Document:

Exhibit
10.1

RESTORATION HARDWARE, INC.

THE
MICHAELS FURNITURE COMPANY, INC.

 

 

 

 

EIGHTH AMENDED AND RESTATED

LOAN AND SECURITY AGREEMENT

Dated: 
June 19, 2006

$150,000,000

 

 

 

THE CIT GROUP/BUSINESS CREDIT, INC.

as Co-Administrative Agent

WELLS FARGO RETAIL FINANCE, LLC

As Documentation Agent

BANK
OF AMERICA, N.A.

Individually and as Agent for any Lender which is

or becomes a Party hereto

 

 

 

TABLE OF
CONTENTS

	
  SECTION 1. CREDIT FACILITY

  	
   

  	
  2

  
	
  1.1

  	
  Revolving Credit Loans.

  	
   

  	
  2

  
	
  1.2

  	
  Overadvances.

  	
   

  	
  2

  
	
  1.3

  	
  Use of Proceeds.

  	
   

  	
  2

  
	
  1.4

  	
  SwingLine Loans.

  	
   

  	
  3

  
	
  1.5

  	
  Letters of Credit; LC Guaranties.

  	
   

  	
  3

  
	
  1.6

  	
  Foreign Exchange Facility

  	
   

  	
  4

  
	
  SECTION 2. INTEREST, FEES AND CHARGES

  	
   

  	
  5

  
	
  2.1

  	
  Interest.

  	
   

  	
  5

  
	
   

  	
  2.1.1

  	
  Rates of Interest

  	
   

  	
  5

  
	
   

  	
  2.1.2

  	
  Default Rate of Interest.

  	
   

  	
  5

  
	
   

  	
  2.1.3

  	
  Maximum Interest.

  	
   

  	
  5

  
	
  2.2

  	
  Computation of Interest and Fees.

  	
   

  	
  5

  
	
  2.3

  	
  Fee Letter.

  	
   

  	
  6

  
	
  2.4

  	
  Letter of Credit and LC Guaranty Fees.

  	
   

  	
  6

  
	
  2.5

  	
  Unused Line Fee.

  	
   

  	
  6

  
	
  2.6

  	
  Prepayment Fee.

  	
   

  	
  6

  
	
  2.7

  	
  Reimbursement of Expenses.

  	
   

  	
  7

  
	
  2.8

  	
  Bank Charges.

  	
   

  	
  7

  
	
  2.9

  	
  Collateral Protection Expenses.

  	
   

  	
  7

  
	
  2.10

  	
  Payment of Charges.

  	
   

  	
  8

  
	
  2.11

  	
  Foreign Exchange Facility

  	
   

  	
  8

  
	
  2.12

  	
  Amendment Fee

  	
   

  	
  8

  
	
  2.13

  	
  Extension Fee

  	
   

  	
  8

  
	
  SECTION 3. LOAN ADMINISTRATION

  	
   

  	
  8

  
	
  3.1

  	
  Manner of Borrowing Revolving Credit Loans.

  	
   

  	
  8

  
	
   

  	
  3.1.1

  	
  Loan Requests.

  	
   

  	
  8

  
	
   

  	
  3.1.2

  	
  Disbursement.

  	
   

  	
  9

  
	
   

  	
  3.1.3

  	
  Payment by Lenders.

  	
   

  	
  9

  

 

 

	
  

  	
  3.1.4

  	
  Authorization.

  	
   

  	
  9

  
	
   

  	
  3.1.5

  	
  LIBOR Advances.

  	
   

  	
  9

  
	
   

  	
  3.1.6

  	
  Conversion of Base Rate Advances.

  	
   

  	
  9

  
	
   

  	
  3.1.7

  	
  Continuation of LIBOR Advances.

  	
   

  	
  10

  
	
   

  	
  3.1.8

  	
  Inability to Make LIBOR Advances.

  	
   

  	
  10

  
	
   

  	
  3.1.9

  	
  Letter of Credit and LC Guaranty Requests.

  	
   

  	
  10

  
	
   

  	
  3.1.10

  	
  Method of Making Requests.

  	
   

  	
  11

  
	
  3.2

  	
  Payments.

  	
   

  	
  11

  
	
   

  	
  3.2.1

  	
  Principal.

  	
   

  	
  11

  
	
   

  	
  3.2.2

  	
  Interest.

  	
   

  	
  12

  
	
   

  	
  3.2.3

  	
  Costs, Fees and Charges.

  	
   

  	
  12

  
	
   

  	
  3.2.4

  	
  Other Obligations.

  	
   

  	
  12

  
	
   

  	
  3.2.5

  	
  Prepayment of LIBOR Advances; Yield Maintenance.

  	
   

  	
  12

  
	
   

  	
  3.2.6

  	
  Application of Proceeds of Collateral and Payments
  after an Event of Default.

  	
   

  	
  13

  
	
  3.3

  	
  Mandatory and Optional Prepayments.

  	
   

  	
  14

  
	
   

  	
  3.3.1

  	
  Proceeds of Sale, Loss, Destruction or Condemnation of
  Collateral.

  	
   

  	
  14

  
	
   

  	
  3.3.2

  	
  LIBOR Advances.

  	
   

  	
  14

  
	
  3.4

  	
  Application of Payments and Collections.

  	
   

  	
  14

  
	
  3.5

  	
  All Loans to Constitute One Obligation.

  	
   

  	
  15

  
	
  3.6

  	
  Loan Account.

  	
   

  	
  15

  
	
  3.7

  	
  Statements of Account.

  	
   

  	
  15

  
	
  3.8

  	
  Sharing of Payments, Etc.

  	
   

  	
  15

  
	
  3.9

  	
  Increased Costs.

  	
   

  	
  16

  
	
   

  	
  3.10

  	
  Basis for Determining Interest Rate Inadequate or
  Unfair.

  	
   

  	
  17

  
	
   

  	
  3.11

  	
  Lead Borrower as Borrowers’ Agent.

  	
   

  	
  17

  
	
   

  	
  3.12

  	
  Replacement of a Lender

  	
   

  	
  18

  
	
  SECTION 4. TERM AND TERMINATION

  	
   

  	
  18

  
	
  4.1

  	
  Term of Agreement.

  	
   

  	
  18

  
	
  4.2

  	
  Termination.

  	
   

  	
  18

  

 

 

	
  

  	
  4.2.1

  	
  Termination by Lenders.

  	
   

  	
  18

  
	
   

  	
  4.2.2

  	
  Termination by Borrowers.

  	
   

  	
  18

  
	
   

  	
  4.2.3

  	
  Effect of Termination.

  	
   

  	
  19

  
	
  SECTION 5. SECURITY INTERESTS

  	
   

  	
  19

  
	
  5.1

  	
  Security Interest in Collateral.

  	
   

  	
  19

  
	
  5.2

  	
  Other Collateral.

  	
   

  	
  21

  
	
   

  	
  5.2.1

  	
  Commercial Tort Claims.

  	
   

  	
  21

  
	
   

  	
  5.2.2

  	
  Other Collateral.

  	
   

  	
  21

  
	
  5.3

  	
  Lien Perfection; Further Assurances

  	
   

  	
  21

  
	
  5.4

  	
  Lien on Realty.

  	
   

  	
  21

  
	
  SECTION 6. COLLATERAL ADMINISTRATION

  	
   

  	
  22

  
	
  6.1

  	
  General.

  	
   

  	
  22

  
	
   

  	
  6.1.1

  	
  Location of Collateral.

  	
   

  	
  22

  
	
   

  	
  6.1.2

  	
  Insurance of Collateral.

  	
   

  	
  22

  
	
   

  	
  6.1.3

  	
  Protection of Collateral.

  	
   

  	
  23

  
	
  6.2

  	
  Administration of Accounts.

  	
   

  	
  23

  
	
   

  	
  6.2.1

  	
  Records, Schedules and Assignments of Accounts.

  	
   

  	
  23

  
	
   

  	
  6.2.2

  	
  Account Verification.

  	
   

  	
  24

  
	
   

  	
  6.2.3

  	
  Cash Receipts.

  	
   

  	
  24

  
	
   

  	
  6.2.4

  	
  Collection of Accounts, Proceeds of Collateral.

  	
   

  	
  25

  
	
  6.3

  	
  Records and Reports of Inventory.

  	
   

  	
  25

  
	
  6.4

  	
  Administration of Equipment.

  	
   

  	
  26

  
	
   

  	
  6.4.1

  	
  Records and Schedules of Equipment.

  	
   

  	
  26

  
	
   

  	
  6.4.2

  	
  Dispositions of Equipment.

  	
   

  	
  27

  
	
  6.5

  	
  Credit Card Receipts

  	
   

  	
  27

  
	
  SECTION 7. REPRESENTATIONS AND WARRANTIES

  	
   

  	
  27

  
	
  7.1

  	
  General Representations and Warranties.

  	
   

  	
  27

  
	
   

  	
  7.1.1

  	
  Organization and Qualification.

  	
   

  	
  27

  
	
   

  	
  7.1.2

  	
  Power and Authority.

  	
   

  	
  28

  
	
   

  	
  7.1.3

  	
  Legally Enforceable Agreement.

  	
   

  	
  28

  
	
   

  	
  7.1.4

  	
  Capital Structure.

  	
   

  	
  28

  

 

 

	
  

  	
  7.1.5

  	
  Names.

  	
   

  	
  29

  
	
   

  	
  7.1.6

  	
  Business Locations; Agent for Process.

  	
   

  	
  29

  
	
   

  	
  7.1.7

  	
  Title to Properties; Priority of Liens.

  	
   

  	
  29

  
	
   

  	
  7.1.8

  	
  Accounts.

  	
   

  	
  29

  
	
   

  	
  7.1.9

  	
  Equipment.

  	
   

  	
  30

  
	
   

  	
  7.1.10

  	
  Financial Statements; Fiscal Year.

  	
   

  	
  31

  
	
   

  	
  7.1.11

  	
  Full Disclosure.

  	
   

  	
  31

  
	
   

  	
  7.1.12

  	
  Solvent Financial Condition.

  	
   

  	
  31

  
	
   

  	
  7.1.13

  	
  Surety Obligations.

  	
   

  	
  31

  
	
   

  	
  7.1.14

  	
  Taxes.

  	
   

  	
  31

  
	
   

  	
  7.1.15

  	
  Brokers.

  	
   

  	
  32

  
	
   

  	
  7.1.16

  	
  Patents, Trademarks, Copyrights and Licenses.

  	
   

  	
  32

  
	
   

  	
  7.1.17

  	
  Governmental Consents.

  	
   

  	
  32

  
	
   

  	
  7.1.18

  	
  Compliance with Laws.

  	
   

  	
  33

  
	
   

  	
  7.1.19

  	
  Restrictions.

  	
   

  	
  33

  
	
   

  	
  7.1.20

  	
  Litigation.

  	
   

  	
  33

  
	
   

  	
  7.1.21

  	
  No Defaults.

  	
   

  	
  33

  
	
   

  	
  7.1.22

  	
  Leases.

  	
   

  	
  33

  
	
   

  	
  7.1.23

  	
  Pension Plans.

  	
   

  	
  34

  
	
   

  	
  7.1.24

  	
  Trade Relations.

  	
   

  	
  34

  
	
   

  	
  7.1.25

  	
  Labor Relations.

  	
   

  	
  34

  
	
   

  	
  7.1.26

  	
  Conduct of Business.

  	
   

  	
  34

  
	
   

  	
  7.1.27

  	
  Hazardous Materials.

  	
   

  	
  34

  
	
   

  	
  7.1.28

  	
  No Margin Stock.

  	
   

  	
  35

  
	
  7.2

  	
  Continuous Nature of Representations and Warranties.

  	
   

  	
  35

  
	
  7.3

  	
  Survival of Representations and Warranties.

  	
   

  	
  35

  
	
  SECTION 8. COVENANTS AND CONTINUING AGREEMENTS

  	
   

  	
  35

  
	
  8.1

  	
  Affirmative Covenants.

  	
   

  	
  35

  
	
   

  	
  8.1.1

  	
  Visits and Inspections; Lender Meeting.

  	
   

  	
  35

  
	
   

  	
  8.1.2

  	
  Notices.

  	
   

  	
  35

  
	
   

  	
  8.1.3

  	
  Financial Statements and Other Information.

  	
   

  	
  36

  

 

 

	
  

  	
  8.1.4

  	
  Borrowing Base Certificates.

  	
   

  	
  38

  
	
   

  	
  8.1.5

  	
  Landlord, Processor and Storage Agreements.

  	
   

  	
  38

  
	
   

  	
  8.1.6

  	
  Canadian Affiliate Financial Statements.

  	
   

  	
  38

  
	
   

  	
  8.1.7

  	
  [Intentionally Omitted].

  	
   

  	
  38

  
	
   

  	
  8.1.8

  	
  Subsidiaries

  	
   

  	
  38

  
	
   

  	
  8.1.9

  	
  Hazardous Materials.

  	
   

  	
  38

  
	
   

  	
  8.1.10

  	
  Deposit and Brokerage Accounts.

  	
   

  	
  39

  
	
  8.2

  	
  Negative Covenants.

  	
   

  	
  39

  
	
   

  	
  8.2.1

  	
  Mergers; Consolidations; Acquisitions; Structural
  Changes.

  	
   

  	
  39

  
	
   

  	
  8.2.2

  	
  Loans.

  	
   

  	
  39

  
	
   

  	
  8.2.3

  	
  Total Indebtedness.

  	
   

  	
  40

  
	
   

  	
  8.2.4

  	
  Affiliate Transactions.

  	
   

  	
  41

  
	
   

  	
  8.2.5

  	
  Limitation on Liens.

  	
   

  	
  41

  
	
   

  	
  8.2.6

  	
  Store Closures.

  	
   

  	
  42

  
	
   

  	
  8.2.7

  	
  Distributions.

  	
   

  	
  42

  
	
   

  	
  8.2.8

  	
  [Intentionally Omitted]

  	
   

  	
  42

  
	
   

  	
  8.2.9

  	
  Disposition of Assets.

  	
   

  	
  42

  
	
   

  	
  8.2.10

  	
  Securities of Subsidiaries.

  	
   

  	
  43

  
	
   

  	
  8.2.11

  	
  Bill-and-Hold Sales, Etc.

  	
   

  	
  43

  
	
   

  	
  8.2.12

  	
  Restricted Investment.

  	
   

  	
  43

  
	
   

  	
  8.2.13

  	
  Subsidiaries and Joint Ventures.

  	
   

  	
  43

  
	
   

  	
  8.2.14

  	
  Tax Consolidation.

  	
   

  	
  43

  
	
   

  	
  8.2.15

  	
  Organizational Documents.

  	
   

  	
  43

  
	
   

  	
  8.2.16

  	
  Fiscal Year End.

  	
   

  	
  43

  
	
   

  	
  8.2.17

  	
  Additional Stores.

  	
   

  	
  43

  
	
   

  	
  8.2.18

  	
  Fixed Charge Coverage Ratio.

  	
   

  	
  43

  
	
   

  	
  8.2.19

  	
  Capital Expenditures.

  	
   

  	
  44

  
	
  SECTION 9. CONDITIONS PRECEDENT

  	
   

  	
  44

  
	
  9.1

  	
  Documentation.

  	
   

  	
  44

  
	
  9.2

  	
  No Default.

  	
   

  	
  44

  

 

 

	
  9.3

  	
  Other Conditions.

  	
   

  	
  44

  
	
  9.4

  	
  Representations and Warranties.

  	
   

  	
  45

  
	
  9.5

  	
  No Litigation.

  	
   

  	
  45

  
	
  9.6

  	
  Material Adverse Effect.

  	
   

  	
  45

  
	
  SECTION 10. EVENTS OF DEFAULT; RIGHTS AND
  REMEDIES ON DEFAULT

  	
   

  	
  45

  
	
  10.1

  	
  Events of Default.

  	
   

  	
  45

  
	
   

  	
  10.1.1

  	
  Payment of Obligations.

  	
   

  	
  45

  
	
   

  	
  10.1.2

  	
  Misrepresentations.

  	
   

  	
  45

  
	
   

  	
  10.1.3

  	
  Breach of Specific Covenants.

  	
   

  	
  45

  
	
   

  	
  10.1.4

  	
  Breach of Other Covenants.

  	
   

  	
  45

  
	
   

  	
  10.1.5

  	
  Default Under Security Documents or Other
  Agreements.

  	
   

  	
  46

  
	
   

  	
  10.1.6

  	
  Other Defaults.

  	
   

  	
  46

  
	
   

  	
  10.1.7

  	
  Uninsured Losses.

  	
   

  	
  46

  
	
   

  	
  10.1.8

  	
  Insolvency and Related Proceedings.

  	
   

  	
  46

  
	
   

  	
  10.1.9

  	
  Business Disruption; Condemnation.

  	
   

  	
  46

  
	
   

  	
  10.1.10

  	
  Change in Control.

  	
   

  	
  47

  
	
   

  	
  10.1.11

  	
  ERISA.

  	
   

  	
  47

  
	
   

  	
  10.1.12

  	
  Challenge to Agreement.

  	
   

  	
  47

  
	
   

  	
  10.1.13

  	
  Key Management.

  	
   

  	
  47

  
	
   

  	
  10.1.14

  	
  Criminal Forfeiture.

  	
   

  	
  47

  
	
   

  	
  10.1.15

  	
  Judgments.

  	
   

  	
  47

  
	
  10.2

  	
  Acceleration of the Obligations.

  	
   

  	
  48

  
	
  10.3

  	
  Other Remedies.

  	
   

  	
  48

  
	
  10.4

  	
  Set Off and Sharing of Payments.

  	
   

  	
  49

  
	
  10.5

  	
  Remedies Cumulative; No Waiver.

  	
   

  	
  50

  
	
  SECTION 11. THE AGENT

  	
   

  	
  50

  
	
  11.1

  	
  Authorization and Action.

  	
   

  	
  50

  
	
  11.2

  	
  Agent’s Reliance, Etc.

  	
   

  	
  51

  
	
  11.3

  	
  Bank of America and Affiliates.

  	
   

  	
  52

  

 

 

	
  11.4

  	
  Lender Credit Decision.

  	
   

  	
  53

  
	
  11.5

  	
  Indemnification.

  	
   

  	
  53

  
	
  11.6

  	
  Rights and Remedies to be Exercised by Agent Only.

  	
   

  	
  53

  
	
  11.7

  	
  Agency Provisions Relating to Collateral.

  	
   

  	
  54

  
	
  11.8

  	
  Agent’s Right to Purchase Commitments.

  	
   

  	
  54

  
	
  11.9

  	
  Right of Sale, Assignment, Participations.

  	
   

  	
  55

  
	
   

  	
  11.9.1

  	
  Sales, Assignments.

  	
   

  	
  55

  
	
   

  	
  11.9.2

  	
  Participations.

  	
   

  	
  55

  
	
   

  	
  11.9.3

  	
  Certain Agreements of Borrowers.

  	
   

  	
  56

  
	
   

  	
  11.9.4

  	
  Non U.S. Resident Transferees.

  	
   

  	
  56

  
	
   

  	
  11.9.5

  	
  Certain Pledges.

  	
   

  	
  56

  
	
  11.10

  	
  Amendment.

  	
   

  	
  56

  
	
  11.11

  	
  Resignation of Agent; Appointment of Successor.

  	
   

  	
  57

  
	
  SECTION 12. MISCELLANEOUS

  	
   

  	
  58

  
	
  12.1

  	
  Power of Attorney.

  	
   

  	
  58

  
	
  12.2

  	
  Indemnity.

  	
   

  	
  59

  
	
  12.3

  	
  Sale of Interest.

  	
   

  	
  59

  
	
  12.4

  	
  Severability.

  	
   

  	
  59

  
	
  12.5

  	
  Successors and Assigns.

  	
   

  	
  60

  
	
  12.6

  	
  Cumulative Effect; Conflict of Terms.

  	
   

  	
  60

  
	
  12.7

  	
  Execution in Counterparts.

  	
   

  	
  60

  
	
  12.8

  	
  Notices.

  	
   

  	
  60

  
	
  Attention: Chief Financial Officer

  	
   

  	
  61

  
	
  12.9

  	
  Consent.

  	
   

  	
  61

  
	
  12.10

  	
  Credit Inquiries.

  	
   

  	
  61

  
	
  12.11

  	
  Time of Essence.

  	
   

  	
  61

  
	
  12.12

  	
  Entire Agreement.

  	
   

  	
  61

  
	
  12.13

  	
  Interpretation.

  	
   

  	
  61

  
	
  12.14

  	
  Confidentiality.

  	
   

  	
  62

  
	
  12.15

  	
  GOVERNING LAW; CONSENT TO FORUM.

  	
   

  	
  62

  
	
  12.16

  	
  WAIVERS BY BORROWER.

  	
   

  	
  63

  

 

 

	
  12.17

  	
  Joint Borrower Provisions.

  	
   

  	
  63

  
	
  12.18

  	
  Patriot Act Notice.

  	
   

  	
  68

  
	
  12.19

  	
  Amendment and Restatement.

  	
   

  	
  68

  

 

 

 

LOAN AND SECURITY AGREEMENT

THIS EIGHTH AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT is made as of this 19th day of June, 2006, by and among
BANK OF AMERICA, N.A. (“Bank of America”), a national banking association with
an office at 40 Broad Street, 10th Floor, Boston, Massachusetts 02109,
individually as a Lender and as Agent (“Agent”) for itself and any other
financial institution which is or becomes a party hereto (each such financial
institution, including Bank of America, is referred to hereinafter individually
as a “Lender” and collectively as the “Lenders”), THE CIT GROUP/BUSINESS
CREDIT, INC., with an office at 300 South Grand Avenue, 3rd Floor, Los Angeles, California 90071,
individually as a Lender and as Co-Administrative Agent, WELLS FARGO RETAIL
FINANCE, LLC, with an office at One Boston Place, 18th Floor, Boston, Massachusetts 02108, as a
Lender and as Documentation Agent, LENDERS, RESTORATION HARDWARE, INC., a
Delaware corporation (“Lead Borrower”) and THE MICHAELS FURNITURE COMPANY,
INC., a California corporation (“Michaels,” together with the Lead Borrower,
the “Borrowers”) both with chief executive offices and principal places of
business at 15 Koch Road, Suite J, Corte Madera, California 94925. Capitalized
terms used in this Agreement have the meanings assigned to them in Appendix A,
General Definitions. Accounting terms not otherwise specifically defined herein
shall be construed in accordance with GAAP consistently applied.

W  I
T  N  E  S  S  E  T  H:

WHEREAS, the Borrowers and certain of the Lenders are
party to that certain Seventh Amended and Restated Loan and Security Agreement
dated as of November 26, 2002 (as amended and in effect, the “Existing Loan Agreement”), entered into by,
among others, the Borrowers, the Lenders party thereto, and Fleet Retail Group,
LLC, a Delaware limited liability company, as successor in interest to Fleet
Capital Corporation, as Agent (in such capacity, the “Existing Agent”) for the Lenders; and

WHEREAS, Fleet Retail Group, LLC has contemporaneously
herewith assigned all of its right, title, and interest as a Lender under the
Existing Loan Agreement and each of the other Loan Documents to Bank of
America, N.A., and the Existing Agent desires to resign as Agent hereunder and
the Lenders desire to appoint Bank of America, N.A. as successor Agent; and

WHEREAS, the Borrowers, the Agent and the Lenders
hereunder desire to amend and restate the Existing Loan Agreement as provided
herein.

NOW, THEREFORE, in consideration of the mutual
conditions and agreements set forth in this Agreement, and for good and
valuable consideration, the receipt of which is hereby acknowledged, the
Lenders, the Agent, and the Borrowers hereby agree that the Existing Loan
Agreement shall be amended and restated, without novation, in its entirety to
read as follows:

 1
 

 

 

SECTION 1. CREDIT FACILITY

Subject to the terms and
conditions of, and in reliance upon the representations and warranties made in,
this Agreement and the other Loan Documents, Lenders agree to make a Total
Credit Facility of up to $150,000,000 available upon Borrowers’ request
therefor, as follows:

1.1           Revolving Credit Loans.

Each Lender agrees,
severally and not jointly, for so long as no Default or Event of Default
exists, to make Revolving Credit Loans to Borrowers from time to time during
the period from the date hereof to but not including the last day of the Term,
as requested by Borrowers in the manner set forth in subsection 3.1.1 hereof,
up to a maximum principal amount at any time outstanding equal to the lesser of
(i) such Lender’s Revolving Loan Commitment minus the product of
such Lender’s Revolving Loan Percentage and the LC Amount plus the amount of LC
Obligations that have not been reimbursed by Borrowers or funded with a
Revolving Credit Loan and (ii) the product of such Lender’s Revolving Loan
Percentage and an amount equal to the Adjusted Borrowing Base at such time minus
the LC Amount plus the amount of LC Obligations that have not been reimbursed
by Borrowers or funded with a Revolving Credit Loan minus the then aggregate
of Availability Reserves, if any. The Revolving Credit Loans shall be further
evidenced by, and repayable in accordance with the terms of, the Revolving
Notes and shall be secured by all of the Collateral. In no event shall the
aggregate of the Revolving Credit Loans and the LC Amount plus the amount of LC
Obligations that have not been reimbursed by Borrowers or funded with a
Revolving Credit Loan, exceed the Revolving Credit Maximum Amount. Further, in
no event shall the aggregate outstanding amount of Incremental Revolving Credit
Loans at any time exceed the Incremental Availability.

1.2           Overadvances.

Agent may make Revolving
Credit Loans on behalf of the Lenders at a time when an Overadvance exists or
would be caused by the making of such Revolving Credit Loans on behalf of the
Lenders where such Revolving Credit Loans are Protective Advances; provided
however, in no event shall (w) the aggregate of the then outstanding
Revolving Credit Loans (including any Overadvances) plus the LC Amount, plus the
amount of LC Obligations that have not been reimbursed by Borrowers or funded
with a Revolving Credit Loan, exceed the aggregate Revolving Loan Commitments
of all Lenders, (x) the making of any Overadvance cause any Lender to
exceed that Lender’s Revolving Loan Commitment, (y) the aggregate amount
of Protective Advances exceed 5% of the Adjusted Borrowing Base or (z) any
such Protective Advance remain outstanding for more than forty-five (45)
consecutive Business Days, unless in case of clause (z) the Majority
Lenders otherwise agree.

1.3           Use of Proceeds.

The Revolving Credit Loans
shall be used solely for (i) the Borrowers’ Capital Expenditures, (ii) for
Borrowers’ general operating capital needs in a manner consistent with 

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the provisions of this Agreement
and all applicable laws, and (iii) for other purposes permitted under this
Agreement.

1.4           SwingLine Loans.

Revolving Credit Loans that
are Base Rate Advances may be made by SwingLine Lender (in the aggregate, the “SwingLine
Loans”) in accordance with the procedures set forth in this Agreement for the
making of Revolving Credit Loans. The unpaid principal balance of the SwingLine
Loans shall not at any one time be in excess of $7,500,000 (which amount may be
increased or decreased from time to time, by reasonable advance notice by Agent
to the Lead Borrower). The aggregate unpaid principal balance of SwingLine
Loans shall bear interest at the rate applicable to Base Rate Advances. The  SwingLine Loans shall be further evidenced
by, and repayable in accordance with the terms of, the SwingLine Notes and
shall be secured by all of the Collateral. In the event that, when a Revolving
Credit Loan is requested and the aggregate unpaid balance of the SwingLine Loan
is less than $7,500,000, then SwingLine Lender may advise Agent that the
SwingLine Lender has determined to include up to the amount of the requested
Revolving Credit Loan as part of the SwingLine Loan. In such event, SwingLine
Lender shall transfer the amount of the requested Revolving Credit Loan to Agent.

The SwingLine Loan shall be
converted to a Revolving Credit Loan in which all Lenders participate at any
time and from time to time (but not less than on a weekly basis), by SwingLine
Lender advising Agent that all of the SwingLine Loan is to be converted to a
Revolving Credit Loan in which all Lenders participate. Agent will settle the
SwingLine Loan the earlier of (a) Wednesday of each week or (b) when
the SwingLine Loan exceeds $7,500,000. Agent shall advise each Lender of such
conversion as if, and with the same effect as if such conversion were the
making of a Revolving Loan as provided in Section 1.1.

1.5           Letters of Credit; LC Guaranties.

Agent agrees, for so long as
no Default or Event of Default exists and if requested by Borrowers, to (i) issue
its, or cause to be issued by Bank or another Affiliate of Agent, on the date
requested by Borrowers, Letters of Credit for the account of Borrowers (any
such Letter of Credit or LC Guaranty, at request of Borrower, may be for the
benefit of a Borrower or any Subsidiary of a Borrower) or (ii) execute LC
Guaranties by which Bank, or another Affiliate of Lender, on the date requested
by Borrowers, shall guaranty the payment or performance by a Borrower of its
reimbursement obligations with respect to Letters of Credit, provided (i) that
the LC Amount, plus the amount of LC Obligations that have not been reimbursed
by Borrowers or funded with a Revolving Credit Loan, shall not exceed
$60,000,000 at any time, (ii) that the aggregate outstanding amount of
usance Letters of Credit (giving effect to the Letter of Credit whose issuance
is requested) plus the face amount of any outstanding bankers’ acceptances
arising out of drawings under Letters of Credit shall not exceed $15,000,000 at
any time and (iii) no Letter of Credit shall be issued or LC Guaranty
executed to the extent such Letter of Credit or LC Guaranty would cause the sum
of any Lender’s Revolving Credit Loans and such Lender’s Revolving Loan
Percentage of the LC Amount (after giving effect to such Letter of Credit or LC
Guaranty), plus the amount of LC Obligations that have not been reimbursed by
Borrowers or funded with a Revolving 

 3
 

 

Credit Loan, to exceed the
lesser of (a) such Lender’s Revolving Loan Commitment, or (b) such
Lender’s Revolving Loan Percentage of the difference between the Adjusted
Borrowing Base and the then aggregate of any Availability Reserves. No
documentary Letter of Credit or LC Guaranty of a documentary letter of credit
may have an expiration date that is more than 60 days after the date of
issuance thereof and if such documentary Letter of Credit is a usance Letter of
Credit, time drafts drawn thereunder shall be payable no later than 60 days
after sight; and no standby Letter of Credit or LC Guaranty of a standby letter
of credit may have an expiration date that is more than one year from the date
of issuance thereof. No Letter of Credit or LC Guaranty may have an expiration
date that is after 30 days prior to the last day of the Term, unless, on the
date such Letter of Credit or LC Guaranty is requested by Borrowers,  (i) an amount equal to 103% of the face
amount of such Letter of Credit or LC Guaranty, in the case of a documentary
Letter of Credit or LC Guaranty with respect to a documentary Letter of Credit,
is deposited with Agent to be held as cash collateral, in a manner satisfactory
to Agent, and such later expiration date shall have been agreed to by, Agent,
Bank or another Affiliate of Agent, as applicable or (ii) an amount equal
to 103% of the face amount of such Letter of Credit or LC Guaranty, in the case
of a standby Letter of Credit or LC Guaranty with respect to a standby Letter
of Credit, is deposited with the Agent to be held as cash collateral, in a
manner satisfactory to Agent, and such later expiration date shall not extend
more than 30 days beyond the last day of the Term. Any such cash collateral
shall be held by Agent and applied by it as specified in Section 10.3(e). Notwithstanding
anything to the contrary contained herein, Borrowers, Agent and Lenders hereby
agree that all LC Obligations and all obligations of Borrowers relating thereto
shall be satisfied by the prompt issuance of one or more Revolving Credit Loans
that are Base Rate Revolving Portions, which Borrowers hereby acknowledge are
requested and Lenders hereby agree to fund; provided that, in the event
that such Revolving Credit Loans cannot be issued because the conditions set
forth in Section 9 cannot be satisfied or for any other reason, the
Borrowers shall be deemed to have incurred from the Agent an LC Borrowing in
the amount of the unreimbursed amount that is not so refinanced, which LC
Borrowing shall be due and payable on demand (together with interest) and shall
bear interest at the Default Rate. In such event, each Lender’s payment to the
Agent as set forth below shall be deemed payment in respect of its
participation in such LC Borrowing and shall be deemed satisfaction of its
participation obligation under this Section 1.5. In the event that
Revolving Credit Loans are not, for any reason, promptly made to satisfy all
then existing LC Obligations, each Lender hereby agrees to pay to Agent, on
demand, an amount equal to such LC Obligations multiplied  by such
Lender’s Revolving Loan Percentage. The Borrowers acknowledge and agree that
until all such amounts paid by each Lender to Agent equal to such LC
Obligations are repaid by Borrowers, such amounts shall be secured by the
Collateral and shall bear interest and be payable at the same rate and in the
same manner as Base Rate Revolving Portions. Immediately upon the issuance of a
Letter of Credit or an LC Guaranty under this Agreement, each Lender shall be
deemed to have irrevocably and unconditionally purchased and received from
Agent, without recourse or warranty, an undivided interest and participation
therein equal to such LC Obligations multiplied  by such Lender’s
Revolving Loan Percentage.

