted hereunder,
other securities requested to be included in such offering exceeds the number
of Registrable Securities and other securities, if any, which can be sold
therein in an orderly manner in such offering within a price range acceptable
to the holders of a majority of the Registrable Securities requested to be
included therein, then the Company (i) shall include in such registration only
such number as may be sold therein in such an orderly manner, and (ii) prior to
the inclusion of any securities which are not Registrable Securities shall
include Registrable Securities pro rata among the respective holders thereof on
the basis of the amount of Registrable Securities owned by each such holder
(with the pro rata share of each such holder determined in accordance with
Section 4 of this Agreement); provided, however, that if the managing
underwriters determine that the inclusion of the number of Other Investor
Registrable Securities and Aldabra Registrable Securities proposed to be
included in any such offering would adversely affect the marketability of such
offering, the Company may exclude such number of Other Investor Registrable
Securities and Aldabra Registrable Securities as necessary to negate such
adverse impact; provided that the provisions of the foregoing proviso
shall not apply in a demand registration effected by holders of Aldabra
Registrable Securities in accordance with the second sentence of Section
3(a).

(d)           Restrictions on
Demand Registrations.  The Company
shall not be obligated to effect any Demand Registration within 120 days after
the effective date of a previous Demand Registration or a previous registration
in which the holders of Registrable Securities were given piggyback rights
pursuant to Section 4 and in which there was no reduction in the number
of Registrable Securities requested to be included.  In addition, the Company may postpone for up
to 120 days the filing or the effectiveness of a registration statement for a
Demand Registration if the Company’s board of directors determines in its
reasonable good faith judgment that such Demand Registration would reasonably
be expected to have a material adverse effect on any proposal or plan by the
Company or any of its Subsidiaries to engage in any acquisition of assets
(other than in the ordinary course of business) or any merger, consolidation,
tender offer, reorganization or similar transaction; provided that in
such event, the holders of Registrable Securities initially requesting such
Demand Registration shall be entitled to withdraw such request and, if such
request is withdrawn, such Demand Registration shall not count as one of the
permitted Long-Form Registrations hereunder and the Company shall pay all
Registration Expenses in connection with such registration.

(e)           Selection of
Underwriters.  If the Company is
offering and selling securities in any registered offering, the Company’s board
of directors shall select the investment banker(s) and manager(s) to administer
such offering.

 10

 

(f)            Form S-3.  If the holders of Registrable Securities do
not intend to distribute the Registrable Securities by means of an underwritten
Public Offering, the Company may, if it is then eligible to do so, effect the
registration of the Registrable Securities on Form S-3 or any comparable
or successor form or forms if such form is available for use by the Company
pursuant to and in accordance with the Securities Act.

4.             Piggyback Registrations.

(a)           Right to
Piggyback.  Whenever the Company
proposes to register any of its securities under the Securities Act (including
pursuant to a Demand Registration) and the registration form to be used may be
used for the registration of Registrable Securities (a “Piggyback
Registration”), the Company shall give prompt written notice to all holders
of Registrable Securities of its intention to effect such a registration and
(subject to the remainder of this Section 4) shall include in such
registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 20 days after the
receipt of the Company’s notice.

(b)           Piggyback
Expenses.  The Registration Expenses
of the holders of Registrable Securities shall be paid by the Company in all
Piggyback Registrations.

(c)           Priority on
Primary Registrations.  If a
Piggyback Registration is an underwritten primary registration on behalf of the
Company, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in an orderly manner in such
offering within a price range acceptable to the Company, the Company (i) shall
include in such registration only such number as may be sold therein in such an
orderly manner, and (ii) prior to the inclusion of any securities which are not
Registrable Securities, shall include Registrable Securities pro rata among the
respective holders thereof on the basis of the amount of Registrable Securities
owned by each such holder; provided, however, that in the event that any
holder of Aldabra Registrable Securities was prevented from participating in a
Piggyback Registration on or prior to February 17, 2008 (a “Prior
Registration”) as a result of his, her or its shares being held in a share
escrow account, the pro rata share referenced in clause (ii) shall be, for each
holder of Registrable Securities requesting inclusion of Registrable Securities
in the first Piggyback Registration after February 17, 2008, determined as such
holder’s Revised Pro Rata Share;  provided,
further that if the managing underwriters determine that the inclusion
of the number of Other Investor Registrable Securities and Aldabra Registrable
Securities proposed to be included in any such offering would adversely affect
the marketability of such offering, the Company may exclude such number of
Other Investor Registrable Securities and Aldabra Registrable Securities pro
rata as necessary to negate such adverse impact.

(d)           Priority on
Secondary Registrations.  If a
Piggyback Registration is an underwritten secondary registration on behalf of
holders of the Company’s securities (including pursuant to a Demand
Registration), and the managing underwriters advise the Company in writing that
in their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in an orderly manner in such
offering within a price range acceptable to the holders initially requesting
such registration, the Company (i) shall include in such registration only such
number as may be sold therein in such an orderly manner, and (ii) 

 11
 

 

prior to the
inclusion of any securities which are not Registrable Securities shall include
Registrable Securities pro rata among the respective holders thereof on the
basis of the amount of Registrable Securities owned by each such holder; provided,
however, that in the event that any holder of Aldabra Registrable Securities
was prevented from participating in a Prior Registration as a result of his,
her or its shares being held in a share escrow account, the pro rata share
referenced in clause (ii) shall be determined, for each holder of Registrable
Securities requesting inclusion of the Registrable Securities in the first
Piggyback Registration after February 17, 2008, as such holder’s Revised Pro
Rata Share; provided, further, however, that if the managing
underwriters determine that the inclusion of the number of Other Investor
Registrable Securities and Aldabra Registrable Securities proposed to be included
in any such offering would adversely affect the marketability of such offering,
the Company may exclude such number of Other Investor Registrable Securities
and Aldabra Registrable Securities pro rata as necessary to negate such adverse
impact.

(e)           Other
Registrations.  If the Company has
previously filed a registration statement with respect to Registrable
Securities pursuant to Section 3 or pursuant to this Section 4,
and if such previous registration has not been withdrawn or abandoned, the
Company shall not file or cause to be effected any other registration of any of
its equity securities or securities convertible or exchangeable into or
exercisable for its equity securities under the Securities Act (except on Form
S-8 or any successor form), whether on its own behalf or at the request of any
holder or holders of such securities, until a period of at least 120 days has
elapsed from the effective date of such previous registration.

5.             Registration Procedures.  Whenever the holders of Registrable Securities
have requested that any Registrable Securities be registered pursuant to this
Agreement, the Company shall use its best efforts to effect the registration
and the sale of such Registrable Securities in accordance with the intended
method of disposition thereof, and pursuant thereto the Company shall as
expeditiously as possible:

(a)           prepare and file
with the Securities and Exchange Commission a registration statement with
respect to such Registrable Securities within 120 days (in connection with an initial
Public Offering) or 60 days (in connection with all other Public Offerings) and
use its best efforts to cause such registration statement to become effective (provided
that before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company shall furnish to the counsel selected by the
holders of a majority of the Registrable Securities covered by such
registration statement copies of all such documents proposed to be filed);

(b)           promptly notify each
holder of Registrable Securities of the effectiveness of each registration
statement filed hereunder and prepare and file with the Securities and Exchange
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than 180 days and
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement during
such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;

 12
 

 

(c)           furnish to each
seller of Registrable Securities such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents as such seller may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such seller;

(d)           use its best efforts
to register or qualify such Registrable Securities under such other securities
or blue sky laws of such jurisdictions as any seller reasonably requests and do
any and all other acts and things which may be reasonably necessary or
advisable to enable such seller to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such seller (provided
that the Company shall not be required to (i) qualify generally to do business
in any jurisdiction where it would not otherwise be required to qualify but for
this subparagraph, (ii) subject itself to taxation in any such jurisdiction or
(iii) consent to general service of process in any such jurisdiction);

(e)           notify each seller
of such Registrable Securities, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of any
event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading, and, at the request of
any such seller, the Company shall prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not contain an untrue statement
of a material fact or omit to state any fact necessary to make the statements
therein not misleading;