1.6           Foreign Exchange Facility

Agent agrees, for so long as
no Default or Event of Default exists and if requested by Borrowers to enter,
or cause its Affiliate to enter, into Derivative Obligations up 

 4
 

 

to a maximum amount, in the
aggregate, not to exceed $5,000,000 (the “Foreign Exchange Facility”). No other
Lender shall have any obligation to Agent or Borrowers with respect to the
Foreign Exchange Facility. No Derivative Obligations may have a term that
exceeds one year and in no event exceeds the Term. The face amount of any
Derivative Obligation shall be reserved from Availability at 100% of the face
amount of such Derivative Obligation if the Derivative Obligation, or the
remaining life of the Derivative Obligation, is for a term of two Business Days
or less. Agent reserves the right to create additional reserves based on the
mark-to-market value of the Derivative Obligation from time to time. All settlements
of any Derivative Obligations will be determined by Agent at Agent’s sole
discretion at the expiration date for such Derivative Obligations. Borrowers
shall pay to Agent all fees and expenses set forth in Section 2.11 in
connection with the Foreign Exchange Facility. All Derivative Obligations will
be processed through Agent’s Treasury and International Services Group.

SECTION 2. INTEREST, FEES AND CHARGES

2.1           Interest.

2.1.1        Rates
of Interest. Interest shall accrue on the principal amount of the Base Rate
Revolving Portion including Incremental Revolving Credit Loans bearing interest
at the Base Rate outstanding at the end of each day at a fluctuating rate per
annum equal to the Applicable Margin then in effect plus the Base Rate. Said
rate of interest shall increase or decrease by an amount equal to any increase
or decrease in the Base Rate, effective as of the opening of business on the
day that any such change in the Base Rate occurs. Interest shall accrue on the
principal amount of each of the LIBOR Advances including Incremental Revolving
Credit Loans bearing interest at LIBOR outstanding at the end of each day at a
fixed rate per annum equal to the Applicable Margin then in effect plus
the LIBOR for the applicable Interest Period.

2.1.2        Default
Rate of Interest. At the option of Agent or upon the instruction of the
Majority Lenders, upon and after the occurrence of an Event of Default, and
during the continuation thereof, the principal amount of all Loans and Letters
of Credit shall bear interest at a rate per annum equal to 2.0% plus the
interest rate otherwise applicable thereto (the “Default Rate”).

2.1.3        Maximum
Interest. In no event whatsoever shall the aggregate of all amounts deemed
interest hereunder or under the Notes and charged or collected pursuant to the
terms of this Agreement or pursuant to the Notes exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. If any provisions of this
Agreement or the Notes are in contravention of any such law, such provisions
shall be deemed amended to conform thereto.

2.2           Computation of Interest and Fees.

Base Rate Interest, Letter
of Credit and LC Guaranty fees and unused line fees hereunder shall be
calculated daily and shall be computed on the actual number of days

 5
 

 

elapsed over a year of 365
days. LIBOR Interest shall be computed on the actual number of days elapsed
over a year of 360 days. For the purpose of computing interest hereunder, all
items of payment received by Agent shall be applied by Agent on account of the
Obligations (subject to final payment of such items) on the Business Day after
receipt by Agent of such items (as determined in accordance with Section 3.4)
in Agent’s account located in Boston, Massachusetts.

2.3           Fee Letter.

Borrowers shall pay to Agent
certain fees and other amounts in accordance with the terms of the fee letter
between Borrowers and Agent dated as of May 10, 2006, which fee letter
supplements the fee letter dated as of September 26, 2000, as
supplemented by that certain fee letter dated as of July 29, 2005 (collectively, the “Agent Fee Letter”).

2.4           Letter of Credit and LC Guaranty
Fees.

Borrowers shall pay to
Agent, for the ratable benefit of the Lenders, a fee equal to 1.5% per annum
(except that, following the occurrence of any Event of Default, such fee shall
be increased by 2% per annum) multiplied  by the aggregate face
amount of all Letters of Credit, LC Guaranties for Letters of Credit and the
aggregate face amount of any outstanding bankers’ acceptances arising out of
drawings under Letters of Credit outstanding from time to time during the term
of this Agreement, which fees shall be payable quarterly in arrears on the
first day of each month hereafter, and, all normal and customary charges
associated with the issuance of such Letters of Credit, LC Guaranties and
bankers’ acceptances, which fees and charges shall be deemed fully earned and
shall be due and payable upon issuance of each such Letter of Credit, LC
Guaranty or bankers’ acceptance and shall not be subject to rebate or proration
upon the termination of this Agreement for any reason.

2.5           Unused Line Fee.

Borrowers shall pay to
Agent, for the ratable benefit of the Lenders, a fee (the “Unused Line Fee”)
equal to 0.25% per annum multiplied by the average daily amount by which the
Total Credit Facility exceeds the sum of (a) the aggregate outstanding
principal balance of the Revolving Credit Loans, plus (b) the LC Amount,
plus (c) the amount of LC Obligations that have not been reimbursed by
Borrowers or funded with a Revolving Credit Loan. The unused line fee shall be
payable quarterly in arrears on the first Business Day of each quarter
hereafter and at the end of the term.

2.6           Prepayment Fee.

Borrowers shall pay to Agent, for the ratable benefit
of the Lenders, a fee in the event that prior to 45 days prior to the end of
the Term Borrowers elect to repay the Loans in full and terminate all Revolving
Loan Commitments or upon the acceleration of the Obligations pursuant to Section 10.2
hereof. Such fee shall be payable upon repayment of the Loans and shall be in
the amount of 0.25% of the Revolving Credit Maximum Amount.

 6
 

 

2.7           Reimbursement of Expenses.

If, at any time or times
regardless of whether or not an Event of Default then exists, (i) Agent
incurs legal or accounting expenses or any other costs or out-of-pocket
expenses in connection with (1) the negotiation and preparation of this
Agreement or any of the other Loan Documents, any amendment of or modification
of this Agreement or any of the other Loan Documents, or any sale or attempted
sale of any interest herein to any assignee (including, without limitation,
printing and distribution of materials to prospective Lenders and all costs
associated with bank meetings, but excluding any closing fees paid to Lenders
in connection therewith) or (2) the administration of this Agreement or
any of the other Loan Documents and the transactions contemplated hereby and
thereby; or (ii) Agent or any Lender incurs legal or accounting expenses
or any other costs or out-of-pocket expenses in connection with (1) any
litigation, contest, dispute, suit, proceeding or action (whether instituted by
Agent, any Lender, Borrowers or any other Person) relating to the Collateral,
this Agreement or any of the other Loan Documents or Borrowers’, any of their
Subsidiaries’ or any Guarantor’s affairs; (2) any attempt to enforce any
rights of Agent or any Lender against Borrowers or any other Person which may
be obligated to Agent or any Lender by virtue of this Agreement or any of the
other Loan Documents, including, without limitation, the Account Debtors; or (3) any
attempt to inspect, verify, protect, preserve, restore, collect, sell,
liquidate or otherwise dispose of or realize upon the Collateral; then all such
legal and accounting expenses, other costs and out of pocket expenses of Agent
or any Lender, as applicable, shall be charged to Borrowers; provided,
that Borrowers shall not be responsible for such costs and out-of-pocket
expenses to the extent incurred because of the gross negligence or willful
misconduct of Agent or any Lender. All amounts chargeable to Borrower under
this Section 2.7 shall be
Obligations secured by all of the Collateral, shall be payable on demand to
Agent and shall bear interest from the date such demand is made until paid in
full at the rate applicable to Base Rate Advances from time to time. Borrowers
shall also reimburse Agent for expenses incurred by Agent in its administration
of the Collateral to the extent and in the manner provided in Section 2.9
hereof.

2.8           Bank Charges.

Borrowers shall pay to Agent
any and all fees, costs or expenses which Agent pays to a bank or other similar
institution arising out of or in connection with (i) the forwarding to
Borrowers or any other Person on behalf of Borrowers, by Agent, of proceeds of
Loans made to Borrowers pursuant to this Agreement and (ii) the depositing
for collection by Agent of any check or item of payment received or delivered
to Agent on account of the Obligations.

2.9           Collateral Protection Expenses.

All out-of-pocket expenses
incurred in protecting, storing, warehousing, insuring, handling, maintaining
and shipping the Collateral, any and all excise, property, sales, and use taxes
imposed by any state, federal, or local authority on any of the Collateral or
in respect of the sale thereof shall be borne and paid by Borrowers. If
Borrowers fail to promptly pay any portion thereof when due, Agent may, at its
option, but shall not be required to, pay the same and charge Borrowers
therefor.

 7
 

 

2.10         Payment of Charges.

All amounts chargeable to
Borrowers under this Agreement shall be Obligations secured by all of the
Collateral, shall be, unless specifically otherwise provided, payable on demand
and shall bear interest from the date demand was made or such amount is due, as
applicable, until paid in full at the rate applicable to Base Rate Revolving
Portions from time to time.

2.11         Foreign Exchange Facility

Borrowers shall pay to Agent
on account of the Foreign Exchange Facility, a fee equal to 1% per annum, based
on a year of 360 days, on the amount reserved from Availability applicable to
the Derivative Obligations plus a transactional fee equal to the Bank’s
standard fee for such transactions.

2.12         Amendment Fee

Borrowers shall pay to
Agent, for the ratable benefit of the Lenders, on the Closing Date an amendment
fee in an amount equal to $50,000.

2.13         Extension Fee

Borrowers shall pay to
Agent, for the ratable benefit of the Lenders, on the Closing Date an extension
fee in an amount equal to $100,000.

SECTION 3. LOAN ADMINISTRATION

3.1           Manner of Borrowing Revolving
Credit Loans.

Borrowings
under the credit facility established pursuant to Section 1 hereof shall
be as follows:

3.1.1        Loan
Requests. A request for a Revolving Credit Loan shall be made, or shall be
deemed to be made, in the following manner: 
(i) Borrowers may give Agent notice of their intention to borrow,
in which notice Borrowers shall specify the amount of the proposed borrowing
(which shall be no less than $10,000 in the case of Base Rate Revolving
Portions) and the proposed borrowing date, no later than 11:00 a.m.
Pacific Time on the proposed borrowing date (or in accordance with Section 3.1.5
in the case of a request for a LIBOR Advance), provided, however, that
no such request may be made at a time when there exists a Default or an Event
of Default; and (ii) the becoming due of any amount required to be paid
under this Agreement, or the Notes, whether as interest or for any other
Obligation, shall be deemed irrevocably to be a request for a Revolving Credit
Loan on the due date in the amount required to pay such interest or other
Obligation. In the event that the aggregate outstanding Revolving Credit Loans
and the LC Amount, plus the amount of LC Obligations that have not been
reimbursed by Borrowers or funded with a Revolving Credit Loan, exceeds the
Borrowing Base, all Revolving Credit Loans made thereafter by the Lenders in
excess of the Borrowing Base shall be deemed to constitute Incremental Revolving
Credit Loans, and only Incremental Revolving Credit Loans shall bear interest
at the Base Rate plus the Base

 8
 

 

Rate Margin for Incremental
Revolving Credit Loans or at LIBOR plus the LIBOR Margin for Incremental
Revolving Credit Loans, as applicable.

3.1.2        Disbursement.
Borrowers hereby irrevocably authorize Lender to disburse the proceeds of each
Revolving Credit Loan requested, or deemed to be requested, pursuant to
subsection 3.1.1 as follows:  (i) the
proceeds of each Revolving Credit Loan requested under subsection 3.1.1(i) shall
be disbursed by Agent in lawful money of the United States of America in
immediately available funds, by wire transfer to such bank account as may be
agreed upon by Borrowers and Agent from time to time or elsewhere if pursuant
to a written direction from Borrowers; and (ii) the proceeds of each
Revolving Credit Loan deemed requested under subsection 3.1.1(ii) shall be
disbursed by Agent by way of direct payment of the relevant interest or other
Obligation.

3.1.3        Payment
by Lenders. Agent shall give to each Lender prompt written notice by
facsimile, telex, cable or electronic mail of the receipt by Agent from
Borrowers of any request for a Revolving Credit Loan. Each such notice shall
specify the requested date and amount of such Revolving Credit Loan, whether
such Revolving Credit Loan shall be a LIBOR Advance, and the amount of each
Lender’s advance thereunder (in accordance with its applicable Revolving Loan
Percentage). Each Lender shall, not later than 12:00 p.m. (Pacific Time)
on such requested date, wire to a bank designated by Agent the amount of that
Lender’s Revolving Loan Percentage of the requested Revolving Credit Loan. The
failure of any Lender to make the Revolving Credit Loans to be made by it shall
not release any other Lender of its obligations hereunder to make its Revolving
Credit Loan. Neither Agent nor any other Lender shall be responsible for the
failure of any other Lender to make the Revolving Credit Loan to be made by
such other Lender.

3.1.4        Authorization.
Borrowers hereby irrevocably authorize Agent to advance to Borrowers, and to
charge to Borrowers’ Loan Account hereunder as a Revolving Credit Loan, a sum
sufficient to pay all interest accrued on the Obligations during the
immediately preceding month and to pay all fees, costs and expenses and other
Obligations at any time owed by Borrowers to Agent or any Lender hereunder.

3.1.5        LIBOR
Advances. Notwithstanding the provisions of subsection 3.1.1, in the event
Borrowers desire to obtain a LIBOR Advance, Borrowers shall give Agent prior,
written, irrevocable notice no later than 11:00 a.m. Pacific Time on the
3rd Business Day prior to the requested borrowing date specifying (i) Borrowers’
election to obtain a LIBOR Advance, (ii) the date of the proposed borrowing
(which shall be a Business Day), (iii) the duration of the Interest Period
with respect thereto and (iv) the amount to be borrowed, which amount
shall be in a minimum principal amount of $1,000,000 and may increase in
integral multiples of $100,000. In no event shall Borrowers be permitted to
have outstanding at any one time LIBOR Advances with more than six separate
Interest Periods.

3.1.6        Conversion
of Base Rate Advances. Provided that no Default or Event of Default has
occurred which is then continuing, Borrowers may, on any Business Day, convert
any Base Rate Advance into a LIBOR Advance. If Borrowers desire to convert a
Base Rate Advance, Borrowers shall give Agent not less than two (2) Business
Days’ prior written notice (prior to 11:00 a.m. Pacific Time on such
Business Day), specifying the date of

 9
 

 

such conversion and the
amount to be converted. Each conversion into or conversion of a LIBOR Advance
shall be in a minimum principal amount of $1,000,000 and may increase in
integral multiples of $100,000 in excess thereof. After giving effect to any
conversion of Base Rate Advances to LIBOR Advances, Borrowers shall not be
permitted to have outstanding at any one time LIBOR Advances with more than six
separate Interest Periods.

3.1.7        Continuation
of LIBOR Advances. The Lead Borrower shall have the right on two (2) Business
Days’ prior irrevocable written notice given to Agent by the Lead Borrower
(prior to 11:00 a.m. Pacific Time on such Business Day), subject to the
provisions hereof, to continue any LIBOR Advance into a subsequent Interest
Period of the same or a different permitted duration, in each case subject to
the satisfaction of the following conditions:

(i)    in the case of a
continuation of less than all LIBOR Advances, the LIBOR Advances continued
shall each be in a minimum principal amount of $1,000,000 and may increase in
integral multiples of $100,000; and

(ii)   no LIBOR Advance (or
portion thereof) may be continued as a LIBOR Advance if a Default or Event of
Default has occurred which is then continuing or if, after giving effect to
such continuation, Borrowers shall have outstanding more than six separate
LIBOR Advances in the aggregate.

If the Lead Borrower shall
fail to give timely notice of its election to continue any LIBOR Advance or portion
thereof as provided above, or if such continuation shall not be permitted, such
LIBOR Advance or portion thereof, unless such LIBOR Advance shall be repaid,
shall automatically be converted into a Base Rate Advance at the end of the
Interest Period then in effect with respect to such LIBOR Advance.

3.1.8        Inability
to Make LIBOR Advances. Notwithstanding any other provision hereof, if any
applicable law, treaty, regulation or directive, or any change therein or in
the interpretation or application thereof, shall make it unlawful for any
Lender (for purposes of this subsection 3.1.8, the term “Lender” shall include
the office or branch where a Lender or any corporation or bank then controlling
such Lender makes or maintains any LIBOR Advances) to make or maintain its
LIBOR Advances, or if with respect to any Interest Period, any Lender is unable
to determine the LIBOR relating thereto, or adverse or unusual conditions in,
or changes in applicable law relating to, the London interbank market make it,
in the reasonable judgment of such Lender, impracticable to fund therein any of
the LIBOR Advances, or make the projected LIBOR unreflective of the actual
costs of funds therefor to such Lender, the obligation of such Lender to make
LIBOR Advances hereunder shall forthwith be suspended during the pendency of
such circumstances and Borrowers shall, if any affected LIBOR Advances are then
outstanding, promptly upon request from such Lender, convert such affected
LIBOR Advances into Base Rate Advances.

3.1.9        Letter
of Credit and LC Guaranty Requests. A request for a Letter of Credit or LC
Guaranty shall be made in the following manner: 
Lead Borrower may

 

 10

 

give Agent and Bank a
written notice of its request for the issuance of a Letter of Credit or LC
Guaranty, not later than 11:00 a.m. Pacific Time, one Business Day before
the proposed issuance date thereof, in which notice Lead Borrower shall specify
the proposed issuer, issuance date and format and wording for the Letter of
Credit or LC Guaranty being requested (which shall be satisfactory to Agent and
the Person being asked to issue such Letter of Credit or LC Guaranty); provided,
that no such request may be made at a time when there exists a Default or Event
of Default. Such request shall be accompanied by an executed application and
reimbursement agreement in form and substance satisfactory to Agent and the
Person being asked to issue the Letter of Credit or LC Guaranty, as well as any
required resolutions and any cash collateral amount required by Section 1.5.

3.1.10      Method
of Making Requests. As an accommodation to Borrowers, unless a Default or
an Event of Default is then in existence, (i) Agent shall permit
telephonic requests for Revolving Credit Loans to Agent, (ii) Agent and
Bank may, in their discretion, permit electronic transmittal of requests for
Letters of Credit and LC Guaranties to them, and (iii) Agent may, in Agent’s
discretion, permit electronic transmittal of instructions, authorizations,
agreements or reports to Agent. Unless Lead Borrower specifically directs Agent
or Bank in writing not to accept or act upon telephonic or electronic
communications from Lead Borrower, neither Agent nor Bank shall have any
liability to Borrowers for any loss or damage suffered by Borrowers as a result
of Agent’s or Bank’s honoring of any requests, execution of any instructions,
authorizations or agreements or reliance on any reports communicated to it telephonically
or electronically and purporting to have been sent to Agent or Bank by one of
the authorized individuals of Lead Borrower listed on Exhibit 3.1.10
hereto, which may be revised from time to time by Lead Borrower in compliance
with Section 8.1.2, and neither Agent nor Bank shall have any duty to
verify the origin of any such communication or the authority of the person
sending it. Each telephonic request for a Revolving Credit Loan, Letter of
Credit or LC Guaranty accepted by Agent and Bank, if applicable, hereunder
shall be promptly followed by a written confirmation of such request from Lead
Borrower to Lender and Bank, if applicable.

3.2           Payments.

Except where evidenced by
notes or other instruments issued or made by Borrowers to any Lender and accepted
by such Lender specifically containing payment instructions that are in
conflict with this Section 3.2 (in which case the conflicting provisions
of said notes or other instruments shall govern and control), the Obligations
shall be payable as follows:

3.2.1        Principal.
Principal payable on account of Revolving Credit Loans shall be payable by
Borrowers to Agent for the ratable benefit of Lenders immediately upon the
earliest of (i) the receipt by Agent or Borrowers of any proceeds of any
of the Collateral (except as otherwise provided herein), including without
limitation pursuant to subsections 3.3.1 and 6.2.3, to the extent of said
proceeds, subject to Borrowers’ rights to reborrow such amounts in compliance
with subsection 1.1 hereof; (ii) the occurrence of an Event of Default in
consequence of which Agent or Majority Lenders elect to accelerate the maturity
and payment of the Obligations, or (iii) termination of this Agreement
pursuant to Section 4 hereof; provided, however, that, if an
Overadvance shall exist at any time,

 11
 

 

Borrowers shall, on demand,
repay the Overadvance. Each payment (including principal prepayments) by
Borrowers on account of principal of the Revolving Credit Loans shall be
applied first to Base Rate Advances, then to LIBOR Advances.

3.2.2        Interest.

(a)           Base Rate Advances. Interest
accrued on Base Rate Advances shall be due and payable on the earliest of (1) the
first calendar day of each month (for the immediately preceding month),
computed through the last calendar day of the preceding month, (2) the
occurrence of an Event of Default in consequence of which Agent or Majority
Lenders elect to accelerate the maturity and payment of the Obligations or (3) termination
of this Agreement pursuant to Section 4 hereof.

(b)           LIBOR Advances. Interest
accrued on each LIBOR Advance shall be due and payable on each LIBOR Interest
Payment Date and on the earlier of (1) the occurrence of an Event of
Default in consequence of which Agent or Majority Lenders elect to accelerate
the maturity and payment of the Obligations or (2) termination of this
Agreement pursuant to Section 4 hereof.

3.2.3        Costs,
Fees and Charges. Costs, fees and charges payable pursuant to this
Agreement shall be payable by Borrowers to Agent, as and when provided in Section 2
hereof or to any other Person designated by Agent in writing.

3.2.4        Other
Obligations. The balance of the Obligations requiring the payment of money,
if any, shall be payable by Borrowers to Agent for distribution to Lenders, as
appropriate, as and when provided in this Agreement, the Other Agreements or
the Security Documents, or on demand, whichever is later.

3.2.5        Prepayment
of LIBOR Advances; Yield Maintenance. Borrowers may repay a LIBOR Advance. Borrowers
shall pay to Agent, upon request of Agent, such amount or amounts as shall be
sufficient (in the reasonable opinion of Agent) to compensate Lenders for any
loss, cost, or expense incurred as a result of: 
(i) any payment of a LIBOR Advance on a date other than the last
day of the Interest Period for such Loan; (ii) any failure by Borrowers to
borrow a LIBOR Advance on the date specified by Borrowers’ written notice; or (iii) any
failure by Borrowers to pay a LIBOR Advance on the date for payment specified
in Borrowers’ written notice. Without limiting the foregoing, Borrowers shall
pay to Agent, for the ratable benefit of Lenders, a “yield maintenance fee” in
an amount computed as follows:  the
current rate for United States Treasury securities (bills on a discounted basis
shall be converted to a bond equivalent) with a maturity date closest to the
Interest Period chosen pursuant to the LIBOR Advance as to which the prepayment
is made, shall be subtracted from the LIBOR in effect at the time of prepayment.
If the result is zero or a negative number, there shall be no yield maintenance
fee. If the result is a positive number, then the resulting percentage shall be
multiplied by the amount of the principal balance being prepaid. The resulting
amount shall be divided by 360 and multiplied by the number of days remaining
in the Interest Period chosen pursuant to the LIBOR Advance as to which the
prepayment is made. Said amount shall be reduced to present value calculated by
using the above referenced United States Treasury securities rate and the
number of days

 12
 

 

remaining in the term chosen
pursuant to the LIBOR Advance as to which prepayment is made. The resulting
amount shall be the yield maintenance fee due to Agent, for the ratable benefit
of Lenders, upon the payment of a LIBOR Advance. If by reason of an Event of
Default, Agent or Majority Lenders elect to declare the Obligations to be
immediately due and payable, then any yield maintenance fee with respect to a
LIBOR Advance shall become due and payable in the same manner as though
Borrowers had exercised such right of prepayment.

3.2.6        Application
of Proceeds of Collateral and Payments after an Event of Default. Upon the
occurrence of and during the continuation of an Event of Default, either if
requested by Majority Lenders or upon termination of the Revolving Loan
Commitments, (a) all payments received on account of the Obligations,
whether from Borrowers or otherwise, shall be applied by Agent against the
Obligations and (b) all proceeds received by Agent in respect of any sale
of, or collection from, or other realization upon all or any part of the
Collateral under any Loan Document may, in the discretion of Agent, be held by
Agent as Collateral for, and/or (then or at any time thereafter) applied in
full or in part by Agent against, the applicable Obligations, in each case in
the following order of priority:

(a)           first, to the
payment of all costs, expenses, indemnities and attorneys’ fees incurred by
Agent in collecting the Obligations, in enforcing the rights of Agent and
Lenders under the Loan Documents and in collecting, retaking, completing,
protecting, removing, storing, advertising for sale, selling and delivering any
Collateral (except for any such costs, expenses, indemnities and attorneys’
fees incurred solely in connection with the Derivative Obligations or other
Obligations not arising under the Loan Documents, and which can be so
identified);

(b)           thereafter, to the
payment of all costs, expenses, indemnities and attorneys’ fees incurred by any
Lender then due under the Loan Documents (except for any such costs, expenses,
indemnities and attorneys’ fees incurred solely in connection with the
Derivative Obligations or other Obligations not arising under the Loan
Documents, and which can be so identified);

(c)           thereafter, to the
payment of all other Obligations (excluding Derivative Obligations or other
Obligations not arising under the Loan Documents) for the ratable benefit of
the holders thereof to the full extent thereof (subject to the provisions of
this subsection 3.2);

(d)           thereafter, to the
payment of all Derivative Obligations or other Obligations not arising under
the Loan Documents and all costs, expenses, indemnities and attorneys’ fees
incurred in connection with such Derivative Obligations or other Obligations
not arising under the Loan Documents, then due and payable pro rata to the full
extent thereof; and

(e)           thereafter, to the
extent of any excess of such proceeds, to the payment to or upon the order of
Borrowers or to whosoever may be lawfully entitled to receive the same or as a
court of competent jurisdiction may direct.

 13
 

 

 

3.3           Mandatory and Optional Prepayments.

3.3.1        Proceeds
of Sale, Loss, Destruction or Condemnation of Collateral. Except as
provided in subsections 6.4.2 and 8.2.9, if any Borrower or any of its
Subsidiaries sells any of the Equipment or real Property, or if any of the
Collateral is lost or destroyed or taken by condemnation, Borrowers shall,
unless otherwise agreed by Majority Lenders, pay to Agent for the ratable
benefit of Lenders as and when received by Borrowers or such Subsidiary and as
a mandatory prepayment of the Loans, as herein provided, a sum equal to the
proceeds (including insurance payments but net of costs and taxes incurred in
connection with such sale or event) received by such Borrower or such Subsidiary
from such sale, loss, destruction or condemnation. The applicable prepayment
shall be applied to reduce the outstanding principal balance of the Revolving
Credit Loans, but shall not permanently reduce the Revolving Loan Commitments. Notwithstanding
the foregoing, if the proceeds of insurance (net of costs and taxes incurred)
with respect to any loss or destruction of Equipment, Inventory or real
Property (i) are less than $500,000, unless an Event of Default is then in
existence, Agent shall remit such proceeds to Borrowers for use in replacing or
repairing the damaged Collateral or (ii) are equal to or greater than
$500,000 and Borrowers have requested that Agent agree to permit Borrowers or
the applicable Subsidiary to repair or replace the damaged Collateral, such
amounts shall be provisionally applied to reduce the outstanding principal
balance of the Revolving Credit Loans until the earlier of Agent’s decision
with respect thereto or the expiration of 90 days from such request. If Agent
agrees, in its reasonable judgment, to permit such repair or replacement under
such clause (ii), such amount shall, unless an Event of Default is in
existence, be remitted to Borrowers for use in replacing or repairing the
damaged Collateral; if Agent declines to permit such repair or replacement or
does not respond to Borrowers within such 90 day period, such amount shall be
applied to the Loans in the manner specified in the second sentence of this
subsection 3.3.1 until payment thereof in full.

3.3.2        LIBOR
Advances. If the application of any payment made in accordance with the
provisions of this Section 3.3 at a time when no Event of Default has
occurred and is continuing would result in termination of a LIBOR Advance prior
to the last day of the Interest Period for such LIBOR Advance, the amount of
such prepayment shall not be applied to such LIBOR Advance, but will, at
Borrowers’ option, be held by Agent in a non-interest bearing account or
deposited by Borrowers in an interest-bearing account at a Lender or another
bank satisfactory to Agent in its discretion, which account is in the name of
Agent and from which account only Agent can make any withdrawal, in each case
to be applied as such amount would otherwise have been applied under this Section 3.3
at the earlier to occur of (i) the last day of the relevant Interest
Period or (ii) the occurrence of a Default or an Event of Default.

3.4           Application of Payments and
Collections.

All items of payment
received by Agent by 2:00 p.m., Pacific Time, on any Business Day shall be
deemed received on that Business Day. All items of payment received after 2:00 p.m.,
Pacific Time, on any Business Day shall be deemed received on the following
Business Day. Borrowers irrevocably waive the right to direct the application
of any and all payments and collections at any time or times hereafter received
by Agent from or on behalf

 14
 

 

 

of Borrowers, and Borrowers
do hereby irrevocably agree that Agent shall have the continuing exclusive
right to apply and reapply any and all such payments and collections received
at any time or times hereafter by Agent or its agent against the Obligations,
in such manner as Agent may deem advisable, notwithstanding any entry by Agent
or any Lender upon any of its books and records. If as the result of collections
of Accounts as authorized by subsection 6.2.3 hereof or otherwise, a credit
balance exists in the Loan Account, such credit balance shall not accrue
interest in favor of Borrowers, but shall be disbursed to Borrowers or
otherwise at Borrowers’ direction in the manner set forth in subsection 
3.1.2, upon Borrowers’ request at any time, so long as no Default or Event of
Default then exists. Agent may at its option, offset such credit balance
against any of the Obligations upon and during the continuance of an Event of
Default.

3.5           All Loans to Constitute One
Obligation.

The Loans shall constitute
one general Obligation of Borrowers, and shall be secured by Lender’s Lien upon
all of the Collateral.

3.6           Loan Account.

Agent shall enter all Loans
as debits to a loan account (the “Loan Account”) and shall also record in the
Loan Account all payments made by Borrowers on any Obligations and all proceeds
of Collateral which are finally paid to Agent, and may record therein, in
accordance with customary accounting practice, other debits and credits,
including interest and all charges and expenses properly chargeable to
Borrowers pursuant to this Agreement or any other Loan Document.

3.7           Statements of Account.

Agent will account to
Borrowers monthly with a statement of Loans, charges and payments made pursuant
to this Agreement during the immediately preceding month, and such account
rendered by Agent shall be deemed final, binding and conclusive upon Borrowers
absent demonstrable error unless Agent is notified by Borrowers in writing to
the contrary within 30 days of the date each accounting is received by
Borrowers. Such notice shall only be deemed an objection to those items
specifically objected to therein.

3.8           Sharing of Payments, Etc.

If any Lender shall obtain
any payment (whether voluntary, involuntary, through the exercise of any right
of set-off, or otherwise) on account of any Loan made by it in excess of its
ratable share of payments on account of Loans made by all Lenders, such Lender
shall forthwith purchase from each other Lender such participation in such Loan
as shall be necessary to cause such purchasing Lender to share the excess
payment ratably with each other Lender; provided, that if all or any
portion of such excess payment is thereafter recovered from such purchasing
Lender, such purchase from each Lender shall be rescinded and such Lender shall
repay to the purchasing Lenders the purchase price to the extent of such
recovery, together with an amount equal to such Lender’s ratable share (according
to the proportion of (i) the amount of such Lender’s required repayment to
(ii) the total amount so recovered from the purchasing Lender) of any
interest or other amount paid or payable by the 

 15
 

 

 

purchasing Lender in respect
of the total amount so recovered. Borrowers agree that any Lender so purchasing
a participation from another Lender pursuant to this Section 3.8 may, to
the fullest extent permitted by law, exercise all its rights of payment
(including the right of set-off) with respect to such participation as fully as
if such Lender were the direct creditor of Borrowers in the amount of such
participation. Notwithstanding anything to the contrary contained herein, all
purchases and repayments to be made under this Section 3.8 shall be made
through Agent.

3.9           Increased Costs.

If any law or any
governmental or quasi-governmental rule, regulation, policy, guideline or
directive (whether or not having the force of law) adopted after the date of
this Agreement and having general applicability to all banks within the
jurisdiction in which any Lender operates (excluding, for the avoidance of
doubt, the effect of and phasing in of capital requirements or other
regulations or guidelines passed prior to the date of this Agreement), or any
interpretation or application thereof by any governmental authority charged
with the interpretation or application thereof, or the compliance of such
Lender therewith, shall:

(1)           subject such Lender to any tax with
respect to this Agreement (other than (a) any tax based on or measured by
net income or otherwise in the nature of a net income tax, including, without
limitation, any franchise tax or any similar tax based on capital, net worth or
comparable basis for measurement and (b) any tax collected by a
withholding on payments and which neither is computed by reference to the net
income of the payee nor is in the nature of an advance collection of a tax
based on or measured by the net income of the payee) or (2) change the
basis of taxation of payments to such Lender of principal, fees, interest or
any other amount payable hereunder or under any Loan Documents (other than in
respect of (a) any tax based on or measured by net income or otherwise in
the nature of a net income tax, including, without limitation, any franchise tax
or any similar tax based on capital, net worth or comparable basis for
measurement and (b) any tax collected by a withholding on payments and
which neither is computed by reference to the net income of the payee nor is in
the nature of an advance collection of a tax based on or measured by the net
income of the payee);

(2)           impose, modify or hold applicable any
reserve (except any reserve taken into account in the determination of the
applicable LIBOR), special deposit, assessment or similar requirement against
assets held by, or deposits in or for the account of, advances or loans by, or
other credit extended by, any office of such Lender, including (without
limitation) pursuant to Regulation D of the Board of Governors of the
Federal Reserve System; or

(3)           impose on such Lender or the London
interbank market any other condition with respect to any Loan Document;

and the result of any of the
foregoing is to increase the cost to such Lender of making, renewing or
maintaining its Loans hereunder by an amount that such Lender deems to be

 16
 

 

material or to reduce the
amount of any payment (whether of principal, interest or otherwise) in respect
of any of such Loans by an amount that such Lender deems to be material, then,
in any such case, Borrowers shall pay such Lender, upon demand and
certification not later than sixty (60) days following its receipt of
notice of the imposition of such increased costs, such additional amount as
will compensate such Lender for such additional cost or such reduction, as the
case may be, to the extent such Lender has not otherwise been compensated, with
respect to a particular Loan, for such increased cost as a result of an
increase in the Base Rate or the LIBOR. An officer of such Lender shall
determine the amount of such additional cost or reduced amount using reasonable
averaging and attribution methods and shall certify the amount of such
additional cost or reduced amount to Borrowers, which certification shall
include a written explanation of such additional cost or reduction to Borrowers.
Such certification shall be conclusive absent manifest error. If such Lender
claims any additional cost or reduced amount pursuant to this Section 3.9,
then such Lender shall use reasonable efforts (consistent with legal and
regulatory restrictions) to designate a different lending office  or to file any certificate or document
reasonably requested by Borrowers if the making of such designation or filing
would avoid the need for, or reduce the amount of, any such additional cost or
reduced amount and would not, in the sole discretion of such Lender, be
otherwise disadvantageous to such Lender.

3.10         Basis for Determining Interest Rate
Inadequate or Unfair.

In the event that Agent
shall have determined that:

(i)    reasonable means do not
exist for ascertaining the LIBOR for any Interest Period; or

(ii)   Dollar deposits in the
relevant amount and for the relevant maturity are not available in the London
interbank market with respect to a proposed LIBOR Advance, or a proposed
conversion of a Base Rate Advance into a LIBOR Advance; then

Agent shall give Borrowers
prompt written, telephonic or electronic notice of the determination of such
effect. If such notice is given, (i) any such requested LIBOR Advance
shall be made as a Base Rate Advance, unless Borrowers shall notify Agent no
later than 11:00 a.m. (Pacific Time) two (2) Business Days prior to
the date of such proposed borrowing that the request for such borrowing shall
be canceled or made as an unaffected type of LIBOR Advance, and (ii) any
Base Rate Advance which was to have been converted to an affected type of LIBOR
Advance shall be continued as or converted into a Base Rate Advance, or, if
Borrowers shall notify Agent, no later than 11:00 a.m. (Pacific Time)
two (2) Business Days prior to the proposed conversion, shall be
maintained as an unaffected type of LIBOR Advance.

3.11         Lead Borrower as Borrowers’ Agent.

Each Borrower hereby
designates the Lead Borrower as that Borrower’s agent to obtain Revolving
Credit Loans hereunder, the proceeds of which shall be available to each
Borrower for the same uses as set forth in Section 1.3 above. As the
disclosed principal for its

 17
 

 

agent, each Borrower shall
be obligated to the Agent and the Lenders on account of Revolving Credit Loans
as if made directly by the Lenders to that Borrower, notwithstanding the manner
by which such loans and advances are recorded on the books and records of the
Lead Borrower and of any other Borrower.

3.12         Replacement of a Lender

If a Lender claims
additional compensation or reduced amount pursuant to Section 3.9 or
determines that its ability to make LIBOR Advances hereunder is suspended
pursuant to Section 3.1.8 (any such Lender, a “Subject Lender”), so long as (i) no Default or Event of
Default shall have occurred and be continuing and Borrowers have obtained a
commitment from another Lender or other Person acceptable to Agent to purchase
at par the Subject Lender’s Loans and assume the Subject Lender’s Revolving
Loan Commitment and all other obligations of the Subject Lender hereunder, (ii) such
Lender is not the issuer or an Affiliate of the issuer of any Letters of Credit
or LC Guaranties outstanding (unless all such Letters of Credit and LC
Guaranties are terminated or arrangements acceptable to such Lender (such as
cash collateral or a “back-to-back” letter of credit) are made) and (iii), if
applicable, the Subject Lender is unwilling to withdraw the claim made pursuant
to Section 3.9, Borrowers may require the Subject Lender to assign all of
its Loans and Revolving Loan Commitment to such other Lender, Lenders, other
Person or other Persons pursuant to the provisions of Section 11.9; provided
that, prior to or concurrently with such replacement, (1) the Subject
Lender shall have received payment in full of all principal, interest, fees and
other amounts (including all amounts under Section 3.9 (if applicable))
through such date of replacement and a release from its obligations under the
Loan Documents, (2) the processing fee required to be paid by subsection
11.9.1 shall have been paid to Agent and (3) all of the requirements for
such assignment contained in Section 11.9.1, including, without
limitation, the consent of Agent and the receipt by Agent of an executed
Assignment Agreement and other supporting documents, have been fulfilled.

SECTION 4. TERM AND TERMINATION

4.1           Term of Agreement.

Subject to the right of
Lenders to cease making Loans to Borrowers during the continuance of any
Default or Event of Default, this Agreement shall be in effect from the date
hereof, through and including June 30, 2011 (the “Term”), unless
terminated as provided in Section 4.2 hereof.

4.2           Termination.

4.2.1        Termination
by Lenders. Agent may, and at the direction of Majority Lenders shall,
terminate this Agreement without notice upon or after the occurrence and during
the continuance of an Event of Default.

4.2.2        Termination
by Borrowers. Upon at least 30 days’ prior written notice to Agent and
Lenders, Borrowers may, at their option, terminate this Agreement; provided,
however, no such termination shall be effective until Borrowers have
paid or collateralized to Agent’s satisfaction all of the Obligations in
immediately available funds, all 

 18
 

 

Letters of Credit and LC
Guaranties have expired, terminated or have been cash collateralized to Agent’s
satisfaction and Borrowers have complied with Sections 2.6 and 3.2.5. Any
notice of termination given by Borrowers shall be irrevocable unless all
Lenders otherwise agree in writing. No Lender shall have any obligation to make
any Loans or issue or procure any Letters of Credit or LC Guaranties on or
after the termination date stated in such notice. Borrowers may elect to
terminate this Agreement in its entirety only. No section of this Agreement or
type of Loan available hereunder may be terminated singly.

4.2.3        Effect
of Termination. All of the Obligations shall be immediately due and payable
upon the termination date stated in any notice of termination of this Agreement.
All undertakings, agreements, covenants, warranties and representations of
Borrowers contained in the Loan Documents shall survive any such termination
and Agent shall retain its Liens in the Collateral and Agent and each Lender
shall retain all of its rights and remedies under the Loan Documents
notwithstanding such termination until all Obligations have been discharged or
paid, in full, in immediately available funds, including, without limitation,
all Obligations under Sections 2.6 and 3.2.5 resulting from such termination. Notwithstanding
the foregoing or the payment in full of the Obligations, Agent shall not be
required to terminate its Liens in the Collateral unless, with respect to any
loss or damage Agent may incur as a result of dishonored checks or other items
of payment received by Agent from Borrowers or any Account Debtor and applied
to the Obligations, Agent shall, at its option, (i) have received a
written agreement satisfactory to Agent, executed by Borrowers and by any
Person whose loans or other advances to Borrowers are used in whole or in part
to satisfy the Obligations, indemnifying Agent and each Lender from any such
loss or damage or (ii) have retained cash Collateral for such period of
time as Agent, in its discretion, may deem necessary to protect Agent and each
Lender from any such loss or damage.

SECTION 5. SECURITY INTERESTS

5.1           Security Interest in Collateral.

To secure the prompt payment
and performance to Agent and each Lender of the Obligations, each Borrower
hereby grants to Agent for the benefit of each Lender a continuing Lien upon
all of such Borrower’s assets, including all of the following Property and
interests in Property of such Borrower, whether now owned or existing or
hereafter created, acquired or arising and wheresoever located:

(i)                 Accounts;

(ii)                Certificated
Securities;

(iii)               Chattel Paper;

(iv)               Computer
Hardware and Software and all rights with respect thereto, including, any and
all licenses, options, warranties, service contracts, program services, test
rights, maintenance rights, support rights, improvement rights, renewal rights
and indemnifications, and any

 19
 

 

substitutions,
replacements, additions or model conversions of any of the foregoing;

(v)                Contract
Rights;

(vi)               Deposit
Accounts;

(vii)              Documents;

(viii)             Financial
Assets;

(ix)               Fixtures;

(x)                General
Intangibles (including Payment Intangibles, Software and Intellectual
Property);

(xi)               Goods,
(including all of its Equipment, Fixtures and Inventory), and all accessions,
additions, attachments, improvements, substitutions and replacements thereto
and therefor;

(xii)              Instruments;

(xiii)             Investment
Property;

(xiv)             money (of every
jurisdiction whatsoever);

(xv)              Letter-of-Credit
Rights;

(xvi)             Security
Entitlements;

(xvii)            Supporting
Obligations;

(xviii)           Uncertificated
Securities; and

(xix)              to the extent
not included in the foregoing, all other personal property of any kind or
description;

together with all books,
records, writings, data bases, information and other property relating to, used
or useful in connection with, or evidencing, embodying, incorporating or
referring to any of the foregoing, and all Proceeds, products, offspring,
rents, issues, profits and returns of and from any of the foregoing; provided
that to the extent that the provisions of any lease or license of such
Collateral expressly prohibit (which prohibition is enforceable under applicable
law) any assignment thereof, and the grant of security interest therein, Agent
will not enforce its security interest in a Borrower’s rights under such lease
or license (other than in respect of the Proceeds thereof) for so long as such
prohibition continues, it being understood that upon request of Agent,
Borrowers will in good faith use reasonable efforts to obtain consent for the
creation of a security interest in favor of Agent (and to Agent’s enforcement
of such security interest) in such Agent’s rights under such lease or license.

 20

 

 

5.2           Other Collateral.

5.2.1        Commercial
Tort Claims. Borrowers shall promptly notify Agent in writing upon
incurring or otherwise obtaining a Commercial Tort Claim after the Closing Date
against any third party and, upon request of Agent, promptly enter into an
amendment to this Agreement and do such other acts or things deemed appropriate
by Agent to give Agent a security interest in any such Commercial Tort Claim.

5.2.2        Other
Collateral. Borrowers shall promptly notify Agent in writing upon acquiring
or otherwise obtaining any Collateral after the date hereof consisting of
Deposit Accounts, Investment Property, Letter of Credit Rights or Electronic
Chattel Paper and, upon the request of Agent, promptly execute such other
documents, and do such other acts or things deemed appropriate by Agent to
deliver to Agent control with respect to such Collateral; promptly notify Agent
in writing upon acquiring or otherwise obtaining any Collateral after the date
hereof consisting of Documents or Instruments and, upon the request of Agent,
will promptly execute such other documents, and do such other acts or things
deemed appropriate by Agent to deliver to Agent possession of such Documents
which are negotiable and Instruments, and, with respect to nonnegotiable Documents,
to have such nonnegotiable Documents issued in the name of Agent; and with
respect to Collateral in the possession of a third party, other than
Certificated Securities and Goods covered by a Document and obtain an
acknowledgement from the third party that it is holding the Collateral for the
benefit of Agent.

5.3.          Lien
Perfection; Further Assurances.Borrowers hereby authorizes such UCC-1
financing statements as are required by the UCC and such other instruments,
assignments or documents as are necessary to perfect Agent’s Lien upon any of
the Collateral and shall take such other action as may be required to perfect
or to continue the perfection of Agent’s Lien upon the Collateral. Unless
prohibited by applicable law, Borrowers hereby irrevocably authorize Agent to
execute and/or file any such financing statements, including, without
limitation, financing statements that indicate the Collateral (i) as all
assets of Borrowers or words of similar effect, or (ii) as being of an
equal or lesser scope, or with greater or lesser detail, than as set forth in Section 5.1,
on Borrowers’ behalf. Borrowers also hereby ratify their authorization for
Agent to have filed in any jurisdiction any like financing statements or
amendments thereto if filed prior to the date hereof. The parties agree that a
carbon, photographic or other reproduction of this Agreement shall be
sufficient as a financing statement and may be filed in any appropriate office
in lieu thereof. At Agent’s request, Borrowers shall also promptly execute or
cause to be executed and shall deliver to Agent any and all documents,
instruments and agreements deemed necessary by Agent to give effect to or carry
out the terms or intent of the Loan Documents.

5.4           Lien on Realty.

The due and punctual payment
and performance of the Obligations shall also be secured by the Lien created by
Mortgages upon all real Property of Borrowers now or hereafter owned. Each
Mortgage shall be executed by Borrowers in favor of Agent. Each Mortgage shall
be duly recorded, at Borrowers’ expense, in each office where such recording is
required to constitute a fully perfected first Lien on the real Property
covered thereby. 

 21
 

 

Borrowers shall deliver to
Agent, at Borrowers’ expense, mortgagee title insurance policies issued by a
title insurance company satisfactory to Agent, which policies shall be in form
and substance satisfactory to Agent and shall insure a valid first Lien in
favor of Agent, for the benefit of itself and the Lenders, on the Property
covered by each Mortgage, subject only to those exceptions acceptable to Agent
and its counsel. Borrowers shall deliver to Agent such other documents,
including, without limitation, as-built survey prints of the real Property, as
Agent and its counsel may request relating to the real Property subject to the
Mortgages.

SECTION 6. COLLATERAL ADMINISTRATION

6.1           General.

6.1.1        Location
of Collateral. All Collateral, other than Inventory in transit and motor
vehicles, will at all times be kept by Borrowers and their Subsidiaries at one
or more of the business locations set forth in Exhibit 6.1.1
hereto, as updated pursuant to Section 6.3 hereof. All Accounts and other
intangible items comprising a portion of the Collateral are deemed to be
located at the Lead Borrower’s chief executive office.

6.1.2        Insurance
of Collateral. Borrowers shall maintain and pay for insurance upon all
Collateral wherever located and with respect to the business of Borrowers and
each of their Subsidiaries, covering casualty, hazard, public liability,
workers’ compensation and such other risks in such amounts and with such
insurance companies as are reasonably satisfactory to Agent. Borrowers shall
deliver certified copies of such policies to Agent as promptly as practicable,
with satisfactory lender’s loss payable endorsements, naming Agent as a loss
payee, assignee or additional insured, as appropriate, as its interest may
appear, and showing only such other loss payees, assignees and additional
insureds as are satisfactory to Agent. Each policy of insurance or endorsement
shall contain a clause requiring the insurer to give not less than 60 days’
prior written notice to Agent in the event of cancellation of the policy and a
clause specifying that the interest of Agent shall not be impaired or
invalidated by any act or neglect of Borrowers, any of their Subsidiaries or
the owner of the Property or by the occupation of the premises for purposes
more hazardous than are permitted by said policy. Borrowers agree to deliver to
Agent, promptly as rendered, true copies of all reports made in any reporting
forms to insurance companies. All proceeds of business interruption insurance
(if any) of Borrowers and their Subsidiaries shall be remitted to Agent for
application to the outstanding balance of the Revolving Credit Loans.

Unless Borrowers provide
Agent with evidence of the insurance coverage required by this Agreement, Agent
may purchase insurance at Borrowers’ expense to protect Agent’s interests in
the Properties of Borrowers and their Subsidiaries, provided, however that
Agent’s purchase of such insurance shall not constitute a cure or waiver of any
Event of Default occasioned by Borrowers’ or their Subsidiaries’ failure to
comply with the provisions of this Section 6.1.2. This insurance may, but
need not, protect the interests of Borrowers and their Subsidiaries. The
coverage that Agent purchases may not pay any claim that Borrowers or any
Subsidiary makes or any claim that is made against Borrowers or any such
Subsidiary in connection with said Property. Borrowers may later cancel any
insurance purchased by Agent, but only after providing Agent with evidence that
Borrowers and their Subsidiaries have obtained insurance as required by this
Agreement. If Agent purchases insurance, 

 22
 

 

Borrowers will be
responsible for the costs of that insurance, including interest and any other
charges Agent may impose in connection with the placement of insurance, until
the effective date of the cancellation or expiration of the insurance. The
costs of the insurance may be added to the Obligations. The costs of the
insurance may be more than the cost of insurance that Borrowers and their
Subsidiaries may be able to obtain on their own.

The Lead Borrower shall
advise Agent of each claim in excess of $200,000 made by any Borrower under any
policy of insurance which covers the Collateral and will permit Agent, at Agent’s
option in each instance, to the exclusion of the Borrowers, to conduct the
adjustment of each such claim (and of all claims following the occurrence of
any Event of Default). Borrowers hereby appoint Agent as Borrowers’ attorney in
fact to obtain, adjust, settle, and cancel any insurance described in this
section and to endorse in favor of the Agent any and all drafts and other
instruments with respect to such insurance. The within appointment, being
coupled with an interest, is irrevocable until this Agreement is terminated by
a written instrument executed by a duly authorized officer of Agent. Agent
shall not be liable on account of any exercise pursuant to said power except
where there has been a final judicial determination (in a proceeding in which
Agent had an opportunity to be heard) that such exercise was conducted in a
grossly negligent manner or in willful misconduct. Agent shall apply any
proceeds of such insurance against the Obligations, whether or not such have
matured, as provided in Section 3.3.1 of this Agreement.

6.1.3        Protection
of Collateral. Lender shall not be liable or responsible in any way for the
safekeeping of any of the Collateral or for any loss or damage thereto (except
for reasonable care in the custody thereof while any Collateral is in Agent’s
or any Lender’s actual possession) or for any diminution in the value thereof,
or for any act or default of any warehouseman, carrier, forwarding agency, or
other person whomsoever, but the same shall be at Borrowers’ sole risk.

6.2           Administration of Accounts.

6.2.1        Records,
Schedules and Assignments of Accounts. Borrowers shall keep accurate and
complete records of their Accounts and all payments and collections thereon and
shall submit to Agent on such periodic basis as Agent shall request a sales and
collections report for the preceding period, in form consistent with the
reports currently prepared by Borrowers with respect to such information. Concurrently
with the delivery of each Borrowing Base Certificate required by subsection
8.1.4, or more frequently as requested by Agent, from and after the date
hereof, Borrowers shall deliver to Agent a detailed aged trial balance of all
of its Accounts, and upon Agent’s request therefor, copies of proof of delivery
and the original copy of all documents, including, without limitation,
repayment histories and present status reports relating to the Accounts so
scheduled and such other matters and information relating to the status of then
existing Accounts as Agent shall request.

If an Account includes a
charge for any tax payable to any governmental taxing authority, Agent is
authorized, in its sole discretion, to pay the amount thereof to the proper
taxing authority for the account of Borrowers and to charge Borrowers therefor,
except for taxes that (i) are being actively contested in good faith and
by appropriate proceedings and with respect to which Borrowers maintain
reasonable reserves on its books therefor and 

 23
 

 

(ii) would not
reasonably be expected to result in any Lien other than a Permitted Lien. In no
event shall Agent or any Lender be liable for any taxes to any governmental
taxing authority that may be due by Borrowers.

6.2.2        Account
Verification. Any of Agent’s officers, employees or agents shall have the
right, at any time or times hereafter, in the name of Agent, any designee of
Agent or Borrowers, to verify the validity, amount or any other matter relating
to any Accounts by mail, telephone, electronic communication or otherwise; provided,
that unless a Default or an Event of Default is then in existence, prior to
conducting each set of verifications, Agent shall generally consult with
Borrowers about the verification process. Borrowers shall cooperate fully with
Agent in an effort to facilitate and promptly conclude any such verification
process.

6.2.3        Cash
Receipts. After the occurrence of a Cash Dominion Event, the Borrowers
shall cause the sweep on each Business Day of all available cash receipts and
other proceeds from the sale or disposition of any Collateral, including,
without limitation, the proceeds of all credit card charges (all such cash
receipts and proceeds, “Cash Receipts”), to (x) a concentration
account maintained by the Agent at Bank of America, N.A. (the “Concentration
Account”), or (y) a Blocked Account, as the Agent may direct.

(a)           The Blocked Account Agreements shall
require, after the occurrence of a Cash Dominion Event, the sweep on each
Business Day of all Cash Receipts to the Concentration Account or to such other
account as the Agent may direct.

(b)           If at any time after the occurrence
of a Cash Dominion Event, any cash or cash equivalents owned by the Borrowers
and constituting proceeds of Collateral are deposited to any account, or held
or invested in any manner, otherwise than in a Blocked Account that is subject
to a Blocked Account Agreement as required herein, the Agent shall require the
Borrowers to close such account and have all funds therein transferred to the
Concentration Account or such Blocked Account as the Agent may direct.

(c)           The Borrowers may close Blocked
Accounts and/or open new Blocked Accounts, subject to the execution and
delivery to the Agent of Blocked Account Agreements consistent with the
provisions of this Section 6.2.3.

(d)           The Concentration Account is and
shall remain under the sole dominion and control of the Agent. Each Borrower
acknowledges and agrees that (i) such Borrower has no right of withdrawal
from the Concentration Account, (ii) the funds on deposit in the Concentration
Account shall continue to be collateral security for all of the Obligations,
and (iii) the funds on deposit in the Concentration Account shall be
applied as provided in Section 3.2.6 or Section 3.4, as applicable.

(e)           So long as  no Cash Dominion
Event has occurred, the Borrowers may direct, and shall have sole control over,
the manner of disposition of its funds in the Blocked Accounts. After the
occurrence of a Cash Dominion Event, 

 24
 

 

whether
or not any Obligations are then outstanding, the Borrowers shall cause the ACH
or wire transfer, upon the Agent’s instruction, to the Concentration Account of
the then entire ledger balance of each Blocked Account.

(f)            In the event that, notwithstanding
the provisions of this Section 6.2.3, after the occurrence of a Cash
Dominion Event, the Borrowers receive or otherwise have dominion and control of
any such proceeds or collections of Collateral, such proceeds and collections
shall be held in trust by the Borrowers for the Agent and shall not be
commingled with any of the Borrowers’ other funds or deposited in any account
of any Borrower other than as instructed by the Agent.

6.2.4        Collection
of Accounts, Proceeds of Collateral. To expedite collection, each Borrower
shall endeavor in the first instance to make collection of its Accounts for
Agent. All remittances received by Borrowers on account of Accounts, together
with the proceeds of any other Collateral, shall be held as Agent’s property,
for its benefit and the benefit of Lenders, by Borrowers as trustee of an
express trust for Agent’s benefit and Borrowers shall on a daily basis deposit
same in kind in the lockboxes or a Blocked Account. Agent retains the right at
all times after the occurrence and during the continuance of a Default or an
Event of Default to notify Account Debtors that Borrowers’ Accounts have been
assigned to Agent and to collect Borrowers’ Accounts directly in its own name
and to charge the collection costs and expenses, including attorneys’ fees, to
Borrowers.

6.3           Records and Reports of Inventory.

(a)           Borrowers shall keep records of their
Inventory which records shall be complete and accurate in all material respects.
Borrowers shall furnish to Agent Inventory reports concurrently with the
delivery of each Borrowing Base Certificate described in subsection 8.1.4
or more frequently as requested by Agent, which reports will be in such other
format and detail as Agent shall request and shall include a current list of
all locations of Borrowers’ Inventory.

(b)           The Borrowers, at their own expense,
shall cause not less than one (1) physical inventory of the Borrowers’
inventory to be undertaken in each twelve (12) month period during which this
Agreement is in effect, conducted by nationally recognized inventory takers and
using practices consistent with practices in effect on the date hereof. The
Agent, at the expense of the Borrowers, may participate in and/or observe each
scheduled physical count of Inventory which is undertaken on behalf of any
Borrower or its Subsidiaries. The Borrowers shall provide the Agent with the
preliminary Inventory levels at each of the Borrowers’ stores within ten (10) days
following the completion of such inventory. The Borrowers, within forty-five
(45) days following the completion of such inventory, shall provide the Agent
with a reconciliation of the results of each such inventory (as well as of any
other physical inventory undertaken by the Borrowers) and shall post such
results to the Borrowers’ stock ledger and general ledger, as applicable. The
Agent, in its discretion, if any Event of Default exists, may cause such
additional inventories to be taken as the Agent determines (each, at the
expense of the Borrowers). The Agent shall use its best 

 25
 

 

efforts to schedule any
such inventories so as to not unreasonably disrupt the operation of the
Borrowers’ business.

(c)           Borrowers shall pay to Agent all out-of-pocket expenses incurred by
Agent in connection with audit of the books and records and Properties of
Borrowers and their Subsidiaries and such other matters as Agent shall deem
appropriate in its sole judgment, whether such audits are conducted by
employees of Agent or by third parties hired by Agent; provided that
the Borrowers shall be responsible only for the costs and expenses of up to
four such audits in any twelve month period following the Closing Date unless
an Event of Default shall have occurred and be continuing (in which event the
Agent may undertake such additional audits as it deems appropriate at the
expense of the Borrowers). Notwithstanding the foregoing limitations on the
Borrowers’ obligation to pay the expenses for such audits prior to the
occurrence of an Event of Default, the Agent may undertake such additional
audits prior to the occurrence of an Event of Default in its sole judgment, at the expense of the Lenders. Such out-of-pocket expenses shall be payable
on the first day of the month following the date of issuance by Agent of a
request for payment thereof to Borrowers.

(d)           From time to time, Agent may, at
Borrowers’ expense, obtain appraisals conducted by such appraisers (who may be
personnel of Agent) as are satisfactory to Agent; provided that the
Borrowers shall be responsible only for the costs and expenses of up to four
such appraisals in any twelve month period following the Closing Date unless an
Event of Default shall have occurred and be continuing (in which event the
Agent may undertake such additional appraisals as it deems appropriate at the
expense of the Borrowers). Notwithstanding the foregoing limitations on the
Borrowers’ obligation to pay the expenses for such appraisals prior to the
occurrence of an Event of Default, the Agent may undertake such additional
appraisals prior to the occurrence of an Event of Default in its sole judgment, at the expense
of the Lenders. Such out-of-pocket
expenses shall be payable on the first day of the month following the date of
issuance by Agent of a request for payment thereof to Borrowers.

(e)           Agent may, from time to time, at
Borrowers’ expense, undertake “mystery shopping” visits to all or any of
Borrowers’ business premises. Agent shall provide the Lead Borrower with a copy
of any non-confidential results of such “mystery shopping.”

(f)            Agent shall provide copies of the
foregoing to the Lenders upon request.

6.4           Administration of Equipment.

6.4.1        Records
and Schedules of Equipment. Borrowers shall keep records of their Equipment
which shall be complete and accurate in all material respects itemizing and
describing the kind, type, quality, quantity and book value of their Equipment
and all dispositions made in accordance with subsection 6.4.2 hereof, and, if
so requested by 

 26
 

 

Agent, Borrowers shall, and
shall cause each of their Subsidiaries to, furnish Agent with a current
schedule containing the foregoing information. Promptly after the reasonable
request therefor by Agent, Borrowers shall deliver to Agent any and all
evidence of ownership, if any, of any of its Equipment.

6.4.2        Dispositions
of Equipment. Borrowers shall not, and shall not permit any of their
Subsidiaries to, sell, lease or otherwise dispose of or transfer any of their
respective Equipment or other fixed assets or any part thereof, without the
prior written consent of Agent; provided, however, that the foregoing
restriction shall not apply, for so long as no Default or Event of Default
exists and is continuing, (i) to dispositions of Equipment or other fixed
assets with a book value not in excess of $50,000 in the aggregate in any
fiscal year and (ii) to replacements of Equipment or other fixed assets
that are substantially worn, damaged or obsolete with Equipment or other fixed
assets which are useful in the business of Borrowers or one of their
Subsidiaries, provided that the replacement Equipment or other fixed
assets shall be acquired within 90 days after any disposition of the Equipment
or other fixed assets that are to be replaced and the replacement Equipment or
other fixed assets shall be free and clear of Liens other than Permitted Liens
that are Purchase Money Liens.

6.5           Credit
Card Receipts.. Annexed hereto as Exhibit 6.5 is a Schedule
that describes all arrangements to which Borrowers are a party with respect to
the payment to Borrowers of the proceeds of credit card charges for sales by
Borrowers. Borrowers have heretofore delivered to Agent, as a condition to the
effectiveness of this Agreement, notification, executed on behalf of Borrowers,
to each of Borrowers’ credit card clearinghouses and processors of notice (in
form satisfactory to Agent), which notice provides that payment of all credit
card charges submitted by Borrowers to that clearinghouse or other processor
and any other amount payable to Borrowers by such clearinghouse or other
processor shall be directed to the Blocked Account or as otherwise designated
from time to time by Agent. Borrowers shall not change such direction or
designation except upon and with the prior written consent of Agent.