(f)            cause all such
Registrable Securities to be listed on each securities exchange on which
similar securities issued by the Company are then listed and, if not so listed,
to be listed on the NASD automated quotation system and, if listed on the NASD
automated quotation system, use its best efforts to secure designation of all
such Registrable Securities covered by such registration statement as a NASDAQ “national
market system security” within the meaning of Rule 11Aa2-1 of the Securities
and Exchange Commission or, failing that, to secure NASDAQ authorization for
such Registrable Securities and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register as such with
respect to such Registrable Securities with the NASD;

(g)           provide a transfer
agent and registrar for all such Registrable Securities not later than the
effective date of such registration statement;

(h)           enter into such
customary agreements (including underwriting agreements in customary form) and
take all such other actions as the holders of a majority of the Registrable
Securities being sold or the underwriters, if any, reasonably request in order
to expedite or facilitate the disposition of such Registrable Securities
(including effecting a stock split or a combination of shares);

(i)            make available for
inspection by any seller of Registrable Securities, any underwriter
participating in any disposition pursuant to such registration statement and
any attorney, accountant or other agent retained by any such seller or
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the 

 13
 

 

Company’s
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;

(j)            otherwise use its
best efforts to comply with all applicable rules and regulations of the
Securities and Exchange Commission, and make available to its security holders,
as soon as reasonably practicable, an earnings statement covering the period of
at least twelve months beginning with the first day of the Company’s first full
calendar quarter after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder;

(k)           permit any holder of
Registrable Securities which holder, in its sole and exclusive judgment, might
be deemed to be an underwriter or a controlling person of the Company, to
participate in the preparation of such registration or comparable statement and
to require the insertion therein of material, furnished to the Company in
writing, which in the reasonable judgment of such holder and its counsel should
be included; and

(l)            the Company agrees
to file all reports and supplements which are required to be filed by the
Company under the Securities Act so that it may be eligible to effect any
registration of Registrable Securities on Form S-3 or any comparable form,
successor form or other form if such form is available for use by the Company.

6.             Registration Expenses.

(a)           All expenses
incident to the Company’s performance of or compliance with this Agreement,
including without limitation all registration and filing fees, fees and
expenses of compliance with securities or blue sky laws, printing expenses,
messenger and delivery expenses, fees and disbursements of custodians, and fees
and disbursements of counsel for the Company and all independent certified
public accountants, underwriters (excluding discounts and commissions) and
other Persons retained by the Company shall be paid by the Company (all such
expenses being herein called “Registration Expenses”) and the Company
shall pay its internal expenses (including, without limitation, all salaries
and expenses of its officers and employees performing legal or accounting
duties), the expense of any annual audit or quarterly review, the expense of
any liability insurance and the expenses and fees for listing the securities to
be registered on each securities exchange on which similar securities issued by
the Company are then listed or on the NASD automated quotation system.

(b)           In connection with
each Demand Registration and each Piggyback Registration, the Company shall
reimburse the holders of Registrable Securities included in such registration
for the reasonable fees and disbursements of one counsel chosen by the holders
of a majority of the Registrable Securities included in such registration.

(c)           To the extent
Registration Expenses are not required to be paid by the Company, each holder
of securities included in any registration hereunder shall pay those
Registration Expenses allocable to the registration of such holder’s securities
so included, and any Registration Expenses not so allocable shall be borne by
all sellers of securities included in such registration in proportion to the
aggregate selling price of the securities to be so registered.

 14
 

 

7.             Indemnification.

(a)           The Company agrees
to indemnify, to the extent permitted by law, each holder of Registrable
Securities, its officers and directors and each Person who controls such holder
(within the meaning of the Securities Act) against all losses, claims, damages,
liabilities and expenses caused by any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or
preliminary prospectus or any amendment thereof or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are caused by or contained in any information furnished in writing to
the Company by such holder expressly for use therein or by such holder’s
failure to deliver a copy of the registration statement or prospectus or any
amendments or supplements thereto after the Company has furnished such holder
with a sufficient number of copies of the same. 
In connection with an underwritten offering, the Company shall indemnify
such underwriters, their officers and directors and each Person who controls
such underwriters (within the meaning of the Securities Act) to the same extent
as provided above with respect to the indemnification of the holders of
Registrable Securities.