SECTION 7. REPRESENTATIONS AND WARRANTIES

7.1           General Representations and
Warranties.

To induce Agent and each
Lender to enter into this Agreement and to make advances hereunder, each
Borrower warrants, represents and covenants to Agent and each Lender that:

7.1.1        Organization
and Qualification. Each Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization listed on Exhibit 7.1.1. Each of
Borrowers’ Subsidiaries is a corporation, limited partnership or limited
liability company duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or organization listed on Exhibit 7.1.1.
Each of Borrowers and each of their Subsidiaries is duly qualified and is
authorized to do business and is in good standing as a foreign limited
liability company, limited partnership or corporation, as applicable, in each
state or jurisdiction listed on Exhibit 7.1.1 hereto and in all
other states and jurisdictions in which the failure of Borrowers 

 27
 

 

or any of their Subsidiaries
to be so qualified would reasonably be expected to have a Material Adverse
Effect.

7.1.2        Power
and Authority. Borrowers and each of their Subsidiaries are duly authorized
and empowered to enter into, execute, deliver and perform this Agreement and
each of the other Loan Documents to which they are a party. The execution,
delivery and performance of this Agreement and each of the other Loan Documents
have been duly authorized by all necessary corporate or other relevant action
and do not and will not (i) require any consent or approval of the
shareholders of Borrowers or any of the shareholders, partners or members, as
the case may be, of any Subsidiary of Borrowers; (ii) contravene Borrowers’
or any of their Subsidiaries’ charter, articles or certificate of
incorporation, partnership agreement, certificate of formation, by-laws, limited
liability agreement, operating agreement or other organizational documents (as
the case may be); (iii) violate, or cause Borrowers or any of their
Subsidiaries to be in default under, any provision of any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
in effect having applicability to Borrowers or any of their Subsidiaries, the
violation of which would reasonably be expected to have a Material Adverse
Effect; (iv) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which Borrowers or any of their Subsidiaries is a party or by
which it or its Properties may be bound or affected, the breach of or default
under which would reasonably be expected to have a Material Adverse Effect; or (v) result
in, or require, the creation or imposition of any Lien (other than Permitted
Liens) upon or with respect to any of the Properties now owned or hereafter
acquired by Borrowers or any of their Subsidiaries.

7.1.3        Legally
Enforceable Agreement. This Agreement is, and each of the other Loan
Documents when delivered under this Agreement will be, a legal, valid and
binding obligation of each of Borrowers and each of their Subsidiaries party thereto,
enforceable against it in accordance with its respective terms, except as
limited by applicable bankruptcy or insolvency laws, and by general principles
of equity.

7.1.4        Capital
Structure. Exhibit 7.1.4 hereto states, as of the date hereof, (i) the
correct name of each of the Subsidiaries of Borrowers, its jurisdiction of
incorporation or organization and the percentage of its Voting Stock owned by
Borrowers or a Subsidiary of Borrowers, (ii) the name of each of Borrowers’
and each of their Subsidiaries’ corporate or joint venture relationships and
the nature thereof and (iii) the number of all outstanding Securities of
Borrowers and each Subsidiary of Borrowers. Borrowers have good title to all of
the Securities they purport to own of each of such Subsidiaries, free and clear
in each case of any Lien other than Permitted Liens. All such Securities have
been duly issued and are fully paid and non-assessable. As of the date hereof,
there are no outstanding options to purchase, or any rights or warrants to
subscribe for, or any commitments or agreements to issue or sell any Securities
or obligations convertible into, or any powers of attorney relating to any
Securities of any Subsidiaries of Lead Borrower. Except as set forth on Exhibit 7.1.4,
as of the date hereof, there are no outstanding agreements or instruments
binding upon any of such Subsidiaries’ partners, members or shareholders, as
the case may be, relating to the ownership of their Securities. Each Affiliate
of Borrowers, whose existence is known to Borrowers is also listed on Exhibit 7.1.4
(such representation and warranty being made only 

 28
 

 

to the knowledge of
Borrowers, without obligation to inquire, as to Persons who are Affiliates
solely by virtue of the acquisition by such Persons of publicly traded Voting
Stock of Borrowers).

7.1.5        Names.
Neither Borrowers nor any of their Subsidiaries has been known as or has used
any legal, fictitious or trade names except those listed on Exhibit 7.1.5
hereto. Except as set forth on Exhibit 7.1.5, neither Borrowers nor
any of their Subsidiaries has been the surviving entity of a merger or
consolidation or has acquired all or substantially all of the assets of any
Person. Borrowers’ and each of their Subsidiaries’ respective states of
incorporation or organization, Type of Organization and Organizational I.D.
Number are set forth on Exhibits 7.1.4 and 7.1.5. The respective
exact legal names of Borrowers and each of their Subsidiaries are set forth on Exhibit 7.1.5.

7.1.6        Business
Locations; Agent for Process. Each of Borrowers’ and their Subsidiary’s
chief executive office and other places of business, including whether such
property is owned or leased and the name and address of any Lessor, as of the
date hereof are as listed on Exhibit 6.1.1 hereto as updated from
time to time by Borrowers. During the preceding one-year period, neither
Borrowers nor any of their Subsidiaries has had an office or place of business
other than as listed on Exhibit 6.1.1. All tangible Collateral is
and will at all times be kept by Borrowers and their Subsidiaries in accordance
with subsection 6.1.1. Except as shown on Exhibit 6.1.1 and except
for Inventory in control of a customs broker who has entered into a Customs
Brokers Agreement, as of the date hereof, no Inventory is stored with a bailee,
distributor, warehouseman or similar party, nor is any Inventory consigned to
any Person.

7.1.7        Title
to Properties; Priority of Liens. Each of Borrowers and their Subsidiaries
has good, indefeasible and marketable title to and fee simple ownership of, or
valid and subsisting leasehold interests in, all of its real Property, and good
title to all of the Collateral and all of its other Property, in each case,
free and clear of all Liens except Permitted Liens. Each of Borrowers and each
of their Subsidiaries has paid or discharged all lawful claims which, if
unpaid, might become a Lien against any of Borrowers’ or such Subsidiary’s
Properties that is not a Permitted Lien. The Liens granted to Agent under Section 5
hereof are first priority Liens, subject only to Permitted Liens.

7.1.8        Accounts.
Agent may rely, in determining which Accounts are Eligible Accounts, on all
statements and representations made by Borrowers with respect to any Account or
Accounts. With respect to each of Borrowers’ Accounts, whether or not such
Account is an Eligible Account, unless otherwise disclosed to Agent in writing:

(i)    It is genuine and in all
respects what it purports to be, and it is not evidenced by a judgment;

(ii)   It arises out of a
completed, bona fide sale and delivery of goods or rendition of services by
Borrowers, in the ordinary course of its business and in accordance with the
terms and conditions of all purchase orders, contracts or other documents
relating thereto and forming a part of the 

 29
 

 

contract
between Borrowers and the Account Debtor and the Account Debtor is not an
Affiliate of Borrowers or a Subsidiary of Borrowers;

(iii)  It is for a liquidated
amount maturing as stated in the duplicate invoice covering such sale or
rendition of services, a copy of which has been furnished or is available to
Agent;

(iv)  There are no facts, events
or occurrences which in any way impair the validity or enforceability of any
Accounts or tend to reduce the amount payable thereunder from the face amount
of the invoice and statements delivered or made available to Agent with respect
thereto;

(v)   To the best of Borrowers’
knowledge, the Account Debtor thereunder (1) had the capacity to contract
at the time any contract or other document giving rise to the Account was
executed and (2) such Account Debtor is Solvent;

(vi)  To the best of Borrowers’
knowledge, there are no proceedings or actions which are threatened or pending
against the Account Debtor thereunder which might result in any material
adverse change in such Account Debtor’s financial condition or the
collectibility of such Account;

(vii) Such Account, and Agent’s
security interest therein, is not, and will not (by voluntary act or omission
of Borrowers) be in the future, subject to any offset, Lien (other than
Permitted Liens), deduction, recoupment, defense, dispute, counterclaim or any
other adverse condition except for disputes resulting in returned goods where
the amount in controversy is deemed by Agent to be immaterial, and each such
Account is absolutely owing to Borrowers and is not contingent in any respect
or for any reason; and

(viii)  Borrowers have made no
agreement with any Account Debtor thereunder for any extension, compromise,
settlement or modification of any such Account or any deduction therefrom,
except discounts or allowances which are granted by Borrowers in the ordinary
course of their business for prompt payment and which are reflected in the
calculation of the net amount of each respective invoice related thereto.

7.1.9        Equipment.
The Equipment of Borrowers and their Subsidiaries is in good operating
condition and repair, and all necessary replacements of and repairs thereto
shall be made so that the operating efficiency thereof shall be maintained and
preserved, reasonable wear and tear excepted, except where the failure to so
maintain the same would not reasonably be expected to have a Material Adverse
Effect. Borrowers will not permit any Equipment to become affixed to any real
Property leased to Borrowers or any of their Subsidiaries so that an interest
arises therein under the real estate laws of the applicable jurisdiction unless
the landlord of such real Property has executed a landlord waiver or leasehold
mortgage in favor of and in form reasonably acceptable to Agent, and 

 

 30

 

Borrowers will not permit
any of the Equipment of Borrowers or any of their Subsidiaries to become an
accession to any personal Property other than Equipment that is subject to
first priority (except for Permitted Liens) Liens in favor of Agent.

7.1.10   Financial Statements; Fiscal Year.   The
Consolidated balance sheets of Borrowers and their Subsidiaries (including the
accounts of all Subsidiaries of Borrowers and their respective Subsidiaries for
the respective periods during which a Subsidiary relationship existed) as of January 28,
2006, and the related statements of income for the periods ended on such dates,
have been prepared in accordance with GAAP, and present fairly in all material
respects the financial positions of Borrowers and such Persons, taken as a
whole, at such dates and the results of Borrowers’ and such Persons’
operations, taken as a whole, for such periods. As of the date hereof, since January 28,
2006, there has been no material adverse change in the financial position of
Borrowers and such other Persons, taken as a whole, as reflected in the
Consolidated balance sheet as of such date.

7.1.11   Full Disclosure.   The
financial statements referred to in subsection 7.1.10 hereof do not, nor does
this Agreement or any other written statement of either Borrower to Agent or
any Lender contain any untrue statement of a material fact or omit a material
fact necessary to make the statements contained therein or herein not
misleading. There is no fact which Borrowers have failed to disclose to Agent
or any Lender in writing which would reasonably be expected to have a Material
Adverse Effect.

7.1.12   Solvent Financial Condition.   Each
of Borrowers and their Subsidiaries, is now and, after giving effect to the
initial Loans to be made and the initial Letters of Credit and LC Guaranties to
be issued hereunder and all related transactions, will be, Solvent.

7.1.13   Surety Obligations.   Except
as set forth on Exhibit 7.1.13, as of the date hereof, neither
Borrowers nor any of their Subsidiaries is obligated as surety or indemnitor
under any surety or similar bond or other contract issued or entered into to assure
payment, performance or completion of performance of any undertaking or
obligation of any Person.

7.1.14   Taxes.   The
Lead Borrower’s federal tax identification number is 68-0140361 and
Michaels’ federal tax identification number is 94-2696491. The federal
tax identification number of each Subsidiary of Borrowers is shown on Exhibit 7.1.14
hereto. Borrowers shall not change their federal tax identification number. Each
of Borrowers and their Subsidiaries has filed all federal, state and local tax
returns and other reports relating to taxes it is required by law to file,
except where the failure to so file would not reasonably be expected to have a
Material Adverse Effect, and has paid, or made provision for the payment of,
all taxes, assessments, fees, levies and other governmental charges upon it,
its income and Properties as and when such taxes, assessments, fees, levies and
charges are due and payable, unless and to the extent any thereof are being
actively contested in good faith and by appropriate proceedings and each of
Borrowers and their Subsidiaries maintains reasonable reserves on its books
therefor. The provision for taxes on the books of Borrowers and their
Subsidiaries is adequate for all years not closed by applicable statutes, and
for the current fiscal year.

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7.1.15   Brokers.   Except
as shown on Exhibit 7.1.15 hereto, there are no claims for
brokerage commissions, finder’s fees or investment banking fees in connection
with the transactions contemplated by this Agreement.

7.1.16   Patents, Trademarks, Copyrights and
Licenses.   Each of Borrowers and their Subsidiaries
owns, possesses or licenses or has the right to use all the patents,
trademarks, service marks, trade names, copyrights, licenses and other
Intellectual Property necessary for the present and planned future conduct of
its business without any known conflict with the rights of others, except for
such conflicts as would not reasonably be expected to have a Material Adverse
Effect. All such patents, trademarks, service marks, tradenames, copyrights,
licenses, and Intellectual Property are listed on Exhibit 7.1.16
hereto. No claim has been asserted to Borrowers or any of their Subsidiaries
which is currently pending that their use of their Intellectual Property or the
conduct of their business does or may infringe upon the Intellectual Property
rights of any third party. To the knowledge of Borrowers and except as set
forth on Exhibit 7.1.16 hereto, as of the date hereof, no Person is
engaging in any activity that infringes in any material respect upon any
Borrower’s or any of their Subsidiaries’ material Intellectual Property. Except
as set forth on Exhibit 7.1.16, each of Borrowers’ and their
Subsidiaries’ (i) material trademarks, service marks, and copyrights are
registered with the U.S. Patent and Trademark Office or in the U.S. Copyright
Office, as applicable and (ii) material license agreements and similar
arrangements relating to its Inventory (1) permits, and does not restrict,
the assignment by Borrowers or any of their Subsidiaries to Agent, or any other
Person designated by Agent, of all of Borrowers’ or such Subsidiary’s, as
applicable, rights, title and interest pertaining to such license agreement or
such similar arrangement and (2) would permit the continued use by
Borrowers or such Subsidiary, or Agent or its assignee, of such license
agreement or such similar arrangement and the right to sell Inventory subject
to such license agreement for a period of no less than 6 months after a default
or breach of such agreement or arrangement. The consummation and performance of
the transactions and actions contemplated by this Agreement and the other Loan
Documents, including without limitation, the exercise by Agent of any of its
rights or remedies under Section 10, will not result in the termination or
impairment of any of Borrowers’ or any of their Subsidiaries’ ownership or
rights relating to its Intellectual Property, except for such Intellectual
Property rights the loss or impairment of which would not reasonably be
expected to have a Material Adverse Effect. Except as listed on Exhibit 7.1.16
and except as would not reasonably be expected to have a Material Adverse
Effect, (i) neither any Borrower nor any of their Subsidiaries is in
breach of, or default under, any term of any license or sublicense with respect
to any of its Intellectual Property and (ii) to the knowledge of
Borrowers, no other party to such license or sublicense is in breach thereof or
default thereunder, and such license is valid and enforceable.

7.1.17   Governmental Consents.   Each
of Borrowers and their Subsidiaries has, and is in good standing with respect
to, all governmental consents, approvals, licenses, authorizations, permits,
certificates, inspections and franchises necessary to continue to conduct its
business as heretofore or proposed to be conducted by it and to own or lease
and operate its Properties as now owned or leased by it, except where the
failure to possess or so maintain such rights would not reasonably be expected
to have a Material Adverse Effect.

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7.1.18   Compliance with Laws.   Each
of Borrowers and their Subsidiaries has duly complied in all material respects
with, and its Properties, business operations and leaseholds are in compliance
in all material respects with, the provisions of all federal, state and local
laws, rules and regulations applicable to Borrowers or such Subsidiary, as
applicable, their Properties or the conduct of its business, except for such
non-compliance as would not reasonably be expected to have a Material Adverse
Effect, and there have been no citations, notices or orders of noncompliance
issued to Borrowers or any of their Subsidiaries under any such law, rule or
regulation, except where such noncompliance would not reasonably be expected to
have a Material Adverse Effect. Borrowers and each of their Subsidiaries have
established and maintain an adequate monitoring system to insure that they
remain in compliance in all material respects with all federal, state and local
rules, laws and regulations applicable to them. To the best of Borrowers’
knowledge, without additional inquiry, no Inventory has been produced in
violation of the Fair Labor Standards Act (29 U.S.C. §201 et seq.), as amended.

7.1.19   Restrictions.   Neither
any Borrower nor any of their Subsidiaries is a party or subject to any
contract or agreement which restricts its right or ability to incur
Indebtedness, except where such restriction would not reasonably be expected to
have a Material Adverse Effect, none of which prohibit the execution of or
compliance with this Agreement or the other Loan Documents by Borrowers or any
of their Subsidiaries, as applicable.

7.1.20   Litigation.   Except
as set forth on Exhibit 7.1.20 hereto, there are no actions, suits,
proceedings or investigations pending, or to the knowledge of Borrowers,
threatened, against or involving Borrowers or any of their Subsidiaries, or the
business, operations, Properties, prospects, profits or condition of Borrowers
or any of their Subsidiaries which, singly or in the aggregate, would
reasonably be expected to have a Material Adverse Effect. Neither Borrowers nor
any of their Subsidiaries is in default with respect to any order, writ,
injunction, judgment, decree or rule of any court, governmental authority
or arbitration board or tribunal, which, singly or in the aggregate, would
reasonably be expected to have a Material Adverse Effect.

7.1.21   No Defaults.   No
event has occurred and no condition exists which would, upon or after the
execution and delivery of this Agreement or Borrowers’ performance hereunder,
constitute a Default or an Event of Default. Neither Borrowers nor any of their
Subsidiaries is in default in (and no event has occurred and no condition
exists which constitutes, or which the passage of time or the giving of notice
or both would constitute, a default in) the payment of any Indebtedness to any
Person for Money Borrowed in excess of $300,000.

7.1.22   Leases.   Exhibit 7.1.22 hereto
is a complete listing of all capitalized and operating personal property leases
of Borrowers and their Subsidiaries and all real property leases of Borrowers
and their Subsidiaries. Each of Borrowers and their Subsidiaries is in full
compliance with all of the terms of each of its respective capitalized and
operating leases, except where the failure to so comply would not reasonably be
expected to have a Material Adverse Effect. Each of Borrowers and their
Subsidiaries shall not alter, amend or modify any real property lease other
than in the ordinary course of business and in a 

 33
 

 

 

manner that would not
reasonably be expected to have a Material Adverse Effect. Borrowers hereby
authorize Agent at any time and from time to time to contact any of the
Borrowers’ landlords in order to confirm the continued compliance by any
Borrower with the terms and conditions of the lease(s) between such
Borrower and that landlord and to discuss such issues, concerning such Borrower’s
occupancy under such lease(s), as Agent may determine.

7.1.23   Pension Plans.   Except
as disclosed on Exhibit 7.1.23 hereto, neither any Borrower nor any
of their Subsidiaries has any Plan. Each of Borrowers and their Subsidiaries is
in compliance with the requirements of ERISA and the regulations promulgated
thereunder with respect to each Plan, except where the failure to so comply
would not reasonably be expected to have a Material Adverse Effect. No fact or
situation that would reasonably be expected to result in a material adverse
change in the financial condition of Borrowers and their Subsidiaries exists in
connection with any Plan. Neither any Borrower nor any of their Subsidiaries
has any material withdrawal liability in connection with a Multiemployer Plan.

7.1.24   Trade Relations.   Except
as set forth on Exhibit 7.1.24, there exists no actual or, to
Borrowers’ knowledge, threatened termination, cancellation or limitation of, or
any modification or change in, the business relationship between any Borrower
or any of its Subsidiaries and any customer or any group of customers whose
purchases individually or in the aggregate are material to the business of
Borrowers and their Subsidiaries, or with any material supplier, except in each
case, where the same would not reasonably be expected to have a Material
Adverse Effect, and there exists no present condition or state of facts or
circumstances which would prevent any Borrower or any of their Subsidiaries
from conducting such business after the consummation of the transaction
contemplated by this Agreement in substantially the same manner in which it has
heretofore been conducted.

7.1.25   Labor Relations.   Except
as described on Exhibit 7.1.25 hereto, as of the date hereof,
neither any Borrower nor any of their Subsidiaries is a party to any collective
bargaining agreement. There are no material grievances, disputes or
controversies with any union or any other organization of any Borrower’s or any
of their Subsidiaries’ employees, or threats of strikes, work stoppages or
any asserted pending demands for collective bargaining by any union or
organization, except those that would not reasonably be expected to have a
Material Adverse Effect.

7.1.26   Conduct of Business.   Neither
Borrowers nor their Subsidiaries shall engage in any business other than the
business in which they are currently engaged or a business reasonably related
thereto.

7.1.27   Hazardous Materials.   Neither
Borrowers nor their Subsidiaries have (i) been legally responsible for any
release or threat of release of any Hazardous Material; or (ii) received
notification of any release or threat of release of any Hazardous Material from
any site or vessel occupied or operated by Borrowers or any Subsidiaries 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.

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7.1.28   No Margin Stock.   Neither
Borrowers nor their Subsidiaries are engaged in the business of extending
credit for the purpose of purchasing or carrying any margin stock (within the
meaning of Regulations 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.

7.2   Continuous Nature of Representations
and Warranties.

Each representation and warranty contained in this
Agreement and the other Loan Documents shall be continuous in nature and shall
remain accurate, complete and not misleading at all times during the term of
this Agreement, except for changes in the nature of Borrowers’ or one of
Borrowers’ Subsidiary’s business or operations that would render the
information in any exhibit attached hereto or to any other Loan Document either
inaccurate, incomplete or misleading, so long as Majority Lenders have
consented to such changes or such changes are expressly permitted by this
Agreement.

7.3   Survival of Representations and
Warranties.

All representations and warranties of Borrowers
contained in this Agreement or any of the other Loan Documents shall survive
the execution, delivery and acceptance thereof by Agent and each Lender and the
parties thereto and the closing of the transactions described therein or
related thereto.

SECTION 8. COVENANTS
AND CONTINUING AGREEMENTS

8.1   Affirmative Covenants.

During the term of this Agreement, and thereafter for
so long as there are any Obligations outstanding, each Borrower covenants that,
unless otherwise consented to by Majority Lenders, in writing, it shall:

8.1.1   Visits and Inspections; Lender
Meeting.   Permit representatives of Agent, and
during the continuation of any Default or Event of Default any Lender, from
time to time, as often as may be reasonably requested, but only during normal
business hours, to visit and inspect the Properties of Borrowers and each of
their Subsidiaries, inspect, audit and make extracts from its books and
records, and discuss with its officers, its employees and its independent
accountants, Borrowers’ and each of their Subsidiaries’ business, assets, liabilities,
financial condition, business prospects and results of operations. Without
limiting the foregoing, Borrowers will participate and will cause its key
management personnel to participate in a meeting with Agent and Lenders
periodically and in no event less than once during each year (except that
during the continuation of an Event of Default such meetings may be held more
frequently as requested by Agent or Majority Lenders), which meeting(s) shall
be held at such times and such places as may be reasonably requested by Agent.

8.1.2   Notices.   Promptly
notify Agent in writing of the occurrence of any event or the existence of any
fact which renders any representation or warranty in this Agreement or any of
the other Loan Documents inaccurate, incomplete or misleading in any 

 35
 

 

 

material respect as of the date made or remade. In
addition, Borrowers agree to provide Agent with (i) 21 days’ (or such
shorter period as the Agent may agree) prior written notice of (1) any
change in the legal name of Borrowers or any of their Subsidiaries, (2) the
adoption by Borrowers or any of their Subsidiaries of any new fictitious name
or trade name, (3) any change in the chief executive office of Borrowers
or any of their Subsidiaries, (4) any change in the Lead Borrower’s chief
executive officer, chief financial officer, chief operating officer, chief
accounting officer or treasurer, (5) the completion of any physical count
of all or a material portion of Borrowers’ Inventory (together with a copy of
the results thereof certified by the Lead Borrower at the Agent’s request), (6) any
cessation by Borrowers of their making payment to its creditors generally as
Borrowers’ debts become due, (7) any failure by Borrowers to pay rent at
any of Borrowers’ locations, which failure continues for more than three days following
the last day on which such rent was payable without more than a de minimus adverse effect to Borrowers, (8) any change
in the business, operations, or financial affairs of Borrowers that could
result in a Material Adverse Effect, (9) the occurrence of any Default or
Event of Default, (10) any intention on the part of the Lead Borrower to
discharge its present independent accountants or any withdrawal or resignation
by such independent accountants from their acting in such capacity or (11) any
litigation which, if determined adversely to Borrowers, might have a Material
Adverse Effect on the financial condition of Borrowers, and (ii) prompt
written notice of any change in the information disclosed in any exhibit
hereto, in each case after giving effect to the materiality limits and Material
Adverse Effect qualifications contained therein.

8.1.3   Financial Statements and Other
Information.   The Borrowers shall furnish to the
Agent:

(a)    Within
ninety (90) days  after the end of
each fiscal year of the Borrowers, a consolidated balance sheet and related
statements of operations and cash flows as of the end of and for such year,
setting forth in each case in comparative form the figures for the previous
fiscal year, all audited and reported on by Deloitte & Touche LLP or
another independent public accountants of recognized national standing (without
a “going concern” or like qualification or exception and without a
qualification or exception as to the scope of such audit) to the effect that
such consolidated financial statements present fairly in all material respects
the financial condition and results of operations of the Borrowers and their
Subsidiaries on a consolidated basis in accordance with GAAP consistently
applied;

(b)    Within
forty-five (45) days after the end of each fiscal quarter of the Borrowers, a
consolidated balance sheet and related statements of operations and cash flows,
as of the end of and for such fiscal quarter and the elapsed portion of the
fiscal year, setting forth in each case in comparative form the figures for the
previous fiscal year, all certified by one of the Lead Borrower’s financial
officers as presenting in all material respects the financial condition and
results of operations of the Borrowers and their Subsidiaries on a consolidated
basis in accordance with GAAP consistently applied, subject to normal year end
audit adjustments and the absence of footnotes;

 36
 

 

 

(c)    (i)         Subject to the provisions of clause
(ii), within thirty (30) days after the end of each fiscal month of the
Borrowers, a consolidated balance sheet and related statements of operations
and cash flows, as of the end of and for such fiscal month and the elapsed
portion of the fiscal year, setting forth in each case in comparative form the
figures for the previous fiscal year, all certified by one of the Lead Borrower’s
financial officers as presenting in all material respects the financial
condition and results of operations of the Borrowers and their Subsidiaries on
a consolidated basis in accordance with GAAP consistently applied, subject to
normal year end audit adjustments and the absence of footnotes;

(ii)        In the event that at
any time during the last fifteen (15) days of any fiscal month the Borrowers
are required to calculate the Fixed Charge Coverage Ratio pursuant to Section 8.2.18
hereof, promptly upon the request of the Agent, the Borrowers shall furnish to
the Agent a calculation of the Fixed Charge Coverage Ratio as of the
immediately preceding fiscal month end, notwithstanding that the monthly
financial statements described in clause (i) above are not yet due and
required to be delivered hereunder.

(d)    Concurrently
with any delivery of financial statements under clause (a), (b), or (c) above,
a certificate of a financial officer of the Lead Borrower in the form of Exhibit 8.1.3(d) hereto (a “Compliance Certificate”) (i) certifying
as to whether a Default or Event of Default has occurred and, if a Default or
Event of Default has occurred, specifying the details thereof and any action
taken or proposed to be taken with respect thereto, (ii) setting forth
reasonably detailed calculations with respect to Availability and the Fixed
Charge Coverage Ratio, whether or not then in effect, for such period, and (iii) stating
whether any change in GAAP or in the application thereof has occurred since the
date of the Borrowers’ most recent audited financial statements and, if any
such change has occurred, specifying the effect of such change on the financial
statements accompanying such Compliance Certificate;

(e)    Not later
than sixty (60) days after the commencement of each fiscal year of the
Borrowers, a detailed, updated and extended forecast which shall go out at
least through the end of the then next fiscal year and shall include a
consolidated income statement, balance sheet, projections of Availability, by
month, a statement of the projected number of Stores to be opened and to be
closed by the Borrowers, by month, and statement of cash flow, by month, each
prepared in conformity with GAAP and consistent with the Borrowers’ then
current practices;

(f)     Promptly
after the same become publicly available, copies of all periodic and other
reports, proxy statements and other materials filed by any Borrower or any of
its Subsidiaries with the Securities and Exchange Commission (including,
without limitation, Forms 10K and 10Q), or any governmental authority succeeding
to any or all of the functions of said Commission, or with any national
securities exchange, as the case may be;

(g)    Promptly
upon receipt thereof, copies of all reports submitted to any Borrower by
independent certified public accountants in connection with each 

 37
 

 

 

annual, interim or special audit of the books of the
Borrowers or any of their Subsidiaries made by such accountants, including any
management letter commenting on the Borrowers’ internal controls submitted by
such accountants to management in connection with their annual audit;

(h)    The
financial and collateral reports described on Exhibit 8.1.3(h)  hereto, at the times set forth in such Schedule; and

(i)     Promptly
following any request therefor, such other information regarding the
operations, business affairs and financial condition of any Borrower or its
Subsidiaries, or compliance with the terms of any Loan Document, as the Agent
or any Lender may reasonably request.

8.1.4   Borrowing Base Certificates.   By
11:30 a.m. Pacific time, the more frequent of (i) weekly, each Monday
for the previous week ending Saturday or (ii) with each request for a
Revolving Credit Loan, Borrowers shall deliver to Agent a Borrowing Base
Certificate as of the last day of the immediately preceding period, with such
supporting materials as Agent shall reasonably request. If Borrowers deem it
advisable, Borrowers shall execute and deliver to Agent Borrowing Base
Certificates more frequently than weekly.

8.1.5   Landlord, Processor and Storage
Agreements.   Upon request, provide Agent with copies
of all agreements between Borrowers or any of their Subsidiaries and any
landlord, processor, distributor, warehouseman or consignee which owns any
premises at which any Collateral may, from time to time, be kept.

8.1.6   Canadian Affiliate Financial
Statements.   Deliver or cause to be delivered to
Agent financial statements, if any, for Canadian Affiliate (to the extent not
consolidated with the financial statements delivered to Agent under subsection
8.1.3) in form and substance satisfactory to Agent at such intervals and
covering such time periods as Agent may request.

8.1.7   [Intentionally Omitted].

8.1.8   Subsidiaries.   Cause
each Subsidiary of Borrowers, whether now or hereafter in existence, promptly
upon Lender’s request therefor, to execute and deliver to Lender a Guaranty
Agreement and a security agreement pursuant to which such Subsidiary guaranties
the payment of all Obligations and grants to Lender a first priority Lien
(subject only to Permitted Liens) on all of its Properties of the types
described in subsection 5.1. Additionally, Borrowers shall execute and deliver
to Lender a pledge agreement pursuant to which Borrowers grant to Lender a
first priority Lien (subject only to Permitted Liens) with respect to all of
the issued and outstanding Securities of each such Subsidiary.

8.1.9   Hazardous Materials.   Borrowers
shall (i) dispose of any Hazardous Material only in compliance with all
Environmental Laws; and (ii) not store on any site or vessel occupied or
operated by 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 Borrowers’ business and is in compliance with all Environmental Laws.
The Lead Borrower shall provide Agent with written notice upon obtaining
knowledge of any 

 38
 

 

 

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 Borrowers may be
liable.

8.1.10   Deposit and Brokerage Accounts.   For
each deposit account or brokerage account that a Borrower at any time opens or
maintains, such Borrower shall, at Agent’s request and option, pursuant to an
agreement in form and substance satisfactory to Lender, cause the depository
bank or securities intermediary, as applicable, to agree to comply at any time
with instructions from Agent to such depository bank or securities
intermediary, as applicable, directing the disposition of funds from time to
time credited to such deposit or brokerage account, without further consent of
such Borrower.