(b)           In connection with
any registration statement in which a holder of Registrable Securities is
participating, each such holder shall furnish to the Company in writing such
information and affidavits as the Company reasonably requests for use in
connection with any such registration statement or prospectus and, to the
extent permitted by law, shall indemnify the Company, its directors and
officers and each Person who controls the Company (within the meaning of the
Securities Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement of material fact
contained in the registration statement, prospectus or preliminary prospectus
or any amendment thereof or supplement thereto or any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in any information or affidavit so furnished
in writing by such holder; provided that the obligation to indemnify
shall be individual, not joint and several, for each holder and shall be
limited to the net amount of proceeds received by such holder from the sale of
Registrable Securities pursuant to such registration statement.

(c)           Any Person entitled
to indemnification hereunder shall (i) give prompt written notice to the
indemnifying party of any claim with respect to which it seeks indemnification
(provided that the failure to give prompt notice shall not impair any
Person’s right to indemnification hereunder to the extent such failure has not
prejudiced the indemnifying party) and (ii) unless in such indemnified party’s
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such indemnifying
party to assume the defense of such claim with counsel reasonably satisfactory
to the indemnified party.  If such
defense is assumed, the indemnifying party shall not be subject to any
liability for any settlement made by the indemnified party without its consent
(but such consent shall not be unreasonably withheld).  An indemnifying party who is not entitled to,
or elects not to, assume the defense of a claim shall not be obligated to pay
the fees and expenses of more than one counsel for all parties indemnified by
such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a 

 15
 

 

conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim.

(d)           The indemnification
provided for under this Agreement shall remain in full force and effect
regardless of any investigation made by or on behalf of the indemnified party
or any officer, director or controlling Person of such indemnified party and
shall survive the transfer of securities. 
The Company also agrees to make such provisions, as are reasonably
requested by any indemnified party, for contribution to such party in the event
the Company’s indemnification is unavailable for any reason.

8.             Participation in Underwritten Registrations; Holdback.  No Person may participate in any registration
hereunder which is underwritten unless such Person (i) agrees to sell such
Person’s securities on the basis provided in any underwriting arrangements approved
by the Person or Persons entitled hereunder to approve such arrangements and
(ii) completes and executes all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents required under the
terms of such underwriting arrangements, in each case pursuant to this clause
(ii) that are in customary form.  Each
holder of Registrable Securities agrees not to effect any public sale or
distribution of any Registrable Securities or other equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
any of the Company’s equity securities, (x) during the seven days prior to and
the 90 days after the effectiveness of any underwritten public offering, except
as part of such underwritten public offering or if otherwise permitted by the
Company, and (y) during the 90 days after the Effective Time.  Each of the Aldabra Shareholders agrees that
the restrictions on transfer in this Section 8 are in addition to, and
not in lieu of, any other restrictions on transfer that such Aldabra
Shareholder may have agreed to with respect to its shares of Common Stock and
warrants exercisable for shares of Common Stock.

9.             Management Equity Arrangements; Subscription
Agreement.  Each Other Investor that
is party to the Management Equity Agreement, the Company (as successor by
merger to GLDD) and MDCP hereby agree that, effective as of the Effective Time,
by its execution and delivery hereof, the Management Equity Agreement is hereby
amended and restated in the form set forth as Exhibit A attached hereto.  Each of the Company (as successor by merger
to GLDD), MDP and each Other Investor party thereto agree that, effective as of
the Effective Time, the Subscription Agreement and the Registration Rights
Agreement are terminated in their entirety.

10.           Transfer of Restricted Securities.

(a)           General
Provisions.  In addition to any other
restrictions on transfer to which such shares may be subject, Restricted
Securities are transferable only pursuant to (i) Public Offerings
registered under the Securities Act, (ii) Rule 144 or Rule 144A of the
Securities and Exchange Commission (or any similar rule or rules then in force)
if such rule is available and (iii) subject to the conditions specified in
Section 10(b) below, any other legally available means of transfer.

(b)           Opinion Delivery.  In connection with the transfer of any
Restricted Securities (other than a transfer described in Section 10(a)(i)
or (ii) above), upon the request of 

 16
 

 

the Company,
the holder thereof shall deliver written notice to the Company describing in
reasonable detail the transfer or proposed transfer, together with an opinion
of Kirkland & Ellis LLP or other counsel which (to the Company’s
reasonable satisfaction) is knowledgeable in securities law matters to the
effect that such transfer of Restricted Securities may be effected without
registration of such Restricted Securities under the Securities Act.  In addition, if the holder of the Restricted
Securities delivers to the Company an opinion of Kirkland & Ellis LLP
or such other counsel that no subsequent transfer of such Restricted Securities
shall require registration under the Securities Act, the Company shall promptly
upon such contemplated transfer deliver new certificates for such Restricted
Securities which do not bear the Securities Act legend set forth in Section
10(c).  If the Company is not
required to deliver new certificates for such Restricted Securities not bearing
such legend, the holder thereof shall not transfer the same until the prospective
transferee has confirmed to the Company in writing its agreement to be bound by
the conditions contained in this Section 10.

(c)           Legend.  Each certificate or instrument representing
Restricted Securities shall be imprinted with a legend in substantially the
following form:

“THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN INVESTOR RIGHTS AGREEMENT
BETWEEN THE COMPANY AND CERTAIN OF ITS EMPLOYEES DATED AS OF DECEMBER 20, 2006,
AS AMENDED AND MODIFIED FROM TIME TO TIME. 
A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
COMPANY’S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE.”

(d)           Legend Removal.  If any Restricted Securities become eligible
for sale pursuant to Rule 144(k), the Company shall, upon the request of the
holder of such Restricted Securities, remove the legend set forth in Section
10(c) from the certificates for such Restricted Securities.

11.           Appointment of Representative.  Each Other Investor that held shares of
capital stock of GLDD (each, a “GLDD Investor”) hereby acknowledges and
agrees to the appointment of the Company Representative (and its successors
designated in accordance with the Merger Agreement) as such GLDD Investor’s
representative and attorney-in-fact to act on behalf of such GLDD Investor
(whether in its capacity as a holder of Company Capital Stock or otherwise) in
accordance with the Merger Agreement, and further acknowledges and agrees to
all of the terms of the Merger Agreement. 
Without limiting the generality of the foregoing, the Company
Representative, in such capacity, shall have such powers and authority as are
necessary or appropriate to carry out the functions assigned to it under the
Merger Agreement and any other document delivered in connection therewith.  The Company, the Buyer, and the Escrow Agent
shall be entitled to rely on the actions taken by the Company Representative 

 17
 

 

without independent inquiry into the capacity of the
Company Representative so to act.  All
actions, notices, communications and determinations by the Company
Representative to carry out such functions shall conclusively be deemed to have
been authorized by, and shall be binding upon, such GLDD Investor.  Furthermore, as provided in the Merger
Agreement, neither the Company Representative nor any of its officers,
directors, employees, agents or representatives shall have any liability to
such GLDD Investor with respect to actions taken or omitted to be taken by the
Company Representative in such capacity (or any of its officers, directors,
employees, agents or representatives in connection therewith), except with
respect to the Company Representative’s gross negligence or willful misconduct,
and the Company Representative (for itself and its officers, directors,
employees, agents and representatives) shall be entitled to full reimbursement
for all reasonable expenses, disbursements and advances (including fees and
disbursements of its counsel, experts and other agents and consultants)
incurred by the Company Representative in such capacity (or any of its
officers, directors, employees, agents or representatives in connection
therewith), and to full indemnification against any loss, liability or expenses
arising out of actions taken or omitted to be taken in its capacity as the
Company Representative (except for those arising out of the Company
Representative’s gross negligence or willful misconduct), including the costs
and expenses of investigation and defense of claims, by the holders of Company
Capital Stock.  The GLDD Investor hereby
reaffirms, approves, accepts and adopts, and hereby agrees to comply with and
perform, all of the acknowledgements and agreements made by the Company
Representative on behalf of the holders of Company Capital Stock in the Merger
Agreement and the other documents delivered in connection therewith.