8.2   Negative Covenants.

During the Term, and thereafter for so long as there
are any Obligations outstanding, each Borrower covenants that, unless otherwise
consented to by Majority Lenders, in writing, it shall not:

8.2.1   Mergers; Consolidations; Acquisitions;
Structural Changes.   Merge or consolidate, or permit
any Subsidiary of Borrowers to merge or consolidate, with any Person; or
acquire, or permit any of their respective Subsidiaries to acquire, all or any
substantial part of the Properties of any Person; or change, or permit any
Subsidiary of Borrowers to change, its state of incorporation or organization
or Type of Organization; or change, or permit any Subsidiary of Borrowers to
change, its legal name, except for:

(i)     mergers
of any Subsidiary of Borrowers into a Borrower or another Subsidiary of
Borrowers; and

(ii)    acquisitions
of assets consisting of fixed assets or real property that constitute Capital
Expenditures.

8.2.2   Loans.   Make,
or permit any Subsidiary of Borrowers to make, any loans or other advances of
money to any Person, other than (i) for salary, travel advances, advances
against commissions and other similar advances to employees and extensions of
trade credit in the ordinary course of business, (ii) deposits with
financial institutions permitted under this Agreement, (iii) prepaid
expenses and (iv) intercompany loans from Lead Borrower to any Subsidiary,
or from any Subsidiary to Lead Borrower; provided that (A) loans to
Canadian Affiliate shall be limited to either (a) working capital loans
relating to the purchase of inventory or payment of current operating expenses
of Canadian Affiliate from Lead Borrower, for each purpose stated above, the
amount of any loan in the aggregate, shall not increase by more than $5,500,000
in any calendar year or (b) loans arising from services fees charged by
Lead Borrower related to the transfers of inventory to Canadian Affiliate, and (B) if
such intercompany loans are evidenced by a promissory note or other Instrument,
such promissory note or other Instrument shall have been delivered to Agent
pursuant to Section 5.2 hereof.

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8.2.3   Total
Indebtedness.   Create, incur, assume, or suffer to exist,
or permit any Subsidiary of Borrowers to create, incur or suffer to exist, any
Indebtedness, except:

(i)     Obligations
owing to Agent or any Lender under this Agreement;

(ii)    Indebtedness
existing on the date of this Agreement and listed on Exhibit 8.2.3;

(iii)   Permitted
Purchase Money Indebtedness;

(iv)   Indebtedness
with respect to Capital Leases aggregating not in excess of $10,000,000 at any
one time;

(v)    Contingent
liabilities, including but not limited to liabilities in respect of gift
certificates, merchandise returns, special order deposits and deferred revenue,
and other contingent liabilities arising out of endorsement of checks or other
negotiable instruments for deposit or collection in the ordinary course of
business;

(vi)   Accounts
payable to trade creditors, accruals for current operating expenses (other than
for Money Borrowed, and accruals including and which include but are not
limited to sales tax payable amounts and payroll, occupancy, interest and
income tax expense accruals), which are not aged more than thirty (30) days
from the due date, in each case incurred in the ordinary course of business and
paid within such time period, unless the same are being actively contested in good
faith and by appropriate and lawful proceedings; and Borrowers or such
Subsidiary shall have set aside such reserves, if any, with respect thereto as
are required by GAAP and deemed adequate by Borrowers or such Subsidiary and
its independent accountants;

(vii)  Indebtedness
in respect of intercompany loans permitted under subsection 8.2.2(iv);

(viii) Accrued
service fees, deferred lease incentives, deferred rent and reserves related to
sales returns, sales and use taxes, litigation, escheat, and insurance
(including self-insurance), in each case established in the ordinary course of
business;

(ix)    Indebtedness
not included in paragraphs (i) through (viii) above which does not
exceed at any time, in the aggregate, the sum of $10,000,000; and

(x)     Indebtedness
in respect of money borrowed, in an aggregate amount not to exceed $100,000,000
(inclusive of the amounts permitted under clause (ix) hereof) at any one
time outstanding, and otherwise

 

 40

 

 

on  terms and subject to documentation acceptable
to the Agent and, if secured by a Lien permitted under Section 8.2.5
hereof, to the Lenders.

8.2.4        Affiliate
Transactions. Enter into, or be a party to, or permit any Subsidiary of
Borrowers to enter into or be a party to, any transaction with any Affiliate of
Borrowers or any holder of any Securities of Borrowers or any Subsidiary of
Borrowers, including without limitation any management, consulting or similar
fees, except (i) in the ordinary course of and pursuant to the reasonable
requirements of Borrowers’ or such Subsidiary’s business and upon fair and
reasonable terms which are fully disclosed to Agent and are no less favorable
to Borrowers than would be obtained in a comparable arms-length transaction
with a Person not an Affiliate or Security holder of Borrowers, (ii) distribution
of proceeds of the Revolving Credit Loans to Michaels and (iii) loans
permitted pursuant to Section 8.2.2.

8.2.5        Limitation
on Liens. Create or suffer to exist, or permit any Subsidiary of Borrowers
to create or suffer to exist, any Lien upon any of its Property, income or
profits, whether now owned or hereafter acquired, except:

(i)    Liens at any time granted
in favor of Agent for the benefit of Lenders;

(ii)   Liens for taxes,
assessments or governmental charges (excluding any Lien imposed pursuant to any
of the provisions of ERISA) not yet due, or being contested in the manner
described in subsection 7.1.14 hereto, but only if such Lien would not
reasonably be expected to have a Material Adverse Effect;

(iii)  Liens arising in the
ordinary course of the business of Borrowers or any of their Subsidiaries by
operation of law or regulation, but only if payment in respect of any such Lien
is not at the time required and such Liens do not, in the aggregate, materially
detract from the value of the Property of Borrowers or any of their
Subsidiaries or materially impair the use thereof in the operation of the
business of Borrowers or any of their Subsidiaries;

(iv)  Purchase Money Liens securing
Permitted Purchase Money Indebtedness;

(v)   Such other Liens as appear
on Exhibit 8.2.5 hereto;

(vi)  Liens incurred or deposits
made in the ordinary course of business in connection with (1) worker’s
compensation, social security, unemployment insurance and other like laws or (2) sales
contracts, leases, statutory obligations, work in progress advances and other
similar obligations not incurred in connection with the borrowing of money or
the payment of the deferred purchase price of property;

(vii) Reservations, covenants,
zoning and other land use regulations, title exceptions or encumbrances granted
in the ordinary course of 

 41
 

 

business,
affecting real Property owned or leased by Borrowers or one of their
Subsidiaries; provided that such exceptions do not in the aggregate
materially interfere with the use of such Property in the ordinary course of
Borrowers’ or such Subsidiary’s business;

(viii)  Judgment Liens that do not
give rise to an Event of Default under subsection 10.1.15;

(ix)   Liens to secure
Indebtedness permitted under Section 8.2.3(ix) and 8.2.3(x) hereof,
provided that the Person holding such Liens shall have entered into an
intercreditor and subordination agreement reasonably acceptable to the Agent
and, the Lenders; and

(x)    Such other Liens as
Majority Lenders may hereafter approve in writing.

8.2.6        Store
Closures. Commit to close any location at which Borrowers maintain, offer
for sale or store any of the Collateral; provided, however that
Borrowers may close up to six Stores during any fiscal year and may close any
Stores the leases of which have expired in accordance with their terms and
which have not been renewed or extended; and provided further that all
payments for termination of Store leases and all proceeds of Relocation Sales shall
be paid, upon the occurrence of a Cash Dominion Event, directly to a Blocked
Account or the Concentration Account, to be applied and distributed as set
forth in Section 6.2.

8.2.7        Distributions.
Declare or make, or permit any Subsidiary of Borrowers to declare or make, any
Distributions, except for:

(i)    Distributions by any
Subsidiary to Lead Borrower; and

(ii)   Distributions paid solely
in Securities of Borrowers or any of its Subsidiaries.

8.2.8        [Intentionally Omitted]

8.2.9        Disposition
of Assets. Sell, lease or otherwise dispose of any of, or permit any
Subsidiary of Borrowers to sell, lease or otherwise dispose of any of, its
Properties, including any disposition of Property as part of a sale and
leaseback transaction, to or in favor of any Person, except for:

(i)    so long as no Event of
Default has occurred and is continuing, sales of Inventory in the ordinary
course of business;

(ii)   transfers of Property to
Borrowers by a Subsidiary of Borrowers;

(iii)  dispositions of Property
that is substantially worn, damaged, uneconomic or obsolete (subject to
subsection 6.4.2 hereof);

 42
 

 

 

(iv)  dispositions of investments
described in paragraphs (iv), (v), (vi) and (vii) of the definition
of the term “Restricted Investments”; and

(v)   other dispositions expressly
authorized by this Agreement.

8.2.10      Securities
of Subsidiaries. Permit any of its Subsidiaries to issue any additional
Securities except director’s qualifying Securities.

8.2.11      Bill-and-Hold
Sales, Etc. Make, or permit any Subsidiary of Borrowers to make, a sale to
any customer on a bill-and-hold or consignment basis.

8.2.12      Restricted
Investment. Make or have, or permit any Subsidiary of Borrowers to make or
have, any Restricted Investment.

8.2.13      Subsidiaries
and Joint Ventures. Create, acquire or otherwise suffer to exist any
Subsidiary or joint venture arrangement not in existence as of the date hereof.

8.2.14      Tax
Consolidation. File or consent to the filing of any consolidated income tax
return with any Person other than Borrowers and Borrowers’ Subsidiaries.

8.2.15      Organizational
Documents. Agree to, or suffer to occur, any amendment, supplement or
addition to its or any of its Subsidiaries’ charter, articles or certificate of
incorporation, certificate of formation, limited partnership agreement, bylaws,
limited liability agreement, operating agreement or other organizational
documents (as the case may be), that would reasonably be expected to have a
Material Adverse Effect.

8.2.16      Fiscal
Year End. Change, or permit any Subsidiary of Borrowers to change, its
fiscal year end.

8.2.17      Additional
Stores. Execute any lease, commit to, or become legally obligated to, open
any additional Stores unless each of the following conditions is satisfied with
respect thereto:

(i)    Such commitment or
obligation is in the ordinary course of business.

(ii)   Such commitment or
obligation is not, and does not result in, a violation of this Agreement.

(iii)  The Borrowers have used
their best efforts to obtain a landlord’s waiver from the landlord of the
subject Store, which waiver is in form reasonably satisfactory to the Agent.

8.2.18      Fixed
Charge Coverage Ratio. At any time that there are Incremental Revolving
Credit Loans outstanding (other than during the period from July 1, 

 43
 

 

2006 through September 30,
2006), in the event that Availability under the Adjusted Borrowing Base shall
be less than ten percent (10%) of the then Adjusted Borrowing Base, the
Borrowers shall not for such time permit the Fixed Charge Coverage Ratio to be
less than 1.1:1.0.

8.2.19      Capital
Expenditures. Borrowers will not make any Net Capital Expenditures for the
period from January 29, 2006 through September 30, 2006 in excess
of  $11,000,000 in the aggregate, as
tested on a monthly basis during the period from July 1, 2006 through September 30,
2006.

SECTION 9. CONDITIONS PRECEDENT

Notwithstanding any other
provision of this Agreement or any of the other Loan Documents, and without
affecting in any manner the rights of Agent or any Lender under the other
sections of this Agreement, no Lender shall be required to make any Loan, nor
shall Agent be required to or issue or procure any Letter of Credit or LC
Guaranty unless and until each of the following conditions has been and
continues to be satisfied:

9.1           Documentation.

(a)           Agent shall have received, in form
and substance satisfactory to Agent and its counsel, a duly executed copy of
this Agreement and the other Loan Documents, together with such additional
documents, instruments and certificates as Agent and its counsel shall require
in connection therewith from time to time, all in form and substance
satisfactory to Agent and its counsel;

(b)           Resolutions of the Board of Directors
of the Borrowers, approving and authorizing the execution, delivery and
performance of this Agreement, certified as of the Closing Date by its
corporate secretary or an assistant secretary as being in full force and effect
without modification or amendment;

(c)           Signature and incumbency certificates
of the officers of Borrowers executing this Loan and Security Agreement; and

(d)           Originally executed copies of the
favorable written opinion of Morrison & Foerster LLP, outside counsel
for Borrowers, in form and substance reasonably satisfactory to Agent and its
counsel, dated as of the Closing Date and setting forth such matters as Agent
acting on behalf of Lenders may reasonably request.

9.2           No Default.

No Default or Event of
Default shall exist.

9.3           Other Conditions.

Each of the conditions
precedent set forth in the Loan Documents shall have been satisfied.

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9.4           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 or on behalf of the Borrowers shall be true and complete as of the date as
of which such representation or warranty was made.

9.5           No Litigation.

No action, proceeding,
investigation, regulation or legislation shall have been instituted or proposed
before any court, governmental agency or legislative body to enjoin, restrain
or prohibit, or to obtain damages in respect of, or which is related to or
arises out of this Agreement or the consummation of the transactions
contemplated hereby.

9.6           Material Adverse Effect.

Since the date of Borrowers’
most recent audited financial statements, there has not been any material
adverse change in its business, assets, financial condition, income or
prospects and no event or condition exists which would be reasonably likely to
result in any Material Adverse Effect.

SECTION 10. EVENTS OF DEFAULT; RIGHTS AND
REMEDIES ON DEFAULT

10.1         Events of Default.

The
occurrence of one or more of the following events shall constitute an “Event of
Default”:

10.1.1      Payment
of Obligations. Borrowers shall fail to pay any of the Obligations
hereunder or under any Note on the due date thereof (whether due at stated
maturity, on demand, upon acceleration or otherwise).

10.1.2      Misrepresentations.
Any representation, warranty or other statement made or furnished to Agent or
any Lender by or on behalf of Borrowers, any Subsidiary of Borrowers or any
Guarantor in this Agreement, any of the other Loan Documents or any instrument,
certificate or financial statement furnished in compliance with or in reference
thereto proves to have been false or misleading in any material respect when
made, furnished or remade pursuant to Section 7.2 hereof.

10.1.3      Breach
of Specific Covenants. Borrowers shall fail or neglect to perform, keep or
observe any covenant contained in Sections 5.2, 6.1.2, 6.2.4, 6.5, 8.1.1,
8.1.2, 8.1.4, or 8.2 hereof on the date that Borrowers are required to perform,
keep or observe such covenant or shall fail or neglect to perform, keep or
observe any covenant contained in Section 8.1.3 hereof within 5 days
following the date on which Borrowers are required to perform, keep or observe
such covenant.

10.1.4      Breach
of Other Covenants. Borrowers shall fail or neglect to perform, keep or
observe any covenant contained in this Agreement (other than a covenant 

 45
 

 

which is dealt with
specifically elsewhere in Section 10.1 hereof) and the breach of such
other covenant is not cured to Agent’s satisfaction within 15 days after the
sooner to occur of Borrowers’ receipt of notice of such breach from Agent or
the date on which such failure or neglect first becomes known to any officer of
Borrowers.

10.1.5      Default
Under Security Documents or Other Agreements. Any event of default shall
occur under, or any Borrower, any of their Subsidiaries or any Guarantor shall
default in the performance or observance of any term, covenant, condition or
agreement contained in, any of the Security Documents or the Other Agreements
and such default shall continue beyond any applicable grace period.

10.1.6      Other
Defaults. (a) There shall occur any default or event of default on the
part of any Borrower, any Subsidiary of Borrowers or any Guarantor under any
agreement, document or instrument to which such Borrower, such Subsidiary of
Borrowers or such Guarantor is a party or by which such Borrower, such
Subsidiary of Borrowers or such Guarantor or any of its Property is bound,
evidencing or relating to any Indebtedness (other than the Obligations) with an
outstanding principal balance in excess of $300,000, if the payment or maturity
of such Indebtedness is accelerated in consequence of such event of default or
demand for payment of such Indebtedness is made or could be made in accordance
with the terms thereof or (b) the occurrence of any of the following with
respect to Leases on which any Borrower or a Subsidiary is the lessee or is obligated:  (i) an aggregate of more than $500,000
in rent is then overdue; (ii) default and the expiry of any applicable
grace period with respect to not more than two Leases of Stores; and (iii) default
and the expiry of any applicable grace period of any Lease of any warehouse or
distribution center.

10.1.7      Uninsured
Losses. Any material loss, theft, damage or destruction of any portion of
the Collateral having a fair market value of $750,000, in the aggregate, if not
fully covered (subject to such deductibles and self-insurance retentions as
Agent shall have permitted) by insurance.

10.1.8      Insolvency
and Related Proceedings. A Borrower, any Subsidiary of Borrowers or any
Guarantor shall cease to be Solvent or shall suffer the appointment of a
receiver, trustee, custodian or similar fiduciary, or shall make an assignment
for the benefit of creditors, or any petition for an order for relief shall be
filed by or against any Borrower, any Subsidiary of Borrowers or any Guarantor
under the federal bankruptcy laws (if against any Borrower, any Subsidiary of
Borrowers or any Guarantor the continuation of such proceeding for more than 30
days), or any Borrower, any Subsidiary of Borrowers or any Guarantor shall make
any offer of settlement, extension or composition to their respective unsecured
creditors generally.

10.1.9      Business
Disruption; Condemnation. There shall occur a cessation of a substantial
part of the business of any Borrower, any Subsidiary of Borrowers or any
Guarantor for a period which materially adversely affects such Borrower’s, such
Subsidiary’s or such Guarantor’s capacity to continue its business on a
profitable basis; or any Borrower, any Subsidiary of Borrowers or any Guarantor
shall suffer the loss or revocation of any material license or permit now held
or hereafter acquired by any Borrower, any Subsidiary of Borrowers or any
Guarantor which is necessary to the continued or lawful 

 46
 

 

operation of its business;
or any Borrower, any Subsidiary of Borrowers or any Guarantor shall be
enjoined, restrained or in any way prevented by court, governmental or
administrative order from conducting all or any material part of its business
affairs; or any material lease or agreement pursuant to which any Borrower, any
Subsidiary of Borrowers or any Guarantor leases, uses or occupies any Property
shall be canceled or terminated prior to the expiration of its stated term,
except any such lease or agreement the cancellation or termination of which
would not reasonably be expected to have a Material Adverse Effect; or any
material portion of the Collateral shall be taken through condemnation or the
value of such Property shall be impaired through condemnation.

10.1.10    Change
in Control. Any Change in Control shall occur.

10.1.11    ERISA.
A Reportable Event shall occur which, in Agent’s determination, constitutes
grounds for the termination by the Pension Benefit Guaranty Corporation of any
Plan or for the appointment by the appropriate United States district court of
a trustee for any Plan, or if any Plan shall be terminated or any such trustee
shall be requested or appointed, or if Borrowers, any Subsidiary of Borrowers
or any Guarantor is in “default” (as defined in Section 4219(c)(5) of
ERISA) with respect to payments to a Multiemployer Plan resulting from
Borrowers’, such Subsidiary’s or such Guarantor’s complete or partial
withdrawal from such Plan and any such event would reasonably be expected to
have a Material Adverse Effect.

10.1.12    Challenge
to Agreement. Any Borrower, any Subsidiary of Borrowers or Guarantor, or
any Affiliate of any of them, shall challenge or contest in any action, suit or
proceeding the validity or enforceability of this Agreement or any of the other
Loan Documents, the legality or enforceability of any of the Obligations or the
perfection or priority of any Lien granted to Agent or a default shall occur
under any Loan Document.

10.1.13    Key
Management. The failure, for any reason, of the Lead Borrower’s chief
executive officer or chief financial officer, as of the Closing Date, to
continue to serve in such capacity, if a replacement therefor, reasonably
satisfactory to Agent, is not identified within 90 days and retained within 120
days, or the failure of any such replacement to continue to serve in such
capacity if a replacement therefor, reasonably satisfactory to Agent, is not
identified within 90 days and retained within 120 days.

10.1.14    Criminal
Forfeiture. Any Borrower, any Subsidiary of Borrowers or any Guarantor
shall be criminally indicted or convicted under any law that could lead to a
forfeiture of any Property of Borrowers, any Subsidiary of Borrowers or any
Guarantor.

10.1.15    Judgments.
Any money judgments, writ of attachment or similar processes (collectively, “Judgments”)
are issued or rendered against any Borrower, any Subsidiary of Borrowers or any
Guarantor, or any of their respective Property (i) in the case of money
judgments, in an amount of $500,000 or more for any single judgment, attachment
or process in excess of any applicable insurance with respect to which the
insurer has admitted liability, and (ii) in the case of non-monetary
Judgments, such Judgment or 

 47
 

 

Judgments (in the aggregate)
would reasonably be expected to have a Material Adverse Effect, in each case
which Judgment is not stayed, released or discharged within 30 days.

10.2         Acceleration of the Obligations.

Upon or at any time after
the occurrence and during the continuance of an Event of Default, (i) the
Revolving Loan Commitments shall, at the option of Agent or Majority Lenders be
terminated and/or (ii) Agent or Majority Lenders may declare all or any
portion of the Obligations at once due and payable without presentment, demand
protest or further notice by Agent or any Lender, and Borrowers shall forthwith
pay to Agent, the full amount of such Obligations, provided, that upon
the occurrence of an Event of Default specified in subsection 10.1.8 hereof,
all of the Obligations shall become automatically due and payable without
declaration, notice or demand by Agent or any Lender.

10.3         Other Remedies.

Upon
the occurrence and during the continuance of an Event of Default, Agent shall
have and may exercise from time to time the following other rights and
remedies:

(a)           All of the rights and remedies of a
secured party under the UCC or under other applicable law, and all other legal
and equitable rights to which Agent or Lenders may be entitled, all of which
rights and remedies shall be cumulative and shall be in addition to any other
rights or remedies contained in this Agreement or any of the other Loan
Documents, and none of which shall be exclusive.

(b)           The right to take immediate
possession of the Collateral, and to (i) require Borrowers and each of
their Subsidiaries to assemble the Collateral, at Borrowers’ expense, and make
it available to Agent at a place designated by Agent which is reasonably
convenient to both parties, and (ii) enter any premises where any of the
Collateral shall be located and to keep and store the Collateral on said
premises until sold (and if said premises be the Property of Borrowers or any
Subsidiary of Borrowers, Borrowers agree not to charge, or permit any of their
Subsidiaries to charge, Agent for storage thereof).

(c)           The right to sell or otherwise
dispose of all or any Collateral in its then condition, or after any further
manufacturing or processing thereof, at public or private sale or sales, with
such notice as may be required by law, in lots or in bulk, for cash or on
credit, all as Agent, in its sole discretion, may deem advisable. Agent may, at
Agent’s option, disclaim any and all warranties regarding the Collateral in
connection with any such sale. Borrowers agree that 10 days’ written notice to
any Borrower or any of their Subsidiaries of any public or private sale or
other disposition of Collateral shall be reasonable notice thereof, and such
sale shall be at such locations as Agent may designate in said notice. Agent
shall have the right to conduct such sales on any Borrower’s or any of their
Subsidiaries’ premises, without charge therefor, and such sales may be
adjourned from time to time in accordance with applicable law. Agent shall have
the right to sell, lease or otherwise dispose of the Collateral, or any part
thereof, for cash, credit or any combination thereof, and Agent, 

 48
 

 

on behalf of Lenders, may
purchase all or any part of the Collateral at public or, if permitted by law,
private sale and, in lieu of actual payment of such purchase price, may set off
the amount of such price against the Obligations. The proceeds realized from
the sale of any Collateral shall be applied to the Obligations upon receipt by
Agent in accordance with Section 3.2.6 hereof. If any deficiency shall
arise, Borrowers and each Guarantor shall remain jointly and severally liable
to Agent and Lenders therefor.

(d)           Agent is hereby granted a license or
other right to use, without charge, each Borrower’s and each of their
Subsidiary’s labels, patents, copyrights, licenses, rights of use of any name,
trade secrets, tradenames, trademarks and advertising matter, or any Property
of a similar nature, as it pertains to the Collateral, in completing,
advertising for sale and selling any Collateral and Borrowers’ and each of
their Subsidiary’s rights under all licenses and all franchise agreements shall
inure to Agent’s benefit.

(e)           Agent may, at its option, require
Borrowers to deposit with Agent funds equal to 103% of (i) the LC Amount
plus (ii) the amount of LC Obligations that have not been reimbursed by
Borrowers or funded with a Revolving Credit Loan, and, if Borrowers fail to
promptly make such deposit, Agent may advance such amount as a Revolving Credit
Loan (whether or not an Overadvance is created thereby). Each such Revolving
Credit Loan shall be secured by all of the Collateral and shall bear interest
and be payable at the same rate and in the same manner as Loans. Any such
deposit or advance shall be held by Agent as a reserve to fund future payments
on such LC Guaranties  and future
drawings against such Letters of Credit. At such time as all LC Guaranties have
been paid or terminated and all Letters of Credit have been drawn upon or
expired, any amounts remaining in such reserve shall be applied against any
outstanding Obligations, or, if all Obligations have been indefeasibly paid in
full, returned to Borrowers.

10.4         Set Off and Sharing of Payments.

In addition to any rights
now or hereafter granted under applicable law and not by way of limitation of
any such rights, during the continuance of any Event of Default, each Lender is
hereby authorized by Borrowers at any time or from time to time, with prior
written consent of the Majority Lenders and with reasonably prompt subsequent
notice to Borrowers (any prior or contemporaneous notice to Borrowers being
hereby expressly waived) and each Lender agrees that it shall, to the extent it
is lawfully entitled to do so, upon the request of Agent or the Majority
Lenders, to set off and to appropriate and to apply any and all (i) balances
held by such Lender at any of its offices for the account of any Borrower or
any of their Subsidiaries (regardless of whether such balances are then due to
Borrowers or their Subsidiaries), and (ii) other property at any time held
or owing by such Lender to or for the credit or for the account of any Borrower
or any of their Subsidiaries, first against and on account of any of the
Obligations (other than the Derivative Obligations or other Obligations not
arising under the Loan Documents) and second, against any outstanding
Derivative Obligations or other Obligations not arising under the Loan
Documents. Any Lender exercising a right to set off shall, to the extent the
amount of any such set off exceeds its 

 49
 

 

Revolving Loan Percentage of
the amount set off, purchase for cash (and the other Lenders shall sell)
interests in each such other Lender’s pro rata share of the Obligations as
would be necessary to cause such Lender to share such excess with each other
Lender in accordance with their respective Revolving Loan Percentages; provided
however, that if all or part of such excess payment received by the purchasing
party is thereafter recovered from it, those purchases of interests shall be
rescinded in whole or in part, as applicable, and the applicable portion of the
purchase price paid therefor shall be returned to the purchasing party. Each
Borrower agrees, to the fullest extent permitted by law, that any Lender may
exercise its right to set off with respect to amounts in excess of its pro rata
share of the Obligations and upon doing so shall deliver such excess to Agent
for the benefit of all Lenders in accordance with the Revolving Loan
Percentages.

10.5         Remedies Cumulative; No Waiver.

All covenants, conditions,
provisions, warranties, guaranties, indemnities, and other undertakings of
Borrowers contained in this Agreement and the other Loan Documents, or in any
document referred to herein or contained in any agreement supplementary hereto
or in any schedule or in any Guaranty Agreement given to Agent or any Lender or
contained in any other agreement between any Lender and Borrowers or between
Agent and Borrowers heretofore, concurrently, or hereafter entered into, shall
be deemed cumulative to and not in derogation or substitution of any of the
terms, covenants, conditions, or agreements of Borrowers herein contained. The
failure or delay of Agent or any Lender to require strict performance by
Borrowers of any provision of this Agreement or to exercise or enforce any
rights, Liens, powers, or remedies hereunder or under any of the aforesaid
agreements or other documents or security or Collateral shall not operate as a
waiver of such performance, Liens, rights, powers and remedies, but all such
requirements, Liens, rights, powers, and remedies shall continue in full force
and effect until all Loans and other Obligations owing or to become owing from
Borrowers to Agent and each Lender have been fully satisfied. None of the
undertakings, agreements, warranties, covenants and representations of
Borrowers contained in this Agreement or any of the other Loan Documents and no
Event of Default by Borrowers under this Agreement or any other Loan Documents
shall be deemed to have been suspended or waived by Lenders, unless such
suspension or waiver is by an instrument in writing specifying such suspension
or waiver and is signed by a duly authorized representative of Agent and
directed to Borrowers.

SECTION 11. THE AGENT

11.1         Authorization and Action.

The Existing Agent hereby confirms its resignation as
Agent under the Existing Loan Agreement and each of the other Loan Documents,
and the Lenders hereby appoint the Agent as successor Agent hereunder, and the
Agent hereby accepts the appointment as successor Agent. The Borrowers hereby
consent to such appointment and waive the requirement under Section 11.11
hereof that such resignation be effective only after thirty (30) days’ notice.

 

 50

 

 

Each Lender hereby appoints
and authorizes Agent to take such action on its behalf and to exercise such
powers under this Agreement and the other Loan Documents as are delegated to
Agent by the terms hereof and thereof, together with such powers as are reasonably
incidental thereto. Each Lender hereby acknowledges that Agent shall not have
by reason of this Agreement assumed a fiduciary relationship in respect of any
Lender. In performing its functions and duties under this Agreement, Agent
shall act solely as agent of Lenders and shall not assume, or be deemed to have
assumed, any obligation toward, or relationship of agency or trust with or for,
Borrowers.

(a)           As to any matters not expressly
provided for by this Agreement and the other Loan Documents (including without
limitation enforcement and collection of the Notes), Agent may, but shall not
be required to, exercise any discretion or take any action, but shall be
required to act or to refrain from acting (and shall be fully protected in so
acting or refraining from acting) upon the instructions of the Majority
Lenders, whenever such instruction shall be requested by Agent or required
hereunder, or a greater or lesser number of Lenders if so required hereunder,
and such instructions shall be binding upon all Lenders; provided, that Agent
shall be fully justified in failing or refusing to take any action which
exposes Agent to any liability or which is contrary to this Agreement, the
other Loan Documents or applicable law, unless Agent is indemnified to its
satisfaction by the other Lenders against any and all liability and expense
which it may incur by reason of taking or continuing to take any such action. If
Agent seeks the consent or approval of the Majority Lenders (or a greater or
lesser number of Lenders as required in this Agreement), with respect to any
action hereunder, Agent shall send notice thereof to each Lender and shall
notify each Lender at any time that the Majority Lenders (or such greater or
lesser number of Lenders) have instructed Agent to act or refrain from acting
pursuant hereto.

(b)           The capacity of Co-Administrative
Agent and Documentation Agent is solely titular in nature and neither
Co-Administrative Agent nor Documentation Agent shall have any additional
rights or obligations under the Loan Documents by reason of such capacity.

(c)           References in the Loan Documents to
Collateral Agent shall be deemed to refer to Agent, and Bank of America (or any
successor entity acting as Agent) shall have all the powers and authority that
any Loan Document confers upon the Collateral Agent in its capacity as Agent. All
of the provisions of this Section 11 applicable to Agent shall apply
equally to Agent when acting pursuant to the Loan Documents as Collateral
Agent.