12.           Definitions.  The following terms will have the meanings
set forth below:

“Aldabra Registrable Securities” means (i) any
shares of Common Stock held by any Aldabra Shareholder on the date hereof, (ii)
any Common Stock issued or issuable with respect to the securities referred to
in clause (i) by way of a stock dividend or stock split or stock conversion or
in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization, (iii) any other shares of Common Stock
of the Company acquired by any Aldabra Shareholder and (iv) any shares of
Common Stock issued upon exercise of any warrants outstanding on the date
hereof held by any Aldabra Shareholder exercisable for shares of Common Stock.

“Applicable Number” means such number of
directors of the Company which, as a percentage of all directors of the
Company, when rounded up most closely approximates the percentage of voting
power represented by the shares of capital stock of the Company held by MDCP.

“Board” means the Company’s Board of Directors.

“Common Stock” means the Company’s Common
Stock, par value $0.0001 per share.

“Expiration Date” means the first date that the
aggregate voting power of capital stock of the Company owned by MDCP and its
Affiliates represents less than 5% of the voting power of all capital stock of
the Company.

 18
 

 

“MDCP Registrable Securities” means (i) any
shares of Common Stock originally issued to MDCP pursuant to the Merger or the
Holdco Merger, (ii) any Common Stock issued or issuable with respect to the
securities referred to in clause (i) by way of a stock dividend or stock split
or stock conversion or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization and (iii) any
other Common Stock of the Company acquired by MDCP.  As to any particular MDCP Registrable
Securities, such securities shall cease to be MDCP Registrable Securities when
they have been distributed to the public pursuant to an offering registered
under the Securities Act or sold to the public through a broker, dealer or
market maker in compliance with Rule 144 under the Securities Act (or any
similar rule then in force) or a sale to the public pursuant to Rule
144(k).  For purposes of this Agreement,
a Person shall be deemed to be a holder of MDCP Registrable Securities whenever
such Person has the right to acquire such MDCP Registrable Securities (upon conversion
or exercise in connection with a transfer of securities or otherwise, but
disregarding any restrictions or limitations upon the exercise of such right),
whether or not such acquisition has actually been effected.

“Other Investor Registrable Securities” means
(i) any shares of Common Stock originally issued to an Other Investor pursuant
to the Merger or the Holdco Merger, (ii) any Common Stock issued or issuable
with respect to the securities referred to in clause (i) by way of a stock
dividend or stock split or stock conversion or in connection with a combination
of shares, recapitalization, merger, consolidation or other reorganization and
(iii) any other Common Stock of the Company acquired by the Other Investors.  As to any particular Other Investor
Registrable Securities, such securities shall cease to be Other Investor
Registrable Securities when they have been distributed to the public pursuant
to an offering registered under the Securities Act or sold to the public
through a broker, dealer or market maker in compliance with Rule 144 under the
Securities Act (or any similar rule then in force) or a sale to the public
pursuant to Rule 144(k).  For purposes of
this Agreement, a Person shall be deemed to be a holder of Other Investor
Registrable Securities whenever such Person has the right to acquire such Other
Investor Registrable Securities (upon conversion or exercise in connection with
a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected.

“Person” means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock
company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.

“Public Offering” means the sale in an
underwritten public offering registered under the Securities Act of shares of
the Common Stock.

“Public Sale” means any sale pursuant to a
registered public offering under the 1933 Act or any sale to the public
pursuant to Rule 144 (or similar rule then in effect) promulgated under
the 1933 Act effected through a broker, dealer or market maker.

“Registrable Securities” means, collectively,
MDCP Registrable Securities, Aldabra Registrable Securities and Other Investor
Registrable Securities.