11.2         Agent’s Reliance, Etc.

Neither Agent, any Affiliate
of Agent, nor any of their respective directors, officers, agents or employees
shall be liable for any action taken or omitted to be taken by it or them under
or in connection with this Agreement or the other Loan Documents, except for
its or their own gross negligence or willful misconduct. Without limitation of
the generality of the foregoing, Agent:  (i) may
treat each Lender party hereto as the holder of Obligations 

 51
 

 

until Agent receives written
notice of the assignment or transfer or such lender’s portion of the
Obligations signed by such Lender and in form reasonably satisfactory to Agent;
(ii) may consult with legal counsel, independent public accountants and
other experts selected by it and shall not be liable for any action taken or
omitted to be taken in good faith by it in accordance with the advice of such
counsel, accountants or experts, (iii) makes no warranties or
representations to any Lender and shall not be responsible to any Lender for
any recitals, statements, warranties or representations made in or in
connection with this Agreement or any other Loan Documents; (iv) shall not
have any duty beyond Agent’s customary practices in respect of loans in which
Agent is the only lender, to ascertain or to inquire as to the performance or
observance of any of the terms, covenants or conditions of this Agreement or
the other Loan Documents on the part of Borrowers, to inspect the property
(including the books and records) of Borrowers, to monitor the financial
condition of Borrowers or to ascertain the existence or possible existence or
continuation of any Default or Event of Default; (v) shall not be
responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement or the
other Loan Documents or any other instrument or document furnished pursuant
hereto or thereto; (vi) shall not be liable to any Lender for any action
taken, or inaction, by Agent upon the instructions of Majority Lenders pursuant
to Section 11.1 hereof or refraining to take any action pending such
instructions; (vii) shall not be liable for any apportionment or
distributions of payments made by it in good faith pursuant to Section 3
hereof; (viii) shall incur no liability under or in respect of this
Agreement or the other Loan Documents by acting upon any notice, consent,
certificate, message or other instrument or writing (which may be by telephone,
facsimile, telegram, cable or telex) believed in good faith by it to be genuine
and signed or sent by the proper party or parties; and (ix) may assume
that no Event of Default has occurred and is continuing, unless Agent has
actual knowledge of the Event of Default, has received notice from Borrowers or
Borrowers’ independent certified public accounts stating the nature of the
Event of Default, or has received notice from a Lender stating the nature of
the Event of Default and that such Lender considers the Event of Default to
have occurred and to be continuing. In the event any apportionment or distribution
described in clause (vii) above is determined to have been made in error,
the sole recourse of any Person to whom payment was due but not made shall be
to recover from the recipients of such payments any payment in excess of the
amount to which they are determined to have been entitled.

11.3         Bank of America and Affiliates.

With respect to its
commitment hereunder to make Loans, Bank of America shall have the same rights
and powers under this Agreement and the other Loan Documents as any other Lender
and may exercise the same as though it were not Agent; and the terms “Lender,” “Lenders”
or “Majority Lenders” shall, unless otherwise expressly indicated, include Bank
of America in its individual capacity as a Lender. Bank of America and its
Affiliates may lend money to, and generally engage in any kind of business
with, Borrowers, and any Person who may do business with or own Securities of
Borrowers all as if Bank of America were not Agent and without any duty to
account therefor to any other Lender.

 52
 

 

 

11.4         Lender Credit Decision.

Each Lender acknowledges
that it has, independently and without reliance upon Agent or any other Lender
and based on the financial statements referred to herein and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon Agent or any
other Lender and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under this Agreement. Agent shall not have any duty or responsibility,
either initially or on an ongoing basis, to provide any Lender with any credit
or other similar information regarding Borrowers, except for notices, reports
and other information as required to be furnished pursuant to this Agreement.

11.5         Indemnification.

Lenders agree to indemnify
Agent (to the extent not reimbursed by Borrowers), in accordance with their
respective Aggregate Percentages, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by, or asserted against Agent in any way relating to or arising
out of this Agreement or any other Loan Document or any action taken or omitted
by Agent under this Agreement; provided that no Lender shall be liable
for any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from
Agent’s gross negligence or willful misconduct or arising in connection with
any Derivative Obligations. Without limitation of the foregoing, each Lender
agrees to reimburse Agent promptly upon demand for its ratable share, as set
forth above, of any out-of-pocket expenses (including attorneys’ fees) incurred
by Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiation, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement and each other Loan Document,
to the extent that Agent is not reimbursed for such expenses by Borrowers; provided
that no Lender shall be liable to reimburse Agent for any portion of such
expenses resulting from Agent’s gross negligence or willful misconduct or
arising in connection with any Derivative Obligations. The obligations of
Lenders under this Section 11.5 shall survive the payment in full of all
Obligations and the termination of this Agreement. If after payment and
distribution of any amount by Agent to Lenders, any Lender or any other Person,
including Borrowers, any creditor of Borrowers, a liquidator, administrator or
trustee in bankruptcy, recovers from Agent any amount found to have been
wrongfully paid to Agent or disbursed by Agent to Lenders, then Lenders, in
accordance with their respective Aggregate Percentages, shall reimburse Agent
for all such amounts, unless such amounts relate to any Derivative Obligations.

11.6         Rights and Remedies to be Exercised
by Agent Only.

Each Lender agrees that,
except as set forth in subsection 10.4, no Lender shall have any right individually
(i) to realize upon the security created by this Agreement or any 

 53
 

 

other Loan Document, (ii) to
enforce any provision of this Agreement or any other Loan Document, or (iii) to
make demand under this Agreement or any other Loan Document.

11.7         Agency Provisions Relating to
Collateral.

Each Lender authorizes and
ratifies Agent’s entry into this Agreement and the Security Documents for the
benefit of Lenders. Each Lender agrees that any action taken by Agent with
respect to the Collateral in accordance with the provisions of this Agreement
or the Security Documents, and the exercise by Agent of the powers set forth
herein or therein, together with such other powers as are reasonably incidental
thereto, shall be authorized and binding upon all Lenders. Agent is hereby
authorized on behalf of all Lenders, without the necessity of any notice to or
further consent from any Lender, from time to time prior to an Event of
Default, to take any action with respect to any Collateral or the Loan
Documents which may be necessary to perfect and maintain perfected Agent’s
Liens upon the Collateral, for its benefit and the ratable benefit of Lenders. Lenders
hereby irrevocably authorize Agent, at its option and in its discretion, to
release any Lien granted to or held by Agent upon any Collateral (i) upon
termination of the Agreement and payment and satisfaction of all Obligations;
or (ii) constituting property being sold or disposed of if a Borrower
certifies to Agent that the sale or disposition is made in compliance with
subsection 8.2.9 hereof (and Agent may rely conclusively on any such
certificate, without further inquiry); or (iii) constituting property in
which no Borrower owned an interest at the time the Lien was granted or at any
time thereafter; or (iv) in connection with any foreclosure sale or other
disposition of Collateral after the occurrence and during the continuation of
an Event of Default or (v) if approved, authorized or ratified in writing
by Agent at the direction of all Lenders. Upon request by Agent at any time,
Lenders will confirm in writing Agent’s authority to release particular types
or items of Collateral pursuant hereto. Agent shall have no obligation
whatsoever to any Lender or to any other Person to assure that the Collateral
exists or is owned by Borrowers or is cared for, protected or insured or has
been encumbered or that the Liens granted to Agent herein or pursuant to the
Security Documents have been properly or sufficiently or lawfully created,
perfected, protected or enforced or are entitled to any particular priority, or
to exercise at all or in any particular manner or under any duty of care,
disclosure or fidelity, or to continue exercising, any of its rights,
authorities and powers granted or available to Agent in this Section 11.7
or in any of the Loan Documents, it being understood and agreed that in respect
of the Collateral, or any act, omission or event related thereto, Agent may act
in any manner it may deem appropriate, in its sole discretion, but consistent
with the provisions of this Agreement, including given Agent’s own interest in
the Collateral as a Lender and that Agent shall have no duty or liability
whatsoever to any Lender.

11.8         Agent’s Right to Purchase
Commitments.

Agent shall have the right,
but shall not be obligated, at any time upon written notice to any Lender and
with the consent of such Lender, which may be granted or withheld in such
Lender’s sole discretion, to purchase for Agent’s own account all of such
Lender’s interests in this Agreement, the other Loan Documents and the
Obligations, for the face amount of the outstanding Obligations owed to such
Lender, including without limitation all accrued and unpaid interest and fees.

 54
 

 

 

11.9         Right of Sale, Assignment,
Participations.

Borrowers hereby consent to any
Lender’s participation, sale, assignment, transfer or other disposition, at any
time or times hereafter, of this Agreement and any of the other Loan Documents,
or of any portion hereof or thereof, including, without limitation, such Lender’s
rights, title, interests, remedies, powers, and duties hereunder or thereunder
subject to the terms and conditions set forth below:

11.9.1      Sales,
Assignments. Each Lender hereby agrees that, with respect to any sale or
assignment (i) no such sale or assignment shall be for an amount of less
than $10,000,000, (ii) each such sale or assignment shall be made on terms
and conditions which are customary in the industry at the time of the
transaction, (iii) Agent and, in the absence of a Default or Event of
Default, Borrowers, must consent, such consent not to be unreasonably withheld,
to each such assignment to a Person (other than any Affiliate of a Lender) that
is not an original signatory to this Agreement, (iv) the assignor Lender
(or Borrowers, in the case of an assignment required by Section 3.12)
shall pay to the Agent a processing and recordation fee of $5,000, provided
that no such processing fee shall be due if such assignor Lender was a Lender
on the Closing Date, and any out-of-pocket attorneys’ fees and expenses
incurred by the Agent in connection with any such sale or assignment and (v) such
assignment shall be pursuant to the Assignment Agreement substantially in the
form of Exhibit 11.9.1 hereto. After such sale or assignment has
been consummated (x) the assignee Lender thereupon shall become a “Lender”
for all purposes of this Agreement and (y) the assigning Lender shall have
no further liability for funding the portion of Revolving Loan Commitments
assumed by such other Lender. Notwithstanding anything to the contrary herein
contained, each partial assignment shall be made as an assignment of a
proportionate part of all of the assigning Lender’s rights and
obligations, including, without limitation, assignments of all Revolving Loan
Commitments to make Incremental Revolving Credit Loans.

11.9.2      Participations.
Any Lender may grant participations in its extensions of credit hereunder to
any other Lender or other lending institution (a “Participant”), provided
that (i) no such participation shall be for an amount of less than
$5,000,000, (ii) no Participant shall thereby acquire any direct rights
under this Agreement, (iii) no Participant shall be granted any right to
consent to any amendment, except to the extent any of the same pertain to (1) reducing
the aggregate principal amount of, or interest rate on, or fees applicable to,
any Loan or (2) extending the final stated maturity of any Loan or the
stated maturity of any portion of any payment of principal of, or interest or
fees applicable to, any of the Loans; provided, that the rights
described in this subclause (2) shall not be deemed to include the right
to consent to any amendment with respect to or which has the effect of
requiring any mandatory prepayment of any portion of any Loan or any amendment
or waiver of any Default or Event of Default, or (3) release a substantial
portion of any Collateral except as provided in the Loan Documents, (iv) no
sale of a participation in extensions of credit shall in any manner relieve the
originating Lender of its obligations hereunder, (v) the originating
Lender shall remain solely responsible for the performance of such obligations,
(vi) Borrowers and the Agent shall continue to deal solely and directly
with the originating Lender in connection with the originating Lender’s rights
and obligations under this Agreement and the other Loan Documents, (vii) in
no event shall any financial 

 55
 

 

institution purchasing the
participation grant a participation in its participation interest in the Loans
without the prior written consent of Agent, and, in the absence of a Default or
an Event of Default, Borrowers, which consents shall not unreasonably be
withheld and (viii) all amounts payable by Borrowers hereunder shall be
determined as if the originating Lender had not sold any such participation.

11.9.3      Certain
Agreements of Borrowers. Borrowers agree that (i) they will use its
best efforts to assist and cooperate with each Lender in any manner reasonably
requested by such Lender to effect the sale of participation in or assignments
of any of the Loan Documents or any portion thereof or interest therein,
including, without limitation, assisting in the preparation of appropriate
disclosure documents and making members of management available at reasonable
times to meet with and answer questions of potential assignees and
Participants; and (ii) subject to the provisions of Section 12.14
hereof, such Lender may disclose credit information regarding Borrowers to any
potential Participant or assignee.

11.9.4      Non
U.S. Resident Transferees. If, pursuant to this Section 11.9, any
interest in this Agreement or any Loans is transferred to any transferee which
is organized under the laws of any jurisdiction other than the United States or
any state thereof, the transferor Lender shall cause such transferee (other
than any Participant), and may cause any Participant, concurrently with and as
a condition precedent to the effectiveness of such transfer, to (i) represent
to the transferor Lender (for the benefit of the transferor Lender, the Agent,
and Borrowers) that under applicable law and treaties no taxes will be required
to be withheld by Agent, Borrowers or the transferor Lender with respect to any
payments to be made to such transferee in respect of the interest so
transferred, (ii) furnish to the transferor Lender, Agent and Borrowers
either United States Internal Revenue Service Form W-8ECI or United
States Internal Revenue Service Form W-8BEN (wherein such transferee
claims entitlement to complete exemption from United States federal withholding
tax on all interest payments hereunder), and (iii) agree (for the benefit
of the transferor Lender, Agent and Borrowers) to provide the transferor
Lender, Agent and Borrowers a new Form W-8ECI or Form W-8BEN
upon the obsolescence of any previously delivered form and comparable
statements in accordance with applicable United States laws and regulations and
amendments duly executed and completed by such transferee, and to comply from
time to time with all applicable United States laws and regulations with regard
to such withholding tax exemption.

11.9.5      Certain
Pledges. Any Lender may at any time pledge or assign a security interest in
all or any portion of its rights under this Agreement (including under its
Note) to secure obligations of such Lender, including any pledge or assignment
to secure obligations to a Federal Reserve Bank; provided that no such
pledge or assignment shall release such Lender from any of its obligations
hereunder or substitute any such pledgee or assignee for such Lender as a party
hereto.

11.10       Amendment.

No amendment or waiver of
any provision of this Agreement or any other Loan Document (including without
limitation any Note), nor consent to any departure by Borrowers therefrom,
shall in any event be effective unless the same shall be in writing and 

 56
 

 

signed by the Majority
Lenders and Borrowers, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given;
provided, that no amendment, waiver or consent shall be effective, unless (i) in
writing and signed by each Lender, do any of the following:  (1) increase (or decrease other than any
pro rata decrease) the aggregate Revolving Loan Commitments, or any Lender’s
Revolving Loan Commitment, (2) reduce the principal of, or interest on,
any amount payable hereunder or under any Note, other than those payable only
to Bank of America in its capacity as Agent, which may be reduced by Bank of
America unilaterally, (3) decrease any interest rate payable hereunder, or
reduce or postpone any fees payable under the terms of this Agreement or any of
the Loan Documents, (4) postpone any date fixed for any payment of
principal of, or interest on, any amounts payable hereunder or under any Note,
other than those payable only to Bank of America in its capacity as Agent,
which may be postponed by Bank of America unilaterally, or reduce or postpone
any fees payable under the terms of this Agreement or any of the Loan
Documents, (5) reduce the number of Lenders that shall be required for Lenders
or any of them to take any action hereunder, (6) except for transactions
permitted pursuant to Section 8.2.9 hereof, release or discharge any
Person liable for the performance of any obligations of Borrowers hereunder or
under any of the Loan Documents, (7) amend any provision of this Agreement
that requires the consent of all Lenders or consent to or waive any breach
thereof, (8) amend the definition of the term “Majority Lenders”, (9) amend
this Section 11.10, (10) release or contractually subordinate all or
any portion of the Collateral with a value in excess of $1,000,000 in the
aggregate, unless otherwise permitted pursuant to Section 11.7 hereof,
(11) increase the Letter of Credit sublimit, (12) amend Section 1.2 or the
definitions of Borrowing Base, Adjusted Borrowing Base, Appraised Inventory
Liquidation Value, Availability, Average Net Availability, Net Availability,
Cash Dominion Event, Incremental Availability, Inventory Advance Rate,
Inventory Appraisal Cap or Receivables Advance Rate or (13) make less
restrictive the eligibility criteria set forth in the definitions of Eligible
Account, Eligible Credit Card Receivables, Eligible In Transit Inventory,
Eligible Inventory or Eligible Letter of Credit Inventory or (14) change the
methodology of calculation with respect to reserves related to customer
deposits, rent and gift certificates; or (ii) in writing and signed by the
Majority Lenders, eliminate or materially decrease any reserves existing on the
Closing Date and set forth in the definition of Availability Reserves,
Inventory Reserves or Receivables Reserves; or (iii) in writing and signed
by Agent in addition to the Lenders required above to take such action, affect
the rights or duties of Agent under this Agreement, any Note or any other Loan
Document; or (iv) in writing and signed by SwingLine Lender in addition to
the Lenders required above to take such action, affect the rights or duties of
SwingLine Lender under this Agreement, any Note or any other Loan Document.

11.11       Resignation of Agent; Appointment of
Successor.

The Agent may resign as
Agent by giving not less than thirty (30) days’ prior written notice to the
Lenders and Borrowers. If the Agent shall resign under this Agreement, then, (i) subject
to the consent of the Borrowers (which consent shall not be unreasonably
withheld and which consent shall not be required during any period in which a
Default or an Event of Default exists), the Majority Lenders shall appoint from
among the Lenders a successor agent for the Lenders or (ii) if a successor
agent shall not be so appointed and approved within the thirty (30) day period
following the Agent’s notice to the Lenders and the 

 57
 

 

Borrowers of its
resignation, then the Agent shall appoint a successor agent who shall serve as
Agent until such time as the Majority Lenders appoint a successor agent,
subject to the Borrowers’ consent as set forth above. Upon its appointment,
such successor agent shall succeed to the rights, powers and duties of the
Agent and the term “Agent” shall mean such successor effective upon its
appointment, and the former Agent’s rights, powers and duties as Agent shall be
terminated without any other or further act or deed on the part of such former
Agent or any of the parties to this Agreement. After the resignation of any
Agent hereunder (including, without limitation, the Existing Agent pursuant to Section 11.1
above), the provisions of this Section 11 shall inure to the benefit of
such former Agent and such former Agent shall not by reason of such resignation
be deemed to be released from liability for any actions taken or not taken by
it while it was an Agent under this Agreement.

SECTION 12. MISCELLANEOUS

12.1         Power of Attorney.

Each Borrower hereby
irrevocably designates, makes, constitutes and appoints Agent (and all Persons
designated by Agent) as such Borrower’s true and lawful attorney (and
agent-in-fact), solely with respect to the matters set forth in this Section 12.1,
and Agent, or Agent’s agent, may, without notice to either Borrowers and in
either Borrower’s or Agent’s name, but at the cost and expense of Borrowers:

(a)           At such time or times as Agent or
said agent, in its sole discretion, may determine, endorse a Borrower’s name on
any checks, notes, acceptances, drafts, money orders or any other evidence of
payment or proceeds of the Collateral which come into the possession of Agent
or under Agent’s control.

(b)           At such time or times upon or after
the occurrence and during the continuance of an Event of Default (provided that
the occurrence of an Event of Default shall not be required with respect to
clauses (iv), (vi), (viii) and (ix) below), as Agent or its agent in
its sole discretion may determine:  (i) demand
payment of the Accounts from the Account Debtors, enforce payment of the
Accounts by legal proceedings or otherwise, and generally exercise all of a
Borrower’s rights and remedies with respect to the collection of the Accounts; (ii) settle,
adjust, compromise, discharge or release any of the Accounts or other
Collateral or any legal proceedings brought to collect any of the Accounts or
other Collateral; (iii) sell or assign any of the Accounts and other
Collateral upon such terms, for such amounts and at such time or times as Agent
deems advisable; (iv) take control, in any manner, of any item of payment
or proceeds relating to any Collateral; (v) prepare, file and sign a
Borrower’s name to a proof of claim in bankruptcy or similar document against
any Account Debtor or to any notice of lien, assignment or satisfaction of lien
or similar document in connection with any of the Collateral; (vi) receive,
open and dispose of all mail addressed to either Borrower and notify postal
authorities to change the address for delivery thereof to such address as Agent
may designate; (vii) endorse the name of a Borrower upon any of the items
of payment or proceeds relating to any Collateral and deposit the same to the
account of Agent on account of the Obligations; (viii) endorse the name of
a Borrower upon any chattel paper, document, instrument, invoice, freight 

 58
 

 

bill, bill of lading or
similar document or agreement relating to the Accounts, Inventory and any other
Collateral; (ix) use a Borrower’s stationery and sign the name of a
Borrower to verifications of the Accounts and notices thereof to Account
Debtors; (x) use the information recorded on or contained in any data
processing equipment and computer hardware and software relating to the
Accounts, Inventory, Equipment and any other Collateral; (xi) make and adjust
claims under policies of insurance; and (xii) do all other acts and things
necessary, in Agent’s determination, to fulfill Borrowers’ obligations under
this Agreement.

(c)           The power of attorney granted hereby
shall constitute a power coupled with an interest and shall be irrevocable.

12.2         Indemnity.

Borrowers hereby agree to
indemnify Agent and each Lender (and each of their Affiliates) and hold Agent
and each Lender (and each of their Affiliates) harmless from and against any
liability, loss, damage, suit, action or proceeding ever suffered or incurred
by any such Person (including reasonable attorneys fees and legal expenses) as
the result of Borrowers’ failure to observe, perform or discharge Borrowers’
duties hereunder. In addition, Borrowers shall defend Agent and each Lender
(and each of their Affiliates) against and save it harmless from all claims of
any Person with respect to the Collateral (except those resulting from the
gross negligence or intentional misconduct of any such Person). Without
limiting the generality of the foregoing, these indemnities shall extend to any
claims asserted against Agent or any Lender (and each of their Affiliates) by
any Person under any Environmental Laws by reason of Borrowers’ or any other
Person’s failure to comply with laws applicable to solid or hazardous waste
materials or other toxic substances. Notwithstanding any contrary provision in
this Agreement, the obligation of Borrowers under this Section 12.2 shall
survive the payment in full of the Obligations and the termination of this
Agreement.

12.3         Sale of Interest.

Borrowers may not sell,
assign or transfer any interest in this Agreement, any of the other Loan
Documents, or any of the Obligations, or any portion thereof, including,
without limitation, Borrowers’ rights, title, interests, remedies, powers, and
duties hereunder or thereunder.

12.4         Severability.

Wherever 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 shall 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 such provision or the
remaining provisions of this Agreement.

 59
 

 

 

12.5         Successors and Assigns.

This Agreement, the Other
Agreements and the Security Documents shall be binding upon and inure to the
benefit of the successors and assigns of Borrowers, Agent and each Lender
permitted under Section 11.9 hereof.

12.6         Cumulative Effect; Conflict of Terms.

The provisions of the Other
Agreements and the Security Documents are hereby made cumulative with the
provisions of this Agreement. Except as otherwise provided in any of the other
Loan Documents by specific reference to the applicable provision of this Agreement,
if any provision contained in this Agreement is in direct conflict with, or
inconsistent with, any provision in any of the other Loan Documents, the
provision contained in this Agreement shall govern and control.

12.7         Execution in Counterparts.

This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which counterparts taken together shall
constitute but one and the same instrument.

12.8         Notices.

Except as otherwise provided
herein, all notices, requests and demands to or upon a party hereto, to be
effective, shall be in writing and shall be sent by certified or registered
mail, return receipt requested, by personal delivery against receipt, by
overnight courier, by facsimile or by electronic mail and, unless otherwise
expressly provided herein, shall be deemed to have been validly served, given,
delivered or received immediately when delivered against receipt, one Business
Day after deposit with an overnight courier or, in the case of facsimile
notice, when sent, addressed as follows:

	
  If to Agent:

  	
  Bank of America, N.A.

  40 Broad Street

  Boston, Massachusetts 02109

  Attention: Mr. Stephen Garvin

  Facsimile No. (617) 434-4312

  
	
   

  	
   

  
	
  With a copy to:

  	
  Riemer &
  Braunstein LLP

  Three Center Plaza

  Boston, Massachusetts 02108

  Attention:  David S. Berman, Esquire

  Facsimile No. (617) 880-3456

   

  

 60
 

 

 

	
  If to Borrowers:

  	
  Restoration Hardware, Inc.

  15 Koch Road, Suite J

  Corte Madera, California 94925

  Attention: Chief Financial Officer

  Facsimile
  No.:  415-927-7264

  
	
   

  	
   

  
	
  With a copy to:

  	
  Morrison &
  Foerster LLP

  425 Market Street

  San Francisco, California 94105

  Attention:  Gavin Grover, Esq.

  Facsimile No.:  415-268-7522

  

or
to such other address as each party may designate for itself by notice given in
accordance with this Section 12.8; provided, however, that any
notice, request or demand to or upon a Lender pursuant to subsection 3.1.1 or
4.2.2 hereof shall not be effective until received by such Lender.

12.9         Consent.

Whenever Agent’s or Majority’s
Lenders’ consent is required to be obtained under this Agreement, any of the
Other Agreements or any of the Security Documents as a condition to any action,
inaction, condition or event, except as otherwise specifically provided herein,
Agent or Majority Lenders, as applicable, shall be authorized to give or
withhold such consent in their sole and absolute discretion.

12.10       Credit Inquiries.

Borrowers hereby authorize
and permit Agent and each Lender to respond to usual and customary credit
inquiries from third parties concerning Borrowers or any of their Subsidiaries.

12.11       Time of Essence.

Time is of the essence of
this Agreement, the Other Agreements and the Security Documents.

12.12       Entire Agreement.

This Agreement and the other
Loan Documents, together with all other instruments, agreements and
certificates executed by the parties in connection therewith or with reference
thereto, embody the entire understanding and agreement between the parties
hereto and thereto with respect to the subject matter hereof and thereof and
supersede all prior agreements, understandings and inducements, whether express
or implied, oral or written.

12.13       Interpretation.

No provision of this
Agreement or any of the other Loan Documents shall be construed against or
interpreted to the disadvantage of any party hereto by any court or other

 

 61

 

 

governmental or judicial
authority by reason of such party having or being deemed to have structured or
dictated such provision.

12.14       Confidentiality.

Agent and each Lender shall
hold all nonpublic information obtained pursuant to the requirements of this
Agreement in accordance with Agent’s and such Lender’s customary procedures for
handling confidential information of this nature and in accordance with safe
and sound banking practices and in any event may make disclosure reasonably
required by a prospective participant or assignee in connection with the
contemplated participation or assignment or as required or requested by any
governmental authority or representative thereof or pursuant to legal process
and shall require any such participant or assignee to agree to comply with this
Section 12.14.

12.15       GOVERNING LAW; CONSENT TO FORUM.

THIS AGREEMENT HAS BEEN
NEGOTIATED AND DELIVERED IN AND SHALL BE DEEMED TO HAVE BEEN MADE IN LOS
ANGELES, CALIFORNIA. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT IF ANY
OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN CALIFORNIA,
THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR
FORECLOSURE OF AGENT’S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF AGENT’S
OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF
SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF
CALIFORNIA.  AS PART OF THE
CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE
DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF ANY BORROWER, AGENT OR ANY LENDER,
BORROWERS HEREBY CONSENT AND AGREE THAT THE SUPERIOR COURT OF LOS ANGELES
COUNTY, CALIFORNIA, OR, AT AGENT’S OPTION, THE UNITED STATES DISTRICT COURT FOR
THE CENTRAL DISTRICT OF CALIFORNIA, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR
AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY BORROWER ON THE ONE HAND AND
AGENT OR ANY LENDER ON THE OTHER HAND PERTAINING TO THIS AGREEMENT OR TO ANY
MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. EACH BORROWER EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND EACH BORROWER HEREBY WAIVES ANY OBJECTION
WHICH SUCH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM  NON  CONVENIENS AND HEREBY CONSENTS
TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY
SUCH COURT. EACH BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS,
COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT
SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY
REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH BORROWER 

 62
 

 

 

AT THE ADDRESS SET FORTH IN
THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE
EARLIER OF SUCH BORROWER’S ACTUAL RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN
THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE
DEEMED OR OPERATE TO AFFECT THE RIGHT OF AGENT OR ANY LENDER TO SERVE LEGAL
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY
AGENT OR ANY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE
TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER
APPROPRIATE FORUM OR JURISDICTION.

12.16       WAIVERS BY BORROWER.

EACH BORROWER WAIVES (i) THE
RIGHT TO TRIAL BY JURY (WHICH AGENT AND EACH LENDER HEREBY ALSO WAIVES) IN ANY
ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED
TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL; (ii) PRESENTMENT,
DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT,
MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL
COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS , CHATTEL
PAPER AND GUARANTIES AT ANY TIME HELD BY AGENT OR ANY LENDER ON WHICH BORROWER MAY IN
ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER AGENT OR ANY LENDER
MAY DO IN THIS REGARD; (iii) NOTICE PRIOR TO AGENT’S TAKING
POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE
REQUIRED BY ANY COURT PRIOR TO ALLOWING AGENT TO EXERCISE ANY OF AGENT’S
REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION
LAWS; AND (v) NOTICE OF ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE
FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO AGENT’S AND EACH LENDER’S
ENTERING INTO THIS AGREEMENT AND THAT AGENT AND EACH LENDER IS RELYING UPON THE
FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWERS. EACH BORROWER WARRANTS
AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL
COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

12.17       Joint Borrower Provisions.

Each Borrower represents to
the Lenders that each is an integral part of a consolidated enterprise, and
that each Borrower will receive direct and indirect benefits from the
availability of the joint credit facility provided for herein, and from the
ability to access the collective credit resources of the consolidated
enterprise that are Borrowers.

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Each Borrower is, and at all
times shall be, jointly and severally liable for each and every one of the
Obligations hereunder, regardless of which Borrower requested, received, used,
or directly enjoyed the benefit of the extensions of credit hereunder. All of
the Collateral shall secure all of the Obligations. Each Borrower’s Obligations
are independent obligations and are absolute and unconditional. Each Borrower,
to the extent permitted by law, hereby waives any defense to such Obligations
that may arise by reason of the disability or other defense or cessation of
liability of any other Borrower for any reason other than payment in full. Each
Borrower also waives any defense to such Obligations that it may have as a
result of any Lender’s or Agent’s election of or failure to exercise any right,
power, or remedy, including, without limitation, the failure to proceed first
against such other Borrower or any security it holds for such other Borrower’s
Obligations under any Loan Document, if any. Without limiting the generality of
the foregoing, each Borrower expressly waives all demands and notices
whatsoever (except for any demands or notices, if any, that such Borrower
expressly is entitled to receive pursuant to the terms of any Loan Document),
and agrees that the Lenders and Agent may, without notice (except for such
notice, if any, as such Borrower expressly is entitled to receive pursuant to
the terms of any Loan Document) and without releasing the liability of such
Borrower, extend for the benefit of the other Borrower the time for making any
payment, waive or extend the performance of any agreement or make any
settlement of any agreement for the benefit of any other Borrower, and may
proceed against each Borrower, directly and independently of any other
Borrower, as such obligee may elect in accordance with this Agreement.

Each Borrower acknowledges
that the Obligations of such Borrower undertaken herein or in the other Loan
Documents, and the grants of security interests and liens by such Borrower to
secure Obligations of the other Borrower could be construed to consist, at
least in part, of the guaranty of Obligations of the other Borrower and, in
full recognition of that fact, each Borrower consents and agrees as hereinafter
set forth in the balance of this Section 12.17. The consents, waivers, and
agreements of the Borrowers that are contained in the balance of this Section 12.17
are intended to deal with the suretyship aspects of the transactions evidenced
by the Loan Documents (to the extent that a Borrower may be deemed a guarantor
or surety for the Obligations of another Borrower) and thus are intended to be
effective and applicable only to the extent that any Borrower has agreed to
answer for the Obligations of another Borrower or has granted a lien or
security interest in Collateral to secure the Obligations of another Borrower. Conversely,
the consents, waivers, and agreements of the Borrowers that are contained in
the balance of this Section 12.17 shall not be applicable to the direct
Obligations of a Borrower with respect to credit extended directly to such
Borrower, and shall not be applicable to security interests or liens on
Collateral of a Borrower given to directly secure direct Obligations of such
Borrower where no aspect of guaranty or suretyship is involved. Each Borrower
consents and agrees that the Lenders may, at any time and from time to time,
without notice or demand, whether before or after any actual or purported
termination, repudiation or revocation of this Agreement by any one or more
Borrowers, and without affecting the enforceability or continuing effectiveness
hereof as to such Borrower, in accordance with the terms of the Loan
Documents:  (a) supplement, restate,
modify, amend, increase, decrease, extend, renew, accelerate or otherwise
change the time for payment or the terms of the Obligations or any part
thereof, including any increase or decrease of the rate(s) of interest
thereon; (b) supplement, restate, modify, amend, increase, decrease or
waive, or enter into or give any agreement, approval or 

 64
 

 

 

consent with respect to, the
Obligations or any part thereof, or any of the Loan Documents or any security
or guarantees granted or entered into by any Person(s) other than such
Borrower, or any condition, covenant, default, remedy, right, representation or
term thereof or thereunder; (c) accept new or additional instruments,
documents or agreements in exchange for or relative to any of the Loan
Documents or the Obligations or any part thereof, (d) accept partial
payments on the Obligations; (e) receive and hold additional security or
guarantees for the Obligations or any part thereof, (f) release, reconvey,
terminate, waive, abandon, fail to perfect, subordinate, exchange, substitute,
transfer or enforce any security or guarantees, and apply any security and
direct the order or manner of sale thereof as the Lenders in their sole and
absolute discretion may determine; (g) release any other Person
(including, without limitation, any other Borrower) from any personal liability
with respect to the Obligations or any part thereof, (h) with respect to
any Person other than such Borrower (including, without limitation, any other
Borrower), settle, release on terms satisfactory to the Lenders or by operation
of applicable laws or otherwise liquidate or enforce any Obligations and any
security therefor or guaranty thereof in any manner, consent to the transfer of
any security and bid and purchase at any sale; or (i) consent to the
merger, change or any other restructuring or termination of the corporate or
partnership existence of any other Borrower or any other Person, and
correspondingly agree, in accordance with all applicable provisions of the Loan
Documents, to the restructure of the Obligations, and any such merger, change,
restructuring or termination shall not affect the liability of any Borrower or
the continuing effectiveness hereof, or the enforceability hereof with respect
to all or any part of the Obligations.

Upon the occurrence and
during the continuance of any Event of Default, Agent and the Lenders may
enforce the Loan Documents independently as to each Borrower and independently
of any other remedy Agent or the Lenders at any time may have or hold in
connection with the Obligations, and it shall not be necessary for Agent or the
Lenders to marshal assets in favor of any Borrower or any other Person or to
proceed upon or against or exhaust any security or remedy before proceeding to
enforce this Agreement or any other Loan Documents. Each Borrower expressly
waives any right to require Agent or the Lenders to marshal assets in favor of
any Borrower or any other Person or to proceed against any other Borrower or
any Collateral provided by any Person, and agrees that Agent and the Lenders
may proceed against Borrowers or any Collateral in such order as they shall
determine in their sole and absolute discretion.

Agent and the Lenders may
file a separate action or actions against any Borrower, whether action is
brought or prosecuted with respect to any security or against any other Person,
or whether any other Person is joined in any such action or actions. Each
Borrower agrees, for itself, that Agent, any Lender and any other Borrower, or
any Affiliate of any other Borrower (other than such Borrower itself), may deal
with each other in connection with the Obligations or otherwise, or alter any
contracts or agreements now or hereafter existing between any of them, in any
manner whatsoever, all without in any way altering or affecting the continuing
efficacy as to such Borrower of the Loan Documents.

Agent’s and the Lenders’
rights hereunder shall be reinstated and revived, and the enforceability of
this Agreement shall continue, with respect to any amount at any time paid on
account of the Obligations which thereafter shall be required to be restored or
returned by Agent or the Lenders (including, without limitation, the
restoration or return of 

 65
 

 

 

any amount pursuant to a
court order or judgment (whether or not final or non-appealable), or pursuant
to a good faith settlement of a pending or threatened avoidance or recovery
action, or pursuant to good faith compliance with a demand made by a Person
believed to be entitled to pursue an avoidance or recovery action (such as a
bankruptcy trustee or a Person having the avoiding powers of a bankruptcy
trustee, or similar avoiding powers), and without requiring Agent or the
Lenders to oppose or litigate avoidance or recovery demands or actions that it
believes in good faith to be meritorious or worthy of settlement or compliance,
or pursue or exhaust appeals), all as though such amount had not been paid. The
rights of Agent or the Lenders created or granted herein and the enforceability
of the Loan Documents at all times shall remain effective to cover the full
amount of all the Obligations even though the Obligations, including any part
thereof or any other security or guaranty therefor, may be or hereafter may
become invalid or otherwise unenforceable as against any other Borrower and
whether or not any other Borrower shall have any personal liability with
respect thereto.

To the maximum extent permitted
by applicable law, each Borrower, for itself, expressly waives any and all
defenses now or hereafter arising or that otherwise might be asserted by reason
of (a) any disability or other defense of any other Borrower with respect
to the Obligations or with respect to the enforceability of Agent’s security
interest in or Encumbrance on any collateral securing any of the Obligations
(including, without limitation, the Collateral), (b) the unenforceability
or invalidity of any security or guaranty for the Obligations or the lack of
perfection or continuing perfection or failure of priority of any security for
the Obligations, (c) the cessation for any cause whatsoever of the
liability of any other Borrower (other than by reason of the full payment and performance
of all Obligations), (d) any failure of Agent to give notice of sale or
other disposition of Collateral to any other Borrower or any other Person other
than such waiving Borrower, or any defect in any notice that may be given to
any other Borrower for any other Person other than such waiving Borrower, in
connection with any sale or disposition of any collateral securing the
Obligations or any of them (including, without limitation, the Collateral), (e) any
failure of Agent to comply with applicable law in connection with the sale or
other disposition of any collateral or other security for any Obligations that
is owned by another Borrower or by any other Person other than such waiving
Borrower, including any failure of Agent to conduct a commercially reasonable
sale or other disposition of any such collateral or other security for any
Obligations, (f) any act or omission of Agent or others that directly or
indirectly results in or aids the discharge or release of any other Borrower,
or the Obligations of any other Borrower, or any security or guaranty therefor,
by operation of law or otherwise, or (g) any law which provides that the
obligation of a surety or guarantor must neither be larger in amount nor in
other respects more burdensome than that of the principal or which reduces a
surety’s or guarantor’s obligation in proportion to the principal obligation. Until
such time, if any, as all of the Obligations (other than contingent Obligations
and indemnities which survive repayment of the Loans) have been paid and
performed in full and no portion of any commitment of the Lenders to any
Borrower under any Loan Document remains in effect, no Borrower shall have any
right of subrogation, contribution, reimbursement or indemnity, and each
Borrower expressly waives any right to enforce any remedy that Collateral Agent
now have or hereafter may have against any other Person and waives the benefit
of, or any right to participate in, any collateral now or hereafter held by
Agent. Except to the extent expressly provided for in any Loan Document, each
Borrower expressly waives, to the maximum extent permitted by applicable law,
all rights or entitlements to presentments, demands for payment 

 66
 

 

 

or performance, notices of
nonpayment or nonperformance, protests, notices of protest, notices of dishonor
and all other notices or demands of any kind or nature whatsoever with respect
to the Obligations, and all notices of acceptance of the Loan Documents or of
the existence, creation or incurring of new or additional Obligations.

In the event that all or any
part of the Obligations at any time should be or become secured by any one or
more deeds of trust or mortgages or other instruments creating or granting
liens on any interests in real property, each Borrower authorizes Agent, upon
the occurrence of and during the continuance of any Event of Default, at its
sole option, without notice or demand except as is or may be expressly required
by the terms of any Loan Document or by the provisions of any applicable law,
to foreclose any or all of such deeds of trust or mortgages or other
instruments by judicial or non-judicial sale, without affecting or diminishing,
except to the extent of the effect of the application of the proceeds realized
therefrom, and except to the extent mandated by any non-waivable provision of
applicable law, the Obligations of any Borrower (other than the Obligations of
a grantor of a foreclosed deed of trust, mortgage, or other instrument, to the
extent, if any, that applicable law affects or diminishes the Obligations of
such grantor), the enforceability of this Agreement or any other Loan Document,
or the validity or enforceability of any remaining security interests or liens
of, or for the benefit of, the Lenders and Agent on any Collateral.

Each Borrower hereby agrees
to keep each other Borrower fully apprised at all times as to the status of its
business, affairs, finances, and financial condition, and its ability to
perform its Obligations under the Loan Documents, and in particular as to any
adverse developments with respect thereto. Each Borrower hereby agrees to
undertake to keep itself apprised at all times as to the status of the
business, affairs, finances, and financial condition of each other Borrower,
and of the ability of each other Borrower to perform its Obligations under the
Loan Documents, and in particular as to any adverse developments with respect
to any thereof. Each Borrower hereby agrees, in light of the foregoing mutual
covenants to inform each other, and to keep themselves and each other informed
as to such matters, that the Lenders and Agent shall have no duty to inform any
Borrower of any information pertaining to the business, affairs, finances, or
financial condition of any other Borrower, or pertaining to the ability of any
other Borrower to perform its Obligations under the Loan Documents, even if
such information is adverse, and even if such information might influence the
decision of one or more of the Borrowers to continue to be jointly and
severally liable for, or to provide Collateral for, Obligations of one or more
of the other Borrowers. To the fullest extent permitted by applicable law, each
Borrower hereby expressly waives any duty of the Lenders and Agent to inform
any Borrower of any such information.

Borrowers and each of them
warrant and agree that each of the waivers and consents set forth herein are
made after consultation with legal counsel and with full knowledge of their
significance and consequences, with the understanding that events giving rise
to any defense or right waived may diminish, or otherwise adversely affect
rights that Borrowers otherwise may have against other Borrowers, Lenders,
Agent, or others, or against Collateral, and that, under the circumstances, the
waivers and consents herein given are reasonable. If any of the waivers or
consents herein is determined to be contrary to any applicable law or public
policy, such waivers and consents shall be effective to the maximum extent
permitted by law.

 67
 

 

 

Without limiting the
generality of the foregoing, or of any other waiver or other provision set
forth in this Agreement, each Borrower hereby absolutely, knowingly,
unconditionally, and expressly waives any and all claim, defense or benefit
arising directly or indirectly under any one or more of Sections 2787 to 2855
inclusive of the California Civil Code or any similar law of California.

12.18       Patriot Act Notice.

Each Lender that is subject to the Act (as hereinafter
defined) and the Agent (for itself and not on behalf of any 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 each Borrower, which information includes the name and address
of each Borrower and other information that will allow such Lender or the
Agent, as applicable, to identify each Borrower in accordance with the Act.
Each Borrower is in compliance, in all material respects, with the Patriot Act.
No part of the proceeds of the Loans will be used by the Borrowers, directly or
indirectly, for any payments to any governmental official or employee,
political party, official of a political party, candidate for political office,
or anyone else acting in an official capacity, in order to obtain, retain or
direct business or obtain any improper advantage, in violation of the United
States Foreign Corrupt Practices Act of 1977, as amended.

12.19       Amendment and Restatement.

This Agreement amends and
restates in full the Existing Loan Agreement. On the Closing Date, all loans
outstanding under the Existing Loan Agreement shall become Revolving Credit
Loans to the Borrowers under this Agreement, of the same type and amount, and
the Revolving Credit Loans by each of the Lenders shall be adjusted according
to their Revolving Loan Percentage.

 

 68

 

 

IN WITNESS WHEREOF, this
Agreement has been duly executed on the day and year specified at the beginning
of this Agreement.

	
  

  	
  RESTORATION HARDWARE, INC., the Lead

  Borrower

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  THE MICHAELS FURNITURE COMPANY, a

  Borrower

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  

 

 S-1
 

 

 

	
  

  	
  FLEET RETAIL GROUP, LLC,
  as Existing Agent

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  BANK OF AMERICA, N.A., as
  Agent and as a

  Lender

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  40 Broad Street

  Boston, Massachusetts 02109

  Revolving Loan
  Commitment:  $55,000,000

  	
   

  	
   

  

 

	
  

  	
  THE CIT GROUP/BUSINESS
  CREDIT, INC. as

  the Co-Administrative Agent and as a Lender

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  300 South Grand Avenue, 10th Floor

  Los Angeles, California 90071

  Revolving Loan
  Commitment:  $45,000,000

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  WELLS FARGO RETAIL
  FINANCE, LLC, as the Documentation Agent and as a Lender

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  One Boston Place, 18th Floor

  Boston, Massachusetts 02108
Revolving Loan Commitment:  $50,000,000

  	
   

  	
   

  

 

 S-2

 

Exhibit
8.3

APPENDIX A

GENERAL DEFINITIONS

When used in the Eighth
Amended and Restated Loan and Security Agreement dated as of June 19,
2006, by and among Bank of America, N.A., individually and as Agent, the other
financial institutions which are or become parties thereto, Restoration
Hardware, Inc. and The Michaels Furniture Company,(a) the terms Account,
Certificated Security, Chattel Paper, Deposit Account, Document,
Equipment, Financial Asset, Fixture, General
Intangibles, Goods, Instruments, Inventory, Investment
Property, Security, Proceeds, Security Entitlement, Uncertificated
Security,  Commercial Tort Claims, Electronic Chattel Paper, Health-Care-Insurance
Receivables, Letter-of-Credit Rights, Payment Intangibles, Software,
Supporting Obligations and Tangible Chattel Paper have the
respective meanings assigned thereto in the UCC (as defined below); (b) all
terms indicating Collateral having the meanings assigned thereto under the UCC
shall be deemed to mean such Property, whether now owned or hereafter created
or acquired by Borrowers or in which Borrowers now have or hereafter acquire
any interest; (c) capitalized terms which are not otherwise defined have
the respective meanings assigned thereto in said Loan and Security Agreement;
and (d) the following terms shall have the following meanings (terms
defined in the singular to have the same meaning when used in the plural and
vice versa):

“Account Debtor” —
any Person who is or may become obligated on or under or on account of any
Account, Contract Right, Chattel Paper or General Intangible.

“Adjusted Borrowing Base”
means, at any time of calculation, an amount equal to the sum of the following:

(a)          The product of (i) 95% multiplied by (ii) the Appraised Inventory Liquidation
Value of Eligible Inventory of the Lead Borrower and the Canadian Affiliate
(net of Inventory Reserves); plus

(b)         The product of (i) the Cost of
Eligible Inventory of Michaels (net of Inventory Reserves) multiplied
by (ii) 25%, which together with the result of clause (c) below
shall not exceed $2,000,000; plus

(c)          The product of (i) the face
amount of Eligible Accounts of Michaels (net of Receivables Reserves) multiplied by (ii) the applicable Receivables Advance
Rate, which together with the result of clause (b) above shall not exceed
$2,000,000; plus

(d)         The product of (i) the amount of
Eligible Credit Card Receivables of the Lead Borrower and the Canadian
Affiliate (net of Receivables Reserves) multiplied by (ii) the
applicable Receivables Advance Rate;

provided, however, that
until the Agent obtains a perfected security interest in the Canadian Assets
and the Canadian Inventory, the amounts set forth in clauses (a) and (d) attributable
to the Canadian Affiliate shall not be included in the Adjusted Borrowing Base
calculation; and provided further that Eligible In-Transit Inventory shall not
constitute more than twenty percent (20%) of the Eligible Inventory at any
time.

 1
 

 

“Affiliate” — a
Person (other than a Subsidiary):  (i) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, a Person; (ii) which
beneficially owns or holds 5% or more of any class of the Voting Stock of a
Person; or (iii) 5% or more of the Voting Stock (or in the case of a
Person which is not a corporation, 5% or more of the equity interest) of which
is beneficially owned or held by a Person or a Subsidiary of a Person.

“Agent” — Bank of
America, N.A. in its capacity as agent for the Lenders under the Agreement and
any successor in that capacity appointed pursuant to subsection 11.11.

“Aggregate Percentage”
— with respect to each Lender, the percentage equal to the quotient of (i) such
Lender’s Revolving Loan Commitment divided by (ii) the aggregate of
all Revolving Loan Commitments.

“Agreement” — the
Eighth Amended and Restated Loan and Security Agreement referred to in the
first sentence of this Appendix A, all Exhibits and Schedules thereto and this
Appendix A, as each of the same may be amended from time to time.

“Applicable Margin” —
initially, the percentages with respect to the Base Rate Revolving Portion
(other than Incremental Revolving Credit Loans) , the LIBOR Revolving Portion
(other than Incremental Revolving Credit Loans) and the Incremental Revolving
Credit Loans set forth in Level III below:

	
  Level

  	
   

  	
  Average Net Availability

  	
   

  	
  Base Rate

  Margin

  	
   

  	
  LIBOR

  Margin

  	
   

  	
  Base Rate

  Margin for

  Incremental

  Revolving

  Credit

  Loans

  	
   

  	
  LIBOR

  Margin for

  Incremental

  Revolving

  Credit

  Loans

  
	
  I

  	
   

  	
  >$50,000,000

  	
   

  	
  0%

  	
   

  	
  1.25%

  	
   

  	
  1.00%

  	
   

  	
  3.50%

  
	
  II

  	
   

  	
  <=$50,000,000
  and >

  $30,000,000

  	
   

  	
  0%

  	
   

  	
  1.50%

  	
   

  	
  1.00%

  	
   

  	
  3.50%

  
	
  III

  	
   

  	
  <=$30,000,000

  	
   

  	
  0%

  	
   

  	
  1.75%

  	
   

  	
  1.00%

  	
   

  	
  3.50%

  

The
Applicable Margin shall thereafter be adjusted quarterly as of the first day of
each fiscal quarter of the Borrowers commencing with the fiscal quarter
beginning August 1, 2006, based upon the Borrowers’ Average Net
Availability for the immediately preceding fiscal quarter; provided that
during the period from July 1, 2006 through September 30, 2006, the
Applicable Margin shall be set at 0.25% above the Applicable Margin otherwise
applicable. Upon the occurrence of an Event of Default, at the option of the
Agent or at the direction of the Majority Lenders, interest shall be
immediately increased to that set forth in Level III (even if the Average Net
Availability requirements for a different Level have been met) and interest
shall accrue at the rate set forth in Section 2.1.2.

“Appraised Inventory
Liquidation Value” — The product of (a) the Cost of Eligible Inventory
(net of Inventory Reserves) multiplied by (b) that percentage, determined

 2
 

 

from the then most recent
appraisal of the Borrowers’ and Canadian Affiliate’s Inventory obtained by the
Agent, to reflect the appraiser’s estimate of the net realization on the
liquidation of the Cost of the Borrowers’ and Canadian Affiliate’s Inventory.

“Availability” — the
amount of additional money which Borrowers are entitled to borrow from time to
time as Revolving Credit Loans, such amount being the difference derived when
the sum of the principal amount of Revolving Credit Loans then outstanding
(including any amounts which Agent or any Lender may have paid for the account
of Borrowers pursuant to any of the Loan Documents and which have not been
reimbursed by Borrowers), the LC Amount, plus the amount of LC Obligations that
have not been reimbursed by Borrowers or funded with a Revolving Credit Loan,
and any Availability Reserves is subtracted from the Adjusted Borrowing Base. If
the amount outstanding is equal to or greater than the Adjusted Borrowing Base,
Availability is zero (0).

“Availability Reserves”
— such reserves as the Agent from time to time determines in the Agent’s
reasonable discretion as being appropriate to reflect the impediments to the
Agent’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:

(i)            Rent (based upon past due rent and/or whether or not a
landlord’s waiver, acceptable to the Agent, has been received by the Agent)
(initially which shall be 2 months rent for each location located in a Landlord
State).

(ii)           Customer Credit Liabilities (initially which shall be 50%
of the amount for such items as reflected on the Borrowers’ general ledger).

(iii)          Past due taxes and other governmental charges, including ad
valorem, personal property, and other taxes which might have priority over the
interests of Agent in the Collateral.

(iv)          Import Landing Costs (initially which shall be 50% of such
amount as reflected on the Borrowers’ stock ledger).

(v)           Landing Costs (initially which shall be 50% of 15% of
Eligible Prepaid Inventory).

(vi)          Deposits on special orders equal to 100% of total special
order deposit amounts as reflected on the Borrowers’ balance sheet.

(vii)         Payables (based upon payables which are past the Borrowers’
historical payment terms consistent with past practices).

(viii)        Additional reserves related to matters
particular to Canadian Assets, including, without limitation, ad valorem taxes.

(ix)           Foreign exchange contracts in an amount established in the
Agent’s discretion.

 3
 

 

In no event shall the Agent
establish an Availability Reserve (a) under clauses (iv) or (v) of
this definition as long as the Borrowers’ cost structure for Import Landing
Costs and Landing Costs is consistent with their historical practices or (b) related
to matters particular to Canadian Assets so long as Canadian Assets are not
eligible for inclusion in the calculation of the Borrowing Base.

“Average Net Availability”
means the average daily Net Availability for the immediately preceding fiscal
quarter of the Borrowers.

“Bank” —Bank of
America, N.A.

“Base Rate” — the
rate of interest announced or quoted by Bank from time to time as its prime
rate for commercial loans, whether or not such rate is the lowest rate charged
by Bank to its most preferred borrowers; and, if such prime rate for commercial
loans is discontinued by Bank as a standard, a comparable reference rate
designated by Bank as a substitute therefor shall be the Base Rate.

“Base Rate Advance” —
any Loan bearing interest computed by reference to the Base Rate.

“Base Rate Revolving
Portion” — that portion of the Revolving Credit Loans that is subject to
interest computed by reference to the Base Rate.

“Blocked Account”
means each deposit account of the Borrowers which is the subject of a Blocked
Account Agreement.

“Blocked Account
Agreement” means agency agreements with the banks maintaining deposit
accounts of the Borrower where funds from one or more checking or other demand
deposit account maintained by any Borrower into which proceeds of Collateral
are deposited are concentrated, which agreements shall be in form and substance
satisfactory to the Agent.

“Borrowing Base” —
means, at any time of calculation, an amount equal to the sum of the following:

(a) The
product of (i) 80% multiplied by (ii) the
Appraised Inventory Liquidation Value of Eligible Inventory of the Lead
Borrower and the Canadian Affiliate (net of Inventory Reserves); plus

(b) 
The product of (i) the Cost of Eligible Inventory of Michaels (net of
Inventory Reserves) multiplied by (ii) 25%,
which together with the result of clause (c) below shall not exceed
$2,000,000; plus

(c) 
The product of (i) the face amount of Eligible Accounts of Michaels (net
of Receivables Reserves) multiplied by (ii) the
applicable Receivables Advance Rate, which together with the result of clause (b) above
shall not exceed $2,000,000; plus

 4
 

 

(d) 
The product of (i) the amount of Eligible Credit Card Receivables of the
Lead Borrower and the Canadian Affiliate (net of Receivables Reserves) multiplied by (ii) the applicable Receivables Advance
Rate.

provided,
however, that until the Agent obtains a perfected security interest in the
Canadian Assets and the Canadian Inventory, the amounts set forth in clauses (a) and
(d) attributable to the Canadian Affiliate shall not be included in the
Borrowing Base calculation; and provided further that Eligible In-Transit
Inventory shall not constitute more than twenty percent (20%) of the Eligible
Inventory at any time.

“Borrowing Base
Certificate” — a certificate by a responsible officer of Borrowers, in a
form acceptable to Agent setting forth the calculation of the Borrowing Base
and the Adjusted Borrowing Base, including a calculation of each component
thereof, all in such detail as shall be satisfactory to Agent. All calculations
of the Borrowing Base and the Adjusted Borrowing Base in connection with the
preparation of any Borrowing Base Certificate shall originally be made by
Borrowers and certified to Agent; provided, that Agent shall have the right to
review and adjust, in the exercise of its reasonable credit judgment, any such
calculation after giving notice thereof to the Borrowers, (1) to reflect
its reasonable estimate of declines in value of any of the Collateral described
therein, and (2) to the extent that such calculation is not in accordance
with this Agreement.

“Business Day” — (i) when
used with respect to the LIBOR Revolving Portion, shall mean a day on which
dealings may be effected in deposits of United States Dollars in the London
interbank foreign currency deposits market and on which Agent is conducting and
other banks may conduct business in London, England or in the State of
California and (ii) when used with respect to any other provision of the
Agreement, any day excluding Saturday, Sunday and any day which is a legal
holiday under the laws of the State of California or is a day on which banking
institutions located in such state are closed.

“Canadian Affiliate” —
Restoration Hardware Canada, Incorporated.

“Canadian Assets” —
the presently existing or hereafter arising assets of the Canadian Affiliate.

“Canadian Inventory”
— the Inventory of the Canadian Affiliate.

“Capital Expenditures”
— expenditures made or liabilities incurred for the acquisition of any fixed
assets or improvements, replacements, substitutions or additions thereto which
have a useful life of more than one year, including the total principal portion
of Capitalized Lease Obligations.

“Capitalized Lease
Obligation” — any Indebtedness represented by obligations under a lease
that is required to be capitalized for financial reporting purposes in
accordance with GAAP.

 5
 

 

“Cash Dominion Event”
means either (i) the occurrence of an Event of Default, or (ii) the
failure of the Borrowers to maintain Availability under the Adjusted Borrowing
Base in an amount equal to at least fifteen (15%) of the then Adjusted
Borrowing Base.

“Cash Receipts” as
defined in Section 6.2.3.

“Change in Control” —
the occurrence of any of the following:

(a)           the failure of the
Lead Borrower to own, beneficially and of record, 100% of the capital stock of
all of the other Borrowers;

(b)           the occurrence of
any event or circumstance such that the Lead Borrower does not have the power
to elect all directors of all other Borrowers; or

(c)           the acquisition, by
any group (within the meaning of the Securities Exchange Act of 1934, as
amended) or by any Person, of beneficial ownership (within the meaning of Rule 13d-3
of the Securities and Exchange Commission), directly or indirectly, of 40% or
more of the issued and outstanding capital stock of the Lead Borrower having
the right to vote for the election of directors of the Lead Borrower other than
Palladin Capital Group, Inc., Reservoir Capital Group, Inc., Gary
Friedman, Glenhill Capital L.P. or any of their respective Affiliates; or

(d)            Continuing
Directors cease for any reason to constitute at least a majority of the Board
of Directors of the Lead Borrower; provided that any individual nominated on
behalf of Reservoir Capital Group, Inc., Glenhill Capital L.P. and/or any
of their respective Affiliates to fill a seat held by a prior nominee of
Reservoir Capital Group, Inc., Glenhill Capital L.P. and/or any of their
respective Affiliates shall be considered to be a Continuing Director.

“Closing Date” —  June 19, 2006.

“Collateral” — all of
the Property and interests in Property described in Section 5 of the
Agreement, and all other Property and interests in Property that now or
hereafter secure the payment and performance of any of the Obligations.

“Computer Hardware and
Software” — all of Borrowers’ rights (including rights as licensee and
lessee) with respect to (i) computer and other electronic data processing
hardware, including all integrated computer systems, central processing units,
memory units, display terminals, printers, computer elements, card readers,
tape drives, hard and soft disk drives, cables, electrical supply hardware,
generators, power equalizers, accessories, peripheral devices and other related
computer hardware; (ii) all Software and all software programs designed
for use on the computers and electronic data processing hardware described in
clause (i) above, including all operating system software, utilities and
application programs in any form (source code and object code in magnetic tape,
disk or hard copy format

 6
 

 

or any other listings
whatsoever); (iii) any firmware associated with any of the foregoing; and (iv) any
documentation  for hardware, Software and
firmware described in clauses (i), (ii) and (iii) above, including
flow charts, logic diagrams, manuals, specifications, training materials,
charts and pseudo codes.

“Concentration Account”
as defined in Section 6.2.3.

“Consolidated” — the
consolidation in accordance with GAAP of the accounts or other items as to
which such term applies.

“Consolidated Fixed
Charges” means for any period the sum of (i)  all interest and
amortization of debt discount and expense (including that portion attributable
to Capitalized Lease Obligations in accordance with GAAP and capitalized
interest, and including commitment fees, commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers’ acceptance
financing, balance deficiency fees and similar expenses, net costs under
interest rate agreements and amounts referred to in Section 2 payable to
Agent or Lenders that are considered interest expense in accordance with GAAP,
but excluding any amendment fee payable pursuant to the Loan Documents) on all
Indebtedness of the Borrowers on a Consolidated basis paid or required to be
paid in accordance with GAAP (including with respect to Capitalized Lease
Obligations), plus (ii) the aggregate amount of scheduled principal
payments paid or required to be paid by the Borrowers with respect to any
Indebtedness (including Capitalized Lease Obligations but excluding payments
with respect to the Revolving Credit Loans).

“Continuing Director”
— Any member of the Board of Directors of the Lead Borrower who was a member of
the Board of Directors of the Lead Borrower on June 19, 2006 or who
becomes a member of the Board of Directors subsequent to that date and whose
appointment, election or nomination for election is duly approved by a majority
of the Continuing Directors on the Board of Directors at the time of such
approval.

“Contract Right” —
any right of Borrowers to payment under a contract for the sale or lease of
goods or the rendering of services, which right is at the time not yet earned
by performance.

“Cost”
— the lower of

(a)           the calculated cost
of Inventory purchases, as determined from invoices received by Borrowers and
reflected in Borrowers’ purchase journal or stock ledger, based upon Borrowers’
accounting practices in effect on the date hereof; and

(b)           the cost equivalent
of the lowest ticketed or promoted price at which the subject Inventory is
offered to the public, after all mark-downs (whether or not such price is then
reflected on Borrowers’ accounting system), determined in accordance with the
lower of cost or market method of accounting and reflecting Borrowers’ historic
business practices.

 7
 

 

“Cost” does not include Inventory capitalization costs or other non—purchase
price charges (such as freight and UNICAP) used in Borrowers’ calculation of
cost of goods sold.

“Credit Card Receivables”
— Accounts due on a non-recourse basis from major credit card processors.

“Current Assets” — at
any date means the amount at which all of the current assets of a Person would
be properly classified as current assets shown on a balance sheet at such date
in accordance with GAAP except that amounts due from Affiliates and investments
in Affiliates shall be excluded therefrom.

“Default” — an event
or condition the occurrence of which would, with the lapse of time or the
giving of notice, or both, become an Event of Default.

“Default Rate” — as
defined in subsection 2.1.2 of the Agreement.

“Derivative Obligations”
— every obligation of a Person under any forward contract, futures contract,
swap, option or other financing agreement or arrangement (including, without
limitation, caps, floors, collars and similar agreement), the value of which is
dependent upon interest rates, currency exchange rates, commodities or other
indices.

“Distribution” — in
respect of any Person means and includes: 
(i) the payment of any dividends or other distributions on
Securities (except distributions in such Securities) and (ii) the
redemption or acquisition of Securities of such Person, as the case may be,
unless made contemporaneously from the net proceeds of the sale of Securities.

“EBITDA” — The
Borrowers’ Consolidated earnings (excluding extraordinary gains and gains from
the sale of assets other than in the ordinary course of business) before
interest, taxes, depreciation, amortization and other non-cash charges properly
deducted in determining earnings in accordance with GAAP. EBITDA shall be
computed to add back any non-cash compensation charges resulting from the
application of FAS 123r.

“Eligible Account” —
such of Michaels’ Accounts arising in the ordinary course of the business of Michaels
from the sale of goods or rendition of services by Michaels which Agent, in its
reasonable credit judgment, deems to be an Eligible Account and subject to
Agent’s right to establish Reserves therefor.

“Eligible Credit Card
Receivables” — Credit Card Receivables (which, if due on account of a
private label credit card program, are deemed in the reasonable credit judgment
of the Agent to be eligible) which accounts have been outstanding for no more
than four Business Days, which are subject to agreements with the applicable
credit card clearinghouse satisfying the terms and conditions of Section 6.5
and otherwise are satisfactory in form and substance to the Agent and as to
which the Agent has a perfected security interest that is prior and superior to
all claims and all Liens (other than Permitted Liens, subject to the Agent’s
right to establish Reserves therefor).