 19
 

 

“Restricted Securities” means (i) the
Common Stock, and (ii) any securities issued with respect to the
securities referred to in clause (i) above by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization and any warrants exercisable for Common
Stock outstanding on the date hereof that are not freely tradable under
applicable law and regulation.  As to any
particular Restricted Securities, such securities shall cease to be Restricted
Securities when they have (a) been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, or (b) been distributed to the public through a broker,
dealer or market maker pursuant to Rule 144 (or any similar provision then in
force) under the Securities Act or become eligible for sale pursuant to Rule 144(k)
(or any similar provision then in force) under the Securities Act.  Whenever any particular securities cease to
be Restricted Securities, the holder thereof shall be entitled to receive from
the Company, without expense, new securities of like tenor not bearing a
Securities Act legend of the character set forth in this Agreement.

“Revised Pro Rata Share” means a fraction, (x)
the numerator of which equals the difference between (i) the product of (a) the
percentage of Registrable Securities owned by such holder (as a percentage of
all Registrable Securities then outstanding) immediately prior to the Prior
Registration multiplied by (b) the sum of (A) the aggregate number of
Registrable Securities included in the Prior Registration plus (B) the
aggregate number of Registrable Securities to be included in the Piggyback
Registration in question minus (ii) the aggregate number of Registrable
Securities sold by such holder in the Prior Registration and (y) the
denominator of which is the number of Registrable Securities to be included in
such Piggyback Registration.

“Securities Act” means the Securities Act of
1933, as amended from time to time.

“Subsidiary” means, with respect to any Person,
any corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total
voting power of shares of stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof, or (ii) if a limited liability company, partnership, association
or other business entity, a majority of the partnership or other similar
ownership interest thereof is at the time owned or controlled, directly or
indirectly, by any Person or one or more Subsidiaries of that Person or a
combination thereof.  For purposes
hereof, a Person or Persons shall be deemed to have a majority ownership
interest in a limited liability company, partnership, association or other
business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other business
entity; provided that Amboy Aggregates shall not be considered a
Subsidiary for any purpose hereof.

13.           Miscellaneous.

(a)           Selection of
Investment Bankers.  Subject to the
terms of Section 3(e), the selection of investment banker(s) and manager(s) for
any public offering or private sale of 

 20
 

 

Registrable
Securities by holders of the Registrable Securities shall be made by the
holders of a majority of  the Registrable
Securities included in such offering or sale.

(b)           No Inconsistent
Agreements.  The Company shall not
hereafter enter into any agreement with respect to its securities which is
inconsistent with or violates the rights granted to the holders of Registrable
Securities in this Agreement.  The
parties hereto agree that that certain Registration Rights Agreement, dated as
of December 22, 2003, by and among the Company and certain of its stockholders
is hereby terminated in its entirety.

(c)           Remedies.  Any Person having rights under any provision
of this Agreement shall be entitled to enforce such rights specifically to
recover damages caused by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law.  The parties hereto agree and acknowledge that
money damages may not be an adequate remedy for any breach of the provisions of
this Agreement and that any party may in its sole discretion apply to any court
of law or equity of competent jurisdiction (without posting any bond or other
security) for specific performance and for other injunctive relief in order to
enforce or prevent violation of the provisions of this Agreement.

(d)           Amendments and
Waivers.  Except as otherwise
provided herein, the provisions of this Agreement may be amended or waived only
upon the prior written consent of the Company and holders of a majority of MDCP
Registrable Securities; provided that if any such amendment or waiver
would adversely affect in any material manner the rights of any holders of
Registrable Securities relative to other holders of Registrable Securities
similarly situated with respect to such rights under this Agreement, such
amendment or waiver must be approved in writing by the holders of a majority of
such Registrable Securities so adversely affected.