 8
 

 

“Eligible In Transit
Inventory” — That portion of the Lead Borrower’s Inventory (without
duplication of Eligible Inventory or Eligible Letter of Credit Inventory) for
which the Lead Borrower has paid, title to which passed to the Lead Borrower,
and which has been shipped from a foreign location to the Lead Borrowers’
warehouse provided that

(i)            Such Inventory is of such types, character, qualities and
quantities as the Agent in its reasonable discretion from time to time
determines to be Eligible Inventory;

(ii)           The documents which relate to such shipment reflects a
Borrower or the Canadian Affiliate as consignee (along with delivery to such
Person of the documents of title with respect thereto) and the Agent has
control over the documents which evidence ownership of the subject Inventory
such as by providing a customs broker agreement reasonably satisfactory to the
Agent; and

(iii)          Such Inventory has not yet been delivered to the Lead
Borrower’s warehouse and has been in transit from the applicable foreign
location for no more than 45 calendar days.

“Eligible Inventory” —
Eligible In Transit Inventory, Eligible Letter of Credit Inventory and other
Inventory of Borrowers and Canadian Affiliate (other than packaging materials
and supplies, tooling, samples and literature) which Agent, in its reasonable
credit judgment, deems to be Eligible Inventory. Without limiting the
generality of the foregoing, no Inventory shall be Eligible Inventory if:

(i)            it is not raw materials, work in process that is readily
marketable in its current form or finished goods;

(ii)           it is not in good, new and saleable condition; or

(iii)          it is slow-moving, obsolete or unmerchantable; or

(iv)          it does not meet all standards imposed by any governmental
agency or authority; or

(v)           it does not conform in all respects to any covenants,
warranties and representations set forth in the Agreement; or

(vi)          it is not at all times subject to Agent’s duly perfected,
first priority security interest and no other Lien except a Permitted Lien; or

(vii)         [Intentionally Omitted]

(viii)        it is Michaels’ supply and label
Inventory; or

(ix)           it is not otherwise acceptable to Agent in its reasonable
credit judgment.

 9
 

 

“Eligible Letter of
Credit Inventory” — That portion of Inventory of a Person (without
duplication of Eligible Inventory and Eligible Prepaid Inventory), the purchase
of which is supported by a documentary Letter of Credit then having an initial
expiry of 60 days or less days provided that

(a)           Such Inventory is of such types, character, qualities and
quantities as the Agent in its reasonable discretion from time to time
determines to be Eligible Inventory;

(b)           The documents which relate to such shipment reflects a
Borrower or the Canadian Affiliate as consignee (along with delivery to such
Person of the documents of title with respect thereto) and the Agent has
control over the documents which evidence ownership of the subject Inventory such
as by providing a customs broker agreement reasonably satisfactory to the
Agent; and

(c)           Such Inventory has not yet been delivered to such Person’s
warehouse and has been in transit from the applicable foreign location for no
more than 45 calendar days.

“Eligible Prepaid
Inventory” — That portion of the Lead Borrower’s Inventory which consists
of Eligible In Transit Inventory and Eligible Letter of Credit Inventory.

Eligible Prepaid Inventory
shall not include Inventory that has been received by Borrowers at Borrowers’
warehouse or distribution center located in the United States and recorded in
Borrowers’ stock ledger.

“Environmental Laws” —
all federal, state and local laws, rules, regulations, ordinances, orders and
consent decrees relating to pollution or the protection of the environment.

“Equipment” — all
machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles
and other tangible personal Property (other than Inventory) of every kind and
description used in the operations of Borrowers or any of its Subsidiaries or
owned by Borrowers or any of its Subsidiaries or in which Borrowers or any of
its Subsidiaries has an interest, whether now owned or hereafter acquired by
Borrowers or any of its Subsidiaries and wherever located, and all parts,
accessories and special tools and all increases and accessions thereto and
substitutions and replacements therefor.

“ERISA” — the
Employee Retirement Income Security Act of 1974, as amended, and all rules and
regulations from time to time promulgated thereunder.

“Event of Default” —
as defined in Section 10.1 of the Agreement.

“Fixed Charge Coverage
Ratio” — means the ratio of (i) Consolidated EBITDA minus Consolidated
Net Capital Expenditures minus current taxes based on income of Borrowers and their
Subsidiaries paid in cash with respect to such period to (ii) Consolidated
Fixed Charges, in each case, for the twelve month period most recently ended
for which financial statements have been delivered or are required to be
delivered to Agent pursuant to Section 8.1.3(c) hereof.

 

 10

 

“Foreign Exchange
Facility” — as defined in Section 1.6.

“GAAP” — generally
accepted accounting principles in the United States of America in effect from
time to time.

“Guarantor”
— means any Subsidiary of Borrowers that executes a guaranty of the Obligations
in favor of Agent and Lenders.

“Hazardous
Materials” — Any (a) hazardous
materials, hazardous waste, hazardous or toxic substances or 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.

“Import Landing Costs”
— to the extent not included in the stated amount of a Letter of Credit,
Landing Costs for Inventory, the purchase of which is supported by such Letter
of Credit, or customs, duty, freight, and other out-of-pocket costs and
expenses that will be expended to “land” in transit Inventory and which is not
included in invoices for prepaid Inventory.

“Incremental Availability”
means, as of any date of determination, the excess of (a) the Adjusted
Borrowing Base, over (b) the Borrowing Base.

“Incremental Revolving
Credit Loans” means all Revolving Credit Loans based on Incremental
Availability at any time made by a Lender.

“Indebtedness”
— as applied to a Person means, without duplication:

(i)            all items which in accordance with GAAP would be included
in determining total liabilities as shown on the liability side of a balance
sheet of such Person as at the date as of which Indebtedness is to be
determined, including, without limitation, Capitalized Lease Obligations;

(ii)           all obligations of other Persons which such Person has
guarantied;

(iii)          all reimbursement obligations in connection with letters of
credit or letter of credit guaranties issued for the account of such Person;

(iv)          Derivative Obligations; and

(v)           in the case of Borrowers (without duplication), the
Obligations.

“Intellectual Property”
— all past, present and future: trade secrets, know—how and other proprietary
information; trademarks, internet domain names, service marks, trade dress,
trade names, business names, designs, logos, slogans (and all translations,
adaptions, derivations and combinations of the foregoing) indicia and other
source and/or business identifiers, and the goodwill of the business relating
thereto and all registrations or applications for registrations which have
heretofore been or may hereafter be issued thereon throughout the world;
copyrights (including copyrights for computer programs) and copyright

 11
 

 

registrations or
applications for registrations which have heretofore been or may hereafter be
issued throughout the world and all tangible property embodying the copyrights,
unpatented inventions (whether or not patentable); patent applications and
patents; industrial design applications and registered industrial designs;
license agreements related to any of the foregoing and income therefrom; books,
records, writings, computer tapes or disks, flow diagrams, specification
sheets, computer software, source codes, object codes, executable code, data,
databases and other physical manifestations, embodiments or incorporations of
any of the foregoing; the right to sue for all past, present and future
infringements of any of the foregoing; all other intellectual property; and all
common law and other rights throughout the world in and to all of the
foregoing.

“Interest Period” —
as applicable to any LIBOR Advance, a period commencing on the date a LIBOR
Advance is made, and ending on the date which is one (1) month, two (2) months,
three (3) months, or six (6) months later, as may then be
requested by Borrowers; provided that (i) any Interest Period which would
otherwise end on a day which is not a Business Day shall end in the next
preceding or succeeding Business Day as is Agent’s custom in the market to
which such LIBOR Advance relates; (ii) there remains a minimum of one (1) month,
two (2) months, three (3) months or six (6) months
(depending upon which Interest Period Borrowers selects) in the Term; and (iii) all
Interest Periods of the same duration which commence on the same date shall end
on the same date.

“Inventory Reserves” —
such Reserves as may be established from time to time by Agent in Agent’s
reasonable discretion with respect to the determination of the saleability, at
liquidation, of the Eligible Inventory or which reflect such other factors as
affect the liquidation value of the Eligible Inventory. Without limiting the
generality of the foregoing, Inventory Reserves may include (but are not
limited to) reserves based on the following:

(i)            Obsolescence (based upon Inventory on
hand beyond a given number of days).

(ii)           Seasonality.

(iii)          Shrinkage, which initially shall be the
amount equal to that percentage of actual shrink in excess of the percentage
accrued by the Borrowers.

(iv)          Imbalance.

(v)           Change in Inventory character.

(vi)          Change in Inventory composition.

(vii)         Change in Inventory mix.

(viii)        Markdowns (both permanent and point of
sale).

(ix)           Retail mark ons and markups
inconsistent with prior period practice and performance; industry standards;
current business plans; or advertising calendar and planned advertising events.

 12
 

 

(x)            Damaged goods.

(xi)           Consigned goods.

(xii)          Any non-merchandise Inventory (such as labels, bags, and
packaging materials).

(xiii)         Return to vendor merchandise.

(xiv)        Packaways.

(xv)         RAW Inventory (i.e. Inventory delivered to vendors on a
temporary basis for such work as assembly).

(xvi)        Catalogue photo sample Inventory.

(xvii)       Inventory subject to open Letters of
Credit.

(xviii)      Inventory owned by the Canadian Affiliate.

Agent reserves the right to
increase or to establish additional Inventory Reserves upon one Business Day’s
written notice to the Lead Borrower. If the Lead Borrower desires to challenge
an increased or additional Inventory Reserve, it may request Agent to obtain an
updated Inventory appraisal (conducted at Borrowers’ expense) by providing a
written request to Agent within two Business Days of the notice by the Agent of
the increased or additional Inventory Reserve. Agent shall instruct the appraisal
firm to conduct an appraisal diligently, with a target completion of no more
than two weeks. Agent will make appropriate adjustments (if any) in the
Inventory Reserves based on such updated Inventory appraisal. Notwithstanding
the foregoing, all increased or additional Inventory Reserves will be binding
pending completion of the updated appraisal. Any appraisals obtained pursuant
to this paragraph shall be in addition to appraisals obtained by Agent pursuant
to Section 6.3.

Any Event of Default that directly
results from the imposition of increased or additional Inventory Reserves
pursuant to the paragraph above shall be deemed cured in the event such Event
of Default would not have existed based upon the adjusted Inventory Reserves
based upon the results of the updated appraisal.

“Landing Costs” —
customs, duty, freight, and other out-of-pocket costs and expenses which will
be expended to “land” in transit Inventory, without duplication of Import
Landing Costs.

“Landlord State” —
initially Washington, Virginia, and Pennsylvania and such other states in which
a landlord’s claim for rent has priority over the Liens of the Agent in the
Collateral.

“LC Amount” — at any
time, the aggregate undrawn face amount of all Letters of Credit and LC
Guaranties then outstanding plus the face amount of any outstanding

 13
 

 

bankers’ acceptances arising
out of drawings under such Letters of Credit, without duplication.

“LC Borrowing” — an
extension of credit resulting from a drawing under any Letter of Credit which
has not been reimbursed on the date when made or refinanced as a Revolving
Credit Loan.

“LC Guaranty” — any
guaranty pursuant to which Agent or any Affiliate of Agent shall guaranty the
payment or performance by Borrowers of its reimbursement obligation under any
letter of credit.

“LC Obligations” —
any Obligations that arise from any draw against any Letter of Credit or
against any Letter of Credit supported by an LC Guaranty, including, without
duplication, any LC Amount comprised of bankers’ acceptances that arise from
any draw against any Letter of Credit.

“Lease” — any lease
or other agreement, no matter how styled or structured, pursuant to which any
Borrower is entitled to the use or occupancy of any space.

“Letter of Credit” —
any standby, documentary or usance letter of credit issued by Agent or any
Affiliate of Agent for the account of Borrowers.

“LIBOR” — as
applicable to any LIBOR Advance, the rate per annum (rounded upward, if
necessary, to the nearest 1/32 of one percent) as determined on the basis of
the offered rates for deposits in U.S. dollars, for a period of time comparable
to such LIBOR Advance which appears on the Telerate page 3750 as of 11:00 a.m.
(London time) on the date that is two (2) London Banking Days preceding
the first day of such LIBOR Advance; provided, however, if the rate described
above does not appear on the Telerate System on any applicable interest
determination date, the LIBOR rate shall be the rate (rounded upwards as
described above, if necessary) for deposits in U.S. dollars for a period
substantially equal to the interest period on the Reuters Page “LIBO” (or
such other page as may replace the LIBO Page on that service for the
purpose of displaying such rates), as of 11:00 a.m. (London Time), on the
day that is two (2) London Banking Days prior to the beginning of such
interest period. If both the Telerate and Reuters systems are unavailable, then
the rate for that date will be determined on the basis of the offered rates for
deposits in U.S. dollars for a period of time comparable to such LIBOR Advance
which are offered by four (4) major banks in the London interbank market
at approximately 11:00 a.m. (London time), on the day that is two (2) London
Banking Days preceding the first day of such LIBOR Advance as selected by Agent.
The principal London office of each of the major London Banks so selected will
be requested to provide a quotation of its U.S. dollar deposit offered rate. If
at least two (2) such quotations are provided, the rate for that date will
be the arithmetic mean of the quotations. If fewer than two quotations are
provided as requested, the rate for that date will be determined on the basis
of the rates quoted for loans in U.S. dollars to leading European banks for a
period of time comparable to such LIBOR Advance offered by major banks in New
York City at approximately 11:00 a.m. (New York City time), on the date
that is two (2) London Banking Days preceding the first day of such
LIBOR  Advance. In the event that Agent
is unable to obtain any such quotation as provided above, it will be determined
that LIBOR

 14
 

 

pursuant to a LIBOR Advance
cannot be determined. In the event that the Board of Governors of the Federal
Reserve System shall impose a Reserve Percentage with respect to LIBOR deposits
of Bank then for any period during which such Reserve Percentage shall apply,
LIBOR shall be equal to the amount determined above divided by an amount equal
to 1 minus the Reserve Percentage.

“LIBOR Advance” — any
Loan bearing interest computed by reference to the LIBOR.

“LIBOR Interest Payment
Date” — the first day of each calendar month during and immediately
following the applicable Interest Period.

“LIBOR Revolving Portion”
— that portion of the Revolving Credit Loans that is subject to interest
computed by reference to the LIBOR.

“Lien” — any interest
in Property securing an obligation owed to, or a claim by, a Person other than
the owner of the Property, whether such interest is based on common law,
statute or contract. The term “Lien” shall also include rights of seller under
conditional sales contracts or title retention agreements, reservations,
exceptions, encroachments, easements, rights—of—way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances affecting
Property. For the purpose of the Agreement, Borrowers shall be deemed to be the
owner of any Property which it has acquired or holds subject to a conditional
sale agreement or other arrangement pursuant to which title to the Property has
been retained by or vested in some other Person for security purposes.

“Loan Account” — the
loan account established on the books of Agent pursuant to Section 3.6 of
the Agreement.

“Loan Documents” —
the Agreement, the Other Agreements and the Security Documents.

“Loans” — all loans
and advances of any kind made by Agent or any Lender (or by any Affiliate of
Bank of America) pursuant to the Agreement.

“London Banking Day” —
any date on which commercial banks are open for business in London, England.

“Majority Lenders” —
as of any date, Lenders holding 66 2/3% of the Revolving Loan Commitments
determined on a combined basis and following the termination of the Revolving
Loan Commitments, Lenders holding 66 2/3% or more of the outstanding Loans, LC
Amounts and LC Obligations not yet reimbursed by Borrowers or funded with a
Revolving Credit Loan; provided, that (i) in each case, if there
are 2 or more Lenders with outstanding Loans, LC Amounts, unfunded and
unreimbursed LC Obligations or Revolving Loan Commitments, at least 2 Lenders
shall be required to constitute Majority Lenders; and (ii) prior to
termination of the Revolving Loan Commitments, if any Lender breaches its
obligation to fund any requested Revolving Credit Loan, for so long as such
breach exists, its voting rights hereunder shall be calculated with reference
to its outstanding Loans, LC 

 15
 

 

Amounts and unfunded and
unreimbursed LC Obligations, rather than its Revolving Loan Commitment.

“Material Adverse Effect”
— (i) a material adverse effect on the business, condition (financial or
otherwise), operation, performance or properties of Borrowers and their
Subsidiaries taken as a whole, (ii) a material adverse effect on the
rights and remedies of Agent or Lenders under the Loan Documents, or (iii) the
material impairment of the ability of any Borrower or any of their Subsidiaries
to perform its obligations hereunder or under any Loan Document.

“Money Borrowed” —
means, without duplication, (i) Indebtedness arising from the lending of
money by any Person to any Borrower or any of its Subsidiaries; (ii) Indebtedness,
whether or not in any such case arising from the lending by any Person of money
to any Borrower or any of its Subsidiaries, (1) which is represented by
notes payable or drafts accepted that evidence extensions of credit, (2) which
constitutes obligations evidenced by bonds, debentures, notes or similar
instruments, or (3) upon which interest charges are customarily paid
(other than accounts payable) or that was issued or assumed as full or partial
payment for Property; (iii) Indebtedness that constitutes a Capitalized
Lease Obligation; (iv) reimbursement obligations with respect to letters
of credit or guaranties of letters of credit and (v) Indebtedness of any
Borrower or any of its Subsidiaries under any guaranty of obligations that
would constitute Indebtedness for Money Borrowed under clauses (i) through
(iv) hereof, if owed directly by any Borrower or any of its Subsidiaries. Money
Borrowed shall not include trade payables or accrued expenses.

“Mortgages” — All
mortgages, deeds of trust and comparable documents now or at any time hereafter
securing the whole or any part of the Obligations.

“Multiemployer Plan” —
has the meaning set forth in Section 4001(a)(3) of ERISA.

“Net Availability” —
Availability less amounts needed to bring trade payables, accrued
expenses, and rents within normal terms (excluding those amounts for which a bona fide dispute exists in the ordinary
course of business), in each case as determined by Agent in its discretion;
provided that, in so exercising its discretion: 
(i) during the period between January 26 and July 31,
inclusive, of each year, Agent’s determination of what constitutes normal terms
for trade payables shall be at least fifty (50) days from the invoice date in
the aggregate for outstanding trade payables; and (ii) during the period
between August 1 and January 25, inclusive, of each year, Agent’s
determination of what constitutes normal terms for trade payables shall be at
least sixty—five (65) days from the invoice date in the aggregate for outstanding
trade payables.

“Net Capital Expenditures”
— Capital Expenditures net of (i) actual cash received from landlords for
tenant improvements relating to the Borrowers’ leased store locations, and (ii) Capitalized
Lease Obligations.

“Notes” — the
Revolving Notes and the Swing Line Note.

 16
 

 

“Obligations” — all
Loans, all LC Obligations and all other advances, debts, liabilities,
obligations, covenants and duties, together with all interest, fees and other
charges thereon, owing, arising, due or payable from Borrowers to any Lender or
Agent, for its own benefit and the benefit of the Lenders, or from Borrowers to
Bank or to any other affiliate of Bank of America, of any kind or nature,
present or future, whether or not evidenced by any note, guaranty or other instrument,
whether arising under the Agreement or any of the other Loan Documents or
otherwise, whether direct or indirect (including those acquired by assignment),
absolute or contingent, primary or secondary, due or to become due, now
existing or hereafter arising and however acquired, including without
limitation any Derivative Obligations owing to Agent, any Lender or Bank and
all interest and fees that accrue after the commencement by or against any
Borrower or any Affiliate thereof of any proceeding under any bankruptcy or
insolvency laws naming such Person as the debtor in such proceeding, regardless
of whether such interest and fees are allowed claims in such proceeding.

“Organizational I.D.
Number” — with respect to Borrowers or any Subsidiary of Borrowers, the
organizational identification number assigned to Borrowers or such Subsidiary
by the applicable governmental unit or agency of the jurisdiction of
organization of Borrowers or such Subsidiary.

“Other Agreements” —
any and all agreements, instruments and documents (other than the Agreement and
the Security Documents), heretofore, now or hereafter executed by Borrowers,
any Subsidiary of Borrowers or any other third party and delivered to Agent in
respect of the transactions contemplated by the Agreement.

“Overadvance” — the
amount, if any, by which the outstanding principal amount of Revolving Credit
Loans, plus the LC Amount, plus the amount of LC Obligations that have not been
reimbursed by Borrowers or funded with a Revolving Credit Loan, plus reserves,
exceeds the Adjusted Borrowing Base.

“Permitted
Liens” — any Lien of a kind specified in subsection 8.2.5 of the Agreement.

“Permitted Purchase Money
Indebtedness” — Purchase Money Indebtedness of Borrowers incurred after the
date hereof which is secured by a Purchase Money Lien.

“Person” — an
individual, partnership, corporation, limited liability company, joint stock
company, land trust, business trust, or unincorporated organization, or a
government or agency or political subdivision thereof.

“Plan” — an employee
benefit plan now or hereafter maintained for employees of Borrowers or any of
its Subsidiaries that is covered by Title IV of ERISA.

“Property” — any
interest in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible.

 17
 

 

“Protective Advances”
— means expenditures by the Agent undertaken in the Agent’s discretion to (i) protect
or preserve any Liens granted pursuant to Section 5, (ii) protect or
preserve any rights upon an Event of Default, or (iii) facilitate a
liquidation in the pursuit of remedies under Section 10.

“Purchase Money
Indebtedness” — means and includes (i) Indebtedness (other than the
Obligations) for the payment of all or any part of the purchase price of any
fixed assets, provided that such Indebtedness does not exceed 100% of the
purchase price of such fixed assets, (ii) any Indebtedness (other than the
Obligations) incurred at the time of or within 20 days prior to or after the
acquisition of any fixed assets for the purpose of financing all or any part of
the purchase price thereof, and (iii) any renewals, extensions or
refinancings thereof, but not any increases in the principal amounts thereof
outstanding at the time.

“Purchase Money Lien”
— a Lien upon fixed assets which secures Purchase Money Indebtedness, but only
if such Lien shall at all times be confined solely to the fixed assets the
purchase price of which was financed through the incurrence of the Purchase
Money Indebtedness secured by such Lien.

“Receivables Advance Rate”
— Eighty-five percent (85%).

“Receivables Reserves”
— such Reserves as may be established from time to time by Agent, in Agent’s
reasonable discretion based upon the Agent’s determination of the
collectibility in the ordinary course and of the creditworthiness of the
Eligible Accounts. Without limiting the generality of the foregoing,
Receivables Reserves may include (but are not limited to) reserves based on the
following:

(i)            The aggregate of all Accounts which are more than 90 days
past invoice or are due or unpaid for more than 60 days from the due date.

(ii)           The aggregate of all Accounts for which 25% or more of
Accounts from the Account Debtor are deemed subject to reserves hereunder or
not deemed Eligible Accounts.

(iii)          That portion of Eligible Accounts owed by any Account
Debtor which exceed ten percent (10%) of all Eligible Accounts.

(iv)          The aggregate of all Accounts which
arise out of the sale by the Borrowers of goods consigned or delivered to the
Borrowers or to an Account Debtor on sale or return terms (whether or not
compliance has been made with the applicable provisions of Article 2 of
the Uniform Commercial Code).

(v)            The aggregate of all Accounts which
arise out of any sale made on a basis other than upon terms usual to the
business of Borrowers.

(vi)           The aggregate of all Accounts which
arise out of any sale made on a “bill and hold,” dating, or delayed shipping
basis.

 18
 

 

(vii)          The aggregate of all Accounts which are
owed by any Account Debtor whose principal place of business is not within the
continental United States.

(viii)        The aggregate of all Accounts which are
owed by any Affiliate.

(ix)           The aggregate of all Accounts to the
extent that the Account Debtor holds or is entitled to any claim, counterclaim,
set off, or chargeback as determined by the Agent in its discretion.

(x)            The aggregate of all Accounts which
are evidenced by a promissory note or other documentation evidencing modified
payment terms.

(xi)            The aggregate of all
Accounts which are owed by any Person employed by, or a salesperson of,
Borrowers.

(xii)          The Account Debtor is also a Michaels creditor or supplier,
and the Account Debtor has disputed liability with respect to such Account, and
the Account Debtor has made any claim with respect to any other Account due
from such Account Debtor to Michaels, or the Account otherwise is or may become
subject to any right of setoff by an Account Debtor who is also a Michaels
creditor or supplier.

(xiii)         The goods giving rise to such Account
have not been delivered to and accepted by the Account Debtor or the services
giving rise to such Account or the Account does not otherwise represent a final
sale.

(xiv)        There exists any agreement with the Account Debtor for any
deduction therefrom, including finance charges and reserves for rebates and
advertising, except for discounts or allowances which are made in the ordinary
course of business for prompt payment and which discounts or allowances are
reflected in the calculation of the face value of each invoice related to the
Account.

“Relocation Sales” —
the Lead Borrower’s liquidation, through sales, of the Inventory and Equipment
located at its Stores that it may close as provided in Section 8.2.6, as
well as associated or otherwise excess Inventory located in related Warehouses.

“Reportable Event” —
any of the events set forth in Section 4043(b) of ERISA.

“Reserves” — the
following: Receivables Reserves, Availability Reserves, and Inventory Reserves.

“Reserve Percentage”
the maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed on member banks of the Federal
Reserve System against “Eurocurrency Liabilities” as defined in Regulation D.

“Restricted Investment”
— any investment made in cash or by delivery of Property to any Person, whether
by acquisition of stock, Indebtedness or other obligation or Security, or by
loan, advance or capital contribution, or otherwise, or in any Property except
the following:

 19
 

 

(i)            investments by Borrowers, to the extent existing on the
Closing Date, in one or more Subsidiaries of Borrowers;

(ii)           Property to be used in the ordinary course of business;

(iii)          Current Assets arising from the sale of goods and services
in the ordinary course of business of Borrowers or any of their Subsidiaries;

(iv)          investments in direct obligations of the United States of
America, or any agency thereof or obligations guaranteed by the United States
of America, provided that such obligations mature within one year from
the date of acquisition thereof;

(v)           investments in certificates of deposit maturing within one
year from the date of acquisition and fully insured by the Federal Deposit
Insurance Corporation;

(vi)          investments in commercial paper given the highest rating by
a national credit rating agency and maturing not more than 270 days from the
date of creation thereof;

(vii)         investments in money market, mutual or similar funds having
assets in excess of $100,000,000 and the investments of which are limited to
investment grade securities;

(viii)        investments existing on the date hereof
and listed on Exhibit 8.2.12 hereto; and

(ix)           investments otherwise expressly permitted pursuant to the
Agreement.

“Retail” — the
current ticket price aggregated by SKU of the Eligible Inventory, as reflected
in Borrowers’ Consolidated stock ledger except that to the extent that Eligible
Inventory is not reflected in the stock ledger, “Retail” shall be determined
using such Consolidated non—stock ledger inventory systems of Borrowers as
Agent shall deem adequate for such purpose in its reasonable discretion.

“Revolving Credit Loan”
— a Loan made by Lender pursuant to Section 1.1 of the Agreement and shall
include, in all events Incremental Revolving Credit Loans made hereunder.

“Revolving Credit Maximum
Amount” — $150,000,000.

“Revolving Loan Commitment”
— with respect to any Lender, the amount of such Lender’s Revolving Loan
Commitment pursuant to subsection 1.1 of the Agreement, as set forth below such
Lender’s name on the signature page to this Agreement.

“Revolving Loan
Percentage” — with respect to each Lender, the percentage equal to the
quotient of such Lender’s Revolving Loan Commitment divided by the aggregate of
all Revolving Loan Commitments.

 20
 

 

“Revolving Notes” —
the notes to be executed by Borrowers on or about the Closing Date in favor of
each Lender to evidence the Revolving Credit Loans, which shall be in the form
of Exhibit 1.1 to the Agreement, together with any replacement or
successor notes therefor.

“Security” — all
shares of stock, partnership interests, membership interests, membership units
or other ownership interests in any other Person and all warrants, options or
other rights to acquire the same.

“Security Documents” —
the Mortgages and all other instruments and agreements now or at any time
hereafter securing the whole or any part of the Obligations.

“Solvent” — as to any
Person, such Person (i) owns Property whose fair saleable value is greater
than the amount required to pay all of such Person’s Indebtedness (including
contingent debts discounted based on the likelihood of their having to be
paid), (ii) is able to pay all of its Indebtedness as such Indebtedness
matures and (iii) has capital sufficient to carry on its business and
transactions and all business and transactions in which it is about to engage.

“Subject Lender” — as
defined in Section 3.12.

“SwingLine Lender” —
Bank of America.

“SwingLine Loans” —
as defined in Section 1.4.

“SwingLine Notes” —
the Secured Promissory Notes to be executed by Borrowers in favor of SwingLine
Lender to evidence the SwingLine Loans, which shall be in the form of Exhibit 1.4
to the Agreement, together with any replacement or successor notes therefor.

“Stores” — All of the
Borrowers’ present and future retail locations, including without limitation,
those locations listed on Exhibit 6.1.1 as retail locations.

“Subsidiary” — any
Person of which another Person owns, directly or indirectly through one or more
intermediaries, more than 50% of the Voting Stock at the time of determination.

“Term” — as defined
in Section 4.1 of the Agreement.

“Total Credit Facility”
— $150,000,000.

“Type of Organization”
— with respect to Borrowers or any Subsidiary of Borrowers, the kind or type of
entity by which Borrowers or such Subsidiary is organized, such as a
corporation or limited liability company.

“UCC” — the Uniform
Commercial Code as in effect in the State of California on the date of this
Agreement, as the UCC may be amended or otherwise modified.

 21
 

 

“Voting Stock” —
Securities of any class or classes of a corporation, limited partnership or
limited liability company or any other entity the holders of which are
ordinarily, in the absence of contingencies, entitled to vote with respect to
the election of corporate directors (or Persons performing similar functions).

“Other Terms”. All
other terms contained in the Agreement shall have, when the context so
indicates, the meanings provided for by the UCC to the extent the same are used
or defined therein.

“Certain Matters of
Construction”. The terms “herein”, “hereof” and “hereunder” and other words
of similar import refer to the Agreement as a whole and not to any particular
section, paragraph or subdivision. Any pronoun used shall be deemed to cover
all genders. The section titles, table of contents and list of exhibits appear
as a matter of convenience only and shall not affect the interpretation of the
Agreement. All references to statutes and related regulations shall include any
amendments of same and any successor statutes and regulations. All references
to any of the Loan Documents shall include any and all modifications thereto
and any and all extensions or renewals thereof.

 

 22Exhibit 10.1
 

 

 

Force
Protection, Inc.

9801
Highway 78, #3

Ladson,
SC 29456

www.forceprotection.net

 

June
19, 2006

 

Fort Ashford Funds, LLC

19200 Von Karman

Suite 600

Irvine, CA  92612

 

Re:
Extension of Maturity Date - Short Term Note 

 

Gentlemen:

 

I refer to that certain
Secured Note in the amount of $2,500,000 having a maturity date of June 20,
2006 issued by Force Protection Inc.  On
behalf of the Company we would hereby request that you agree to an extension of
the Maturity Date through Friday July 21, 2006 upon payment by the Company of
the following amounts:

 

•                  1% extension fee of  $25,000

•                  2% Pre-paid Interest for the
extension period of $50,000

 

If this is acceptable to
you, I would ask that you kindly sign below and return by fax to me at (843) 553-3832.

 

We appreciate you
cooperation in this matter.

 

 

Very
Truly Yours,

 

 

	
   /s/ Gordon McGilton

  	
   

  	
   

  
	
  Gordon
  McGilton

  	
   

  	
   

  
	
  Chief
  Executive Officer

  	
   

  	
   

  
	
   

  	
   

  	
  Accepted
  and Agreed

  
	
   

  	
   

  	
  For
  Fort Ashford Funds

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/
  Frank Kavanaugh

  
	
   

  	
   

  	
   

  	
  Frank
  Kavanaugh

  
	
   

  	
   

  	
   

  	
  Principal

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