(e)           Successors and
Assigns.  All covenants and
agreements in this Agreement by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not. 
In addition, whether or not any express assignment has been made, the
provisions of this Agreement which are for the benefit of purchasers or holders
of Registrable Securities are also for the benefit of, and enforceable by, any
subsequent holder of Registrable Securities. 
Each party (including the Company) acknowledges and agrees that promptly
after the Closing contemplated by the Merger, it is contemplated that the
Company will merge with and into a second-tier subsidiary of the Company (“Holdco
Merger Sub”) through the Holdco Merger (as defined in the Merger Agreement),
with the effect that the Company will be a wholly-owned subsidiary of Holdco
and thereafter the Post-Closing Mergers will take place with the effect that
(i) Great Lakes Dredge & Dock Corporation will merge with and into the
surviving company of the Merger, (ii) the surviving corporation of the merger
referred to in clause (i) will merge with and into the surviving corporation of
the Holdco Merger, and (iii) the surviving corporation referred to in clause
(ii) will merge with and into Holdco. 
Each party acknowledges and agrees that effective as of immediately
prior to the consummation of the Holdco Merger, without further action on the
part of any party hereto, the Company does hereby assign to Holdco, and Holdco
does assume, all rights and obligations of the Company hereunder and from and
after the effectiveness of such assignment Holdco shall be “the Company” for all
purposes of this Agreement and all rights and obligations of the parties hereto
shall automatically survive the Merger, the Holdco Merger and 

 21
 

 

the
Post-Closing Mergers.  Each of
MDCP and each Other Investor party hereto as of the date of this Agreement
irrevocably agree, after review of the information statement circulated by GLDD
in connection with the Merger, that he, she or it is irrevocably waiving all
appraisal rights arising under Delaware law that he, she or it may have from
the Merger and the Holdco Merger.

(f)            Severability.  Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.

(g)           Counterparts.  This Agreement may be executed simultaneously
in two or more counterparts (including by facsimile or electronic
transmission), any one of which need not contain the signatures of more than
one party, but all such counterparts taken together shall constitute one and
the same Agreement.

(h)           Descriptive
Headings.  The descriptive headings
of this Agreement are inserted for convenience only and do not constitute a
part of this Agreement.

(i)            Governing Law.  All issues and questions concerning the
construction, validity, interpretation and enforcement of this Agreement and
the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without giving effect to
any choice of law or conflict of law rules or provisions (whether of the State
of Delaware or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Delaware.

(j)            Notices.  All notices, demands or other communications
to be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable overnight
courier service (charges prepaid) or mailed to the recipient by certified or
registered mail, return receipt requested and postage prepaid.  Such notices, demands and other
communications shall be sent to the Company, MDCP and each Other Investor at
the address indicated on the signature pages hereto or to such other address or
to the attention of such other person as the recipient party has specified by
prior written notice to the sending party.

(k)           Third-Party
Beneficiaries.  Each Person asked to
rely on any covenants or agreements of the Company Representative shall be
entitled to rely on the covenants and agreements of the GLDD Investors set
forth in Section 11 of this Agreement.

*     *    
*     *    *

 22
 

 

IN
WITNESS WHEREOF, the parties have executed this Investor Rights Agreement as of
the date first written above.

	
  

  	
  ALDABRA ACQUISITIONS CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jason G. Weiss

  
	
   

  	
   

  	
   

  
	
   

  	
  Its:

  	
  Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
  c/o Terrapin Partners LLP

  
	
   

  	
  540 Madison Avenue

  
	
   

  	
  New York, New York 10022

  
	
   

  	
  Attention: 
  Chief Executive Officer

  

 

 23
 

 

 

	
  

  	
  GREAT LAKES DREDGE & DOCK HOLDINGS CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jason G. Weiss

  
	
   

  	
   

  	
   

  
	
   

  	
  Its:

  	
  Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
  2122 York Road

  
	
   

  	
  Oak Brook, IL 60523

  
	
   

  	
  Attention: 
  Chief Executive Officer

  
	
   

  	
                    Chief
  Financial Officer

  

 

 24
 

 

 

	
  

  	
  MADISON DEARBORN CAPITAL PARTNERS IV, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Madison Dearborn Partners IV, L.P.

  
	
   

  	
  Its:

  	
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Madison Dearborn Partners, L.L.C.

  
	
   

  	
  Its:

  	
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Thomas S. Souleles

  
	
   

  	
   

  	
   

  
	
   

  	
  Its:

  	
  Member

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
  c/o Madison Dearborn Partners, LLC

  
	
   

  	
  Three First National Plaza

  
	
   

  	
  70 W. Madison, Suite 3800

  
	
   

  	
  Chicago, IL 60602

  
	
   

  	
  Attention: 
  Samuel M. Mencoff

  
	
   

  	
                    Thomas
  S. Souleles

  

 

 25

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